RBS hedges the exchange rate risk of its net investment in foreign currency denominated operations with currency borrowings and forward foreign exchange contracts. RBS reviews the value of the investments’ net assets, executing hedges where appropriate to reduce the sensitivity of capital ratios to foreign exchange rate movement. Hedge accounting relationships will be designated where required.
Residual risk positions are hedged with forward foreign exchange contracts. Exposure to the variability in future payments due to the movement of foreign exchange rates is hedged, fixing the exchange rate the payments will be settled in. The derivatives are documented as cash flow hedges.
For all cash flow hedging and fair value hedge relationships RBS determines that there is an adequate level of offsetting between the hedged item and hedging instrument by assessing the initial and ongoing effectiveness by comparing movements in the fair value of the expected highly probable forecast interest cash flows/ fair value of the hedged item attributable to the hedged risk with movements in the fair value of the expected changes in cash flows from the hedging interest rate swap. Hedge effectiveness is measured on a cumulative basis over a time period management determines to be appropriate. RBS uses either the actual ratio between the hedged item and hedging instrument(s) or one that minimises hedge ineffectiveness to establish the hedge ratio for hedge accounting.
RBS is managing the process to transition to alternative benchmark rates in the following ways:  reviewed or is in the process of reviewing the fall-back language for IBOR linked instruments
 is in the process of adjusting its products, processes and information systems to deal with the expected effects of the discontinuation of IBOR most notably the transition and calculation rules.
Further details on the transition from IBOR based rates to risk free rates are in the Capital and risk management section on page 183.
Cash flow hedging Interest rate contracts 148.4 1,450 833 366 149.7 1,148 872 (770) Exchange rate contracts 12.3 66 8 (59) 12.5 106 — —
Net investment hedging Exchange rate contracts 0.4 — 4 8 2.0 32 10 —
202 22 358 21 Note: (1) The change in fair value used for hedge ineffectiveness includes instruments that were decrecognised in the year.
The following table shows the period in which the hedging contract ends: 0-3 months 3-12 months 1-3 years 3-5 years 5-10 years 10-20 years 20+ years Total 2019 £bn £bn £bn £bn £bn £bn £bn £bn
RBS – Annual Report and Accounts 2019 230 10 Derivatives continued The table below analyses assets and liabilities subject to hedging derivatives.
Other financial liabilities - debt securities in issue 26,811 830 (807) 30 Subordinated liabilities 5,398 (275) (222) 24 Total 32,209 555 (1,029) 54
Cash flow hedging - interest rate Loans to banks and customers - amortised cost 69,254 (566) Other financial assets - securities 2,275 (16) Total 71,529 (582)
Cash flow hedging - interest rate Loans to banks and customers - amortised cost 81,880 686 Bank and customer deposits 67,854 (28)
Notes: (1) The change in fair value used for hedge ineffectiveness instruments derecognised in the year. (2) Comparative period balances are nil.
Fair value hedging - LIBOR 42.0 908 - EURIBOR 12.7 93 Cash flow hedging - LIBOR 9.6 (115) - EURIBOR 3.3 (46) - BOE Base rate 34.7 (172) - ECB REFI rate 0.1 0 - SONIA 0.1 0
RBS – Annual Report and Accounts 2019 231 10 Derivatives continued Hedge ineffectiveness recognised in other operating income comprises: Fair value hedging Gains/(losses) on the hedged items attributable to the hedged risk 610 54 (48) (Losses)/gains on the hedging instruments (585) (7) 78 Fair value hedging ineffectiveness 25 47 30 Cash flow hedging - Interest rate risk 23 (112) 9 Cash flow hedging ineffectiveness 23 (112) 9 Total 48 (65) 39
RBS – Annual Report and Accounts 2019 232 11 Financial instruments – classification The following tables analyse financial assets and liabilities in accordance with the categories of financial instruments on an IFRS 9 basis. Assets and liabilities outside the scope of IFRS 9 are shown within other assets and other liabilities.
Cash and balances at central banks 88,897 88,897 Trading assets 75,119 75,119 Derivatives (3) 133,349 133,349 Settlement balances 2,928 2,928 Loans to banks - amortised cost (4) 12,947 12,947 Loans to customers - amortised cost 305,089 305,089 Other financial assets 1,638 46,077 11,770 59,485 Intangible assets 6,616 6,616 Other assets 9,805 9,805 31 December 2018 210,106 46,077 421,631 16,421 694,235
Bank deposits (6) 20,493 20,493 Customer deposits 369,247 369,247 Settlement balances 4,069 4,069 Trading liabilities 73,949 73,949 Derivatives (7) 146,879 146,879 Other financial liabilities (8) 2,258 42,962 45,220 Subordinated liabilities 724 9,255 9,979 Other liabilities (9) 2,206 7,441 9,647 31 December 2019 220,828 2,982 448,232 7,441 679,483
Bank deposits (6) 23,297 23,297 Customer deposits 360,914 360,914 Settlement balances 3,066 3,066 Trading liabilities 72,350 72,350 Derivatives (7) 128,897 128,897 Other financial liabilities (8) 2,840 36,892 39,732 Subordinated liabilities 867 9,668 10,535 Other liabilities 2,218 6,736 8,954 31 December 2018 201,247 3,707 436,055 6,736 647,745
Notes: (1) Mandatory fair value through profit or loss. (2) Fair value through other comprehensive income (3) Includes net hedging derivatives of £202 million (2018 - 358 million). (4) Includes items in the course of collection from other banks of £50 million (2018 - £484 million). (5) Designated as at fair value through profit or loss. (6) Includes items in the course of transmission to other banks of £2 million (2018 - £125 million). (7) Includes net hedging derivatives of £22 million (2018 - £22 million). (8) The carrying amount of other customer accounts designated as at fair value through profit or loss is nil (2018 - £26 million) higher than the principal amount. (9) Includes lease liabilities.
Reverse repos Trading assets 24,095 24,759 Loans to banks - amortised cost 165 3,539 Loans to customers - amortised cost 10,649 9
Repos Bank deposits 2,597 941 Customer deposits 1,765 3,774 Trading liabilities 27,885 25,645
Instruments which can be offset Potential for offset not recognised by IFRS Effect of Net amount after Instruments master netting Other the effect of netting outside IFRS Balance and similar Cash financial agreements and netting Balance
Gross offset sheet agreements collateral collateral related collateral agreements sheet total £m £m £m £m £m £m £m £m £m
Derivative assets 158,850 (10,913) 147,937 (122,697) (18,685) (4,292) 2,263 2,092 150,029 Derivative liabilities 154,396 (11,724) 142,672 (122,697) (17,296) (1,276) 1,403 4,207 146,879 Net position (1) 4,454 811 5,265 — (1,389) (3,016) 860 (2,115) 3,150
2018 Derivative assets 136,329 (5,041) 131,288 (106,762) (17,937) (4,469) 2,120 2,061 133,349 Derivative liabilities 133,965 (6,776) 127,189 (106,762) (15,227) (3,466) 1,734 1,708 128,897 Net position (1) 2,364 1,735 4,099 — (2,710) (1,003) 386 353 4,452
Modelled approaches may be used to measure instruments classed as level 2 or 3. Estimation expertise is required in the selection, implementation and calibration of appropriate models. The resulting modelled valuations are considered for accuracy and reliability. Portfolio level adjustments consistent with IFRS 13 are raised to incorporate counterparty credit risk, funding and margining risks. Expert judgement is used in the initial measurement of modelled products by control teams.
Assets Trading assets Loans — 46,172 449 — 44,983 120 Securities 20,865 8,704 555 22,003 7,312 701 Derivatives — 148,800 1,229 — 131,513 1,836 Other financial assets Loans — 307 58 — 768 136 Securities 41,044 8,326 263 40,132 6,172 507 Total financial assets held at fair value 61,909 212,309 2,554 62,135 190,748 3,300
RBS – Annual Report and Accounts 2019 235 12 Financial instruments - valuation continued Fair value hierarchy Financial Instruments carried at fair value have been classified under the IFRS fair value hierarchy as follows.
Level 3 - instruments 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. Examples include cash instruments which trade infrequently, certain syndicated and commercial mortgage loans, certain emerging markets and derivatives with unobservable model inputs.
Price volatilities and correlations - volatility is a measure of the tendency of a price to change with time.
Funding – FVA 244 250 Credit – CVA 386 419 Bid – Offer 165 238 Product and deal specific 238 327 1,033 1,234
Product and deal specific On initial recognition of financial assets and liabilities valued using valuation techniques incorporating information other than observable market data, any difference between the transaction price and that derived from the valuation technique is deferred. Such amounts are recognised in profit or loss over the life of the transaction; when market data becomes observable; or when the transaction matures or is closed out as appropriate. At 31 December 2019, net gains of £88 million (2018 - £59 million) were carried forward. During the year, net gains of £183 million (2018 - £151 million) were deferred and £154 million (2018 - £148 million) were recognised in the income statement.
RBS – Annual Report and Accounts 2019 237 12 Financial instruments – valuation: Level 3 ranges of unobservable inputs 2019 2018 Financial instrument Valuation Technique Unobservable inputs Units Low High Low High
Trading assets and Other financial assets Loans Price-based Price % — 101 — 132 Credit Spreads Credit spread bps 53 101 — —
Debt securities in issue Price-based Price CCY 44 JPY 146 EUR 21 JPY 136 EUR Valuation Fund NAV GBP — — — 622
Interest rate & FX Option pricing Correlation % (50) 99 (45) 99 derivatives Volatility % 19 70 1 76
(2) 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.
Upfront points will compensate for the difference between the standard premium and the actual premium at the start of the contract. (10) Mean reversion: a measure of how much a rate reverts to its mean level. (11) Constant prepayment rate: the rate is used to reflect how fast a pool of assets pay down. (12) Day count: yield analysis on deposits are calculated using day count as an input, referring to the maturity of the deposit. (13) RBS does not have any material liabilities measured at fair value that are issued with an inseparable third party credit enhancement.
RBS – Annual Report and Accounts 2019 238 12 Financial instruments – valuation: areas of judgment Whilst the business has simplified, the diverse range of products historically traded by RBS results in a wide range of instruments that are classified into level 3 of the hierarchy. Whilst the majority of these instruments naturally fall into a particular level, for some products an element of judgment is required. The majority of RBS financial instruments carried at fair value are classified as level 2. IFRS requires extra disclosures in respect of level 3 instruments.
Liabilities Trading liabilities Deposits 56 — — 377 40 (40) Debt securities in issue 59 — — 112 10 (10) Derivatives Interest rate 630 70 (70) 808 70 (70) Foreign exchange 222 10 (10) 279 10 (10) Other 209 20 (10) 101 — (10) Other financial liabilities - debt securities in issue 141 10 (10) 280 10 (10)
RBS – Annual Report and Accounts 2019 239 12 Financial instruments – valuation: level 3 sensitivities The level 3 sensitivities presented above are calculated at a trade or low level portfolio basis. They are not calculated on an overall portfolio basis and therefore do not reflect the likely potential uncertainty on the portfolio as a whole. The figures are aggregated and do not reflect the correlated nature of some of the sensitivities. In particular, for some of the portfolios the sensitivities may be negatively correlated where a downwards movement in one asset would produce an upwards movement in another, but due to the additive presentation of the above figures this correlation cannot be displayed. The actual potential downside sensitivity of the total portfolio may be less than the noncorrelated sum of the additive figures as shown in the above table.
At 1 January 2,657 643 3,300 1,957 2,692 530 3,222 2,187 Amounts recorded in the income statement (1) (418) (1) (419) 162 (147) 178 31 (344) Amounts recorded in the statement of comprehensive income — 86 86 — — 23 23 — Level 3 transfers in 492 2 494 104 1,307 19 1,326 419 Level 3 transfers out (857) (59) (916) (588) (624) (1) (625) (231) Issuances — — — 46 — — — 47 Purchases 1,121 15 1,136 532 871 16 887 401 Settlements (218) (38) (256) (429) (512) (3) (515) (204) Sales (541) (326) (867) (466) (930) (125) (1,055) (316) Foreign exchange and other adjustments (3) (1) (4) (1) — 6 6 (2) At 31 December 2,233 321 2,554 1,317 2,657 643 3,300 1,957
Amounts recorded in the income statement in respect of balances held at year end - unrealised (421) 8 (413) 110 (134) 158 24 (330) - realised — — — — (2) 6 4 —
Items where fair value approximates Carrying Fair value hierarchy level carrying value value Fair value Level 1 Level 2 Level 3 2019 £bn £bn £bn £bn £bn £bn
Financial liabilities Bank deposits 4.1 16.4 16.5 — 12.2 4.3 Customer deposits 312.4 56.8 56.9 — 7.5 49.4 Settlement balances 4.1 Other financial liabilities - debt securities in issue 43.0 43.7 — 38.5 5.2 Subordinated liabilities 9.3 10.0 — 9.9 0.1 Other liabilities - notes in circulation 2.2
Financial assets Cash and balances at central banks 88.9 Settlement balances 2.9 Loans to banks 0.5 12.4 12.4 — 9.2 3.2 Loans to customers 305.1 301.7 — 0.5 301.2 Other financial assets - securities 11.8 11.8 7.3 3.0 1.5
Loans to banks and customers – amortised cost In estimating the fair value of net loans to customers and banks measured at amortised cost, RBS’s loans are segregated into appropriate portfolios reflecting the characteristics of the constituent loans. Two principal methods are used to estimate fair value: (a) Contractual cash flows are discounted using a market discount rate that incorporates the current spread for the borrower or where this is not observable, the spread for borrowers of a similar credit standing. This method is used for portfolios where counterparties have external ratings: institutional and corporate lending in NatWest Markets.
Deposits by banks and customer accounts Fair values of deposits are estimated using discounted cash flow valuation techniques.
Debt securities in issue and subordinated liabilities Fair values are determined using quoted prices for similar liabilities where available or by reference to valuation techniques, adjusting for own credit spreads where appropriate.
Assets Cash and balances at central banks 77,858 — 77,858 88,897 — 88,897 Trading assets 51,825 24,920 76,745 49,094 26,025 75,119 Derivatives 40,798 109,231 150,029 28,503 104,846 133,349 Settlement balances 4,387 — 4,387 2,928 — 2,928 Loans to banks - amortised cost 10,676 13 10,689 12,833 114 12,947 Loans to customers - amortised cost 77,742 249,205 326,947 67,354 237,735 305,089 Other financial assets 10,187 51,265 61,452 11,681 47,804 59,485
Assets and liabilities by contractual cash flow maturity The tables show on the following page, show the contractual undiscounted cash flows receivable and payable, up to a period of 20 years, including future receipts and payments of interest of financial assets and liabilities by contractual maturity. The balances in the following tables do not agree directly with the consolidated balance sheet, as the tables include all cash flows relating to principal and future coupon payments, presented on an undiscounted basis. The tables have been prepared on the following basis: Financial assets have been reflected in the time band of the latest date on which they could be repaid, unless earlier repayment can be demanded by RBS. Financial liabilities are included at the earliest date on which the counterparty can require repayment, regardless of whether or not such early repayment results in a penalty. If the repayment of a financial instrument is triggered by, or is subject to, specific criteria such as market price hurdles being reached, the asset is included in the time band that contains the latest date on which it can be repaid, regardless of early repayment.
MFVTPL assets of £227.3 billion (2018 - £209.7 billion) and HFT liabilities of £220.8 billion (2018 - £201.2 billion) have been excluded from the following tables.
RBS – Annual Report and Accounts 2019 242 13 Financial instruments – maturity analysis continued 0-3 months 3-12 months 1-3 years 3-5 years 5-10 years 10-20 years
Guarantees and commitments notional amount Guarantees (3) 2,757 — — — — — Commitments (4) 117,228 — — — — —
Assets by contractual maturity Cash and balances at central banks 88,897 — — — — — Settlement balances 2,928 — — — — — Loans to banks - amortised cost 11,920 925 106 — — — Other financial assets (1) 4,451 7,397 14,138 11,279 11,826 2,744 Total maturing assets 108,196 8,322 14,244 11,279 11,826 2,744 Loans to customers - amortised cost 42,953 31,719 65,486 51,319 66,149 78,902 Finance lease 143 368 955 520 829 641 Derivatives held for hedging 40 98 184 95 49 34 151,332 40,507 80,869 63,213 78,853 82,321 Liabilities by contractual maturity Bank deposits 7,417 21 13,785 2,003 — 59 Settlement balances 3,066 — — — — — Other financial liabilities 1,736 7,226 10,724 11,658 9,316 2,029 Subordinated liabilities 131 637 1,476 7,532 1,737 1,422 Other liabilities (2) 2,152 — — — — — Total maturing liabilities 14,502 7,884 25,985 21,193 11,053 3,510 Customer deposits 351,054 8,114 1,727 14 6 26 Derivatives held for hedging 15 30 94 35 53 45 365,571 16,028 27,806 21,242 11,112 3,581 Guarantees and commitments notional amount Guarantees (3) 3,952 Commitments (4) 116,843 — — — — —
120,795 — — — — — Notes: (1) Other financial assets excludes equity shares. (2) Other liabilities include notes in circulation. (3) RBS is only called upon to satisfy a guarantee when the guaranteed party fails to meet its obligations. RBS expects most guarantees it provides to expire unused. (4) RBS has given commitments to provide funds to customers under undrawn formal facilities, credit lines and other commitments to lend subject to certain conditions being met by the counterparty. RBS does not expect all facilities to be drawn, and some may lapse before drawdown.
RBS – Annual Report and Accounts 2019 243 14 Loan impairment provisions Loan exposure and impairment metrics The table below summarises loans and related credit impairment measures on an IFRS 9 basis.
Notes: (1) Includes £4 million (2018 – £5 million) related to assets classified as FVOCI. (2) ECL provisions coverage is calculated as ECL provisions divided by loans - amortised cost. (3) ECL provisions coverage and ECL loss rates are calculated on third party loans and related ECL provisions and charge respectively. (4) Includes a £2 million charge (2018 – £3 million charge) related to other financial assets, of which at a £1 million release (2018 – £1 million charge) related to assets classified as FVOCI; and nil (2018 – £31 million release) related to contingent liabilities. (5) The table above shows gross loans only and excludes amounts that are outside the scope of the ECL framework. Refer to page 142 for Financial instruments within the scope of the IFRS 9 ECL framework for further details. Other financial assets within the scope of the IFRS 9 ECL framework were cash and balances at central banks totalling £76.1 billion and debt securities of £59.4 billion (2018 – £87.2 billion and £57.0 billion respectively).
UK US Other debt Total shares loans Total 2019 £m £m £m £m £m £m £m £m
Mandatory fair value through profit or loss — — — 305 305 45 365 715 Fair value through other comprehensive income 18,437 13,981 8,786 7,130 48,334 949 — 49,283 Amortised cost 5,411 242 120 5,681 11,454 — — 11,454 Total 23,848 14,223 8,906 13,116 60,093 994 365 61,452
Mandatory fair value through profit or loss — — — 669 669 65 904 1,638 Fair value through other comprehensive income 17,192 11,767 11,329 5,306 45,594 483 — 46,077 Amortised cost 6,928 264 120 4,458 11,770 — — 11,770 Total 24,120 12,031 11,449 10,433 58,033 548 904 59,485
Intangible assets other than goodwill are reviewed for indicators of impairment. In 2019 £44 million (2018 - £37 million) of previously capitalised software was impaired primarily as a result of software which is no longer expected to yield future economic benefit.
RBS Group’s goodwill acquired in business combinations analysed by reportable segment is in Note 4, Segmental analysis. It is reviewed annually at 31 December for impairment. No impairment was indicated at 31 December 2019 or 2018.
The recoverable amounts for all CGUs at 31 December 2019 were based on value in use, using management's latest five-year revenue and cost forecasts. The long-term growth rates have been based on expected nominal growth of the CGUs. The pre-tax risk discount rates are based on those observed to be applied to businesses regarded as peers of the CGUs.
The table below has not been restated for the re-segmentation which transferred Business Banking from UK Personal & Business Banking to Commercial Banking. The impact was a transfer of £0.7 billion goodwill from UK Personal & Business Banking (now UK Personal Banking) to Commercial Banking. This re-segmentation has improved the headroom of Commercial Banking (including Business Banking) by approximatively £4.2 billion and reduced the headroom of UK Personal Banking by the equivalent amount without generating any impairment of the goodwill in the CGUs impacted.
UK Personal Banking 2.7 1.6 13.3 8.7 (2.2) (1.0) (2.1) (0.9) 16.3 Commercial Banking 2.6 1.6 13.4 4.1 (1.8) (0.7) (2.1) (1.1) 12.7 RBS International 0.3 1.6 12.0 2.1 (0.5) (0.3) (0.4) (1.2) 16.8 31 December 2018 UK Personal & Business Banking 3.4 1.8 13.1 14.4 (2.2) (1.4) (4.0) (1.7) 27.7 Commercial & Private Banking 1.9 1.8 13.0 4.5 (1.2) (0.8) (2.3) (1.0) 17.6 RBS International 0.3 1.8 12.9 0.7 (0.2) (0.2) (0.4) (0.1) 18.5
Property, plant and equipment 4,928 4,351 Deferred tax (Note 7) 1,011 1,412 Assets of disposal groups (1) 66 1,404 Prepayments 380 435 Accrued income 275 317 Interests in associates (2) 436 404 Pension schemes in net surplus (Note 5) 614 520 Tax recoverable 46 37 Other assets 554 925 Other assets 8,310 9,805
Notes: (1) Includes interest in Alawwal bank of nil (2018 - £1,179 million). (2) Includes interest in Business Growth Fund £424 million (2018 - £387 million).
Customer deposits designated as at fair value through profit or loss — 212 Debt securities in issue - designated as at fair value through profit or loss 2,258 2,628 - amortised cost 42,962 36,892 Total 45,220 39,732 19 Subordinated liabilities £m £m
The Royal Bank of Scotland Group plc US$750 million 3.754% dated notes 2029 Tier 2 577 —
Redemptions The Royal Bank of Scotland Group plc US$350 million 4.70% dated notes 2018 Ineligible — 267 €1,000 million 3.63% dated notes 2024 (callable March 2019) Tier 2 855 —
NatWest Markets Plc €2,000 million 6.934% dated notes 2018 Tier 2 — 1,743 £103 million 9.5% undated subordinated bonds 2018 (callable August 2018) Ineligible — 103 £35 million 5.5% fixed rate undated subordinated notes (callable December 2019) Ineligible 35 —
NatWest Plc SEK 90 million floating rate notes 2019 Tier 1 8 —
NWM N.V. and subsidiaries US$500 million 4.65% dated notes 2018 Tier 2 — 141 US$16 million floating rate notes 2019 Tier 2 10 2 US$71.8 million floating rate notes 2019 Tier 2 56 — €250 million 4.70% notes 2019 (partial redemption) Tier 2 145 —
Retirement benefit liabilities (Note 5) 119 165 Deferred tax (Note 7) 266 454 Notes in circulation 2,109 2,152 Current tax 132 100 Accruals 1,125 1,047 Deferred income 362 451 Lease liabilities (Note 22) (3) 1,823 — Other liabilities 1,034 1,581 Provisions for liabilities and charges 2,677 3,004
Payment Other Litigation protection customer and other insurance (1) redress regulatory Other (2) Total £m £m £m £m £m
Notes: (1) The balance at 31 December 2019 includes provisions held in relation to offers made in 2018 and earlier years of £97 million. (2) Materially comprises provisions relating to property closures and restructuring costs. (3) Refer to Note 22 for further information on the impact of IFRS 16 implementation.
Average redress (1) £1,631 £1,552 +/- £150 +/- 74 No PPI % (2) 28% 60% +/- 3% +/- 13 Uphold rate (3) 85% 94% +/- 2% +/- 16
Critical accounting policy: Provisions for liabilities Judgment is involved in determining whether an obligation exists, and in estimating the probability, timing and amount of any outflows. Where RBS Group can look to another party such as an insurer to pay some or all of the expenditure required to settle a provision, any reimbursement is recognised when, and only when, it is virtually certain that it will be received.
Ordinary shares of £1 12,094 12,049 12,093,909 12,048,605 Non-cumulative preference shares of US$0.01 (1) — — 10 10 Cumulative preference shares of £1 1 1 900 900
Note: (1) No shares were redeemed in 2019. (2018 – 26 million shares with a total nominal value of £0.2 million were redeemed).
Ordinary shares There is no authorised share capital under the company’s constitution. At 31 December 2019, the directors had authority granted at the 2019 Annual General Meeting to issue up to £605 million nominal of ordinary shares other than by pre-emption to existing shareholders.
In the three years to 31 December 2019, the percentage increase in issued share capital due to non pre-emptive issuance (excluding employee share schemes) for cash was 1.42%. In addition, the company issued 45 million ordinary shares of £1 each in connection with employee share plans.
In 2019 RBS paid an interim dividend of £241 million, or 2.0p per ordinary share (2018 - £241 million, or 2.0p per ordinary share) and a special dividend of £1,449 million, or 12.0p per ordinary share (2018 – nil). In addition, the company announced that the directors have recommended a final dividend of £364 million, or 3.0p per ordinary share (2018 – £422 million, or 3.5p per ordinary share), and a further special dividend of £606 million, or 5.0p per ordinary share (2018 –
£904 million, or 7.5p per ordinary share), which are both subject to shareholders’ approval at the Annual General Meeting on 29 April 2020.
If approved, payment will be made on 4 May 2020 to shareholders on the register at the close of business on 27 March 2020. The exdividend date will be 26 March 2020.
RBS – Annual Report and Accounts 2019 249 21 Share capital and other equity continued
On a winding-up or liquidation of the company, the holders of the noncumulative preference shares are entitled to receive, out of any surplus assets available for distribution to the company's shareholders (after payment of arrears of dividends on the cumulative preference shares up to the date of repayment) pari passu with the cumulative preference shares and all other shares of the company ranking pari passu with the non-cumulative preference shares as regards participation in the surplus assets of the company, a liquidation distribution per share equal to the applicable redemption price detailed in the table above, together with an amount equal to dividends for the then current dividend period accrued to the date of payment, before any distribution or payment may be made to holders of the ordinary shares as regards participation in the surplus assets of the company.
US$2.0 billion 7.5% notes callable August 2020 (2) 1,278 1,278 1,278 US$1.15 billion 8% notes callable August 2025 (2) 734 734 734 US$2.65 billion 8.625% notes callable August 2021 (3) 2,046 2,046 2,046
Notes: (1) The coupons on these notes are non-cumulative and payable at the company’s discretion. In the event RBS Group’s CET1 ratio falls below 7% any outstanding notes will be converted into ordinary shares at a fixed price. While taking the legal form of debt, these notes are classified as equity under IFRS.
Merger reserve - the merger reserve comprises the premium on shares issued to acquire NatWest, less goodwill amortisation charged under previous GAAP.
RBS – Annual Report and Accounts 2019 250 22 Leases RBS Group has adopted IFRS 16 Leases retrospectively from 1 January 2019 on a modified retrospective basis without restating prior periods. The impact on RBS Group’s balance sheet and retained earnings is shown below: £bn
Retained earnings at 1 January 2019 14.3 Loans to customers - Finance leases 0.2 Other assets - Net right of use assets 1.3 - Recognition of lease liabilities (1.9) - Provision for onerous leases 0.2 Other liabilities (1.7) Net impact on retained earnings (0.2) Retained earnings at 1 January 2019 14.1
On adoption of IFRS 16, RBS Group recognised right of use assets and lease liabilities in relation to leases which has been previously classified as operating leases under IAS17 Leases subject to certain practical expedients as allowed by the standard (see below).
The following practical expedients permitted by the standard were used:  A single discount rate has been applied to a portfolio of lease with reasonably similar characteristics.
 The accounting for operating leases with a remaining lease term of 12 months at 1 January 2019 for non property leases.
 Reliance on assessment of onerous provisions under IAS 37 Provisions, Contingent Liabilities and Contingent Assets for the purposes of impairment.
 The use of hindsight where contracts contain options to extend or terminate the lease in determining the lease term.
Operating lease commitments at 31 December 2018 2,689 Adjustments as a result of different treatment of extension and termination options (134) Discounted using the incremental borrowing rate (684) Other 5 Lease liabilities recognised as at 1 January 2019 on adoption of IFRS 16 1,876
Rental expense in respect of operating leases in 2018 was £233 million. 2019 £m
RBS – Annual Report and Accounts 2019 251 22 Leases continued £m
Operating leases Minimum rentals payable under non-cancellable leases (1) - within 1 year 232 - after 1 year but within 5 years 736 - after 5 years 1,721
Amount receivable under finance leases Within 1 year 3,388 1 to 2 years 2,229 2 to 3 years 1,733 3 to 4 years 758 4 to 5 years 682 After 5 years 1,758 Lease payments total 10,548 Unguaranteed residual values (215) Future drawdowns (30) Unearned income (1,196) Present value of lease payments 9,107 Impairments (110) Net investment in finance leases 8,997
The total present value of finance lease contracts and hire purchase agreements excludes £62m of impairment allowance.
RBS – Annual Report and Accounts 2019 252 22 Leases continued The following tables show undiscounted lease receivables from operating leases: £m
Amounts receivable under operating leases Within 1 year 154 1 to 2 years 123 2 to 3 years 83 3 to 4 years 48 4 to 5 years 17 After 5 years 12 Total 437 £m
Within 1 year 139 1 to 5 years 325 After 5 years 49 Total 513 £m £m
Nature of operating lease assets on the balance sheet Transportation 334 313 Cars and light commercial vehicles 24 11 Other 295 285
Residual value exposures The table below gives details of the unguaranteed residual value included in the carrying value of finance lease receivables and operating lease assets.
Within 1 but within but within After 5 year 2 years 5 years years £m £m £m £m £m
Operating leases - transportation 25 15 94 14 148 - cars and light commercial vehicles 1 1 2 — 4 - other 26 19 37 10 92 Finance lease contracts 68 32 67 38 205 Hire purchase agreements 55 2 — — 57
RBS – Annual Report and Accounts 2019 253 23 Structured entities A structured entity (SE) is an entity that has been designed such that voting or similar rights are not the dominant factor in deciding who controls the entity, for example, when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements. SEs are usually established for a specific, limited purpose. They do not carry out a business or trade and typically have no employees. They take a variety of legal forms - trusts, partnerships and companies - and fulfil many different functions. As well as being a key element of securitisations, SEs are also used in fund management activities in order to segregate custodial duties from the provision of fund management advice.
RBS arranges securitisations to facilitate client transactions and undertakes own asset securitisations to sell or to fund portfolios of financial assets. RBS also acts as an underwriter and depositor in securitisation transactions in both client and proprietary transactions.
Own asset securitisations In own-asset securitisations, the pool of assets held by the SE is either originated by RBS, or (in the case of whole loan programmes) purchased from third parties.
Trading assets and derivatives Trading assets 760 52 812 621 148 769 Derivative assets 196 24 220 200 47 247 Derivative liabilities (154) (4) (158) (156) (49) (205) Total 802 72 874 665 146 811
Non trading assets Loans to customers 1,544 636 2,180 1,972 536 2,508 Other financial assets 5,373 107 5,480 4,521 — 4,521 Total 6,917 743 7,660 6,493 536 7,029
The following assets have failed derecognition (1) 2019 2018 £m £m
Assets pledged as collateral RBS Group pledges collateral with its counterparties in respect of derivative liabilities and bank and stock borrowings.
The capital resources based on the PRA transitional basis for RBSG plc are set out below. PRA transitional basis
CET1 capital 29,054 30,639 Additional Tier 1 (AT1) capital Qualifying instruments and related share premium 4,051 4,051 Qualifying instruments and related share premium subject to phase out 1,366 1,393 Qualifying instruments issued by subsidiaries and held by third parties subject to phase out 140 140 AT1 capital 5,557 5,584 Tier 1 capital 34,611 36,223 Qualifying Tier 2 capital Qualifying instruments and related share premium 4,867 6,386 Qualifying instruments issued by subsidiaries and held by third parties 1,345 1,565 Tier 2 capital 6,212 7,951 Total regulatory capital 40,823 44,174
A number of subsidiaries and sub-groups within RBS Group, principally banking 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 RBS Group to lend money to other members of RBS may be subject to restrictions such as local regulatory or legal requirements, the availability of reserves and financial and operating performance.
More than More than 1 year but 3 years but Less than less than less than Over
Guarantees 1,015 427 218 1,097 2,757 3,952 Other contingent liabilities 1,134 600 161 583 2,478 3,052 Standby facilities, credit lines and other commitments 59,878 21,054 31,664 7,164 119,760 119,879 Contingent liabilities and commitments 62,027 22,081 32,043 8,844 124,995 126,883
Banking commitments and contingent obligations, which have been entered into on behalf of customers and for which there are corresponding obligations from customers, are not included in assets and liabilities. RBS Group's maximum exposure to credit loss, in the event of its obligation crystallising and all counterclaims, collateral or security proving valueless, is represented by the contractual nominal amount of these instruments included in the table above. These commitments and contingent obligations are subject to RBS Group's normal credit approval processes.
RBS – Annual Report and Accounts 2019 256 26 Memorandum items continued Trustee and other fiduciary activities In its capacity as trustee or other fiduciary role, RBS Group may hold or place assets on behalf of individuals, trusts, companies, pension schemes and others. The assets and their income are not included in RBS Group's financial statements. RBS Group earned fee income of £250 million (2018 - £257 million; 2017- £244 million) from these activities.
The FSCS had borrowed from HM Treasury to fund compensation costs associated with the failure of Bradford & Bingley, Heritable Bank, Kaupthing Singer & Friedlander, Landsbanki ‘Icesave’ and London Scottish Bank plc. The industry has now repaid all outstanding loans with the final £4.7 billion being repaid in June 2018. The loan was interest bearing with the reference rate being the higher of 12 month LIBOR plus 111 basis points or the relevant gilt rate for the equivalent cost of borrowing from HMT.
In many proceedings and investigations, it is not possible to determine whether any loss is probable, or to estimate reliably the amount of any loss, either as a direct consequence of the relevant proceedings and investigations or as a result of adverse impacts or restrictions on RBS Group’s reputation, businesses and operations. Numerous legal and factual issues may need to be resolved, including through potentially lengthy discovery and document production exercises and determination of important factual matters, and by addressing novel or unsettled legal questions relevant to the proceedings in question, before a liability can reasonably be estimated for any claim. RBS Group cannot predict if, how, or when such claims will be resolved or what the eventual settlement, damages, fine, penalty or other relief, if any, may be, particularly for claims that are at an early stage in their development or where claimants seek substantial or indeterminate damages.
There are situations where RBS Group may pursue an approach that in some instances leads to a settlement agreement. This may occur in order to avoid the expense, management distraction or reputational implications of continuing to contest liability, or in order to take account of the risks inherent in defending claims or investigations, even for those Matters for which RBS 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 future outflow of resources in respect of any Matter may ultimately prove to be substantially greater than or less than the aggregate provision that RBS Group has recognised. Where (and as far as) liability cannot be reasonably estimated, no provision has been recognised. RBS Group expects that in future periods, additional provisions, settlement amounts and customer redress payments will be necessary, in amounts that are expected to be substantial in some instances.
For a discussion of certain risks associated with RBS Group’s litigation, investigations and reviews, see the Risk Factor relating to legal, regulatory and governmental actions and investigations set out on page 293.
Several class actions relating to USD LIBOR, as well as more than two dozen non-class actions concerning USD LIBOR, are part of a coordinated proceeding in the SDNY. In December 2016, the SDNY held that it lacks personal jurisdiction over NWM Plc with respect to certain claims. As a result of that decision, all RBS Group companies have been dismissed from each of the USD LIBOR-related class actions (including class actions on behalf of over-the-counter plaintiffs, exchange-based purchaser plaintiffs, bondholder plaintiffs, and lender plaintiffs), but seven non-class cases in the co-ordinated proceeding remain pending against RBS Group defendants. The dismissal of RBS Group companies for lack of personal jurisdiction is the subject of a pending appeal to the United States Court of Appeals for the Second Circuit. In September 2019, RBS Group companies reached a settlement in principle to resolve the class action on behalf of bondholder plaintiffs (those who held bonds issued by non-defendants on which interest was paid from 2007 to 2010 at a rate expressly tied to USD LIBOR). The settlement is subject to documentation and court approval. The amount of the settlement is covered by an existing provision.
In addition, there are two class actions relating to JPY LIBOR and Euroyen TIBOR, both pending before the same judge in the SDNY. In the first class action, which relates to Euroyen TIBOR futures contracts, the court dismissed the plaintiffs’ antitrust claims in March 2014, but declined to dismiss their claims under the Commodity Exchange Act for price manipulation. The Commodity Exchange Act claims are now the subject of a further motion to dismiss on the ground that they are impermissibly extraterritorial. The second class action relates to other derivatives allegedly tied to JPY LIBOR and Euroyen TIBOR. The court dismissed that case in March 2017 on the ground that the plaintiffs lack standing. The plaintiffs have commenced an appeal of that decision.
Details of UK litigation claims in relation to the alleged mis-sale of interest rate hedging products (IRHPs) involving LIBOR-related allegations are set out under ‘Interest rate hedging products and similar litigation’ on page 258.
In January 2019, a class action antitrust complaint was filed in the SDNY alleging that the defendants (USD ICE LIBOR panel banks and affiliates) have conspired to suppress USD ICE LIBOR from 2014 to the present by submitting incorrect information to ICE about their borrowing costs. The RBS Group defendants are RBSG plc, NWM Plc, NWMSI, and NWB Plc. A motion to dismiss was filed by the defendants in August 2019, and remains pending before the court.
FX antitrust litigation NWM Plc, NWMSI and / or RBSG plc, are defendants in several cases relating to NWM Plc’s foreign exchange (FX) business, each of which is pending before the same federal judge in the SDNY.
In 2015, NWM Plc paid US$255 million to settle the consolidated antitrust class action on behalf of persons who entered into over-thecounter FX transactions with defendants or who traded FX instruments on exchanges. That settlement received final court approval in August 2018. On 7 November 2018, some members of the settlement class who opted out of the settlement filed their own non-class complaint in the SDNY asserting antitrust claims against NWM Plc, NWMSI and other banks. On 31 December 2018, some of the same claimants, as well as others, filed proceedings in the High Court of Justice of England and Wales, asserting competition claims against NWM Plc and several other banks. The claim was served on 25 April 2019.
Certain other foreign exchange transaction related claims have been or may be threatened. RBS Group cannot predict whether any of these claims will be pursued, but expects that some may.
RBS – Annual Report and Accounts 2019 258 26 Memorandum items continued Litigation, investigations and reviews customers sold the bonds. The class consists of those who purchased or sold EGBs in the US between 2007 and 2012. The defendants have filed a motion to dismiss this matter, which remains pending.
Interest rate hedging products and similar litigation RBS Group is dealing with a number of active litigation claims in the UK in relation to the alleged mis-selling of interest rate hedging products (IRHPs). In general, claimants allege that the relevant IRHPs were mis-sold to them, with some also alleging that misrepresentations were made in relation to LIBOR. Claims have been brought by customers who were considered under the UK Financial Conduct Authority (FCA) redress programme for IRHPs, as well as customers who were outside of the scope of that programme, which was closed to new entrants in March 2015. RBS Group remains exposed to potential claims from customers who were either ineligible to be considered for redress or who are dissatisfied with their redress offers.
Tax dispute HMRC issued a tax assessment in 2012 against RBSG plc for approximately £86 million regarding a value-added-tax (‘VAT’) matter in relation to the trading of European Union Allowances (‘EUAs’) by a joint venture subsidiary in 2009. RBSG plc has lodged an appeal, which is still to be heard, before the First-tier Tribunal (Tax), a specialist tax tribunal, challenging the assessment (the ‘Tax Dispute’). In the event that the assessment is upheld, interest and costs would be payable, and a penalty of up to 100 per cent of the VAT held to have been legitimately denied by HMRC could also be levied. Separately, NWM Plc is a named defendant in civil proceedings before the High Court of Justice of England and Wales brought in 2015 by ten companies (all in liquidation) (the ‘Liquidated Companies’) and their respective liquidators (together, ‘the Claimants’). The Liquidated Companies previously traded in EUAs in 2009 and are alleged to be defaulting traders within (or otherwise connected to) the EUA supply chains forming the subject of the Tax Dispute. The Claimants claim approximately £71.4 million plus interest and costs and allege that NWM Plc dishonestly assisted the directors of the Liquidated Companies in the breach of their statutory duties and/or knowingly participated in the carrying on of the business of the Liquidated Companies with intent to defraud creditors. The trial in that matter concluded on 20 July 2018 and judgment is awaited.
NWM N.V. and certain other financial institutions, are defendants in several actions pending in the United States District Courts for the Eastern and Southern Districts of New York, filed by a number of US nationals (or their estates, survivors, or heirs), most of whom are or were US military personnel, who were killed or injured in attacks in Iraq between 2003 and 2011. NWM Plc is also a defendant in some of these cases.
RBS – Annual Report and Accounts 2019 259 26 Memorandum items continued Litigation, investigations and reviews allegations as to the alleged conspiracy and causation. The plaintiffs are appealing the decision to the United States Court of Appeals for the Second Circuit. Another action, filed in the SDNY in 2017, was dismissed on 28 March 2019 on similar grounds. The dismissal is subject to re-pleading by the plaintiffs or appeal. Other follow-on actions that are substantially similar to the two that have now been dismissed are pending in the same courts.
Securities underwriting litigation NWMSI is an underwriter defendant in several securities class actions in the US in which plaintiffs generally allege that an issuer of public debt or equity securities, as well as the underwriters of the securities (including NWMSI), are liable to purchasers for misrepresentations and omissions made in connection with the offering of such securities.
Investigations and reviews RBS Group’s businesses and financial condition can be affected by the actions of various governmental and regulatory authorities in the UK, the US, the EU and elsewhere. RBS Group has engaged, and will continue to engage, in discussions with relevant governmental and regulatory authorities, including in the UK, the US, the EU and elsewhere, on an ongoing and regular basis, and in response to informal and formal inquiries or investigations, regarding operational, systems and control evaluations and issues including those related to compliance with applicable laws and regulations, including consumer protection, business conduct, competition / anti-trust, anti-bribery, antimoney laundering and sanctions regimes.
The RBS Group’s NatWest Markets business is currently responding to a separate criminal investigation by the USAO concerning unrelated securities trading in 2018 by certain former traders of NWM Plc, involving alleged spoofing, which was reported in connection with the NPA. In January 2020, the NPA was extended for a fourth time (for three additional months) to accommodate advanced discussions with the USAO and the DoJ concerning potential resolution of the criminal investigation into alleged spoofing as well as the impact of that conduct and any such resolution on the status of the NPA and the potential consequences thereof. The duration and outcome of these matters remain uncertain, including in respect of whether settlement may be reached. Material adverse collateral consequences, in addition to further substantial costs and the recognition of further provisions may occur depending on the outcome of the investigation, as further described in the Risk Factor relating to legal, regulatory and governmental actions and investigations set out on page 293.
As part of the settlement with the Federal Reserve, NWM Plc and NWMSI entered into a cease and desist order (the FX Order). In the FX Order, which is publicly available and will remain in effect until terminated by the Federal Reserve, NWM Plc and NWMSI agreed to take certain remedial actions with respect to FX activities and certain other designated market activities, including the creation of an enhanced written internal controls and compliance programme, an improved compliance risk management programme, and an enhanced internal audit programme. NWM Plc and NWMSI are obligated to implement and comply with these programmes as approved by the Federal Reserve, and are also required to conduct, on an annual basis, a review of applicable compliance policies and procedures and a risk-focused sampling of key controls.
FCA review of RBS Group’s treatment of SMEs In 2014, the FCA appointed an independent Skilled Person under section 166 of the Financial Services and Markets Act 2000 to review RBS Group’s treatment of SME customers whose relationship was managed by RBS Group’s Global Restructuring Group (GRG) in the period 1 January 2008 to 31 December 2013.
The Skilled Person delivered its final report to the FCA during September 2016, and the FCA published an update in November 2016. In response, RBS Group announced redress steps for SME customers in the UK and the Republic of Ireland that were in GRG between 2008 and 2013. These steps were (i) an automatic refund of certain complex fees; and (ii) a new complaints process, overseen by
In July 2018, the FCA confirmed that it had concluded its investigation and that it did not intend to take disciplinary or prohibitory action against any person in relation to these matters. On 13 June 2019, the FCA published a full report explaining how it had reached that conclusion.
FCA mortgages market study In December 2016, the FCA launched a market study into the provision of mortgages. On 26 March 2019 the final report was published. This found that competition was working well for many customers but also proposed remedies to help customers shop around more easily for mortgages. A period of consultation is underway and the FCA has indicated that it intends to provide updates on the remedies in due course.
RBS Group has made provisions totalling €312 million (£266 million) to date for this matter, of which €269 million (£229 million) had been utilised by 31 December 2019.
Separately, in April 2016, the CBI notified UBI DAC that it was also commencing an investigation under its Administrative Sanctions Procedure into suspected breaches of the Consumer Protection Code 2006 during the period 4 August 2006 to 30 June 2008 in relation to certain customers who switched from tracker mortgages to fixed rate mortgages. This investigation remains ongoing and UBI DAC continues to co-operate with the CBI.
27 Analysis of the net investment in business interests and intangible assets
Note: (1) Includes cash collateral posted with bank counterparties in respect of derivative liabilities of £7,570 million (2018 - £7,302 million; 2017 - £6,683 million).
Certain members of RBS 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.
No directors accrued benefits under defined benefit schemes or money purchase schemes during 2019 and 2018.
A new board and committee operating model was introduced in 2018 in order to align with UK ring-fencing requirements. The definition of key management has been revised and now comprises members of the RBSG plc and NWH Ltd Boards, members of the RBSG plc and NWH Ltd Executive Committees, and the Chief Executives of NatWest Markets Plc and RBS International (Holdings) Limited. This is on the basis that these individuals have been identified as Persons Discharging Managerial Responsibilities of RBSG plc under the new governance structure.
For the purposes of IAS 24 ‘Related Party Disclosures’, key management comprise directors of the company and Persons Discharging Managerial Responsibilities (PDMRs) of RBSG plc under the new governance structure. The captions in the RBS Group's primary financial statements include the following amounts attributable, in aggregate, to key management: Loans to customers 1,662 1,544 Customer deposits 37,727 31,361
RBS – Annual Report and Accounts 2019 263 32 Related parties UK Government On 1 December 2008, the UK Government through HM Treasury became the ultimate controlling party of The Royal Bank of Scotland Group plc. The UK Government's shareholding is managed by UK Government Investments Limited, a company wholly owned by the UK Government. As a result, the UK Government and UK Government controlled bodies became related parties of RBS Group.
RBS Group enters into transactions with many of these bodies on an arm’s length basis. Transactions include the payment of: taxes – principally UK corporation tax (Note 7) and value added tax; national insurance contributions; local authority rates; and regulatory fees and levies (including the bank levy (Note 3) and FSCS levies (Note 26) together with banking transactions such as loans and deposits undertaken in the normal course of banker-customer relationships.
Members of RBS Group that are UK authorised institutions are required to maintain non-interest bearing (cash ratio) deposits with the
RBS Group provides guarantees for certain subsidiary liabilities to the Bank of England.
(b) RBS recharges The Royal Bank of Scotland Group Pension Fund with the cost of administration services incurred by it. The amounts involved are not material to RBS Group.
Owners’ equity includes a total comprehensive profit for the year, dealt with in the accounts of the parent company, of £2,712 million (2018 - £2,554 million profit; 2017 - £1,211 million profit). Comprehensive profit for 2018 and 2017 has been restated for IAS12 ‘income taxes’. Refer to Accounting policy 1, Other amendments to IFRS, for further details.
Statement of changes in equity for the year ended 31 December 2019 2019 2018* 2017*
Called-up share capital (1) At 1 January 12,049 11,965 11,823 Ordinary shares issued 45 84 142 At 31 December 12,094 12,049 11,965
Share premium account At 1 January 1,027 887 25,693 Ordinary shares issued 67 140 235 Capital reduction (3) — — (25,789) Redemption of debt preference shares (4) — — 748 At 31 December 1,094 1,027 887
Cash flow hedging reserve At 1 January 83 20 186 Amount recognised in equity (5) 18 103 (157) Amount transferred from equity to earnings (6) (39) (25) (47) Tax 5 (15) 38 At 31 December (7) 67 83 20
Notes: (1) Details of the company’s share capital are set out in Note 21 on the consolidated accounts. (2) Paid-in equity reclassified to liabilities as a result of the call of US$564 million and CAD321 million EMTN notes in August 2017 (redeemed in October 2017). (3) On 15 June 2017, the Court of Session approved a reduction of RBSG plc’s capital so that the amounts which stood to the credit of share premium account and capital redemption reserve were transferred to retained earnings. (4) During 2017, non-cumulative US dollar preference shares recorded as debt were redeemed at their original issue price of US$1.1 billion. The nominal value of £0.3 million has been credited to the capital redemption reserve; share premium increased by £0.7 billion in respect of the premium received on issue, with a corresponding decrease in retained earnings.
(5) Relates to foreign exchange hedges. (6) Relates to foreign exchange hedges transferred to net interest income. (7) Relates mainly to de-designated hedges. (8) During 2018, non-cumulative US dollar, Euro and Sterling preference shares were redeemed.
Cash flow statement for the year ended 31 December 2019 £m £m £m
Issue of ordinary shares 17 144 306 Issue of other equity instruments: Additional Tier 1 capital notes — — — Issue of subordinated liabilities 577 — — Redemption of other equity instruments — (2,805) (627) Redemption of debt preference shares — — (748) Redemption of subordinated liabilities (855) (267) (1,665) Service cost of other equity instruments (3,424) (798) (583) Interest on subordinated liabilities (441) (443) (514) Issue of MRELs 1,178 (2,997) 3,612 Redemption and maturity of MRELs (1,285) (83) (774) Interest on MRELs 69 171 105 Net cash flows from financing activities (2) (4,164) (7,078) (888)
Net increase/(decrease) in cash and cash equivalents 232 62 (950) Cash and cash equivalents at 1 January 307 245 1,195 Cash and cash equivalents at 31 December (3) 539 307 245
(2) 2018 has been re-presented to align the balance sheet classification. MREL was previously presented in Operating activities and is now presented in Financing activities.
The accounting policies that are applicable to RBSG plc are included in RBS’s accounting policies which are set out on pages 208 to 212 of the consolidated financial statements, except that it has no policy regarding ‘Basis of consolidation’.
The income statement now includes any tax relief on the servicing cost of instruments classified as equity. Relief of £67 million was recognised in the statement of changes in equity for the year ended 31 December 2018; this and prior years have been restated.
Future accounting developments International Financial Reporting Standards A number of IFRSs and amendments to IFRS were in issue at 31 December 2019. RBSG plc is assessing the effect of adopting these standards on its financial statements.
3 Financial instruments - 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.
Financial assets Amounts due from subsidiaries (1) 11.0 11.3 12.0 12.0
Financial liabilities Amounts due to subsidiaries (2) 0.1 0.1 0.6 0.5 Other financial liabilities - debt securities in issue (3) 16.7 17.3 16.8 16.7 Subordinated liabilities (3) 7.6 8.4 7.9 8.3
RBS – Annual Report and Accounts 2019 268 4 Financial instruments - maturity analysis Remaining maturity The following table shows the residual maturity of financial instruments based on contractual date of maturity.
Assets Derivatives with subsidiaries - designated hedges 104 872 976 (20) 545 525 - economic hedges (95) 98 3 40 (22) 18 Amounts due from subsidiaries - amortised cost 5,169 5,815 10,984 6,959 5,077 12,036 Amounts due from subsidiaries - MFVTPL 145 13,884 14,029 14 10,741 10,755 Other financial assets — 277 277 — 241 241
0-3 months 3-12 months 1-3 years 3-5 years 5-10 years 10-20 years £m £m £m £m £m £m
Derivatives held for designated hedging purposes are as follows: Notional Assets Liabilities Notional Assets Liabilities £bn £m £m £bn £m £m
RBS – Annual Report and Accounts 2019 269 6 Investments in Group undertakings Investments in Group undertakings are carried at cost less impairment. Movements during the year were as follows: At 1 January 56,747 47,559 Currency translation and other adjustments (38) — Additional investments in Group undertakings 2,523 9,574 Additions — 33,807 Disposals (1,973) (33,900) Impairment of investments (1,451) (293) At 31 December 55,808 56,747
In 2019 the company invested additional capital in its subsidiaries of £1.8 billion of equity (NWM Plc) and AT1 issuances of £0.7 billion (NWM Plc £0.2 billion, RFS Holdings B.V. £0.2 billion and The Royal Bank of Scotland International (Holdings) Limited £0.3 billion). On 29 November 2019 RBSG plc sold its investment in RBS Holdings N.V. (the parent company of NWM N.V.) to NWM Plc. This is reflected in the disposals and additional investments in Group undertakings respectively.
The 2019 and 2018 impairments mainly related to the company’s investment in NWM Plc, mainly due to the decline in net realisable value as a result of challenging market conditions. In 2018 the addition relates to the acquisition of NatWest Holdings Limited from NatWest Markets Plc. On 29 June 2018, the Court of Session in Scotland approved a capital reduction which was completed on 2 July 2018 which effected, primarily through a distribution in specie, the transfer of NatWest Holdings Limited to RBSG thereby creating the legal separation of those RBS Group entities that are within the ring fenced sub-group from those held outside the ring-fence. Additional investments in Group undertakings in 2018 primarily relate to NatWest Holdings Limited.
The value in use review as at 31 December 2019 did not indicate the need for an impairment in the investment in NatWest Holdings Limited. The directors considered the lack of headroom and the uncertainty relating to the estimate of the value in use, but concluded that there was a sufficient basis to conclude that no impairment was required. Future value in use is primarily affected by changes in profitability, and changes in discount rate. Adverse changes would lead to value in use falling below carrying value, and the need to recognise an impairment. The most likely cause for this would be a failure to meet budgeted targets, including cost targets, or external downgrades in the UK economy.
The value in use model shows the following sensitivities: Potential VIU movement 2019 2018 £bn £bn 1% adverse movement in discount rate (5.0) (5.3) 1% adverse movement in terminal growth rate (2.0) (2.3) £250m adverse movement in operating profit before tax (2.2) (2.2)
The principal subsidiary undertakings of the company are shown below. Their capital consists of ordinary and preference shares which are unlisted with the exception of certain preference shares listed by NWB Plc. All of these subsidiaries are included in RBS Group’s consolidated financial statements and have an accounting reference date of 31 December.
Notes: (1) The company does not hold any of the preference shares in issue. (2) Coutts & Company is incorporated with unlimited liability. (3) Owned via NatWest Holdings Limited. (4) Owned via NatWest Markets Plc. (5) Owned via The Royal Bank of Scotland International (Holdings) Limited.
Redemptions in the period are disclosed on Note 19 in the consolidated accounts.
RBS – Annual Report and Accounts 2019 270 7 Subordinated liabilities continued Capital 2019 2018
US$2,250 million 6.13% dated notes 2022 Tier 2 1,737 1,739 US$650 million 6.425% dated notes 2043 (callable January 2034) (1) Ineligible 554 501 US$2,000 million 6.00% dated notes 2023 Tier 2 1,578 1,572 US$1,000 million 6.10% dated notes 2023 Tier 2 773 770 €1,000 million 3.63% dated notes 2024 (callable March 2019) Tier 2 — 918 US$2,250 million 5.13% dated notes 2024 Tier 2 1,769 1,753 US$750 million 3.754% dated notes 2029 Tier 2 569 —
6,980 7,253 Note: (1) The call is on the underlying security in the partnership, rather than the internal issued debt.
Note: (1) Further details of the contractual terms of the preference shares are given in Note 19 on the consolidated accounts.
The following table analyses intercompany subordinated liabilities: Undated loan capital treatment £m £m
Transfer to retained earnings — — (25,789) — — — Ordinary shares issued in respect of employee share schemes 95 80 71 — — — Redemption of debt preference shares — — 748 — — — Other adjustments including foreign exchange — — 196 423 349 (1,026) At 31 December 17,235 17,123 16,899 7,763 8,059 7,977 9 Directors’ and key management remuneration Directors’ remuneration is disclosed in Note 30 on the consolidated accounts. The directors had no other reportable related party transactions or balances with the company.
The Royal Bank of Scotland Group Independent Financial Services Ltd BF FC (5)
The following table details active related undertakings incorporated outside the UK which are 100% owned by RBS Group and fully consolidated for accounting purposes
RBS Polish Financial Advisory Services Sp. Z. o.o. BF FC (54)
The following table details active related undertakings incorporated in the UK where RBS Group ownership is less than 100%
Belfast Bankers’ Clearing Company Ltd BF IA PC 25 (83) BGF Group Plc BF EAA PC 25 (84) GWNW City Developments Ltd BF EAJV DE 50 (30) Higher Broughton (GP) Ltd BF EAA PC 41 (31) Higher Broughton Partnership LP BF EAA DE 41 (32) Isobel AssetCo Ltd BF FC FC 75 (33) Isobel EquityCo Ltd BF FC FC 75 (33) Isobel HoldCo Ltd BF FC FC 75 (33) Isobel Intermediate HoldCo Ltd BF FC FC 75 (33) Isobel Loan Capital Ltd BF FC FC 75 (33) Isobel Mezzanine Borrower Ltd BF FC FC 75 (33) Jaguar Cars Finance Ltd BF FC FC 50 (1)
RBS – Annual Report and Accounts 2019 274 10 Related undertakings continued The following table details related undertakings incorporated outside the UK where RBS Group ownership is less than 100%
Ardmore Securities No.1 DAC BF FC DE 0 (81) Ardmore Securities No.2 DAC BF FC DE 0 (82)
Galaxy Futures Company Ltd BF EAA PC 17 (28) German Public Sector Finance B.V. BF EAJV PC 50 (29) Lunar Funding VIII Ltd BF FC DE 0 (16) Optimus KB BF FC FC 51 (6) Pharos Estates Ltd OTH EAA DE 49 (50) Sempra Energy Trading LLC BF FC FC 51 (19) Solar Energy Capital Europe SARL BF EAJV PC 33 (62) Spring Allies Jersey Ltd BF IA DE 49 (48) Thames Asset Global Securitization No.1 Inc. BF FC FC 0 (74) The Drive4Growth Company Ltd OTH IA DE 20 (73) Tulip Asset Purchase Company B.V. BF FC FC 0 (76) Wiöniowy Management sp. Z.o.o. SC EAA DE 25 (79)
RBS – Annual Report and Accounts 2019 275 10 Related undertakings continued The following table details related undertakings that are dormant
Coutts & Co Ltd Hong Kong National Westminster Bank Plc Finland, France, Germany, Italy,
Netherlands, Norway, Spain, Sweden Natwest Markets Plc Germany, Hong Kong, Japan,
United Kingdom The Royal Bank of Scotland Gibraltar, Guernsey, Isle of Man, International Ltd Luxembourg, United Kingdom
Notes Registered addresses Country of incorporation (1) 250 Bishopsgate, London, EC2M 4AA, England UK (2) Claude Debussylaan 94, 1082 MD, Amsterdam, Netherlands (3) FRP Advisory LLP, Apex 3, 95 Haymarket Terrace, Edinburgh, EH12 5HD, Scotland UK (4) Hudsun Chambers, PO Box 986, Road Town, Tortola British Virgin Islands (5) 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland UK (6) c/o Nordisk Renting AB, Jakobsbergsgatan 13, 8 storey, Box 14044, SE-111 44, Stockholm Sweden (7) c/o Visma Services Danmark A/S, Lyskaer 3C-3D, 2730 Herlev, Hjortespring Denmark (8) Tirolerweg 8, Zug, CH-6300 Switzerland (9) Level 5, Mill Court, La Charroterie, St Peter Port, GY1 1EJ Guernsey (10) 3rd Floor, Dixcart House, Sir William Place, St Peter Port, GY1 1GX Guernsey (11) 35 Great St Helen's, London, EC3A 6AP, England UK (12) c/o Epicenter, Mikonkatu 9, 6th Floor, 00100, Helsinki Finland (13) Hieronymus Heyerdahlsgate 1, Postboks 2020 Vika, 0125, Oslo Norway (14) 1 Princes Street, London, EC2R 8BP, England UK (15) Royal Bank House, 71 Bath Street, St Helier, JE4 8PJ Jersey (16) Boundary Hall, Cricket Square, 171 Elgin Avenue, George Town, Grand Cayman, KY1-1104 Cayman Islands
Notes Registered addresses Country of incorporation (17) 440 Strand, London, WC2R OQS, England UK (18) Suite 200B, 2nd Floor, Centre of Commerce, One Bay Street, PO Box N-3944, Nassau Bahamas (19) 251, Little Falls Drive, Wilmington, Delaware, 19808 USA (20) Riverside One, Sir John Rogersons Quay, Dublin 2, D02 X576 RoI (21) 5 Harbourmaster Place, Dublin 1, D01 E7E8 RoI (22) c/o Estera Trust (Cayman) Ltd, Clifton House, 75 Fort Street, PO Box 1350, Grand Cayman, KY1-1108 Cayman Islands (23) Lerchenstrasse 18, Zurich, CH-8022 Switzerland (24) c/o Regus Rue du Rhone Sarl, Rue du Rhone 14, 1204, Geneva Switzerland (25) c/o Maples Corporate Services Ltd, PO Box 309, 121 South Church Street, George Town, Grand Cayman, KY1-1104 Cayman Islands (26) Ulster Bank Group Centre, George's Quay, Dublin 2, D02 VR98 RoI (27) One Edinburgh Quay, 133 Fountainbridge, Edinburgh, EH3 9QG, Scotland UK (28) 9th Floor, SOHO Century Plaza, 1501 Century Avenue, Pudong New Area, Shanghai China (29) De entree 99 -197, 1101 HE Amsterdam Zuidoost Netherlands (30) Gate House, Turnpike Road, High Wycombe, Buckinghamshire, HP12 3NR, England UK (31) 3rd Floor, 1 St Ann Street, Manchester, M2 7LR, England UK (32) Cornwall Buildings, 45-51 Newhall Street, Birmingham, B3 3QR, England UK (33) 40 Berkeley Square, London, W1J 5AL, England UK (34) The Mill, High Street, Rocester, Staffordshire, ST14 5JW, England UK (35) 11-16 Donegall Square East, Belfast, Co Antrim, BT1 5UB, Northern Ireland UK (36) Clarendon House, Two Church Street, Suite 104, Reid Street, Hamilton, HM 11 Bermuda (37) 66-72, Gaspé House, Esplanade, St Helier, JE2 3QT Jersey (38) c/o Nordisk Renting Oy, Mikonkatu 9, 00100 Helsinki Finland (39) 99 Queen Victoria Street, London, EC4V 4EH, England UK (40) 2 Athol Street, Douglas, IM99 1AN Isle Of Man (41) PO Box 230, Heritage Hall, Le Marchant Street, St Peter Port, GY1 4JH Guernsey (42) Via Vittorio Alfieri 1, Conegliano TV, IT-TN 31015 Italy (43) PO Box 384, The Albany, South Esplanade, St Peter Port, GY1 4NF Guernsey (44) c/o CE Serviced Offices Pvt Ltd, Level 1, Tower A, Building No 10, Phase III, DLF Cyber City, Gurgaon, Haryana, 122002 India (45) 36 St Andrew Square, Edinburgh, EH2 2YB, Scotland UK (46) Level 54, Hopewell Centre, 183 Queen's Road East Hong Kong (47) 16 Library Place, St Helier, JE4 8NH Jersey (48) 44 Esplanade, St Helier, JE4 9WG Jersey (49) c/o Adv Jan-Erik Svensson, HC Andersens Boulevard 12, Kopenhaum V, 1553 Denmark (50) 24 Demostheni Severi, 1st Floor, Nicosia, 1080 Cyprus (51) 70 Sir John Rogerson's Quay, Dublin 2, D02 R296 RoI (52) Victoria Place, 5th Floor, 31 Victoria Street, Hamilton, HM 10 Bermuda (53) Madison Building, Midtown, Queensway Gibraltar (54) Wiśniowy Business Park, ul. 1-go Sierpnia 8A, Warsaw, 02-134 Poland (55) 254, 13th Floor, Rua Boa Vista, Sao Paulo, 01014-907 Brazil (56) One Dockland Central, Guild Street, IFSC, Dublin 1, D01 E4X0 RoI (57) 1209, Orange Street, Wilmington, Delaware, 19801 USA (58) 301, Bellevue Parkway, 3rd Floor, Wilmington, Delaware, 19809 USA (59) Roßmarkt 10, Frankfurt am Main, 60311 Germany (60) Regency Court, Glategny Esplanade, St Peter Port, GY1 3AP Guernsey (61) 340, Madison Avenue, New York, 10173 USA (62) 46, Avenue John F. Kennedy, L-1855 Luxembourg (63) Ashurst L26, 181 William Street, Melbourne, VIC, 3000 Australia (64) Gustav Mahlerlaan 350, 1082 ME, Amsterdam Netherlands (65) 40, Avenue John F. Kennedy, L -1855 Luxembourg (66) 23/25 Broad Street, St Helier, JE4 8ND Jersey (67) 12/14, Veer Nariman Road, Brady House, 4th Floor, Fort, Mumbai 400 001 India (68) PO Box 236, First Island House, Peter Street, St Helier, JE4 8SG Jersey (69) c/o Intertrust Group, 35 Great St Helens, London, EC3A 6AP, England UK (70) 6th Floor, Building 2, Tower A, GIL IT/ITES SEZ, Candor TechSpace, Sector 21, Dundahera, Gurugram, Haryana, 122016 India (71) c/o Nordisk Renting AS, 9 Etasje, Klingenberggata 7, NO-0161, Oslo Norway (72) c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm Sweden (73) c/o Denis Crowley & Co Chartered Accountants, Unit 6 Riverside Grove, Riverstick, Co. Cork, P43 W221 RoI (74) 114 West 47th Street, New York, 10036 USA (75) Level 7, Menara Milenium, Jalan Damanlela, Pusat Bandar Damansara, Damansara Heights, Kuala Lumpur, 50490 Malaysia (76) Claude Debussylaan 24, 1082 MD, Amsterdam Netherlands (77) 4 Atlantic Quay, 70 York Street, Glasgow, G2 8JX, Scotland UK (78) 24/26 City Quay, Dublin 2, D02 NY19 RoI (79) Wisniowy Business Park Ul Ilzecka 26, Building E, 02-135, Warsaw Poland (80) 200, Bellevue Parkway, Suite 210, Wilmington, Delaware 19809 USA (81) 28 Fitzwilliam Place, Dublin 2, D02 P283 RoI (82) 3rd Floor, Fleming Court, Fleming's Place, Dublin 4, D04 N4X9 RoI (83) c/o Pinsent Masons LLP, The Soloist Building, 1 Lanyon Place, Belfast, BT1 3LP, Northern Ireland UK (84) 13-15 York Buildings, London, WC2N 6JU, England UK (85) Level 9, Menara Maxis, Kuala Lumpur City Centre, Kuala Lumpur, 50088 Malaysia (86) Office Block A, Bay Studios Business Park, Fabian Way, Swansea, SA1 8QB, Wales UK (87) The Chestnuts Brewers End, Takeley, Bishop's Stortford, CM22 6QJ, England UK (88) Kokermolen 16, 3994 Dh Houten Netherlands (89) c/o Advokatfirmaet Wirsholm AS, Dokkveien 1, NO-0250, Oslo Norway (90) Pinnacle 2, Eastpoint Business Park, Clontarf, Dublin 3, 662844 RoI
As described in the Accounting policies, RBS prepares its financial statements in accordance with IFRS as issued by the IASB which constitutes a body of generally accepted accounting principles (GAAP). This document contains a number of adjusted or alternative performance measures, also known as non-GAAP or non-IFRS performance measures. These measures are adjusted for certain items which management believe are not representative of the underlying performance of the business and which distort period-on-period comparison. These non-IFRS measures are not measures within the scope of IFRS and are not a substitute for IFRS measures. These measures include: Measure Basis of preparation Additional analysis or reconciliation
Profit for the period attributable to ordinary shareholders, adjusted for FX recycling gains, for the period divided by average tangible equity. Average tangible equity is total equity less intangible assets and other owners’ equity.
Segmental operating profit adjusted for tax and for preference share dividends divided by average notional equity, allocated at an operating segment specific rate, of the period average segmental risk-weighted assets incorporating the effect of capital deductions (RWAes).
RBS and segmental business performance commentary have been adjusted for the impact of specific items such as the Alawwal bank merger, FX recycling gains, push payments fraud costs, strategic, litigation and conduct costs (detailed on pages 53 to 54).
NIM Net interest income of the banking business as a percentage of interest-earning assets of the banking business.
ECL loss rate The annualised loan impairment charge divided by gross customer loans. Page 54
In Q1 2019, RBS introduced a new adjusted performance metric, Bank NIM, which is calculated as RBS net interest income and interestearning assets less NWM net interest income and interest-earning assets. Bank NIM is believed by management to more accurately reflect the performance of the business as net interest income is not considered a main income stream for the NWM segment.
Profit attributable to ordinary shareholders (£m) 3,133 1,622 Adjustment for FX recycling gain (£m) (1,572) Adjusted profit attributable to ordinary shareholders (£m) 1,561 1,622
Average total equity (£m) 45,160 48,483 Adjustment for other owners equity and intangibles (£m) (11,960) (14,997) Adjusted total tangible equity (£m) 33,200 33,486
*2018 and 2017 data has been restated for the business re-segmentation completed in the first quarter of 2019. Refer to Note 4 for further details.
Staff expenses (3,567) (3,649) (3,923) Premises and equipment (1,020) (1,241) (1,218) Other administrative expenses (1,638) (1,787) (1,710) Strategic costs (1) (1,381) (1,004) (1,565) Litigation and conduct costs (2) (895) (1,282) (1,285) Administrative expenses (8,501) (8,963) (9,701) Depreciation and amortisation (824) (645) (684) Impairment of other intangible assets — (37) (16) Total (9,325) (9,645) (10,401)
Operating expenses (3,618) (552) (2,600) (486) (264) (1,418) (387) (9,325) Operating lease depreciation — — 138 — — — — 138 Adjusted operating expenses (3,618) (552) (2,462) (486) (264) (1,418) (387) (9,187) Total income 4,866 567 4,318 777 610 1,342 1,773 14,253 Operating lease depreciation — — (138) — — — — (138) Adjusted total income 4,866 567 4,180 777 610 1,342 1,773 14,115 Cost:income ratio 74.4% 97.4% 58.9% 62.5% 43.3% 105.7% nm 65.1%
RBS net interest income 8,047 8,656 8,987 NWM net interest income 188 (112) (203) Net interest income excluding NWM 8,235 8,544 8,784 Average interest earning assets (IEA) 448,556 436,957 422,337 NWM average IEA 35,444 27,851 31,231 Bank average IEA excluding NWM 413,112 409,106 391,106
Principal Risks and Uncertainties Set out below are certain risk factors that could adversely affect the RBS Group’s future results, its financial condition and prospects and cause them to be materially different from what is forecast or expected and directly or indirectly impact the value of its securities in issue. These risk factors are broadly categorised and should be read in conjunction with other sections of this annual report, including the forward looking statements section, the strategic report and the capital and risk management section, and should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties facing the RBS Group.
To deliver against this purpose and deliver sustainable returns, the RBS Group intends to: focus on the lifecycles of its customers using insights about customers to evolve product and service offerings; re-engineer and simplify the RBS Group by updating operational and technological capabilities and strengthening governance and control frameworks to reduce costs and improve customer journeys; focus on innovation and partnership to drive change and achieve growth in new product areas and customer segments; and have a sharper focus on capital allocation and deploying it more effectively for customers, in particular by refocusing its NatWest Markets franchise (‘NWM franchise’).
The scale and scope of the intended changes present material business, operational, IT system, internal culture, conduct and people risks to the RBS Group as the planning and implementation of the transformation programme are resource-intensive and disruptive, and will divert management resources. In addition, the changes being concurrently implemented will require the implementation and application of robust governance and controls frameworks, in particular with respect to any strategic partnerships and acquisitions, and further consolidation of IT systems and there is no guarantee that the RBS Group will be successful in doing so. The implementation of the Purpose-led Strategy could result in materially higher costs than currently contemplated, (including due to material uncertainties and factors outside of the RBS Group’s control) or could be phased in a manner other than currently expected. These risks will be present throughout the period of implementation which is expected to last during the medium term, and in some cases, materially beyond.
Changes in the economic, political and regulatory environment in which the RBS Group operates or regulatory uncertainty and changes, strong market competition and industry disruption or economic volatility, including as a result of the continued uncertainty surrounding the terms of the UK’s exit from the EU, or changes in the scale and timing of policy responses on climate change, may require the RBS Group to adjust aspects of its Purpose-led Strategy or the timeframe for its implementation. In particular, because some initiatives depend on achieving growth in new ventures and markets for the RBS Group, the Purpose-led Strategy is vulnerable to an economic downturn. Furthermore, any new strategy requires ongoing confidence from customers and the wider market, without which customer activity and related income levels may fall or the RBS Group’s reputation may be adversely affected.
Each of these risks, and others identified in these Risk Factors, individually or collectively could jeopardise the implementation and delivery of the Purpose-led Strategy, result in higher than expected restructuring costs, impact the RBS Group’s products and services offering, reputation with customers or business model and adversely impact the RBS Group’s ability to deliver its strategy and meet its targets and guidance, each of which could in turn have a material adverse impact on the RBS Group’s results of operations, financial condition and prospects.
The realignment of the NatWest Markets franchise entails significant execution risks and is based on management plans, projections and models and are subject to certain material assumptions and judgments which may prove to be incorrect such that the go-forward strategy is re-assessed for example: if revenues reduce relatively faster than costs; material execution issues arise or market distress occurs; if RWAs take longer to exit or are more costly to reduce than anticipated; or if the key franchise legal entities, NWM Plc and NWM N.V., have difficulties accessing the funding market on acceptable terms or at all.
Implementing these changes to the NWM franchise entails significant commercial and operational and risks. These include risks around how it is perceived by its customers and stakeholders and the ability for NWM to retain employees required to deliver the transition and whom are key for its go-forward strategic priorities. Revenues and costs may be negatively impacted (revenues, for example, may decrease significantly more quickly than associated costs) and the implementation may be more difficult or expensive than expected, including as a result of the UK’s exit from the EU and regulatory requirements. The orderly run-down of certain of its portfolios and the reduction of its riskweighted assets may be accompanied by the recognition of disposal losses which may be higher than anticipated, including due to a degraded economic environment, and may not lead to a concurrent and proportionate reduction in required capital. The NWM Plc and NWM N.V. boards support the strategy and the associated plans and budgets, but successful implementation of the strategy within the NWM franchise will need their continued support, as well as that of the NWM .N.V. boards and NWM management.
The RBS Group’s new Purpose-led Strategy includes one area of focus on climate change which entails significant execution risk and is likely to require material changes to the business model of the RBS Group over the next ten years. The RBS Group’s new strategy on climate change, together with its commitments under the UN Principles on Responsible Banking to align its strategy to the 2015 Paris Agreement, will require significant resource to develop the capacity and methodology to understand, and measure the climate impact of the emissions from its financing activity. There is currently no standard approach or methodology to measure such emissions and provide a scenario-based model for alignment to the 2015 Paris Agreement (‘Paris Alignment’). The RBS Group must identify its approach to this on a short time scale to meet its target of setting and publishing sector-specific targets by 2021 and its goal of setting comprehensive climate impact scenario-based reduction targets and plans for Paris Alignment by 2022, and be able to adequately define and benchmark its current climate impact to demonstrate its progress against its ambition to reduce this by half over the next 10 years. Any delay to establishing such targets and developing its plan for Paris Alignment may entail reputational and market risk, and increase the risks the RBS Group faces as a result of climate change.
It is expected that the targets and measures that the RBS Group will need to adopt in line with its new strategy on climate change will require significant reductions to the RBS Group’s financed emissions to be realised which, together with the impact of embedding climate into its risk framework and other regulatory, policy and market changes, is likely to necessitate far reaching changes to the RBS Group’s business model and existing exposures, and potentially on timescales outside of risk appetite. Whilst the risks presented by climate change are unprecedented in magnitude and scale, how the RBS Group implements its strategy to respond to climate change may also have a material adverse effect on the RBS Group’s business growth, its competitiveness, and profitability over the short, medium and long term. Once established, there is no certainty that the RBS Group will be able to meet its climate change targets and ambitions or that seeking to do so will not have an adverse impact on the RBS Group, including its competition position. See also ‘The RBS
Group expects to face significant risks in connection with climate change and the transition to a low carbon economy, which may adversely impact the RBS Group’.
Operational and IT resilience risk The RBS Group is subject to increasingly sophisticated and frequent cyberattacks. The RBS Group is experiencing an increase in cyberattacks across both the entire RBS Group and against the RBS Group’s supply chain, re-enforcing the importance of due diligence and close working with the third parties on which the RBS Group relies. The RBS Group is reliant on technology, against which there is a constantly evolving series of attacks that are increasing in terms of frequency, sophistication, impact and severity. As cyberattacks evolve and become more sophisticated, the RBS Group is required to continue to invest in additional capability designed to defend against the emerging threats. In 2019, the RBS Group was subjected to a small number of Distributed Denial of Service (‘DDOS’) attacks, which are a pervasive and significant threat to the global financial services industry. The focus is to mitigate the impact of the attacks and sustain availability of services for RBS Group’s customers. The RBS Group continues to invest significant resources in the development and evolution of cyber security controls that are designed to minimise the potential effect of such attacks.
Any failure in the RBS Group’s cybersecurity policies, procedures or controls, may result in significant financial losses, major business disruption, inability to deliver customer services, or loss of data or other sensitive information (including as a result of an outage) and may cause associated reputational damage. Any of these factors could increase costs (including costs relating to notification of, or compensation for customers, credit monitoring or card reissuance), result in regulatory investigations or sanctions being imposed or may affect the RBS Group’s ability to retain and attract customers. Regulators in the UK, US, Europe and Asia continue to recognise cybersecurity as an increasing systemic risk to the financial sector and have highlighted the need for financial institutions to improve their monitoring and control of, and resilience
Additionally, third parties may also fraudulently attempt to induce employees, customers, third party providers or other users who have access to the RBS Group’s systems to disclose sensitive information in order to gain access to the RBS Group’s data or that of the RBS Group’s customers or employees. Cyber security and information security events can derive from groups or factors such as: internal or external threat actors, human error, fraud or malice on the part of the RBS Group’s employees or third parties, including third party providers, or may result from accidental technological failure.
The RBS Group expects greater regulatory engagement, supervision and enforcement in relation to its overall resilience to withstand IT and related disruption, either through a cyberattack or some other disruptive event. Such increased regulatory engagement, supervision and enforcement is uncertain in relation to scope, consequence and pace of change, which could negatively impact the RBS Group. Due to the RBS Group’s reliance on technology and the increasing sophistication, frequency and impact of cyberattacks, it is likely that such attacks could have a material adverse impact on the RBS Group.
In accordance with the EU General Data Protection Regulation (‘GDPR’), the RBS Group is required to ensure it implements timely, appropriate and effective organisational and technological safeguards against unauthorised or unlawful access to the data of the RBS Group, its customers and its employees. In order to meet this requirement, the RBS Group relies on the effectiveness of its internal policies, controls and procedures to protect the confidentiality, integrity and availability of information held on its IT systems, networks and devices as well as with third parties with whom the RBS Group interacts. A failure to monitor and manage data in accordance with the GDPR requirements of the applicable legislation may result in financial losses, regulatory fines and investigations and associated reputational damage. In addition, whilst the RBS Group takes measures to prevent, detect and minimise attacks, the RBS Group’s systems, and those of third party providers, are subject to frequent cyberattacks.
Operational risks are inherent in the RBS Group’s businesses. Operational risk is the risk of loss resulting from inadequate or failed internal processes, procedures, people or systems, or from external events, including legal risks. The RBS Group operates in many countries, offering a diverse range of products and services supported by 62,900 employees as at 31 December 2019; it therefore has complex and diverse operations. As a result, operational risks or losses can arise from a number of internal or external factors (including financial crime). These risks are also present when the RBS Group relies on third-party suppliers or vendors to provide services to it or its customers, as is increasingly the case as the RBS Group outsources certain functions, including with respect to the implementation of new technologies, innovation and responding to regulatory and market changes.
Operational risks continue to be heightened as a result of the implementation of the RBS Group’s Purpose-led Strategy, including the refocusing of its NatWest Markets franchise, the RBS Group’s current cost-reduction measures and conditions affecting the financial services industry generally (including Brexit and other geo-political developments) as well as the legal and regulatory uncertainty resulting therefrom. This may place significant pressure on the RBS Group’s ability to maintain effective internal controls and governance frameworks. The effective management of operational risks is critical to meeting customer service expectations and retaining and attracting customer business. Although the RBS Group has implemented risk controls and mitigation actions, with resources and planning having been devoted to mitigate operational risk, such measures may not be effective in controlling each of the operational risks faced by the RBS Group. Ineffective management of such risks could adversely affect the RBS Group. See also, ‘The RBS Group has announced a new Purpose-led Strategy which will entail a period of transformation and require an internal cultural shift across the RBS Group. It carries significant execution and operational risks and it may not achieve its stated aims and targeted outcomes’.
The RBS Group’s operations are highly dependent on its complex IT systems, and any IT failure could adversely affect the RBS Group. The RBS Group’s operations are highly dependent on the ability to process a very large number of transactions efficiently and accurately while complying with applicable laws and regulations. The proper functioning of the RBS Group’s payment systems, financial crime and sanctions controls, risk management, credit analysis and reporting, accounting, customer service and other IT systems, as well as the communication networks between its branches and main data processing centres, is critical to the RBS Group’s operations.
In 2019, the RBS Group continued to make considerable investments to further simplify, upgrade and improve its IT and technology capabilities (including migration of certain services to cloud platforms). The RBS Group continues to develop and enhance digital services for its customers and seeks to improve its competitive position through enhancing controls and procedures and strengthening the resilience of services including cyber security. Should such investment and rationalisation initiatives fail to achieve the expected results or prove to be insufficient due to cost-challenges or otherwise, this could negatively affect the RBS Group’s operations, its reputation and ability to retain or grow its customer business or adversely impact its competitive position, thereby negatively impacting the RBS Group’s financial position.
RBS – Annual Report and Accounts 2019 284 including senior management, directors and key employees, in a highly competitive labour market and under internal cost reduction pressures. This entails risk, particularly in light of the implementation of the RBS Group’s Purpose-led Strategy and refocusing of its NatWest Markets franchise, heightened regulatory oversight of banks and the increasing scrutiny of, and (in some cases) restrictions placed upon, employee compensation arrangements, in particular those of banks in receipt of government support such as the RBS Group, all of which may have an adverse effect on the RBS Group’s ability to hire, retain and engage wellqualified employees. The market for skilled personnel is increasingly competitive, especially for technology-focussed roles, thereby raising the cost of hiring, training and retaining skilled personnel. In addition, certain economic, market and regulatory conditions and political developments (including Brexit) may reduce the pool of candidates for key management and non-executive roles, including non-executive directors with the right skills, knowledge and experience, or increase the number of departures of existing employees.
Many of the RBS Group’s employees in the UK, the Republic of Ireland (‘ROI’) and continental Europe are represented by employee representative bodies, including trade unions. Engagement with its employees and such bodies is important to the RBS Group in maintaining good employee relations. Any failure to do so could impact the RBS Group’s ability to operate its business effectively.
The RBS Group’s operations are inherently exposed to conduct risks. These include business decisions, actions or reward mechanisms that are not responsive to or aligned with the RBS Group’s regulatory obligations, customers’ needs or do not reflect the RBS Group’s customer-focussed strategy, ineffective product management, unethical or inappropriate use of data, implementation and utilisation of new technologies, outsourcing of customer service and product delivery, the possibility of mis-selling of financial products and mishandling of customer complaints. Some of these risks have materialised in the past and ineffective management and oversight of conduct risks may lead to further remediation and regulatory intervention or enforcement. The RBS Group’s businesses are also exposed to risks from employee misconduct including non-compliance with policies and regulations, negligence or fraud (including financial crimes), any of which could result in regulatory fines or sanctions and serious reputational or financial harm to the RBS Group.
The RBS Group has been seeking to embed a strong risk culture across the organisation and has implemented policies and allocated new resources across all levels of the organisation to manage and mitigate conduct risk and expects to continue to invest in its risk management framework. However, such efforts may not insulate the RBS Group from future instances of misconduct and no assurance can be given that the RBS Group’s strategy and control framework will be effective. Any failure in the RBS Group’s risk management framework could negatively affect the RBS Group and its financial condition through reputational and financial harm and may result in the inability to achieve its strategic objectives for its customers, employees and wider stakeholders.
Although the RBS Group has implemented a Reputational Risk Policy to improve the identification, assessment and management of customers, transactions, products and issues which represent a reputational risk, the RBS Group cannot be certain that it will be successful in avoiding damage to its business from reputational risk.
World Trade Organization terms, the outcome of which for RBS Group would be similar in certain respects to a ‘no-deal’ Brexit, and which may result in, amongst others, loss of access to the EU single market for goods and services, the imposition of import duties and controls on trade between the UK and the EU and related trade disruption.
The RBS Group faces increased political and economic risks and uncertainty in the UK and global markets. In the UK, significant economic and political uncertainty continues to surround the terms of Brexit and now also the future relationship between the UK and the EU. See also, ‘Prevailing uncertainty regarding the terms of the UK’s withdrawal from the European Union has adversely affected and will continue to affect the RBS Group’.
In addition, the RBS Group is exposed to risks arising out of geopolitical events or political developments, such as trade barriers, exchange controls, sanctions and other measures taken by sovereign governments that may hinder economic or financial activity levels. Furthermore, unfavourable political, military or diplomatic events, including secession movements or the exit of other member states from the EU, armed conflict, pandemics and widespread public health crises (including the recent coronavirus outbreak, the impact of which will depend on future developments, which are highly uncertain and cannot be predicted), state and privately sponsored cyber and terrorist acts or threats, and the responses to them by governments and markets, could negatively affect the business and performance of the RBS Group, including as a result of the indirect effect on regional or global trade and/or the RBS Group’s customers.
The value of the RBS Group’s financial instruments may be materially affected by market risk, including as a result of market fluctuations. Market volatility, illiquid market conditions and disruptions in the credit markets may make it extremely difficult to value certain of the RBS Group’s financial instruments, particularly during periods of market displacement which could cause a
In addition, financial markets are susceptible to severe events evidenced by rapid depreciation in asset values, which may be accompanied by a reduction in asset liquidity. Under these conditions, hedging and other risk management strategies may not be as effective at mitigating trading losses as they would be under more normal market conditions. Moreover, under these conditions, market participants are particularly exposed to trading strategies employed by many market participants simultaneously and on a large scale, increasing the RBS Group’s counterparty risk. The RBS Group’s risk management and monitoring processes seek to quantify and mitigate the RBS Group’s exposure to more extreme market moves. However, severe market events have historically been difficult to predict and the RBS Group could realise significant losses if extreme market events were to occur.
The RBS Group expects to face significant risks in connection with climate change and the transition to a low carbon economy which may adversely impact the RBS Group. The risks associated with climate change are subject to rapidly increasing prudential and regulatory, political and societal focus, both in the UK and internationally. Embedding climate risk into the RBS Group’s risk framework, and adapting the RBS Group’s operations and business strategy to address the physical risks of climate change and the risk associated with a transition to a low carbon economy in line with its Purpose-led Strategy and ambition to reduce the climate impact of its financing activities and evolving regulatory requirements and market expectations is expected to have a significant impact on the RBS Group. Multilateral agreements, in particular the 2015 Paris Agreement, and subsequent UK and Scottish Government commitments to achieving net zero carbon emissions by 2050 and 2045, respectively, will require widespread levels of adjustment across all sectors of the UK economy and markets in which the RBS Group operates. Some sectors such as property, energy, infrastructure (including transport) and agriculture are expected to be particularly impacted. The nature and timing of the far-reaching commercial, technological, policy and regulatory changes that this transition will entail remain uncertain. The UK Government and UK regulators, including the PRA, the RBSG plc’s UK prudential regulator, have indicated it is a priority issue. The impact of such regulatory, policy, commercial and technological changes is expected to be highly significant and may be disruptive, especially if such changes do not occur in an orderly or timely manner or are not effective in reducing emissions sufficiently. Furthermore, the nature and timing of the manifestation of the physical risks of climate change (which include more extreme specific weather events such as flooding and heat waves and longer term shifts in climate) are also uncertain, and their impact on the economy is predicted to be more acute if carbon emissions are not reduced on a timely basis or to the requisite extent. Recent data indicates that global carbon emissions are continuing to increase. The potential impact on the economy includes, but is not limited to, lower GDP growth, significant changes in asset prices and profitability of industries, higher unemployment and the prevailing level of interest rates. See also, ‘The RBS Group’s new Purpose-led Strategy includes one area of focus on climate change which entails significant execution risk and is likely to require material changes to the business model of the RBS Group over the next ten years’, ‘The RBS Group’s businesses are subject to substantial regulation and oversight, which are constantly evolving and may adversely affect the RBS Group’ and ‘Any reduction in the credit rating assigned to RBSG plc, any of its subsidiaries or any of their respective debt securities could adversely affect the availability of funding for the RBS Group, reduce the RBS Group’s liquidity position and increase the cost of funding’.
HM Treasury (or UKGI on its behalf) could exercise a significant degree of influence over the RBS Group and further offers or sales of the RBS Group’s shares held by HM Treasury may affect the price of securities issued by the RBS Group. In its November 2018 Autumn Budget, the UK Government announced its intention to continue the process of privatisation of RBSG plc and to carry out a programme of sales of RBSG plc ordinary shares with the objective of selling all of its remaining shares in RBSG plc by 2023-2024. On 6 February 2019, RBSG plc obtained shareholder approval to participate in certain directed share buyback activities. As at 31 December 2019, the UK Government held 62.1% of the issued ordinary share capital of RBSG plc. There can be no certainty as to the continuation of the sell-down process or the timing or extent of such sell-downs which could result in a prolonged period of increased price volatility on the RBS Group’s ordinary shares.
In addition, UK Government Investments Limited (‘UKGI’) manages HM Treasury’s shareholder relationship with RBSG plc and, although HM Treasury has indicated that it intends to respect the commercial decisions of the RBS Group and that the RBS Group will continue to have its own independent board of directors and management team determining its own strategy, its position as a majority shareholder (and UKGI’s position as manager of this shareholding) means that HM Treasury or UKGI could exercise a significant degree of influence over, among other things, the election of directors and appointment of senior management, the RBS Group’s capital strategy, dividend policy, remuneration policy or the conduct of the RBS Group’s operations, and HM Treasury or UKGI’s approach depends on government policy, which could change, including as a result of a general election. The manner in which HM Treasury or UKGI exercises HM Treasury’s rights as majority shareholder could give rise to conflicts between the interests of HM Treasury and the interests of other shareholders, including as a result of a change in government policy.
Changes in interest rates have significantly affected and will continue to affect the RBS Group’s business and results. Interest rate risk is significant for the RBS Group, as monetary policy has been accommodative in recent years, including as a result of certain policies implemented by the Bank of England and HM Treasury such as the Term Funding Scheme, which have helped to support demand at a time of pronounced fiscal tightening and balance sheet repair. However, there remains considerable uncertainty as to the direction of interest rates and pace of change (as set by the Bank of England and other major central banks) as well as the general UK political climate. Further decreases in interest rates and/or continued sustained low or negative interest rates could put pressure on the RBS Group’s interest margins and adversely affect the RBS Group’s profitability and prospects. In addition, a continued period of low interest rates and flat yield curves has affected and may continue to affect the RBS Group’s interest rate margin realised between lending and borrowing costs.
Changes in foreign currency exchange rates may affect the RBS Group’s results and financial position. Although the RBS Group is now principally a UK and ROI-focussed banking group, it is subject to foreign exchange risk from capital deployed in the RBS Group’s foreign subsidiaries, branches and joint arrangements, and non-trading foreign exchange risk, including customer transactions and profits and losses that are in a currency other than the functional currency of the transaction entity. The RBS Group also relies on issuing securities in foreign currencies that assist in meeting the RBS Group’s minimum requirements for own funds and eligible liabilities (‘MREL’). The RBS Group maintains policies and procedures designed to manage the impact of exposures to fluctuations in currency rates. Nevertheless, changes in currency rates, particularly in the sterling-US dollar and euro-sterling rates, can adversely affect the value of assets, liabilities (including the total amount of regulatory capital and MREL eligible instruments), income, RWAs, capital base and expenses and the reported earnings of the RBS Group’s UK and non-UK subsidiaries and may affect the RBS Group’s reported consolidated financial condition or its income from foreign exchange dealing and may also require incremental MREL eligible instruments to be issued.
Increasingly many of the products and services offered by the RBS Group are, and will become, technology intensive, for example Bό, Mettle, Esme, FreeAgent, Tyl, APtimise and Path, some of the RBS Group’s recent fintech ventures. The RBS Group’s ability to develop digital solutions that comply with related regulatory changes has become increasingly important to retaining and growing the RBS Group’s customer business in the UK. There can be no certainty that the RBS Group’s innovation strategy (which includes investment in its IT capability intended to address the material increase in customer use of online and mobile technology for banking as well as selective acquisitions, which carry associated risks) will be successful or that it will allow the RBS Group to continue to grow such services in the future. Certain of the RBS Group’s current or future competitors may be more successful in implementing innovative technologies for delivering products or services to their customers. The RBS Group may also fail to identify future opportunities or derive benefits from disruptive technologies in the context of rapid technological innovation, changing customer behaviour and growing regulatory demands, including the UK initiative on Open Banking (PSD2) and Open Finance (for which the FCA announced a call for input in December 2019), resulting in increased competition from both traditional banking businesses as well as new providers of financial services, including technology companies with strong brand recognition, that may be able to develop financial services at a lower cost base.
In addition, recent and future disposals and restructurings by the RBS Group, the implementation of its Purpose-led Strategy, including the refocusing of its NatWest Markets franchise and delivery on its climate ambition, cost-reduction measures, as well as employee remuneration constraints, may also have an impact on its ability to compete effectively and intensified competition from incumbents, challengers and new entrants in the RBS Group’s core markets could affect the RBS Group’s ability to maintain satisfactory returns. See also, ‘The RBS Group has announced a new Purpose-led Strategy which will entail a period of transformation and require an internal cultural shift across the RBS Group. It carries significant execution and operational risks and it may not achieve its stated aims and targeted outcomes’. Moreover, activist investors have increasingly become engaged and interventionist in recent years, which may pose a threat to the RBS Group’s strategic initiatives. Furthermore, continued consolidation in certain sectors of the financial services industry could result in the RBS Group’s remaining competitors gaining greater capital and other resources, including the ability to offer a broader range of products and services and geographic diversity, or the emergence of new competitors.
The RBS Group is exposed to the financial institutions industry, including sovereign debt securities, banks, financial intermediation providers (including providing facilities to financial sponsors and funds, backed by assets or investor commitments) and securitised products (typically senior lending to special purpose vehicles backed by pools of financial assets). Due to the RBS Group’s exposure to the financial industry, it also has exposure to shadow banking entities (ie, entities which carry out banking activities outside a regulated framework). Recently, there has been increasing regulatory focus on shadow banking. In particular, the European Banking Authority Guidelines (EBA/GL/2015/20) require the RBS Group to identify and monitor its exposure to shadow banking entities, implement and maintain an internal framework for the identification, management, control and mitigation of the risks associated with exposure to shadow banking entities, and ensure effective reporting and governance in respect such exposure. If the RBS Group is unable to properly identify and monitor its shadow banking exposure, maintain an adequate framework, or ensure effective reporting and governance in respect of shadow banking
As at 31 December 2019, the RBS Group’s CET1 ratio was 16.2% and the RBS Group currently targets to maintain its CET1 ratio at 13 -14% over the medium to long term. The RBS Group’s target capital ratio is based on a combination of its expected regulatory requirements and internal modelling, including stress scenarios and management’s and/or the PRA’s views on appropriate buffers above minimum operating levels.
A number of factors may impact the RBS Group’s ability to maintain its current CET1 ratio target and achieve its capital strategy. These include, amongst other things:  a depletion of its capital resources through increased costs or liabilities, reduced profits or losses (including as a result of extreme one-off incidents such as cyberattack, fraud or conduct issues) or, sustained periods of low or lower interest rates, reduced asset values resulting in write-downs, impairments, changes in accounting policy, accounting charges or foreign exchange movements;  a failure to reduce RWAs in accordance within the timeline contemplated by the RBS Group’s capital plan;  an increase in the quantum of RWAs in excess of that expected, including due to regulatory changes;  changes in prudential regulatory requirements including the RBS Group’s Total Capital Requirement set by the PRA, including Pillar 2 requirements and regulatory buffers (including the increased 2% countercyclical capital buffer for UK banks with effect from 16 December 2020), as well as any applicable scalars; and reduced dividends from the RBS Group’s subsidiaries because of changes in their financial performance and/or the extent to which local capital requirements exceed RBS Group’s target ratio; and
In accordance with the provisions of CRD IV, a minimum level of capital adequacy is required to be met by RBS Group in order for it to be entitled to make certain discretionary payments, and institutions which fail to meet the combined buffer requirement are subject to restricted discretionary payments. The resulting restrictions are scaled according to the extent of the breach of the combined buffer requirement and calculated as a percentage of the profits of the institution since the last distribution of profits or discretionary payment which gives rise to a maximum distributable amount (MDA) (if any) that the financial institution can distribute through discretionary payments. In the event of a breach of the combined buffer requirement, the RBS Group will be required to calculate its MDA, and as a consequence it may be necessary for the RBS Group to reduce or cease discretionary payments (including payments of dividends to shareholders) to the extent of the breach.
If, under a stress scenario, the level of capital or MREL falls outside of risk appetite, there are a range of recovery management actions (focused on risk reduction and mitigation) that the RBS Group could take to manage its capital levels, which may not be sufficient to restore adequate capital levels. Under the EU Bank Recovery and Resolution Directive (‘BRRD’), as implemented in the UK, the RBSG Group must maintain a recovery plan acceptable to its regulator, such that a breach of the RBS Group’s applicable capital or leverage requirements may trigger the application of the RBS Group’s recovery plan to remediate a deficient capital position. The RBS Group’s regulator may request that the RBS Group carry out certain capital management actions or, if the RBS Group’s CET1 ratio falls below 7%, certain regulatory capital instruments issued by the RBS Group will be written-down or converted into equity and there may be an issue of additional equity by the RBS Group, which could result in the dilution of the RBS Group’s existing shareholders. The success of such issuances will also be dependent on favourable market conditions and the RBS Group may not be able to raise the amount of capital required on acceptable terms or at all. Separately, the RBS Group may address a shortage of capital by taking action to reduce leverage exposure and/or RWAs via asset or business disposals. Such actions may, in turn, affect, among other things, the RBS Group’s product offering, credit ratings, ability to operate its businesses, pursue its current strategies and pursue strategic opportunities, any of which may affect the underlying profitability of the RBS Group and future growth potential. See also, ‘The RBS Group may become subject to the application of UK statutory stabilisation or resolution powers which may result in, among other actions, the cancellation, transfer or dilution of ordinary shares, or the write-down or conversion of certain of the RBS Group’s securities’.
January 2022, the RBS Group may be required to take action to enhance its preparations to be resolvable, resulting in additional cost and the dedication of additional resources. Such actions may adversely affect the RBS Group, resulting in restrictions on maximum individual and aggregate exposures, a requirement to dispose of specified assets, a requirement to cease carrying out certain activities and/or maintaining a specified amount of MREL. This may also result in reputational damage and/or loss of investor confidence.
The RBS Group may not be able to adequately access sources of liquidity and funding. The RBS Group is required to access sources of liquidity and funding through retail and wholesale deposits, as well as through the debt capital markets. As at 31 December 2019, the RBS Group held £389.7 billion in deposits. The level of deposits may fluctuate due to factors outside the RBS Group’s control, such as a loss of confidence (including in individual RBS Group entities), increasing competitive pressures for retail customer deposits or the reduction or cessation of deposits by foreign wholesale depositors, which could result in a significant outflow of deposits within a short period of time. An inability to grow, or any material decrease in, the RBS Group’s deposits could, particularly if accompanied by one of the other factors described above, materially affect the RBS Group’s ability to satisfy its liquidity or funding needs.
The RBS Group’s financial statements are sensitive to the underlying accounting policies, judgments, estimates and assumptions. The preparation of financial statements requires management to make judgments, estimates and assumptions that affect the
RBS – Annual Report and Accounts 2019 291 reported amounts of assets, liabilities, income, expenses, exposures and RWAs. Due to the inherent uncertainty in making estimates (particularly those involving the use of complex models), future results may differ from those estimates. Estimates, judgments, assumptions and models take into account historical experience and other factors, including market practice and expectations of future events that are believed to be reasonable under the circumstances.
Changes in accounting standards may materially impact the RBS Group’s financial results. Changes in accounting standards or guidance by accounting bodies or in the timing of their implementation, whether immediate or foreseeable, could result in the RBS Group having to recognise additional liabilities on its balance sheet, or in further write-downs or impairments to its assets and could also significantly impact the financial results, condition and prospects of the RBS Group.
Where the RBS Group is required to recognise a goodwill impairment, it is recorded in the RBS Group’s income statement, but it has no effect on the RBS Group’s regulatory capital position.
In recent years, regulators and governments have focussed on reforming the prudential regulation of the financial services industry and the manner in which the business of financial services is conducted. Amongst others, measures have included: enhanced capital, liquidity and funding requirements, implementation of the UK ring-fencing regime, implementation and strengthening of the recovery and resolution framework applicable to financial institutions in the UK, the EU and the US, financial industry reforms (including in respect of MiFID II), enhanced data privacy and IT resilience requirements, enhanced regulations in respect of the provision of ‘investment services and activities’, and increased regulatory focus in certain areas, including conduct, consumer protection regimes, anti-money laundering, anti-bribery, anti-tax evasion, payment systems, sanctions and anti-terrorism laws and regulations. This has resulted in the RBS Group facing greater regulation and scrutiny in the UK, the US and other countries in which it operates.
EU and the US have resulted in increased capital, funding and liquidity requirements, changes in the competitive landscape, changes in other regulatory requirements and increased operating costs, and have impacted, and will continue to impact, product offerings and business models. In particular, the RBS Group is required to continue to comply with regulatory requirements in respect of the implementation of the UK ringfencing regime and to ensure operational continuity in resolution; the steps required to ensure such compliance entail significant costs, and also impose significant operational, legal and execution risk. Serious consequences could arise should the RBS Group be found to be non-compliant with such regulatory requirements. Such changes may also result in an increased number of regulatory investigations and proceedings and have increased the risks relating to the RBS Group’s ability to comply with the applicable body of rules and regulations in the manner and within the time frames required.
 other requirements or policies affecting the RBS Group and its profitability or product offering, including through the imposition of increased compliance obligations or obligations which may lead to restrictions on business growth, product offerings, or pricing.
RBS – Annual Report and Accounts 2019 293 have a significant impact on the markets in which the RBS Group operates, especially mortgage lending, and its associated credit, market and financial risk profile.
The FCA have also announced that climate change and green finance will be priorities with a focus on disclosure, integrating climate change into decision-making and consumers’ access to green financial services. The RBS Group also recognises various legislative actions and proposals by, among others, the European Commission’s Action Plan on Sustainable Finance which include a taxonomy on sustainable finance. Many of these legislative and regulatory initiatives, and especially the EU taxonomy, are focused on developing standardised definitions for the green and sustainable criteria of assets and liabilities, which could change over time and impact the RBS Group’s recognition of its climate financing activity and lead to reputational and conduct risk on its own sustainable financing activity.
The RBS Group is subject to a number of legal, regulatory and governmental actions and investigations as well as associated remedial undertakings, the outcomes of which are inherently difficult to predict, and which could have an adverse effect on the RBS Group. The RBS Group’s operations are diverse and complex and it operates in legal and regulatory environments that expose it to potentially significant legal proceedings, and civil and criminal regulatory and governmental actions. The RBS Group has settled a number of legal and regulatory actions over the past several years but continues to be, and may in the future be, involved in such actions in the US, the UK, Europe and other jurisdictions.
The legal and regulatory actions specifically referred to below are, in the RBS Group’s view, the most significant legal and regulatory actions to which the RBS Group is currently exposed. However, the RBS Group is also subject to a number of ongoing reviews, investigations and proceedings (both formal and informal) by governmental law enforcement and other agencies and litigation proceedings, relating to, among other matters, the offering of securities, conduct in the foreign exchange market, the setting of benchmark rates such as LIBOR and related derivatives trading, the issuance, underwriting, and sales and trading of fixedincome securities (including government securities), product mis-selling, customer mistreatment, anti-money laundering, antitrust and various other compliance issues. Legal and regulatory actions are subject to many uncertainties, and their outcomes, including the timing, amount of fines or settlements or the form of any settlements, which may be material and in excess of any related provisions, are often difficult to predict, particularly in the early stages of a case or investigation, and the RBS Group’s expectation for resolution may change.
In particular, the RBS Group has for a number of years been involved in conduct-related reviews and redress projects, including a review of certain historical customer connections in its former Global Restructuring RBS Group (GRG), management of claims arising from historical sales of payment protection insurance, and a review of tracker mortgage products in the Republic of Ireland. In relation to the GRG review, the RBS Group established a complaints process in November 2016, overseen by an independent third party. The complaints process is now closed to new complaints, although the RBS Group continues to handle certain complaints that were made before the deadline for new complaints passed. In addition, the RBS Group continues to handle claims in relation to historical sales of payment protection insurance and took an additional provision of £900 million in third quarter of 2019, reflecting greater than predicted complaints volumes in the lead up to the 29 August 2019 deadline for making new PPI complaints.
RBS Group companies are currently responding to a criminal investigation by the United States Attorney for the District of Connecticut (USAO) and the United States Department of Justice (DoJ), concerning securities trading in 2018 by certain former traders of NWM Plc ,involving alleged spoofing. The trading activity occurred during the term of the non prosecution agreement (NPA) that NWMSI entered into with the USAO in October 2017 in connection with alleged misrepresentations to counterparties relating to secondary trading in various forms of asset-backed securities. Under the NPA, non-prosecution was conditioned on NWMSI and affiliated companies not engaging in conduct during the NPA that the USAO determines was a felony under federal or state law or a violation of the antifraud provisions of the United States securities law. See also, ‘Litigation, investigations and reviews’ of Note 26 to the consolidated accounts for details of these matters.
The duration and outcome of the criminal investigation into alleged spoofing, which may include the extension, modification, or deemed violation of the NPA, remain uncertain. No settlement may be reached and further substantial additional provisions and costs may be recognised. Any finding of criminal liability by US authorities as to NWM Plc, NWMSI, or an affiliate (including as a result of pleading guilty), as to either the alleged spoofing or the conduct underlying the NPA, could have material collateral consequences for RBS Group’s business. These may include consequences resulting from the need to reapply for various important licenses or obtain waivers to conduct certain existing activities of the RBS Group, particularly but not solely in the US, which may take a significant period of time and the
RBS – Annual Report and Accounts 2019 294 results of which are uncertain. Failure to obtain such licenses or waivers could adversely impact the RBS Group’s business, in particular in the US, including if it results in the RBS Group being precluded from carrying out certain activities.
It is therefore currently difficult to determine to what extent the changes will affect the RBS Group, or the costs of implementing any relevant remedial action. Uncertainty as to the nature and extent of such potential changes, alternative reference rates or other reforms including the potential continuation of the publication of LIBOR may adversely affect financial instruments using LIBOR as benchmarks. The implementation of any alternative RFRs may be impossible or impracticable under the existing terms of such financial instruments and could have an adverse effect on the value of, return on and trading market for certain financial instruments and on the RBS Group’s profitability. There is also the risk of an adverse effect to reported performance arising from the transition rules established by accounting bodies, as certain rules (as proposed by the IASB) are still to be finalised.
The RBS Group operates in markets that are subject to intense scrutiny by the competition authorities. There is significant oversight by competition authorities of the markets which the RBS Group operates in. The competitive landscape for banks and other financial institutions in the UK, the rest of Europe and the US is rapidly changing. Recent regulatory and legal changes have and may continue to result in new market participants and changed competitive dynamics in certain key areas, such as in retail and SME banking in the UK where the introduction of new entrants is being actively encouraged by the UK Government.
These reviews raised significant concerns about the effectiveness of competition in the retail banking sector. The CMA’s Retail Banking Market Order 2017 imposes remedies primarily intended to make it easier for consumers and businesses to compare personal current account (‘PCA’) and SME bank products, increase the transparency of price comparison between banks and amend PCA overdraft charging. These remedies impose additional compliance requirements on the RBS Group and could, in aggregate, adversely impact the RBS Group’s competitive position, product offering and revenues.
As a direct consequence of the incentivised switching scheme (which comprises part of the Alternative Remedies Package), the RBS Group will lose existing customers and deposits, which in turn will have adverse impacts on the RBS Group’s business and associated revenues and margins.
Furthermore, the capability and innovation fund (which also comprises part of the Alternative Remedies Package) is intended to benefit eligible competitors and negatively impact the RBS Group’s competitive position. To support the incentivised switching initiative, upon request by an eligible bank, the RBS Group has agreed to grant those customers which have switched to eligible banks under the incentivised switching scheme access to its branch network for cash and cheque
RBS – Annual Report and Accounts 2019 295 handling services, which may impact customer service quality for the RBS Group’s own customers with consequent competitive, financial and reputational implications. The implementation of the incentivised switching scheme is also dependent on the engagement of the eligible banks with the incentivised switching scheme and the application of the eligible banks to and approval by the Independent Body. The incentivised transfer of SME customers to third party banks places reliance on those third parties to achieve satisfactory customer outcomes which could give rise to reputational damage to the RBS Group if these are not forthcoming.
A failure to comply with the terms of the Alternative Remedies Package could result in the imposition of additional measures or limitations on the RBS Group’s operations, additional supervision by the RBS Group’s regulators, and loss of investor confidence.
Changes in tax legislation or failure to generate future taxable profits may impact the recoverability of certain deferred tax assets recognised by the RBS Group. In accordance with IFRS (as adopted by the European Union), the RBS Group has recognised deferred tax assets on losses available to relieve future profits from tax only to the extent it is probable that they will be recovered. The deferred tax assets are quantified on the basis of current tax legislation and accounting standards and are subject to change in respect of the future rates of tax or the rules for computing taxable profits and offsetting allowable losses.
The company gave certain representations and warranties to HM Treasury on the date of the Acquisition and Contingent Capital Agreement, on the date the circular was posted to shareholders, on the first date on which all of the conditions precedent were satisfied, or waived, and on the date of the Acquisitions. The company also agreed to a number of undertakings.
Under the terms of the Directed Buyback Contract, the company may agree with HM Treasury to make off-market purchases from time to time of its ordinary shares held by HM Treasury, including by way of one or more standalone purchases, through a nondiscretionary, broker-managed directed trading programme, or in conjunction with any offer or sale by HM Treasury by way of an institutional placing. Neither the company nor HM Treasury would be under an obligation to agree to make such off-market purchases and would only do so subject to regulatory approval at the time.
Deed of Indemnity In the context of the Framework and State Aid Deed, the company entered into a Deed of Indemnity with HM Treasury on 25 April 2018, pursuant to which the company agreed to indemnify HM Treasury to cover liabilities that may be incurred in implementing the Alternative Remedies Package, as described under “Framework and State Aid Deed” above.
Memorandum of Understanding Relating to The Royal Bank of Scotland Group Pension Fund On 16 April 2018 the company entered into a Memorandum of Understanding (the ”MoU”) with the trustee of The Royal Bank of Scotland Group Pension Fund (the ”Group Fund”), which aimed to facilitate both the necessary changes to the Main Section of the Group Fund to align the employing entity structure with the requirements
RBS – Annual Report and Accounts 2019 297 of the UK ring-fencing legislation and acceleration of the settlement framework for the 31 December 2017 triennial valuation of the Main Section of the Group Fund (brought forward from 31 December 2018). In addition, the MoU also provided clarity on the additional related funding contributions required to be made by the company to the Main
Section of the Group Fund as follows: (i) a pretax payment of £2 billion that was made in the second half of 2018 and (ii) from 1 January 2020, further pre-tax contributions of up to £1.5 billion in aggregate linked to the making of future distributions to RBS shareholders including ordinary and special dividends and/or share buy backs (subject to an annual cap on contributions of £500 million before tax).
Financial calendar 298 Shareholder enquiries 298 Analysis of ordinary shareholders 299 Important addresses 299 Principal offices 299 Forward-looking statements 300
Annual General Meeting 29 April 2020 RBS Conference Centre RBS Gogarburn Edinburgh, EH12 1HQ
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Telephone: 1-888-269-2377 (US callers – toll free) Telephone: +1 201 680 6825 (International) Email: shrrelations@cpushareownerservices.com Website: www.mybnymdr.com
The Royal Bank of Scotland Group plc PO Box 1000, Gogarburn Edinburgh, EH12 1HQ Telephone: +44 (0)131 626 0000
Ulster Bank Limited 11-16 Donegall Square East, Belfast, Co Antrim, BT1 5UB Northern Ireland
Ulster Bank Ireland DAC Ulster Bank Group Centre, George's Quay, Dublin 2, D02 VR98
In particular, this document includes forward-looking statements relating, but not limited to: future profitability and performance, including financial performance targets such as return on tangible equity; cost savings and targets; implementation of the RBS Group’s strategy; litigation and government and regulatory investigations, including the timing and financial and other impacts thereof; the implementation of the Alternative Remedies Package; the continuation of the RBS Group’s balance sheet reduction programme, including the reduction of risk-weighted assets (RWAs) and the timing thereof; capital and strategic plans and targets; capital, liquidity and leverage ratios and requirements, including CET1 Ratio, RWA equivalents (RWAe), Pillar 2 and other regulatory buffer requirements, minimum requirement for own funds and eligible liabilities, and other funding plans; funding and credit risk profile; capitalisation; portfolios; net interest margin; customer loan and income growth; the level and extent of future impairments and write-downs, including with respect to goodwill; restructuring and remediation costs and charges; the RBS Group’s exposure to political risk, economic risk, climate change risk, operational risk, conduct risk, cyber and IT risk and credit rating risk and to various types of market risks, including interest rate risk, foreign exchange rate risk and commodity and equity price risk; customer experience including our Net Promotor Score (NPS); employee engagement and gender balance in leadership positions.
Important factors that could affect the actual outcome of the forwardlooking statements We caution you that a large number of important factors could adversely affect our results or our ability to implement our strategy, cause us to fail to meet our targets, predictions, expectations and other anticipated outcomes or affect the accuracy of forward-looking statements we describe in this document, including in the risk factors and other uncertainties set out in the RBS Group’s 2019 Annual Report and Accounts and other risk factors and uncertainties discussed in this document. These include the significant risks for the RBS Group presented by: strategic risk (including in respect of: the implementation and execution of the RBS Group’s Purpose-led Strategy, including as it relates to the re-alignment of the NWM franchise and the RBS Group’s climate ambition and the risk that the RBS Group may not achieve its targets); operational and IT resilience risk (including in respect of: the RBS Group being subject to cyberattacks; operational risks inherent in the RBS Group’s business; exposure to third party risks including as a result of outsourcing and its use of new technologies and innovation, as well as related regulatory and market changes; the RBS Group’s operations being highly dependent on its IT systems; the RBS Group relying on attracting, retaining and developing senior management and skilled personnel and maintaining good employee relations; the RBS Group’s risk management framework; and reputational risk), economic and political risk (including in respect of: prevailing uncertainty regarding the terms of the UK’s withdrawal from the European Union; increased political and economic risks and uncertainty in the UK and global markets; climate change and the transition to a low carbon economy; HM Treasury’s ownership of RBSG plc and the possibility that it may exert a significant degree of influence over the RBS Group; changes in interest rates and changes in foreign currency exchange rates), financial resilience risk (including in respect of: the RBS Group’s ability to meet targets and make discretionary capital distributions; the highly competitive markets in which the RBS Group operates; deterioration in borrower and counterparty credit quality; the ability of the RBS Group to meet prudential regulatory requirements for capital and MREL, or to manage its capital effectively; the ability of the RBS Group to access adequate sources of liquidity and funding; changes in the credit ratings of RBSG plc, any of its subsidiaries or any of its respective debt securities; the RBS Group’s ability to meet requirements of regulatory stress tests; possible losses or the requirement to maintain higher levels of capital as a result of limitations or failure of various models; sensitivity of the RBS Group’s financial statements to underlying accounting policies, judgments, assumptions and estimates; changes in applicable accounting policies; the value or effectiveness of any credit protection purchased by the RBS Group; the level and extent of future impairments and write-downs, including with respect to goodwill; and the application of UK statutory stabilisation or resolution powers) and legal, regulatory and conduct risk (including in respect of: the RBS Group’s businesses being subject to substantial regulation and oversight; the RBS Group complying with regulatory requirements; legal, regulatory and governmental actions and investigations (including the final number of PPI claim and their amounts); the replacement of LIBOR, EURIBOR and other IBOR rates to alternative risk free rates; heightened regulatory and governmental scrutiny (including by competition authorities); implementation of the Alternative Remedies Package and the costs related thereto; and changes in tax legislation).