Those assets outside the IFRS 9 ECL framework were as follows:  Settlement balances, items in the course of collection, cash balances and other non-credit risk assets of £4.9 billion. These were assessed as having no ECL unless there was evidence that they were credit impaired.
 Commercial cards which operate in a similar manner to charge cards, with balances repaid monthly via mandated direct debit with the underlying risk of loss captured within the customer’s linked current account of £0.4 billion.
Financial assets Stage 1 145,650 19,055 84,393 12,755 7,791 11,762 52,523 333,929 96,566 430,495 Stage 2 14,490 2,347 8,490 333 307 995 10 26,972 5 26,977 Stage 3 3,202 3,669 3,468 324 119 501 — 11,283 — 11,283 163,342 25,071 96,351 13,412 8,217 13,258 52,533 372,184 96,571 468,755 ECL provisions (2) Stage 1 144 29 58 18 5 2 5 261 1 262 Stage 2 352 106 106 9 5 42 1 621 — 621 Stage 3 1,110 1,054 1,156 27 28 190 — 3,565 — 3,565 1,606 1,189 1,320 54 38 234 6 4,447 1 4,448 ECL provisions coverage (3) Stage 1 (%) 0.1 0.1 0.1 0.1 0.1 — — 0.1 — 0.1 Stage 2 (%) 2.4 4.5 1.2 2.7 1.6 4.2 10.0 2.3 — 2.3 Stage 3 (%) 34.7 28.7 33.3 8.3 23.5 37.9 — 31.6 — 31.6
Notes: (1) The segment analysis tables as at 31 December 2018 include all loans – amortised cost within the scope of IFRS 9. The comparative tables at 1 January 2018 include all financial assets within the scope of IFRS 9, including debt securities of £50.4 billion, of which £42.7 billion related to debt securities classified as FVOCI. ECL on these debt securities at 1 January 2018 was £28 million, of which £4 million related to those classified as FVOCI.
(3) ECL provisions coverage is ECL provisions divided by loans – amortised cost. (4) ECL charge balances in the above table include a £3 million charge related to other financial assets, of which a £1 million charge related to assets at FVOCI; and a £31 million release related to contingent liabilities.
Gross loans to banks 500 2,447 697 109 29 7,490 4,992 16,264 Gross loans to customers 162,957 20,623 98,182 13,514 8,743 22,902 77 321,633 Risk elements in lending (REIL) 1,975 3,282 3,196 95 103 253 — 8,904 Provisions 1,280 1,131 1,162 32 35 174 — 3,814 REIL as a % of gross loans to customers 1.2 15.9 3.3 0.7 1.2 1.1 — 2.7 Provisions as a % of REIL 65 34 36 34 34 69 — 43 Provisions as a % of gross loans to customers 0.8 5.5 1.2 0.2 0.4 0.8 — 1.2 Impairment losses/(releases) 235 60 362 6 3 (137) 1 530 Amounts written-off 572 124 335 4 6 167 2 1,210
 Provision coverage remained stable in the Stage 1 population and increased in Stage 2, with the uplift including the effect of methodology refinements. The Stage 3 provision coverage reduced slightly including the effect of debt sales and underlying business as usual movements.
 The impairment charge for the year was £398 million. This reflected the relatively stable external environment.
 The reduction in the Commercial Banking portfolio reflected the transfer of customers to RBSI and NWM as well as the continued exit from legacy assets.
UK PBB 146,764 14,163 791 14,954 2,220 163,938 131 434 54 488 796 1,415 Personal 134,836 12,520 725 13,245 1,908 149,989 101 382 48 430 597 1,128 Wholesale 11,928 1,643 66 1,709 312 13,949 30 52 6 58 199 287 Ulster Bank RoI 17,822 1,968 112 2,080 2,308 22,210 35 103 11 114 638 787 Personal (4) 11,059 1,353 105 1,458 2,153 14,670 13 73 11 84 530 627 Wholesale 6,763 615 7 622 155 7,540 22 30 — 30 108 160 Commercial Banking 79,106 7,445 364 7,809 2,136 89,051 94 134 2 136 743 973 Private Banking 13,750 380 151 531 225 14,506 13 5 5 10 20 43 Personal 10,803 183 25 208 203 11,214 5 3 — 3 17 25 Wholesale 2,947 197 126 323 22 3,292 8 2 5 7 3 18 RBS International 13,383 274 15 289 101 13,773 6 3 — 3 17 26 NatWest Markets 8,196 407 — 407 728 9,331 6 12 — 12 106 124 Central items & other 6,964 27 — 27 — 6,991 — — — — — — Total loans excluding balances at central banks 285,985 24,664 1,433 26,097 7,718 319,800 285 691 72 763 2,320 3,368 Personal 159,553 14,106 865 14,971 4,351 178,875 122 458 59 517 1,158 1,797 Wholesale 126,432 10,558 568 11,126 3,367 140,925 163 233 13 246 1,162 1,571 Balances at central banks 87,181 — — — — 87,181 2 — — — — 2 Total loans 373,166 24,664 1,433 26,097 7,718 406,981 287 691 72 763 2,320 3,370
Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total
Credit risk – Banking activities continued Segmental loans and impairment metrics (audited) The table below summarises gross loans and ECL provisions coverage, by days past due, by segment and stage, within the scope of the ECL framework. ECL provisions coverage ECL Stage 2 (2,3) Total Amounts Stage 1 <30 DPD >30 DPD Total Stage 3 Total charge Loss rate written-off
ECL provisions coverage Stage 2 (2,3) Stage 1 <30 DPD >30 DPD Total Stage 3 Total
Notes: (1) The segment analysis tables at 31 December 2018 include all loans – amortised cost within the scope of IFRS 9. The comparative tables at 1 January 2018 include all financial assets within the scope of IFRS 9, including debt securities of £50.4 billion, of which £42.7 billion related to debt securities classified as FVOCI. ECL on these debt securities at 1 January 2018 was £28 million, of which £4 million related to those classified as FVOCI.
(2) 30 DPD – 30 days past due, the mandatory 30 days past due backstop is prescribed by IFRS 9 for significant increase in credit risk. (3) ECL provisions on contingent liabilities and commitments are included within the Financial assets section so as not to distort ECL coverage ratios. (4) 31 December 2018, £3 million of the write offs related to business banking portfolio in Ulster Bank RoI.
Key points  The UK PBB and Ulster Bank RoI franchises accounted for the vast majority of Personal provisions. In Ulster Bank RoI, Personal provisions were primarily driven by Stage 3 impairments on the legacy mortgage book.
Mortgages (1) cards personal Total Property Corporate FI Sovereign Total 31 December 2018 £m £m £m £m £m £m £m £m £m £m
Loans by geography 165,081 4,216 9,578 178,875 36,707 72,240 25,011 6,967 140,925 319,800 - UK 150,233 4,112 9,117 163,462 33,855 60,657 11,611 3,089 109,212 272,674 - RoI 14,350 104 233 14,687 1,114 3,733 392 2,497 7,736 22,423 - Other Europe 102 — 67 169 1,395 3,760 5,903 1,088 12,146 12,315 - RoW 396 — 161 557 343 4,090 7,105 293 11,831 12,388 Loans by asset quality (2,3) 165,081 4,216 9,578 178,875 36,707 72,240 25,011 6,967 140,925 319,800 - AQ1-AQ4 104,989 35 1,040 106,064 16,133 22,587 22,397 6,802 67,919 173,983 - AQ5-AQ8 55,139 3,990 7,736 66,865 18,815 47,651 2,574 161 69,201 136,066 - AQ9 1,287 69 239 1,595 74 359 5 — 438 2,033 - AQ10 3,666 122 563 4,351 1,685 1,643 35 4 3,367 7,718 Loans by stage 165,081 4,216 9,578 178,875 36,707 72,240 25,011 6,967 140,925 319,800 - Stage 1 149,760 2,851 6,942 159,553 33,145 61,844 24,502 6,941 126,432 285,985 - Stage 2 11,655 1,243 2,073 14,971 1,877 8,753 474 22 11,126 26,097 - Stage 3 3,666 122 563 4,351 1,685 1,643 35 4 3,367 7,718 Loans - past due analysis (4,5) 165,081 4,216 9,578 178,875 36,707 72,240 25,011 6,967 140,925 319,800 - Not past due 160,165 4,027 8,749 172,941 35,420 69,782 24,388 6,923 136,513 309,454 - Past due 1-29 days 1,714 69 180 1,963 270 1,397 604 42 2,313 4,276 - Past due 30-89 days 1,048 40 105 1,193 271 344 11 2 628 1,821 - Past due 90-180 days 632 29 69 730 56 83 1 — 140 870 - Past due >180 days 1,522 51 475 2,048 690 634 7 — 1,331 3,379 Loans - Stage 2 11,655 1,243 2,073 14,971 1,877 8,753 474 22 11,126 26,097 - Not past due 9,788 1,172 1,843 12,803 1,556 8,196 472 22 10,246 23,049 - Past due 1-29 days 1,126 43 133 1,302 68 244 1 — 313 1,615 - Past due 30-89 days 741 28 97 866 253 313 1 — 567 1,433 Weighted average life * - ECL measurement (years) 8 2 3 5 3 3 4 3 3 4 Weighted average 12 months PDs * - IFRS 9 (%) 0.32 4.03 2.77 0.54 0.75 0.97 0.14 0.06 0.75 0.62 - Basel (%) 0.84 3.52 3.50 1.04 0.95 1.43 0.23 0.06 1.01 1.03 ECL provisions by geography 839 230 728 1,797 588 941 41 1 1,571 3,368 - UK 237 227 707 1,171 518 615 27 1 1,161 2,332 - RoI 602 3 21 626 43 125 2 — 170 796 - Other Europe — — — — 22 53 10 — 85 85 - RoW — — — — 5 148 2 — 155 155 ECL provisions by stage 839 230 728 1,797 588 941 41 1 1,571 3,368 - Stage 1 23 38 61 122 43 107 12 1 163 285 - Stage 2 150 120 247 517 39 200 7 — 246 763 - Stage 3 666 72 420 1,158 506 634 22 — 1,162 2,320 ECL provisions coverage (%) 0.51 5.46 7.60 1.00 1.60 1.30 0.16 0.01 1.11 1.05 - Stage 1 (%) 0.02 1.33 0.88 0.08 0.13 0.17 0.05 0.01 0.13 0.10 - Stage 2 (%) 1.29 9.65 11.92 3.45 2.08 2.28 1.48 — 2.21 2.92 - Stage 3 (%) 18.17 59.02 74.60 26.61 30.03 38.59 62.86 — 34.51 30.06 ECL charge 57 87 210 354 30 13 3 (2) 44 398 - UK 38 88 207 333 31 9 6 (2) 44 377 - RoI 19 (1) 3 21 (1) (3) (1) — (5) 16 - Other Europe — — — — — 8 (2) — 6 6 - RoW — — — — — (1) — — (1) (1) ECL loss rate (%) 0.03 2.06 2.19 0.20 0.08 0.02 0.01 (0.03) 0.03 0.12 Amounts written-off 368 79 329 776 292 395 31 — 718 1,494 * Not within audit scope.
Off-balance sheet by asset quality (2) 13,228 16,613 12,229 42,070 16,044 52,730 28,761 29,277 126,812 168,882
Total IFRS 9 credit risk exposure by stage Total credit Stage 2 (2,3) ECL exposure Stage 1 <30 DPD >30 DPD Total Stage 3 provisions
Personal 177,196 155,843 14,460 625 15,085 6,268 2,316 UK mortgages 146,556 134,350 10,119 431 10,550 1,656 262 RoI mortgages 15,549 10,674 1,351 127 1,478 3,397 961 Credit cards 4,247 3,097 999 11 1,010 140 222 Other personal (6) 10,844 7,722 1,991 56 2,047 1,075 871 Wholesale 194,988 178,086 11,500 387 11,887 5,015 2,131 Property 37,877 33,884 1,942 87 2,029 1,964 685 Corporate 73,667 62,253 8,224 245 8,469 2,945 1,325 Financial institutions 34,064 32,923 981 55 1,036 105 115 Sovereign 49,380 49,026 353 — 353 1 6 Total financial assets excluding balances at central banks 372,184 333,929 25,960 1,012 26,972 11,283 4,447 Balances at central banks 96,571 96,566 5 — 5 — 1 Total financial assets 468,755 430,495 25,965 1,012 26,977 11,283 4,448 Total contingent liabilities and commitments 146,800 139,550 6,388 113 6,501 749 Total exposure 615,555 570,045 32,353 1,125 33,478 12,032 Financial assets - asset quality (2) - AQ1-AQ4 230,773 223,789 6,883 101 6,984 — - AQ5-AQ8 128,814 109,962 17,449 660 18,109 743 - AQ9 2,912 178 1,628 251 1,879 855 - AQ10 (3) 9,685 — — — — 9,685
(6) At 1 January 2018, mortgages other than UK and RoI were reported within other personal but at 31 December 2018 they are reported separately.
Forbearance (flow) 14 305 — 2,247 2,566 Forbearance (stock) 15 477 — 2,756 3,248 Heightened Monitoring and Risk of Credit Loss 100 503 16 4,145 4,764 2017 Forbearance (flow) 11 417 — 1,473 1,901 Forbearance (stock) 14 764 — 3,067 3,845 Heightened Monitoring and Risk of Credit Loss 144 739 — 4,183 5,066
The table below summarises risk elements in lending by segment on an IAS 39 basis.
PBB RoI Banking Banking International Markets & other Total £m £m £m £m £m £m £m £m
Credit risk – Banking activities continued Portfolio summary – sector analysis (audited) Key points  Geography – The majority of exposures in both the Personal and
 Asset quality – Measured against RBS’s asset quality scale, 54% of lending exposure was rated in the AQ1-AQ4 bands at 31 December 2018. This equated to an indicative investment rating of BBB- or above. Specifically 59% of Personal and 48% of Wholesale lending exposure were in the AQ1-AQ4 category respectively.
 Loans by stage – 90% of exposures were in Stage 1, with 8% in Stage 2 significantly credit deteriorated. Stage 3 assets, which align to AQ10, represented 2% of total exposures. In line with expectations, the Personal portfolio had a higher proportion of unsecured lending assets in Stage 2 than the mortgage portfolio. In the Wholesale portfolio, the proportion of assets in Stage 2 was slightly lower than in Personal overall.
 Loans – Past due analysis – Stage 2: the vast majority of assets overall were not past due, with the Stage 2 classification driven primarily by changes in lifetime PD. (For further detail, refer to the Significant increase in credit risk section). In mortgages, the majority of assets past due by more than 180 days were in Ulster Bank RoI reflecting the legacy mortgage portfolio and the residual effects from the financial crisis. In other personal, the relatively high rate of exposures past due by more than 90 days reflected the fact that impaired assets can be held on balance sheet with commensurate ECL provision for up to six years after default. Similarly in the Wholesale portfolio, impaired assets can be held on the balance sheet for a significant period of time while restructuring and recovery processes are concluded.
 ECL provision by stage and coverage – The weight of ECL by value was in Stage 3 impaired, with similar seen in both Personal and Wholesale. Provision coverage was progressively higher by stage reflecting the lifetime nature of losses in both Stage 2 and Stage 3. In the Personal portfolio, provision coverage was materially lower in mortgages relative to credit cards and other personal reflecting the secured nature of the facilities. For Wholesale exposures, security and enterprise value mitigated against losses in Stage 3.
 The ECL charge for the year was £398 million. This reflected the relatively stable external environment.
 Other financial assets by asset quality – Consisting almost entirely of cash and balances at central banks and debt securities, these assets were mainly within the AQ1-AQ4 category.
 Off-balance sheet exposures by asset quality – For Personal exposures, undrawn exposures are reflective of available credit lines in credit cards and current accounts. Additionally, the mortgage portfolio had undrawn exposure, where a formal offer has been made to a customer but has not yet been drawn down. There is also a legacy portfolio of flexible mortgages where a customer has the right and ability to draw down further funds. The asset quality distribution in mortgages is heavily weighted to the highest quality bands AQ1-AQ4, with credit card concentrated in the risk bands AQ5-AQ8. In Wholesale, 83% of undrawn exposure, relating mainly to loan commitments, was in the AQ1-AQ4 category.
Credit risk – Banking activities continued Portfolio summary – sector analysis (audited) The table below summarises both current and potential exposure by geographical region on an IAS 39 basis.
Loan asset quality The table below summarises asset quality and impairments by banks and customers on an IAS 39 basis. Impairment AQ1-AQ4 AQ5-AQ8 AQ9 AQ10 Past due Impaired provision Total 2017 £bn £bn £bn £bn £bn £bn £bn £bn
Loan sector concentration The table below summarises gross loans to banks and customers (excluding reverse repos) and related credit metrics by sector, on an IAS 39 basis.
Central and local government 4,684 — — — — — — — Finance 30,832 54 44 0.2 81 0.1 3 7 Personal - mortgage (1) 163,010 3,876 994 2.4 26 0.6 50 87 - unsecured 14,587 937 763 6.4 81 5.2 235 424
Past due analysis The table below summarises loans – amortised cost to customers that were past due at the balance sheet date but were not considered impaired.
Past due 1-29 days 3,535 Personal 3,731 Past due 30-59 days 902 Property and construction 667 Past due 60-89 days 456 Financial institution 24 Past due 90 days or more 1,481 Other corporate 1,952
Cash and balances at central banks 87.2 — 87.2 — — — — — — 87.2 — Loans - amortised cost (3) 302.6 3.2 299.4 5.0 4.1 188.1 19.7 211.9 4.5 87.5 0.5 Personal (4) 164.6 1.7 162.9 2.9 — 151.7 — 151.7 2.7 11.2 0.2 Wholesale (5) 138.0 1.5 136.5 2.1 4.1 36.4 19.7 60.2 1.8 76.3 0.3 Debt securities 57.0 — 57.0 — — — — — — 57.0 — Total financial assets 446.8 3.2 443.6 5.0 4.1 188.1 19.7 211.9 4.5 231.7 0.5
Contingent liabilities and commitments Personal (6) 31.0 — 31.0 0.3 — 4.9 — 4.9 — 26.1 0.3 Wholesale 126.2 — 126.2 0.3 0.6 5.9 6.1 12.6 — 113.6 0.3 Total off balance sheet 157.2 — 157.2 0.6 0.6 10.8 6.1 17.5 — 139.7 0.6 Total exposure 604.0 3.2 600.8 5.6 4.7 198.9 25.8 229.4 4.5 371.4 1.1
(4) On personal, Stage 3 mortgage exposures have relatively limited uncovered exposure reflecting the security held. On unsecured credit cards and other personal borrowing, the residual uncovered amount reflects historical experience of continued cash recovery post default through on-going engagement with customers.
The table below summarises financial asset exposures, both gross and net of offset arrangements, as well as credit mitigation and enhancement. Exposure Collateral (1) post credit Gross IFRS Carrying Balance sheet Real estate and other Credit mitigation and exposure offset (5) value (6) offset (7) Cash (2) Securities (3) Residential (4) Commercial (4) enhancement (8) enhancement 2017 £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn
Cash and balances at central banks 98.4 — 98.4 — — — — — — 98.4 Trading assets 118.6 (32.6) 86.0 (0.3) — (32.5) — — — 53.2 Derivatives 177.9 (17.1) 160.8 (128.3) (20.3) (5.9) — — (6.3) — Settlement balances 3.2 (0.7) 2.5 — — — — — — 2.5 Loans - amortised cost 334.1 (12.5) 321.6 (27.9) (0.9) (11.2) (174.2) (45.0) (2.1) 60.3 Other financial assets 52.0 — 52.0 — — — — (0.1) — 51.9 Total third party gross of short positions 784.2 (62.9) 721.3 (156.5) (21.2) (49.6) (174.2) (45.1) (8.4) 266.3
(2) Includes cash collateral pledged by counterparties based on daily mark-to-market movements of net derivative positions with the counterparty. (3) Represent the fair value of securities received from counterparties, mainly relating to reverse repo transactions as part of netting arrangements. (4) Property valuations are capped at the loan value and reflect the application of haircuts in line with regulatory rules to indexed valuations. Commercial collateral includes ships and plan and equipment collateral. (5) Relates to offset arrangements that comply with IFRS criteria and transactions cleared through and novated to central clearing houses, primarily London
Credit risk – Banking activities continued Personal portfolio (audited) Disclosures in the Personal portfolio section include drawn exposure (gross of provisions). Loan-to-value (LTV) ratios are split by stage under IFRS 9 at 31 December 2018 and by performing and non-performing status under IAS 39 at 31 December 2017.
Personal lending PBB Bank RoI Banking RBSI Total PBB Bank RoI Banking RBSI Total £m £m £m £m £m £m £m £m £m £m
Mortgages 138,250 14,361 9,082 2,684 164,377 136,625 15,352 8,421 2,745 163,143 Of which: Owner occupied 122,642 13,105 7,953 1,781 145,481 118,764 13,455 7,275 1,821 141,315 Buy-to-let 15,608 1,256 1,129 903 18,896 17,861 1,897 1,146 924 21,828 Interest only - variable 8,358 188 3,871 489 12,906 11,245 260 4,076 636 16,217 Interest only - fixed 12,229 12 3,636 187 16,064 12,584 8 2,866 96 15,554 Mixed (1) 6,036 68 2 18 6,124 6,039 79 2 20 6,140 Impairment provisions (2) 212 602 5 16 835 153 909 7 27 1,096 Other personal lending (3) 11,633 330 1,676 55 13,694 11,080 348 1,701 65 13,194 Impairment provisions (2) 909 25 19 1 954 833 44 19 2 898 Total personal lending 149,883 14,691 10,758 2,739 178,071 147,705 15,700 10,122 2,810 176,337 Mortgage LTV ratios - Total portfolio 56% 62% 56% 58% 57% 56% 69% 55% 58% 57%
- Stage 1 53% 58% 53% 52% 53% - Stage 2 57% 72% 53% 57% 60% - Stage 3 58% 78% 68% 75% 71% Gross new mortgage lending 29,555 1,015 1,846 353 32,769 30,314 890 2,243 481 33,928 of which: Owner occupied 28,608 1,004 1,689 241 31,542 28,504 875 1,904 319 31,602 Weighted average LTV 69% 73% 62% 68% 69% 70% 75% 63% 70% 70% Buy-to-let 947 11 157 112 1,227 1,810 15 339 162 2,326 Weighted average LTV 61% 57% 55% 61% 60% 62% 57% 56% 62% 61% Interest only - variable rate 43 — 697 13 753 335 6 902 39 1,282 Interest only - fixed rate 1,189 — 764 43 1,996 1,835 1 874 48 2,758 Mixed (1) 912 1 — — 913 893 — — — 893 Mortgage forbearance (4) Forbearance flow 446 210 11 667 440 201 31 5 677 Forbearance stock 1,338 2,645 8 3,991 1,384 3,893 7 25 5,309 Current 724 1,291 6 2,021 834 1,779 6 12 2,631 1-3 months in arrears 350 261 — 611 304 466 — 2 772 > 3 months in arrears 264 1,093 2 1,359 246 1,648 1 11 1,906
Notes: (1) Includes accounts which have an interest only sub-account and a capital and interest sub-account to provide a more comprehensive view of interest only exposures. (2) 31 December 2018 data was prepared under IFRS 9. 31 December 2017 data was prepared under IAS 39. For UK PBB this excludes a non-material amount of provisions held on relatively small legacy portfolios. (3) Excludes loans that are commercial in nature, for example loans guaranteed by a company and commercial real estate lending to Personal customers. (4) The reduction in RBSI forbearance is due to reclassification.
 Owner occupied and buy-to-let – Most of the mortgage growth was in the owner-occupied portfolio. New mortgages in the buy-to-let portfolio remained subdued.
≤50% 50,583 527 51,110 4,593 >50% and ≤70% 47,361 505 47,866 8,310 >70% and ≤80% 20,514 150 20,664 7,709 >80% and ≤90% 13,409 87 13,496 8,239 >90% and ≤100% 2,559 36 2,595 1,285 >100% and ≤110% 130 14 144 1 >110% and ≤130% 114 10 124 1 >130% and ≤150% 58 5 63 — >150% 25 8 33 1 Total with LTVs 134,753 1,342 136,095 30,139 Other 512 18 530 175 Total 135,265 1,360 136,625 30,314
≤50% 3,818 374 463 — 4,655 1 5 40 46 — 1.4 8.6 1.0 >50% and ≤70% 3,567 365 459 — 4,391 2 10 47 59 — 2.7 10.3 1.3 >70% and ≤80% 1,564 190 241 — 1,995 1 11 52 64 0.1 5.5 21.5 3.2 >80% and ≤90% 1,059 184 272 — 1,515 2 15 82 99 0.2 8.3 30.2 6.5 >90% and ≤100% 570 154 261 — 985 2 17 99 118 0.4 11.1 37.7 11.9 >100% and ≤110% 197 80 207 — 484 2 10 85 97 0.9 12.8 41.1 20.1 >110% and ≤130% 51 35 179 — 265 — 6 84 90 0.8 16.6 47.0 34.0 >130% and ≤150% 5 5 37 — 47 — 1 20 21 0.3 19.1 54.7 45.2 >150% 10 1 13 — 24 — 1 7 8 2.1 27.2 58.9 33.5 Total with LTVs 10,841 1,388 2,132 — 14,361 10 76 516 602 0.1 5.4 24.2 4.2
≤50% 3,743 333 4,076 >50% and ≤70% 3,600 382 3,982 >70% and ≤80% 1,858 233 2,091 >80% and ≤90% 1,420 273 1,693 >90% and ≤100% 1,070 309 1,379 >100% and ≤110% 814 317 1,131 >110% and ≤130% 378 414 792 >130% and ≤150% 20 126 146 >150% 23 39 62 Total with LTVs 12,926 2,426 15,352
 ECL coverage rates increase through the LTV bands with both UK PBB and Ulster Bank RoI having only limited exposures in the highest LTV bands. The relatively high coverage level in the lowest LTV band for UK PBB included the effect of time-discounting on expected recoveries. Additionally, this also reflected the modelling approach that recognised an element of expected loss on mortgages that are not subject to formal repossession activity.
Development Residential (2) 2,715 122 124 2,961 3,107 145 154 3,406 Office (3) 192 — — 192 169 — — 169 Retail (4) 94 7 1 102 187 5 2 194 Industrial (5) 119 2 12 133 49 — — 49 Mixed/other (6) 32 2 — 34 59 3 — 62
Notes: (1) Geographical splits are based on country of collateral risk. (2) Residential properties including houses, flats and student accommodation. (3) Office properties including offices in central business districts, regional headquarters and business parks. (4) Retail properties including high street retail, shopping centres, restaurants, bars and gyms. (5) Industrial properties including distribution centres, manufacturing and warehouses. (6) Mixed usage or other properties that do not fall within the other categories above. Mixed generally relates to a mixture of retail/office with residential.
Stage 1 Stage 2 Stage 3 scope (3) Total Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total Performing performing Total
Notes: (1) CRE current exposure comprises gross lending, interest rate hedging derivatives and other assets carried at fair value that are managed as part of the overall CRE portfolio. (2) The exposure in Stage 3 mainly related to legacy assets. (3) Includes exposures relating to non-modelled portfolios and other exposures carried at fair value, including derivatives. (4) ECL provisions coverage is ECL provisions divided by current exposure. (5) Relates mainly to business banking, rate risk management products and unsecured corporate lending. The low Stage 3 ECL provisions coverage was driven by a single large exposure, which has been written down to the expected recoverable amount. (6) Relates to the development of commercial and residential properties. LTV is not a meaningful measure for this type of lending activity.
Key points (audited)  Overall – The majority of the CRE portfolio was managed in the UK
within Commercial Banking, Private Banking and UK PBB. The remainder was managed in Ulster Bank RoI and NatWest Markets. Business appetite and strategy remain aligned across the segments.
 Performance varied widely by sub-sector with strong growth from industrials contrasting with material decline in parts of the retail sector.
Credit risk – Banking activities continued Flow statements (audited) The ECL flow statements analyse the key elements that drive the movement of ECL and related income statement over the reporting period. The key themes are:  The flow statements capture the changes in ECL as well as the changes in related financial assets used in determining ECL. Exposures in this section may therefore differ from those reported in other tables in the credit risk section, principally in relation to exposures in Stage 1 and Stage 2. These differences do not have a material ECL impact.
 Stage transfers (for example, exposures moving from Stage 1 to Stage 2) – these transfers are a key feature of the ECL movements, with the net re-measurement cost of transitioning to a worse stage being a primary driver of income statement charges for the period (likewise there is an ECL benefit for accounts improving stage).
 Changes in risk parameters – captures the reassessment of the ECL within a given stage, including any ECL overlays and residual income statement gains or losses at the point of write-off or accounting write-down.
 Other (P&L only items) – includes any subsequent changes in the value of written-down assets (for example, fortuitous recoveries) along with other direct write-off items such as direct recovery costs. Note: other (P&L only items) only affects the income statement and does not impact the balance sheet ECL movements.
 Amounts written-off – represent the gross asset written-down against accounts with ECL, including the net asset write-down for debt sale activity.
 There were small amounts of ECL flows from Stage 3 to Stage 1 during the year. This does not however indicate that accounts can return from Stage 3 to Stage 1 directly. On a similar basis, flows from Stage 1 to Stage 3 were observed, however this also included legitimate transfers due to unexpected default events. The small number of write-offs in Stage 1 and 2 reflect the effect of portfolio debt sales and also staging at the start of the analysis period.
 The impact of model changes during 2018 were not material at a RBS Group-wide level or on the portfolios disclosed below.
Stage 1 Stage 2 Stage 3 Total Financial Financial Financial Financial assets ECL assets ECL assets ECL assets ECL £m £m £m £m £m £m £m £m
At 1 January 2018 419,038 262 29,637 621 10,595 3,565 459,270 4,448 Currency translation and other adjustments 1,820 (6) 88 17 50 (11) 1,958 — Transfers from Stage 1 to Stage 2 (18,416) (52) 18,416 52 — — — — Transfers from Stage 2 to Stage 1 13,723 228 (13,723) (228) — — — — Transfers to Stage 3 (1,205) (3) (1,837) (108) 3,042 111 — — Transfers from Stage 3 1,272 16 1,523 163 (2,795) (179) — — Net re-measurement of ECL on stage transfer (207) 247 447 487 Changes in risk parameters (model inputs) 34 74 36 144 Other changes in net exposure 6,312 29 (6,716) (32) (1,633) (85) (2,037) (88) Other (P&L only items - primarily fortuitous recoveries) 1 3 (149) (145) Income statement (releases)/charges (143) 292 249 398 Amounts written-off (3) (3) (28) (28) (1,463) (1,463) (1,494) (1,494)
The following flow statements provide insight into the material portfolios underpinning the Group flow statements. Personal The following flow statements are at a portfolio level.
 The increase in Stage 3 ECL changes in risk parameters reflected the monthly assessment of the loss requirement, capturing underlying changes in risk and forward-looking assessments.
At 31 December 2018 2,632 36 1,226 118 106 71 3,964 225 Net carrying amount 2,596 1,108 35 3,739
 Transfers from Stage 2 to Stage 1 were higher than in other personal portfolios, primarily due to the ECL assessment period being reset when cards are re-issued.
 The amounts in other (P&L only items) mainly reflected cash recoveries after write-off. These benefited the income statement without affecting ECL.
 Amounts written-off primarily represented charge-offs (analogous to write-off) which typically occurs after 12 missed payments, and also 2018 debt sale activity.
 Overall ECL reduction was mainly driven by debt sale activity and business-as-usual write-offs in Stage 3, both reflected in amounts written-off.
 Overall ECL reduced slightly during the year, with some modest Stage 1 and Stage 2 ECL increases being more than offset by Stage 3 write-offs, which was the key driver of the overall income statement charge for 2018.
Key points  The overall ECL reduction was driven by reduced ECL in Stage 3, which was subject to significant debt sale activity in 2018 (approximately £0.9 billion of gross exposures were sold during the year).
 The reduction in Stage 2 exposures resulted from the portfolio debt sale and decreasing stock of exposures meeting the highrisk backstop criteria. This reflected ongoing improvements in the underlying portfolio performance.
 Write-off generally occurs once the repossessed property has been sold and there is a residual shortfall balance remaining outstanding which has been deemed irrecoverable.
Commercial Banking At 1 January 2018 84,228 58 9,056 106 3,735 1,156 97,019 1,320 Currency translation and other adjustments 367 — 47 (1) 29 (4) 443 (5)
Transfers from Stage 1 to Stage 2 (8,224) (9) 8,224 9 — — — — Transfers from Stage 2 to Stage 1 5,911 52 (5,911) (52) — — — — Transfers to Stage 3 (881) — (938) (13) 1,819 13 — — Transfers from Stage 3 1,056 11 937 89 (1,993) (100) — —
Net re-measurement of ECL on stage transfer (57) 13 160 116 Changes in risk parameters (model inputs) 46 8 41 95 Other changes in net exposure (4,274) (1) (2,748) (19) (489) (40) (7,511) (60) Other (P&L only items) — 1 (8) (7)
Income statement (releases)/charges (12) 3 153 144 Amounts written-off — — — — (460) (460) (460) (460) Other movements — — (10) (10)
 Release in Stage 1 was driven by a reduction in ECL for exposures transferring from Stage 2 and Stage 3, which previously had a lifetime ECL but are now assessed for 12 month ECL.
Net re-measurement of ECL on stage transfer (26) 5 — (21) Changes in risk parameters (model inputs) (5) 4 — (1) Other changes in net exposure 19,902 8 (669) (8) (4) (6) 19,229 (6) Other (P&L only items - primarily fortuitous recoveries) — — (64) (64)
£105 million) purchased or originated credit impaired (POCI) assets. No ECL impairment was held on these positions and a £61 million impairment recovery was recognised on these POCI assets during 2018 (included in other (P&L only items – primarily fortuitous recoveries)).
 The release in Stage 1 was driven by a reduction in ECL on exposures transferring from Stage 2, which previously had a lifetime ECL but are now assessed for 12 month ECL.
Private Banking At 1 January 2018 13,046 18 412 9 300 27 13,758 54 Currency translation and other adjustments 12 — 1 2 — — 13 2 Inter-Group transfers 23 — — — — — 23 — Transfers from Stage 1 to Stage 2 (270) (1) 270 1 — — — — Transfers from Stage 2 to Stage 1 92 2 (92) (2) — — — — Transfers to Stage 3 (60) — (8) — 68 — — — Transfers from Stage 3 7 — 1 — (8) — — —
Net re-measurement of ECL on stage transfer (2) 3 1 2 Changes in risk parameters (model inputs) (3) (2) 1 (4) Other changes in net exposure 1,100 — (65) (1) (121) (2) 914 (3) Other (P&L only items) — — (1) (1)
Other movements — — (1) (1) At 31 December 2018 13,950 14 519 10 232 19 14,701 43 Net carrying amount 13,936 509 213 14,658
(primarily mortgages driven) with minimal ECL impact due to high credit quality.
At 1 January 2018 8,652 5 385 5 118 28 9,155 38 Currency translation and other adjustments 98 (2) — 2 — (1) 98 (1) Inter-Group transfers 1,834 — 95 — — — 1,929 — Transfers from Stage 1 to Stage 2 (299) — 299 — — — — — Transfers from Stage 2 to Stage 1 340 5 (340) (5) — — — — Transfers to Stage 3 (14) — (11) — 25 — — — Transfers from Stage 3 190 — 4 — (194) — — —
Key points  The reduction in ECL was driven by write-offs and Stage 3 impairment releases, both of which are primarily in the Spanish mortgage portfolio.
 The increases in exposure were partly due to new lending, but mainly due to the establishment of a liquidity portfolio across central and correspondent banks and sovereign bond holdings. These exposures were in Stage 1 with very low credit risk and contribute minimal ECL.
Credit risk – Banking activities continued Stage 2 decomposition – arrears status and contributing factors The tables below summarise Stage 2 decomposition for the Personal and Wholesale portfolios.
 In Personal exposures, as expected, ECL coverage was higher on accounts that are more than 30 days past due. Also in line with expectations, accounts exhibiting PD deterioration have a higher ECL coverage than accounts in Stage 2 for other reasons.
Property Corporate FI Other Total 31 December 2018 Loans ECL Loans ECL Loans ECL Loans ECL Loans ECL
Currently in arrears (>30 DPD) 255 7 315 5 1 — — — 571 12 Currently up-to-date 1,622 32 8,438 195 473 7 22 — 10,555 234 - PD deterioration 924 23 5,564 138 281 6 8 — 6,777 167 - Up-to-date, PD persistence 57 1 170 5 4 — — — 231 6 - Other driver (forbearance, RoCL etc.) 641 8 2,704 52 188 1 14 — 3,547 61 Total Stage 2 1,877 39 8,753 200 474 7 22 — 11,126 246
 The primary driver of credit deterioration was PD, which including persistence, accounted for the majority of movements to Stage 2. High risk back-stops, for example, forbearance, adverse credit bureau, provide additional valuable discrimination particularly on mortgages.
PD movement 940 50.1 5,617 64.2 281 59.3 8 36.4 6,845 61.5 PD persistence 57 3.0 171 2.0 4 0.8 — — 232 2.1 Risk of Credit Loss 321 17.1 1,964 22.4 103 21.7 — — 2,388 21.5 Forbearance support provided 65 3.5 209 2.4 — — — — 274 2.5 Customers in collections 9 0.5 43 0.5 — — — — 52 0.5 Other reasons (3) 251 13.4 525 6.0 85 17.9 14 63.6 875 7.9 Days past due >30 234 12.5 224 2.6 1 0.2 — — 460 4.1 1,877 100 8,753 100 474 100 22 100 11,126 100
Notes: (1) The data table is built on a hierarchical basis from top to bottom, for example, accounts with PD deterioration may also trigger backstop(s) but are only reported under PD deterioration. (2) Includes customers who have accessed payday lending, interest only mortgages past end of term, a small number of mortgage customers on a highly flexible mortgage significantly behind their outline repayment plan and customers breaching risk appetite thresholds for new business acquisition. On the RoI mortgage portfolio, this reflected customers who remained in probation following the conclusion of forbearance support, exposures breaching risk appetite thresholds for new business acquisition and exposures classified as non-performing exposures under EBA requirements.
 The primary driver of credit deterioration was PD, which including persistence, accounted for 62% of Stage 2. The Risk of Credit Loss framework accounted for a further 21% highlighting the importance of expert judgement being used to identify deterioration.
Stage 3 loans (£bn) 1.2 2.1 3.4 Vintage (time in default): <1 year 26% 7% 22%
Asset quality (audited) Asset quality analysis is based on internal asset quality ratings which have ranges for the probability of default. Customers are assigned credit grades, based on various credit grading models that reflect the key drivers of default for the customer type. All credit grades across RBS map to both an asset quality scale, used for external financial reporting, and a master grading scale for wholesale exposures used for internal management reporting across portfolios. The table that follows details the relationship between internal asset quality (AQ) bands and external ratings published by Standard & Poor’s (S&P), for illustrative purposes only. This relationship is established by observing S&P’s default study statistics, notably the one year default rates for each S&P rating grade. A degree of judgement is required to relate the probability of default ranges associated with the master grading scale to these default rates given that, for example, the S&P published default rates do not increase uniformly by grade and the historical default rate is nil for the highest rating categories.
UK mortgages AQ1-AQ4 95,618 3,621 99,239 6 11 17 0.01 0.30 0.02 AQ5-AQ8 42,771 5,845 48,616 6 46 52 0.01 0.79 0.11 AQ9 32 804 836 — 17 17 — 2.11 2.03 AQ10 1,541 1,541 151 151 9.80 9.80
AQ1-AQ4 34 1 35 — — — — — — AQ5-AQ8 2,810 1,180 3,990 38 103 141 1.35 8.73 3.53 AQ9 7 62 69 — 17 17 — 27.42 24.64 AQ10 122 122 72 72 59.02 59.02
AQ1-AQ4 997 43 1,040 4 5 9 0.40 11.63 0.87 AQ5-AQ8 5,889 1,847 7,736 55 186 241 0.93 10.07 3.12 AQ9 56 183 239 2 56 58 3.57 30.60 24.27 AQ10 563 563 420 420 74.60 74.60
Note: (1) At 31 December 2018, AQ10 includes £0.6 billion RoI mortgages which are not currently considered defaulted for capital calculation purposes for RoI but included in Stage 3.
 The relatively high level of Stage 3 impaired assets (AQ10) in RoI mortgages reflected their legacy mortgage portfolio and the residual effects from the financial crisis. In other personal, the relatively high level of exposures in AQ10 reflected the fact that impaired assets can be held on balance sheet with commensurate ECL provision for up to six years after default.
Credit risk – Banking activities continued Asset quality (audited) The table below summarises asset quality bands of gross loans and ECL by stage for the Wholesale portfolio. Gross loans ECL provisions ECL provisions coverage Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total Stage 1 Stage 2 Stage 3 Total
Key points  Across the Wholesale portfolio, the asset quality band distribution differed reflecting the diverse nature of differing sectors. 48% of Wholesale lending exposure was in the AQ1-AQ4 band.
Credit risk – Trading activities This section covers the credit risk profile of RBS’s trading activities. All disclosures are audited. Security funding transactions and collateral (audited) The table below captures securities funding transactions in NWM and Treasury. All transactions that are outside netting arrangements are in NWM. Reverse repos Repos Outside Outside Of which: netting Of which: netting
Gross 68,044 65,057 2,987 70,097 68,940 1,157 IFRS offset (39,737) (39,737) — (39,737) (39,737) — Carrying value 28,307 25,320 2,987 30,360 29,203 1,157
Master netting arrangements (762) (762) — (762) (762) — Securities collateral (24,548) (24,548) — (28,441) (28,441) — Potential for offset not recognised under IFRS (25,310) (25,310) — (29,203) (29,203) — Net 2,997 10 2,987 1,157 — 1,157 2017 Gross 84,706 78,991 5,715 82,395 80,088 2,307 IFRS offset (43,974) (43,974) — (43,974) (43,974) — Carrying value 40,732 35,017 5,715 38,421 36,114 2,307
Exchange rate Spot, forwards and futures 17,904 18,610 19,283 19,172 Currency swaps 11,322 12,062 11,163 13,534 Options purchased 7,319 — 8,765 — Options written — 7,558 — 8,975
Banks (2) 362 443 461 466 Other financial institutions (3) 1,054 1,144 1,608 1,625 Corporate (4) 2,510 1,817 3,843 2,065 Government (5) 255 38 483 76
AQ1-AQ4 3,384 5,173 AQ5-AQ8 773 1,216 AQ9 3 3 AQ10 21 3
Credit risk – Trading activities continued Derivatives: settlement basis and central counterparties (audited) The table below summarises the derivative notional and fair value by trading and settlement method.
Interest rate 1,642 5,952 2,942 10,536 — 96,410 — 90,444 Exchange rate 4 — 3,422 3,426 — 36,545 — 38,230 Credit — — 16 16 — 346 — 208 Equity and commodity — — 1 1 — 48 — 15 2017 Interest rate 1,506 7,400 3,110 12,016 — 120,945 — 112,160 Exchange rate 4 — 3,421 3,425 — 39,211 — 41,681 Credit — — 38 38 — 531 — 558 Equity and commodity — — 3 3 — 156 1 106
AAA — — 1,474 1,576 21 3,071 AA to AA+ 3,514 3,667 2,386 984 168 10,719 A to AA- — — 7,224 427 78 7,729 BBB- to A- — — 3,267 796 493 4,556 Non-investment grade — — 385 552 171 1,108 Unrated — — — 255 43 298 Total 3,514 3,667 14,736 4,590 974 27,481
Credit risk continued Key IFRS 9 terms and differences to the prior IAS accounting standard and regulatory framework (audited)
To determine the risk of a default occurring, management applies a default definition that is consistent with the Basel/regulatory definition of default.
Impaired financial assets were those for which there was objective evidence that the amount or timing of future cash flows had been adversely impacted since initial recognition.
Regulatory PDs adjusted to point in time metrics were used in the latent provision calculation.
For Wholesale, PD models reflect losses that would arise through-thecycle; this represents a long run average view of default levels.
A framework incorporating both quantitative and qualitative measures aligned to the Group’s current risk management framework has been established. Credit deterioration will be a management decision, subject to approval by governing bodies such as the Provisions Committee.
Attribute IFRS 9 IAS 39 Regulatory (CRR) Loss given default (LGD)
LGD is a current assessment of the amount that will be recovered in the event of default, taking account of future conditions. It may occasionally equate to the regulatory view albeit with conservatism and downturn assumptions generally removed.
Regulatory LGD values were often used for calculating collective and latent provisions; bespoke LGDs were also used.
The reference date used to assess a significant increase in credit risk is as follows. Term lending: the date the facility became available to the customer. Wholesale revolving products: the date of the last substantive credit review (typically annual) or, if later, the date facility became available to the customer. Retail Cards: the account opening date or, if later, the date the card was subject to a regular three year review or the date of any subsequent limit increases. Current accounts/overdrafts: the account opening date or, if later, the date of initial granting of overdraft facility or of limit increases.
Sources of risk RBS’s non-traded market risk exposure is largely managed in line with the following key categories: interest rate risk; credit spread risk; foreign exchange risk; equity risk; and accounting volatility risk.
Interest rate risk Non-traded interest rate risk (NTIRR) arises from the provision to customers of a range of banking products with differing interest rate characteristics. When aggregated, these products form portfolios of assets and liabilities with varying degrees of sensitivity to changes in market interest rates. Mismatches can give rise to volatility in net interest income as interest rates vary. NTIRR comprises three primary risk types: gap risk, basis risk and option risk.
Credit spread risk Credit spread risk arises from the potential adverse economic impact of a change in the spread between bond yields and swap rates, where the bond portfolios are accounted at fair value through equity.
Foreign exchange risk Non-traded foreign exchange risk arises from two main sources:  Structural foreign exchange risk – arises from the capital deployed in foreign subsidiaries, branches and joint arrangements and related currency funding where it differs from sterling.
Equity risk Non-traded equity risk is the potential variation in income and reserves arising from changes in the values of equity positions. Equity exposures may arise through strategic acquisitions, venture capital investments and certain restructuring arrangements.
 Compliance with ring-fencing regulations resulted in the split of nontraded market risk management responsibility for NatWest Holdings and its subsidiaries from non-ring-fenced companies.
Risk governance Responsibility for identifying, measuring, monitoring and controlling market risk arising from non-trading activities lies with the relevant business. Oversight is provided by the independent Risk function.
Risk positions are reported monthly to the Executive Risk Committee and quarterly to the Board Risk Committee, as well as to the Asset & Liability Management Committee (monthly in the case of interest rate, credit spread and accounting volatility risks and quarterly in the case of foreign exchange and equity risks).
Its quantitative appetite is expressed in terms of value-at-risk (VaR), stressed value-at-risk (SVaR), sensitivity and stress limits, and earnings-at-risk limits. These limits comprise both board risk measures (which are approved by the RBS Board on the recommendation of the Board Risk Committee) and key risk measures, which are approved by the Asset & Liability Management Committee.
NTIRR factors are grouped into the following categories:  Gap risk – arises from the timing of rate changes in non-trading book instruments. The extent of gap risk depends on whether changes to the term structure of interest rates occur consistently across the yield curve (parallel risk) or differentially by period (nonparallel risk).
Non-traded equity risk is the potential variation in the income and reserves arising from changes in equity valuations. Any such risk is identified prior to any investments and then mitigated through a framework of controls.
Risk measurement The market risk exposures arising as a result of RBS’s retail and commercial banking activities are measured using a combination of valuebased metrics (VaR and sensitivities) and earnings-based metrics, as explained in greater detail for each of the exposure types discussed in this section. The following table presents one-day internal banking book VaR at a 99% confidence level, split by risk type.
 Structural foreign exchange rate VaR peaked in H1 2018. The VaR
measures the residual spot sensitivity of the CET1 ratio to exchange rate movements. CET1 ratio sensitivity to the sterling/US dollar exchange rate increased in May when foreign exchange rate options were exercised to hedge additional US dollar liabilities that were recognised when the agreement in principle with the US Department of Justice was reached.
After hedging the net interest rate exposure externally, RBS allocates income to equity or products in structural hedges by reference to the relevant interest rate swap curve. Over time, this approach has provided a basis for stable income attribution to products and interest rate returns. The programme aims to track a time series of medium-term swap rates, but the yield will be affected by changes in product volumes and RBS’s capital composition.
Equity structural hedging 469 672 29 29 2.33 628 703 28 28 2.48 Product structural hedging 368 1,104 110 108 1.02 680 1,027 107 101 1.02 Other structural hedges 89 167 22 22 0.77 147 165 21 20 0.83
Equity structural hedges refer to income allocated primarily to equity and reserves. This includes NatWest Markets Plc and NatWest Holdings. Product structural hedges refer to income allocated to customer products, for example current accounts, in NatWest Holdings. Other structural hedges refer to hedges managed by the subsidiaries (Private Banking, Ulster Bank Limited, UBIDAC and RBSI). A significant proportion of Other structural hedges are euro-denominated.
 Additionally, as a result of ring-fencing legislation, RBSI is not able to hedge with NatWest Holdings. Instead of placing hedges with NatWest Holdings Treasury, RBSI now hedges its structural exposure with bonds, primarily UK government Gilts.
RBS uses VaR as its value-based approach and sensitivity of net interest income (NII) as its earnings-based approach.
RBS’s standard VaR metrics – which assume a time horizon of one trading day and a confidence level of 99% – are based on interest rate repricing gaps at the reporting date. Daily rate moves are modelled using observations from the last 500 business days. These incorporate customer products plus associated funding and hedging transactions as well as non-financial assets and liabilities. Behavioural assumptions are applied as appropriate.
The non-traded interest rate risk VaR metrics for RBS’s retail and commercial banking activities are included in the banking book VaR table on page 153. The VaR captures the risk resulting from mismatches in the repricing dates of assets and liabilities.
Sensitivity of net interest earnings Net interest earnings are sensitive to changes in the level of interest rates because changes to coupons on some customer products do not always match changes in market rates of interest or central bank policy rates.
The sensitivity of net interest earnings table shows the expected impact, over 12 months, to an immediate upward or downward change of 25 and 100 basis points to all interest rates. Yield curves are expected to move in parallel though interest rates are assumed to floor at zero per cent or, for euro rates, at the current negative rate.
However, reported sensitivities should not be considered a guide to future performance. They do not capture potential management action in response to sudden changes in the interest rate environment. Actions that could reduce NII sensitivity and mitigate adverse impacts are changes in pricing strategies on customer loans and deposits as well as hedging. Management action may also be targeted at stabilising total income taking into account non-interest income in addition to NII.
Non-traded market risk continued The tables below show the net interest earnings sensitivity on a one-year, two-year and three-year forward-looking basis to a parallel upward or downward shift in interest rates of 25 basis points. The projection is a simplified sensitivity in which the balance sheet is assumed to be constant, with no change in customer behaviour or margin management strategy as a result of rate changes. The benefit of structural hedges increases (or decreases) as maturing hedges are reinvested over the three-year period.
+25 basis points parallel upward shift -25 basis points parallel downward shift Year 1 Year 2 (1) Year 3 (1) Year 1 Year 2 (1) Year 3 (1)
Interest rate swaps are used to implement the structural hedging programme and also hedging of some personal and commercial lending portfolios, primarily fixed rate mortgages. Generally these swaps are booked in hedge accounting relationships. Changes in the valuation of swaps that are in effective cash flow hedge accounting relationships are recognised in cash flow hedge reserves.
 The increase in FVOCI reserve sensitivity was driven by the increase in the bonds held in liquidity portfolios due to the establishment of the NatWest Markets Plc liquid asset buffer as a result of ring-fencing implementation.
US dollar 553 — 553 (4) 549 (549) — Euro 6,428 33 6,395 (853) 5,542 — 5,542 Other non-sterling 2,600 710 1,890 (1,249) 641 (81) 560 2017 US dollar 766 — 766 (14) 752 (752) — Euro 7,160 61 7,099 (342) 6,757 (2,224) 4,533 Other non-sterling 2,493 645 1,848 (930) 918 (453) 465
 Euro economic hedges reduced as a result of the redemption of equity securities.  Changes in exchange rates affect equity in proportion to structural foreign currency exposures. At 31 December 2018, a 5% strengthening in all foreign currencies against sterling results in a £0.4 billion increase in equity reserves, while a 5% weakening in all foreign currencies against sterling results in a £0.3 billion reduction in equity reserves.
Equity risk (audited) Equity positions are carried at fair value on the balance sheet based on available market prices where possible. If market prices are not available, fair value is based on appropriate valuation techniques or management estimates.
Sources of risk Traded market risk mainly arises from RBS’s trading activities. These activities provide a range of financing, risk management and investment services to clients − including corporations and financial institutions − around the world. From a market risk perspective, activities are focused on rates; currencies; securitised products; and traded credit. RBS undertakes transactions in financial instruments including debt securities, as well as securities financing and derivatives.
All material traded market risk resides in NatWest Markets. The key categories are interest rate risk, credit spread risk and foreign currency price risk.
 Traded VaR fluctuated throughout 2018, reflecting political developments and geopolitical risk, but remained broadly unchanged on an average basis compared to 2017.
Risk governance Responsibility for identifying, measuring, monitoring and controlling market risk arising from trading activities lies with the relevant trading business. Oversight is provided by the Market Risk function. Traded market risk positions are reported monthly to the Executive Risk Committee and quarterly to the Board Risk Committee. Market risk policy statements set out the governance and risk management framework.
RBS’s qualitative appetite for traded market risk is set out in the traded market risk appetite statement. Quantitative appetite is expressed in terms of exposure limits. The limit framework at RBS level comprises value-at-risk (VaR) and stressed value-at-risk (SVaR). More details on these are provided on the following pages.
The limit framework at trading unit level also comprises additional metrics specific to the market risk exposures within its scope. These additional metrics aim to control various risk dimensions such as product type, exposure size, aged inventory, currency and tenor. For each trading business, a document known as a dealing authority compiles details of all applicable limits and trading restrictions.
Risk controls For information on risk controls, refer to page 92.
Risk monitoring and mitigation Traded market risk is identified and assessed by gathering, analysing, monitoring and reporting market risk information at desk, business, franchise and RBS-wide levels. Industry expertise, continued system developments and techniques such as stress testing are also used to enhance the effectiveness of the identification and assessment of all material market risks.
Business profit and loss performance is monitored automatically through loss triggers which, if breached, require a remedial action plan to be agreed between the Market Risk function and the business. The loss triggers are set using both a fall-from-peak approach and an absolute loss level. In addition, regular updates on traded market risk positions are provided to the Executive Risk Committee and Board Risk Committee.
Risk measurement (audited) RBS uses VaR, SVaR and the incremental risk charge to measure traded market risk. Risks that are not adequately captured by VaR or SVaR are captured by the Risks Not In VaR (RNIV) framework to ensure that RBS is adequately capitalised for market risk. In addition, stress testing is used to identify any vulnerabilities and potential losses in excess of VaR and SVaR.
 Ongoing model validation – VaR model performance is assessed both regularly and on an ad-hoc basis if market conditions or portfolio profile change significantly.
Traded VaR (1-day 99%) The table below shows one-day 99% internal VaR for RBS’s trading portfolios, split by exposure type.
Interest rate 14.3 27.3 9.2 13.0 14.1 24.5 8.8 15.3 Credit spread 11.0 24.2 6.9 8.2 12.1 19.4 8.8 16.7 Currency 3.1 7.6 1.4 5.3 4.9 10.0 2.3 3.5 Equity 0.8 1.6 0.3 0.8 1.2 2.1 0.4 0.4 Commodity 0.3 1.0 0.1 0.1 0.4 1.3 — 0.2 Diversification (1) (10.5) (8.8) (12.8) (15.3)
 The peaks in January, May and July were largely related to bond syndication activity and, in the case of January, long euro rates.
The Hypo P&L reflects the firm’s Actual P&L excluding any intra-day activities.
 The exceptions in the Currencies business were mainly due to market movements.
Stressed VaR (SVaR) As with VaR, the SVaR methodology produces estimates of the potential change in the market value of a portfolio, over a specified time horizon, at a given confidence level. SVaR is a VaR-based measure using historical data from a one-year period of stressed market conditions.
For quantitative disclosures on RNIVs, refer to the Market Risk section of the Pillar 3 Report.
Stress testing For information on stress testing, refer to page 93.
 Model Risk Management quantifies the model risk, which may include comparing the model outputs with those of alternative models developed by Model Risk Management.
Risk models All model changes are approved through model governance committees at franchise level. Changes to existing models are subject to Model Risk Management review. RBS follows regulatory guidance for assessing the materiality of extensions and changes to the internal model approach for market risk. In addition to Model Risk Management’s independent oversight – which provides additional assurance that RBS holds appropriate capital for the market risk to which it is exposed – the model testing team monitors the model performance for market risk through back-testing and other processes.
Sources of risk RBS has exposure to pension risk through its defined benefit schemes worldwide. The Main section of The Royal Bank of Scotland Group Pension Fund (the Main section) is the largest source of pension risk with £43.8 billion of assets and £35.5 of liabilities at 31 December 2018 (2017 – £44.7 billion assets and £37.9 billion liabilities). Further detail on RBS’s pension obligations, including sensitivities to the main risk factors, can be found in Note 5 on the consolidated accounts.
RBS also undertakes stress tests and scenario analyses on its material defined benefit pension schemes each year. These tests are also used to satisfy the requests of regulatory bodies such as the Bank of England. The stress testing framework includes pension risk capital calculations for the purposes of the Internal Capital Adequacy Assessment Process as well as additional stress tests for a number of internal management purposes.
The results of the stress tests and their consequential impact on RBS’s balance sheet, income statement and capital position are incorporated into the overall RBS stress test results.
Sources of risk Compliance and conduct risks exist across all stages of RBS’s relationships with its customers and arise from a variety of activities including product design, marketing and sales, complaint handling, staff training, and handling of confidential insider information. As set out in Note 27 on the consolidated accounts, RBS and certain members of staff are party to legal proceedings and are subject to investigation and other regulatory action in the UK, the US and other jurisdictions.
The compliance and conduct risk framework facilitates the consistent monitoring and measurement of compliance with laws and regulations and the delivery of consistently good customer outcomes.
The first line of defence is responsible for effective risk identification, reporting and monitoring, with oversight, challenge and review by the second line. Compliance and conduct risk management is also integrated into RBS’s strategic planning cycle.
Financial crime Definition Financial crime risk is the risk presented by criminal activity in the form of money laundering, terrorist financing, bribery and corruption, sanctions and tax evasion. It does not include fraud risk management.
 In October 2018, the Federal Reserve Board terminated a Cease & Desist Order originally imposed in December 2013. The Order, which related to RBS Group and RBS plc’s historical compliance with Office of Foreign Assets Control (OFAC) economic sanctions regulations, was terminated following a multi-year programme of work to establish a robust, sustainable OFAC Sanctions compliance framework.
 While the financial crime governance framework was strengthened during 2018 – along with the introduction of enhanced control effectiveness assurance processes, enhancements to existing risk assessment models, the introduction of a new Anti-Tax Evasion risk assessment; and improved monitoring controls and enhanced investigation processes – the journey of improvement continues.
Risk appetite RBS has no appetite to operate in an environment where systems and controls do not enable RBS to identify, assess, monitor, manage and mitigate financial crime risk. RBS’s systems and controls must be comprehensive and proportionate to the nature, scale and complexity of its businesses. RBS has no tolerance to systematically or repeatedly breach relevant financial crime regulations and laws.
Sources of risk Operational risk may arise from a failure to manage operations, systems, transactions and assets appropriately. This can take the form of human error, an inability to deliver change adequately or on time, the non-availability of technology services, or the loss of customer data. Fraud and theft – as well as the increasing threat of cyber attacks – are sources of operational risk, as is the impact of natural and man-made disasters. Operational risk can also arise from a failure to account for changes in law or regulations or to take appropriate measures to protect assets.
 RBS continued to review its well established incident management and coordination procedures to manage the persistent and evolving nature of information and cyber security risks.
 RBS continued to reduce and simplify its technology estate through strategic investment and Technology transformation initiatives to limit opportunities for hackers and fraudsters. Improvements in capability were also made to the Security Operations Centre, strengthening controls to prevent data leakage, enhance malware defences and management of user access to key systems.
 The number of critical customer impacting incidents that RBS experiences continues to reduce year-on-year. There were 17 such incidents in 2018 compared to 20 in 2017.
Risk governance A strong operational risk management function is vital to support RBS’s ambitions to serve its customers better. Improved management of operational risk against defined appetite directly supports the strategic risk objective of improving stakeholder confidence and is vital for stability and reputational integrity.
The Group-wide operational risk appetite statement encompasses the full range of operational risks faced by its legal entities, franchises and functions. A subset of the most material risk appetite measures are defined as board risk measures, which are those that, should the limit be breached, would impact on the ability to achieve business plans and threaten stakeholder confidence.
CEC covers material risks and the underlying key controls, including financial, operational and compliance controls, as well as supporting risk management frameworks. The CEC outcomes, including forwardlooking assessments for the next two half-yearly cycles and progress on control environment improvements, are reported to the Board, Group Audit Committee and Board Risk Committee. They are also shared with external auditors.
Risk monitoring and measurement Risk and control assessments are used across all business areas and support functions to identify and assess material operational and conduct risks and key controls. All risks and controls are mapped to RBS’s Risk Directory. Risk assessments are refreshed at least annually to ensure they remain relevant and capture any emerging risks, with associated trigger processes to ensure risks are reassessed at key periods of change.
The process is designed to confirm that risks are effectively managed and prioritised in line with risk appetite. Controls are tested at the appropriate frequency to verify that they remain fit-for-purpose and operate effectively.
Event and loss data management The operational risk event and loss data management process ensures RBS captures and records operational risk financial and non financial events that meet defined criteria. Loss data is used for regulatory and industry reporting and is included in capital modelling when calculating economic capital for operational risk. The most serious events are escalated in a simple, standardised process to all senior management, by way of a Group Notifiable Event Process.
Operational risk continued All financial impacts associated with an operational risk event are reported against the date they were recorded in RBS’s financial accounts. A single event can result in multiple losses (or recoveries) that may take time to crystallise. Losses and recoveries with a financial accounting date in 2018 may relate to events that occurred, or were identified in, prior years. RBS purchases insurance against specific losses and to comply with statutory or contractual requirements.
Percentage and value of events At 31 December 2018, events aligned to the clients, products and business practices event category accounted for 98% of RBS’s operational risk losses (compared to 93% in 2017). The increase reflected new or additional conduct-related provisions recorded during 2018, most notably the US Department of Justice mortgage-backed securities-related settlement.
Clients, products and business practices (2) 1,552 1,264 98% 93% 15% 12% Execution, delivery and process management 12 58 1% 4% 10% 9% Employment practices and workplace safety 1 5 — 1% 1% 5%
Notes: (1) The calculation in the table above is based on the volume and value of events (the proportion and cost of operational risk events to RBS) where the associated loss is more than or equal to £10,000. (2) 2017 losses have been restated from £732 million following finalisation of material MBS-related settlements.
Operational resilience RBS manages and monitors operational resilience through its risk and control assessments methodology. As challenges to operational resilience become more demanding, given a hostile cyber environment and a greater focus on serving customers through digital platforms, RBS is working with supervisory authorities in the UK to ensure the provision of its products and services can be maintained regardless of the cause of disruption.
This is underpinned by setting, monitoring and testing tolerances for key business services, which define the amount of disruption that could be tolerated.
 RBS also restructured the NatWest Markets Plc (former RBS plc)
 RBS reached a civil settlement in principle with the US Department of Justice in relation its investigation into RBS’s issuance and underwriting of US Residential Mortgage Backed Securities (RMBS) between 2005 and 2007, resulting in a £1.0 billion additional provision.
 On 17 April 2018 RBS agreed a Memorandum of Understanding (MoU) with the Trustees of the RBS Group Pension Fund in connection with the requirements of ring-fencing. NatWest Markets Plc cannot continue to be a participant in the Main section and separate arrangements are required for its employees. Under the MoU NatWest Bank made a contribution of £2 billion on 9 October 2018 to strengthen funding of the Main section in recognition of the changes in covenant.
 RBS declared an interim ordinary dividend of 2 pence per share – the first since September 2008.
Risk governance A reputational risk policy supports reputational risk management across RBS. Reputational risk committees in PBB, CPB, RBSI, Ulster Bank RoI and NatWest Markets review relevant issues at an individual franchise or entity level, while the Group Reputational Risk Committee – which has delegated authority from the Executive Risk Committee – opines on cases, issues, sectors and themes that represent a material reputational risk to the Group. The Board Risk Committee oversees the identification and reporting of reputational risk. The Sustainable Banking Committee has a specific focus on environmental, social and ethical issues.
Risk appetite RBS manages and articulates its appetite for reputational risk through a qualitative reputational risk appetite statement and quantitative measures. RBS seeks a continued improvement in the identification, assessment and management of customers, transactions, products and issues that present a material reputational risk.
Risk mitigation Reputational risk is mitigated through the policy and governance framework, with ongoing staff training to ensure early identification, assessment and escalation of material issues.
The most material threats to RBS’s reputation continued to originate from historical and more recent conduct issues. As a result, RBS has been the subject of investigations and reviews by a number of regulators and governmental authorities, some of which have resulted in fines, settlements and public censure. Refer to the Litigation, investigations and reviews section of Note 27 on the consolidated accounts.
Notes on the consolidated accounts 1 Net interest income 187 2 Non-interest income 187 3 Operating expenses 188 4 Segmental analysis 191 6 Auditor’s remuneration 199 8 Earnings per share 202 9 Trading assets and liabilities 202 11 Financial instruments - classification 205 12 Financial instruments - valuation 207 13 Financial instruments - maturity analysis 214 14 Loan impairment provisions 217 15 Other financial assets 218 16 Intangible assets 219 17 Other assets 220 18 Other financial liabilities 220 19 Subordinated liabilities 220 20 Other liabilities 222 21 Non-controlling interests 223 22 Share capital and other equity 223 24 Structured entities 226 25 Asset transfers 227 26 Capital resources 228 27 Memorandum items 229 28 Analysis of the net investment in business interests and intangible assets 235 29 Analysis of changes in financing during the year 235 30 Analysis of cash and cash equivalents 236 31 Directors’ and key management remuneration 236 32 Transactions with directors and key management 236 33 Adoption of IFRS 9 237 34 Related parties 238 35 Post balance sheet events 238
 Consolidated balance sheet as at 31 December 2018;  Consolidated income statement for the year then ended;  Consolidated statement of comprehensive income for the year then ended;  Consolidated statement of changes in equity for the year then ended;  Consolidated cash flow statement for the year then ended;  Accounting policies on pages 181 to 185;  Related Notes 1 to 35 to the financial statements;  Information identified as ‘audited’ in the Annual report on remuneration; and
 Capital and risk management section of the Business review identified as ‘audited’.
Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements, as a whole, and in our opinion thereon, and we do not provide a separate opinion on these matters.
 Adequacy of disclosures of provision for liabilities and charges and contingent liabilities.
We tested the design and operating effectiveness of key controls over the identification, estimation, monitoring and disclosure of provisions considering the potential for management override of controls. The controls tested included those designed and operated by management to identify and monitor claims, and to assess the completeness and accuracy of data used to estimate provisions.
We examined the relevant regulatory and legal correspondence to assess developments in key cases. For the cases which were settled during the period, such as the investigations by the US Department of Justice (DoJ), we verified the actual outflows, compared with the level of existing provision, considered whether further risk existed, and evaluated the level of disclosures provided.
We tested the disclosures provided on conduct, litigation and regulatory provisions to determine whether they complied with accounting standards. Given the inherent estimation uncertainty and the judgmental nature of these provisions, we evaluated the appropriateness of the disclosure made in the financial statements.
 We obtained the RMBS settlement agreements with the US Department of Justice for the amount settled during the year. We are satisfied that the provision for remaining matters are reasonable.
Impairment of loans On 1 January 2018, a new accounting standard for financial instruments (IFRS 9) became effective, which introduced impairment based on expected credit losses, rather than the incurred loss model previously applied under IAS 39.
At 31 December 2018 the Group reported total gross loans of £319.8 billion and £3.4 billion of expected credit loss provisions.
Key judgements and estimates in respect of the timing and measurement of expected credit losses (ECL) include:  Allocation of assets to stage 1, 2, or 3 using criteria in accordance with the accounting standard;  Accounting interpretations and modelling assumptions used to build the models that calculate the ECL;  Completeness and accuracy of data used to calculate the ECL;  Inputs and assumptions used to estimate the impact of multiple economic scenarios;  Completeness and valuation of post model adjustments;  Measurements of individually assessed provisions including the assessment of multiple scenarios; and
We observed the key executive finance and risk committees where the inputs, assumptions and adjustments to the ECL were discussed and approved.
To verify data quality, we tested the data used in the ECL calculation by reconciling to source systems. To test credit monitoring, we recalculated the risk ratings for a sample of performing loans.
We assessed the completeness and appropriateness of post model adjustments and recalculated a sample. Based on current economic conditions and market circumstances, we considered the need for sector or systemic adjustments. We assessed the appropriateness of the scenarios used and calculation of the overlay in response to Brexit related economic uncertainty.
With the support of our internal valuation specialists, we recalculated a sample of individually assessed provisions including comparing to alternative scenarios and challenging probability weights assigned. The sample was based on a number of factors including higher risk sectors such as construction, retail, automotive, commercial real estate, shipping and oil and gas
We assessed the adequacy and appropriateness of disclosures for compliance with the accounting standards including disclosure of transition from IAS 39.
Key judgements and estimates include:  Revenue and cost forecasts which are impacted by the Group’s transformation programme;  Key assumptions used in the recoverability and valuation assessments (discount rates, growth rates, macroeconomic assumptions, etc.);  Assumptions regarding the economic consequences of Brexit and other political developments over an extended period.
With the support of our internal economic specialists, we tested whether key macroeconomic assumptions, including Brexit considerations, used in the Group’s forecasting process were reasonable. Given the uncertainty on Brexit and its consequential impact on the macro-economic assumptions and resulting forecasts, we considered the need for additional disclosures in the financial statements.
We tested how previous management forecasts, including the impact of cost reduction programmes, compared to actual results to evaluate the accuracy of the forecasting process. We assessed the achievability of future cost reduction plans by reviewing and challenging the details of the underlying initiatives and how key cost ratios compared to peer banks and commentaries from external analysts.
We evaluated how management considered alternative assumptions and performed our own sensitivity and scenario analyses on certain key assumptions.
Risk Our response to the risk Key observations communicated to the Group Audit Committee We highlighted the following matters to the Group Audit Committee:  Sensitivity analysis of the value in use and headroom to changes in the key assumptions in the forecasts supported the carrying values of both goodwill and investment in subsidiaries;  Our stress testing of the Group’s forecast cost reduction including the amount and timing supported the Group’s conclusion that no impairment was required to goodwill or the investment in subsidiaries; and
 We are satisfied that the carrying values of deferred tax assets, goodwill and, in the parent company accounts, investments in subsidiaries are reasonable and the related disclosures are compliant with IFRS
The key judgements and estimates are:  Complex model-dependent valuations, which include interest-rate swaps linked to prepayment behaviour and interest rate and foreign exchange options with exotic features such as those having multiple call dates or with a variable notional;  Pricing inputs and calibrations for illiquid instruments, which are largely aligned with material positions defined as level 3 within the Group’s IFRS 7 fair value hierarchy disclosure. These include rarely traded debt securities, and derivative instruments whose valuation is dependent upon the correlation between certain interest rates or uncertainty surrounding the discount rate associated with complex collateral arrangements;  Fair value adjustments made to derivatives including Funding Valuation Adjustments (FVA) and Credit Valuation Adjustments (CVA) relating to derivative counterparties whose credit spread is less readily able to be determined, and material product and deal specific adjustments on long dated derivative portfolios.
We tested the design and operating effectiveness of controls including independent price verification, model review and approval, collateral management, and income statement analysis and reporting.
With the support of our internal financial instrument valuation and modelling specialists we performed the following procedures:  Tested complex model-dependent valuations using our internally developed challenger models and review of model documentation to challenge the appropriateness of models and the adequacy of assumptions and inputs used by the Group;  We re-priced instruments that had been valued using illiquid pricing inputs, using independently obtained alternative pricing sources challenging and substantiating any differences between management’s valuation; and
 For fair value adjustments we compared the methodology used to current market practice. We re-valued a sample of counterparty level FVA and CVA, compared funding spreads to third party data and independently challenged illiquid CVA inputs. We performed back-testing analysis of recent trade activity to verify the drivers of any significant differences between book value and trade value to challenge the impact on the fair value of similar instruments within the portfolio.
 Where differences between our independent valuation and management’s valuation were outside our thresholds, we performed additional testing over each variance to support our assessment of the appropriateness of the fair value.
 Valuation adjustments applied on derivative portfolios for credit, funding and other risks were appropriate based on our assessment of trade activity for positions with common risk characteristics and analysis of market data. We reported a judgemental difference in respect of the estimate involved in portfolio specific valuation adjustments, however this difference was not considered material.
The Independent Commission on Banking’s (ICB) structural reform required banks to ensure certain activities and services are undertaken in a ring-fenced bank (RFB) by 1 January 2019. The Group’s implementation of structural reform resulted in the reorganisation of some of the legal entities in the Group and the transfer of assets and liabilities between the RFB and other entities of the group. These transfers mainly related to the transfer of customer loans (£64.5 billion) and customer deposits (£74.6 billion) from NWM plc to RBS plc. Ring-fencing related transfers also included the transfer of the RBS Treasury function and related balances to NatWest Bank plc from NatWest Markets plc.
With the support of our regulatory specialists we understood the implications of ICB for the Group and gained an understanding of management’s process for implementing the ringfencing regulation. We also examined the relevant regulatory correspondence to understand the impact and resolution of any significant findings that might impact financial reporting.
We assessed the control environment for the impairment of value of investments based on the post-ringfencing profit forecasts for each legal entity, considering the implications of other changes across legal entities on forecasted profitability.
We tested controls over changes to the carrying value of investments and reserves to ensure they correctly reflected changes in ownership. This included transfers and recycling of reserves, including merger reserves, cash flow hedge reserves and foreign exchange reserves. We challenged the criteria applied to identified recycling events.
 We tested the design and operating effectiveness of the Group’s key controls over financial reporting as it relates to the implications of ICB and the relevant disclosures. We assessed the quality of the disclosures including any need for additional notes. At the Group level, we verified the transfers did not have an impact on overall consolidation
Key observations communicated to the Group Audit Committee We are satisfied that the impact of structural reform has been properly accounted for and disclosed in accordance with IFRS. We highlighted the following matters to the Group Audit Committee:  Processes and controls in place over the transfer of balances including the measurement of assets transferred were designed and operated effectively; and  A control deficiency was identified in relation to the foreign exchange reserves. Additional procedures were performed and audit differences identified were not considered material.
 Equalisation adjustments following the recent court ruling in respect of Guaranteed Minimum Pension (GMP)
With the support of our actuarial specialists, we challenged the actuarial assumptions by comparing them to our independently obtained sources and market practice. We challenged the impact on pension liabilities of changes in financial, demographic and longevity assumptions over the year and whether these were in line with our own expectations.
With the support of our valuation specialists, we challenged the appropriateness of management’s valuation methodology including the judgements made in determining significant assumptions used in the valuation of complex and illiquid pension assets. We tested the fair value of scheme assets by independently calculating fair value for a sample of the assets held. Our sample included cash, equity instruments, derivative financial instruments and illiquid assets.
Key observations communicated to the Group Audit Committee We are satisfied that the valuation and disclosure of the retirement benefit obligations are reasonable and in accordance with IFRS. We highlighted the following matters to the Group Audit Committee:  Our benchmarking of key actuarial assumptions including the discount rate, inflation, mortality and pension payments concluded that assumptions tested were within a reasonable range;  Independent valuation of a sample of pension assets identified no material differences; and
We assessed and challenged the design and operating effectiveness of IT controls over the applications, operating systems and databases that are relevant to financial reporting.
We assessed and challenged system migrations and related technology changes resulting from transformation programmes and the implementation of ICB that were material to financial reporting.
Where we identified systems outsourced to third party service providers we challenged IT general controls through the relevant Service Organisation Controls Reports produced by third parties and tested assessed required complementary controls performed by the Group.
In the prior year, our auditor’s report included key audit matters in relation to hedge effectiveness testing, including the impact on non-interest income, and provision for restructuring costs. In 2018, given materiality and our assessment of the risk, these were not considered key audit matters.
An overview of the scope of our audit Tailoring the scope Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope for each component of the Group. Taken together, this enables us to form an opinion on the financial statements. We take into account the size and risk profile of the component and its activities, the organisation of the Group and effectiveness of group-wide controls, changes in the business environment and other factors such as recent internal audit results when assessing the level of work to be performed at each component. The scoping below is consistent with the prior year.
The table below illustrates the coverage obtained from the work performed by our audit teams. We considered total assets, total equity and the absolute value of the amounts in the income statement (meaning the magnitude of the amounts without regard to their positive or negative value) to verify we had appropriate overall coverage on the income statement.
Total assets 84% 15% 1% 100% Total equity 59% 39% 2% 100% Absolute value of the income statement 88% 8% 4% 100%
The audit scope of Specific scope components may not have included testing of all significant accounts within the component. However the testing will have contributed to the total coverage of significant accounts tested for the overall Group.
Involvement with component teams In establishing our overall approach to the Group audit, we determined the type of work that needed to be undertaken in each of the components by us, as the primary audit engagement team, or by component auditors in the United Kingdom or from other EY global network firms operating under our instruction.
We determined materiality for the Group and parent company to be £210 million (2017 materiality: £300 million), which is 5% of Group profit before tax (2017 materiality basis was equity) and 0.6% of equity of the parent company. As the Group has been profitable for the past two years, we changed our basis of materiality to profit before tax. This measure is consistent with the wider industry and is the standard for listed and regulated entities and we believe it reflects the most useful measure for users of the financial statements. The materiality of the parent company is based on equity as we consider this to be the most appropriate factor to the users of the financial statements.
Performance materiality The application of materiality at the individual account or balance level is set at an amount to reduce to an appropriately low level the probability that the aggregate of uncorrected and corrected misstatements exceed materiality.
Audit work of component teams for the purpose of obtaining audit coverage over significant financial statement accounts is undertaken based on a percentage of total performance materiality. The performance materiality set for each component team is based on the relative scale and risk of the component to the Group as a whole and our assessment of the risk of misstatement at that component. In the current year, the range of performance materiality allocated by the primary audit engagement team to components was between £75 million and £40 million.
Other information The other information comprises the information included in the Annual Report and Accounts, including the Strategic Report (Governance, Business review, Capital and risk management, Risk Factors ,Shareholder Information), and Important addresses other than the financial statements and our auditor’s report thereon. The directors are responsible for the other information.
Opinions on other matters prescribed by the Companies Act 2006 In our opinion, the part of the directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006. In our opinion, based on the work undertaken in the course of the audit:  the information given in the Strategic report and the Report of the directors for the financial year for which the financial statements are prepared is consistent with the financial statements; and
Matters on which we are required to report by exception In the light of the knowledge and understanding of the group and the parent company and its environment obtained in the course of the audit, we have not identified material misstatements in the Strategic report or the Report of the directors.
We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion:  adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received from branches not visited by us; or
Responsibilities of directors As explained more fully in the directors’ responsibilities statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for the implementation of such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditor’s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
Use of our report This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Jonathan Bourne (Senior Statutory Auditor) for and on behalf of Ernst & Young LLP, Statutory Auditor London 14 February 2019
Fees and commissions receivable 3,218 3,338 3,340 Fees and commissions payable (861) (883) (805) Income from trading activities 1,507 634 974 Loss on redemption of own debt — (7) (126)
Premises and equipment (1,383) (1,565) (1,388) Other administrative expenses (3,372) (3,323) (8,745) Depreciation and amortisation (731) (808) (778) Write down of goodwill and other intangible assets (37) (29) (159)
Attributable to: Ordinary shareholders 1,622 752 (6,955) Preference shareholders 182 234 260 Dividend access share — — 1,193 Paid-in equity holders 288 394 244 Non-controlling interests (8) 35 10
Earnings/(loss) per ordinary share 8 13.5p 6.3p (59.5p) Earnings/(loss) per ordinary share - fully diluted 8 13.4p 6.3p (59.5p)
Notes: (1) On 17 April 2018 RBS agreed a Memorandum of Understanding (MoU) with the Trustees of the RBS Group Pension Fund in connection with the requirements of ring-fencing. NatWest Markets Plc cannot continue to be a participant in the Main section and separate arrangements are required for its employees. Under the MoU NatWest Bank made a contribution of £2 billion on 9 October 2018 to strengthen funding of the Main section in recognition of the changes in covenant. Also under the MoU, NatWest Markets Plc is required to make a £53 million contribution to the NWM section in Q1 2019.
Other financial assets 15 59,485 51,929 Intangible assets 16 6,616 6,543 Other assets 17 9,805 10,263
Liabilities Bank deposits 11 23,297 30,396 Customer deposits 11 360,914 361,316 Settlement balances 3,066 2,844 Trading liabilities 9 72,350 81,982 Derivatives 10 128,897 154,506 Other financial liabilities 18 39,732 30,326 Subordinated liabilities 19 10,535 12,722 Other liabilities 20 8,954 14,871
The accounts were approved by the Board of directors on 14 February 2019 and signed on its behalf by: Howard Davies Chairman
Paid-in equity - at 1 January 4,058 4,582 2,646 Redeemed/reclassified (1) — (524) (110) Securities issued during the year (2) — — 2,046 At 31 December 4,058 4,058 4,582
Share premium account - at 1 January 887 25,693 25,425 Ordinary shares issued 140 235 268 Redemption of debt preference shares (3) — 748 — Capital reduction (4) — (25,789) — At 31 December 1,027 887 25,693
Foreign exchange reserve - at 1 January 2,970 2,888 1,674 Retranslation of net assets 195 111 1,470 Foreign currency losses on hedges of net assets (33) (6) (278) Tax 23 (1) 62 Recycled to profit or loss on disposal of businesses (9) 123 (22) (40)
Capital redemption reserve - at 1 January — 4,542 4,542 Capital reduction (4) — (4,542) — At 31 December — — 4,542 Retained earnings - at 1 January 17,130 (12,936) (4,020) Implementation of IFRS 9 on 1 January 2018 (5) (105) — — Profit/(loss) attributable to ordinary shareholders and other equity owners 2,092 1,380 (5,258) Equity preference dividends paid (182) (234) (260) Paid-in equity dividends paid, net of tax (288) (394) (244) Ordinary dividends paid (241) — — Capital reduction (4) — 30,331 — Dividend access share dividend — — (1,193) Redemption of debt preference shares (3) — (748) — Redemption of equity preference shares (10) (2,805) — (1,160) Redemption/reclassification of paid-in equity — (196) (21) Realised gains in period on FVOCI equity shares, net of tax 6 — —
Remeasurement of the retirement benefit schemes - contributions in preparation for ring-fencing (11) (2,053) — — - other movements 86 90 (1,049)
Changes in fair value of credit in financial liabilities designated at fair value through profit or loss - gross 200 (126) — - tax (33) 18 — Shares issued under employee share schemes (2) (5) (10) Share-based payments (32) (22) (9)
(4) On 15 June 2017, the Court of Session approved a reduction of RBSG plc capital so that the amounts which stood to the credit of share premium, account and capital redemption reserve were transferred to retained earnings.
(6) The amount debited direct to the cash flow hedging reserve comprised £166 million in relation to interest rate hedges less a credit of £103 million in relation to foreign exchange hedges.
(7) The cash flow hedging reserve was reduced by £25 million in relation to foreign exchange hedges and £493 million in relation to interest rate hedges which were credited in aggregate to net interest income.
(8) The hedging element of the cash flow hedging reserve and foreign exchange reserve relate mainly to de-designated hedges. (9) No tax impact. (10) During 2018, non-cumulative US dollar, Euro and Sterling preference shares were redeemed. (11) On 17 April 2018 RBS agreed a Memorandum of Understanding (MoU) with the Trustees of the RBS Group Pension Fund in connection with the requirements of ring-fencing. NatWest Markets Plc cannot continue to be a participant in the Main section and separate arrangements are required for its employees. Under the MoU NatWest Bank made a contribution of £2 billion on 9 October 2018 to strengthen funding of the Main section in recognition of the changes in covenant Also under the MoU, NatWest Markets Plc is required to make a £53 million contribution to the NWM section in Q1 2019.
Impairment releases on loans to banks and customers (1,197) (647) (3,221)
Depreciation, amortisation and impairment of property, plant, equipment, goodwill and intangibles 718 762 919 Loss on redemption of own debt — 7 126 Elimination of foreign exchange differences (160) (426) (6,518) Other non-cash items 767 (214) 133 Net cash outflow from trading activities (3,157) (2,886) (11,892) Decrease/(increase) in net loans to banks and customers 2,627 2,466 (12,960) (Increase)/decrease in securities (47) (1,319) 16,741 Decrease/(increase) in other assets 258 (221) 1,195 Increase in trading assets and liabilities (2,087) — — Decrease/(increase) in derivative assets and liabilities 1,885 4,169 (2,696) (Decrease)/increase in settlement balance assets and liabilities and short positions (189) 8,658 104 (Decrease)/increase in banks and customers deposits (8,164) 25,449 10,418 Increase/(decrease) in debt securities in issue 10,068 3,326 (3,967) Decrease in other liabilities (956) (381) (422) Changes in operating assets and liabilities 3,395 42,147 8,413 Income taxes paid (466) (520) (171) Net cash flows from operating activities (1) (228) 38,741 (3,650)
Net (decrease)/increase in cash and cash equivalents (13,794) 24,035 (5,022) Cash and cash equivalents at 1 January 122,605 98,570 103,592 Cash and cash equivalents at 31 December 30 108,811 122,605 98,570
Adoption of IFRS 9 Refer to Note 33 for details of the adoption of IFRS 9.
Other amendments to IFRS effective for 2018, including IFRS 2 ‘Share-based payments’ and IAS 40 ‘Investment Property’ have not had a material effect on the Group’s financial statements.
2. Basis of consolidation The consolidated accounts incorporate the financial statements of the company and entities (including certain structured entities) that are controlled by the Group. The Group controls another entity (a subsidiary) when it is exposed, or has rights, to variable returns from its involvement with that entity and has the ability to affect those returns through its power over the other entity; power generally arises from holding a majority of voting rights. On acquisition of a subsidiary, its identifiable assets, liabilities and contingent liabilities are included in the consolidated accounts at their fair value. A subsidiary is included in the consolidated financial statements from the date it is controlled by the Group until the date the Group ceases to control it through a sale or a significant change in circumstances.
Changes in the Group’s interest in a subsidiary that do not result in the Group ceasing to control that subsidiary are accounted for as equity transactions. All intergroup balances, transactions, income and expenses are eliminated on consolidation.
3. Revenue recognition Interest income or expense on financial instruments that are measured at amortised cost and fair value through comprehensive income is determined using the effective interest rate method. The effective interest rate allocates the interest income or interest expense over the expected life of the asset or liability at the rate that exactly discounts all estimated future cash flows to equal the instrument's initial carrying amount. Calculation of the effective interest rate takes into account fees payable or receivable that are an integral part of the instrument's yield, premiums or discounts on acquisition or issue, early redemption fees and transaction costs. All contractual terms of a financial instrument are considered when estimating future cash flows. Negative effective interest accruing to financial assets is presented in interest payable.
The charge to profit or loss for pension costs (recorded in operating expenses) comprises:  the current service cost
 interest, computed at the rate used to discount scheme liabilities, on the net defined benefit liability or asset
8. Investment property Investment property comprises freehold and leasehold properties that are held to earn rentals or for capital appreciation or both. Investment property is not depreciated but is stated at fair value. Fair value is based on current prices for similar properties in the same location and condition. Any gain or loss arising from a change in fair value is recognised in profit or loss. Rental income from investment property is recognised on a straight-line basis over the term of the lease in Other operating income. Lease incentives granted are recognised as an integral part of the total rental income.
Rental income from operating leases is recognised in income on a straight-line basis over the lease term unless another systematic basis better represents the time pattern of the asset’s use. Operating lease assets are included within Property, plant and equipment and depreciated over their useful lives. Operating lease rentals receivable are included in Other operating income.
(b) the contractual terms of the financial asset are solely payments of principal and interest on the outstanding balance.
Amortised cost liabilities – all liabilities that are not subsequently measured at fair value are measured at amortised cost.
Reclassifications – financial liabilities cannot be reclassified. Financial assets are only reclassified where there has been a change in the business model.
14. Impairments At each balance sheet date each financial asset or portfolio of loans measured at amortised cost or at fair value through other comprehensive income, issued financial guarantee and loan commitment is assessed for impairment. Loss allowances are forwardlooking, based on 12 month expected credit losses where there has not been a significant increase in credit risk rating, otherwise allowances are based on lifetime expected losses. Loss allowances for lease receivables are always made on a lifetime basis.
The costs of loss allowances on assets held at amortised cost are presented as impairments in the income statement. Allowances in respect financial guarantees and loan commitments are presented in administrative expenses.
 Credit cards: the irrecoverable amount is written off after 12 months; three years later any remaining amounts outstanding are written off. Overdrafts and other unsecured loans: write off occurs within six years.
 Overdrafts and other unsecured loans: write off occurs within six years
A financial guarantee is recognised as a liability; initially at fair value and, if not designated as at fair value through profit or loss, subsequently at the higher of its initial value less cumulative amortisation and any provision under the contract measured in accordance with Accounting policy 13. Amortisation is calculated so as to recognise fees receivable in profit or loss over the period of the guarantee.
17. Derecognition A financial asset is derecognised when the contractual right to receive cash flows from the asset has expired or when it has been transferred and the transfer qualifies for derecognition. A transfer requires that the Group either (a) transfers the contractual rights to receive the asset's cash flows; or (b) retains the right to the asset's cash flows but assumes a contractual obligation to pay those cash flows to a third party. After a transfer, the Group assesses the extent to which it has retained the risks and rewards of ownership of the transferred asset. The asset remains on the balance sheet if substantially all the risks and rewards have been retained. It is derecognised if substantially all the risks and rewards have been transferred.
19. Netting Financial assets and financial liabilities are offset and the net amount presented in the balance sheet when, and only when, the Group currently has a legally enforceable right to set off the recognised amounts and it intends either to settle on a net basis or to realise the asset and settle the liability simultaneously. The Group is party to a number of arrangements, including master netting agreements, that give it the right to offset financial assets and financial liabilities, but where it does not intend to settle the amounts net or simultaneously, the assets and liabilities concerned are presented gross.
A derivative embedded in a contract is accounted for as a stand-alone derivative if its economic characteristics are not closely related to the economic characteristics of the host contract; unless the host is a financial asset or the entire contract is measured at fair value with changes in fair value recognised in profit or loss.
Cash flow hedge - in a cash flow hedge, the effective portion of the gain or loss on the hedging instrument is recognised in other comprehensive income and the ineffective portion in profit or loss. When the forecast transaction results in the recognition of a financial asset or financial liability, the cumulative gain or loss is reclassified from equity to profit or loss in the same periods in which the hedged forecast cash flows affect profit or loss. Otherwise the cumulative gain or loss is removed from equity and recognised in profit or loss at the same time as the hedged transaction. Hedge accounting is discontinued if the hedge no longer meets the criteria for hedge accounting; if the hedging instrument expires or is sold, terminated or exercised; if the forecast transaction is no
If an award is modified, the original cost continues to be recognised as if there had been no modification. Where modification increases the fair value of the award, this increase is recognised as an expense over the modified vesting period. A new award of shares or share options is treated as the modification of a cancelled award if, on the date the new award is, the Group identifies them as replacing the cancelled award. The cancellation of an award through failure to meet non-vesting conditions triggers an immediate expense for any unrecognised element of the cost of an award.
Critical accounting policy Note Deferred tax 7 Fair value: financial instruments 12 Loan impairment provisions 14 Goodwill 16 Provisions for liabilities and charges 20
The Group has new models and processes to implement IFRS 16. The most significant impact from initially applying IFRS 16 will be to recognise rights of use assets in respect of branches and office properties leased by the Group under contracts classified as operating leases under IAS 17. The present value of other contracts is immaterial. The Group will apply IFRS 16 on a modified retrospective basis without restating prior years and electing for the following exemptions on transition at 1 January 2019. The Group will
 apply IFRS 16 to contracts previously identified as leases by IAS 17
 exclude initial direct costs from the measurement of the right of use asset
The opening balance sheet at 1 January 2019 will be adjusted to create a right of use asset of approximately £1.3 billion. A lease liability will also be recognised of £1.9 billion. Retained earnings will decrease by £0.2 billion after tax. This will have an estimated impact of 21 basis points on the CET 1 ratio. Application of IFRS 16 by the Group is not expected to have a significant impact on lessor accounting or for finance lease accounting by lessees.
Effective after 2019 IFRS 17 ‘Insurance contracts’ was issued in May 2017 to replace IFRS 4 and to establish a comprehensive standard for inceptors of insurance policies. The effective date is 1 January 2021, subject to IASB’s approval of a deferral until 1 January 2022.
In February 2018 the IASB amended IAS 19 ‘Employee Benefits’ to clarify the need to update assumptions whenever there is a plan amendment, curtailment or settlement.
Loans to banks - amortised cost 522 277 246 Loans to customers - amortised cost 9,993 10,409 10,706 Other financial assets 534 348 306
Income from trading activities Foreign exchange 643 525 989 Interest rate 695 (50) (480) Credit 45 197 336 Changes in fair value of own debt and derivative liabilities attributable to own credit - debt securities in issue 72 12 87 - derivative liabilities 20 (81) 67 Equities, commodities and other 32 31 (25)
Other operating income Operating lease and other rental income 256 276 287 Changes in the fair value of financial assets and liabilities designated at fair value through profit or loss (26) 60 (13) Changes in the fair value of own debt designated as at fair value through profit or loss attributable to own credit risk - debt securities in issue — — 41 - subordinated liabilities — — (15) Changes in fair value of other financial assets fair value through profit or loss 18 — — Hedge ineffectiveness (65) 39 — Profit/(loss) on disposal of amortised cost assets 44 (35) (277) Profit on disposal of fair value through other comprehensive income assets 34 226 71 Profit on sale of property, plant and equipment 50 75 18 Share of profits of associated entities 83 104 59 (Loss)/profit on disposal of subsidiaries and associates (72) 245 273 Other income (1) 560 74 55
Note: (1) Includes income from activities other than banking. 2018 includes insurance recoveries of £357 million.
Salaries 3,002 3,180 3,771 Variable compensation 225 298 281 Social security costs 307 318 388 Pension costs 401 467 357 Other 187 413 327
Note: (1) Includes litigation and conduct costs, net of amounts recovered. Refer to Notes 20 and 27 for further details.
The average number of persons employed, rounded to the nearest hundred, during the year, excluding temporary staff, was 67,600 (2017 - 73,400; 2016 - 82,400). The average number of temporary employees during 2018 was 4,000 (2017 - 5,000; 2016 - 6,700). The number of persons employed at 31 December, excluding temporary staff, by reportable segment, was as follows: UK Personal & Business Banking 25,800 21,900 25,100 Ulster Bank RoI 2,900 2,600 3,000
UK 46,600 51,200 57,300 USA 500 500 700 Europe 4,100 4,200 5,200 Rest of the World 14,200 13,800 13,800
The awards granted in 2018 vest in equal tranches on their anniversaries, predominantly over three years.
Value at Shares Options Value at Shares Options at grant awarded over shares grant awarded over shares grant awarded over shares £m (million) (million) £m (million) (million) £m (million) (million)
The market value of awards vested/exercised in 2018 was £5 million (2017 - £22 million; 2016 - £40 million). There are vested options of 2 million shares exercisable up to 2020 (2017 - 2 million; 2016 - 4 million).
Income statement charge for amounts awarded in current year 205 209 240
Less: forfeiture of amounts deferred from prior years (66) (7) (106)
Income statement charge for amounts deferred from prior years 20 89 41
Notes: (1) Cash awards are limited to £2,000 for all employees. (2) Excludes other performance related compensation. (3) Operating profit before tax and variable compensation expense. This was previously measured against adjusted operating profit before variable compensation expense (2017: 7%).
Commercial & Private Banking (CPB) comprises two reportable segments: Commercial Banking and Private Banking. Commercial Banking serves commercial and corporate customers in the UK. Private Banking serves UK high net worth individuals and their business interests.
Central items & other includes corporate functions, such as RBS Treasury, finance, risk management, compliance, legal, communications and human resources. Central functions manages RBS capital resources and RBS-wide regulatory projects and provides services to the reportable segments. Balances in relation to legacy litigation issues and the international private banking business are included in Central items in the relevant periods.
UK Personal & Business Banking 5,098 1,078 106 6,282 (3,482) — (342) 2,458 Ulster Bank RoI 444 91 75 610 (583) — (15) 12
Total 8,656 2,357 2,389 13,402 (8,914) (731) (398) 3,359 2017 UK Personal & Business Banking 5,130 1,099 248 6,477 (3,829) — (235) 2,413 Ulster Bank RoI 421 94 89 604 (676) — (60) (132)
Total 8,987 2,455 1,691 13,133 (9,593) (808) (493) 2,239 2016 UK Personal & Business Banking 4,945 1,147 35 6,127 (4,278) 2 (125) 1,726 Ulster Bank RoI 409 82 85 576 (669) — 113 20
RBS International 469 125 594 281 108 389 239 135 374 NatWest Markets 1,510 (68) 1,442 1,077 (27) 1,050 1,296 (84) 1,212 Central items & other 55 270 325 256 195 451 15 214 229
Fees and commissions receivable - Credit and debit card fees 474 22 103 13 — — — 612 - Investment management, trustee and fiduciary services 49 4 — 191 42 — — 286
Fees and commissions receivable - Credit and debit card fees 507 25 93 18 2 — — 645 - Investment management, trustee and fiduciary services 84 3 37 118 (3) — 11 250
RBS International 28,398 27,663 25,867 29,077 23,420 25,280 NatWest Markets 244,531 227,399 277,886 248,553 372,496 340,471 Central items & other 36,641 54,344 49,268 75,877 28,241 60,048
Segmental analysis of goodwill is as follows: UK Personal Commercial & & Business Private RBS Banking Banking International Total £m £m £m £m
At 1 January 2017 and 31 December 2017 3,351 1,907 300 5,558 Acquisitions 48 — — 48 Inter-segment transfers (9) 9 — —
Geographical segments The geographical analysis in the tables below has been compiled on the basis of location of office where the transactions are recorded.
2018 UK USA Europe RoW Total £m £m £m £m £m
Operating profit/(loss) before tax 3,805 (718) 150 122 3,359 Total assets 624,228 32,573 34,441 2,993 694,235 Total liabilities 588,185 31,329 27,183 1,048 647,745 Net assets attributable to equity owners and non-controlling interests 36,043 1,244 7,258 1,945 46,490 Contingent liabilities and commitments 121,267 — 5,408 208 126,883
Net interest income 8,611 (4) 346 34 8,987 Net fees and commissions 2,192 97 113 53 2,455 Income from trading activities 570 83 (24) 5 634 Other operating income 806 22 121 108 1,057
Operating (loss)/profit before tax (2,214) (1,652) (266) 50 (4,082) Total assets 715,685 44,447 32,142 6,382 798,656 Total liabilities 675,089 44,513 26,311 3,339 749,252 Net assets attributable to equity owners and non-controlling interests 40,596 (66) 5,831 3,043 49,404 Contingent liabilities and commitments 141,963 639 8,038 51 150,691
Defined benefit schemes The Group sponsors a number of pension schemes in the UK and overseas, including the Main section of The Royal Bank of Scotland Group Pension Fund (the “Main section”) which operates under UK trust law and is managed and administered on behalf of its members in accordance with the terms of the trust deed, the scheme rules and UK legislation.
The schemes generally provide a pension of one-sixtieth of final pensionable salary for each year of service prior to retirement up to a maximum of 40 years and are contributory for current members. These have been closed to new entrants for over ten years, although current members continue to build up additional pension benefits, currently subject to 2% maximum annual salary inflation, while they remain employed by the Group.
The Main section corporate trustee is RBS Pension Trustee Limited (the Trustee), a wholly owned subsidiary of National Westminster Bank Plc, Principal Employer of the Main section. The Board of the Trustee comprises four member trustee directors selected from eligible active staff, deferred and pensioner members who apply and six appointed by the Group. Under UK legislation a defined benefit pension scheme is required to meet the statutory funding objective of having sufficient and appropriate assets to cover its liabilities (the pensions that have been promised to members).
Swaps have been executed at prevailing market rates and within standard market bid/offer spreads with a number of counterparty banks, including NatWest Markets Plc.
At 31 December 2018, the gross notional value of the swaps was £72 billion (2017 - £57 billion) and had a net positive fair value of £2,557 million (2017 - £3,045 million) against which the banks had posted approximately 103% collateral.
At 1 January 2017 43,824 38,851 4,973 — 49,229 43,990 5,326 87 Currency translation and other adjustments — — — — 46 46 3 3 Income statement 1,155 1,266 134 245 1,285 1,518 142 375 Statement of comprehensive income 1,580 (9) 1,608 19 1,728 4 1,634 (90)
(2) Includes adjustment for assets of £276 million and liabilities of £198 million transferred at no consideration to establish two separate sections of the RBS Group Pension Fund because ring-fencing rules do not allow employees outside the ring-fenced group to be members of the Main section.
(3) The Group expects to make contributions to the Main section of £218 million in 2019.
Net assets of schemes in surplus (included in Other assets, Note 17) 520 392 Net liabilities of schemes in deficit (included in Other liabilities, Note 20) (165) (129)
The triennial funding valuation of the Main section as at 31 December 2017 determined the funding level to be 96%, pension liabilities to be £47 billion and the deficit to be £2 billion, which was eliminated by a £2 billion cash payment in October 2018. The average cost of the future service of current members is 44% of basic salary before administrative expenses and contributions from those members.
The most significant assumptions used for the Main section are shown below: Principal IAS 19 actuarial assumptions
Discount rate 2.9 2.6 Fixed interest swap yield curve plus 0.8% per annum
Rate of increase in pensions in payment 2.9 2.9 Modelled allowance for relevant caps and floors
Future pensioners, currently aged 40 Males 28.4 28.6 29.3 Females 30.5 30.4 31.5
The weighted average duration of the Main section’s defined benefit obligation at 31 December 2018 is 20 years (2017 – 21 years).
The chart below shows the projected benefit payment pattern for the Main section in nominal terms. These cashflows are based on the most recent formal actuarial valuation, effective 31 December 2017.
Increase in (Decrease)/increase (Decrease)/increase net pension assets/ in value of assets in value of liabilities (obligations) 2018 £m £m £m 0.25% increase in interest rates/discount rate (2,214) (1,644) (570)
0.25% additional rate of increase in pensions in payment — 1,328 (1,328)
The defined benefit obligation of the Main section is attributable to the different classes of scheme members in the following proportions: Active members 12.9 16.2 Deferred members 48.6 47.3 Pensioners and dependants 38.5 36.5
Fair value of plan assets 43,806 44,652 43,824 30,703 30,077 48,752 49,746 49,229 34,708 34,359 Present value of plan obligations 35,466 37,937 38,851 30,966 31,776 39,607 42,378 43,990 35,152 36,643
Amounts paid to the Group's auditors for statutory audit and other services are set out below: £m £m £m
Fees payable for the audit of the Group’s annual accounts (1) 3.5 4.0 4.0 - the audit of the company’s subsidiaries (1) 27.5 22.9 20.7 - audit-related assurance services (1,2) 2.9 4.3 4.0
Other assurance services 1.3 1.7 3.4 Corporate finance services (3) 0.2 0.2 0.2 Non-audit services — - —
Notes: (1) The 2018 audit fee was approved by the Group Audit Committee. At 31 December 2018, £16 million has been billed in and paid in respect of 2018 Group audit fees. (2) Comprises fees of £1.1 million (2017 - £1.1 million) in relation to reviews of interim financial information, £1.1 million (2017 - £2.5 million) in respect of reports to the Group’s regulators in the UK and overseas, £0.7 million (2017 - £0.7 million) in relation to non-statutory audit opinions. (3) Comprises fees of £0.2 million (FY 2017 - £0.2 million) in respect of work performed by the auditors as reporting accountants on debt and equity issuances undertaken by the Group.
Current tax: Charge for the year (1,092) (1,018) (1,126) Over provision in respect of prior years 125 227 186
Total 675 680 Overseas tax losses carried forward - Ulster Bank Ireland DAC 261 259
Critical accounting policy: Deferred Tax The deferred tax assets of £1,412 million at 31 December 2018 (2017 - £1,740 million) principally comprise losses that arose in the UK, and temporary differences. These deferred tax assets are recognised to the extent that it is probable that there will be future taxable profits to recover them.
Deferred tax liabilities of £257 million (2017 - £255 million; 2016 - £258 million) have not been recognised in respect of retained earnings of overseas subsidiaries and held-over gains on the incorporation of overseas branches. Retained earnings of overseas subsidiaries are expected to be reinvested indefinitely or remitted to the UK free from further taxation. No taxation is expected to arise in the foreseeable future in respect of held-over gains. Changes to UK tax legislation largely exempts from UK tax, overseas dividends received on or after 1 July 2009.
Trading assets and liabilities comprise assets and liabilities held at fair value in trading portfolios. 2018 2017
Repos 25,645 28,363 Collateral received 20,187 22,683 Other deposits 1,788 1,302 Total deposits 47,620 52,348 Debt securities in issue 903 1,107 Short positions 23,827 28,527 Total 72,350 81,982
RBS enters into fair value hedges, cash flow hedges and hedges of net investments in foreign operations. The majority of RBS’s interest rate hedges relate to the management of RBS’s non-trading interest rate risk. RBS manages this risk within approved limits. Residual risk positions are hedged with derivatives principally interest rate swaps. Suitable larger financial instruments are fair value hedged; the remaining exposure, where possible, is hedged by derivatives documented as cash flow hedges.
For cash flow hedge relationships of interest rate risk, the hedged items are actual and forecast variable interest rate cash flows arising from financial assets and financial liabilities with interest rates linked to the relevant benchmark rate LIBOR, EURIBOR or the Bank of England Official Bank Rate. The financial assets are loans to banks and customer and the financial liabilities are bank and customer deposits and LIBOR linked medium-term notes and other issued securities. The variability in cash flows due to movements in the relevant benchmark rate is hedged; this risk component is identified using the risk management systems of RBS. This risk component comprises the majority of cash flow variability risk.
For fair value hedge relationships RBS determines that there is an economic relationship between the hedged items and hedging instrument via assessing the initial and ongoing effectiveness by comparing movements in the 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 hedges the currency 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.
Cash flow hedging Interest rate contracts 149.7 1,148 872 1,989 1,295 Exchange rate contacts 12.5 106 — 63 37
Net investment hedging Exchange rate contracts 2.0 32 10 11 28
Net investment hedging Exchange rate risk (£bn) 1.2 0.6 0.2 — — — — 2.0 Principal currency hedges Average SAR - £ rate 4.80 4.83 4.82 — — — — 4.81 Average CHF - £ rate 1.22 1.23 1.18 — — — — 1.21
Fair value hedging - interest rate Loans to banks and customers - amortised cost 6,197 875 91 Other financial assets - securities 31,879 362 10
Other financial liabilities - debt securities in issue 23,289 (19) — Subordinated liabilities 2,359 22 —
Fair value hedging - exchange rate Other financial assets - securities 3 — —
The main sources of ineffectiveness for interest rate risk hedge accounting relationships are:  The effect of the counterparty credit risk on the fair value of the interest rate swap, which is not reflected in the fair value of the hedged item attributable to the change in interest rate (fair value hedge).
Assets Hedging Amortised Other MFVTPL (1) DFV(2) derivatives FVOCI cost assets Total £m £m £m £m £m £m £m
Cash and balances at central banks — — — 88,897 88,897 Trading assets 75,119 — — 75,119 Derivatives 131,098 2,251 133,349 Settlement balances — — — 2,928 2,928
Held-for- Hedging Available- Loans and Held-to- Other trading DFV(2) derivatives for-sale receivables maturity assets Total £m £m £m £m £m £m £m £m
(Losses)/Gains on financial assets/liabilities designated as at fair value through profit or loss (26) 60 (13)
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 arrangements and netting Balance
Trading reverse repos 53,148 (31,376) 21,772 (762) — (21,000) 10 2,987 24,759 Trading repos 55,864 (31,376) 24,488 (762) — (23,726) — 1,157 25,645
Critical accounting policy: Fair value - financial instruments In accordance with Accounting policies 13 and 21, financial instruments classified as mandatory fair value through profit or loss, held-for-trading or designated as at fair value through profit or loss and financial assets classified as fair value through other comprehensive income are recognised in the financial statements at fair value. All derivatives are measured at fair value.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. It also uses the assumptions that market participants would use when pricing the asset or liability. In determining fair value the Group maximises the use of relevant observable inputs and minimises the use of unobservable inputs.
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.
Where the Group manages a group of financial assets and financial liabilities on the basis of its net exposure to either market risks or credit risk, it measures the fair value of a group of financial assets and financial liabilities on the basis of the price that it would receive to sell a net long position (i.e. an asset) for a particular risk exposure or to transfer a net short position (i.e. a liability) for a particular risk exposure in an orderly transaction at the measurement date under current market conditions. Credit valuation adjustments are made when valuing derivative financial assets to incorporate counterparty credit risk. Adjustments are also made when valuing financial liabilities measured at fair value to reflect the Group’s own credit standing. Where the market for a financial instrument is not active, fair value is established using a valuation technique. These valuation techniques involve a degree of estimation, the extent of which depends on the instrument’s complexity and the availability of market-based data. Further details about the valuation methodologies and the sensitivity to reasonably possible alternative assumptions of the fair value of financial instruments valued using techniques where at least one significant input is unobservable are given below.
Total financial assets held at fair value 62,135 190,748 3,300 56,805 230,899 3,288
Total financial liabilities held at fair value 18,941 184,056 1,957 23,717 215,802 2,185
Level 2 - instruments valued using valuation techniques that have observable inputs., Examples include most government agency securities, investment-grade corporate bonds, certain mortgage products, including CLOs, most bank loans, repos and reverse repos, less liquid listed equities, state and municipal obligations, most notes issued, and certain money market securities and loan commitments and most OTC derivatives.
Modelled products valued using a pricing model range in complexity from comparatively vanilla products such as interest rate swaps and options (e.g. interest rate caps and floors) through to more complex derivatives. The valuation of modelled products requires an appropriate model and inputs into this model. Sometimes models are also used to derive inputs (e.g. to construct volatility surfaces). RBS uses a number of modelling methodologies.
Credit spreads - where available, these are derived from prices of credit default swaps or other credit based instruments, such as debt securities. For others, credit spreads are obtained from third-party benchmarking services. For counterparty credit spreads, adjustments are made to market prices (or parameters) when the creditworthiness of the counterparty differs from that of the assumed counterparty in the market price (or parameters).
Correlation measures the degree which two or more prices or other variables are observed to move together.
IPV takes place at least each monthly, for all fair value positions. The IPV control includes formalised reporting and escalation of any valuation differences in breach of established thresholds.
As permitted by IFRS 13, netting is applied on a portfolio basis to reflect the value at which RBS believes it could exit the portfolio, rather than the sum of exit costs for each of the portfolio’s individual trades. This is applied where the asset and liability positions are managed as a portfolio for risk and reporting purposes.
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 2018, net gains of £59 million (2017 - £56 million) were carried forward. During the year, net gains of £151 million (2017 - £64 million) were deferred and £148 million (2017 - £80 million) were recognised in the income statement.
Where system generated valuations do not accurately recover market prices, manuals valuation adjustments are applied either at a position or portfolio level. Manual adjustments are subject to the scrutiny of independent control teams and are subject to monthly review by senior management.
12 Financial instruments – valuation: Level 3 ranges of unobservable inputs 2018 2017 Financial instrument Valuation Technique Unobservable inputs Units Low High Low High
Equity Shares Price-based Price GBP 0 24,181 0 585,066 Valuation Discount factor % 8 11 9 13 Valuation Fund NAV % 80 120 80 120
Equity derivatives Option pricing Correlation % (57) 92 (57) 95 Forward Points 864 7,106 146 189 Volatility % 1 49 7 11
Active and inactive markets A key input in the decision making process for the allocation of assets to a particular level is market activity. In general, the degree of valuation uncertainty depends on the degree of liquidity of an input.
Modelled products For modelled products the market convention is to quote these trades through the model inputs or parameters as opposed to a cash price equivalent. A mark-to-market is derived from the use of the independent market inputs calculated using RBS’s model.
For some instruments with a wide number of available price sources, there may be differing quality of available information and there may be a wide range of prices from different sources. In these situations the highest quality source is used to determine the classification of the asset. For example, a tradable quote would be considered a better source than a consensus price.
2018 2017 Level 3 Favourable Unfavourable Level 3 Favourable Unfavourable £m £m £m £m £m £m
Other financial assets Loans 136 10 (20) 56 — — Securities 507 50 (30) 505 20 (30)
Other financial liabilities Debt securities in issue 280 10 (10) 262 10 (10)
Level 3 The following table shows the movement in level 3 assets and liabilities in the year. 2018 2017
Trading Other financial Total Total Trading Other financial Total Total assets (3) assets (4) assets liabilities assets (3) assets (4) assets liabilities £m £m £m £m £m £m £m £m
Foreign exchange and other adjustments — 6 6 (2) 11 (29) (18) 5 At 31 December 2,657 643 3,300 1,957 2,727 561 3,288 2,185
12 Financial instruments: fair value of financial instruments not carried at fair value
12 Financial instruments: fair value of financial instruments not carried at fair value continued
Loans to banks and customers 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.
MFVTPL assets of £207.9 billion (2017 - £243.9 billion) and HFT liabilities of £198.3 billion (2017 - £232.9 billion) have been excluded from the following tables.
Liabilities by contractual maturity Bank deposits 9,180 1,740 3,614 16,023 61 71 Settlement balances 2,844 — — — — — Other financial liabilities 4,360 4,777 10,640 3,731 9,762 49 Subordinated liabilities 87 2,645 1,515 1,620 7,746 2,582 Other liabilities (2) 2,186 — — — — —
Loans - amortised cost Stage 1 285,985 333,929 Stage 2 26,097 26,972 Stage 3 7,718 11,283
ECL provisions (2) - Stage 1 285 261 - Stage 2 763 621 - Stage 3 2,320 3,565
Notes: (1) The analysis tables as at 31 December 2018 include all loans within IFRS 9 ECL scope and exclude debt securities. The comparative table at 1 January 2018 includes loans and debt securities of £50.4 billion, of which £42.7 billion related to debt securities classified as FVOCI. ECL on these debt securities at 1 January 2018 was £28 million, of which £4 million related to those classified as FVOCI.
(3) ECL provisions coverage is ECL provisions divided by loans - amortised cost. (4) ECL charge balances in the above table included a £3 million charge relating to other financial assets, of which a £1 million charge related to assets at FVOCI; and a £31 million release related to contingent liabilities.
14 Loan impairment provisions continued Critical accounting policy: Loan impairment provisions The Group's 2017 loan impairment provisions were established in accordance with IAS 39 in respect of incurred losses. They comprised individual and collective components as more fully explained in the 2017 Annual Report and Accounts. In 2018 the loan impairment provisions have been established in accordance with IFRS 9. Accounting policy 14 sets out how the expected loss approach is applied. At 31 December 2018, customer loan impairment provisions amounted to £3,368 million (2017 - £3,814 million). A loan is impaired when there is objective evidence that the cash flows will not occur in the manner expected when the loan was advanced. Such evidence includes changes in the credit rating of a borrower, the failure to make payments in accordance with the loan agreement; significant reduction in the value of any security; breach of limits or covenants; and observable data about relevant macroeconomic measures.
The measurement of credit impairment under the IFRS expected loss model depends on management’s assessment of any potential deterioration in the creditworthiness of the borrower, its modelling of expected performance and the application of economic forecasts. All three elements require judgments that are potentially significant to the estimate of impairment losses. Further information and sensitivity analyses are on Page 119.
Approach for multiple economic scenarios (MES) The base scenario plays a greater part in the calculation of ECL than the approach to MES.
UK US Other debt Total shares loans Total 2018 £m £m £m £m £m £m £m £m
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 2017 Designated as at fair value through profit or loss — — — — — 134 56 190 Available-for-sale 17,656 8,461 11,454 6,110 43,681 287 — 43,968 Loans and receivables — — — 3,643 3,643 — — 3,643 Held-to-maturity 4,128 — — — 4,128 — — 4,128 Total 21,784 8,461 11,454 9,753 51,452 421 56 51,929
Equity shares classified as fair value through other comprehensive income include the following entities and 2018 dividend income received; VISA Inc. £98 million (dividend of £1 million) and Tradeweb Markets LLC £89 million (dividend of £4 million).
At 1 January 18,039 2,259 20,298 17,756 2,095 19,851 Currency translation and other adjustments 77 9 86 283 (3) 280 Acquisition of subsidiaries 48 2 50 — — — Additions — 364 364 — 384 384 Disposals and write-off of fully amortised assets — (610) (610) — (217) (217)
The Group’s goodwill acquired in business combinations analysed by reportable segment in Note 4, Segmental analysis. It is reviewed annually at 31 December for impairment. No impairment was indicated at 31 December 2018 or 2017.
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
Customer deposits - designated as at fair value through profit or loss 212 874 Debt securities in issue - designated as at fair value through profit or loss 2,628 3,403 - amortised cost 36,892 26,049 Total 39,732 30,326
Dated loan capital 8,262 10,394 Undated loan capital 2,127 2,169 Preference shares 146 159
US$2,132 million 9.50% subordinated notes 2022 Tier 2 — 1,724 €100 million floating rate subordinated notes 2017 Tier 2 — 90 £51 million 2.35% + 5 year UK Gilts yield undated subordinated notes (callable December 2012) Ineligible — 51
€15 million floating rate notes 2022 (partial redemption) Tier 2 — 2 €250 million 4.70% notes 2019 (partial redemption) Tier 2 — 80
NatWest Holdings Limited £20 million 11.75% perpetual Tier 2 capital (partial redemption) Tier 2 — 9 €38 million 11.375% perpetual Tier 2 capital (partial redemption) Tier 2 — 6
Total protection customer and other insurance redress DoJ (2) regulatory Other (3)
At 1 January 2018 1,053 870 3,243 641 1,950 7,757 Implementation of IFRS 9 on 1 January 2018 — — — — 85 85 ECL impairment charge — — — — (18) (18) RMBS transfer — — (683) 683 — — Transfer from accruals and other liabilities — (4) — (4) 15 7 Currency translation and other movements — 8 161 21 (1) 189 Charge to income statement 200 245 1,040 181 429 2,095 Releases to income statement — (134) — (325) (304) (763)
Notes: (1) Refer to Note 33 for further details on the impact of IFRS 9 on classification and basis of preparation. (2) The RMBS provision has been redesignated DoJ and the remaining RMBS litigation matters transferred to Litigation and other regulatory as of 1 January 2018 to reflect progress on resolution. (3) Materially comprises provisions relating to property closures and restructuring costs. At 1 January 2018 Other provisions for liabilities and charges included £800 million in respect of a package of remedies that would conclude its State Aid commitments which were paid during 2018.
The principal assumptions underlying the Group’s provision in respect of PPI sales are: assessment of the total number of complaints that the Group will receive; the proportion of these that will result in redress; and the average cost of such redress. The number of complaints has been estimated from an analysis of the Group’s portfolio of PPI policies sold by vintage and by product. Estimates of the percentage of policyholders that will lodge complaints (the take up rate) and of the number of these that will be upheld (the uphold rate) have been established based on recent experience, guidance in FCA policy statements and the expected rate of responses from proactive customer contact. The average redress assumption is based on recent experience and FCA calculation rules. The table below shows the sensitivity of the provision to changes in the principal assumptions (all other assumptions remaining the same). Sensitivity
Processing costs per claim (4) £152 £151 +/- 20k claims +/- 3
Notes: (1) Claims received directly by RBS to date, including those received via CMCs and Plevin (commission) only. Excluding those for proactive mailings and where no PPI policy exists. (2) Average uphold rate per customer initiated claims received directly by RBS including those received via CMCs, to end of timebar for both PPI (mis-sale) and
At 1 January 2017 733 62 795 Currency translation and other adjustments 22 (5) 17 Profit attributable to non-controlling interests 30 5 35 Dividends paid (20) (5) (25) Equity withdrawn and disposals (59) — (59)
At 1 January 2018 706 57 763 Currency translation and other adjustments 24 1 25 Profit/(loss) attributable to non-controlling interests 13 (21) (8) Dividends paid — (5) (5) Equity withdrawn and disposals — (21) (21)
22 Share capital and other equity Number of shares 2018 2017 2018 2017
Movement in allotted, called up and fully paid ordinary shares Number of £m shares - 000s
On 6 February 2019 RBS held a General Meeting and shareholders approved a special resolution to give authority for the Company to make off-market purchases of ordinary shares from HM Treasury (or its nominee) at such times as the Directors may determine is appropriate. Full details of the proposal are set out in the Circular and Notice of General Meeting.
In 2018 RBS paid an interim dividend of £241 million, or 2.0p per ordinary share. In addition, the company announced that the directors have recommended a final dividend of 3.5p per ordinary share, and a further special dividend of 7.5p per ordinary share, which are both subject to shareholders’ approval at the Annual General Meeting on 25 April 2019.
If approved, payment will be made on 30 April 2019 to shareholders on the register at the close of business on 22 March 2019. The exdividend date will be 21 March 2019. No dividend was paid in 2017.
Non-cumulative preference shares Non-cumulative preference shares entitle their holders to periodic noncumulative cash dividends at specified fixed rates for each Series payable out of distributable profits of the company.
In December 2018, the company redeemed in whole the Series S noncumulative preference shares of US$0.01, Series 1,2 and 3 noncumulative preference shares of €0.01 and Series 1 non-cumulative preference shares of £1. In December 2017, the company redeemed in whole the Series F, H, L and 1 non-cumulative preference shares of US$0.01 and Series 1 non-cumulative convertible preference shares of £0.01.
Holders of the non-cumulative preference shares are not entitled to receive notice of or attend general meetings of the company except if any resolution is proposed for adoption by the shareholders of the company to vary or abrogate any of the rights attaching to the noncumulative preference shares or proposing the winding-up or liquidation of the company. In any such case, they are entitled to receive notice of and to attend the general meeting of shareholders at which such resolution is to be proposed and are entitled to speak and vote on such resolution (but not on any other resolution). In addition, in the event that, prior to any general meeting of shareholders, the company has failed to pay in full the most recent dividend payment due on the Series U non-cumulative dollar preference shares, the holders shall be entitled to receive notice of, attend, speak and vote at such meeting on all matters together with the holders of the ordinary shares. In these circumstances only, the rights of the holders of the non-cumulative preference shares so to vote shall continue until the company shall have resumed the payment in full of the dividends in arrears.
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
Trust preferred issues: subordinated notes (4) £93 million 5.6457% 2047 (redeemed June 2017) (5) - - 93
(3) Issued in August 2016. In the event of conversion, converted into ordinary shares at a price of $2.284 nominal per £1 share.
Within 1 year 3,237 (208) (123) (70) 2,836 139 After 1 year but within 5 years 4,566 (370) (100) — 4,096 325 After 5 years 1,935 (710) (38) — 1,187 49
Transportation 313 283 Cars and light commercial vehicles 11 45 Other 285 271 £m £m £m
Amounts recognised as income and expense Finance leases - contingent rental rebate (44) (34) (76) Operating leases - minimum rentals payable 233 221 239
Operating leases - transportation 25 15 94 14 148 29 22 69 17 137 - cars and light commercial vehicles 1 1 2 — 4 5 7 7 — 19 - other 26 19 37 10 92 21 24 30 9 84 Finance lease contracts 68 32 67 38 205 88 20 72 27 207 Hire purchase agreements 55 2 — — 57 38 2 1 — 41
Consolidated structured entities Securitisations In a securitisation, assets, or interests in a pool of assets, are transferred generally to an SE which then issues liabilities to third party investors. The majority of securitisations are supported through liquidity facilities or other credit enhancements.
24 Structured entities continued Unconsolidated structured entities RBS’s interests in unconsolidated structured entities are analysed below
Non trading assets Loans to customers 1,636 544 2,180 1,243 120 1,363 Other financial assets 4,461 — 4,461 3,888 141 4,029
Securities sold under repurchase transactions and transactions with the substance of securities repurchase agreements are not derecognised if RBS retains substantially all the risks and rewards of ownership. The fair value (and carrying value) of securities transferred under such transactions included on the balance sheet, are set out below. All of these securities could be sold or repledged by the holder.
The following assets have failed derecognition (1) 2018 2017 £m £m
Trading assets 14,020 10,463 Other financial assets 9,890 13,717 23,910 24,180 Note: (1) Associated liabilities were £23,222 million (2017 - £23,692 million).
26 Capital resources Under Capital Requirements Regulation (CRR), regulators within the European Union monitor capital on a legal entity basis, with local transitional arrangements on the phasing in of end-point CRR.
Qualifying instruments and related share premium 4,051 4,041 Qualifying instruments and related share premium subject to phase out 1,393 3,416 Qualifying instruments issued by subsidiaries and held by third parties subject to phase out 140 140
More than More than 1 year but 3 years but Less than less than less than Over 1 year 3 years 5 years 5 years £m £m £m £m £m £m
Guarantees and assets pledged as collateral security 1,296 414 250 1,992 3,952 7,718 Other contingent liabilities 1,111 582 211 1,148 3,052 3,391 Standby facilities, credit lines and other commitments 61,105 20,934 32,535 5,305 119,879 124,941
Minimum rentals payable under non-cancellable leases (1) - within 1 year 232 220 - after 1 year but within 5 years 736 696 - after 5 years 1,721 1,676 2,689 2,592 Capital expenditure on property, plant and equipment 17 18 Contracts to purchase goods or services (2) 541 682
Notes: (1) Predominantly property leases. (2) Of which due within 1 year: £253 million (2017 - £276 million).
The FSC 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.
RBS Group has accrued £1.8 million for its share of estimated FSCS levies.
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 has recognised. Where (and as far as) liability cannot be reasonably estimated, no provision has been recognised.
Litigation Residential mortgage-backed securities (RMBS) litigation in the US RBS companies continue to defend RMBS-related claims in the US in which plaintiffs allege that certain disclosures made in connection with the relevant offerings of RMBS contained materially false or misleading statements and/or omissions regarding the underwriting standards pursuant to which the mortgage loans underlying the RMBS were issued. The remaining RMBS lawsuits against RBS companies consist of cases filed by the Federal Home Loan Banks of Boston and Seattle and the Federal Deposit Insurance Corporation that together involve the issuance of less than US$1 billion of RMBS issued primarily from 2005 to 2007. In addition, NatWest Markets Securities Inc. previously agreed to settle a purported RMBS class action entitled New Jersey Carpenters Health Fund v. Novastar Mortgage Inc. et al. for US$55.3 million, which has been paid into escrow pending court approval of the settlement.
Among the non-class claims dismissed by the SDNY in December 2016 were claims that the Federal Deposit Insurance Corporation (FDIC) had asserted on behalf of certain failed US banks. On 10 July 2017, the FDIC, on behalf of 39 failed US banks, commenced substantially similar claims against RBS companies and others in the High Court of Justice of England and Wales. The action alleges that the defendants breached
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, and the case is proceeding in the discovery phase. The second class action relates to other derivatives allegedly tied to JPY LIBOR and Euroyen TIBOR. The court dismissed that case on 10 March 2017 on the ground that the plaintiffs lack standing. The plaintiffs have commenced an appeal of that decision.
There is also a class action relating to the Singapore Interbank Offered Rate and Singapore Swap Offer Rate pending in the SDNY. In that case, the court denied defendants’ motion to dismiss on 5 October 2018. The court’s ruling would permit certain antitrust claims to proceed against NatWest Markets Plc and other non-RBS defendants, however, in November 2018, the defendants filed another motion to dismiss plaintiffs’ claims.
NatWest Markets Plc is defending a claim in the High Court in London brought by London Bridge Holdings Ltd and others, in which the claimants allege LIBOR manipulation in connection with the sale of interest rate hedging products. The sum claimed in that case is £446.7 million.
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 defendants are RBSG, NatWest Markets Plc, NatWest Markets Securities Inc., and NatWest Plc.
FX antitrust litigation NatWest Markets Plc and certain other members of the Group, including RBSG, are defendants in several cases relating to NatWest Markets Plc’s foreign exchange (FX) business, each of which is pending before the same federal judge in the SDNY.
RBS companies have also been named as defendants in two motions to certify FX-related class actions in the Tel Aviv District Court in Israel.
Certain other foreign exchange transaction related claims have been or may be threatened against RBS companies. RBS cannot predict whether any of these claims will be pursued, but expects that some may.
Swaps antitrust litigation NatWest Markets Plc and other members of the Group, including RBSG, as well as a number of other interest rate swap dealers, are defendants in several cases pending in the SDNY alleging violations of the US antitrust laws in the market for interest rate swaps. There is a consolidated class action complaint on behalf of persons who entered into interest rate swaps with the defendants, as well as non-class action claims by three swap execution facilities (TeraExchange, Javelin, and trueEx). The plaintiffs allege that the swap execution facilities would have successfully established exchange-like trading of interest rate swaps if the defendants had not unlawfully conspired to prevent that from happening through boycotts and other means. Discovery in these cases is ongoing.
In addition, on 8 June 2017, TeraExchange filed a complaint against RBS companies, including RBSG, as well as a number of other credit default swap dealers, in the SDNY. TeraExchange alleges it would have established exchange-like trading of credit default swaps if the defendant dealers had not engaged in an unlawful antitrust conspiracy. On 1 October 2018, the court dismissed all claims against RBS companies.
27 Memorandum items continued Litigation, investigations and reviews In the primary action, filed in December 2010, the trustee originally sought to recover US$75.8 million in redemptions that NWM N.V. allegedly received from certain Madoff feeder funds and US$162.1 million that NWM N.V. allegedly received from certain swap counterparties. In August 2018, the trustee voluntarily dismissed a portion of this claim (relating to US$74.6 million received from certain swap counterparties) without prejudice to-refiling at a later date. Otherwise this action remains pending before the bankruptcy court, where it will in due course be the subject of a motion to dismiss. In the second action, filed in October 2011, the trustee seeks to recover an additional US$21.8 million. In November 2016, the bankruptcy court dismissed this case on international comity grounds, and that decision is currently on appeal to the United States Court of Appeals for the Second Circuit.
Thornburg adversary proceeding Certain RBS companies were defendants in an adversary proceeding filed in the US bankruptcy court in Maryland by the trustee for TMST, Inc. (formerly known as Thornburg Mortgage, Inc.). The trustee sought recovery of transfers made under certain restructuring agreements as avoidable fraudulent and preferential transfers. On 26 October 2018, the bankruptcy court approved a US$23.5 million settlement of this matter. RBS companies have paid this settlement amount, which was covered by a provision existing as of 30 September 2018.
Interest rate hedging products and similar litigation RBS 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 missold 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 on 31 March 2015. RBS remains exposed to potential claims from customers who were either ineligible to be considered for redress or who are dissatisfied with their redress offers.
Property Alliance Group (PAG) v NatWest Markets Plc was the leading case before the English High Court involving both IRHP mis-selling and LIBOR misconduct allegations. The amount claimed was £34.8 million and the trial ended in October 2016. In December 2016 the Court dismissed all of PAG’s claims. PAG appealed that decision, and the Court of Appeal’s judgment dismissing the appeal was handed down on 2 March 2018. On 24 July 2018 the Supreme Court declined the request from PAG for permission to appeal an aspect of the judgment relating to implied representations of Sterling LIBOR rates. The Court of Appeal’s decision may impact other IRHP and LIBORrelated cases currently pending in the English courts, some of which involve substantial amounts.
Tax dispute HMRC issued a tax assessment in 2012 against NatWest Markets Plc for approximately £86 million regarding a value-added-tax (‘VAT’) matter in relation to the trading of European Union Allowances (‘EUAs’) by an RBS joint venture subsidiary in 2009. RBS 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, RBS is a named defendant in civil proceedings before the High Court 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 NatWest Markets 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.
US Anti-Terrorism Act litigation NatWest Plc is defending lawsuits filed in the United States District Court for the Eastern District of New York by a number of US nationals (or their estates, survivors, or heirs) who were victims of terrorist attacks in Israel. The plaintiffs allege that NatWest Plc is liable for damages arising from those attacks pursuant to the US Anti-Terrorism Act because NatWest Plc previously maintained bank accounts and transferred funds for the Palestine Relief & Development Fund, an organisation which plaintiffs allege solicited funds for Hamas, the alleged perpetrator of the attacks.
The attacks at issue in the cases were allegedly perpetrated by Hezbollah and certain Iraqi terror cells allegedly funded by the Islamic Republic of Iran. According to the plaintiffs’ allegations, the defendants are liable for damages arising from the attacks because they allegedly conspired with Iran and certain Iranian banks to assist Iran in transferring money to Hezbollah and the Iraqi terror cells, in violation of the US Anti-Terrorism Act, by agreeing to engage in ‘stripping’ of transactions initiated by the Iranian banks so that the Iranian nexus to the transactions would not be detected. The first of these actions was filed in the United States District Court for the Eastern District of New York in November 2014. On 27 July 2018, the magistrate judge in that case issued a report to the district court recommending that the district court deny the defendants’ pending motion to dismiss. NatWest Markets N.V. has requested that the district court grant the motion to dismiss notwithstanding the magistrate’s recommendation. The other actions are either subject to a pending motion to dismiss, or will be the subject of such a motion in due course.
Securities underwriting litigation NatWest Markets Securities Inc. 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 NatWest Markets Securities Inc.), are liable to purchasers for misrepresentations and omissions made in connection with the offering of such securities.
The NatWest Markets business in particular has been providing, and continues to provide, information regarding a variety of matters, including, for example, the setting of benchmark rates and related derivatives trading, conduct in the foreign exchange market, and various issues relating to the issuance, underwriting, and sales and trading of fixed-income securities, including structured products and government securities, some of which have resulted, and others of which may result, in investigations or proceedings.
RMBS and other securitised products investigations In the US, RBS companies have in recent years been involved in investigations relating to, among other things, issuance, underwriting and trading in RMBS and other mortgage-backed securities and collateralised debt obligations (CDOs).
Investigations by the US Department of Justice (DoJ) and certain state attorneys general relating to the issuance and underwriting of RMBS were resolved in 2018. Certain other state attorneys general have sought information regarding similar issues, and RBS is aware that at least one such investigation is ongoing.
US mortgages - loan repurchase matters RBS’s NatWest Markets business in North America was a purchaser of non-agency residential mortgages in the secondary market, and an issuer and underwriter of non-agency RMBS, and, in some circumstances, made certain representations and warranties regarding the characteristics of the underlying loans. As a result, NatWest Markets may be, or may have been, contractually required to repurchase such loans or indemnify certain parties against losses for certain breaches of such representations and warranties. Depending on the extent to which such loan repurchase related claims are pursued against and not rebutted by NatWest Markets on timeliness or other grounds, the aggregate potential impact on RBS, if any, may be material.
Foreign exchange related investigations In 2014 and 2015, NatWest Markets Plc paid significant penalties to resolve investigations into its FX business by the FCA, the CFTC, the DoJ, and the Board of Governors of the Federal Reserve System (Federal Reserve). As part of its plea agreement with the DoJ, NatWest Markets Plc pled guilty to a one-count information charging an antitrust conspiracy occurring between as early as December 2007 to at least April 2010. NatWest Markets Plc admitted that it knowingly, through one of its euro/US dollar currency traders, joined and participated in a conspiracy to eliminate competition in the purchase and sale of the euro/US dollar currency pair exchanged in the FX spot market. On 5 January 2017, the United States District Court for the District of Connecticut imposed a sentence on NatWest Markets Plc consisting of a US$395 million fine and a three-year probation, which among other things, prohibits NatWest Markets Plc from committing another crime in violation of US law or engaging in the FX trading practices that form the basis for the charged crime and requires NatWest Markets Plc to implement a compliance program designed to prevent and detect the unlawful conduct at issue and to strengthen its compliance and internal controls as required by other regulators (including the FCA and the CFTC). A violation of the terms of probation could lead to the imposition of additional penalties.
NatWest Markets Plc is co-operating with investigations and responding to inquiries from other governmental and regulatory (including competition) authorities on similar issues relating to failings in its FX business. The timing and amount of financial penalties with respect to any further settlements and related litigation risks and collateral consequences remain uncertain and may well be material.
RBS made a provision of £400 million in 2016, in respect of the above redress steps, of which £270 million had been utilised by 31 December 2018. An additional provision of £50 million was taken at 31 December 2018 reflecting the increased costs of the complaints process.
In addition, RBS agreed with the FCA that it would carry out a remediation exercise, for a specific customer segment who were sold a particular structured product. Redress was paid to certain customers who took out the structured product.
RBS provisions in relation to these matters totalled £206 million as at 31 December 2018, of which £144 million had been utilised by that date.
Packaged accounts RBS has had dedicated resources in place since 2013 to investigate and resolve packaged account complaints on an individual basis. RBS provisions for this matter totalled £444 million as at 31 December 2018. The FCA conducted a thematic review of packaged bank accounts across the UK from October 2014 to April 2016, the results of which were published in October 2016. RBS made amendments to its sales process and complaints procedures to address the findings from that review.
Payment Protection Insurance (PPI) Since 2011, RBS has been implementing the FCA’s policy statement for the handling of complaints about the mis-selling of PPI (Policy Statement 10/12). In August 2017, the FCA’s new rules and guidance on PPI complaints handling (Policy Statement 17/3) came into force. The Policy Statement introduced new so called ‘Plevin’ rules, under which customers may be eligible for redress if the bank earned a high level of commission from the sale of PPI, but did not disclose this detail at the point of sale. The Policy Statement also introduced a two year PPI deadline, due to expire in August 2019, before which new PPI complaints must be made. RBS is implementing the Policy Statement.
RBS has made provisions totalling £5.3 billion to date for PPI claims, including an additional provision of £200 million taken at Q3 2018, reflecting greater than predicted complaints volumes. Of the £5.3 billion cumulative provision, £4.7 billion had been utilised by 31 December 2018.
FCA mortgages market study In December 2016, the FCA launched a market study into the provision of mortgages. On 4 May 2018 the interim 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. Following a period of consultation, the final report is due to be published in Q1 2019.
27 Memorandum items continued Litigation, investigations and reviews In addition, Coutts & Co Ltd continues to assist with investigations and enquiries from authorities where requested to do so.
RBS has made provisions totalling €297 million (£266 million) to date for this matter. Of the €297 million (£266 million) cumulative provision, €211million (£189 million) had been utilised by 31 December 2018.
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 is ongoing and UBI DAC continues to co-operate with the CBI.
As part of an internal review of the wider retail and commercial loan portfolios extending from the tracker mortgage examination programme, UBI DAC identified further legacy business issues. A programme is ongoing to identify and remediate impacted customers. RBS has made provisions totalling €167 million (£150 million) based on expected remediation and project costs of which €41 million (£37 million) had been utilised by 31 December 2018.
28 Analysis of the net investment in business interests and intangible assets 2018 2017 2016
Net assets/(liabilities) sold — 177 (400) Non-cash consideration — (15) (5) Profit on disposal — 155 22 Net cash and cash equivalents disposed — — 55
Issue of ordinary shares 144 306 300 Issue of Additional Tier 1 capital notes — — 2,046 Redemption of paid-in equity — (720) (110) Redemption of subordinated liabilities (2,258) (5,747) (3,606)
Comprising: Cash and balances at central banks 88,897 98,337 74,250 Treasury bills and debt securities 83 427 387 Net loans to banks 19,831 23,841 23,933
Certain members of RBS 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.
Compensation of key management The aggregate remuneration of directors and other members of key management during the year was as follows: Short-term benefits 20,316 19,019 Post-employment benefits 82 434 Share-based payments — 3,558 20,398 23,011
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 and NWH Ltd Boards, members of the RBSG and NWH Ltd Executive Committees, and the Chief Executives of NatWest Markets Plc and RBS International. This is on the basis that these individuals have been identified as Persons Discharging Managerial Responsibilities (PDMRs) of RBSG under the new governance structure.
32 Transactions with directors and key management At 31 December 2018, amounts outstanding in relation to transactions, arrangements and agreements entered into by authorised institutions in the Group, as defined in UK legislation, were £9,660 in respect of loans to five persons who were directors of the company at any time during the financial period.
For the purposes of IAS 24 ‘Related Party Disclosures’, key management comprise directors of the company and Persons Discharging Managerial Responsibilities (PDMRs) of RBSG under the new governance structure. The captions in the Group's primary financial statements include the following amounts attributable, in aggregate, to key management: 2018
IFRS 9 changed the classification categories of financial assets from IAS 39. Held-for-trading assets were classified to mandatory fair value through profit or loss; loans and receivables were classified to amortised cost; and available-for-sale assets were classified as fair value through other comprehensive income unless they were deemed to be in a fair value business model or failed the contractual cash flow requirements under IFRS 9. There were no changes in the classification and measurement of financial liabilities.
The table below reflects the impact of IFRS 9 on total equity: Total £m
At 1 January 2018 - under IFRS on transition to IFRS 9 49,022
The 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 27) together with banking transactions such as loans and deposits undertaken in the normal course of banker-customer relationships.
Derivatives with subsidiaries - designated hedges 5 525 136 - economic hedges 18 27 Amounts due from subsidiaries - amortised cost 12,036 24,983 Amounts due from subsidiaries - MFVTPL 10,755 — Investments in Group undertakings 6 56,747 47,559 Other financial assets 241 104 Other assets 26 53
Paid-in equity At 1 January 4,047 4,478 2,438 Securities issued during the year (2) — — 2,040 Redeemed/reclassified (3) — (431) —
Cash flow hedging reserve At 1 January 20 186 32 Amount recognised in equity (6) 103 (157) 243 Amount transferred from equity to earnings (6) (25) (47) (54)
Retained earnings At 1 January 38,042 7,995 16,252 Implementation of IFRS 9 on 1 January 2018 (8) 231 — — Profit/(loss) attributable to ordinary shareholders and other equity owners 2,424 1,284 (5,409) Equity preference dividends paid (182) (234) (260) Dividend access share dividend — — (1,193) Ordinary dividend paid (241) — — Paid-in equity dividends paid, net of tax (288) (390) (235) Capital reduction (4) — 30,331 — Redemption of debt preference shares (5) — (748) — Redemption of equity preference shares (9) (2,805) — (1,160) Reclassification of paid-in equity — (196) —
(8) Refer to Note 33 for further information on the impact of IFRS 9 on classification and basis of preparation, year ended 31 December 2018 prepared under IFRS 9 prior years under IAS 39.
Cash flow statement for the year ended 31 December 2018 £m £m £m
Decrease/(increase) in balances with subsidiaries 2,254 2,087 (8,322) (Increase)/decrease in derivative assets and liabilities held with subsidiaries (219) 234 39 Increase in securities (131) — — Increase in other financial assets (15) (64) (65) Increase in debt securities in issue 7,619 2,370 1,772 Increase in other financial liabilities 316 61 36
Effects of exchange rate changes on cash and cash equivalents 1 (14) 122
Net increase/(decrease) in cash and cash equivalents 62 (950) (1,811) Cash and cash equivalents at 1 January 245 1,195 3,006
Cash and cash equivalents at 31 December (2) 307 245 1,195
The accounting policies that are applicable to the company are included in RBS accounting polices which are set out on pages 182 to 186 of the consolidated financial statements, except that it has no policy regarding ‘Basis of consolidation’ and that the company’s investments in its subsidiaries are stated at cost less any impairment.
The Group opted to early adopt the IFRS 9 amendment on negative compensation with effect from 1 January 2018.
3 Financial instruments - 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) 12.0 12.0 25.0 25.4 Other financial assets Debt securities (2) — — 0.1 0.2
Assets Derivatives with subsidiaries - designated hedges (20) 545 525 16 120 136 - economic hedges 40 (22) 18 9 18 27 Amounts due from subsidiaries - amortised cost 6,959 5,077 12,036 19,340 5,643 24,983 Amounts due from subsidiaries - MFVTPL 14 10,741 10,755 — — — Other financial assets — 241 241 — 104 104
2018 0-3 months 3-12 months 1-3 years 3-5 years 5-10 years 10-20 years £m £m £m £m £m £m
Amount due to subsidiaries - amortised cost 482 5 19 19 46 211 Other financial liabilities - amortised cost 158 1,744 1,109 9,611 6,270 1,451 - designated at fair value through profit or loss 2 — 2 — — — Subordinated liabilities 113 340 905 6,872 1,334 808
Assets by contractural maturity Amount due to subsidiaries - amortised cost — 9 18 18 44 200 Other financial liabilities - debt securities in issue - amortised cost 115 209 1,824 2,715 6,052 — - designated at fair value through profit or loss 1 77 4 — — — Subordinated liabilities 60 640 858 858 7,149 1,880
Total maturing assets 176 935 2,704 3,591 13,245 2,080 Derivatives held for hedging 10 3 110 47 25 —
5 Derivatives with subsidiaries – designated hedges Fair value hedging is used to hedge loans and other financial liabilities, and cash flow hedging is used to hedge other financial liabilities and subordinated liabilities.
Fair value hedging - interest rate contracts 25.5 419 310 74 176 Cash flow hedging - exchange rate contracts 12.5 106 — 62 37
In 2018 the addition relates to the acquisition of NatWest Holdings Limited from NatWest Markets Plc (formerly The Royal Bank of Scotland Plc renamed in 2018). 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. The 2017 additions principally relate to the acquisition of the Royal Bank of Scotland International (Holdings) Limited from NatWest Markets Plc. Additional investments in Group undertakings in 2018 primarily relate to NatWest Holdings Limited.
In 2018 the impairment relates to the company’s investment in NatWest Markets Plc. The write-back in 2017 relates to the partial reversal of the company’s investment in RFS Holdings B.V.
The principal subsidiary undertakings of the company are shown below. Their capital consists of ordinary shares which are unlisted. All of these subsidiaries are included in RBS'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
Dated loan capital 7,253 7,213 Undated loan capital 687 650 Preference shares 1 1
US$350 million 4.70% dated notes 2018 Ineligible — 265 US$2,250 million 6.13% dated notes 2022 Tier 2 1,739 1,665 US$650 million 6.425% dated notes 2043 (callable January 2034) (1) Ineligible 501 479 US$2,000 million 6.00% dated notes 2023 Tier 2 1,572 1,470 US$1,000 million 6.10% dated notes 2023 Tier 2 770 737 €1,000 million 3.63% dated notes 2024 (callable March 2019) Tier 2 918 907 US$2,250 million 5.13% dated notes 2024 Tier 2 1,753 1,690 7,253 7,213 Note: (1) The call is on the underlying security in the partnership, rather than the internal issued debt.
US$106 million floating rate notes (callable semi-annually) Ineligible 83 79 US$762 million 7.648% notes (callable September 2031) (1) Ineligible 604 571 687 650 Note: (1) The company can satisfy interest payment obligations by issuing sufficient ordinary shares to appointed Trustees to enable them, on selling these shares, to settle the interest payment.
Share capital, share premium, paid-in equity and merger reserve Subordinated liabilities £m £m £m £m £m £m
Net cash (outflow)/inflow from financing 144 (321) 2,340 (267) (1,665) (425) Transfer to retained earnings — (25,789) — — — — Ordinary shares issued in respect of employee share schemes 80 71 166 — — — Redemption of debt preference shares — 748 — — — — Other adjustments including foreign exchange — 196 — 349 (1,026) 1,727 9 Directors’ and key management remuneration Directors’ remuneration is disclosed in Note 31 on the consolidated accounts. The directors had no other reportable related party transactions or balances with the company.
10 Related undertakings Legal entities and activities at 31 December 2018 In accordance with the Companies Act 2006, the company’s related undertakings and the accounting treatment for each are listed below. All undertakings are wholly-owned by the company or subsidiaries of the company and are consolidated by reason of contractual control (Section 1162(2) CA 2006), unless otherwise indicated. Group interest refers to ordinary shares of equal values and voting rights unless further analysis is provided in the notes. Activities are classified in accordance with Annex I to the Capital Requirements Directive (“CRD IV”) and the definitions in Article 4 of the Capital Requirements Regulation. All other requirements of the Capital Requirements (country-by-country) Reporting Regulations 2013 will be published on the RBS Group’s website.
Caledonian Sleepers Rail Leasing Ltd BF FC (3) NatWest Holdings Ltd INV FC (24)
Churchill Management Ltd BF FC (3) NatWest Property Investments Ltd INV DE (19)
Coutts & Company CI FC (33) NatWest Trustee and Depositary Services Ltd INV FC (19)
FreeAgent Holdings PLC SC FC (81) Patalex V Productions Ltd BF FC (94)
Gatehouse Way Developments Ltd INV DE (3) Premier Audit Company Ltd BF DE (19)
KUC Properties Ltd BF DE (16) Property Venture Partners Ltd INV FC (16)
Lombard & Ulster Ltd BF FC (6) R.B. Leasing (April) Ltd BF FC (94)
Lombard Charterhire Ltd BF FC (24) R.B. Leasing Company Ltd BF FC (16)
Lombard Corporate Finance (11) Ltd BF FC (94) R.B. Quadrangle Leasing Ltd BF FC (94)
Lombard Corporate Finance (6) Ltd BF FC (94) RBOS (UK) Ltd BF FC (19)
Lombard Leasing Company Ltd BF FC (94) RBS Invoice Finance Ltd BF FC (19)
Lombard Lessors Ltd BF FC (24) RBS Mezzanine Ltd BF FC (16)
Lombard North Central PLC BF FC (24) RBS SME Investments Ltd BF FC (3)
Lombard Technology Services Ltd BF FC (24) RBSG International Holdings Ltd BF FC (16)
National Westminster Bank Plc CI FC (19) RBSSAF (12) Ltd BF FC (94)
National Westminster Home Loans Ltd BF FC (19) RBSSAF (2) Ltd BF FC (94)
National Westminster Properties No. 1 Ltd SC DE (19) RBSSAF (25) Ltd BF FC (94)
RBSSAF (6) Ltd BF FC (94) The One Account Ltd BF FC (19)
Royal Bank Investments Ltd BF FC (16) Theobald Film Productions LLP BF FC (94)
Royal Bank Invoice Finance Ltd BF FC (19) Total Capital Finance Ltd BF DE (3)
Safetosign Ltd SC FC (19) West Register (Property Investments) Ltd BF DE (16)
Sandford Leasing Ltd BF FC (94) West Register (Realisations) Ltd INV DE (16)
SIG Number 2 Ltd BF FC (16) Winchcombe Finance Ltd BF FC (94)
AA Merchant Banking B.V. BF PC (67) Gredelinen KB BF FC (45)
Action Corporate Services Ltd BF FC (70) Greenwich Capital Derivatives, Inc. BF PC (21)
Airside Properties AB BF FC (45) Grinnhagen KB BF PC (45)
Airside Properties Denmark AS BF FC (51) Horrsta 4:38 KB BF FC (45)
Alternative Investment Fund B.V. BF DE (67) Kallebäck Institutfastigheter AB BF FC (45)
Arkivborgen KB BF FC (45) Kastrup Commuter K/S BF FC (51)
Artul Kiinteistöt Oy BF FC (47) Kastrup Hangar 5 K/S BF FC (51)
Backsmedjan KB BF FC (45) Kastrup V & L Building K/S BF FC (51)
Bilfastighet i Täby AB BF FC (45) KB Lagermannen BF FC (45)
Bilfastighet i Akalla AB BF FC (44) KB Likriktaren BF DE (45)
Braheberget KB BF FC (45) KEB Investors, L.P. BF FC (52)
C.J. Fiduciaries Ltd BF FC (89) Kiinteistö Oy Pennalan Johtotie 2 BF FC (47)
Coutts & Co Ltd BF FC (75) Koy Helsingin Mechelininkatu 1 BF FC (47)
Coutts & Co Trustees (Suisse) S.A. BF DE (49) Koy Helsingin Osmontie 34 BF FC (47)
Coutts General Partner (Cayman) V Ltd BF FC (80) Koy Helsingin Panuntie 11 BF FC (47)
CTB Ltd BF FC (96) Koy Helsingin Panuntie 6 BF FC (47)
Eiendomsselskapet Apteno La AS BF FC (46) Koy Iisalmen Kihlavirta BF FC (47)
Eurohill 4 KB BF FC (45) Koy Jämsän Keskushovi BF FC (91)
Förvaltningsbolaget Dalkyrkan KB BF FC (45) Koy Kokkolan Kaarlenportti Fab BF FC (47)
Fastighet Kallebäck 2:4 I Göteborg AB BF FC (45) Koy Millennium BF FC (47)
Fastighets AB Flöjten I Norrköping BF FC (45) Koy Nummelan Portti BF FC (47)
Fastighets AB Hammarbyvagnen BF FC (45) Koy Nuolialan päiväkoti BF FC (47)
Fastighets AB Stockmakaren BF FC (45) Koy Peltolantie 27 BF FC (47)
Fastighets AB Xalam BF FC (45) Koy Puotikuja 2 Vaasa BF FC (47)
First Active Insurances Services Ltd BF DE (97) Koy Vapaalan Service-Center BF DE (47)
First Active Investments No. 4 Ltd BF FC (97) Läkten 1 KB BF FC (45)
First Active Ltd BF FC (97) LerumsKrysset KB BF FC (45)
Foundation Commercial Property Ltd OTH PC (89) Lombard Ireland Group Holdings Unlimited BF FC (97)
Lombard Manx Leasing Ltd BF FC (88) RBS Financial Products Inc. BF FC (21)
Lombard Manx Ltd BF FC (88) RBS Group (Australia) Pty Ltd BF FC (77)
Lothbury Insurance Company Ltd BF DE (83) RBS Holdings III (Australia) Pty Ltd BF FC (77)
Mjälgen KB BF FC (45) RBS Holdings USA Inc. BF FC (21)
Morar ICC Insurance Ltd BF DE (85) RBS Hollandsche N.V. CI FC (67)
NatWest Markets Securities Japan Ltd INV FC (78) RBS Nominees (Ireland) Ltd BF FC (97)
Nordisk Renting Facilities Management AB BF FC (45) RBS Prime Services (India) Private Ltd BF FC (31)
Nordiska Strategifastigheter Holding AB BF FC (45) Redlion Investments Ltd OTH FC (60)
NWM Services India Private Ltd SC FC (76) Redshield Holdings Ltd BF FC (60)
Nybergflata 5 AS BF FC (68) Ringdalveien 20 AS BF FC (46)
Pyrrhula 6,7 AB BF FC (45) Royhaven Secretaries Ltd BF FC (60)
Random Properties Acquisition Corp. IV INV DE (21) Skinnarängen KB BF FC (45)
RBS (Gibraltar) Ltd CI FC (1) Solbänken KB BF FC (45)
RBS Acceptance Inc. CI FC (21) Svenskt Fastighetskapital AB BF FC (45)
RBS Alternative Investments (Australia) Pty Ltd BF FC (77) Svenskt Energikapital AB BF FC (45)
RBS Asia Futures Ltd BF FC (78) The Royal Bank of Scotland International (Holdings) Ltd BF FC (89)
RBS Assessoria Ltda SC FC (90) Tingsbrogården KB BF FC (45)
RBS Bank (Polska) S.A. CI FC (101) Ulster Bank (Ireland) Holdings Unlimited Company INV FC (97)
RBS Deutschland Holdings GmbH BF FC (72) Ulster Bank Holdings (ROI) Ltd BF FC (97)
RBS Capital LP II BF DE (8) RBS Retirement And Death Provision Company Ltd BF DE (84)
% Notes Isobel Intermediate HoldCo Ltd BF FC DE 75 (30)
NatWest Markets Secured Funding (LM) Ltd BF FC PC 20 (50)
CITIC Capital China Mezzanine Fund Ltd BF IA PC 33 (40)
Eris Finance S.R.L. BF IA PC 45 (100) Spring Allies Jersey Ltd BF IA DE 49 (32)
Celtic Residential Irish Mortgage Securitisation No 11 plc FC DE 0 (35)
Celtic Residential Irish Mortgage Securitisation No 16 DAC FC DE 0 (35)
Attlee Personal Loans Plc FC FC 0 (26) Coutts Group FC FC 100 (3)
Celtic Residential Irish Mortgage Securitisation No 09 plc FC DE 0 (87) First Active Holdings Ltd FC FC 100 (97)
First Active Treasury Ltd FC FC 100 (97) RBS Investments Holdings (UK) Ltd FC FC 100 (19)
Marnin Ltd NC DE 98 (97) RBS Trustees (Ireland) Ltd FC FC 98 (61)
MSE Holdings Ltd IA DE 37 (43) Riossi Ltd FC DE 100 (24) Mulcaster Street Nominees Ltd FC FC 100 (89) RoboScot DevCap Ltd FC DE 100 (16)
Norgay Property Ltd FC DE 100 (97) Springwell Street Developments (No 1) Ltd FC FC 100 (24)
RBS Equities (UK) Ltd FC FC 100 (19) West Register (Project Developments) Ltd FC DE 100 (16)
RBS International Investment Holdings (UK) Ltd FC FC 100 (19) Zrko Ltd FC DE 67 (36) RBS Investments (UK) Ltd FC FC 100 (19)
% Notes Adam & Company (Nominees) Ltd FC FC 100 (18) Glyns Nominees Ltd FC FC 100 (19)
Atlas Nominees Ltd FC DE 100 (78) HPUT A Ltd FC DE 100 (19) Blydenstein Nominees Ltd FC FC 100 (19) HPUT B Ltd FC DE 100 (19) British Overseas Bank Nominees Ltd FC FC 100 (19) JCB Finance Pension Ltd FC DE 88 (6)
Buchanan Holdings Ltd FC FC 100 (3) Lombard Corporate Finance (10) Ltd FC FC 100 (94)
Dixon Vehicle Sales Ltd FC FC 100 (3) Marigold Nominees Ltd FC FC 100 (3)
FIT Nominee 2 Ltd FC FC 100 (19) National Westminster Bank Nominees (Jersey) Ltd FC FC 100 (19)
Nextlinks Ltd FC FC 100 (19) RBSG Collective Investments Nominees Ltd FC FC 100 (16)
RBOS Nominees Ltd FC FC 100 (19) TDS Nominee Company Ltd FC FC 100 (16) RBS Cards Securitisation Funding Ltd FC DE 100 (89)
The Royal Bank of Scotland (1727) Ltd FC FC 100 (16)
RBS Investment Executive Ltd NC DE 100 (16) W.G.T.C.Nominees Ltd FC FC 100 (19)
% Notes Adam & Company Second General Partner Ltd BF IA DE 50 (64) Uniconn Ltd OTH IA DE 30 (29)
Key: BF Banking and financial institution CI Credit institution INV Investment (shares or property) holding company SC Service company TR Trustee OTH Other DE Deconsolidated FC Full consolidation PC Pro-rata consolidation EAA Equity accounting – associate EAJV Equity accounting – joint venture IA Investment accounting NC Not consolidated
10 Related undertakings continued Registered addresses (UK unless stated otherwise) Country of incorporation (22) 2711 Centerville, Road Suite 400, Wilmington, Delaware, DE 19808 USA (23) 28 Fitzwilliam Place, Dublin 2 RoI (24) 280 Bishopsgate, London, EC2M 4RB, England UK (25) 340 Madison Avenue, New York, 10173 USA (26) 35 Great St Helen's, London, EC3A 6AP, England UK (27) 36 St Andrew Square, Edinburgh, EH2 2YB, Scotland UK (28) 3rd Floor, Dixcart House, Sir William Place, St Peter Port, GY1 1GX Guernsey (29) 4 Atlantic Quay, 70 York Street, Glasgow, G2 8JX UK (30) 40 Berkeley Square, London, W1J 5AL, England UK (31) 414, Empire Complex (South Wing), Senapati Bapat Marg, Lower Parel, Mumbai, 400 013 India (32) 44 Esplanade, St Helier, JE4 9WG Jersey (33) 440 Strand, London, WC2R 0QS, England UK (34) 46 Avenue J.F. Kennedy, Luxembourg-Kirchberg, L-1855 Luxembourg (35) 5 Harbourmaster Place, Dublin 1 RoI (36) 70 Sir John Rogerson's Quay, Dublin 2 RoI (37) 99 Queen Victoria Street, London, EC4V 4EH, England UK (38) Al-Dhabab Street, Riyadh, 11431 Saudi Arabia (39) Bellevue Parkway, Suite 210, Wilmington, Delaware, DE 19809 USA (40) Boundary Hall, Cricket Square, 171 Elgin Avenue, George Town, Grand Cayman, KY1-1104 Cayman Islands (41) c/o Adv Jan-Erik Svensson, HC Andersens Boulevard 12, Kopenhaum V, 1553 Denmark (42) c/o Denis Crowley & Co, Chartered Accountants, Unit 6 Riverside Grove, Riverstick, Cork RoI (43) c/o Gentoo Fund Services Ltd, Mill Court, La Charrotiere, St Peter Port, GY1 3GG Guernsey (44) C/O Nordisk Renting AB, 151 36 Sodertalje Stockholm County Sweden (45) c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm Sweden (46) c/o Nordisk Renting AS, 9 Estaje, Klingenberggata 7, NO-0161, Oslo Norway (47) c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130, Helsinki Finland (48) C/O PINSENT MASONS LLP, The Soloist, 1 Lanyon Place, Belfast, BT1 3LP UK (49) c/o Regus Rue du Rhône Sàrl, Geneva, CH-1204 Switzerland (50) c/o SFM Corporate Services Ltd, 35 Great St Helens, London, EC3A 6AP, England UK (51) c/o Visma Services, Lyskaer 3 CD, Herlev, 104 40 Denmark (52) Clarendon House, Two Church Street, Suite 104, Reid Street, Hamilton, HM 11 Bermuda (53) Claude Debussylaan 24, Amsterdam, 1082 MD Netherlands (54) Cornwall Buildings, 45-51 Newhall Street, Birmingham, West Midlands, B3 3QR, England UK (55) Corporation Trust Centre, 1209 Orange St, Wilmington, Delaware, DE 19808 USA (56) Corporation Trust Centre, 1209 Orange Street, Wilmington, New Castle County, Delaware USA (57) Coutts & Co Trustees (Jersey) Limited, 23/25 Broad Street, St Helier, JE4 8ND Jersey (58) De entree 99 -197, 1101HE, Amsterdam, Zuidoost Netherlands (59) DLF Cyber City, Tower C, DLF Phase III, Haryana, 122 002 India (60) Estera Trust (Cayman) Limited, PO Box 1350, Clifton House, 75 Fort Street, George Town, Grand Cayman, KY1-1108 Cayman Islands 61) First Floor, 10/11 Exchange Place, International Financial Services Centre, Dublin 1 RoI (62) Floor 3, 1 St Ann Street, Manchester, M2 7LR, England UK (63) Floor 9th, SOHO Century Plaza, 1501 Century Avenue, Pudong New Area, Shanghai China (64) FRP Advisory LLP, Apex 3, 95 Haymarket Terrace, Edinburgh, EH12 5HD, Scotland UK (65) Gate House, Turnpike Road, High Wycombe, Buckinghamshire, HP12 3NR, England UK (66) Guild House, Guild Street, IFSC, D01 K2C5, Dublin 1 RoI (67) Gustav Mahlerlaan 350, Amsterdam, 1082 ME Netherlands (68) H. Heyerdahlsgate 1, Postboks 2020 Vika, Oslo Norway (69) Herikerbergweg 238, Luna Arena, 1101 CM, Amsterdam Zuidoost Netherlands (70) Hudson Trust Company Limited, Third Floor, Geneva Place, Road Town, Tortola, VG1110 British Virgin Islands (71) Ilzecka 26 Street, Warsaw, 02-135 Poland (72) Junghofstrasse 22, Frankfurt am Main, D-60311 Germany (73) Kaya Flambayan 9, Curacao, Netherlands Antilles Netherlands Antilles (74) La Motte Chambers, St. Helier, JE1 1BJ Jersey (75) Lerchenstrasse 18, Zurich, CH 8022 Switzerland (76) Level 1, Tower A, Building No 10, Phase III, DLF Cyber City, Gurgaon India (77) Level 22, 88 Phillip Street, Sydney, NSW, 2000 Australia (78) Level 54, Hopewell Centre, 183 Queen's Road East Hong Kong (79) Level 9, Menara Maxis, Kuala Lumpur City Centre, Kuala Lumpur, 50088 Malaysia (80) Maples Corporate Services Limited, P.O. Box 309, 121 South Church Street, George Town, Grand Cayman, KY1-1104 Cayman Islands (81) One Edinburgh Quay, 133 Fountainbridge, Edinburgh, Scotland, EH3 9QG UK (82) One Raffles Quay, #23-10 South Tower, Singapore, 48583 Singapore (83) PO Box 230, Heritage Hall, Le Marchant Street, St Peter Port, GY1 4JH Guernsey (84) PO Box 236, First Island House, Peter Street, St Helier, JE4 8SG Jersey (85) PO Box 384, The Albany, South Esplanade, St Peter Port, GY1 4NF Guernsey (86) Quartermile Two, 2 Lister Square, Edinburgh, Midlothian, EH3 9GL, Scotland UK (87) Riverside One, Sir John Rogersons Quay, Dublin 2 RoI (88) Royal Bank House, 2 Victoria Street, Douglas, IM1 2LN Isle of Man (89) Royal Bank House, 71 Bath Street, St Helier, JE4 8PJ Jersey (90) Rua Boa Vista, Sao Paulo, SP 01014-907 Brazil (91) Södra esplanaden, 12 c/o Nordisk Renting Oy, FI-00130, Helsinki Finland (92) Suite 1, 3rd Floor 11-12 St James's Square, London, SW1Y 4LB, England UK (93) The Mill, High Street, Rocester, ST14 5JW, England UK (94) The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England UK (95) Tirolerweg 8, 6300, Zug Switzerland (96) Trident Corporate Services (Bahamas) Ltd, Suite 200B, 2nd Floor, Centre of Commerce, One Bay Street, PO Box N-3944, Bahamas (97) Ulster Bank Group Centre, George's Quay, Dublin 2 RoI (98) Union Plaza 6th Floor, 1 Union Wynd, Aberdeen, AB10 1DQ, Scotland UK (99) Verlengde Poolseweg 16, 4818 CL, Breda Netherlands (100) Via Vittorio Alfieri 1, Conegliano, 31015 Italy (101) Wisniowy Business Park, ul 1-go Sierpnia 8a, Warsaw 02-134 Poland
Principal Risks and Uncertainties Set out below are certain risk factors that could adversely affect the Group’s future results, its financial condition and prospects and cause them to be materially different from what is forecast or expected and either directly or indirectly impact the value of its securities in issue. These risk factors are broadly categorised and should be read in conjunction with the forward looking statements section, strategic report and the capital and risk management section of this annual report, and should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties facing the Group.
In accordance with the EU General Data Protection Regulation (‘GDPR’), the Group is required to ensure it timely implements appropriate and effective organisational and technological safeguards against unauthorised or unlawful access to the data of the Group, its customers and its employees. In order to meet this requirement, the 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 Group interacts and a failure to monitor and manage data in accordance with the GDPR requirements may result in financial losses, regulatory fines and investigations and associated reputational damage. In addition, whilst the Group takes appropriate measures to prevent, detect and minimise attacks, the Group’s systems, and those of third party providers, are subject to frequent cyberattacks.
Operational risks are inherent in the 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 Group operates in many countries, offering a diverse range of products and services supported by 65,400 employees; it therefore has complex and diverse operations. As a result, operational risks or losses can arise from a number of internal or external factors. These risks are also present when the Group relies on outside suppliers or vendors to provide services to it or its customers, as is increasingly the case as the Group implements new technologies, innovates and responds to regulatory and market changes.
Operational risks continue to be heightened as a result of the Group’s current costreduction 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
Group’s ability to maintain effective internal controls and governance frameworks. In particular, new governance frameworks have recently been put into place throughout the Group for certain Group entities, due to the implementation of the UK ring-fencing regime and the resulting legal entity structure. The effective management of operational risks is critical to meeting customer service expectations and retaining and attracting customer business. Although the Group has implemented risk controls and loss mitigation actions, and significant resources and planning have been devoted to mitigate operational risk, there is uncertainty as to whether such actions will be effective in controlling each of the operational risks faced by the Group.
In 2018, the Group upgraded its IT systems and technology and expects to continue to make considerable investments to further simplify, upgrade and improve its IT and technology capabilities (including migration to the Cloud) to make them more cost-effective, improve controls and procedures, strengthen cyber security, enhance digital services provided to its bank customers and improve its competitive position. 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 Group’s operations, its reputation and ability to retain or grow its customer business or adversely impact its competitive position, thereby negatively impacting the Group’s financial position.
A failure in the Group’s risk management framework could adversely affect the Group, including its ability to achieve its strategic objectives. Risk management is an integral part of all of the Group’s activities and includes the definition and monitoring of the Group’s risk appetite and reporting on the Group’s risk exposure and the potential impact thereof on the Group’s financial condition. Financial risk management is highly dependent on the use and effectiveness of internal stress tests and models and ineffective risk management may arise from a wide variety of factors, including lack of transparency or incomplete risk reporting, unidentified conflicts or misaligned incentives, lack of accountability control and governance, lack of consistency in risk monitoring and management or insufficient challenges or assurance processes. Failure to manage risks effectively could adversely impact the Group’s reputation or its relationship with its customers, shareholders or other stakeholders.
Although the 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 Group cannot be certain that it will be successful in avoiding damage to its business from reputational risk.