RBS provides a wide range of products and services to personal, commercial and large corporate and institutional customers through its two main subsidiaries, The Royal Bank of Scotland and NatWest, as well as through a number of other well-known brands including Ulster Bank and Coutts.
Strategic Report 2015 Performance 02 Our progress in 2015 09 Chairman’s statement 10 Chief Executive’s review 13 Business model and strategy 15
Our Structure 16 Our Strategy 17 Our Operating Model 18 Our Values 18 Our Customers 19
Personal & Business Banking 22 Commercial & Private Banking 24 Corporate & Institutional Banking 26 Capital Resolution 28
Non-executive directors Sandy Crombie Alison Davis Morten Friis Robert Gillespie Penny Hughes Brendan Nelson Baroness Noakes Mike Rogers
RBS continues to strengthen and reshape the balance sheet, building on a strong track record of delivery. Risk-weighted assets (RWAs) reduced 32%, or £113 billion, including £109 billion from the disposal of Citizens Financial Group and the accelerated run-down of Capital Resolution.
RBS intends to pay a final dividend on the Dividend Access Share (DAS) during the first half of 2016 subject to final Board and PRA approval, further normalising the capital structure of the bank and removing a constraint on the resumption of capital distributions.
Adjusted operating profit(1) totalled £4,405 million compared with an adjusted operating profit of £6,056 million in 2014, lower primarily due to income attrition and disposal losses in the Capital Resolution business.
The Royal Bank of Scotland Group (RBS) continues to deliver on its plan to build a strong, simple and fair bank for both customers and shareholders. RBS delivered against its 2015 targets.
(2) Excluding restructuring costs, litigation and conduct costs and write down of goodwill.
Commercial Banking adjusted operating profit was down 6% at £1,384 million, driven by a marginal fall in income reflecting margin pressure and included a Q4 2015 loss of £34 million on the sale of non-strategic asset portfolios. Deposit and lending volumes (net new lending of £3.6 billion excluding business transfers, run-off and disposals), contributed to a 1% rise in net interest income.
Capital Resolution recorded an adjusted operating loss of £412 million, compared with a profit of £1,115 million in 2014, reflecting increased disposal losses as it accelerated the run-down of its portfolios, reducing RWAs by almost half to £49.0 billion.
Adjusted bank return on equity was 11.0% in 2015, compared with (1.5%) in 2014. Franchise return on equity (3) was 11.2%.
Common Equity Tier 1 (CET1) ratio improved 430 basis points to 15.5% in 2015, as RWAs declined by £113 billion, partially offset by the attributable loss and the accelerated recognition of previously committed contributions in relation to The Royal Bank of Scotland Group Pension Fund following a change in accounting policy.
(4) Based on end-point CRR Tier 1 capital and leverage exposure based on CRR Delegated Act.
(5) Tangible equity is equity attributable to ordinary shareholders less intangible assets.
(6) Cost:income ratio is based on total income excluding own credit adjustments, loss on redemption of own debt, strategic disposals, and operating expenses excluding litigation and conduct costs, restructuring costs and write down of goodwill.
Citizens deconsolidation Sold full stake a year ahead of schedule, allowing full deconsolidation.
Year-on-year significant improvement in NatWest Business Banking, RBS Business Banking and Ulster Bank Personal Banking (NI).
Employee engagement Raise employee engagement index to within 8% of Global Financial Services (GFS) norm
Surpassed employee engagement goal, up six points to within three points of GFS.
Balance sheet progress RBS continued to improve its capital strength, with the CET1 ratio increasing to 15.5% at 31 December 2015, up 430 basis points from 11.2% at 31 December 2014 and up 690 basis points from 8.6% at 31 December 2013. CET1 ratio benefited from the disposal of Citizens and Capital Resolution’s performance in running off and disposing of capital intensive assets, partly offset by the attributable loss and the pension accounting policy change.
Progress was made in de-risking the balance sheet as the bank continued the run-down or sale of certain businesses and higher risk or capital intensive assets. RWAs decreased from £356 billion at 31 December 2014 to £243 billion at 31 December 2015.
£40.5 billion, exceeding its target RWA reduction of £25 billion. The business substantially exited the North American and Asia-Pacific (APAC) portfolios, and a partnership for our international customers was agreed with BNP Paribas as an alternative to the Global Transaction Services business. Agreed the sale of our Russian subsidiary which is due to complete in Q2 2016.
• Completed the first tranche of the international private banking business sale, with the final tranche due to complete in the first half of 2016.
• Continued to progress the Williams & Glyn (W&G) divestment, submitting a banking licence application to UK regulatory authorities in September 2015 and work continues on separation (although this will not now be achieved until after the previously announced Q1 2017). The Group remains committed to full divestment by the end of 2017.
In line with the progress to de-risk the balance sheet, committed exposures to the natural resources sectors have more than halved, with oil and gas in particular substantially reducing by 70% during 2015 to £6.6 billion. The majority of our emerging market exposures have declined following action on non-strategic activities, reducing by 75% our exposure to China and Russia. Reductions primarily reflected corporate loan portfolio disposal activity and the strategic direction of CIB.
Our funding and liquidity position remains strong, aided by the accelerated reduction of the Capital Resolution balance sheet. The liquidity coverage ratio was 136%, compared with 112% at 31 December 2014, whilst the net stable funding ratio was 121%, compared with 112% at 31 December 2014, both well above regulatory minima at the end of 2015.
The 2015 Bank of England stress test results concluded that RBS did not need to alter its capital plan, as sufficient steps had already been taken by RBS to strengthen its capital position.
Product proposition enhanced: • Investing in building deeper customer engagement through the launch of a new current account, ‘Reward’, which enables customers to receive 3% cashback on household bills for a monthly account fee of £3.
• Launched an innovative new home insurance product offering customers a fixed premium for three years, which we believe is a positive departure from industry practice.
Continue to lead on collaboration and innovation: • Launched Royal National Institute of
Blind People (RNIB) approved cards, becoming the first bank to achieve RNIB accreditation.
• Became the first UK bank to enable customers to use only their fingerprint to log into their phone banking app via Touch ID.
• Real time registration of our mobile banking app enabling customers to log in as they open their current account.
Supporting UK entrepreneurs and businesses: • Opened four Entrepreneur Hubs across the UK, increasing our involvement to seven, enabling entrepreneurs and small businesses to access free office space, mentoring and financial support, with a further five hubs to be opened in 2016.
• The Commercial Bank has issued 12,500 statements of appetite letters to our customers, offering up to £8 billion of new borrowing facilities.
Investing in our operational capabilities: • Enhanced our mortgage operations, including an online mortgage tracker application to improve customer experience, whilst increasing mortgage advisors by 21% from 803 to 974.
• Planned £3.5 billion IT investment spend committed from 2015 to 2017 to improve core infrastructure and resilience whilst addressing innovation capabilities.
Upgrading our points of presence: • Upgraded 322 branches and replaced 922 ATMs as the bank enhances customers’ experience.
• Customers in Ireland are benefiting from a joint venture with ‘An Post’, accessing 1,140 new points of presence.
• Continued to evolve the NatWest mobile app through Touch ID and the ability to apply for loans and savings products whilst enhancing the PAYM feature and ability to use Apple Pay. Active mobile users have increased 27% to 3.7 million in 2015.
• Broke with tradition to open 34 of the busiest branches in the UK during bank holidays.
• Announced a target of having 30% female leaders in every business unit by 2020 and a further goal of a 50/50 spilt by 2030 across all levels of the business.
• Became the first bank to achieve Investing in Young People Accreditation.
Our current plan assumes that we will pay the final Dividend Access Share (DAS) dividend of £1,180 million, plus interest, during the first half of 2016, subject to final Board and PRA approval. This thereby effects the conversion of the DAS into a single ordinary share. This will further normalise the capital structure of the bank and remove a constraint on the resumption of capital distributions. The retirement of the DAS demonstrates the strategic progress of the bank and follows an initial payment of £320 million in 2014. The pro forma impact, at 31 December 2015, to TNAV from making the payment in 2016 is approximately 10p per share and approximately 50 basis points to the CET1 ratio.
Pension Fund On 27 January 2016, the bank announced a change to its pensions accounting policy; in particular, the policy for determining whether or not it has an unconditional right to a refund of surpluses in its employee pension funds. As a result of this accounting change, a minimum funding requirement of £3.3 billion in respect of the Main scheme was recorded as a liability at 31 December 2015 representing the present value of deficit reduction contributions for 2016 to 2023 (£3.7 billion) less an asset ceiling of £400 million. The net post tax impact of the policy change, together with updated IAS 19 year-end scheme valuations, is approximately £1.6 billion or approximately 13p per share reduction in TNAV and approximately 70 basis points on the CET1 ratio.
Separately, RBS has signed a memorandum of understanding with The Royal Bank of Scotland Group Pension Fund trustee to make a payment of £4.2 billion into the scheme. The pro-forma 2016 impact on TNAV, at point of payment, is a further £400 million or approximately 3p per share and approximately 30 basis points on the CET1 ratio.
The accelerated payment improves capital planning and resilience, bringing forward the valuation date not later than 31 December 2015. The next valuation date will take place between 31 October 2018 and 31 December 2018, with any future funding arrangements needed to be agreed with the Trustee no later than Q1 2020. This provides increased certainty on contribution commitments and the pension balance sheet position. Subject to PRA approval, the bank expects the adverse core capital impact to be partially offset by a reduction in RBS’s core capital requirements. Any such potential core capital offsets are likely to occur at the earliest 1 January 2017 and will depend on the PRA’s assessment of RBS’s core capital position at that time.
Note: (1) Excluding litigation and conduct costs, restructuring costs, write down of goodwill and other intangible assets and the operating costs of Williams & Glyn.
Previous guidance has indicated restructuring costs of approximately £5 billion and disposal losses of approximately £1.5 billion in the period 2015-19. Consistent with this, restructuring costs are expected to remain high in 2016, totalling over £1 billion. Most of the remaining signalled disposal losses are expected to be incurred in 2016 (2015 - £367 million). Capital Resolution is expected to reduce RWAs to around £30 billion by the end of 2016, ahead of our original plan, despite a more difficult economic environment for disposals, given the momentum we created in 2015, and continued substantial run-off activity.
RBS plans to return excess capital to shareholders through dividends or buybacks, subject to Board and PRA approval at the time. Key milestones before seeking such approval for capital distributions would include, among other considerations: passing the 2016 Bank of England stress test (including our Individual Capital Guidance hurdle); operating within our capital risk appetite; passing the peak of litigation and conduct costs including US RMBS; confidence in sustainable profitability; and an assured exit of Williams & Glyn. Given the challenges in separating Williams & Glyn and the potentially elongated period to resolve US RMBSrelated litigation claims and regulatory investigations, we now consider it more likely that capital distributions will resume later than Q1 2017.
Our progress in 2015 We have a clear ambition to become No.1 for customer service, trust and advocacy. In 2015, our focus has been on Cost, Capital, Restructuring and Resilience. We have also begun the process of making RBS a simpler place to work and an easier bank to do business with.
Fair Banking Launched an innovative new home insurance product offering customers a fixed premium for three years, which we believe is a positive departure from industry practice.
Reward Account New banking proposition launched: ‘Reward’ offering customers 3% cashback on their household bills.
Account opening efficiency New automated account opening process has increased our onboarding process efficiency, with end-to-end account opening times falling by 50% for business customers and 30% for Commercial customers.
Entrepreneurial Hubs In partnership with Entrepreneurial Spark, RBS has opened four Entrepreneurial Hubs across the UK, increasing our involvement to seven, enabling entrepreneurs and small businesses to access free office space, mentoring and financial support, with a further five hubs to be opened in 2016.
Accessible banking First banking product to be awarded ‘RNIB approved’ as RBS launched new cards specifically designed for blind and partially sighted customers.
Financial inclusion Launched the fee-free Foundation account to better support unbanked individuals in the UK.
Independent Lending Review (ILR) progress is available on rbs.com 9Our progress in 2015
“ The Board’s strategy for this bank is straightforward: a simpler bank focused on doing fewer things, and doing them well, built around a low risk UK and Irish retail and commercial bank.”
For most of the year the Board was chaired by my predecessor, Philip Hampton; it is right, therefore, to begin by thanking him for his service to the company since 2009.
As part of the reshaping, RBS Capital Resolution (RCR) was established in 2013 to separate and wind down capital intensive assets. Rapid progress has continued during 2015, and the target of removing 85% of these assets from the balance sheet by the end of 2016 was achieved a year earlier than planned. The RCR Oversight Committee met for its
final meeting in January 2016 to finalise the transfer of remaining assets and the closure of RCR.
The necessary application for a new banking licence was made in September 2015, a major step on the route to separation. While our planned separation will not now be achieved until after the previously announced Q1 2017, we remain committed to full divestment by the end of 2017. The Board exercises close oversight of this programme, which is uniquely challenging, especially from an IT perspective.
The strategy for the remainder of the bank, including The Royal Bank of Scotland, NatWest, Coutts, Ulster Bank in Ireland, RBS International in Jersey and other linked entities, remained essentially unchanged through the year. The responsible executives make regular presentations to the Board on progress against their objectives, and a strategy offsite was held in June 2015, at which progress was reviewed in greater detail. While the strategic direction for the core businesses is clear, the bank continues to execute a major transformation programme, designed to reduce costs and enhance IT capability. That is an essential element of strategic delivery.
Conduct, regulation, and litigation Over the past seven years the global regulatory and supervisory environment for banks has changed beyond all recognition, a necessary reaction to the parlous state in which many in the industry, notably RBS, had found themselves in 2008.
Banks have responded to the changes, and capital levels and other loss absorbency tools have been transformed. The Board has provided detailed oversight of the bank’s capital management capacity, which involved reviewing the outputs of stress tests, recovery and resolution plans, and defining the bank’s continuing risk appetite. We are firmly committed to being a strongly capitalised entity, meeting the requirements imposed on us by our many regulators.
Another key element of the Board’s role relates to the significant conduct issues which the bank has experienced, and continues to face. These costs have materially delayed our return to profitability. So a very high priority for the Board is to resolve legacy issues and oversee the implementation of strengthened control frameworks to guard against future misconduct.
Specifically, in May 2015 the Board authorised the bank’s settlements with the Department of Justice and the Federal Reserve in relation to investigations into its foreign exchange business. We regret the conduct which led to those settlements. Appropriate remediation policies have since been put in place.
Throughout the year the Board has received regular reports on other litigation, and a number of settlements have been reached on terms which the Board regarded as acceptable. Particular attention has been paid to the claims and investigations related to the origination and trading of US mortgage-backed securities, dating back to 2007, raised by the Department of Justice, the Federal Housing Finance Agency, the National Credit Union Administration, and several state Attorneys General. Although we have put aside substantial provisions for mortgage-backed securities litigation claims we have not provided for the Department of Justice and state Attorneys General investigations. It is not possible at this point to forecast when these claims and investigations will be resolved or at what ultimate cost but further substantial provisions may be required.
The Board has also overseen the response to the action raised by the 2008 rights issue Shareholders Action Groups. That case is unlikely to come to court before the end of 2016.
In 2015 a Board oversight committee was established in relation to the Financial Conduct Authority review of the treatment
of SME customers referred to the bank’s Global Restructuring Group. As I write, that review is still under way.
I have been impressed by the focus on culture and diversity at RBS. To deliver on the strategy we need to have a culture that puts customers at the heart of the business and places a premium on integrity. This is a long-term journey but it is central to making RBS a bank that is growing and flourishing for its customers and shareholders. Central to culture is diversity, which drives innovation and improves decision making, and I am pleased to see the emphasis in the business on ensuring women take a significant number of roles throughout the bank and at all levels.
Our role in the Community RBS is a core part of the communities it serves and undertakes a number of initiatives to support them and help them succeed. In 2015 the bank’s MoneySense programme, which provides impartial financial education for young people, celebrated its 21st anniversary. To mark the occasion, MoneySense was redeveloped and relaunched on a new digital platform with brand new content.
In 2015, we also spent a great deal of effort and resource supporting small businesses and encouraging start-ups. In partnership with social enterprise Entrepreneurial Spark we opened four new entrepreneur hubs, with a further six to be launched throughout the UK in the next two years, including one in our HQ in Edinburgh opened in February. These business accelerators, which are based in our buildings, provide start-ups with free office space, mentoring and access to our networks. 7,000 entrepreneurs will be supported in this way over five years, helping to grow the economy and create jobs. In Scotland, we have also been supporting local charities and social enterprises through use of vacant space in our retained branch network.
The particular challenges of RBS impose heavy burdens on the Board of directors. Their time commitment is unusually high, even by the rising standards of European banking. I am very impressed by the dedication and skills which my colleagues bring to the role. They all serve on more than one committee, and their workloads are intense. I look forward to continuing to lead such a motivated and diligent team as we continue the recovery process through 2016.
“ Our brand franchises are strong and distinctive and there is much to build on as we refocus RBS on its core markets in the British Isles.”
Year one of our plan in 2014 was about getting cost out and improving our capital position. This gave us the platform to go further, faster in 2015 by exiting more businesses that didn’t fit our strategy, and accelerating improvements in our core bank. We delivered on both.
Like other banks, we continue to look for opportunities to resolve legacy conduct issues on terms we believe to be acceptable. We have recently added to our provisions in relation to residential mortgage-backed securities in the US (RMBS) and Payment Protection Insurance (PPI). We hope to conclude many of the remaining substantial conduct and litigation issues over the coming year, but the timing of many of these matters is not in our hands.
We have also improved our products and service for customers. Our new current account proposition – Reward – is a further step forward in terms of our offering, with our customers receiving 3% cashback on their household bills. This product is geared toward building stronger and deeper customer relationships.
Across our franchises we demonstrated further commitment to becoming a fair bank that earns the trust and loyalty of its customers. We launched a progressive three year fixed premium home insurance product, made £100 and £250 overdrafts available to an additional one million customers, and launched new cards for visually impaired customers that secured approval from the Royal National Institute of Blind People (RNIB).
2016 Targets Each year, the bank moves toward delivering stronger returns from a lower risk profile; our strategic priorities are at the core of this. For 2016, we have a new set of targets which ultimately underpin achieving the long-term target of being number one for customer service, trust and advocacy: Strength and sustainability: maintain bank CET1 ratio of 13%.
Customer experience: narrow the gap to No.1 for NPS in every primary UK brand.
Supporting growth: net 4% growth in PBB and CPB customer loans.
Employee engagement: raise employee engagement to within two points of GFS norm.
In Commercial Banking, we will continue to shift capital toward business that delivers higher quality returns, and cement our position as the number one bank for UK business.
RBS International is another strong franchise. The solid returns in this business will become an increasing feature of our profit mix over the coming years.
The sale of our international private banking business in 2015 means we can accelerate the repositioning of our UK private bank so it delivers better returns.
The separation and eventual divestment of Williams & Glyn remains a top priority for us. We will not now achieve our planned separation until after the previously announced Q1 2017 but remain committed to full divestment by the end of 2017. Separation of this business is a complex process and we continue to invest sizeable resources.
We have previously said that we are in phase two of our plan, working through as many of the remaining conduct and restructuring issues as we can. This is a tough but important part of our plan and we are determined to get through it as quickly as possible.
We will then move to the third phase as a strong, simple and fair bank that delivers solidly on the needs of its customers and shareholders.
Our Corporate & Institutional Banking business also earns income from trading activities supporting its provision of financing and risk management services to customers, particularly Rates, Currencies and Financing. We do business in competitive markets but we have strong franchises and good growth opportunities, and we aim to target our investment to maximise these opportunities.
Our Personal & Business Banking and Commercial & Private Banking franchises provide services to over 17 million personal and business customers in the UK and to over 1 million personal and business customers in the Republic of Ireland. Our Corporate & Institutional Banking business focuses on large corporate clients operating in the UK and Western Europe, as well as serving global financial institutions.
Customer Franchises Our three customer-facing franchises are primarily responsible for defining the strategy and financial plan of their business and ensuring it is aligned with the wider RBS strategy. Teams define and deliver the customer proposition and are accountable for end-to-end customer processes and products. The teams partner with functions to specify functional requirements that deliver on customer needs.
Our Priorities We have a long way to go to be the bank that our customers deserve. But we are in a period of very significant, positive change. We have millions of great customers, tens of thousands of outstanding employees. By building on this foundation, we can achieve our ambition to be number one for customer service, trust and advocacy in all our chosen markets.
Customer experience No.1 for service, trust and advocacy Narrow the gap to No.1 for NPS
Phase 2 – 2015/16 Improve our core businesses and deal with Citizens, Capital Resolution, and Williams & Glyn exits
• Cement customer-centric positioning – #1 for customer service, trust and advocacy by 2020
• Achieve attractive, balanced and sustainable financial returns – target 12+% RoTE in 2019
• Pay out surplus capital above 13% CET1 ratio subject to PRA approval (1)
Notes: (1) During the period of restructuring. (2) Excluding litigation and conduct costs, restructuring costs, write down of goodwill and other intangible assets and the operating costs of Williams & Glyn.
Our Values are universal and guide our actions every day, in every part of our business. The values are the foundation of how we work at RBS.
�We know we succeed only when our customers and communities succeed.
Customer orientation The organisation will be easy and effective for customers.
Sticking to a long term investment plan to address a complex technology environment
Customer trust (6) NatWest (England & Wales) 41% 44% 48% 46%
We also use independent experts to measure our customers’ trust in the bank. Each quarter we ask customers to what extent they trust or distrust their bank to do the right thing. The score is a net measure of those customers that trust their bank (a lot or somewhat) minus those that distrust their bank (a lot or somewhat). Customer trust in RBS is at its highest in two years and NatWest has also improved.
RBS remains committed to achieving its target of being number one bank for customer service, trust and advocacy by 2020. In recent years, RBS has launched a number of initiatives to make it a simple and fair bank to do business with, and it continues to deliver on the commitments that it made to its customers in 2014.
We use independent surveys to measure our customers’ experience and track our progress against our goal in each of our markets.
Driven by strong export performance, growth in Ireland accelerated sharply to around 7.0% in the first three quarters of 2015, its fastest rate since before the crisis. Unemployment fell to under 10%, which, while materially below the recession peak of 15% remains high by the standards of the past. House price inflation moderated from 16.3% in 2014 to 6.6%, reflecting a continuing imbalance between supply and demand.
The UK economy grew by 2.2% in 2015, its average of the last 40 years. In a healthy job market, the number of people in work rose by more than 500,000 and unemployment fell to 5.1%. For the first time in six years there was meaningful wage growth, averaging 2.0%. Businesses’ profits were as strong as at any point since the 1990s, at least outside the oil and gas sector, and business investment continued to rise. House prices grew by around 8%.
Personal & Business Banking (PBB) comprises two reportable segments: UK Personal & Business Banking (UK PBB) and Ulster Bank RoI.
In addition, RBS will continue to manage and report Capital Resolution separately until disposal or wind down.
• Operating expenses of £4,606 million included £959 million of provisions for customer redress, principally in relation to Payment Protection Insurance, as well as £182 million of restructuring costs. Adjusted operating expenses of £3,465 million were down 3% from 2014.
• Credit conditions remained benign, with modest net impairment releases in the UK and substantial releases in RoI, albeit lower than in 2014.
• PBB continued to improve and develop the NatWest mobile banking app, becoming the first UK bank to enable customers to log in using their fingerprint with Touch ID and adding enhanced functionality on real time registration, Apple Pay and PAYM.
With Apple Pay, customers can now shop using just their mobile phone.
So now if you leave your wallet at home, it need not ruin your day.
Performance overview • Adjusted operating profit of £1,708 million was down 11%, with lower income partially offset by reduced litigation and conduct costs. Operating profit of £1,001 million was impacted by a goodwill impairment charge of £498 million attributed to Private Banking.
• Total expenses of £3,182 million included £146 million of restructuring costs (up 26% from 2014) and £63 million of conduct and litigation costs (down 69% from 2014). Adjusted operating expenses increased by 3% to £2,475 million.
• Opened four Entrepreneur Hubs across the UK, increasing our involvement to seven, enabling entrepreneurs and small businesses to access free office space, mentoring and financial support, with a further five hubs to be opened in 2016.
A campus fit for a king Established in 1829, King’s College London has an illustrious history, with alumni including John Keats and Florence Nightingale.
This strong relationship helped the bank and the University work together to raise the funding to redevelop the campus and create a new business school.
Zoopla Property Group (ZPG) is a digital media and lead generation platform that owns and operates some of the UK’s most widely recognised and trusted digital brands including Zoopla, uSwitch and PrimeLocation. Its mission is to be the most useful resource for consumers and the most effective marketing channel for related business partners.
The Corporate & Institutional Banking (CIB) business has a core focus on UK and Western Europe corporates and global financial institutions, shaped around three product lines: Rates, Currencies and Financing. The business is undergoing a multiyear transformation, which was launched in 2015.
• Rates income declined, reflecting the reduced scale and risk appetite of the business. Currencies incurred losses when the Swiss Central Bank unexpectedly removed the Swiss Franc’s peg to the Euro. Financing was impacted by the strategically reduced corporate footprint especially in the US and by lower levels of EMEA investment grade issuance.
• RWAs reduced by £8.8 billion to £33.1 billion compared with £41.9 billion, nearing the end-state target of c.£30 billion. The reduction was primarily driven by the transfer to Commercial Banking of the UK and Western European portfolio business.
Building a better bank that serves customers well • CIB managed the largest liability management exercise in Europe in 2015 whilst raising approximately £50 billion for customers in debt capital markets in 2015.
A consortium, Cheung Kong Infrastructure Holdings and Power Assets Holdings, bought the business in 2013 and we recently helped them refinance part of that acquisition through the capital markets.
The deal means the company can now operate more cheaply. This is good for AVR, and for Dutch communities as the company is now able to bid more competitively for public authority waste contracts.
• Capital Resolution RWAs reduced from £95.1 billion to £49.0 billion, driven by significant reductions across CIB Capital Resolution and RCR, which primarily reflected disposals and repayment activity.
• Capital Resolution made an operating loss of £3,687 million, including income related disposal losses of £367 million, restructuring costs of £1,307 million together with litigation and conduct costs of £2,105 million primarily relating to additional provisions for mortgagebacked securities litigation in the US. Adjusted expenses were reduced by £481 million, or 24% to £1,539 million, principally reflecting a fall in headcount of approximately 1,100. Net impairment releases of £725 million were recorded, primarily in RCR driven by the disposal strategy and favourable market and economic conditions.
Building a better bank that serves customers well • CIB Capital Resolution consists of three regional businesses (Americas, EMEA and APAC), Shipping, Markets assets, Other legacy assets including Saudi Hollandi Bank and Global Transaction Services.
• RCR consisted of four asset groups: Ulster Bank (RCR Ireland), Real Estate Finance (ex. Ireland), Corporate and Markets. The remaining funded assets are included in Capital Resolution and RCR ceases to exist (following formal approval by the PRA).
RBS became an official partner of Sport Relief in summer 2015, and September saw the first bank-wide fundraising event for the charity. Almost 750 colleagues from right across the business took part in the London to Edinburgh cycle challenge. Colleagues chose to cycle the full 500 miles, or 100 or 35 mile stretches, with hundreds more also taking part in static bike challenges, bake sales and other fundraising activities in our buildings across the UK.
RBS employee Howard Fairclough shared his experience of the challenge: “Fantastic day, although my thighs might not agree. In terms of staff engagement this was the best event I’ve taken part in, in my 29 year career with the bank.”
RBS Capital Resolution (RCR) Board Oversight Committee Provides oversight of RCR’s progress against, and compliance with, its primary objective and asset management principles. The RCR BOC met for the final time in January 2016 to finalise the closure of RCR.
Sustainable Banking Committee Provides support to the Board in overseeing actions being taken by management to run a sustainable long term business, with specific focus on culture, people, customer, brand and Environmental Social and Ethical issues.
Group Nominations Committee Assists the Board in the selection and appointment of directors. It reviews the structure, size and composition of the Board, and the membership and chairmanship of Board committees. It considers succession planning taking into account the skills and expertise which will be needed on the Board in future. In 2016, the Nominations Committee will be replaced by the Nominations and Governance Committee, which has an expanded remit including governance oversight.
UK Corporate Governance Code Throughout the year ended 31 December 2015, RBS has complied with all of the provisions of the UK Corporate Governance Code issued by the Financial Reporting Council dated September 2014 except in relation to provision (D.2.2) that the Group Performance and Remuneration Committee should have delegated responsibility for setting remuneration for the Chairman and executive directors. RBS considers that this is a matter which should rightly be reserved for the Board.
Our Board The Board has eleven directors comprising the Chairman, two executive directors and eight independent non-executive directors, one of whom is the Senior Independent Director. Biographies for each director can be found on pages 37 to 40.
In September 2015, Howard Davies was appointed Chairman of RBS, succeeding Philip Hampton. Mike Rogers was appointed to the Board on 26 January 2016.
• Risk-weighted assets fell 32% in the year to £243 billion.
• The Common Equity Tier 1 (CET1) capital ratio increased by 430 bps to 15.5% and the leverage ratio increased by 140 bps to 5.6%.
• Risk elements in lending (REIL) fell to £12.2 billion, representing 3.9% of gross customer loans, down from 6.8% at 31 December 2014.
• RBS continued to reduce risk concentrations, notably in sectors such as Oil & Gas and Commercial Real Estate as well as in the Eurozone periphery countries.
• Good progress was made in de-risking the balance sheet as a result of the continued run-down or sale of certain businesses and higher-risk or capitalintensive assets.
• Citizens was fully divested resulting in a total RWA reduction of £63 billion.
• Capital Resolution reduced RWAs to £49 billion at 31 December 2015 from £95 billion at 31 December 2014, with substantial progress seen across exit portfolios. RCR reached its targeted run-down for 2015 with a total RWA reduction of £38 billion since launch and a £13.5 billion reduction in 2015.
In the Bank of England (BoE) 2015 stress test, RBS’s transitional Common Equity Tier 1 (CET1) capital ratio under the hypothetical adverse scenario was 6.1% after the impact of management actions, above the 4.5% post-stress minimum CET1 capital ratio threshold set by the BoE. Taking into account the capital actions achieved in 2015 and those planned in the future, RBS did not need to alter its current capital plan as a result of the stress test, including the requirements relating to its Individual Capital Guidance (ICG). RBS’s Tier 1 leverage ratio under the hypothetical adverse scenario was 2.9%. After the impact of management actions, the ratio was 3.0%, which met the 3.0% post-stress minimum Tier 1 leverage ratio threshold set by the BoE.
Effective risk management plays a central role in the successful development and execution of RBS’s strategy. Risk appetite is set in line with the overall strategy and approved by the board while the risk management framework identifies and manages current and emerging risks that could materially affect the delivery of our strategy.
have a material negative impact: a UK recession including large house price falls; vulnerabilities in emerging market economies, including China, resulting in contagion in RBS’s core markets; global deflation; volatility in international markets linked to advanced economy interest rate increases or decreases; a resumption of the eurozone crisis, including a worsening of the situation in Greece; and major geopolitical instability. To mitigate these risks, RBS has strengthened its capital, liquidity and leverage positions. A number of higher-risk portfolios have been exited or reduced. Stress testing is used extensively to inform strategic planning and risk mitigation relating to these risks.
• Risks related to the UK referendum on EU membership: The referendum on the UK’s membership of the EU during this parliament increases economic and operational uncertainty. The result may also give rise to further political uncertainty regarding Scottish independence. RBS actively monitors, and considers responses to, varying EU referendum outcomes to ensure that it is well prepared for all eventualities.
• Failure of information technology systems: RBS’s information technology systems may be subject to failure. As such systems are complex, recovering from failure is challenging. To mitigate these risks, a major investment programme has significantly improved the resilience of the systems and more benefits are expected. Back-up system sustainability has improved, and a ‘shadow bank’ system, to provide basic services, if needed, has been created.
Given the bank is subject to regulatory oversight, we are also required to meet regulatory standards of capital and liquidity adequacy and stress test thresholds under severe but plausible conditions, which have also informed our assessment.
The bank’s business and strategic plans provide long term direction and are reviewed on at least an annual basis, including multi-year forecasts showing the expected financial position throughout the planning horizon. The base plans show that the bank has sufficient capital and liquidity resources over the three year assessment period. As part of the planning process, a realistic downside scenario (a variant of the base case, not a stress scenario) is also presented. The bank also has sufficient capital and liquidity resources under this downside scenario.
In accordance with provision C.2.2 of the UK Corporate Governance Code, the directors have assessed the viability of the bank taking account of the current position of the bank, the Board’s assessment of the bank’s prospects, and the bank’s principal risks, as detailed on pages 30 and 31.
RBS and NatWest support more businesses in the UK than any other bank, but we are determined to do more to get behind the entrepreneurs and businesses that power the UK economy. One of the ways we’re doing this is through our partnership with Entrepreneurial Spark, the free business accelerator programme. By the end of 2015 there were seven business accelerator hubs in Brighton, Birmingham, Bristol, Leeds, Glasgow, Edinburgh and Ayr and we will open six more around the UK by 2017. These hubs offer free workspace, hands-on mentoring, a start-up ‘bootcamp’ and a free programme of up to 18-months of advice, support and funding clinics for entrepreneurs and high growth businesses.
2015 also marked the successful conclusion of our Inspiring Enterprise initiative. In 2012 we began supporting and helping to fund organisations that work with young people, women and social enterprises to help them develop and progress their business ideas. By the end of the three year period, our support had directly contributed to the creation of 2,173 new businesses across the UK and we exceeded our initial targets by assisting 114,059 young people, 28,365 women and 5,349 social enterprises to develop their ideas and take their next steps on their enterprise journey.
Inclusion Building a more inclusive bank is essential for our customers and colleagues. Our inclusion policy standard applies to all our people globally.
One of our most established initiatives is MoneySense, which is one of the longest running financial education programmes for young people in the UK and Ireland. Over 60% of secondary schools were registered to use MoneySense in 2015, gaining access to a range of resources and interactive materials for teachers, staff volunteers and young people to help them get to grips with money and how to manage it. To celebrate the programme’s 21st birthday, we re-launched MoneySense to open it up to primary schools for the first time and introduced new materials to make learning about money more real, relevant and fun for 5-18 year olds. The programme continues to empower young people to take control of their own financial journeys and build financial capability throughout their lives.
focus on disability has led to the development of a comprehensive plan to support our colleagues and customers with additional needs and will help RBS achieve its ambition of becoming a ‘disability smart’ organisation. From an LGBT perspective, we continue to deliver improvements to our people policies and customer operating procedures, including the introduction of guidance to support employees going through gender transition, introducing the ‘Mx’ honorific, and improving our customer gender change process. We are finalising plans to improve our ethnic representation within senior roles and are continuing to support our 15,000 strong employee-led networks.
There were 701 ‘senior managers’, which comprises our executive employee population and individuals who are directors of our subsidiaries. The RBS Board of directors has eleven members, consisting of eight male and three female directors.
The RBS Code of Conduct ‘Our Code’ sets out the standards we expect our people to work to, including a clear commitment to respecting human rights. We conduct regular consultations with employees on key aspects of their working environment, and operate a confidential helpline facility that allows employees to discuss any matter of concern with regards to their wellbeing. We are an accredited living wage employer.
Our Environment, Social, Ethical (ESE) Risk policies include sector-specific human rights risk screenings and are regularly reviewed and updated to ensure best practice. We conduct due diligence on clients relating to human rights standards, and expect our clients to share our commitment to respecting human rights within their operations. In all sectors, we will not provide financial services to companies involved in harmful child labour or forced labour.
We also participate in projects with our peers through the Thun Group and UNEP FI to better understand and implement the human rights responsibilities of banks as defined by the UN Guiding Principles on Business and Human Rights. We have adopted and contributed to a number of internationally accepted codes, notably the Equator Principles and the UN Global Compact, which specifically address the management of human rights issues.
Emission factor data source DEFRA (2015), US Environmental Protection Agency eGRID (2014)
Total Scope 2 CO2e emissions (tonnes) 439,607 414,710 373,133 369,640 326,956 -26% -12%
Total Scope 1 & Scope 2 CO2e emissions (tonnes) 482,272 460,797 416,731 404,484 361,692 -25% -11%
Emissions of ozone-depleting gases (tonnes) 1,928 7,648 3,750 3,872 2,730 42% -29%
Notes: *Scope 1: Emissions from fluorinated gas loss and fuel combustion in RBS premises/vehicles. **Scope 2: Emissions from electricity, district heating and district cooling used in RBS premises. ***Scope 3: Emissions associated with business travel (air, rail and road) by RBS employees.
Bank of England from 1995 to 1997 and Chairman of the UK Financial Services Authority from 1997 to 2003. Howard was Director of the London
Commission and is also the author of several books on financial subjects.
External appointment(s): • Independent director of Prudential plc and chair of the Risk Committee
Between August 2012 and September 2013, he was Chief Executive Officer for UK Retail, joining from Commonwealth Bank of Australia where he was Group Executive for Retail Banking Services for five years. Prior to this he was Executive
Experience: Sandy spent his entire full-time career with Standard Life plc, retiring as group chief executive. An actuary, he has served his profession in a variety of roles and has also served as a director of the Association of British
Corporation and Xoom and as chair of the board of LECG Corporation. She has also worked at
External appointment(s): • Non-executive director and member of the compensation committee of Unisys
• Non-executive director, chair of the compensation committee and member of the audit committee of Diamond
Morten had a 34 year financial services career and held various roles at Royal Bank of Canada and its subsidiaries including Associate Director at Orion Royal Bank, Vice President, Business
President, Group Risk Management and served as the Chief Credit Officer then Chief Risk Officer from 2004 to 2014. He was also previously a
• Non-executive director and member of the audit and nomination committees of SuperGroup plc
External appointment(s): • Non-executive director and chairman of the audit committee of BP plc
Premier Banking and UK Retail Banking. Mike is currently Chief Executive of Liverpool Victoria
The Board is supported by the Executive Committee comprising the executive directors and other senior executives. Details of the composition of the Executive Committee and biographies of its members can be found at rbs.com>about us>corporate governance>ce and board>executive committee.
The Board has eleven directors comprising the Chairman, two executive directors and eight independent non-executive directors, one of whom is the Senior Independent Director.
July 2015 and assumed the role of Chairman on 1 September 2015. Mike Rogers was appointed as a non-executive director and a member of the Sustainable Banking Committee on 26
RBS and delivery of sustainable shareholder value. The Board’s terms of reference include a formal schedule of matters specifically reserved for the Board’s decision and are reviewed at least annually. The terms of reference are available at rbs.com>about us.
The role of Chairman is distinct and separate from that of the
Chief Executive and there is a clear division of responsibilities with the Chairman leading the Board and the Chief Executive managing RBS’s business day to day.
Governance Officer and Board Counsel, ensure that members of the Board receive accurate, timely and clear information, to enable the Board to lead RBS, take sound decisions and monitor effectively the performance of executive management; • ensure that the performance of individual directors and of the Board as a whole and its committees is evaluated regularly; and
Along with the Chairman and executive directors, the nonexecutive directors are responsible for ensuring the Board fulfils its responsibilities under its terms of reference. The nonexecutive directors combine broad business and commercial experience with independent and objective judgement and they provide independent challenge to the executive directors and the leadership team. The balance between non-executive and executive directors enables the Board to provide clear and effective leadership across RBS’s business activities.
Aileen Taylor is the Chief Governance Officer and Board Counsel and is also the Company Secretary. Reporting directly to both the
Chairman and the Chief Executive, she provides support and advice to the Board on a broad range of strategic and governance issues. She acts as a trusted advisor in the effective functioning of the Board, ensuring appropriate alignment and information flows between the Board and its committees, including the Executive Committee. As Board Counsel, she is responsible for delivery of commercial corporate governance support and related legal advice to the Board and overseeing the provision of legal advice to the Board by the General Counsel.
• leading on implementation of recommendations from the annual Board evaluation.
Situational conflicts can be authorised by the Board in accordance with the Companies Act 2006 and the company’s
Details of all directors’ conflicts of interest are recorded in a register which is maintained by the Chief Governance Officer and
The Board is structured to ensure that the directors provide RBS
Board, which is co-ordinated by the Chief Governance Officer and Board Counsel. This includes visits to RBS’s major businesses and functions and meetings with directors and senior management. Meetings with external auditors, counsel and stakeholders are also arranged as appropriate. Each induction programme has a core element that the director is required to complete, with the remainder of the programme tailored to the new director’s specific requirements. A list of example meetings arranged during an induction programme for a new director is set out below: Chairman
Internal training relevant to the business of RBS is also provided.
Committee and Board Risk Committee schedule (details of which can be found on pages 50 and 56) and all non-executive directors are invited to attend. Directors undertake the training they consider necessary to assist them in carrying out their duties and responsibilities as directors.
Chairman and directors and is satisfied that they are able to allocate sufficient time to enable them to discharge their duties and responsibilities effectively. The time commitment currently required of our non-executive directors continues to be significant.
In 2015, the Board and committee evaluation process was externally facilitated by Condign Board Consulting Limited, a specialist board evaluation consultancy which was selected following a competitive tender process. The Board is satisfied that Condign has no other connection with RBS.
The external facilitator undertook a formal and rigorous evaluation by: • using a tailored discussion guide to structure individual meetings held with each director, as well as the Chief
• outlining outcomes and suggesting areas for improvement through a written report and oral presentation to the Board.
Amongst the areas reviewed were Board dynamics, culture and engagement; Board and committee meetings and processes
The 2015 performance evaluation concluded that the Board was strong and operated effectively and within its terms of reference.
The evaluation highlighted the continuing need to ensure the right preparations take place before a paper reaches the Board. It also highlighted the challenge of achieving an appropriate balance between Board and Committee agendas to ensure the best use of directors’ time and to support effective decision-making.
Board. An action plan has been agreed to progress these recommendations, as appropriate, during 2016. Key actions include: • Creation of a Nominations and Governance Committee, adding a governance oversight function, and streamlining processes and membership.
• A focused review of Board and committee agendas and their supporting information and processes.
insights and experience fully. This in turn will allow sufficient space for focus on RBS’s onward priorities, particularly its customers.
The Chairman met with each director individually to discuss their own performance and ongoing professional development and also shared peer feedback provided as part of the evaluation process. Separately, the Senior Independent Director sought feedback on the Chairman’s performance from the nonexecutive, executive directors and key external stakeholders and discussed it with the Chairman.
Director and the chairmen of the Board committees are available to answer questions at the Annual General Meeting.
Remuneration Committee communicate shareholder feedback to the Board. The directors also receive reports reviewing share price movements and performance against the sector. Detailed market and shareholder feedback is provided to the Board after major public announcements such as a results release. The arrangements in place are to ensure that directors develop an understanding of the views of major shareholders and that these are considered as part of the annual Board evaluation.
The Group Nominations Committee reviews the structure, size and composition of the Board, and membership and chairmanship of Board Committees. The Committee engages with external consultants, considers potential candidates and recommends appointments of new directors to the Board. The terms of reference of the Group Nominations Committee are reviewed annually, approved by the Board and are available at rbs.com.
Board. The Chief Executive and the Chief Financial Officer are invited to attend meetings.
The Group Nominations Committee holds at least two scheduled meetings per year, and also meets on an ad hoc basis as required. In 2015, there were four Group Nominations Committee meetings, three of which were chaired by Philip Hampton, and individual attendance by directors at these meetings is shown in the table below. In addition a number of ad hoc meetings were held to discuss Chairman succession prior to my appointment.
Group was appointed to support the search for further nonexecutive directors in future and the EZ engagement will come to an end. JCA Group does not provide search services to any other part of RBS.
The CIB Board Oversight Committee first met in March 2015 to oversee the strategic change programme for the Bank’s CIB
business, including monitoring execution risk and external stakeholder management. Robert Gillespie chairs the Committee.
Gillespie, Penny Hughes and Baroness Noakes are members. It is anticipated that this Committee will be stood down once the
The 2015 performance evaluation was independently facilitated by Condign Board Consulting Limited, a specialist board evaluation consultancy. The Committee has considered and discussed the outcomes of this evaluation.
Committee continued to operate effectively although some areas for potential improvement were identified.
A summary of the key themes arising from the evaluation is set out below together with an overview of the key actions proposed: Key themes
Areas of focus for the Committee during 2016 will include the key themes identified during the external evaluation process, as set out above.
Governance Committee. The Board also approved changes to the composition of the Committee, effective as at 26 January 2016. I continue in my role as chairman of the Committee with membership now comprising Sandy Crombie, Alison Davis,
Robert Gillespie and Brendan Nelson. The Group Nominations and Governance Committee held its first meeting in February
Dear Shareholder, 2015 has been another significant year for the bank as it progresses on its journey to becoming number one for customer service, trust and advocacy. I am pleased to report that the
Following consideration of these matters ahead of the 2015 results, it was determined that a public announcement was appropriate and the Group Audit Committee recommended that the Board release a trading statement to the market on 27
January 2016. The Committee also supported the proposal to change the bank’s reporting segments based on the six segments within the bank’s three core franchises, plus Capital
Resolution and Williams & Glyn. This re-segmentation reflects the manner in which the bank is now managed.
As part of our overall assessment of the Annual Report and
In line with the requirements of the Code and related FRC
Financial & Business Reporting, the Committee has reviewed and reported to the Board on the effectiveness of RBS’s internal controls. While there has been increased focus and attention during 2015 from management on addressing and closing identified deficiencies, some known issues continued to impact internal controls during 2015 as set out in the report that follows.
While it is clear that execution of the bank’s simplification strategy will deliver benefits, the transformation programme is unprecedented in scale and the Committee has monitored the impact of such significant change upon the control environment of the organisation during the year. The Committee has reviewed reports from Internal Audit assessing progress of the bank’s major change programmes and where appropriate has challenged management regarding the associated impact on controls.
Embedding robust controls, driving the correct risk behaviours and ensuring the effectiveness of the three lines of defence remains a work in progress across RBS and, in conjunction with the Board Risk Committee, will continue to be priority areas for the Group Audit Committee during 2016.
I would like to thank Deloitte for their work as auditor of RBS and its subsidiaries over the past 16 years and for their professionalism in securing an orderly handover to EY.
“a priority of the Committee has been to monitor the impact of transformation on the bank’s control environment.”
The members of GAC are selected with a view to the expertise and experience of the Committee as a whole and with proper regard for the key issues and challenges facing RBS.
The Board is satisfied that all GAC members have recent and relevant financial experience and that each member of the
Committee is independent as defined in the SEC rules under the
US Securities Exchange Act of 1934 (the “Exchange Act”) and related guidance. The Board has further determined that Brendan
Other executives, subject matter experts and external advisers were also invited to attend, as required, to present and advise on reports commissioned by the Committee. The Committee also met privately with the external auditors and separately with
and Internal Audit plus visits to: PBB; CPB; CIB; Services; Finance; and Restructuring.
Risk Committee, undertook a visit to India which has over 14,000 staff and contractors engaged in significant back office activities.
During the week-long trip the Committee spent time in both Delhi and Chennai meeting with local management teams to discuss key risk and control matters in the country. Specific sessions were held with the following local teams: Internal and External
A small number of general recommendations which are relevant for both the Board and its senior committees were made. Key themes and actions arising from these general recommendations are set out in the Board report on pages 45 and 46 and will be considered, and addressed as appropriate, at Board level.
The Committee also tracked progress on the implementation of the recommendations from the 2014 Committee effectiveness evaluation during the year to ensure successful delivery.
The Group Audit Committee focused on a number of salient judgements and reporting issues in the preparation of the 2015 accounts, in particular, the Committee considered: • the capital impact and accounting treatment of committed pension obligations in light of accounting developments during 2015, including the issue of exposure draft amendments to IFRIC 14. In light of these changes, the Committee supported the decision to amend the accounting policy for pensions and to apply this retrospectively leading to the recognition of an additional liability in the 2015 year end accounts in relation to committed future pension payments; • provision and disclosure for ongoing regulatory and litigation actions: including foreign exchange trading; retail mortgage backed securities litigation in the US; UK shareholder actions; and Payment Protection Insurance
(PPI). Following discussion, the Committee was satisfied that it would be appropriate to take further incremental provisions against both retail mortgage backed securities litigation and PPI in the 2015 year end accounts; • the going concern basis of accounting including considering evidence in relation to RBS’s capital, liquidity and funding position. The Committee supported the directors’ going concern conclusion. Further information is set out on page 89; • the revised UK Corporate Governance Code requirement to make a longer-term viability statement in the 2015 report and accounts. The Committee considered the processes to support the assessment of principal risks; assessed the company’s prospects in the light of its current position and the identified principal risks; selected the time period to be covered by the statement; and reviewed the disclosure on behalf of the Board; • the adequacy of loan impairment provisions, focusing in particular on judgements and methodology applied to provisions. The Committee was satisfied that the overall loan impairment provisions and underlying assumptions and methodologies were reasonable and applied consistently; • valuation methodologies and assumptions for financial instruments carried at fair value including RBS’s credit market exposures and own liabilities assessed at fair value; • the level of goodwill and other intangible assets to be carried. Following discussion and based on year end testing, the Committee supported recognition of an impairment in goodwill attributed to Private Banking driven primarily by weaker forecast future profitability for Private Banking; • the judgements that had been made by management in assessing the recoverability of deferred tax assets, in light of continued execution of the bank’s strategy and changes to the UK corporate tax system; • the assessment by management of the adequacy of internal controls over financial reporting, and assessment of identified deficiencies. Weaknesses had been identified in user access controls relating to certain IT
• the quality and transparency of financial and risk disclosures contained within the Annual Report and
Accounts to the Board for approval. Consideration was given to the comprehensive review process that supports both the Group Audit Committee and ultimately the Board in reaching the conclusion that the disclosures taken as a whole were fair, balanced and understandable and provided the information necessary for shareholders to assess the company’s position and performance, business model and strategy. The review process included: central coordination of the Annual Report and Accounts by the Director of Finance with guidance on requirements being provided to individual contributors; review of the Annual Report and Accounts by the Executive Disclosure
Auditor considered the Board’s statement as part of its audit requirements.
The Committee reviewed the effectiveness of RBS’s internal controls at both Group-wide and business/functional levels. This was undertaken via scrutiny of the first line of defence’s actions and plans in respect of internal controls and consideration of reports from the second and third lines of defence.
The Committee considered the outputs of bi-annual self-assessments of the robustness of the internal control environment for the bank's customer-facing businesses, and customer support and control functions.
In conjunction with the Board Risk Committee, the Committee also continued to monitor the remediation of the
Markets Control Environment to address some of the deficiencies as set out in the report of the Board Risk
Committee report. The Committee received separate reports from management on progress in this area.
Reports on the work underway to fully embed the three lines of defence model within the organisation were considered by the Committee. Particular attention was given to the articulation of responsibilities and accountabilities of the first and second lines of defence. This will remain a focus of the Committee in 2016.
The Committee received quarterly updates on risk assurance activities and monitored the deliverables of the credit risk assurance team.
The Committee monitored progress of the Coutts Control Remediation Programme, established to drive improvements to the control environment in Private Banking; progress was made on the delivery of the end-to-end credit process.
The Committee considered regular reports on material litigation and regulatory investigations and on the work of the Sensitive Investigations Unit.
applications within the bank; these deficiencies did not lead to the identification of any errors in the financial statements. Action is being taken by Management to improve these processes.
The Committee received quarterly reports and opinions from Internal Audit throughout 2015 on the overall effectiveness of the governance, risk management and internal control framework, its control environment ratings, details of emerging and iterative issues and the adequacy of remediation activity. Reports also included assessments of the bank’s management control approach (being a measure of how management ensures that risks are understood, assessed and mitigated in a transparent and efficient manner). The Committee requested an additional report from Internal Audit on matters which could potentially cause the bank’s overall control environment rating to deteriorate.
Minor changes to Internal Audit’s charter were approved by the Committee and it confirmed the independence of
Approval of Deloitte’s 2015 Audit Agreement, audit engagement plan and 2015 audit fees including its fee for the review of the 2015 interim results, as authorised by shareholders at the Annual General Meeting.
The Committee made recommendations to the Board on the transition of external auditors and appointment of EY
achieved the requisite independence from RBS in June 2015. The Board will recommend the appointment of EY
as external auditor to shareholders for approval at the Annual General Meeting.
As EY transitions towards being appointed the bank’s external auditor, it has been subject to the full audit/nonaudit services policy since reaching the point of independence from the bank in June 2015. Prior to that, all engagements of EY for non-audit services work were approved by either the Financial Controller or Committee
• as part of the preparations for a possible future sale of HM Treasury’s shareholding in RBS, it is possible that a prospectus would be prepared for which the Group and Directors would have statutory responsibility and uncapped liability. In order to comply with relevant UKLA rules on such activities, a working capital report from an independent reporting accountant on RBS’s financial projections was required to be included in a circular to shareholders. The appointment of the External Auditor offered significant synergies in undertaking the reporting accountant role and preparing the working capital report having undertaken audit procedures on the Group’s forecasts and budgets for the five years ending 31 December 2019 (Deloitte).
I would like to begin by thanking my colleagues on the Board
Risk Committee for their contribution and support during 2015. It has been another challenging year. The report which follows describes how the Committee discharged its responsibilities in 2015 and provides details of the key issues considered and debated during the year. I will also highlight some of the key themes below.
Committee and we dedicated significant time to monitoring execution risk on behalf of the Board. During 2015, we received regular updates from the project team and considered the impact of the programme on the bank’s change risk profile and control environment. We made recommendations to management in relation to governance and prioritisation and requested focus sessions on the key work streams under the programme.
Board, we approved the main regulatory filings for the Williams &
Remediation and Conduct Regrettably, customer experience was impacted again by an IT
The conduct issues that have impacted the bank’s recovery and reputation continued to be of concern in 2015. We oversaw the remaining internal and regulatory investigations into the manipulation of foreign exchange markets and were kept appraised of the negotiations that culminated in the announcement of settlements with two US regulators in May
Risk Culture A strong culture risk is fundamental to achieving our strategic objectives for our customers, employees and wider stakeholders and was a key focus of the Committee this year. We reviewed the outputs of benchmarking surveys by both McKinsey and PwC
in this area and discussed and agreed the dimensions of the bank’s target risk culture prior to consideration by the full Board.
Risk culture standards will ultimately be linked to the bank’s people and leadership standards and wider industry standards.
Other Other material areas of Committee focus during the year have included: • internal and external stress testing exercises and capability; • the risk appetite framework of RBS and individual risk appetite statements for material risks, franchises and functions; • improvements to the Operational Risk Management
More detailed information on each of these areas is set out in the
“a strong risk culture is fundamental to achieving our strategic risk objectives for our customers, employees and wider stakeholders”
Baroness Noakes (Chairman) 9/9 Morten Friis 9/9 Robert Gillespie (1) 8/9 Penny Hughes 9/9 Brendan Nelson 9/9
Mr Gillespie was unable to attend owing to a clash with a Citizens Financial Group Inc. Board meeting.
Hughes chairs the Sustainable Banking Committee. This common membership across Committees ensures effective governance across all risk, finance, reputational and remuneration issues, that agendas are aligned and that overlap of responsibilities is avoided where possible.
Executive. The lead partner of the External Auditor also became a regular attendee of all meetings from January 2015 onwards.
The Committee also held in-depth sessions on risk reporting, risk appetite, economic capital and an education session on stress testing.
Committees, including the Board Risk Committee, was conducted by Condign Board Consulting Limited, an external consultant, in 2015. The Committee has considered and discussed the outcomes of this evaluation. Overall the review concluded that the Board Risk Committee continued to operate effectively.
Consideration of execution risk of the bank-wide transformation programme and the impact of mandatory change programmes on the programme. The Committee requested regular updates from the transformation team on progress including independent opinions from Risk Management, Internal Audit, HR and C&RA.
Credit Permission Applications (namely the Regulatory Business Plan, Business Strategy including five year financials, ILAAP, ICAAP and RRP) and oversaw the governance and assurance processes in place for the whole of the applications.
Risk regarding prioritisation and Board and management oversight. The Committee asked management to map transformation initiatives and in-flight programmes to the bank’s risk and control environment for use in future prioritisation considerations.
Review and recommendation of the 2015 Recovery Plan to the Board for approval prior to submission to the
Received updates on macroeconomic and geopolitical risks including developments in Russia, China, the removal of the Swiss Franc floor and the possible UK exit from the EU. The Committee also considered the implications of reduced secondary market liquidity, driven by changing market conditions, on the bank’s risk profile and control environment.
Chief Conduct and Regulatory Affairs Officer on current and material risks at each Committee meeting.
An in-depth session on risk reporting in July 2015 led to further recommendations for improvements to the monthly risk report. In response to a Committee request, the monthly MI pack will transition to a quarterly report during 2016, enabling more strategic insights to be highlighted. Management will continue to refine the data provided during 2016.
Detailed overviews of key risk types were provided to the Committee on a rotational basis. Topics covered in 2015 included reputational risk, market risk, operational risk, credit risk and country risk.
Oversight of progress to fully embed the Three Lines of Defence model and checking the project had an appropriate plan to deliver targeted results. The Committee is aware of the importance of staff understanding their roles and accountability and in conjunction with the Group Audit Committee, will oversee that the model continues to be reinforced across the organisation, placing particular emphasis on management’s identification and control of risk within the first line of defence.
(RDAR), which come into effect in January 2016, and recommended to the Board approval of the bank’s
Reviewed the progress of the Skilled Person’s review of the Global Restructuring Group (GRG) early in 2015.
This is now being overseen by a temporary GRG Board Oversight Committee and the Committee has received updates on progress.
Order issued by the Federal Reserve Bank of Boston) and the status of the investigation into the alleged misselling of Interest Rate Hedging Products.
The remediation programme established in response to the IT incident in June 2012 was closed in H1 2015 following completion of the major deliverables and based upon assurances from Risk, Internal Audit and also independent advice from PwC, that the work undertaken had been appropriate and sustainable. Residual issues will be monitored by Internal Audit and reported to the Committee by exception.
Considered the regulatory response to a systems incident in June 2015. A systems issue delayed a number of customer transactions over a two day period, as a result of software failure. Remedial actions have been taken following a post-incident review. The Committee considered its root causes and mitigation and will keep the residual risks under review.
The Committee also received reports on other conduct and regulatory issues including: • the remediation of issues arising within the former Markets Division, as part of the Markets Standards
• the remediation of identified trade and transaction reporting compliance and collateral management issues in CIB; • the implementation of the bank’s strategy to reduce the volume of customer complaints; • tax risk and European tax-related investigations; and
• status reports on Americas remediation issues. In particular, the Committee considered section 12 of the
US Bank Holding Company Act (BHCA) and its implementing rules (the ”Volcker” rule) and approved the bank’s Volcker compliance programme
The Committee exercises oversight of implementation of the new Senior Managers Regime across the bank and received reports on preparation and progress.
Consideration of credit, market and operational risks formed an integral part of the agenda of each meeting, with detailed MI demonstrating the impact on risk profile, presented within the monthly risk report.
Committee also separately received a report on Information Security and insights from an external industry expert on cyber risk. It reviewed the responses to the PRA and FCA Dear Chairman II Exercises and the subsequent letters from the PRA and FCA and made recommendations to the Board for approval prior to submission.
Exercised oversight of the bank’s data quality programme, which aims to measure the quality of the most important data in the bank and to remediate data quality issues. The Committee noted the progress made. A
detailed plan will be presented to the Committee in Q1 2016.
The Committee regularly reviewed the capital and liquidity position of the bank. This included reviewing the
and Internal Audit’s assurance opinion on the adequacy of the processes supporting their preparation and recommending that the Board approve these submissions to the PRA.
Considered the bank’s contingency funding plan and recommended it to the Board for approval.
Conducted visits to Risk and C&RA and considered people engagement, resources and budget, bench strength and succession planning and the control environment of both functions.
Continued to provide strategic risk oversight over performance and remuneration arrangements, working closely with the Group Performance and Remuneration Committee (RemCo). RemCo’s report on pages 64 to 83 includes further detail on how risk is taken into account in remuneration decisions. Key matters considered by the Committee included: • the risk and control objectives of members and attendees of the bank’s Executive Committee, with additional focus on underlying objectives for the Chief Risk Officer and the Chief Conduct & Regulatory
Affairs Officer; • an assessment of the risk/conduct performance of members and attendees of the bank’s Executive
The RBS Capital Resolution Board Oversight Committee was established following the creation of RBS Capital Resolution
of these assets from the balance sheet by the end of 2015 and 85% by the end of 2016.
The Committee’s role is to: • oversee the actions of RCR’s management, including implementation of RCR’s strategy; • review and report to the Board on RCR’s progress against and compliance with the primary objective (to eliminate the bank’s exposure to RCR assets) and the asset management principles (criteria for taking decisions on the reduction of capital and assets); • agree in consultation with the Group Performance and
The Chairman of the Committee is the Chairman of the Board
Risk Committee. The Senior Independent Director, the Chairman of RBS and the Chairman of the Group Audit Committee are members. Attendance at meetings is shown below.
RCR’s financial performance, outlook and delivery against the targets and asset management principles. There is a well established framework for quarterly reporting which includes impact on RBS‘s capital levels and impairment releases. Market conditions allowed for exits to be accelerated and the Committee received regular updates on progress and market conditions, as well as RCR's ability to execute and complete transactions efficiently. The Committee also received quarterly updates on key transactions and the exit strategy for assets deemed to pose higher operational risk. Customer, conduct and control environment considerations were also discussed regularly. The
In April 2015, the Committee discussed the RCR transfer/closure plan, noting requirements for the completion of RCR and how this would be evidenced to the relevant stakeholders. At the later meetings more detailed plans were considered, including regulatory expectations, internal audit approach and arrangements for reporting to the Board.
RCR substantially completed its work by the end of 2015. The
Committee met for its final meeting in January 2016 to finalise the transfer/closure of RCR. The RBS Board agreed closure of RCR
on the recommendation of the Committee, which confirmed its satisfaction that RCR had met its 85% asset reduction target.
Deloitte on RCR’s statement of assets as at 31 December 2015 and an opinion from Internal Audit. The relevant confirmations and information were provided to the PRA at the end of January
RBS continues to have a clear ambition to be number one for customer service, trust and advocacy in each of our chosen business areas. Delivery of this ambition depends in large part on our ability to demonstrate beyond question that we are a responsible company doing business in a sustainable way.
The Sustainable Banking Committee is primarily concerned with overseeing, supporting and challenging actions taken by management to run the bank as a sustainable business, capable of generating long term value for its shareholders.
The Committee will continue to operate at a strategic level, supporting and challenging the executive on their key priority of turning RBS into a customer centric bank. The work to strengthen our customer and employer brands will continue and culture will be a key focus, with the Committee reviewing actions being taken to deliver on the goals agreed by the Board.
My thanks go to the Committee members and attendees for their contribution and support in steering the work of the Committee through another challenging year.
Committee meetings in 2015 which were attended by senior representatives from the customer-facing franchises as well as
In addition to ongoing engagement which takes place across our business each day, the Sustainable Banking Committee runs a proactive engagement programme to which we invite external stakeholders to meet with, and challenge, the most senior decision makers in RBS. These discussions help shape future policies, influence strategic priorities and inform decision making across the Bank and will continue to play a key role. To date we have met with over 50 different groups of NGOs, civil society groups, government bodies, consumer groups and investors in this way. In particular, in 2015 we held four such stakeholder engagement sessions covering the following topics: • financial inclusion including the issue of debt and access to affordable credit; • the issues the Bank should prioritise to become number one for customer service, trust and advocacy; • the disintermediation of the banking sector and the increasing availability of alternative sources of finance; and
The Sustainable Banking Committee comprises three independent non-executive directors. The Chairman and members of the Committee, together with their attendance at meetings, are shown below.
Notes: (1) Required to attend Citizens Financial Group, Inc meeting. (2) Appointment with effect from April 2016.
The annual review of the effectiveness of the Board and its senior committees, including the Sustainable Banking Committee, was conducted by Condign Board Consulting Limited. The
The review also included a small number of general recommendations which are relevant for both the Board and its senior committees. Key themes and actions arising from these general recommendations are set out in the Board report on pages 45 and 46 will be considered, and addressed as appropriate.
• provide challenge on how well RBS is integrating sustainable banking into its business strategy and what is being done to foster a sustainable business for customers; • oversee customer centricity priorities including receiving reports on key customer metrics; • consider product sustainability, transparency and fairness; • receive reports on how RBS is supporting SMEs and oversee the approach to responsible lending and financial inclusion; Sustainability/emerging issues
• engage with key internal and external stakeholder groups on emerging sustainability issues; • approve the annual Sustainability Report and receive the external auditors’ assurance report; and
Annual statement from the Chairman of the Group Performance and Remuneration Committee 65
In November, changes were announced to the pay arrangements for customer-facing employees in Personal & Business Banking.
These changes are intended to reinforce the message that our employees should offer services and advice solely on the basis of what best meets the needs of the customer. Accordingly, we have removed incentives based on sales and other criteria from these employees, and instead have made a modest increase to their fixed pay. I believe this is a bold and significant step in our efforts to rebuild trust in RBS.
While pay remains an important and sensitive topic, an encouraging sign is that pay is not dominating discussions with shareholders in the way that it used to. I hope this reflects the efforts of the Committee in recent years to implement a remuneration policy that is simpler than before and strongly aligned to shareholders’ interests over the long term.
RBS is posting losses and continuing to deal with conduct and litigation issues from the past. Against this background, bonuses have fallen by over 72% across RBS and by over 90% in the investment bank since 2010. While the bonus pool has been coming down year on year, including a further reduction in 2015, it is important that RBS does not become too disconnected from industry norms. The Committee recognises the need to maintain a commercial approach to pay and reward the hard work by those employees who are helping to turn around RBS.
No changes are being made to the remuneration structure for executive directors at this time. Executive directors are not eligible for annual bonuses. Instead, for them and their most senior colleagues, variable pay continues to be delivered in longterm incentives, aligning to shareholder value over the long term.
Further guidance on remuneration practices has been published by the European Banking Authority (EBA) which will also be considered by the Committee when reviewing policy in 2016.
I would like to conclude by thanking my fellow Committee members and those who support the Committee for their commitment and guidance over the year. I am also grateful for the input received from shareholders which plays an important part in developing responsible pay practices.
“we believe the focus on culture and encouraging good behaviours will, in time, make a significant contribution to driving sustainable returns”
To provide customers with the best possible service, RBS is building a strong, simple and fair bank. Performance and pay management is part of that process and good progress was made on all three fronts during 2015.
RBS needs to build an engaged and inclusive workforce, capable of providing excellent customer service.
• Employee engagement is also targeted and 2015 results show an improvement of six points on 2014. RBS is now within three points of industry peers.
• Pay is not the only lever and employees are supported by wider people initiatives with over 13,000 employees undertaking the ‘Determined to Lead’ programme in 2015.
Simplifying RBS and the way it operates will reduce costs and our senior leaders are measured on this as part of their
• Any variable pay for executive directors is delivered as an
• 2015 is the first full year that RBS has been operating as a fully accredited living wage employer.
Committee can apply malus (reduction or cancellation of variable pay awards prior to payment) or clawback
• The Committee aims to strike a fair balance between adjustments to variable pay as a targeted measure to change behaviour whilst not disproportionately penalising employees who are not directly responsible for events. • Bonuses have continued to shrink at RBS, aligned with the restructuring that has taken place and the actions taken by the Committee, but a certain level is considered necessary in order to run a commercial and sustainable business.
Ross McEwan was granted an LTI award in March 2013 while
Further details on the performance measures for the LTI award to be granted in March 2016 are set out on page 75.
The full Directors’ Remuneration Policy was approved by shareholders at the AGM on 25 June 2014 and is available at rbs.com/about/board-and-governance.html. No changes are being made that would require shareholder approval at the AGM in 2016.
Base salary To aid recruitment and retention of high performing individuals whilst paying no more than is necessary. To provide a competitive level of fixed cash remuneration, reflecting the skills and experience required, and to discourage excessive risk-taking.
The rates for 2016 are unchanged: Chief Financial Officer - £800,000
Further details on remuneration arrangements for the year ahead are set out in the annual report on remuneration.
Individuals will receive shares that vest immediately subject to any deductions required for tax purposes and a retention period will apply. Shares will be released from the retention period in equal tranches over a five year period.
The fixed share allowance will broadly be paid in arrears, currently in two instalments per year.(1)
Also entitled to the use of a car and driver on company business and standard benefits such as holiday and sick pay.
Further benefits such as relocation allowances and other benefits (e.g. tax advice, housing and flight allowances and payment of legal fees) may be offered in line with market practice.
Variable pay is intended to incentivise superior long-term performance and promote the success of RBS, with rewards aligned with shareholders’ interests and adjusted for risk, based on the achievement of stretching performance measures.
Performance is assessed against a range of financial and non-financial measures to encourage superior long-term value creation for shareholders.
Any variable pay award made will be delivered in the form of a long-term incentive, paid in shares (or in other instruments if required by regulators) and subject to a combination of time and performance-based vesting requirements.
A minimum three year performance period will apply. The award will have an overall five year vest period, vesting equally in years four and five.
As a minimum, shares will be subject to deferral and retention periods as required by UK regulators.
For these purposes, awards will be valued in line with the EBA rules, including any available discount for long-term deferral.
The vesting level of the award could vary between on the achievement of performance conditions.
Committee discretion to reduce vesting amounts in light of underlying financial results, or conduct and risk management effectiveness.
Details of the performance measures for awards to be granted in 2016 are set out as part of the implementation of remuneration policy on
• Any incentive awards will be treated in accordance with the relevant plan rules as approved by shareholders. Any outstanding share awards held by ‘good leavers’ will vest, normally on the original vesting dates, and shares from the fixed share allowance will continue to be released over the applicable five year retention period in order to ensure former executive directors maintain an appropriate interest in RBS shares.
• Non-executive directors do not have service contracts or notice periods although they have letters of appointment reflecting their responsibilities and time commitments. No compensation would be paid to any non-executive director in the event of termination of appointment.
Under his letter of appointment, Howard Davies or RBS can terminate his appointment by giving notice, such notice to take immediate effect. In the event that his election or re-election is not approved by shareholders, the appointment will terminate automatically with immediate effect. No compensation or payment in lieu of notice will be payable upon termination of his appointment.
The Committee retains oversight of remuneration policy for all employees to ensure there is a fair and consistent approach throughout the organisation. The policy uses deferral, malus and clawback to promote effective risk management and alignment with shareholders’ interests.
Consultation on remuneration generally takes place with our social partners, including representatives from UNITE. RBS is a fully accredited Living Wage employer and we set our minimum pay (including benefit funding) higher than required for this.
An annual employee opinion survey takes place which includes a number of questions on pay and culture. This includes questions on how pay is determined and evaluated, including the need to consider both ‘what’ and ‘how’ outcomes have been achieved, and whether employees believe they are paid fairly for the work they do.
Fees To provide a competitive level of fixed remuneration that reflects the skills, experience and time commitment required for the role.
Chairman and nonexecutive directors can maintain appropriate independence, focus on long-term decision making and constructively challenge performance of the executive directors.
The level of remuneration reflects their responsibility and time commitment and the level of fees paid to directors of comparable major UK
Board Committees provided these are not greater than fees payable for the existing Board Committees as detailed in the annual report on remuneration.
No changes have been made to the underlying policy for 2016.
Long-term incentive (LTI) award calculated in line with regulatory cap (2)
US businesses for which he receives fees of £15,000 per annum. In terms of changes for 2016, the RCR BOC held its final meeting in
January 2016 and has been disbanded. The expectation is that the GRG BOC will be stood down during the course of 2016. A US Risk
The first meeting of the US Risk Committee will take place during 2016. The Group Nominations Committee has been replaced by the
Group Nominations and Governance Committee, with an expanded remit and a reduced number of members. This is to deliver a more streamlined nominations process and a stronger overall governance framework for the Board and its Committees.
Notes: (1) Benefits figure includes standard benefit funding of £26,250 per annum with the remainder being relocation expenses provided to Ross McEwan. (2) The value in 2015 for Ross McEwan relates to an LTI award granted in 2013. The performance conditions ended on 31 December 2015 and have been assessed as set out on the next page. The value for 2014 has been restated from the estimated value of £358,000 provided in the 2014 report to reflect the value on the vesting date in August 2015. (3) The amount shown for Ewen Stevenson in 2014 relates to an award made on appointment to replace the value of awards forfeited on leaving Credit Suisse. The award was delivered entirely in shares and subject to deferral, on terms that are no more generous than the terms of the awards replaced.
His change in role during the three year vesting period has resulted in a weighting of 25% based on performance of UK Retail and 75%
An assessment of performance of each relevant element was provided by the control functions and PwC assessed relative TSR
performance against a peer group of comparator banks. The Committee determined overall vesting based on these assessments including consideration of the drivers of performance and the context against which it was delivered.
Relative TSR 25% TSR at median 20% TSR at upper quartile 31st percentile
Notes: (1) The following ten targets were all met or exceeded over the performance period to 31 December 2015: Core Tier 1 capital >10%; leverage ratio <18x; wholesale funding <10%; liquidity reserves >1.5x short-term wholesale funding; loan:deposit ratio c.100%; non-core run down and cumulative non-core loss before tax of c£3.6bn; Core Tier 1 capital on fully loaded Basel 3 basis >=10%; leverage ratio based on tangible equity <18x; liquidity coverage ratio >100%; net stable funding ratio >100%. Some improvement was still needed in the conduct risk target which was deemed not to have been met.
The table represents an early indication of potential vesting outcomes only based on the position at 31 December 2015. The 2014 LTI
award is due to vest in March 2017 and the 2015 LTI award will vest equally in March 2019 and March 2020. Details of performance against targets and any use of discretion will be disclosed once the awards vest.
Target ranges set for: Net Promoter Score, Net Trust Score (for 2015 awards) and
Conditional share awards subject to performance conditions, as set out above, measured over the three year period from 1 January 2015 to 31 December 2017 Ewen Stevenson 6 March 2015 2,160 578,128
The performance measures are designed to be stretching and to support delivery of the business strategy. A three year performance period will apply until 31 December 2018. Subject to the achievement of the performance conditions, shares will then vest in equal tranches in years four and five. Any awards that vest will be subject to a retention period in line with regulatory requirements.
Details of the actual targets, and performance against these, will be disclosed retrospectively after any vesting has been determined, in the annual report on remuneration for 2018.
Standard Chartered has been reduced to be in line with continental European banks given its international focus.
Reason: These measures reward management for building a customer-focused business with strength in terms of trust, reputation and the engagement of employees.
The overall vesting under the above categories will be qualified by the Committee’s discretion taking into account changes in circumstances over the performance period, the margin by which individual targets have been missed or exceeded, and any other relevant factors.
Bruce Van Saun's Unfunded Unapproved Retirement Benefit Scheme (UURBS) operated as a cash balance plan. Under the rules of his
determines that any amounts are taxable, RBS will settle the associated tax liability on behalf of the non-executive director. (4) Under the ‘Other’ column, Sandy Crombie received fees as the Senior Independent Director and Morten Friis received fees for his work on the US steering group. Robert
LTI vesting rates against maximum opportunity 0% 0% 0% 0% 0% 72.85% 62%
Notes: (1) Executive directors are not eligible for an annual bonus. Standard benefit funding for executive directors remained unchanged between 2014 and 2015. The benefits for the
(2) Data represents full year salary costs of the UK based employee population, which covers the majority of RBS employees and is considered to be the most representative comparator group.
The table below shows a comparison of remuneration expenditure against other distributions and charges. 2015 (1)
Taxation and other charges recognised in the income statement: - Social security, Bank levy and Corporation tax 597 2,538 (76%)
The Committee is responsible for: • approving the remuneration policy for all employees and overseeing its implementation; • reviewing performance and making recommendations to the
Material Risk Takers falling within the scope of UK regulatory requirements.
The Committee considered issues under the accountability review process at every meeting. Future pay construct and people proposition was considered at the majority of meetings.
• 2014 performance reviews and remuneration arrangements for members and attendees of the Executive Committee and high earners.
The Committee has considered the findings of the annual review of the effectiveness of the Committee which was conducted by
Overall the review concluded that the Committee continued to operate effectively. Executives and non-executives continued to develop effective working relationships, supported by a more consistent operating rhythm. In particular, the Masterclasses, where in-depth consideration is given to specific matters, continued to make a positive impact and the Committee had provided strong and consistent leadership of the remuneration agenda. The review also identified scope for improvements in paper quality in some instances with the addition of more comparative data and analysis.
Chairs should ensure continued focus on agenda planning and streamlined reporting to the Board, which will be a priority for the
Committee during 2016. The review did not include any specific recommendations relating solely to the Group Performance and
RBS subsidiaries. The Chairman of the Committee is notified of other remuneration work that is being undertaken by PwC. In addition, there are processes in place to ensure the advice received by the Committee is independent of any support provided to management. As well as receiving advice from PwC
AGM held in June 2015 and the resolution at the AGM in June 2014 when the Directors’ Remuneration Policy was last approved.
Committee making any final decisions on remuneration and variable pay awards.
resilience and cyber security. Shareholders asked a number of questions including the process for making adjustments to the bonus pool in relation to conduct and litigation costs. The
Chairman of the Committee explained the bonus adjustment process and the need to consider the proximity of current employees when making such adjustments.
The Chairman noted during discussions that, while bonus pool levels have been coming down year on year, it was important that
Shareholders also asked if RBS was experiencing any difficulties in hiring employees in light of pay levels. The Chairman of the
Shareholders continue to play a vital role in developing remuneration practices that support the long-term interests of the business and the Committee is grateful and greatly encouraged by their involvement in the process.
During the ten year period to 31 December 2015, awards made that could require new issue shares under the company's share plans represented 4.8% of the company's issued ordinary share capital, leaving an available dilution headroom of 5.2%. The company meets its employee share plan obligations through a combination of new issue shares and market purchase shares.
Long-term incentive awards (vested value) 458 458 735 513 363 494 — —
The RBS remuneration policy explicitly aligns remuneration with effective risk management. Focus on risk is achieved through clear risk input into objectives, performance reviews, the determination of variable pay pools and incentive plan design as well as the application of malus and clawback. The Committee is supported in this by the BRC and the RBS Risk function.
There are a number of trigger events under which malus and clawback will be considered including: • the individual participating in or being responsible for conduct which results in significant losses for RBS; • the individual failing to meet appropriate standards of fitness and propriety; • reasonable evidence of an individual’s misbehaviour or material error; • RBS or the individual’s relevant business unit suffering a material failure of risk management; and
Annual bonus To support a culture where employees recognise the importance of serving customers well and are rewarded for superior performance.
The annual bonus pool is based on a balanced scorecard of measures including customer, financial, risk and people measures. Allocation from the pool depends on performance of the franchise or function and the individual.
Individual performance assessment is supported by a structured performance management framework.
Immediate cash awards are limited to a maximum of £2,000. Under the deferral arrangements a significant proportion of annual bonus awards for our more senior employees are deferred over a minimum three year period.
Awards are subject to malus and clawback provisions. For MRTs, a minimum of 50% of any annual bonus is delivered in shares and subject to a minimum six month retention period post vesting in line with regulatory requirements.
RBS provides certain employees in senior roles with long-term incentive awards. Awards are structured as performance-vesting shares. Performance is typically measured over a three year period.
The amount of the award that vests may vary between 0% -100% depending on the performance achieved. Awards are subject to malus and clawback provisions and a minimum six month retention period applies to MRTs post vesting.
Note: (1) The EBA has issued criteria for identifying MRT roles i.e. staff whose professional activities have a material influence over RBS’ performance or risk profile. The criteria for identifying MRTs are both Qualitative (based on the nature of the role) and Quantitative (i.e. those who exceed the stipulated total remuneration threshold based on the previous year’s total remuneration).
In accordance with UK regulatory requirements and the RBS Staff Dealing Rules, the conditions attached to discretionary share-based awards prohibit the use of any personal hedging strategies to lessen the impact of a reduction in value of such awards.
Aggregate remuneration expenditure in respect of 2015 performance was as follows: PBB £m
Total £m 2. Amounts and form of fixed and variable remuneration
Consisted of deferred awards payable over a minimum three year period. Under the RBS bonus deferral structure cash awards are limited to £2,000 per employee.
The table below includes deferred remuneration awarded or paid out in 2015 in respect of prior performance years. Deferred remuneration reduced during the year relates to long-term incentives lapsed when performance conditions are not met, long-term incentives and deferred awards forfeited on leaving and malus of prior year deferred awards and long-term incentives.
Unvested at year end 34.2 256.9 4. Sign-on and severance payments
RBS does not operate ‘Sign-on awards’. Guaranteed variable remuneration may be used for new hires in compensation for awards foregone in their previous company. One such payment of £320,000 is included in the tables above. This relates to a commitment on recruitment made in respect of one new employee. These awards are still subject to deferral.
Notes: (1)Total remuneration in the table above includes fixed pay, pension and benefit funding and variable pay (including actual value of LTI vesting in 2015) after the application of malus.
(2)Executive directors and employees of CFG are not included in the table. The table is based on an exchange rate where applicable of €1.377 to £1 as at 31 December 2015 and amounts disclosed for 2014 have been restated using the same exchange rate so that comparison can be made on a like for like basis.
Employees that earned total remuneration of over €1 million in 2015 represent just 0.1% of our employees. This number reduces to 105 employees if we exclude pension and benefit funding.
These employees include those who manage major businesses and functions with responsibility for significant assets, earnings or areas of strategic activity and can be grouped as follows: • The CEOs responsible for each area and their direct reports.
Governance Code issued by the Financial Reporting Council dated September 2014 (the “Code”) except in relation to provision (D.2.2) that the Group Performance and Remuneration
considers that this is a matter which should rightly be reserved for the Board and this is an approach RBS has adopted for a number of years. Remuneration for the executive directors is first considered by the Group Performance and Remuneration
Chairman’s remuneration. The Board believes this approach is very much in line with the spirit of the Code and no director is involved in decisions regarding his or her own remuneration. We do not anticipate any changes to our approach on this aspect of the Code. Information on how RBS has applied the main principles of the Code can be found in the Corporate governance report on pages 36 to 83. A copy of the Code can be found at www.frc.org.uk
Financial Reporting Council Guidance on Audit Committees issued in September 2012.
Ongoing processes for the identification, evaluation and management of the principal risks faced by RBS operated throughout the period from 1 January 2015 to 25 February 2016, the date the directors approved the Annual Report & Accounts.
RBS operates a three lines of defence model, which provides a framework for responsibilities and accountabilities across the organisation. As part of their second line of defence roles, the
Risk and Conduct & Regulatory Affairs functions oversee and challenge the firm-wide management of risk and the efficacy of the related controls. In addition, the Risk function is responsible for developing material risk policies and strategic frameworks for the business to use.
Committee during 2015. For further information on their oversight of remediation of the most significant issues, please refer to the
Oxley Act of 2002 and assess the effectiveness of internal control over financial reporting as of 31 December 2015.
RBS has assessed the effectiveness of its internal control over financial reporting as of 31 December 2015 based on the criteria set forth by the Committee of Sponsoring Organizations of the
Commission as part of the 2015 Annual Report on Form 20-F.
Executive and Chief Financial Officer) have conducted an evaluation of the effectiveness and design of RBS’s disclosure controls and procedures (as defined in the Exchange Act rules)
The Group Audit Committee fully complies with the mandatory provisions of the NYSE Standards (including by reference to the rules of the Exchange Act) that relate to the composition, responsibilities and operation of audit committees. In April 2015, the company submitted its required annual written affirmation to the NYSE confirming its full compliance with those and other applicable provisions. More detailed information about the Group
Board has not assessed the independence of the members of the
the NYSE Standards require that the compensation committee must have direct responsibility to review and approve the Chief
Compliance report, in the case of RBS, the Board, rather than the
Banking and Group Nominations Committees are otherwise composed solely of non-executive directors deemed by the Board to be independent.
The directors present their report together with the audited accounts for the year ended 31 December 2015.
The company is a holding company owning the entire issued ordinary share capital of The Royal Bank of Scotland plc, the principal direct operating subsidiary undertaking of the company.
Organisational change On 26 February 2015, RBS announced its commitment to becoming a leaner, less volatile business based around its core franchises of Personal & Business Banking (PBB) and
into go-forward CIB and CIB Capital Resolution; • the divestment of Citizens; • the sale of the international private banking business; and
Williams & Glyn (W&G) comprises RBS England and Wales branch-based businesses, along with certain small and medium enterprises and corporate activities across the UK. During the period presented W&G has not operated as a separate legal entity. The perimeter of the segment currently reported does not include certain portfolios that are ultimately intended to be divested as part of W&G, for example, certain NatWest branches in Scotland.
The Dividend Access Share (DAS) retirement agreement was approved at the General Meeting of shareholders held on 25
June 2014. The first dividend payment on the DAS of £320 million was made in the third quarter of 2014. The balance of £1.18 billion is subject to an uplift at 5% per annum from 1
RBS is engaged principally in providing a wide range of banking and other financial services. Further details of the organisational structure and business overview of RBS, including the products and services provided by each of its segments, are contained in the Business review on page 93. Details of the strategy for delivering the company’s objectives can be found in the Strategic report.
RBS’s future performance and results could be materially different from expected results depending on the outcome of certain potential risks and uncertainties. Full details of these and other risk factors are set out on pages 390 to 414.
RBS’s approach to risk management, including its financial risk management objectives and policies and information on RBS’s exposure to price, credit, liquidity and cash flow risk, is discussed in the Business review: Capital and risk management.
RBSG, RBS plc, RBS Holdings and RBS N.V., a substantial part of the business activities of RBS N.V. had been successfully transferred to RBS plc by the end of 2012, with further transfers in 2013 and 2014. There have been no transfers in 2015, the focus continues to be on further de-risking the RBS N.V. balance sheet.
In September 2013, RBS reached an agreement with an investor consortium led by Corsair Capital and Centerbridge Partners for an investment in these businesses ahead of a stock market flotation. This includes 308 RBS branches in England and Wales.
used for its branches in England and Wales before 1985. The
(21%) and October 2015 (21%). Consequently, RBS has completed its divestment of Citizens.
As at 31 December 2015, RBS employed 93,659 people (full-time equivalent basis, including temporary workers) throughout the world. Details of related costs are included in Note 3 on the consolidated accounts.
Building a healthy culture and risk culture that lives up to our values is one of our core priorities. We have governance to monitor and guide and track progress on our cultural goals. We gather qualitative and quantitative feedback to assess our progress and respond accordingly. We do this in tandem with feedback from regulators and industry bodies.
In 2015 we launched determined to make a difference, an internal campaign that provides a rallying call for our employees.
It was drawn from our extensive research with staff and is based on their reflections about the difference we make for our customers, colleagues, communities and shareholders.
Our approach to performance management allows us to provide clarity for our people about how their individual contribution links to our ambition. It recognises behaviour that supports our values and holds individuals to account for behaviour and performance that does not.
Instead, we gave every eligible employee an increase to their guaranteed pay. This change ensures that our people are paid clearly, fairly and simply for the job they do for our customers every day. It also ensures our customers can be certain that if they take a product from us, it has no financial impact on what our people are paid.
Developing great leaders with the capability to deliver our ambition is a key priority. In 2015, we launched ‘Determined to lead’, a programme that focuses on great people management, a consistent tone from leaders throughout the Bank and the tools to engage our people. In 2015 we trained over 13,000 leaders.
We have mandatory learning that has to be completed by everyone and is focused on keeping our people, our customers and the Bank safe. Elements of our learning have been aligned to the Chartered Banker: Professional Standards Board foundation standards. We committed that our people in the UK (excluding
We have hired over 250 graduates and over 300 Apprentices in 2015. We have been accredited by “Investors in Young People”
We offer a wide range of health benefits and services to help maintain physical and mental health, and support our people if they become unwell.
Challenge, the launch of Resilience programmes and continued support for Time to Change, the UK’s biggest programme to challenge mental health stigma.
There has been ongoing engagement and discussion with those bodies given the changes the bank announced in February 2015.
Building a more inclusive bank is essential for our customers and colleagues. Our inclusion policy standard applies to all our people globally.
organisation. From an LGBT perspective, we continue to deliver improvements to our people policies and customer operating procedures, including the introduction of guidance to support employees going through gender transition, introducing the ‘Mx’
We are finalising plans to improve our ethnic representation within senior roles and are continuing to support our 15,000 strong employee-led networks.
- our Gold ranking for Race for Opportunity (race); retaining a position in the Times Top 50 Employers for Women; and improving upon our ranking in the Stonewall Workplace Equality
RBS’s 2015 financial statements have been prepared in compliance with the principles set out in the Code for Financial
Association in 2010.The Code sets out five disclosure principles together with supporting guidance. The principles are that RBS
The company is committed to high standards of corporate governance. Details are given in the Corporate governance report on pages 36 to 83. The Corporate governance report and compliance report (pages 84 and 85) form part of this Report of the directors.
During 2015, the company allotted and issued a total of 90.1 million new ordinary shares of £1 each for the purposes of ensuring 2015 coupon payments on discretionary hybrid capital securities were partly neutralised from a Core Tier 1 capital perspective. The shares were allotted to UBS AG at the subscription prices determined by reference to the average market prices during the sale periods set out below.
In the three years to 31 December 2015, the percentage increase in issued share capital due to non-pre-emptive issuance
Companies House in the UK or can be found at rbs.com>about us.
The rules governing the powers of directors, including in relation to issuing or buying back shares and their appointment are set out in the company’s Articles of Association. It will be proposed at the 2016 Annual General Meeting that the directors be granted authorities to allot shares under the Companies Act 2006. The company’s Articles of Association may only be amended by a special resolution at a general meeting of shareholders.
The rights and obligations of holders of non-cumulative preference shares are set out in Note 24 on the consolidated accounts.
Voting rights are exercised by the Trustees on receipt of participants’ instructions. If a participant does not submit an instruction to the Trustee no vote is registered.
The Royal Bank of Scotland plc 1992 Employee Share Trust, The
Royal Bank of Scotland Group plc 2001 Employee Share Trust and The Royal Bank of Scotland Group plc 2007 US Employee
Trustees abstain from voting. The Trustees would take independent advice before accepting any offer in respect of their shareholdings for the company in a takeover bid situation.
Outstanding awards and options may vest and become exercisable on change of control, subject where appropriate to the satisfaction of any performance conditions at that time and pro-rating of awards. In the context of the company as a whole, these agreements are not considered to be significant.
Noakes and Ewen Stevenson all served throughout the year and to the date of signing of the financial statements.
Meeting and, in accordance with the UK Listing Rules, the election or re-election of independent directors requires approval by all shareholders and also by independent shareholders.
In terms of section 236 of the Companies Act 2006 (the
In terms of section 236 of the Companies Act, Qualifying Pension
In accordance with the UK Listing Rules, the company has entered into an agreement with HM Treasury (the ‘Controlling
As at 25 February 2016, there were no changes to the shareholdings shown in the table above.
Rules the information to be included in the Annual Report and
9.8.4. (10) and (11) given in Additional Information on page 388.
Deloitte LLP are currently the auditors. On 3 November 2014, the
As set out in ‘Accounting policies’ on page 267, RBS has revised its accounting policy for determining whether or not it has an unconditional right to a refund of surpluses in its employee pension funds. The change has been applied retrospectively and comparatives restated.
RBS continues to deliver on its plan to build a strong, simple and fair bank for both customers and shareholders. To support this and reflect the progress made the previously reported operating segments have been realigned as follows: Personal & Business Banking (PBB) comprises two reportable segments. UK Personal & Business Banking (UK PBB) and
European corporate customers, and global financial institutions, supported by trading and distribution platforms in the UK, US and
Capital Resolution includes CIB Capital Resolution and the remainder of RBS Capital Resolution (RCR).
Williams & Glyn (W&G) comprises the RBS England and Wales branch-based businesses, along with certain small and medium enterprises (SME) and corporate activities across the UK. During the period presented W&G has not operated as a separate legal entity. The perimeter of the segment currently reported does not include certain portfolios that are ultimately intended to be divested as part of W&G, for example, certain NatWest branches in Scotland.
Central items & other includes corporate functions, such as 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.
In line with RBS’s strategy to be a simpler bank the following reporting changes have been implemented in relation to the presentation of RBS results: One-off and other items
Treasury allocations which are included within segmental net interest income and segmental net interest margins, have been revised to reflect the following.
RBS’s CET 1 target is 13% but for the purposes of computing segmental return on equity (ROE), to better reflect the differential drivers of capital usage, segmental operating profit after tax and adjusted for preference dividends is divided by notional equity allocated at different rates of 11% (Commercial Banking and
Ulster Bank RoI), 12% (RBSI) and 15% for all other segments, of the monthly average of segmental risk-weighted assets after capital deductions (RWAes). This notional equity was previously 13% for all segments. In addition, due to changes in UK tax rules enacted in the Finance (No 2) Act 2015, RBS has increased its longer-term effective 31 December tax rate. The notional tax rate used in the segmental ROE has been revised from 25% to 28%
Summary consolidated income statement for the year ended 31 December 2015
Gross yield on interest-earning assets of the banking business (4) 2.88 3.02 3.04
Net interest margin of the banking business (1,2,6) 2.12 2.13 1.88
The Royal Bank of Scotland plc base rate (average) 0.50 0.50 0.50
Notes: (1) For the purpose of net interest margin calculations interest receivable has been increased by nil (2014 - £11 million; 2013 - £4 million) and interest payable has been increased by £15 million (2014 - £58 million; 2013 - £83 million) in respect of interest on financial assets and liabilities designated as at fair value through profit or loss. Related interestearning assets and interest-bearing liabilities have also been adjusted.
(2) Interest receivable has been decreased by £38 million and interest payable has been decreased by £31 million in 2013 in respect of non-recurring adjustments. (3) Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities. (4) Gross yield is the interest earned on average interest-earning assets of the banking book. (5) Interest spread is the difference between the gross yield and the interest rate paid on average interest-bearing liabilities of the banking business. (6) Net interest margin is net interest income of the banking business as a percentage of interest-earning assets (IEA) of the banking business. (7) The analysis into UK and overseas has been compiled on the basis of location of office.
reduction in Capital Resolution, down from £673 million to £365 million, in line with the planned shrinkage of the balance sheet.
reflecting new business volumes in core UK businesses, primarily mortgages remaining under competitive margin pressures combined with an increased portion of the book shifting toward lower margin secured assets. This was partly offset by deposit repricing and the planned run down of low margin assets in
Net interest income increased by 3%, to £9,258 million. This mainly reflected improvements in deposit margins in CPB and
Income from trading activities declined by £519 million, or 39%, to £806 million compared with £1,325 million, due to the reduced scale and resources in CIB and the continued planned reduction of the Capital Resolution business and the impact of disposal losses.
Net fees and commissions fell by 6% principally reflecting declines in CIB and Commercial Banking.
Income from trading activities declined by £1,211 million, or 48%, in line with CIB’s smaller balance sheet and reduced risk profile and the planned reduction of the Capital Resolution business.
Own credit adjustments represented a charge of £146 million compared with £120 million in 2013.
Staff costs as a percentage of total income 38% 35% 35%
Staff costs were 9% lower totalling £4,896 million compared with £5,376 million, reflecting reduced headcount in CIB and Capital
Staff expenses declined by 7% and by 1% on a per capita basis against average full time employees. Average full time employees, rounded to the nearest hundred, for continuing
Restructuring costs increased by £514 million to £1,154 million, including £378 million in relation to Williams & Glyn and a write off of intangible assets of £247 million.
Litigation and conducts costs totalled £2,194 million compared with £3,844 million in 2013. This included additional provisions for
incident fine (£59 million) booked in Centre and other costs (£580 million) primarily relating to packaged accounts and investment products.
Net impairment releases of £727 million were 46% lower compared with net impairment releases of £1,352 million in 2014.
Loan impairment provision coverage of REIL remained stable at 64% and the provision now stands at £18.0 billion, a £7.2 billion reduction in the year. Provision coverage of gross loans is 4.4%
The tax charge for the year ended 31 December 2014 reflects a reduction in the carrying value of the deferred tax asset in respect of UK tax losses (£850 million) and US temporary differences
TouchID, enabling customers to log-in to its mobile app using only their fingerprint.
• Enabled real time registration of our mobile banking app, allowing customers to log-in immediately as they open their new current account.
• Continued to be at the forefront of technological collaboration; one of the first UK banks to launch Apple Pay whilst developing an Apple Watch app.
Launched market differentiating propositions: • UK PBB continued to invest in building deeper engagement with our customers through the launch of our new banking proposition – “Reward” whereby customers receive 3%
• Launched the fee-free Foundation account to better support the 1.5 million unbanked individuals in the UK.
• Launched an online mortgage application tracker to improve customer experience.
• One of the first UK banks to offer the UK Government-led
Help to Buy: ISA as we continue to help first time buyers.
NatWest and Ulster Bank customers are offered a variable rate of 2% AER and can save up to £1,200 in the first month.
Operational investment continued apace: • New onboarding system for Business Banking was completed in November 2015. It has reduced the average account opening time by 50% from 15 days to 7 days and we are onboarding c. 500 new customers every day.
Personal Banker role in branches, enabling more of our staff to fulfil customer needs.
• We also announced the ending of incentives for our frontline staff from January 2016, which has been positively received and will ensure our staff are focused on what is best for the customer.
UK PBB recorded an operating profit of £1,030 million in 2015, a reduction of 9% or £103 million from 2014. This was primarily driven by lower non-interest income combined with increased restructuring costs and litigation and conduct costs. This was partially offset by a small net impairment release compared with a prior year charge. Adjusted operating profit of £2,169 million and return on equity of 11.7% were broadly stable compared with the prior year.
Operating expenses were £4,177 million, remaining broadly stable against 2014. Litigation and conduct costs increased 6%
UK PBB recorded an operating profit of £1,133 million, up £1,097 million, while adjusted operating profit totalled £2,162 million compared with £1,161 million in the prior year. This reflected higher income, up 7% to £5,444 million and lower adjusted expenses, down 4% to £3,128 million, together with substantially lower impairments, down £516 million to £154 million.
Net interest income increased by £297 million or 8% with strong improvements in deposit margins and volume growth. This was partly offset by lower asset margins linked to the continued change in the mix of the loan book towards secured lending and lower mortgage margins.
Non-interest income increased by £45 million or 4%, largely reflecting the transfer of the commercial cards business to UK
Gain on redemption of own debt — — 284 — — 242
Operating profit before impairment releases/(losses) 168 226 495 121 183 422
Total income - adjusted (2) 758 749 782 550 604 664 Operating expenses - adjusted (3) (587) (531) (463) (427) (427) (393)
Net interest margin excluding central IEAs (5) 1.57% 1.99% 1.71% 1.57% 1.99% 1.71%
Notes: (1) Staff expenses include costs relating to employees of Ulster Bank Ireland Limited only. Recharges for services provided by or to Ulster Bank Limited are reflected through a management fee within other costs. (2) Excluding gain on redemption on own debt. (3) Excluding restructuring costs, litigation and conduct costs. (4) Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity based on 11% (previously 13%) of the monthly average of segmental RWAes, assuming 15% tax rate. (5) Ulster Bank Ireland Limited manages its regulatory liquidity requirements locally and consequently maintains a low yielding liquid asset portfolio.
Net loans and advances to customers 22.7 23.3 26.4 16.7 18.1 21.9
Following the strategic review of Ulster Bank in 2014, it was confirmed that the Northern Ireland and Republic of Ireland businesses were to be separated. The change of management controls and governance was completed in October 2015 with the
• Made it easier for our customers to bank with us. The bank’s current account proposition was re-launched in October and a partnership with 'An Post' provides customers with 1,140 new points of presence.
Total income was £550 million, a decrease of 9% from the prior year reflecting the weakening of the euro during 2015. Excluding the impact of the euro exchange rate movement, total income increased 1% due to a continued improvement in deposit pricing in line with market trends, combined with non-recurring benefits, including a gain on the sale of a buy-to-let portfolio of £12 million and the closure of a foreign exchange exposure of £24 million.
These benefits were largely offset by reduced income on free funds.
Cost savings delivered through a further reduction in both employee numbers and the property footprint were somewhat offset by further investment in the business and operational infrastructure.
Total income decreased by £302 million to £604 million largely as a result of a £242 million gain on redemption of own debt in 2013 following a successful liability management exercise.
The transfer of assets to RCR coupled with improved credit quality across key portfolios resulted in a 42% reduction in risk elements in lending. Provision coverage reduced from 62% to 55% during 2014 reflecting the further de-risking of the balance sheet coupled with the impact of an increase in asset values.
RWAs decreased by 23% reflecting an improvement in credit metrics and a reduced loan book.
Loan impairment charge as a % of gross customer loans and advances by sector
In the course of the year Commercial Banking: • Opened four Entrepreneur Hubs across the UK, increasing our involvement to seven, enabling entrepreneurs and small businesses to access free office space, mentoring and financial support, with a further five hubs to be opened in
• Rolled out a new on-boarding and account opening system across England and Wales which has delivered a reduction in customer paper work and a reduction in account opening times of approximately 30%.
• Issued 12,500 statements of appetite letters to customers, offering up to £8 billion of new borrowing facilities as part of our continued support of UK business.
• Awarded Residential Funder of the Year, providing finance for c.20k homes to be built in 2015.
• Grew net new lending by £3.6 billion excluding the impact of the transferred businesses from CIB and strategic run-off decisions.
Comparisons with prior periods are affected by a number of internal business transfers. In line with changes to the business model, the UK and Western European corporate loan portfolios transferred to Commercial Banking on 1 May 2015 and 1 October 2015 respectively. The prior period financials were adjusted for the UK Transaction Services business transfer and do not affect comparisons. The results exclude RBS International which is reported as a separate segment for the first time.
Net interest margin decreased three basis points to 1.88% with improved deposit margins partly offsetting competitive pressures on new business asset margins. Non-interest income fell by 5%
Net impairment losses decreased £16 million to £69 million due to lower individual charges, offsetting lower net provision releases.
RWAs increased £9.1 billion to £72.3 billion in 2015, of which £8.4 billion relates to £5 billion of assets transferred in. The higher capital intensity reflects increased level of undrawn commitments in the transferred businesses.
The Commercial Banking run-off portfolio includes funded assets of £12.5 billion and RWAs of £8.5 billion.
Commercial Banking recorded an operating profit of £1,256 million compared with £537 million in the prior year. This was driven by lower net impairment losses, down £516 million, lower operating expenses, down £178 million and higher income, up £25 million. Adjusted operating profit increased by £629 million to
Operating expenses were down £178 million or 8%, as a result of lower litigation and conduct costs, primarily relating to interest rate swap redress, and lower underlying direct costs reflecting the continued focus on cost saving. These reductions were partially offset by higher restructuring costs, as the business aligned itself to better support customers, and growth in operating lease depreciation. Adjusted operating expenses declined by £88 million.
Notes: (1) Excluding restructuring costs and litigation and conduct costs and write down of goodwill. (2) Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity based on 15% (previously 13%) of the monthly average of segmental RWAes, assuming 28% tax rate; previously 25%.
Notes: (1) Provision coverage represents loan impairment provisions as a percentage of risk elements in lending. (2) RWAs in 2013 are on a Basel 2.5 basis.
Private Banking results exclude the international private banking business given its plan for disposal.
Private Banking continued to invest in the customer proposition whilst moving toward a more focused business model: • Strategic repositioning to focus on UK customers with the sale of the European, the Middle East and Africa tranche of the international private banking business completed in Q4 2015. The smaller Far East tranche is scheduled to complete in the first half of 2016.
Private Banking recorded an adjusted operating profit of £113 million, a fall of £77 million reflecting lower income and higher impairment losses. A charge for goodwill impairment of £498 million attributed to the business drove an operating loss of £470 million, compared with an operating profit of £99 million in 2014.
Private Banking recorded an operating profit of £99 million compared with a loss of £26 million in the prior year. This was driven by reduced operating expenses, down £78 million, income higher by £35 million with impairment releases of £5 million compared with a net £7 million loss in 2013. Adjusted operating profit increased by £92 million to £190 million.
Notes: (1) Excluding restructuring costs and litigation and conduct costs. (2) Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity based on 12% (previously 13%) of the monthly average of segmental RWAes, assuming 10% tax rate.
RBS International (RBSI) operates under the CPB franchise, serving retail, commercial, corporate and financial institution customers in Jersey, Guernsey, Isle of Man and Gibraltar. RBSI
leverages a strong multi-currency banking platform combined with a comprehensive product suite. RBSI completed a strategy review at the end of 2015 with plans to invest in and grow the business now being implemented, with particular focus on the funds and mortgage businesses.
Total income decreased 6% to £367 million, mainly due to reductions in net interest income, falling £20 million to £303 million, principally reflecting lower deposit margins and lower return on free funds partly offset by higher asset volumes. Noninterest income declined £4 million to £64 million as a result of a lower CIB revenue share and lower net lending fees.
RWAs increased by £0.8 billion to £8.3 billion as a result of a change in business mix and foreign exchange movements.
RBS International recorded an operating profit of £238 million compared with £165 million in the prior year. This was driven by a net impairment release, instead of a prior year loss and increased income. Adjusted operating profit increased by £66 million to
Net interest income increased by £24 million or 8%, largely reflecting an increase in new lending volumes, which was partly offset by the impact of reduced deposit volumes and margins.
Net loans and advances to customers increased 13% or £0.8 billion as growth returned to some key asset classes. Deposits were stable at £20.8 billion.
RWAs were £0.5 billion higher at £7.5 billion, primarily reflecting the growth in the asset book.
Loans and advances to customers (gross, excluding reverse repos) 16.1 26.5 24.7
Notes: (1) Excludes disposal groups. (2) RWAs in 2013 are on a Basel 2.5 basis.
Key points Corporate & Institutional Banking (CIB) announced its new business strategy in February 2015, separating the segment between go-forward and CIB Capital Resolution (now Capital
Achieving target steady state requires a multi-year transformation programme, which was launched in 2015. Alongside this, CIB
continues to focus on customers: • Agreements signed by RBS with three separate investment partners: AIG Asset Management (Europe) Ltd, Hermes
Investment Management and M&G Investments to provide small to mid-market UK businesses with greater access to capital investment.
BBA/IFS Financial Innovation awards for delivering innovative, flexible and customer-centric products.
Comparisons with prior periods are affected by a number of internal business transfers. In line with changes to the business model, the UK and Western European corporate loan portfolios transferred to Commercial Banking on 1 May 2015 and 1 October 2015 respectively; the Short Term Money markets business was transferred to Treasury on 1 August 2015. The prior period financials were adjusted for the UK Transaction Services business transfer to Commercial Banking and do not affect prior period comparisons.
Operating expenses fell by £281 million, or 11%, to £2,369 million in 2015. This includes £35 million relating to the transfer of portfolio businesses to Commercial Banking. Expenses remaining in CIB were £2,334 million. Adjusted operating expenses fell by £249 million or 15% to £1,467 million as the business reshaped, including a considerable reduction in headcount. Litigation and conduct costs fell by £454 million, or 55%, to £378 million, primarily relating to foreign exchange settlements in the US. This reduction was offset by an increase in restructuring costs of £422 million to £524 million, primarily relating to property and intangible asset write downs.
• Financing income reduced, reflecting the year on year weakening in EMEA corporate investment grade primary issuance and subdued secondary credit markets.
Operating expenses fell by £261 million driven primarily by lower business and support costs, partially offset by an increase in litigation and conduct costs. Adjusted expenses decreased by £504 million, or 23%, reflecting the continued focus on cost savings across both business and support areas.
CRDIV on 1 January 2014. This reflected the businesses commitment to carefully manage risk-weighted assets.
Notes: (1) Excluding own credit adjustments and strategic disposals. (2) Excluding restructuring costs, litigation and conduct costs and write-down of goodwill. (3) Asia-Pacific portfolio. (4) European, the Middle East and Africa portfolio.
There is a three stage process in place to guide the business down; starting with taking the capital out, then running down the cost base and finally managing tail risk in the longer-term.
RWA was driven by disposal activity; • Similarly, EMEA loan portfolio reduced RWAs by £4.7 billion to £1.2 billion; and
Capital Resolution RWAs reduced from £95.1 billion to £49.0 billion driven by significant reductions across CIB Capital
to £1,539 million, principally reflecting a fall in headcount of approximately 1,100. Net impairment releases of £725 million were recorded, primarily in RCR driven by the disposal strategy and favourable market and economic conditions.
Capital Resolution funded assets fell £62.2 billion to £53.4 billion. Within that CIB Capital Resolution funded assets fell £51.9 billion to £48.8 billion in 2015, primarily due to loan portfolio disposals. RCR, funded assets fell £10.3 billion to £4.6 billion, driven by extensive disposal activity across all asset groups with 533 deals completed in 2015 at an average price of 109% of book value.
RCR was managed and analysed in four asset management groups - Ulster Bank (RCR Ireland), Real Estate Finance, Corporate and
Markets. Real Estate Finance excludes commercial real estate lending in Ulster Bank.
Loan impairment charge as a % of gross customer loans and advances (4)
(2014 - £87 million gain) in income from trading activities and £50 million gain (2014 - £57 million loss) in other operating income. (2) Excluding own credit adjustments. (3) Excluding restructuring costs. (4) Includes disposal groups.
Risk-weighted assets 1 January Risk 31 December 2014 Repayments Disposals (1) parameters (2) Impairments Other (3) 2015 £bn £bn £bn £bn £bn £bn £bn
Capital deductions 1 January Risk 31 December 2014 Repayments Disposals (1) parameters (2) Impairments Other (3) 2015 £m £m £m £m £m £m £m
Gross % of gross as a % as a % of (releases)/ Amounts loans REIL Provisions loans of REIL gross loans losses (2) written-off
Notes: (1) Does not reflect the cost base, funding, liquidity and capital profile of a standalone bank. Operating expenses include charges based on an attribution of support provided by
Banking Direct and NatWest Direct Business Banking and certain mid-corporate customers across the UK. Together, this business is referred to as ‘Williams & Glyn’ (W&G).
commitments to fully divest the business by the end of 2017.
Total income was £833 million, compared with £852 million in 2014. Net interest income reduced £6 million to £658 million due to mortgage margin pressure from the impact of market competition on new business pricing. Net interest margin declined 6 basis points to 2.87%, due to the aforementioned margin pressure on new mortgage volumes and a reduction in the number of customers on the standard variable rate. Noninterest income fell by 7%, primarily due to lower fee income from credit and debit cards as well as lower overdraft usage and tariffs.
Net impairment losses were £55 million, a reduction of £25 million compared with the prior year as a result of increased recoveries and reduced levels of default.
Loans and advances decreased £0.2 billion from £20.1 billion to £19.9 billion. Customer deposits increased £0.5 billion to £22 billion.
Notes: (1) Includes losses on disposals of £221 million for 2013. (2) Excludes disposal groups. (3) Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.
Consolidated balance sheet as at 31 December 2015 2015 2014* £m £m
Tangible net asset value per ordinary share (1) 352p 374p *Restated – refer to page 267 for further details.
Note: (1) Tangible net asset value per ordinary share represents tangible equity divided by the number of ordinary shares in issue.
Total assets of £815.4 billion as at 31 December 2015 were down £235.6 billion, 22%, compared with 31 December 2014. This was primarily driven by the disposal of Citizens, and decreases in loans and advances to customers and derivative assets, reflecting the reshaping of CIB and Capital Resolution run-down.
Loans and advances to customers declined £44.3 billion, 12%, to £333.9 billion. Within this, reverse repos were down £16.4 billion, 37%, to £27.6 billion. Customer lending decreased by £27.9 billion, 8%, to £306.3 billion, or £38.3 billion to £313.5 billion before impairments. This reflected reductions in CIB together with run-down and disposals in Capital Resolution, partially offset by increases in UK PBB reflecting growth in mortgages and in
Debt securities were down £4.6 billion, 5%, to £82.1 billion, driven mainly by reductions within CIB, partially offset by increases in Treasury in the liquidity portfolio.
Equity shares decreased by £4.3 billion, 76%, to £1.4 billion primarily due to the continuing risk reduction and run-down in
Property, plant and equipment decreased by £1.7 billion, 27%, to £4.5 billion mainly reflecting disposals and write downs.
Deposits by banks decreased by £22.4 billion, 37%, to £38.3 billion, with decreases in inter-bank deposits, down £7.8 billion, 22%, to £28.0 billion and decreases in repurchase agreements and stock lending (‘repos’), down £14.6 billion, 59%, to £10.3 billion, reflecting the reshaping of CIB and Capital Resolution rundown.
Owners’ equity decreased by £2.3 billion, 4%, to £53.4 billion, primarily driven by the £2.0 billion attributable loss for the year.
The major factors contributing to the net cash inflow from operating activities of £918 million were the increase of £8,589 million in operating assets and liabilities, other provisions charged net of releases of £4,566 million, write down of goodwill and other intangible assets £1,332 million and depreciation and amortisation of £1,180 million. These were partially offset by loans and advances written-off net of recoveries of £8,789 million, other provisions utilised of £2,202 million, elimination of foreign exchange differences of £1,501 million, profit on sale of subsidiaries and associates of £1,135 million, cash contribution to defined benefit pension schemes of £1,060 million, decrease in income accruals of £1,075 million and the operating loss before tax of £937 million.
Net cash inflows from investing activities of £21,183 million related to the net inflows from sales of securities of £19,211 million, the sale of property, plant and equipment of £1,448 million and net divestments of business interests and intangible assets of £1,150 million offset by net cash outflows from the purchase of property, plant and equipment of £626 million.
Net cash outflows from financing activities of £2,728 million relate primarily to the repayment of subordinated liabilities of £3,500 million and interest paid on subordinated liabilities of £958 million partly offset by the issue of subordinated liabilities of £1,796 million.
Reverse repurchase agreement and stock borrowing 27,558 — 27,558 43,987 — 43,987
Provisions, accruals and other liabilities 15,115 97 15,212 13,346 683 14,029 *Restated – refer to page 267 for further details.
Notes: (1) Primarily international private banking. (2) Primarily Citizens. (3) Excludes reverse repos.
Presentation of information 134 Business model and associated risks 134 Governance, assurance and risk models 135 Risk culture and appetite 139 Risk coverage 142 Capital management Definition, overview and key developments 145 Risk appetite and strategy 145 Framework and governance 146
� Capital planning 147 � Stress testing 148 � ICAAP 150 � Recovery planning 151
Liquidity risk 162 � Key metrics 162 � Liquidity portfolio Funding risk 163 � Key funding metrics and sources of funding 163 � Maturity analysis 166 � Encumbrance 169
Balance sheet to CRA bridge 211 Country risk 212 Credit risk: balance sheet analysis Financial assets 214 Loans, REIL and impairment provisions 218 Securities and AFS reserves 224 Derivatives and valuation reserves 228 Market risk
Following the deconsolidation of Citizens during 2015, to aid comparison, the 2014 Citizens balances have been presented as a separate line in the disclosures in the Capital and risk management section, with the exception of capital management and most liquidity and funding disclosures which remain in line with the relevant regulatory reporting basis. The 2014 comparatives in the Credit risk section exclude Citizens unless otherwise stated.
Republic of Ireland through Ulster Bank RoI. CPB serves commercial and corporate customers in the UK and Western
Europe and high-net-worth individuals, providing loan products and investment services. RBS International serves customers in
Jersey, Guernsey, Isle of Man and Gibraltar. CIB serves UK and
The main sources of earnings are interest income from lending and fee income from transactional and other services. Given increased competition and the low interest rate environment in the UK, RBS’s net interest margin has been under pressure.
RBS is reducing costs through rationalisation, integration and simplification. A major programme is in train to transform and enhance the ways in which RBS operates.
RBS has made significant progress on the accelerated disposal of selected assets, with the complete divestment of Citizens, the sale of the majority of international private banking businesses, the run-down or sale of RCR assets one year ahead of schedule and a significant proportion of CIB Capital Resolution.
Completion of this process will significantly reduce or otherwise improve the profile of credit and market risk faced by the bank.
An improved ability to serve customers and other stakeholders through increased focus on key strengths in Western European markets is intended to deliver financial robustness and stronger risk management. However, it does raise geographic and product concentration risks within RBS’s target business model. These risks must be managed effectively in increasingly competitive and fast changing target markets, while navigating industry-wide risks such as those related to increasing cyber crime.
Communications and Financial MI. Responsibilities include: • Owning, managing and supervising, within a defined risk appetite, the risks which exist in business areas and support functions.
• Leading the articulation, design and development of RBS's risk culture and appetite.
Responsibilities include: • Designing and delivering a risk-based audit plan to provide assurance on material risks and report on whether RBS is managing its material risks effectively.
• Engaging with management and participating in key governance fora to provide perspectives, insights and challenge so as to influence the building of a sustainable bank.
• Advising the Group Audit Committee and executive management with respect to RBS’s material risks and their associated controls.
Board, the Board Risk Committee, Group Audit Committee and the Executive Committee as appropriate.
Stress testing, capital review, strategic risk, risk appetite, enterprise policy and framework, risk analytics , risk models
Refer to the Liquidity and funding risk section for further details
Director of Risk Assurance Credit quality assurance, market risk assurance and model risk management
Risk committees in the customer businesses and key functional risk committees oversee risk exposures arising from management and business activities and focus on ensuring that they are adequately monitored and controlled.
(2) Conduct & Regulatory Affairs Conduct & Regulatory Affairs (C&RA) is led by the Chief Conduct & Regulatory Affairs Officer, who reports directly to the Chief Executive and has an indirect reporting line to the Board Risk Committee and a right of access to the committee’s chairman. It is responsible for providing oversight of conduct risk and regulatory risk at RBS, and does so by setting RBS-wide policy and standards, providing advice to each customer business, and ensuring that the mitigating controls are suitable. C&RA also provides leadership of RBS’s relationships with its regulators.
Credit risk and market risk quality assurance undertake reviews which assess various aspects of risk as appropriate: including: the quality of risk portfolios; the completeness, suitability, accuracy and timeliness of risk measurements; the quality of risk management practices; policy compliance; and adherence to risk appetite. This includes monitoring the bank’s credit portfolios and market risk exposures to assist in early identification of emerging risks, as well as undertaking targeted reviews to examine specific concerns raised either by these teams or by their stakeholders.
Controls assurance: This team tests the adequacy and effectiveness of key controls relating to credit and market risk, including those within the scope of Section 404 of the US
MRM is responsible for setting policy, providing governance and insight for all of RBS’s statistical, economic, financial or mathematical models and performing independent model validation where necessary. It works with individual businesses to set appropriate model standards, and monitor adherence to these, to ensure that models are developed and implemented appropriately and that their operational environment is fit for purpose.
Going forward, MRM will be responsible for defining and monitoring model risk appetite in conjunction with model developers, monitoring the model risk profile and reporting on the model population and escalating issues to senior management.
The general approach to MRM’s independent model validation for risk and pricing models is detailed below. For more specific information relating to market risk models and pricing models, refer to page 242. For more specific information relating to credit risk models, refer to page 18 of the Pillar 3 Report 2015.
Other examples include the use of models to measure market risk exposures and calculate associated capital requirements, as well as for the valuation of positions. The models used for stress testing purposes also play a key role in ensuring the bank holds sufficient capital, even in stressed market scenarios.
MRM’s independent review comprises some or all of the following steps, as appropriate: • Testing and challenging the logical and conceptual soundness of the methodology; • Testing the assumptions underlying the model, where feasible, against actual behaviour. In its validation report,
MRM will opine on the reasonableness and stability of the assumptions and specify which assumptions, if any, should be routinely monitored in production; • Testing whether all key appropriate risks have been sufficiently captured; • Checking the accuracy of calculations; • Comparing outputs with results from alternative methods; • Testing parameter selection and calibration; • Ensuring model outputs are sufficiently conservative in areas where there is significant model uncertainty; • Confirming the applicability of tests for accuracy and stability; recalculating and ensuring that results are robust; and
A strong risk culture, as part of a healthy organisational culture, is essential to the realisation of RBS’s ambition to build a truly customer-centric bank.
It seeks to create a strong risk culture that becomes part of the way people work and think. Such a culture should be supported by robust practices on risk identification, measurement and management, and on associated controls and governance. Risk competencies, mindsets and behaviours needed to support
RBS’s risk culture should be embedded across the organisation and made integral to performance reviews.
Aligned to these values is the Code of Conduct. The Code provides guidance on expected behaviour and sets out the standards of conduct that support the values. It explains the effect of decisions that are taken and describes the principles that must be followed.
They are aligned with the people management and remuneration processes to support a positive and strong risk culture through appropriate incentive structures.
The Group Performance and Remuneration Committee also consider risk performance and conduct when determining overall bonus pools. The Committee’s decisions on pay aim to reinforce the need for good behaviours by all employees.
RBS’s policies require that risk behaviour assessment is incorporated into performance assessment and compensation processes for enhanced governance staff.
RBS-wide remuneration policy requires remuneration to be aligned with, and to support, effective risk management. The policy ensures that the remuneration arrangements for all employees reflect the principles and standards prescribed by the
RBS offers a wide range of risk learning across the risk disciplines: Market Risk; Credit Risk; Operational Risk; Enterprise
Risk; and Conduct and Regulatory Risk. This training can be mandatory, role specific or for personal development and includes technical and behavioural content.
There is mandatory learning that has to be completed by everyone and is focused on keeping employees, customers and the bank safe. This learning is accessed via the online learning system and is dependent on their role and business area. This makes it easy for employees to access and complete and allows monitoring at all levels to ensure completion.
Risk appetite is set for material risks and is cascaded and embedded across RBS. It clearly informs, guides and empowers the businesses to execute their strategies within risk appetite.
The Board has set out four key strategic risk appetite objectives, aligned with the strategic plan, which provide the boundaries within which the risk appetite for all material risks is set. The strategic risk appetite objectives are: • Maintain capital adequacy. To ensure there is sufficient capital resources to meet regulatory requirements and to cover the potential for unexpected losses.
• Designed to ensure stable and efficient access to funding and liquidity. To ensure that there is sufficient funding to meet its obligations, taking account of the constraint that some forms of funding may not be available when they are most needed.
Risk control frameworks and limits set detailed tolerances and limits for managing risk (such as credit risk and market risk) on a day-to-day basis. These limits support, and are required to be consistent with, the strategic risk appetite.
• Considers performance under stress. The establishment and monitoring of risk appetite considers potential risk exposures and vulnerabilities under plausible stress conditions
Effective processes exist for frequent reporting of RBS’s risks against agreed risk appetite to the Board and senior management.
Risk appetite statements provide clarity on the scale and type of activities permitted, in a manner that is easily communicated.
Risk appetite is set at RBS-wide level then cascaded and embedded across all businesses and support functions.
• Articulates the level of acceptable risk for all risks deemed material.
• Articulates the escalation path to be followed in the instance of a breach in risk appetite.
The communication of risk appetite helps embed appropriate risk taking into the bank’s culture.
Risk control frameworks and their associated limits are an integral part of the risk appetite framework and a key part of embedding risk appetite in day-to-day risk management decisions. The risk control frameworks manage risk by expressing a clear tolerance for material risk types that is aligned to business activities.
The RBS Policy Framework directly supports the qualitative aspects of risk appetite, helping to rebuild and maintain stakeholder confidence in RBS’s risk control and governance. Its integrated approach is designed to ensure that appropriate controls, aligned to risk appetite, are set for each of the material risks it faces, with an effective assurance process put in place to monitor and report on performance. Risk appetite has its own policy within the RBS Policy Framework. This policy sets out clear roles and responsibilities to set, measure, cascade and report performance against risk appetite, and provides assurances that business is being conducted within approved risk limits and tolerances.
The main risk types faced by RBS are presented below. For further information, refer to pages 145 to 251.
RBS’s CET1 ratio improved from 11.2% to 15.5% at 31 December 2015 despite absorbing the 0.7% impact of the pension accounting policy change and 0.8% impact from additional US RMBS and PPI provisions of
• Capital structure extended and leverage ratio improved through issuance of £2 billion AT1 capital notes in August 2015.
• Leverage ratio improved from 4.2% to 5.6% reflecting the improvements in capital strength, including AT1 issuance, as well as reduction in funded assets by £145 billion from £697 billion to £553 billion.
• RBS would have a GSIB capital surcharge requirement of 1.0% of RWAs, based on the FSB’s most recent determination of RBS’s systemic importance, a reduction from 1.5% previously.
Liquidity and funding risk arise through the maturity transformation role that RBS
• The liquidity portfolio increased by £5 billion in the year to £156 billion, primarily reflecting the strategic run-down of Capital Resolution loans faster than the associated liabilities and proceeds from the Citizens share sales; this was offset to some extent by UK PBB and Commercial Banking loan growth.
• Short-term whoesale funding (STWF) including derivative collateral decreased by £16 billion to £38 billion mainly due to the maturity of term debt issued during the financial crisis. STWF excluding derivative collateral covering short-term wholesale funding (STWF), by more than nine times.
• LCR was 136% at 31 December 2015, with the improvement from 112%
Business risk Business risk arises from exposure to, and the ability to assess the impact of, changes in the macroenvironment, competition, business operations and technology.
Reputational risk Reputational risk can arise from the conduct of employees; activities of customers and the countries in which they operate; provision of products and transactions; as well as operations and infrastructure.
• The importance of reputational risk was reinforced with the implementation of a Reputational Risk Policy across business franchises and functions to improve the identification, assessment and management of customers and issues that present a reputational risk.
• Conduct and litigation costs were £3.6 billion in 2015 compared with £2.2 billion in 2014 and included additional provisions of £2.1 billion for historical investment banking activity in the US and £0.6 billion for PPI. RBS
• RBS implemented programmes to prepare for ring-fencing and the UK’s new individual accountability regime, as well as other future regulatory requirements; there was significant investment in anti-money laundering controls, governance and training.
• Operational Risk continued to oversee the execution of major projects, including the transformation plan, the restructuring of CIB and the divestment of Williams & Glyn. This ensured the associated risks were assessed and understood with mitigating activity in place wherever possible.
Pension risk RBS is exposed to pension risk through its defined benefit schemes and the variations in their value.
RBS revised its policy for determining whether or not it has an unconditional right to a refund of any surpluses in its employee pension funds and also revised prior periods. The incremental impact of this, combined with the one-off accelerated payment expected to be made in 2016, is anticipated to improve RBS’s risk profile, capital planning, and resilience through the period to 2019. The accelerated payment is also expected to provide the Main Scheme Trustee with more flexibility over investment strategy.
• Subject to PRA approval, the adverse CET1 capital impact resulting from the accounting policy change and the accelerated payment is expected to be partially offset by a reduction in CET1 capital requirements. Any such core capital offsets are likely to occur at the earliest from 1 January 2017, but they will depend on the PRA’s assessment of RBS’s CET1 capital position at that time.
• Asset quality improved due to continued focus on reducing risk concentrations and the reduction in exit portfolios driven by the RCR
disposal strategy as well as improving economic and market conditions in the UK and Ireland.
• Deteriorating market conditions in the Oil & Gas and Mining & Metals sectors have led to heightened credit monitoring in these sectors. However, there was no material deterioration in asset quality during 2015 with the majority of the portfolios remaining investment grade.
Resolution disposals but also the impact of supportive economic conditions: ° Impairment provisions of £7.1 billion (2014 - £18.0 billion) covered REIL
Market risk The majority of RBS’s traded market risk exposure arises in
CIB and Capital Resolution through transactions in financial instruments including debt securities, loans, deposits and equities, as well as securities financing and derivatives.
• RWAs decreased by £2.8 billion to £21.2 billion, primarily in Capital
• Non-trading interest rate VaR was significantly lower following the divestment of Citizens.
(CET1) and other classes of capital such as Additional Tier 1
(AT1) and Tier 2. RBS will build up sufficient minimum requirements for eligible liabilities (MREL) over the coming years in line with regulatory requirements. Capital management involves the optimisation and efficient use of capital required by the bank’s businesses, the outcomes of stress testing, the requirements of the market and the regulators and the supply of adequate forms of capital at acceptable prices.
on a pro forma basis at end 2014) and 0.8% impact from additional US RMBS and PPI provisions of £2 billion during
• RWAs have reduced by £113 billion from £356 billion to £243 billion, ahead of year end target of £300 billion, driven by the disposal of Citizens (£63 billion) and the continued progress of Capital Resolution (down £46 billion).There were further small reductions across most core businesses.
assessment is a point in time measure of the amount of capital that is required to be held to meet the overall financial adequacy rules. This assessment may change over time, including as a result of an at least annual supervisory review and evaluation of RBS’s internal capital adequacy assessment process.
• Based on PRA’s proposals on MREL being twice current minimum Pillar 1 and Pillar 2A requirements, RBS’s current
(previously 1.5%) of RWAs, based on the FSB’s most recent determination of RBS’s systemic importance. *unaudited
RBS’s capital risk appetite, which informs its capital targets, is reviewed and set annually by the Board. Capital risk appetite sets target ratios for CET1 and leverage under stress scenarios and reverse stress tests. These then inform capital targets for CET1 and leverage. RBS also looks at other factors that may impact capital targets such as double leverage, distributable reserves, capital headroom to Maximum Distributable Amount (MDA) and intra group limits and exposures. Risk appetites are also set at legal entity level and may encompass additional specific risk measures such as intra group exposures and limits and double leverage.
accumulation of profits over time, by raising new equity via, for example, a rights issue or debt exchange and by raising AT1 and
The level of CET1 at the consolidated level and within specific legal entities is the cornerstone of capital strategy.
Complementing CET1, RBS issues externally and will allocate internally AT1 capital, Tier 2 capital and looking forward, MREL
It is under constant review and evaluation to ensure that it provides efficient and optimally valued benefits to the bank at all times.
The capital raising strategy is driven by two factors: the optimal blend to satisfy regulatory requirements, and the most cost effective means of financing. RBS has a range of instruments available to it both internally and externally. RBS also has legacy capital instruments that may still have some transitional benefits under the changing regulatory framework. RBS constantly looks at the value and efficiency provided by those instruments and will take such market related actions to the extent that circumstances and conditions merit such action. RBS’s policy is to manage its externally issued portfolio of debt securities for value.
RBS uses the budgeting cycle to forecast future capital requirements at CET1, Tier 1,
Strategic considerations in the mediumterm capital plan will be driven by key impacts such as a more restrictive approach to the capital base, higher capital ratio targets and enhanced risk coverage.
Stress testing results are produced through the same capital planning and stress testing models used for the budgeting and monthly review.
In addition to informing the ICAAP, stress testing in RBS is a key risk management tool used to support strategic financial planning, risk appetite, risk identification and risk mitigation.
The ICAAP assesses RBS’s material risks determining how much capital is required to cover these risks. The ICAAP consists of two types of internal capital assessment: • a Point-in-time capital assessment as at the financial year end, and
Risk Committee (BRC) is responsible for providing oversight and advice to the
Board in relation to current and potential future risk exposures of RBS and future risk strategy, including determination of risk appetite and tolerance.
Capital planning Capital and leverage is actively managed and regulatory ratios are a key factor in the Group’s planning processes and stress analyses. Capital planning is an activity undertaken within
From these inputs a forecast will be derived on how much capital is required to support these assumptions using both risk and leverage based approaches. This will estimate the required amount of CET1 through to non-capital minimum requirement eligible liabilities (MREL) in each period over the forecast.
The regulatory framework within which RBS operates continues to be developed at a global level through the FSB and Basel
A management buffer may be overlaid on top of that to reflect additional risks that the Board believe are prudent to cover (such as headroom over and above any MDA threshold).
The diagram below summarises a number of areas where stress testing is used within RBS. These include four overall categories, including strategic, financial and capital planning, risk appetite, risk identification and risk mitigation.
• Better understanding of underlying risks to inform the setting of risk appetite (e.g. sector reviews, earnings volatility, reverse stress test).
• Stress scenario definition: ° RBS-specific vulnerabilities are identified and linked to the development of relevant stresses; ° Scenario is defined, severity calibrated and parameters established; and
° Final stressed capital, leverage and liquidity ratios are produced for each year of the scenario.
RBS also takes part in external stress tests as part of wider stress testing frameworks implemented by regulatory authorities to test industry-wide vulnerabilities under crystallising global systemic risks. In 2015, RBS participated in a regulatory stress test designed by the Bank of England (BoE).
The BoE stress test exercise tested the impact of a synchronised global downturn triggered by a sharp slowdown in China and deep recession in the eurozone, amidst amplifying disinflationary pressures. In particular, the scenario examined the resilience of
° Pillar 2A - additional capital requirements for risks not captured or not adequately captured in Pillar 1. A
• Forward-looking stress capital assessment: ° Pillar 2B - Capital planning buffer is set to ensure RBS
The final ICAAP is approved by the Board prior to submission to the PRA. Component parts of the ICAAP are set out in the diagram below.
An economic capital framework and associated models are used by RBS as a supplement to other risk and capital management tools, such as stress testing and regulatory capital. Economic capital enables the bank to assess the adequacy of capital allocated to its material risks at different confidence levels/severities and to incorporate the assessment of additional risks that are not fully addressed by other measures, for example, concentration risk, which is not addressed by regulatory capital requirements. Models are developed and maintained for the bank’s material risk categories and are used in the ICAAP, to assess risk profiles within the risk appetite framework and as part of risk management frameworks e.g. operational risk and credit risk management.
Regulatory proposals and rules issued or set by the following regulators are the most relevant for RBS: • Basel - recommendations for all major international institutions - usually through Basel Committee of Banking
Following the implementation of the Basel III proposals through the Capital Requirements Regulation (CRR) and the Capital
• Valid and viable recovery plans in place for banks to return to normality after a period of stress or, easy application of the resolution frameworks.
Many of these aspects still require analysis and debate and therefore any implementation is likely to take many years.
CRR/CRD IV introduced the following minimum requirements to be met by 2019: • Pillar 1 requirement of: CET1 of 4.5% of RWAs; Tier 1 of 6%; and total capital of 8%; • CRD IV Combined buffers: capital conservation buffer of 2.5% of RWAs; countercyclical capital buffer of up to 2.5%; GSIB surcharge of 1.0% based on the most recent determination from the FSB; and
The PRA policy statement PS7/13 outlined changes to the minimum level of CET1 capital for large UK banks as follows: • The PRA required UK banks to meet the CRD IV end point
Pillar 1 requirement from 1 January 2015; • All Pillar 2A risks must be met with at least 56% CET1 capital. This matches the proportion of CET1 capital required for Pillar 1. The remaining (44%) allocation of Pillar 2A is restricted to 19% Tier 1 and 25% Tier 2; and
• All regulatory deductions from capital align CET1 with the end-point CRR definition, effectively making fully loaded
Implementation is from 1 January 2016 in line with the CRD IV
‘Implementing a UK leverage ratio framework’): • Minimum Tier 1 leverage ratio of 3%. To be met 75% by
• A countercyclical leverage ratio buffer equal to 35% of the risk-weighted countercyclical capital buffer rate to be met from CET1. The countercyclical buffer is currently set at 0%.
• A hurdle rate framework is to be enhanced, and will align to the overall capital framework. Within the hurdle rate, a bank will be expected to meet all of its minimum risk-based CET1 capital requirements (Pillar 1) in the scenario, as well as
Pillar 2A CET1 requirements. Additionally, GSIB buffers will be included in the hurdle rate.
As a major UK bank, RBS will be included in the annual cyclical scenarios and may also be required to participate in the biennial exploratory scenario stress tests to the extent that the risks being probed are relevant to RBS.
The EBA noted that the technical standards would be compatible with the proposed term sheet published by the FSB on TLAC
requirements for GSIBs, but there remains a degree of uncertainty as to the extent to which MREL and TLAC
Following the FSB finalising its TLAC proposals in November 2015, the PRA published its proposed requirements for MREL
• At an amount at least equal to two times the current minimum Pillar 1 and Pillar 2A capital requirements, or, if higher, any applicable leverage ratio requirement, or the minimum capital requirements under Basel plus any applicable CRD IV capital buffers: once for loss absorbency, once for recapitalisation
As at November 2015, RBS was moved down to the lowest bucket for required loss absorbency in the FSB’s updated list of
The purpose of the SRB is to prevent and mitigate long term noncyclical systemic or macro prudential risks not covered by existing regulation where there is potential for serious negative consequences for the financial system and real economy
Under the FPC’s proposals, ring-fenced bank sub-groups and large building societies in scope with total assets below £175 billion will be subject to a 0% SRB. Based on current information, under these proposals the FPC expects the largest ring-fenced bank in 2019 to have a 2.5% SRB. In line with the FPC’s previous announcement on the leverage ratio framework, those institutions subject to the SRB will also be set a 3% minimum leverage ratio requirement, together with an additional leverage ratio buffer calculated at 35% of the applicable SRB rate. For example, an institution with an SRB rate of 1% would have an additional leverage ratio buffer of 0.35%. The proposed calibration is expected to add around an aggregate 0.5 percentage points of risk-weighted assets to equity requirements of the system in aggregate.
The PRA will be responsible for applying the framework and will have ultimate discretion over which firms must hold the buffer and its specific size.
• The UK Financial Services (Banking Reform) Act passed into UK law in December 2013 implementing recommendations of the ICB. The PRA is in the process of finalising its rules with respect to ring-fencing.
The more relevant proposals issued by the BCBS are as follows: • Capital floors (BCBS 306); • Revised Pillar 3 disclosure (BCBS 309); • Total loss absorption capacity (BCBS 342); • Standardised approach for credit risk (BCBS 347); and
(3) Based on end-point CRR Tier 1 capital and leverage exposure under the CRR Delegated Act.
General: In accordance with the PRA’s Policy Statement PS7/2013 issued in December 2013 on the implementation of CRD IV, all regulatory adjustments and deduction to CET1 have been applied in full (end-point CRR) with the exception of unrealised gains on AFS securities which will be included from 2015 (PRA transitional basis).
Shareholders’ equity (excluding non-controlling interests) Shareholders' equity 53,431 53,431 55,763 55,763
AT1 capital 1,997 8,716 — 7,468 Tier 1 capital 39,605 46,346 39,919 47,117 Qualifying Tier 2 capital
Qualifying instruments issued by subsidiaries and held by third parties 2,257 7,354 3,175 7,490 Tier 2 capital 8,002 13,619 8,717 13,626 Total regulatory capital 47,607 59,965 48,636 60,743
Note: (1) Capital Requirements Regulation (CRR) as implemented by the Prudential Regulation Authority in the UK, with effect from 1 January 2014. All regulatory adjustments and deductions to CET1 have been applied in full for the end-point CRR basis with the exception of unrealised gains on available-for-sale (AFS) securities which has been included from 2015 for the PRA transitional basis.
Loss for the year net of movements in fair value of own credit (2,583) — — (2,583)
Excess of expected loss over impairment provisions 456 — — 456
Note: (1) This reflects the recycling of the reserve to profit and loss account following the deconsolidation of Citizens.
The leverage exposure is based on the CRR Delegated Act. End-point CRR basis £bn £bn
Additional analysis of derivative notionals and undrawn commitments, two of the major components contributing to the leverage exposure are set out below.
The table below analyses the derivative notionals by maturity for contracts other than credit derivatives, and credit derivatives by qualifying and non-qualifying. 2015 2014 Derivatives other than Derivatives other than credit derivatives (1) Credit derivatives (2) credit derivatives (1) Credit derivatives (2)
<1 year 1-5 years >5 years Qualifying qualifying Total <1 year 1-5 years >5 years Qualifying qualifying Total £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn
Leverage ratio and related disclosures: Weighted undrawn commitments The below table provides a breakdown of weighted undrawn commitments. 2015 2014 £bn £bn
Total 63.5 96.4 Note: (1) Based on a 10% credit conversion factor (CCF).
The following table illustrates the components of estimated LAC in the holding company and operating companies.
Tier 1 capital: end point CRR compliant AT1 of which: RBSG plc (holdco) 2.0 2.0 2.0 2.0 of which: RBSG operating subsidiaries (opcos) — — — —
MREL/TLAC proposals. The following table illustrates the roll-off profile and weighted average spreads of RBS’s major wholesale funding programmes.
RBS plc - weighted average rate spread (bps) 182 202 171 167 141 212 156
- weighted average rate spread (bps) 151 127 255 40 126 5 136
Note: (1) Modelled refers to advanced internal ratings basis for non-counterparty credit risk, internal model method for counterparty credit risk, and value-at-risk and related models for market risk. These principally relate to Commercial Banking (£58 billion).
• Business movements include a decrease of £5 billion relating to the annual recalculation of operational risk. Ulster Central
Notes: (1) Risk parameter changes relate to changes in credit quality metrics of customers and counterparties such as probability of default (PD) and loss given default (LGD). They comprise: - UK PBB and Ulster Bank RoI: primarily reflects recalibration of PD and LGD models reflecting improvements in the UK and Irish economies. - Capital Resolution: decrease in defaulted assets (£2.5 billion).
• Commercial Banking RWAs increased £9.1 billion, of which £8.4 billion related to the transfer of UK and Western
European loan portfolios from CIB which have a high proportion of undrawn commitments.
• Capital Resolution successfully implemented its risk reduction strategy by reducing RWAs by £46.1 billion overall, £32.6 billion in CIB and £13.5 billion in RCR: ° CIB portfolio: accelerated disposal and run-off of capitalintensive regional portfolios totalling £15.0 billion; in the
All the quantitative disclosures in this section are audited except for those in Liquidity metrics and Behavioural maturity, and collateral (on and off-balance sheet). Certain disclosures exclude
RBS’s primary funding source is its customer deposit base, primarily built through its retail and commercial franchises in the
RBS may access various funding facilities offered by central banks from time to time. The use of such facilities can be both part of a wider strategic objective to support initiatives to help stimulate economic growth or as part of the broader liquidity management and funding strategy. Overall usage and repayment of available central bank facilities will fit within the overall liquidity risk appetite and concentration limits.
• The liquidity portfolio increased by £5 billion in the year, primarily reflecting the strategic run-down of Capital
Capital Resolution assets at a faster rate than their associated liabilities. The ratio is strengthened by the placing of surplus Capital Resolution liabilities in short-term liquid assets.
• The net stable funding ratio (NSFR), based on RBS’s interpretation of the Basel framework, had increased to 121% at 31 December 2015 from 112% at 31 December 2014. The increase in the metric is also partly due to the reduced need for stable funding as a result of Capital
• Liquidity risk appetite is measured by reference to the liquidity portfolio as a proportion of net stressed outflows and the ratio was 227% at 31 December 2015 (186% at 31
• Based on its assessment of the PRA proposals, RBS may issue between £3 - £5 billion per annum during 2016 - 2019 to meet MREL requirements.
• The customer loan:deposit ratio reduced to 89% compared with 95% at the end of 2014. This reflects the strategic run down of Capital Resolution loans and higher retail and commercial deposits, this was partly offset by loan growth within UK PBB.
• Has in place strategies, polices and practices to ensure that
The Asset and Liability Management Committee (ALCo) sets and reviews the liquidity risk management framework and limits within the risk appetite set by the Board. ALCo, and by delegation the
(PRA), has a comprehensive set of liquidity regulations which were revised in 2015 to replace the existing BIPRU 12 regime with the CRD IV liquidity regime in the UK. To comply with the
Process (L-SREP) with the PRA, that involves a comprehensive review of the RBS ILAAP, liquidity policies and risk management framework. This results in the settings of the Individual Liquidity Guidance, which influences the size and overall composition of the liquidity portfolio.
banks are initially required to maintain a minimum of 80% of LCR, rising to 100% by 1 January 2018.
October 2014, proposing an implementation date of 1 January 2018, by which time banks are expected to meet an NSFR ratio of 100% from this point onwards. The EC has stated that it shall, if appropriate, submit a legislative proposal to the European
Measurement, monitoring and contingency planning In implementing the liquidity risk management framework, a suite of tools are used to monitor, limit and stress test the risks within the balance sheet. The limits control the amount and composition of funding sources, asset and liability mismatches and funding concentrations, in addition to the level of liquidity risk.
Liquidity risks are reviewed at a significant legal entity level daily, and at a business level monthly, with performance reported to
Stress testing* Under the liquidity risk management framework RBS maintains the ILAA, a component of which is an assessment of net stressed liquidity outflows. These liquidity stress tests apply scenariobased behavioural and contractual assumptions to cash inflows and outflows under the worst of three severe stress scenarios, as prescribed by the PRA. These are a market-wide stress, an idiosyncratic stress and a combination of both.
A stress event can occur when either firm-specific or market-wide factors lead to depositors and investors withdrawing or not renewing funding on maturity. This could be caused by many factors including fears over the viability of the firm. Additionally, liquidity stress can be brought on by customers choosing to draw down on loan agreements and facilities.
Stress tests are designed to examine the impact of a variety of firm-specific and market-wide scenarios on the future adequacy of the liquidity reserves. Stress test scenarios are designed to take into account RBS’s experience during the financial crisis, recent market conditions and events. These scenarios can be run at any time in response to the emergence of firm-specific or market-wide risks that could have a material impact on RBS’s liquidity position. In the past these have included credit rating changes and political and economic conditions changing in particular countries.
Liquidity portfolio Liquidity risks are mitigated by a centrally managed liquidity portfolio. The size of the portfolio is determined under the liquidity risk management framework with reference to RBS’s liquidity risk appetite.
The majority of the portfolio is centrally managed by Treasury, ring-fenced from the CIB trading book, and is the ultimate responsibility of the RBS Treasurer. This portfolio is held in the
Separately from the liquidity portfolio, RBS holds high quality assets to meet payment systems collateral requirements; these are managed by Treasury but are not freely available to other areas of RBS.
The composition of the liquidity portfolio is subject to internal policies and limits over quality of counterparty, maturity mix and currency mix. The liquidity value of the portfolio is determined with reference to current market prices and the haircuts necessary to generate cash from the asset.
The table below sets out the key liquidity and related metrics monitored by RBS. All measures include Citizens for 2014.
Notes: (1) RBS's liquidity risk appetite is measured by reference to the liquidity portfolio as a percentage of stressed contractual and behavioural outflows under the worst of three severe stress scenarios of a market-wide stress, an idiosyncratic stress and a combination of both in RBS’ ILAA. This assessment is performed in accordance with PRA guidance. (2) On 1 October 2015 the LCR became the PRA’s primary regulatory liquidity standard. It is a Pillar 1 metric to which the PRA apply Pillar 2 add-ons. UK banks are required to meet a minimum standard of 80% initially rising to 100% by 1 January 2018. The published LCR excludes Pillar 2 add-ons. RBS calculates the LCR using its own interpretations of the EU LCR Delegated Act, which may change over time and may not be fully comparable with those of other financial institutions.
(3) BCBS issued its final recommendations for the implementation of the net stable funding ratio in October 2014, proposing an implementation date of 1 January 2018. Pending further guidelines from the EU and the PRA, RBS uses the definitions and proposals from the BCBS paper and internal interpretations, to calculate the NSFR. Consequently RBS’s ratio may change over time and may not be comparable with those of other financial institutions.
Cash and balances at central banks 67,790 1,611 69,401 67,294 69,736 68,925 68,410 67,042 61,956 60,816
Total liquidity portfolio GBP USD EUR Total £m £m £m £m
Westminster Bank Plc, Ulster Bank Limited, Coutts & Co and Adam & Company. In addition, certain of RBS’s significant operating subsidiaries - RBS N.V. and Ulster Bank Ireland Limited - hold locally managed portfolios that comply with local regulations that may differ from PRA rules.
The composition of RBS’s balance sheet is a function of the broad array of product offerings and diverse markets served by its core businesses. The structural composition of the balance sheet is augmented as needed through active management of both asset and liability portfolios. The objective of these activities is to optimise the liquidity profile, while ensuring adequate coverage of all cash requirements under extreme stress conditions.
Liquidity and funding risk continued Funding sources The table below shows the principal funding sources excluding repurchase agreements (repos).
By product 1 year 1 year Total 1 year 1 year Total £m £m £m £m £m £m
Total funding excluding repos and Citizens 377,669 47,381 425,050 394,933 68,379 463,312
Notes: (1) Includes £0.7 billion relating to RBS’s participation in central bank financing operations under the European Central Bank’s Targeted Long Term Refinancing Operations (2) Cash collateral includes £9,504 million (2014 - £12,036 million) from financial institutions.
The table below analyses repos by counterparty type. 2015 2014 £m £m
Reverse repos at 31 December 2015 were £39.9 billion (2014 - £64.7 billion). Fair value of securities received as collateral for reverse repos was £39.8 billion (2014 - £64.7 billion), of which £29.0 billion (2014 - £60.2 billion) had been rehypothecated for RBS’s own transactions, in line with normal market practice.
Behavioural analysis* Contractual maturity analysis and net behavioural funding surplus/(gap) are set out below.
CIB (£5 billion) rundown of loans faster than associated liabilities when compared with the prior year end. This was partly offset slightly by lending growth in UK PBB during the year.
• Customer deposits and customer loans compare broadly from a behavioural perspective. The net surplus position increase has largely been seen within the 1 to 5 year bucket, in addition to the funding gap having closed in the greater than 5 year bucket during 2015. Reasons for these movements include longer-dated behaviours in RBSI during 2015 and quicker than previously anticipated rundown of
Cash and balances at central banks 74,872 — — — 74,872 — — — 74,872 — 74,872
Total financial liabilities excluding Citizens 326,089 13,485 9,627 13,592 362,793 18,868 11,115 34,779 427,555 477,104 904,659
Retail assets including residential mortgages, credit card receivables and personal loans display many of these features.
Balance sheet encumbrance Encumbered as a result of transactions Assets encumbered at the with counter parties other than central banks central bank and unencumbered assets
(7) Total Total £bn £bn £bn £bn £bn £bn £bn £bn £bn £bn
Liabilities secured Intra-Group - secondary liquidity (4.0) — — (4.0) Intra-Group - other (6.2) — — (6.2) Third-party (8) (8.0) (31.1) (39.6) (78.7)
Encumbered as a result of transactions Assets encumbered at the 2014*
Covered Total Positioned Readily Capable bonds and Repos and encumbered at the available for of being Cannot be securitisations(1) Derivatives similar (2) assets (3) central bank encumbrance encumbered encumbered
Liabilities secured Intra-Group - secondary liquidity (13.1) — — (13.1) Intra-Group - other (11.6) — — (11.6) Third-party (8) (12.7) (39.6) (64.7) (117.0)
(7) Cannot be encumbered includes: (a) Derivatives, reverse repurchase agreements and trading related settlement balances. (b) Non-financial assets such as intangibles, prepayments and deferred tax. (c) Loans that cannot be pre-positioned with central banks based on criteria set by the central banks, including those relating to date of origination and level of documentation. (d) Non-recourse invoice financing balances and certain shipping loans whose terms and structure prohibit their use as collateral.
(8) In accordance with market practice, RBS employs securities recognised on the balance sheet, and securities received under reverse repo transactions as collateral for repos. Secured derivative liabilities reflect net positions that are collateralised by balance sheet assets.
Responsibility for the day-to-day management of business risk lies primarily with the franchises with oversight by the Finance function. The franchises are responsible for delivery of their business plans and the management of such factors as pricing, sales volumes, marketing expenditure and other factors that can introduce volatility into earnings.
Business risk is directly managed and controlled through RBS’s strategic planning, budgeting and new product development processes, in which the following elements are incorporated: • Evaluation of the macroeconomic environment; • Industry analysis; • Competitor analysis, across geography, product, customer; • Customer behaviour analysis (i.e. understanding customer segments, trends and behaviours); • Understanding of technological developments; • Assessment of regulatory developments and changes; and
The following aspects of the strategic planning process also control business risk: • The Top Risks process which aims to identify early, monitor closely and avoid or otherwise manage effectively strategic risks that have the highest likelihood of impacting strategic plans; and
• At the end of the strategic planning process sensitivity analysis is undertaken on the consolidated budget to assess the robustness of the plan and compliance with strategic risk objectives, including under a variety of stressed conditions
Furthermore, business risk is controlled as a result of having a requirement for RBS and each business to incorporate the following elements when formulating strategic plans: • Organisational capabilities; • Organisational resources; • Organisational commitment; and
Finally, business risk is controlled through the adoption of policy standards that inform the approach to strategy development and business planning. Examples include the policy standards on
The monthly and quarterly performance review processes described above, as well as the Top Risks process are also all central to the identification and monitoring of business risk.
Business risk is reviewed and assessed through the planning cycles. Financial plans are developed on a bottom-up basis and refined under expected and potential scenarios reflecting expectations of the external environment and strategic priorities.
A major part of the Top Risks process is to ensure that all appropriate action is taken to mitigate the most material risks to strategic objectives.
RBS also undertakes strategic reviews to decide on how to react to specific developments.
The importance of reputational risk was reinforced with the implementation of a Reputational Risk Policy across customerfacing businesses and functions to improve the identification, assessment and management of customers and issues that present a reputational risk.
This resulted in the strengthening of governance frameworks in businesses including enhancing reputational risk forums that consider customers, transactions, products or issues that present material reputational risks. The membership of the most senior
RBS-wide Reputational Risk Forum (RRF) was also reinforced through the addition of the Chief Marketing Officer as a member.