(2) Based on indicative Core attributable profit taxed at standard rates and Core average tangible equity per the average balance sheet (c.75% of Group tangible equity based on risk-weighted assets at 31 December 2011).
We invested £72 million in the communities in which we operate
RBS Group serves over 30 million customers in over 30 countries. We serve a variety of customers, ranging from individuals to large corporates, and small businesses to governments. We offer them a range of products to meet their differing needs.
We offer services that help customers to manage these risks; the first-time buyer taking a fixed-rate mortgage, the UK farmer receiving payments in euros, and the business managing its inflation risks.
International Banking provides supply chain finance and payment services to UK Corporate clients via MaxTrad and Access Direct.
UK Corporate and UK Retail worked together to help small business customers affected by the riots in England in 2011.
UK Retail have supplied over £100 million of mortgages to Wealth customers since Q3 2011.
However, RBS has reported a pre-tax loss of £766 million overall and, in common with others, has seen a share price fall, albeit still at levels much higher than the 10p starting point in January 2009. These outcomes reflect the stage of our recovery and the external environment. They mask real and important accomplishments, however.
RBS wholesale businesses are a vital part of the Group. They are important contributors in their own right. They are linked with our other banking businesses closely in a way that helps us to serve all our customers better, makes us more profitable as a whole and gives greater stability and resilience to the Group.
• the domestic corporate customers, previously served by GTS, will be managed by our domestic corporate banking businesses in the UK, Ireland and the US.
We want to hold strong liquidity buffers, to guard against unexpected funding difficulties.
Rigorous capital and cost allocation Accurately deploy the Group’s capital and allocate appropriate costs to focus the Divisions on returns, as well as on profit growth.
Originally implemented in 2009 and ongoing to reflect revised Group targets.
Our liquidity reserves were £155 billion at the end of 2011, above our medium-term target.
• We launched a new iPhone banking app in May, followed by an iPad app in July, a BlackBerry app in September and an Android app in October.
Our Wealth business is founded on good advice and high levels of service. That is what our clients want. We will be: • Human – when our clients need advice or a service they should be able to speak to us, either in person or by telephone.
It might seem odd that a business that relies on personal service places so much emphasis on the role technology plays in what we do. However, our desire to provide exceptional service was in danger of being let down by systems that were past their best. That is why we invested in the Avaloq platform.
Bankline is our internet banking service for UK business customers. More than 110,000 customers use it, from small businesses to large corporations. Since we launched Bankline in 2006 we have upgraded it every year to make it easier to use it and more efficient, saving our customers time and money.
Economic conditions remained extremely challenging. In the Republic of Ireland, the economy faltered again in the second half of the year. Unemployment averaged more than 14%. Northern Ireland grew, although unemployment was still above the prerecession rate and house prices fell.
• Since we launched our Start Up and Early Stage proposition in September 2010, we have supported more than 6,000 new businesses.
Non-interest income fell 2%. Higher gains on the sale of securities and higher account and transaction fees partially offset the impact of legislative changes on debit card and deposit fees. Total expenses were down 1%.
In light of the changed market and regulatory environment, we have re-focused our strategic priorities for the longer term. We are combining our wholesale Banking business with the international arm of Global Transaction Services to create a Markets business and an International Banking unit. We will continue to offer world-class debt financing, transaction services and risk management, while seeking to reduce our use of wholesale funding and making our capital work harder to improve our return on equity.
We signed a five-year deal with Sainsbury’s Finance, marking a significant new partnership for us, to provide underwriting, sales, service and claims management for their car insurance customers.
Our work with UK Retail in delivering the flagship NatWest branch in Westfield Mall, Stratford – the gateway to London’s 2012 Olympic Park – was an emblem of what we do best.
It’s the first branch with our new modular, sustainable design and includes helpful technology such as a ‘Select A Service’ system that directs customers to get the right solution first time, reducing waiting times and increasing satisfaction.
• Our technology team introduced Select A Service, free WiFi and digital media services.
When we cut the Group’s assets, we reduce: • the amount of capital the Group needs to hold. That can free-up capital to lend to other customers; • the Group’s reliance on short-term funding. That makes us more resilient; and
Description of business Introduction The Royal Bank of Scotland Group plc is the holding company of a large global banking and financial services group. Headquartered in Edinburgh, the Group operates in the United Kingdom, the United States and internationally through its principal subsidiaries, the Royal Bank and NatWest. Both the Royal Bank and NatWest are major UK clearing banks. In the United States, the Group's subsidiary Citizens is a large commercial banking organisation. Globally, the Group has a diversified customer base and provides a wide range of products and services to personal, commercial and large corporate and institutional customers.
Global Banking & Markets (GBM) is a leading banking partner to major corporations and financial institutions around the world, providing an extensive range of debt and equity financing, risk management and investment services to its customers. The division is organised along six principal business lines: money markets; rates flow trading; currencies; equities; credit and mortgage markets; and portfolio management & origination.
RBS Insurance provides a wide range of general insurance products to consumers through a number of well known brands including; Direct Line, Churchill and Privilege. It also provides insurance services for third party brands, through its UKI Partnerships business. In the commercial sector, its NIG and Direct Line for Business operations provide insurance products for businesses via brokers or direct respectively. Through its international division, RBS Insurance sells general insurance, mainly motor, in Germany and Italy. In addition to insurance services, RBS Insurance continues to provide support and reassurance to millions of UK motorists through its Green Flag breakdown recovery service and Tracker stolen vehicle recovery and telematics business. On 15 February 2012, a new corporate brand, Direct Line Group, was announced.
Central Functions comprises Group and corporate functions, such as treasury, funding and finance, risk management, legal, communications and human resources. The Centre manages the Group's capital resources and Group-wide regulatory projects and provides services to the operating divisions.
(4) Adjusted earnings/(loss) per ordinary and B share is based on earnings from continuing operations adjusted for movements in fair value of own debt, Asset Protection Scheme, Payment Protection Insurance costs, sovereign debt impairment, amortisation of purchased intangible assets, integration and restructuring costs, gain on redemption of own debt, strategic disposals, bonus tax, bank levy, gains on pensions curtailment, interest rate hedge adjustments on impaired available-for-sale Greek government bonds and write-down of goodwill and other intangible assets.
Integration and restructuring costs remained broadly flat at £1,064 million, reflecting significant GBM restructuring in 2011.
Earnings Basic earnings per ordinary share, including discontinued operations, was a loss of 1.8p per share compared with a loss of 0.5p in 2010.
Administrative expenses 13,836 14,948 15,528 16,060 16,068 14,888 Depreciation and amortisation 1,642 1,762 1,873 1,875 2,150 2,166 Write-down of goodwill and other intangible assets — — — 91 10 363 Operating expenses 15,478 16,710 17,401 18,026 18,228 17,417
Staff costs as a percentage of total income 29% 27% 31% 30% 30% 30%
Non-taxable items - gain on sale of Global Merchant Services 12 221 — - gain on redemption of own debt — 11 693 - other non-taxable items 245 341 410 Taxable foreign exchange movements 4 4 1 Losses brought forward and utilised 2 2 94 Adjustments in respect of prior years 196 355 (118) Actual tax (charge)/credit (1,250) (634) 429 2011 compared with 2010 - managed and statutory The high tax charge in 2011 reflects profits in high tax regimes (principally US) and losses in low tax regimes (principally Ireland), losses in overseas subsidiaries for which a deferred tax asset has not been recognised (principally Ireland and the Netherlands) and the effect of two reductions of 1% in the rate of UK corporation tax enacted in March 2011 and July 2011 on the net deferred tax balance.
Divisional performance continued Employee numbers at 31 December (full time equivalents in continuing operations rounded to the nearest hundred)
Note: (1) Divisional return on equity is based on divisional operating profit after tax, divided by average notional equity (based on 9% of the monthly average of divisional RWAs, adjusted for capital deductions).
Analysis of income by product Mortgages and home equity 744 786 781 464 509 499 Personal lending and cards 673 735 706 420 476 451 Retail deposits 1,474 1,397 1,296 918 903 828 Commercial lending 931 896 848 580 580 542 Commercial deposits 469 495 624 292 320 398 Other 362 244 9 226 158 6 Total income 4,653 4,553 4,264 2,900 2,946 2,724
Performance ratios Return on equity (1) 6.3% 3.6% (1.3%) 6.3% 3.6% (1.3%) Net interest margin 3.06% 2.85% 2.37% 3.06% 2.85% 2.37% Cost:income ratio 72% 72% 78% 72% 72% 78%
2011 compared with 2010 Operating profit fell by 54%, from £3,364 million for 2010 to £1,561 million for 2011, driven by a 25% decrease in revenue. The year was characterised by volatile and deteriorating credit markets, especially during the second half of the year when the European sovereign debt crisis drove a sharp widening in credit spreads.
Notes: (1) ‘Other’ predominately consists of the personal lines broker business. (2) Total in-force policies include travel and creditor policies sold through RBS Group. These comprise travel policies included in bank accounts e.g. Royalties Gold Account, and creditor policies sold with bank products including mortgage, loan and card payment protection. (3) Return on regulatory capital required is based on annualised operating profit/(loss) after tax divided by average notional regulatory equity. (4) Return on tangible equity is based on annualised operating profit/(loss) after tax divided by average tangible equity. (5) Loss ratio is based on net claims divided by net premium income. (6) Commission ratio is based on fees and commissions divided by gross written premium income. (7) Expense ratio is based on expenses divided by gross written premium. (8) Combined operating ratio is the sum of the loss, commission and expense ratios. (9) Consists of general and life insurance liabilities, unearned premium reserves and liability adequacy reserve.
While overall gross written premium fell by 5% in 2011, it increased by 10% in Commercial, which includes NIG, the commercial broker business, and Direct Line for Business, the direct SME insurer. A new brand identity was unveiled for NIG and work continued to improve its product offering and service to brokers. Direct Line for Business continued to develop well.
2010 as a whole was a disappointing profit year, impacted by significant reserve strengthening for bodily injury claims and severe weather, resulting in a loss of £295 million.
UK Corporate Manufacturing and infrastructure 0.1 0.3 0.3 Property and construction 5.9 11.4 14.1 Transport 4.5 5.4 — Banking and financial institutions 0.6 0.8 — Lombard 1.0 1.7 2.9 Other 7.5 7.4 17.6 Total UK Corporate 19.6 27.0 34.9
The Group Board ensures that the Group manages risk effectively through approving and monitoring the Group’s risk appetite, considering Group stress scenarios and agreed mitigants and identifying longer-term strategic threats to the Group’s business operations.
Sovereign risk increased in 2011, resulting in rating downgrades for a number of countries, including several eurozone members. This resulted in an impairment charge recognised by the Group in 2011 in respect of available-for-sale Greek government bonds. In response, the Group further strengthened its country risk appetite setting and risk management systems during the year and brought a number of advanced countries under limit control. This contributed to a reduction in exposure to a range of countries. Refer to pages 208 to 228.
During 2011, the Group continued to manage down its market risk exposure in Non-Core and reduce the asset-backed securities trading inventory such that the trading portfolio became less exposed to credit risk. Refer to pages 229 to 235.
Financial cost of adapting to changes in laws, rules or regulations or of penalties for non-compliance.
Credit risk 344.3 385.9 513.2 410.4 Counterparty risk 61.9 68.1 56.5 56.5 Market risk 64.0 80.0 65.0 65.0 Operational risk 37.9 37.1 33.9 33.9 508.1 571.1 668.6 565.8 Asset Protection Scheme relief (69.1) (105.6) (127.6) (127.6)
Note: (1) Total capital includes certain instruments issued by RBS N.V. Group that are treated consistent with the local implementation of the Capital Requirements Directive (including the transitional provisions of that Directive). The FSA formally confirmed this treatment in 2012.
The Group also accesses professional markets funding by way of public and private debt issuances on an unsecured and secured basis. These debt issuance programmes are spread across multiple currencies and maturities, to appeal to a broad range of investor types and preferences around the world. This market-based funding supplements the Group’s structural liquidity needs and, in some cases, achieves certain capital objectives.
Average £m Period end £m Period end £m Period end £m
Key point In view of the continuing uncertain market conditions, the liquidity portfolio was maintained above the Group’s target level of £150 billion at £155.3 billion, with an average balance in 2011 of £161.4 billion. In anticipation of challenging market conditions, the composition was altered to become more liquid and conservative, as cash and balances at central banks rose to 45% of the total portfolio at 31 December 2011, from 35% at 31 December 2010.
Cash 79 — 57 — 52 — — Inter-bank lending 44 — 58 — 49 — — Debt securities > 1 year - central and local governments AAA to AA- 77 4 89 4 84 4 5 - other eligible bonds 73 15 75 15 87 17 20 - other bonds 14 14 10 10 9 9 100 Debt securities < 1 year 45 — 43 — 69 — — Derivatives 530 — 427 — 438 — — Reverse repurchase agreements 101 — 95 — 76 — — Customer loans and advances > 1 year - residential mortgages 145 94 145 94 137 89 65 - other 173 173 211 211 241 241 100 Customer loans and advances < 1 year - retail loans 19 16 22 19 24 20 85 - other 137 69 125 63 153 77 50 Other (3) 70 70 97 97 103 103 100 Total assets 1,507 455 1,454 513 1,522 560 Undrawn commitments 240 12 267 13 289 14 5 Total assets and undrawn commitments 1,747 467 1,721 526 1,811 574
The Group holds a single own-asset conduit, which has assets funded by the Group. The Group’s maximum exposure to loss on own-asset conduits was £1.1 billion in 2011 (2010 - £4.1 billion; 2009 - £9.1 billion), with no ABCP outstanding at that date (2010 - £2.2 billion; 2009 - £7.7 billion).
Limits on IRRBB are proposed by the Group Treasurer for approval by the Executive Risk Forum annually.
Group Treasury aggregates exposures arising from its own external activities and positions transferred to it from divisions. Where appropriate, Group Treasury nets off-setting risk exposures to determine a residual exposure to interest rate movements. Hedging transactions using cash and derivative instruments are executed to manage IRRBB exposures, within the GALCO approved VaR limits.
The Group’s structural foreign currency exposure at 31 December 2011 was £24.2 billion and £17.9 billion before and after economic hedges respectively, broadly unchanged from the end of 2010 position.
In response to the severe budgetary cuts mandated by the UK Government in 2010, the UK and Northern Ireland teams conducted a full review of the likely impact of the austerity measures on their corporate and retail lending portfolios. Areas of specific focus, such as local authority lending, where budgetary pressures will be hard felt, and portfolios exposed to discretionary consumer spend, such as the retail and leisure industries, were stressed using downside assumptions on further house price deterioration and higher unemployment. The output of these activities was reviewed by the Executive Risk Forum and actions agreed in the event that these scenarios threaten to materialise.
Risk management: Credit risk continued Problem debt management continued The wholesale restructured loan data presented in the tables below include only those arrangements that achieved legal completion during 2011 and that individually exceed respective thresholds set at divisional level, which range from nil to £10 million. This population captures approximately 71% of that proportion of the wholesale portfolio that is either on Watchlist or under GRG stewardship. Within this population, restructurings amounting to £8.6 billion achieved legal completion during 2011. A further £14.7 billion was in the process of being completed at year end (these loans are not included in the tables below). Of the loans that were subject to restructuring during 2011 by the divisions, 82% remained in the performing book at 31 December 2011. Of those restructured within the GRG during the year, 17% had been returned to satisfactory by year end.
Within collections, a range of tools is deployed to initiate contact with the customer, establish the cause of their financial difficulty and, where possible, return the customer to a satisfactory position using, where appropriate, forbearance strategies. If these strategies are unsuccessful, the customer is transferred to the recoveries team.
For those loans classified as non-performing, the Group’s objective in granting forbearance is to minimise the loss on these accounts and wherever possible, return the customer to the performing book. For those loans that are performing, the aim is to enable the customers to continue to service the loan.
Notes: (1) Includes all forbearance arrangements regardless of whether or not the customer is experiencing financial difficulty. (2) Comprises the current stock position of forbearance deals agreed since January 2008 for UK Retail and since July 2008 for Ulster Bank. (3) Refer to page 155 for details of the proportion of UK Retail and Citizens mortgage loans that have missed three or more payments, compared to the forbearance population above.
The security charges may be floating or fixed, with the type of security likely to impact (i) the credit decision; and (ii) the potential loss upon default. In the case of a general charge such as a mortgage debenture, balance sheet information may be used as a proxy for market value if the information is deemed reliable.
For automobile lending in the US, new vehicles are valued at cost and used vehicles at the average trade-in value. At 31 December 2011 this portfolio amounted to £4.8 billion (2010 - £5.1 billion; 2009 - £5.7 billion), all of which was fully secured and predominantly (over 99%) in the performing book.
Key points Exposure to retail portfolios within the UK Retail, Ulster Bank and US Retail & Commercial divisions remained broadly constant during the year. A reduction in wholesale portfolios was seen across all divisions, with the exception of Wealth, for which product demand and risk appetite typically have more in common with retail portfolios. Another exception was ‘Other’, which is driven by Treasury where growth in credit risk assets relates to exposure to central banks in the USA, the UK and Germany and is a function of the Group’s liquidity requirements and cash positions.
By geography Commercial £m Residential £m Commercial £m Residential £m Total £m Core £m Non-Core £m Core £m Non-Core £m Total £m
& Markets Total Maturity profile of portfolio £m £m £m £m £m
Average LTV on new originations during the year 58.4 64.2 67.2 63.8 64.8 62.6
Of the total portfolio, 98.6% is designated as Core business, primarily comprising mortgages branded the Royal Bank of Scotland, NatWest, the One Account and First Active. Non-Core comprises Direct Line Mortgages.
Citizens Citizens’ average credit card portfolio totalled £936 million during 2011, with Core assets comprising 90.2% of the portfolio. Citizens’ cards business has traditionally adopted conservative risk strategies compared with the US market and given the economic climate, has introduced tighter lending criteria and lower credit limits. These actions have led to improving new business quality and a business performing better than industry benchmarks (provided by VISA). The latest available metrics show the 60+ days delinquency as a percentage of total outstandings at 2.15% at November 2011 (compared to an industry figure of 2.45%) and net contractual charge-offs as a percentage of total outstandings at 2.89% at November 2011 (compared to an industry figure of 3.69%).
Core Mortgages 20,020 2,184 945 10.9 43 4.7 570 11 Personal unsecured 1,533 201 184 13.1 92 12.0 56 25 Commercial real estate - investment 3,882 1,014 413 26.1 41 10.6 225 —
Comprising: Repurchase agreements 10,712 Derivative balances 361,493 Derivative collateral 31,015 Other 15,325 418,545
Commercial and other property related lending declined from £102.1 billion to £86.2 billion, including disposal groups (£4.7 billion). The decline was driven by Non-Core reductions.
RoW Central and local government 34 425 428 853 14,073 — 14,073 189 6 15,155 — 15,155 Finance - banks 5,129 4,453 197 4,650 3,299 — 3,299 — 1,526 14,604 — 14,604 - other (3) 2,088 6,751 22 6,773 145 444 589 27,531 1,792 38,773 22,575 16,198 Residential mortgages — 410 203 613 — — — — — 613 — 613 Personal lending — 1,460 2 1,462 — — — 6 — 1,468 — 1,468 Property — 735 1,205 1,940 303 15 318 68 — 2,326 — 2,326 Construction — 183 91 274 12 4 16 22 — 312 — 312 Manufacturing — 2,185 686 2,871 — 4 4 448 — 3,323 — 3,323 Service industries and business activities - retail, wholesale and repairs — 1,030 102 1,132 13 28 41 149 — 1,322 1 1,321 - transport and storage — 430 403 833 398 27 425 199 — 1,457 — 1,457 - health, education and recreation — 132 17 149 — 8 8 29 — 186 — 186 - hotels and restaurants — 90 13 103 — 3 3 4 — 110 — 110 - utilities — 1,468 399 1,867 33 34 67 97 — 2,031 — 2,031 - other 1 2,100 912 3,012 85 270 355 1,004 8 4,380 1 4,379 Agriculture, forestry and fishing — 6 — 6 — — — 2 — 8 — 8 Finance lease and instalment credit — 47 — 47 — — — — — 47 — 47 Interest accruals — 90 6 96 82 — 82 — — 178 — 178 Group 7,252 21,995 4,686 26,681 18,443 837 19,280 29,748 3,332 86,293 22,577 63,716
Notes: (1) Includes cash and balances at central banks of £79,269 million (2010 - £57,014 million; 2009 - £52,261 million) and settlement balances of £7,771 million (2010 - £11,605 million; 2009 - £12,033 million). (2) This shows the amount by which the Group’s credit risk exposure is reduced through arrangements, such as master netting agreements, which give the Group a legal right to set off the financial asset against a financial liability due to the same counterparty. In addition, the Group holds collateral in respect of individual loans and advances to banks and customers. This collateral includes mortgages over property (both personal and commercial); charges over business assets such as plant, inventories and trade debtors; and guarantees of lending from parties other than the borrower. The Group obtains collateral in the form of securities in reverse repurchase agreements. Cash and securities are received as collateral in respect of derivative transactions.
Total AAA 13,486 38,009 44,123 10,704 39,388 878 146,588 67 51,235 AA to AA+ — — 18,025 3,511 6,023 616 28,175 13 6,335 A to AA- — — 9,138 4,926 2,656 1,155 17,875 8 3,244 BBB- to A- — — 2,845 1,324 3,412 2,005 9,586 5 3,385 Non-investment grade — — 1,770 1,528 5,522 2,425 11,245 5 4,923 Unrated — — 54 480 2,552 925 4,011 2 1,703 13,486 38,009 75,955 22,473 59,553 8,004 217,480 100 70,825
Cash collateral held against derivative exposures (1) (37,222) Net exposure 50,770
Note: (1) At 31 December 2011, in addition to cash collateral the Group holds collateral in the form of securities of £5.3 billion (2010 - £2.9 billion; 2009 - £3.6 billion) against derivative positions.
At 1 January 2011 13,511 22,190 35,701 1,696 1,201 2,897 15,207 23,391 38,598 Transfers to disposal groups (1,287) — (1,287) (238) — (238) (1,525) — (1,525) Intra-group transfers 300 (300) — 149 (149) — 449 (449) — Currency translation and other adjustments (158) (496) (654) (14) — (14) (172) (496) (668) Additions 8,379 8,698 17,077 2,585 1,059 3,644 10,964 9,757 20,721 Transfers 645 381 1,026 (362) (352) (714) 283 29 312 Disposals and restructurings (407) (1,470) (1,877) (9) (97) (106) (416) (1,567) (1,983)
Risk management: Country risk continued Monitoring, management and mitigation* continued Going forward, the Group continues to extend country limit control to other countries within and outside the eurozone and will continue to manage medium-term exposure closer to its medium-term benchmark ratios. In addition, work is continuing on the determination of actual appetite per country, on the country risk reporting systems and their integration with credit, treasury and finance systems, on the representation of country risk aspects in rating models, economic capital models and integrated stress testing, and on the combination with actual and expected returns. All of this should help RBS determine and steer its risk profile and further optimise the Group’s global portfolio management.
Key points* Reported exposures are affected by currency movements. Over the year, sterling fell 0.3% against the US dollar and rose 3.1% against the euro.
Exposure to the central bank fluctuates, driven by regulatory requirements and by deposits of excess liquidity as part of the Group’s assets and liabilities management. Exposures fell by £0.7 billion over the year, with most of the decline occurring in the fourth quarter.
Corporate Corporate lending exposure fell approximately £0.9 billion over the year, driven by a combination of exchange rate movements and write-offs. At the end of 2011, lending exposure was highest in the property sector (£11.6 billion), which is also the sector that experienced the largest year-on-year reduction (£0.4 billion). REIL and impairment provisions rose by £2.0 billion and £1.6 billion respectively over the year.
As at 31 December 2011, Non-Core had lending exposure of £3.7 billion to Spain, a reduction of £0.8 billion or 18% since 31 December 2010. The real estate (66%), construction (11%), electricity (7%) and land transport (3%) sectors account for the majority of this lending exposure.
As a result of the continued deterioration in Greece’s fiscal position, coupled with the potential for the restructuring of Greek sovereign debt, the Group recognised an impairment charge in respect of available-for-sale Greek government bonds.
Banks 2,922 786 46 12 — — — — 2,968 798 Other financial institutions 1,874 517 — — 33 15 — — 1,907 532 Total 4,796 1,303 46 12 33 15 — — 4,875 1,330
Non-Core lending exposure has been generally reduced in line with the Group’s Strategic Plan. Lending exposure in France was £2.3 billion at 31 December 2011, having declined £0.5 billion during 2011. The lending portfolio mainly comprises property (45%) and sovereign and quasi-sovereign (20%) exposures.
The Group undertakes transactions in financial instruments that are traded or cleared on an exchange, including interest rate swaps, futures and options. Holders of exchange traded instruments provide margin on a daily basis with cash or other security at the exchange.
Historical stress tests calculate the changes in the portfolio valuations that would be generated if the market movements that occurred during historical market events were repeated.
The maximum credit spread VaR was considerably lower in 2011 than in 2010. This was due to the implementation in early 2011 of the relative price-based mapping scheme for the Dutch RMBS portfolio. The availability of more granular data provided a better reflection of the risk in the portfolio.
Although the operational risk tools encompass all stages of the risk cycle, they can be broadly categorised as follows: Identification and assessment Risk and control assessments Controls that are effective without being excessive ensure the Group retains its reputation for efficient customer service and security. Risk and control assessments are used to identify and assess material operational risks and key controls across all business areas. The process is designed to ensure that risks are effectively managed in line with stated risk appetite, prioritised and documented. Controls are tested frequently with a view to ensuring they remain fit for purpose and operate effectively. The Group’s risk assessment methodology was enhanced during 2011 to ensure a more consistent approach to identifying risks and their associated controls and measuring expected loss. Risk assessments consider the new firm-wide taxonomy and will soon be captured in the Group-wide repository for operational risk.
Risk assessments are often conducted in a workshop environment, bringing together subject matter experts from across the division and key functions. By sharing expertise, they can identify improvements to risk identification, measurement and control. Risk governance is reviewed regularly ensuring that there is clarity and ownership of key risk areas. Through coming together and sharing knowledge, participants gain a broader understanding of how their work fits together.
Similar to risk assessments, scenarios are run in a workshop environment, bringing business, risk and control experts together and thereby ensuring that risk management is approached holistically.
Other initiatives in the prudential space have included, notably, continued work on developing the Solvency II framework for insurers; the development of legislative proposals on corporate governance in financial institutions; and the further development and UK implementation of the EU’s common reporting framework (COREP) for banks.
The Group intends to sustain its strong momentum on the development of RRPs. As well as working with the UK authorities, the Group will continue to work with global policy developers in order to contribute to the development of RRPs in other jurisdictions, in particular within the EU and the US. The timeframes for the development of RRPs in these regions are considerably longer than in the UK, and it will be important to ensure that a consistent policy approach and format are adopted if the RRPs of UK-based global banks are to meet local requirements, and do not have to be redrawn or duplicated.
Governance A key component of the pension risk framework is the Pension Risk Committee, which was established in 2011 and has the authority to articulate the Group’s view of risk appetite for the various RBS pension schemes. The Pension Risk Committee also serves as a formal link between the Group and the Trustee of the Group’s largest pension schemes on risk management asset strategy and financing issues and, during 2011, facilitated an agreement between the two on mechanisms for reducing risk within the RBS Group Pension Fund.
Previously chief executive of The British Land Company PLC, chief operating officer of Abbey National plc and prior to that held positions with Credit Suisse First Boston including chief financial officer, head of fixed income and co-head of European investment banking. In 2008 he served as a non-executive director of Northern Rock plc.
Election and re-election of directors In accordance with the provisions of the Code, all directors of the company, with the exception of John McFarlane, will stand for election or re-election by shareholders at the company’s Annual General Meeting. John McFarlane will step down from the Board on 31 March 2012. Further information in relation to the company’s Annual General Meeting can be found in the Chairman’s letter to shareholders which accompanies the notice of meeting.
Board balance and independence The roles of Chairman and Group Chief Executive are distinct and separate, with a clear division of responsibilities. The Chairman leads the Board and ensures the effective engagement and contribution of all executive and non-executive directors. The Group Chief Executive has responsibility for all Group businesses and acts in accordance with the authority delegated by the Board.
An annual programme of divisional presentations is agreed by the Board each year. During 2011, the Board received in-depth presentations from Global Transaction Services, Non-Core division, Global Banking & Markets, RBS Insurance, Citizens, UK Retail and Ulster Bank. These presentations enhance the Board’s knowledge of the Group’s key divisions and afford directors the opportunity for discussion and debate with divisional senior management. Other key areas of focus for the Board during 2011 included the Independent Commission on Banking reports, Recovery and Resolution Planning and other regulatory reports and updates and these will continue to be key areas of focus for the Board during 2012.
In light of John McFarlane stepping down from the Board in March 2012 the composition of the Board and Board committees should be reviewed to ensure the current balance of skills, experiences, independence and knowledge is maintained.
In addition to the annual evaluation performed by the Group Audit Committee, the External Auditors also conduct their own annual review of audit quality. Twelve service criteria for the audit have been defined by the External Auditors to measure their performance against the quality commitments set out in their annual audit plan, under the headings of ‘quality of audit, approach and conduct’, ‘independence and objectivity’, ‘quality of the team’ and ‘value added’. Feedback will be obtained and discussed with the relevant internal stakeholders. The results of this exercise will be presented to the Group Audit Committee, with actions defined and agreed to address any areas where performance has fallen below expected standards.
In particular, the Group may not engage the External Auditors to provide any of the non-audit services described below: bookkeeping or other services related to the accounting records or financial statements; financial information systems design and implementation; appraisal or valuation services, fairness opinions or contribution-inkind reports; actuarial services; internal audit outsourcing services; management functions or human resources; broker or dealer, investment adviser, or investment banking services; legal services and expert services unrelated to the audit; or other services determined to be impermissible by the US Public Company Accounting Oversight Board.
Membership The Board Risk Committee is comprised of at least three independent non-executive directors. The Chairman and members of the Committee, together with their attendance at meetings, are shown below.
I am convinced that the remuneration approach that we have developed will serve all our stakeholders well in the long term.
The Group Remuneration Committee and the Group Board have considered carefully their responsibilities and have applied judgement to achieve a balance whereby remuneration policy supports business goals without causing unacceptably high people risks.
External developments In September 2011, the Department for Business Innovation and Skills (BIS) issued a consultation on plans for investors to have greater clarity on how companies are run and how executive pay is matched to performance. The Group Remuneration Committee played an active role in this consultation process, providing responses and meeting with representatives from BIS on a number of occasions to discuss possible outcomes. This demonstrates a real willingness to engage not just with shareholders but with wider stakeholders in developing a responsible approach to future remuneration practices.
The process for determining bonus pools is discretionary, to avoid the unintended consequences and incentives of formulaic systems. However, the Group Remuneration Committee's discretion is applied within a structured framework which starts with an assessment of financial performance measured against budget, prior year and long-term strategic plans. This analysis is used to adjust market median bonus funding levels (obtained from rigorous benchmarking against market compensation data) to a performance-adjusted basis.
Retail & Commercial’s ROE improved to 11.3%, or 16.6% excluding Ulster Bank. GBM ROE was 7.7% above median compared to peers, leaving Core overall ROE at 10.5%. Core cost:income ratio was 60%, with Core Tier 1 ratio at 10.6%. The liquidity portfolio was held above target levels at £155 billion, while short-term funding was cut to £102 billion. Gross new lending to business increased by 22%, with lending to SMEs up 4%, exceeding the Group’s Merlin targets. The branch sale to Santander made good progress as did the turnaround of RBS Insurance; facilitating its planned divestment.
People management Group’s people strategy including performance, succession and people management. Improvements in employee engagement.
Achievement of ‘best in class’ for external reporting within the UK market. Key contribution to de-risking strategy with significantly reduced reliance on short term funding and raised £20 billion for 2011 term funding in challenging conditions. Good interest rate positioning achieved. New central bank and lending target reporting requirements implemented. Improved capital planning capabilities, with detailed capital plans developed at Group and UK solo entity level.
Monitor and improve the Group and Divisional Strategic Plans. Drive effective design and implementation of revised plan. Work with CEO on Group Strategy/M&A/APS.
Risk and control Continue culture change across the Group including delivery of measures relating to wholesale funding reliance and liquidity reserves and leverage ratio. Deliver against agreed APS objectives.
Core bank economic profit (25%) As the value of the Group will be determined by the Core Bank’s ability to generate enduring returns for shareholders, the Economic Profit measure is focused on the Core Bank to ensure that performance reflects enduring earnings for the bank. Economic Profit, being a risk-adjusted financial measure, is consistent with the FSA Code and also provides a balance between measuring growth and the cost of capital employed in delivering that growth.
Information regarding the executive directors' service contracts is shown below: Date of current contract Notice period - from the company
Re-election Under the Articles of Association of the company, directors must stand for re-election by shareholders at least once every three years. However, in accordance with the provisions of the Code, all directors of the company will stand for annual re-election by shareholders at the company’s Annual General Meetings.
Notes: (1) Awards to replace bonus and share awards Stephen Hester forfeited on leaving The British Land Company PLC, which reflect the vesting dates of the original awards. Initially Stephen Hester was awarded 10,407,081 restricted shares on joining the Group. The remaining awards granted to Stephen Hester under this plan on joining the Group vested during 2011. (2) These awards vested as to one-third on each of the first, second and third anniversary of award, subject to their terms. (3) The performance conditions attached to the awards above included measures on effective governance and stewardship of RBS, relationships with key stakeholders and delivery of value and return to shareholders. Philip Hampton has waived his right to an award of restricted shares which was made in 2009 and due to vest in 2012.
Remuneration of executive directors and eight highest paid senior executives (attendees at Group Executive Committee)
While John Hourican, as a member of RBS executive committee, is eligible for annual LTIP awards, the 2009 award was unusual in its size reflecting the special circumstances of the time. Nevertheless, in recognition of the 2009 award payout and the public debate around executive pay, John Hourican has asked the Group Remuneration Committee not to make any LTIP award to him for the 2012 grant year, which would normally vest in 2015.
The effectiveness of the Group’s internal controls are reviewed regularly by the Group Board, the Group Audit Committee and the Board Risk Committee. Executive management committees or boards of directors in each of the Group’s businesses also receive regular reports on significant risks facing their business and how they are being controlled. In addition, the Group Board receives monthly risk management reports. Details of the Group’s approach to risk management are given in the Risk and balance sheet management section, on pages 100 to 249 of the Business review. The Group Audit Committee has received confirmation that management has taken, or is taking, the necessary action to remedy any failings or weaknesses identified through the operation of the Group framework of controls.
Disclosure controls and procedures As required by US regulations, the effectiveness of the company's disclosure controls and procedures (as defined in the rules under the Exchange Act) have been evaluated. The evaluation concluded that the company's disclosure controls and procedures were adequate and effective and designed to ensure that material information relating to the company and its consolidated subsidiaries would be made known to them by others within those entities.
The company did not pay a dividend on ordinary shares in 2010 or 2011.
The Group has two European employee fora that provide elected representatives with an opportunity to understand better its European operations.
The code of conduct is available on the Group’s website www.rbs.com and will also be provided to any person without charge, upon request, by contacting RBS Secretariat at the telephone number listed on page 487.
Solicitor For The Affairs of Her Majesty’s Treasury as Nominee for Her Majesty’s Treasury Number of shares
Operating loss before tax (766) (399) (2,647) Tax (charge)/credit 6 (1,250) (634) 429 Loss from continuing operations (2,016) (1,033) (2,218) Profit/(loss) from discontinued operations, net of tax 20 47 (633) (105) Loss for the year (1,969) (1,666) (2,323)
Liabilities Deposits by banks 10 108,804 98,790 142,144 Customer accounts 10 502,955 510,693 614,202 Debt securities in issue 10 162,621 218,372 267,568 Settlement balances 7,477 10,991 10,413 Short positions 21 41,039 43,118 40,463 Derivatives 14 523,983 423,967 424,141 Accruals, deferred income and other liabilities 22 23,125 23,089 30,327 Retirement benefit liabilities 4 2,239 2,288 2,963 Deferred tax 23 1,945 2,142 2,811 Insurance liabilities 24 6,312 6,794 10,281 Subordinated liabilities 25 26,319 27,053 37,652 Liabilities of disposal groups 20 23,995 9,428 18,890 Total liabilities 1,430,814 1,376,725 1,601,855
Redemption of equity preference shares — (2,968) — Gain on redemption of equity preference shares — 609 — Redemption of preference shares classified as debt — (118) — Transfer from merger reserve 50 12,250 9,950 Actuarial (losses)/gains recognised in retirement benefit schemes - tax 86 (71) 1,043 Purchase of non-controlling interest — (38) — Shares issued under employee share schemes (58) (13) (16) Share-based payments
Commitment and utilisation fees are determined as a percentage of the outstanding facility. If it is unlikely that a specific lending arrangement will be entered into, such fees are taken to profit or loss over the life of the facility otherwise they are deferred and included in the effective interest rate on the advance.
Insurance brokerage - this is made up of fees and commissions received from the agency sale of insurance. Commission on the sale of an insurance contract is earned at the inception of the policy, as the insurance has been arranged and placed. However, provision is made where commission is refundable in the event of policy cancellation in line with estimated cancellations.
Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. Fair values are determined from quoted prices in active markets for identical financial assets or financial liabilities where these are available. Fair value for a net open position in a financial instrument in an active market is the number of units of the instrument held times the current bid price (for financial assets) or offer price (for financial liabilities). In determining the fair value of derivative financial instruments gross long and short positions measured at current mid market prices are adjusted by bid-offer reserves calculated on a portfolio basis. Credit valuation adjustments are made when valuing derivative financial assets to incorporate counterparty credit risk. Adjustments are also made when valuing financial liabilities to reflect the Group’s own credit standing. Where the market for a financial instrument is not active, fair value is established using a valuation technique. These valuation techniques involve a degree of estimation, the extent of which depends on the instrument’s complexity and the availability of market-based data. More details about the Group’s valuation methodologies and the sensitivity to reasonably possible alternative assumptions of the fair value of financial instruments valued using techniques where at least one significant input is unobservable are given in Note 11 on pages 345 to 361.
In June 2011, the IASB issued amendments to two standards: Amendments to IAS 1 ‘Presentation of Items of Other Comprehensive Income’ require items that will never be recognised in profit or loss to be presented separately in other comprehensive income from those that are subject to subsequent reclassification. The amendments are effective for annual periods beginning on or after 1 July 2012. Earlier application is permitted.
Customer accounts: demand deposits 1,147 1,228 970 Customer accounts: savings deposits 1,307 1,148 1,245 Customer accounts: other time deposits 1,075 1,345 2,546 Deposits by banks 982 1,333 2,898 Debt securities in issue 3,371 3,277 4,482 Subordinated liabilities 740 417 1,291 Internal funding of trading businesses 109 (181) (509)
(3) Measured as the change in fair value from movements in the year in the credit risk premium payable by the Group. (4) Includes income from activities other than banking and insurance.
Write-down of goodwill and other intangible assets 91 10 363 18,026 18,228 17,417
Share-based payments As described in the Remuneration report on pages 272 to 295, the Group grants share-based awards to employees principally on the following bases: Award plan Eligible employees Nature of award (1) Vesting conditions (2) Issue dates
At 1 January 219 250 377 122 7 413 79 1 92 Granted 154 369 9 115 247 3 70 8 353 Exercised (6) (14) — — — (1) — — — Lapsed (22) (29) (15) (18) (4) (38) (27) (2) (32)
Interim valuations of the Group’s schemes under IAS 19 ‘Employee Benefits’ were prepared to 31 December with the support of independent actuaries, using the following assumptions: Main scheme All schemes
Longevity at age 60 for future pensioners currently aged 40 (years) Males 29.3 29.3 29.2
decrement was announced by the UK Government in the Budget on 23 March 2011. The first decrement was enacted on 27 July 2010, the second on 29 March 2011 and the third on 5 July 2011. Existing temporary differences may therefore unwind in periods subject to these reduced tax rates. Accordingly, the closing deferred tax assets and liabilities have been calculated at the rate of 25%.
9 Earnings per ordinary and B share Earnings per ordinary and B share have been calculated based on the following: £m
liabilities Total 2009 £m £m £m £m £m £m £m £m £m
Loans and advances to customers - reverse repos 26,313 — — 14,727 41,040
Reclassified from HFT to LAR Loans 7,876 6,371 208 (1,263) 161 1,216 Debt securities 5,057 4,273 (179) (16) 294 489 12,933 10,644 29 (1,279) 455 1,705
Key points The exposure to monolines reduced primarily due to the restructuring of some exposures, partially offset by lower prices of underlying reference instruments. The credit valuation adjustments decreased due to the reduction in exposure partially offset by wider credit spreads.
Credit valuation adjustments (CVA) Credit valuation adjustments represent an estimate of the adjustment to fair value that a market participant would make to incorporate the credit risk inherent in counterparty derivative exposures.
The correlation between exposure and counterparty risk is also incorporated within the CVA calculation where this risk is considered significant. The risk primarily arises on trades with emerging market counterparties where the gross mark-to-market value of the trade, and therefore the counterparty exposure, increases as the strength of the local currency declines.
Amounts deferred on initial recognition On initial recognition of financial assets and liabilities valued using valuation techniques incorporating information other than observable market data, any difference between the transaction price and that derived from the valuation technique is deferred. Such amounts are recognised in profit or loss over the life of the transaction; when market data becomes observable; or when the transaction matures or is closed out as appropriate. At 31 December 2011, net gains of £161 million (2010 - £167 million; 2009 - £204 million) were carried forward. During the year, net gains of £89 million (2010 - £62 million; 2009 - £127 million) were deferred and £95 million (2010 - £99 million; 2009 - £25 million) recognised in the income statement.
Of which Core 126.9 724.5 7.2 858.6 129.4 617.6 7.2 754.2 Non-Core 0.5 13.9 9.2 23.6 1.1 22.3 8.5 31.9 127.4 738.4 16.4 882.2 130.5 639.9 15.7 786.1
2011 2010 2009 Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total\
Other asset-backed and corporate debt securities Where observable market prices for a particular debt security are not available, the fair value will typically be determined with reference to observable market transactions in other related products, such as similar debt securities or credit derivatives. Assumptions are made about the relationship between the individual debt security and the available benchmark data. Where significant management judgment has been applied in identifying the most relevant related product, or in determining the relationship between the related product and the instrument itself, the instrument is classified as level 3.
As the inputs into the valuation model are not all observable the APS derivative is a level 3 instrument. The fair value of the credit protection at 31 December 2011 was £(0.2) billion (2010 - £0.6 billion; 2009 - £1.4 billion).
Loss credits: +/- 10% The level of expected losses on covered assets that have been sold that can be treated as losses for the purpose of the APS are assessed by the Asset Protection Agency. For disposals made by the Group where this assessment has not been completed, the Group makes an estimate of the likely assessment for the purpose of valuing of the APS. A range of +/- 10% in the level of assessment is considered reasonable.
Amounts recorded in the income statement relating to instruments held at year end
The fair values of intangible assets, such as core deposits, credit card and other customer relationships are not included in the calculation of these fair values as they are not financial instruments.
For certain portfolios where there are very few or no recent transactions, for example Ulster Bank’s corporate property lending portfolio, a bespoke approach is used based on available market data.
On balance sheet liabilities The following tables show by contractual maturity, the undiscounted cash flows payable up to a period of 20 years from the balance sheet date, including future payments of interest.
Liabilities with a contractual maturity of greater than 20 years - the principal amounts of financial liabilities that are repayable after 20 years or where the counterparty has no right to repayment of the principal, are excluded from the table along with interest payments after 20 years.
Held-for-trading assets and liabilities - held-for-trading assets and liabilities amounting to £763.3 billion (assets) and £708.0 billion (liabilities) (2010 - £665.0 billion assets and £586.1 billion liabilities; 2009 - £650.5 billion assets and £568.5 billion liabilities) have been excluded from the table in view of their short-term nature.
13 Financial assets - impairments The following table shows the movement in the provision for impairment losses on loans and advances.
Notes: (1) Impairment provisions individually assessed. (2) Impairment provisions individually assessed on balances of £29,196 million (2010 - £25,492 million; 2009 - £24,540 million).
Hedged forecast cash flows expected to occur Forecast receivable cash flows 504 466 423 267 163 379 141 — 2,343 Forecast payable cash flows (554) (521) (416) (350) (299) (990) (819) (167) (4,116)
Cost At 1 January 27,139 612 2,458 4,575 34,784 Transfers to disposal groups (95) — — — (95) Currency translation and other adjustments (219) 8 (60) 59 (212) Acquisition of subsidiaries 18 — — — 18 Additions — — 34 1,050 1,084 Disposals and write-off of fully amortised assets — — — (236) (236)
The assets and liabilities of disposal groups at 31 December 2011 primarily comprise the RBS England and Wales and NatWest Scotland branch-based businesses (“UK branch-based businesses”) and the RBS Aviation Capital business both of which are expected to be sold in the second half of 2012. On being classified as held-for-sale, disposal groups are required to be measured at the lower of carrying amount and fair value less costs to sell. Accordingly, £80 million of allocated goodwill has been written off against other income in respect of the UK branch-based businesses. No adjustment has been made in respect of the RBS Aviation Capital business.
At 1 January 2010 2,490 (67) 2,423 Increase in the year 2,191 (76) 2,115 Release in the year (2,393) 71 (2,322) At 1 January 2011 2,288 (72) 2,216 Increase in the year 1,906 (66) 1,840 Release in the year (2,257) 78 (2,179) Foreign exchange and other adjustments (5) — (5)
AUD590 million 6% subordinated notes 2014 (callable July 2012) 392 391 330 AUD410 million floating rate subordinated notes 2014 (callable July 2012) 272 272 229 CAD700 million 4.25% subordinated notes 2015 (callable March 2015) 444 452 419
The Royal Bank of Scotland Group plc (1) Non-cumulative preference shares of US$0.01
Series H 9.7 million 7.25% 31 March 2004 US$25 Debt Series L 30.0 million 5.75% 30 September 2009 US$25 Debt Series M 23.1 million 6.4% 30 September 2009 US$25 Equity Series N 22.1 million 6.35% 30 June 2010 US$25 Equity Series P 9.9 million 6.25% 31 December 2010 US$25 Equity Series Q 20.6 million 6.75% 30 June 2011 US$25 Equity Series R 10.2 million 6.125% 30 December 2011 US$25 Equity Series S 26.4 million 6.6% 30 June 2012 US$25 Equity Series T 51.2 million 7.25% 31 December 2012 US$25 Equity Series U 10,130 7.64% 29 September 2017 US$100,000 Equity
Notes: (1) Assets that have been pledged to the SPEs which itself is a subset of the total portfolio of eligible assets within a collateral pool. (2) Debt securities that have been sold to third party investors and represents a source of external wholesale funding. (3) Debt securities issued pursuant to own-asset securitisations where the debt securities are retained by the Group as a source of contingent liquidity where those securities can be used in repurchase agreements with central banks. (4) Comprises corporate, social housing and student loans. (5) At 31 December 2011, cash deposits comprised £11.2 billion from mortgage repayments and £0.8 billion from other loan repayments held in the SPEs, to repay debt securities issued by the ownasset securitisation vehicles (2010 - £12.3 billion and £0.8 billion; 2009 - £11.1 billion and £0.9 billion respectively).
Madoff In December 2010, Irving Picard, as trustee for the bankruptcy estates of Bernard L. Madoff and Bernard L. Madoff Investment Securities LLC filed a claim against RBS N.V. for approximately US$271 million. This is a clawback action similar to claims filed against six other institutions in December 2010. RBS N.V. (or its subsidiaries) invested in Madoff funds through feeder funds. The Trustee alleges that RBS N.V. received US$71 million in redemptions from the feeder funds and US$200 million from its swap counterparties while RBS N.V. ‘knew or should have known of Madoff’s possible fraud’. The Trustee alleges that those transfers were preferences or fraudulent conveyances under the US bankruptcy code and New York law and he asserts the purported right to claw them back for the benefit of Madoff’s estate. A further claim, for US$21.8 million, was filed in October 2011. The Group considers that it has substantial and credible legal and factual defences to these claims and intends to defend itself vigorously.
Multilateral interchange fees In 2007, the EC issued a decision that while interchange is not illegal per se, MasterCard’s current multilateral interchange fee (MIF) arrangements for cross border payment card transactions with MasterCard and Maestro branded consumer credit and debit cards in the European Union are in breach of competition law. MasterCard was required by the decision to withdraw the relevant cross-border MIF (i.e. set these fees to zero) by 21 June 2008.
Personal current accounts On 16 July 2008, the OFT published the results of its market study into Personal Current Accounts (PCAs) in the United Kingdom. The OFT found evidence of competition and several positive features in the personal current account market but believed that the market as a whole was not working well for consumers and that the ability of the market to function well had become distorted.
32 Memorandum items continued Litigation and Investigations continued Private motor insurance On 14 December 2011, the OFT launched a market study into private motor insurance, with a focus on the provision of third party vehicle repairs and credit hire replacement vehicles to claimants. The OFT aims to complete its market study by spring 2012. At this stage, it is not possible to estimate with any certainty the effect the market study and any related developments may have on the Group.
On 8 November 2011, the FSA published its Final Notice having reached a settlement with Coutts & Co, under which Coutts & Co agreed to pay a fine of £6.3 million. The FSA did not make any findings on the suitability of advice given in individual cases. Nonetheless, Coutts & Co has agreed to undertake a past business review of its sales of the product. This review will be overseen by an independent third party and will consider the advice given to customers invested in the EVRF as at the date of its suspension, 15 September 2008. For any sales which are found to be unsuitable, redress will be paid to the customers to ensure that they have not suffered financially.
To comply with EC State Aid requirements, the Group has agreed to dispose of RBS Insurance. It continues to be reported as a separate operating segment rather than within the Non-Core division as its operating results are regularly reviewed by the Group’s Chief Executive Officer and its business is distinct from the activities of the Non-Core division.
Assets and liabilities held for sale included in the divisional segments above: 2011 2010 2009
Operating profit/(loss) before tax 1,292 1,794 (3,414) (438) (766) Total assets 1,007,096 359,592 66,239 73,940 1,506,867 Of which total assets held for sale 19,343 53 6,011 43 25,450 Total liabilities 936,477 341,631 82,059 70,647 1,430,814 Of which total liabilities held for sale 21,903 104 1,988 — 23,995 Net assets attributable to equity owners and non-controlling interests 70,619 17,961 (15,820) 3,293 76,053 Contingent liabilities and commitments 118,702 95,703 51,465 12,949 278,819 Cost to acquire property, plant and equipment and intangible assets 2,522 500 1,484 58 4,564
No directors are accruing benefits under defined benefit schemes (2010 - nil). One director is accruing benefits under a defined contribution arrangement (2010 - one).
The APS is a single contract providing credit protection in respect of a portfolio of financial assets. Under IFRS, credit protection is treated either as a financial guarantee contract or as a derivative financial instrument depending on the terms of the agreement and the nature of the protected assets and exposures. The Group has concluded, principally because the covered portfolio includes significant exposure in the form of derivatives, that the APS does not meet the criteria to be treated as a financial guarantee contract. The contract has been accounted for as a derivative financial instrument and is recognised as a fair value liability £231 million (2010 - asset £550 million; 2009 - asset £1,400 million) and included within the Derivative liability balance sheet caption. Changes in fair value of £906 million (2010 - £1,550 million; 2009 - nil) were recognised in profit or loss within Income from trading activities. Details of the valuation methodology for the APS are set out in Note 11 Financial instruments on pages 356 and 357.
Contingent capital reserve At 1 January (1,208) (1,208) — Contingent capital agreement - consideration payable — — (1,208)
2 Profit dealt with in the accounts of the company As permitted by section 408(3) of the Companies Act 2006, the primary financial statements of the company do not include an income statement or statement of comprehensive income. Condensed information is set out below.
Notes: (1) Further details of the contractual terms of the preference shares are given in Note 27 on the consolidated accounts. (2) Partially repurchased following completion of the exchange and tender offers in May 2010. (3) Partially converted into ordinary shares in the company in 2010.
Financial summary continued Loan impairment provisions For a discussion of the factors considered in determining the amount of provisions, see ‘Impairment loss provision methodology’ on pages 202 and 203 and ‘Critical accounting policies’ on page 323. The following table shows the movements in loan impairment provisions.
Recoveries of amounts previously written-off Domestic 158 151 175 116 158 Foreign 369 260 224 203 184 527 411 399 319 342 Charged to income statement - continuing operations (1) Domestic 2,749 3,948 5,370 2,701 1,395 Foreign 4,492 5,196 7,720 3,777 508 7,241 9,144 13,090 6,478 1,903 Charged to income statement - discontinued operations Domestic — — — (3) 25 Foreign (8) 42 1,044 616 18 (8) 42 1,044 613 43 Unwind of discount (recognised in interest income) Domestic (220) (214) (226) (151) (150)
Latent book provisions 1,986 2,650 3,076 1,944 1,050 Total provisions 19,760 18,055 17,126 10,889 6,449
General insurance business was principally undertaken by Direct Line Insurance plc and Churchill Insurance Company Limited. On 10 December 2011, the assets and liabilities of these companies were transferred under Part VII of the Financial Services and Markets Act 2000 to UK Insurance Limited, who now undertake general insurance business.
The Group has actively engaged with, and contributed to, a number of inquiries regarding the future of banking. These included the Independent Commission on Banking and various Treasury Select Committee inquiries. It has contributed to debates led by the Financial Stability Board, European Commission and UK authorities on resolution frameworks, including possible mechanisms such as contingent capital and bail-in arrangements. It participated in the FSA's pilot for the development of Living Wills and will be developing suitable Living Wills in line with forthcoming regulatory requirements.
The FSA, in its 2011/2012 Business Plan, made reference to the proposed changes to the structure of regulation in the UK. The FSA will be responsible for transitioning to the new regulatory structure and the Group is committed to working with the authorities to establish a system that delivers the new structure.
At 22 February 2012, the directors of the company had options to purchase a total of 10,455,306 ordinary shares of the company.
As at 31 December 2011, almost all of the company's US$ denominated preference shares and American Depository Shares representing ordinary shares were held by shareholders registered in the US. All other shares were predominantly held by shareholders registered outside the US.
The Group’s businesses and performance can be negatively affected by actual or perceived global economic and financial market conditions and by other geopolitical risks The Group’s businesses and performance are affected by local and global economic conditions and perceptions of those conditions and future economic prospects. The outlook for the global economy over the near to medium-term remains challenging and many forecasts predict at best only stagnant or modest levels of gross domestic product (GDP) growth across a number of the Group’s key markets over that period. In the UK, latest estimates suggest the economy grew by only 1% in 2011, while the current consensus of forecasts predicts GDP growth of just 0.5% in 2012. GDP in the European Monetary Union (EMU) in 2011 was estimated to have grown by 1.6% in 2011 (although this was mainly boosted by Germany, the EMU’s largest economy, which grew by 3%). While the German economy has proven to be relatively robust, austerity measures in many EMU economies, initiated in response to increased sovereign debt risk, have resulted in weak economic and GDP growth. Economic growth in the EMU is predicted to fall in 2012 by 0.3% (source: Consensus Economics Inc, Eurostat, ONS). Despite significant interventions by governments and other non-governmental bodies during and since the financial crisis in 2008/2009, capital and credit markets around the world continue to be volatile and be subject to intermittent and prolonged disruptions. In particular, increasingly during the second half of 2011, a heightened risk of sovereign default relating to certain EU member states has had a negative impact on capital and credit markets. Such challenging economic and market conditions have exerted downward pressure on asset prices and on credit availability and upward pressure on funding costs, and continue to impact asset recovery rates and the credit quality of the Group’s businesses, customers and counterparties, including sovereigns. In particular, the Group has significant exposure to customers and counterparties within the EU (including the UK and Ireland), which includes sovereign debt exposures that have been, and may in the future be, affected by restructuring of their terms, principal, interest and maturity. These exposures have resulted in the Group making significant provisions and recognising significant writedowns in prior periods, which may also occur in future periods. These conditions, alone or in combination with regulatory changes or actions of market participants, may also cause the Group to experience reduced activity levels, additional write-downs and impairment charges and lower profitability, and may restrict the ability of the Group to access funding and liquidity. In particular, should the scope and severity of the adverse economic conditions currently experienced by some EU member states and elsewhere worsen, the risks faced by the Group would be exacerbated. Developments relating to the current economic conditions and unfavourable financial environment, including those discussed above, could have a material adverse effect on the Group’s business, results of operations, financial condition and prospects and could have a negative impact on the value of any securities issued by the Group.
As part of the State Aid restructuring plan, there is a prohibition on the making of discretionary dividend (including on preference shares and B shares) or coupon payments on existing hybrid capital instruments for a two year period which ends on 30 April 2012. These restrictions prevent the Group, the Royal Bank and other Group companies (other than companies in the RBS Holdings N.V. group (which was renamed from ABN AMRO Holding N.V. on 1 April 2010), which are subject to different restrictions) from paying discretionary dividends on their preference shares and discretionary coupons on other Tier 1 securities, and the Group from paying dividends on its ordinary shares, for the same duration, and it may impair the Group’s ability to raise new capital through the issuance of ordinary shares and other securities issued by the Group.
The implementation of the Basel III reforms will begin on 1 January 2013; however, the requirements are subject to a series of transitional arrangements and will be phased in over a period of time, to be fully effective by 2019.
The Group’s participation in the APS is costly and may not produce the benefits expected and the occurrence of associated risks may have a material adverse impact on the Group’s business, capital position, financial condition and results of operations On 22 December 2009, the Group acceded to the APS with HM Treasury acting on behalf of the UK Government. Under the APS, the Group purchased credit protection over a portfolio of specified assets and exposures of the Royal Bank and certain members of the Group (“Covered Assets”) from HM Treasury in return for an annual fee. If losses on assets covered by the APS exceed £60 billion (net of recoveries), HM Treasury will bear 90% of further losses. The costs of participating in the APS include, among others, a fee of £700 million per annum, payable in advance to HM Treasury for each of the first three years of the APS and £500 million per annum thereafter until the earlier of (i) the date of termination of the APS and (ii) 31 December 2099. In order to terminate the Group’s participation in the APS, the Group must have FSA approval and must pay an exit fee.
Trading market continued Ordinary shares The following table shows, for the periods indicated, the high and low sales prices for the company's ordinary shares on the London Stock Exchange, as derived from the Daily Official List of the UK Listing Authority. Prices for 2008 and 2007 were restated for the effect of the rights issue in June 2008 and the capitalisation issue in September 2008.
The US Treasury has expressed concerns that parties to whom depositary receipts are released before shares are delivered to the depositary, or intermediaries in the chain of ownership between US holders and the issuer of the security underlying the depositary receipts, may be taking actions that are inconsistent with the claiming of foreign tax credits for US holders of depositary receipts. Such actions would also be inconsistent with the claiming of the reduced rate of US tax applicable to dividends received by certain non-corporate US holders. Accordingly, the availability of the reduced tax rate for dividends received by certain non-corporate US holders could be affected by actions taken by such parties or intermediaries.
Asset-backed securities (ABS) - securities that represent interests in specific portfolios of assets. They are issued by a special purpose entity following a securitisation. The underlying portfolios commonly comprise residential or commercial mortgages but can include any class of asset that yields predictable cash flows. Payments on the securities depend primarily on the cash flows generated by the assets in the underlying pool and other rights designed to assure timely payment, such as guarantees or other credit enhancements. Collateralised bond obligations, collateralised debt obligations, collateralised loan obligations, commercial mortgage backed securities and residential mortgage backed securities are all types of ABS.
Structured credit portfolio (SCP) - a portfolio of certain of the Group’s illiquid assets - principally CDO super senior positions, negative basis trades and monoline exposures - held within Non-Core division.
Derivatives Risk and balance sheet management 185 Notes on the consolidated accounts 366
Non-interest income Business review 53 Notes on the consolidated accounts 328