Further information on environmental, social, employee and human rights matters is available on the Sustainable Banking webpages on rbs.com.
Notes: (1) Operating expenses excluding litigation and conduct costs of £1,282 million (2017 – £1,285 million), strategic costs of £1,004 million (2017 - £1,565 million)
Awarded ‘highly commended’ at the Ethical Corporation awards for Climate Action.
Simplifying the Bank We are a simpler bank, but we can’t yet call ourselves simple to deal with. While we are now more efficient with a lower cost base, as we have shrunk in size, many of our processes are still too difficult for our customers to deal with, and are frustrating for our colleagues as they try to serve our customers. Whether it is booking travel, watching a film or shopping online, customers now expect a fast and reliable service. Banking is no different from any other customer focused industry, and we are responding to those changes in customer behaviour.
Housing Housing is a major expense for most people and in many parts of the UK there are concerns about the affordability, standard and availability of housing. RBS is a major mortgage provider and also lends to the housing and construction sectors.
“This is a great opportunity for the Board to gather opinions on important topics and for colleagues to share their views on issues ranging from the bank’s strategy to social purpose, wellbeing and inclusion.”
• During 2018, we supplemented our unconscious bias learning (c.80% of colleagues trained) with wider inclusion and diversity learning for all our colleagues to create a solid platform for behavioural and cultural change.
We are aware that there is a significant gap to achieving our ambition to be No. 1 for customer service, trust and advocacy. Colleagues across the bank are fully focused on delivering a more consistent service which is right first time. In addition, our digital innovations continue to attract strong customer advocacy, proof that when we get the product and service proposition right, our NPS improves.
Our Commercial Banking NPS has fallen recently, however it remains ahead of the rest of the market. Our NatWest and Royal Bank of Scotland brands are ahead of the rest of their respective markets.
Our long term success is dependent on serving our customers well and generating value for society through our products, services and facilities.
Target of £10.0 billion of funding to sustainable energy projects between 2018 and 2020.
NatWest Markets In NatWest Markets we help global financial institutions and corporates manage their financial risks and achieve their short and long-term financial goals while navigating changing markets and regulation. We do this by providing global market access, financing, risk management and trading solutions.
Customer banking preferences continue to evolve and we are working hard to anticipate and respond. Approximately 85% of customers now interact with us digitally and we have developed solutions they value. We successfully launched our Bankline Mobile in the Apple app store, while our lending journey now enables customers to apply digitally for loans of up to £750,000 through a self-service application process.
Notes: (1) Market share includes personal bank accounts used as business accounts; includes NatWest, RBS & W&G; Source Charterhouse Business Banking Survey, Q4 2018. Commercial £2m+ in GB. Sample size 3,075; sample size excluding don’t knows: NatWest (598); Royal Bank of Scotland (271). Question: “How likely would you be to recommend (bank)”. Base: Claimed main bank. Data weighted by region and turnover to be representative of businesses in Great Britain.
• #1 for Overall Service Quality for UK Corporate (Source: 2017 Greenwich Associates FX Survey)
A leading UK retail and commercial bank with strong non-ring-fenced banks in NatWest Markets and RBS International
RBS Group capital distributions We propose a 3.5 pence final ordinary dividend and a 7.5 pence special dividend for the 2018 financial year, while maintaining a CET1 ratio of 16.2% as at 31 December 2018.
- There is a risk that RBS lacks sufficient capability or capacity at a senior level to deliver, or adapt to, change. - Losses may arise from changes in the RBS business model due to ring-fencing or such as the restructuring of NatWest Markets in light of ring fencing and Brexit. - A breach in data privacy, either within RBS or in a third-party organisation, may lead to negative impacts. There is a risk that RBS’s data strategy is not adequate for the evolving landscape. - There is a risk that the actions of a third-party supplier could negatively affect RBS’s reputation or profitability.
- RBS has implemented plans to prepare for an immediate loss of access to the European Single Market on 29 March 2019 (a “hard Brexit”). - RBS uses a range of complementary approaches to inform strategic planning and risk mitigation relating to a range of economic and political risks. These include robust risk assessment and dynamic portfolio management in accordance with the risk appetite framework, the setting of prudent lending criteria and, for specific market risks, structural hedging. Stress testing and scenario planning is also used extensively. - RBS is working to embed climate risk into its risk framework, and adapting its operation and business strategy to mitigate the risks of both climate change and the transition to a low carbon economy.
Net interest income 5,130 421 2,286 464 325 203 158 8,987 Non-interest income 1,347 183 1,198 214 64 847 293 4,146
 Owners’ equity decreased by £2.6 billion, 5.4%, to £45.7 billion, primarily driven by preference share redemptions and the pension contribution in the year offset by the £2.1 billion profit for the year.
 Operating expenses decreased by €115 million, or 14.9%, principally due to a €113 million reduction in litigation and conduct costs and €39 million lower strategic costs. 2018 included a €79 million conduct and litigation provision for customer remediation and project costs associated with legacy business issues.
 A net impairment charge of €17 million reflects a charge associated with a non-performing loan sale partially offset by observable improvements in the performance of the loan portfolio.
 Net loans to customers reduced by €1.0 billion, or 4.5%, principally reflecting the sale of a portfolio of non-performing loans of €0.6 billion in 2018 and a continued reduction in the tracker mortgage book.
 RWAs decreased by £2.0 billion, or 2.9%, driven by £10.5 billion of gross RWA reductions associated with active capital management, partially offset by model updates of £2.9 billion, underlying business growth and partial reinvestment of gross RWA reductions through refinancing to existing clients under our revised pricing framework.
Loans to customers (amortised cost) - personal 2.0 2.3 (0.3) (13.0%)
Total Net loans to customers (amortised cost) 14.3 13.5 0.8 5.9%
prior to Q1 2018) of the monthly average of segmental RWAes, assuming 28% tax rate. (2) Comprises assets under management, assets under custody and investment cash. (3) Comparisons with prior periods are impacted by the transfer of the Collective Investment Fund business from UK PBB and by the transfers of Coutts Crown
 Impairments decreased by £5 million reflecting a number of small releases and improvements in underlying lending quality.
6 Patrick Flynn Appointed 1 June 2018 Experience: Patrick Flynn was the Chief Financial Officer and a member of the Executive Board of ING Group (Netherlands' largest financial services group) from April 2009 to May 2017. Prior to that, he was Chief Financial Officer of HSBC Insurance from 2007 to 2009 and prior to that, from 2002 to 2007, was Chief Financial Officer of HSBC South America based in Brazil where he was responsible for HSBC's banking and insurance operations.
External appointments: Independent board director at Ashurst LLP; chairman of the Boat Race Company Limited; director of Social Finance Limited; and professor of practice, Durham University Business School.
Chief Governance & Regulatory Officer and Board Counsel; Company Secretary 14 Aileen Taylor Appointed 1 May 2010 Experience: A qualified solicitor, Aileen joined RBS in 2000. She was appointed Group Secretary in 2010 and extended her remit further in 2015, becoming Chief Governance Officer and Board Counsel. In 2017 she also assumed responsibility for Regulatory Affairs. Prior to that Aileen held various legal, secretariat and risk roles including Head of External Risk (Retail), Head of Regulatory Risk (Retail Direct) and Head of Legal and Compliance (Direct Line Financial Services).
In conclusion, I and my fellow directors are committed to observing high standards of corporate governance, integrity and professionalism. Our statement of compliance with the UK Corporate Governance Code (the Code) can be found on page 83.
UBI DAC Board Oversight Committee A Board Oversight Committee was established in September 2017 in order to provide oversight of required enhancements to the governance and risk management practices within Ulster Bank Ireland DAC (UBI DAC), reporting to the Board, as appropriate. The journey of improvement remains a continued area of focus within UBI DAC. The Committee was disbanded in October 2018.
In addition to its scheduled meetings, the Board also met with the executive management team in June for the annual Board strategy offsite, which included particular focus on RBS’s purpose and longterm future, technology and innovation. In October the Board held a focused and forward-looking discussion on culture, in support of the Board’s critical role in leading the development of RBS’s culture, values and standards.
Boardroom Inclusion Policy The Board operates a Boardroom Inclusion Policy which reflects the most recent industry targets and is aligned to the RBS Inclusion Policy and Principles applying to the wider bank. This policy provides a framework to ensure that the Board attracts, motivates and retains the best talent and avoids limiting potential caused by bias, prejudice or discrimination. The policy currently applies to the most senior RBS boards: The Royal Bank of Scotland Group plc (RBSG), NatWest Holdings Limited, The Royal Bank of Scotland plc, National Westminster Bank Plc and Ulster Bank Limited. A copy of the Boardroom Inclusion Policy is available on rbs.com>about us.
In conjunction with the BRC, the GAC took part in an annual programme of visits to control functions in order to maintain a thorough understanding of their priorities and operational structure. This programme comprised two visits to Risk; two visits to Internal Audit and a visit to Finance. In addition, the GAC and BRC visited RBS’s operations in India where they met with RBS India Executive Committee members, the local internal and external audit teams and HR team, as well as key employee groups. During the visit the GAC and BRC received updates on the RBS India business units, the top risks in the Indian business and plans for their remediation, the people plan and Technology strategy for India.
Looking forward to 2019, the GAC will continue its focus on financial reporting; accounting policies and internal controls, ensuring robust scrutiny of RBS’s financial reports and disclosures.
Opinions – Quarterly opinion reports updated GAC on Internal Audit’s view of the risk and control environment and risk and control awareness of each business and function, and the risks which could impact RBS achieving its targets. Internal Audit also outlined material and emerging concerns identified through their audit work. In addition, Internal Audit reported on items including Pillar 3 reporting and the whistleblowing process. Annual Plan and Budget – GAC considered and approved Internal Audit’s plan for 2018. Updates and anticipated changes to the plan were provided to the GAC periodically. The GAC also considered Internal Audit’s budget. The Committee was satisfied that Internal Audit had adequate budget and resources to deliver the plan. Internal Audit Charter and Independence – Updates to Internal Audit’s charter reflecting changes to RBS’s legal entity structure were noted by the GAC. The GAC also noted the Chief Audit Executive’s independence statement. Visits – Together with the BRC, GAC participated in two visits to Internal Audit during 2018. A variety of issues impacting the Internal Audit function were discussed, including: resourcing and structure; succession planning; quality assurance; the future of internal audit; and the 2019 Audit Plan. Performance – The Chief Audit Executive continued to report to the GAC Chairman, with a secondary reporting line to the Chief Executive for administrative purposes. The GAC assessed the annual performance (including risk performance) of the function and Chief Audit Executive. Evaluation – The 2018 annual review of the effectiveness of Internal Audit was undertaken externally by KPMG. The evaluation assessed the function against the Institute of Internal Auditor International Standards and found that it “Generally Conforms” to the requirements, and is in line with peer organisations. There were some areas where the function “Partially Conforms” to a limited number of requirements, but none were considered to be significant and in most cases, steps were already being taken to address these.
Further details of the non-audit services that are prohibited and permitted under the policy can be found on rbs.com. Information on fees paid in respect of audit and non-audit services carried out by the External Auditor can be found in Note 6 to the consolidated accounts.
Regular attendees at meetings include: the RBS Chairman, Chief Executive, Chief Financial Officer, Chief Risk Officer, Chief Legal Officer and General Counsel, Chief Audit Executive, and the External Auditor. External advice is sought by the Committee where appropriate.
 The Committee supported management in developing a sustainable banking dashboard which provides a consolidated view on performance in respect of key priorities.
Page Annual statement from the Committee Chairman 62 Remuneration at a glance 63 Directors’ Remuneration Policy 65 Annual Report on Remuneration 69 Other Remuneration Disclosures 79
The maximum value of LTI award is smaller and we have significantly increased the value of shares that executive directors need to hold.
Summary of pay construct Chief Executive Chief Financial Officer (from 2019)
While the 2017 policy allows for pension funding of 35% of salary for existing executive directors and up to 25% of salary for new executive directors, a rate of 10% was agreed on the appointment of the new Chief Financial Officer to align with the UK Corporate Governance Code. The 10% rate is in line with the wider workforce.
Delivery in shares with the ability to apply malus adjustments and clawback further supports longerterm alignment with shareholders’ interests.
(2) Based on a RBS share price of £2.28, the average over the three month period from October to December 2018.
Evidence used to support the Committee’s assessment of these questions will include whether there has been: a material fall in share price, net promoter scores, employee engagement or culture scores; a breach of minimum capital ratio; or a material deterioration in the risk culture or profile.
Payments to past directors (audited) Payments made to Ewen Stevenson during the year are set out above and in the total remuneration paid to executive directors table earlier in this report. There are no other payments to past directors to disclose for 2018.
Bank of Scotland plc, National Westminster Bank Plc and Ulster Bank Limited. Where appropriate, directors receive additional fees in respect of membership of other subsidiary company boards and committees including NatWest Markets Plc. The value of fees received will be disclosed in this report each year.
LTI awards subject to service (2) 371,098 513,890 — — — — — — — — — — — — — LTI awards subject to performance (3) 2,968,335 2,448,749 — — — — — — — — — — — — —
(3) Still subject to performance assessment. All LTI awards held by Ewen Stevenson were forfeited on 30 November 2018, his final date of employment. (4) Interest is 10,000 American Depositary Receipts representing 20,000 ordinary shares.
In mitigating potential conflicts of interest, directors are not involved in decisions regarding their own remuneration and remuneration advisers are appointed by the Committee rather than management.
As well as receiving advice from PwC, the Committee took account at meetings of the views of the Chairman; the Chief Executive; the Chief Financial Officer; the Chief HR Officer; the Director of Reward, Pension & Benefits; the Company Secretary; and the Chief Risk Officer. The Committee also received input from the Board Risk Committee, the Group Audit Committee and the Sustainable Banking Committee.
Operation In most jurisdictions, employee benefits or a cash equivalent are provided from a flexible benefits account.
Operation Executive directors and certain senior executives are required to build up and hold a shareholding equivalent to a percentage of salary. There is a restriction on the number of shares that individuals can sell until the requirement is met.
The NYSE Standards require that the compensation committee must have direct responsibility to review and approve the Chief Executive’s remuneration. As stated at the start of this Compliance Report, in the case of RBS, the Board, rather than the Group RemCo, reserves the authority to make the final determination of the remuneration of the Chief Executive. (v) The NYSE Standards require listed companies to adopt and disclose corporate governance guidelines. Throughout the year ended 31 December 2018, RBS has complied with all of the provisions of the Code (subject to the exception described above) and the Code does not require RBS to disclose the full range of corporate governance guidelines with which it complies. (vi) The NYSE Standards require listed companies to adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers. RBS has adopted a code of conduct which is supplemented by a number of key policies and guidance dealing with matters including, among others, anti-bribery and corruption, anti-money laundering, sanctions, confidentiality, inside information, health, safety and environment, conflicts of interest, market conduct and management records. This code of conduct applies to all officers and employees and is fully aligned to the PRA and FCA Conduct Rules which apply to all directors. The Code of Conduct is available to view on RBS’s website at rbs.com.
Other information incorporated into this report by reference can be found at: Page/Note
In 2018 RBS paid an interim dividend of £241 million, or 2.0p per ordinary share. In addition, the company announced that the directors have recommended a final dividend of 3.5p per ordinary share, and a further special dividend of 7.5p per ordinary share.
2018 also saw Sales Excellence, the RBS bank-wide sales programme, get underway, teaching the tools and techniques that enable those in sales roles to be the best at ethical, needs-based selling. More information can be found on page 15 of the Strategic Report and on the Sustainable Banking pages on rbs.com.
Business Disability Forum. RBS was also proud to be named Employer of the Year by Women in Finance 2018.
Howard Davies, Frank Dangeard, Alison Davis, Morten Friis, Robert Gillespie, Ross McEwan, Brendan Nelson, Baroness Noakes, Mike Rogers, Mark Seligman and Lena Wilson all served throughout the year and to the date of signing of the financial statements.
Auditors EY LLP are the auditors and have indicated their willingness to continue in office. A resolution to re-appoint EY LLP as the company’s auditors will be proposed at the forthcoming Annual General Meeting. By order of the Board
Howard Davies Ross McEwan Katie Murray Chairman Chief Executive Chief Financial Officer
RBS aims to have the right tools in place to support effective risk management. Having the appropriate capability, people and infrastructure is central. This is supported by a strong emphasis on systems, training and development to ensure threats are anticipated and managed appropriately within the boundaries determined by the agreed risk appetite.
Leads Risk for RBS Group by defining and overseeing risk, conduct, compliance and financial crime strategies, to achieve a generative risk culture and support the Group’s ambitions and strategy. Defines overall Risk service provision requirements to enable delivery of Group strategies, including policies, governance, frameworks, oversight and challenge, risk culture and risk reporting. Contributes to the development of strategy, transformation and culture as a member of Group Executive Committee.
RBS uses the most severe combination of these to set the internal stress testing scenario. The results of this enable RBS to set its internal liquidity risk appetite, which complements the regulatory liquidity coverage ratio requirement.
 On an IFRS 9 transitional basis, the Tier 1 leverage ratio low point was projected to be 5.1% under stress, significantly above the leverage ratio hurdle rate of 3.59%.
Liquidity risk management RBS manages its liquidity risk taking into account regulatory, legal and other constraints to ensure sufficient liquidity is available where required to cover liquidity stresses. The principal levels at which liquidity risk is managed are:  NatWest Holdings Group  UK DoLSub  UBI DAC  NatWest Markets  NatWest Markets Securities Inc.  RBS International  NWM N.V.
Tier 2 capital: end-point CRR non compliant of which: holdco 0.1 0.1 0.1 0.1 0.3 0.4 0.1 0.1 of which: opcos 1.9 2.0 1.4 1.6 2.1 2.3 1.5 2.0
Capital, liquidity and funding risk continued Roll-off profile The following table illustrates the roll-off profile and weighted average spreads of RBS’s major wholesale funding programmes.
Capital, liquidity and funding risk continued RWAs by segment The chart below illustrates the concentration of risk-weighted assets by segment.
Covered SFT, assets held debts & Derivatives at central Readily Other Cannot securitisations and similar (2) Total (3) banks (4) available available be used Total Total 2018 (1) £bn £bn £bn £bn (5) £bn (6) £bn (7) £bn £bn £bn
Commercial real estate valuations – RBS has a panel of chartered surveying firms that cover the spectrum of geography and property sectors in which RBS takes collateral. Suitable valuers for particular assets are contracted through a single service agreement to ensure consistency of quality and advice. Valuations are commissioned when an asset is taken as security; a material increase in a facility is requested; or a default event is anticipated or has occurred. In the UK, an independent third-party market indexation is applied to update external valuations once they are more than a year old and every three years a formal independent valuation is commissioned.
Counterparty credit risk In addition to the credit risk management practices set out in this section, RBS mitigates counterparty credit risk arising from both derivatives transactions and repurchase agreements through the use of market standard documentation, enabling netting (for credit risk management only and not for accounting purposes), and through collateralisation.
Heightened Monitoring customers are performing customers that have met certain characteristics, which have led to significant credit deterioration. Collectively, characteristics reflect circumstances that may affect the customer’s ability to meet repayment obligations. Characteristics include trading issues, covenant breaches, material PD downgrades and past due facilities.
Credit risk continued Appropriate corrective action is taken when circumstances emerge that may affect the customer’s ability to service its debt (refer to Heightened Monitoring characteristics). Corrective actions may include granting a customer various types of concessions. Any decision to approve a concession will be a function of specific appetite, the credit quality of the customer, the market environment and the loan structure and security. All customers granted forbearance are classified Heightened Monitoring as a minimum.
EAD estimates Retail The IFRS 9 Personal modelling approach for EAD is dependent on product type.  Revolving products use the existing Basel models as a basis, with appropriate adjustments incorporating a term structure based on time to default.
Credit risk continued Governance and post model adjustments The IFRS 9 PD, EAD and LGD models are subject to RBS’s model monitoring and governance frameworks, which include approving post model adjustments (PMAs) calculated to incorporate the most recent data available and made on a temporary basis ahead of the underlying model parameter changes being implemented. These PMAs totalled approximately £60 million at the year end primarily in respect of PD under-predictions. In addition, as at 31 December 2018, judgemental ECL overlays on the UK PBB mortgage portfolio totalled £30 million, including £15 million in respect of the repayment risk not captured in the models that a proportion of customers on interest only mortgages will not be able to repay the capital element of their loan at end of term. The overlay for interest only mortgages was based on an analysis of recent experience on customer repayments pre and post end of term, and modelling that forward for maturities over the next ten years. These adjustments were over and above those covering economic uncertainty and non-linearity of losses discussed above and are also subject to over-sight and governance by the Provisions Committee.
This scenario has been applied to all modelled portfolios in the analysis below, with the simulation impacting both PDs and LGDs. For some portfolios this creates a significant impact on ECL, for others less so but on balance the impact is deemed reasonable. In this simulation, it is assumed the existing modelled relationship between key economic variables and loss drivers holds good.
Ulster Bank RoI Personal and business banking 12.8 11.9 100.0 60.5 60.5 24.5 24.4 24.4 17.3 Of which: mortgages 12.2 11.4 85.5 — — — — — — 6.1 7.2 11.7
Notes: (1) At 31 December 2018, Mortgages include £0.7 billion secured lending in Private Banking, in line with ECL calculation methodology. (2) AQ bandings are based on Basel PDs. (3) At 31 December 2018, AQ10 includes £0.6 billion (31 December 2017 – £0.7 billion) RoI mortgages which are not currently considered defaulted for capital calculation purposes for RoI but included in Stage 3. (4) 30 DPD – 30 days past due, the mandatory 30 days past due backstop as prescribed by the IFRS 9 guidance for significant increase in credit risk. (5) Days past due – Personal products: at a high level, for amortising products, the number of days past due is derived from the arrears amount outstanding and the monthly repayment instalment. For credit cards, it is based on payments missed, and for current accounts the number of continual days in excess of borrowing limit. Wholesale products: the number of days past due for all products is the number of continual days in excess of borrowing limit.
Notes: (1) Includes SME customers managed in UK PBB Business Banking who are assigned a sector under RBS’s sector concentration framework. (2) Includes exposures to central governments, central banks and sub-sovereigns such as local authorities. (3) Rest of world (RoW) also includes supranationals such as the World Bank and exposure relating to ocean-going vessels which cannot be meaningfully assigned to specific countries from a country risk perspective.
 Other lending asset quality – Unsecured credit quality remained stable, reflecting active portfolio management. Credit standards and controls were tightened across all three unsecured products to ensure that higher risk customer performance remained within risk appetite.
≤50% 47,111 3,423 516 153 51,203 4,779 2 16 64 82 — 0.5 12.4 0.2 >50% and ≤70% 44,037 3,632 459 49 48,177 8,535 2 23 39 64 — 0.6 8.5 0.1 >70% and ≤80% 20,345 1,490 135 15 21,985 7,434 1 11 11 23 — 0.7 8.1 0.1 >80% and ≤90% 12,733 1,118 81 12 13,944 7,524 2 12 8 22 — 1.1 10.0 0.2 >90% and ≤100% 2,343 178 24 7 2,552 1,104 1 4 3 8 — 2.4 12.1 0.3 >100% and ≤110% 57 35 8 1 101 — — 2 1 3 0.1 4.6 14.1 2.8 >110% and ≤130% 53 41 9 2 105 — — 2 1 3 0.1 5.4 14.6 3.4 >130% and ≤150% 23 23 6 — 52 — — 1 1 2 0.1 6.2 13.4 4.3 >150% 3 9 3 — 15 — — 1 1 2 0.1 6.2 17.3 7.2 Total with LTVs 126,705 9,949 1,241 239 138,134 29,376 8 72 129 209 — 0.7 10.4 0.2 Other 96 13 4 3 116 179 — 1 2 3 — 4.7 53.5 2.6 Total 126,801 9,962 1,245 242 138,250 29,555 8 73 131 212 — 0.7 10.5 0.2
UK PBB - mortgages At 1 January 2018 124,180 11 10,621 64 1,353 157 136,154 232 Transfers from Stage 1 to Stage 2 (4,928) (1) 4,928 1 — — — — Transfers from Stage 2 to Stage 1 4,245 15 (4,245) (15) — — — — Transfers to Stage 3 (61) — (327) (5) 388 5 — — Transfers from Stage 3 7 — 235 23 (242) (23) — — Net re-measurement of ECL on stage transfer (15) 11 17 13 Changes in risk parameters (model inputs) — 4 51 55 Other changes in net exposure 4,228 — (970) (6) (257) (14) 3,001 (20) Other (P&L only items) 1 — (6) (5) Income statement (releases)/charges (14) 9 48 43 Amounts written-off — — (1) (1) (26) (26) (27) (27)
 Write-off of any residual shortfall following the sale of a repossessed property typically occurs within five years, although this period can be longer, reflecting the ongoing support for customers who engage constructively with RBS.
At 1 January 2018 4,518 46 1,790 164 705 582 7,013 792 Transfers from Stage 1 to Stage 2 (1,452) (18) 1,452 18 — — — — Transfers from Stage 2 to Stage 1 733 42 (733) (42) — — — — Transfers to Stage 3 (51) (1) (182) (50) 233 51 — — Transfers from Stage 3 2 — 15 4 (17) (4) — —
UK PBB - business banking £m £m £m £m £m £m £m £m
 Stage 1 and Stage 2 changes to risk parameters largely reflected the increase in ECL for economic uncertainty and a change to the forward-looking modelling approach for point-in-time PDs, where PDs now revert to long-run average after one year rather than five years.
Key points  Stage 3 financial assets include £166 million (1 January 2018 –
Property Corporate FI Other Total 31 December 2018 £m % £m % £m % £m % £m %
Total can be offset arrangements Total can be offset arrangements 2018 £m £m £m £m £m £m
Master netting arrangements (329) (329) — (329) (329) — Securities collateral (34,646) (34,646) — (35,785) (35,785) — Potential for offset not recognised under IFRS (34,975) (34,975) — (36,114) (36,114) — Net 5,757 42 5,715 2,307 — 2,307
Central and local government Financial UK US Other institutions Corporate Total 2018 £m £m £m £m £m £m
France 4,721 11,739 2,320 18,780 3,324 15,456 Germany 7,643 5,819 2,165 15,627 9,957 5,670 Netherlands 1,897 798 5,395 8,090 986 7,104 United States 8,697 4,494 8,048 21,239 2,607 18,632 Japan 7,533 4,879 197 12,609 15 12,594 2016 France 4,275 7,045 2,003 13,323 2,392 10,931 Germany 8,868 4,836 2,138 15,842 4,207 11,635 Netherlands 2,809 563 6,699 10,071 1,061 9,010 United States 7,677 6,012 8,138 21,827 5,099 16,728 Japan 8,291 5,441 375 14,107 1 14,106
 The persistence of low interest rates and weaker sterling partly reflected uncertainty over Brexit.
Key points  The main driver of the reduction in structural foreign currency exposures was lower net investment in eurozone subsidiaries as a result of the €1.5 billion dividend paid by UBI DAC to NatWest Holdings Limited during Q1 2018. The reduction in US dollar exposures reflected the impact of the agreement with the US Department of Justice in relation to RMBS conduct fines.
Testing of the performance and adequacy of the VaR model is done on a regular basis through the following processes:  Back-testing – Internal and regulatory back-testing is conducted on a daily basis. (For information on internal back-testing, refer to page 159.)
Key developments in 2018  A Memorandum of Understanding between RBS and the Trustee of the Main section was reached in April 2018, which enabled RBS to bring the pension scheme into alignment with ring-fencing rules and reduce exposure to pension risk.
Risk governance The Pension Committee is chaired by the RBS Chief Financial Officer. It receives its authority from the Group Executive Committee and formulates RBS’s view of pension risk. The Pension Committee is a key component of RBS’s approach to managing pension risk and it reviews and monitors risk management, asset strategy and financing issues on behalf of RBS. It also considers investment strategy proposals from the Trustee.
Compliance & conduct risk Definition Compliance risk is the risk that the behaviour of RBS towards customers fails to comply with laws, regulations, rules, standards and codes of conduct. Such a failure may lead to breaches of regulatory requirements, organisational standards or customer expectations and could result in legal or regulatory sanctions, material financial loss or reputational damage.
 Enhanced product monitoring and reporting was introduced.  Controls, systems and processes were revised to ensure compliance with the UK’s ring-fencing rules.  PPI remediation continued in advance of the FCA’s August 2019 deadline for claims (refer to Note 20 on the consolidated accounts).  Work to address legacy GRG complaints continued. The process closed to new complaints in the UK on 22 October 2018.  Product and pricing continued to be simplified for new and existing customers.
 RBS has established an Innovation Risk Oversight team to provide bank-wide oversight of its innovation portfolio to help deliver safely and at pace.
Reputational risk Definition Reputational risk is the risk to RBS’s public image from a failure to meet stakeholders’ expectations in relation to performance, conduct or business profile. Stakeholders include customers, investors, employees, suppliers, government, regulators, special interest and consumer groups, media and the general public.
Sources of risk Reputational risk can arise from the conduct of employees; customer activities and the sectors and countries in which they operate; provision of products and transactions; as well as operations and infrastructure.
 the disclosures in the Annual Report and Accounts that describe the principal risks and explain how they are being managed or mitigated;  the directors’ confirmation in the Annual Report and Accounts that they have carried out a robust assessment of the principal risks facing the entity, including those that would threaten its business model, future performance, solvency or liquidity;  the directors’ statement in the financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them, and their identification of any material uncertainties to the entity’s ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements;  whether the directors’ statement in relation to going concern required under the Listing Rules in accordance with Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit; or
We performed an overall assessment of the ECL provision levels by stage to determine if they were reasonable considering the Group’s portfolio, risk profile, credit risk management practices and the macroeconomic environment. We considered trends in the economy and industries to which the Group is exposed.
We are satisfied that credit impairment provisions were reasonable and in compliance with IFRS 9. We highlighted the following matters to the Group Audit Committee:  Control deficiencies were identified on the transition to IFRS 9 and several compensating controls were implemented notably in the process to produce the financial statement disclosures;  Our testing and sensitivity analysis on the staging criteria did not identify material differences and overall, we concluded that the stage allocation at 31 December 2018 was reasonable;  Our testing of models and model assumptions did not highlight material differences. and  For individually assessed impairments, in a few instances we reported judgemental differences in respect of the extent of the impairment identified, however none of these differences were considered material. Relevant references in the Annual Report and Accounts Report of the Group Audit Committee Credit Risk section of the Capital and risk management section Accounting policies Note 14 on the financial statements
 The manipulation of revenue recognition through the inappropriate valuation of these instruments given the level of management judgement involved.
Attributable to: Ordinary shareholders 305 2 (5,999) Preference shareholders 182 234 260 Dividend access share — — 1,193 Paid-in equity holders 288 394 244 Non-controlling interests 17 52 121
(5) Refer to Note 33 for further information on the impact of IFRS 9 on classification and basis of preparation, year ended 31 December 2018 prepared under IFRS 9 prior years under IAS 39.
With the exception of investment property and certain financial instruments as described in Accounting policies 8, 13, and 21, the accounts are presented on an historical cost basis.
Fees in respect of services are recognised as the right to consideration accrues through the performance of each distinct service obligation to the customer. The arrangements are generally contractual and the cost of providing the service is incurred as each service is performed. The price is usually fixed and always determinable.
Expenditure on internally generated goodwill and brands is written-off as incurred. Direct costs relating to the development of internaluse computer software are capitalised once technical feasibility and economic viability have been established. These costs include payroll, the costs of materials and services, and directly attributable overheads. Capitalisation of costs ceases when the software is capable of operating as intended. During and after development, accumulated costs are reviewed for impairment against the benefits that the software is expected to generate. Costs incurred prior to the establishment of technical feasibility and
Intangible assets include goodwill arising on the acquisition of subsidiaries and joint ventures. Goodwill on the acquisition of a subsidiary is the excess of the fair value of the consideration transferred, the fair value of any existing interest in the subsidiary and the amount of any non-controlling interest measured either at fair value or at its share of the subsidiary’s net assets over net fair value of the subsidiary’s identifiable assets, liabilities and contingent liabilities.
Assets designated at fair value through other comprehensive income – An equity instrument may be designated irrevocably at fair value through other comprehensive income. Other assets have to meet both the following criteria: (a) the asset is held within a business model whose objective is both to hold assets to collect contractual cash flows and selling financial assets; and
15. Financial guarantee contracts Under a financial guarantee contract, the Group, in return for a fee, undertakes to meet a customer’s obligations under the terms of a debt instrument if the customer fails to do so.
longer expected to occur; or if hedge designation is revoked. On the discontinuance of hedge accounting (except where a forecast transaction is no longer expected to occur), the cumulative unrealised gain or loss is reclassified from equity to profit or loss when the hedged cash flows occur or, if the forecast transaction results in the recognition of a financial asset or financial liability, when the hedged forecast cash flows affect profit or loss. Where a forecast transaction is no longer expected to occur, the cumulative unrealised gain or loss is reclassified from equity to profit or loss immediately.
 rely on the assessment of whether the lease contract is onerous under IAS 37 at 31 December 2018 as an alternative to performing an impairment review of the right of use assets created on 1 January 2019 Where this is the case the carrying amount of the assets will be adjusted by the onerous lease provision.
Less: deferral of charge for amounts awarded for current year (130) (133) (103)
Analysis of net fees and commissions PBB Bank RoI Banking Banking International Markets & other Total 2018 £m £m £m £m £m £m £m £m
2018 2017 Major classes of plan assets as a percentage of Quoted Unquoted Total Quoted Unquoted Total total plan assets of the Main section % % % % % %
The Main section’s holdings of derivative instruments are summarised in the table below: 2018 2017 Notional Fair value Notional Fair value amounts Assets Liabilities amounts Assets Liabilities £bn £m £m £bn £m £m
Present value Asset Net Present value Asset Net Fair of defined ceiling/ pension Fair of defined ceiling/ pension value of benefit minimum liability/ value of benefit minimum liability/
Funding and contributions by the Group In the UK, the trustees of defined benefit pension schemes are required to perform funding valuations every three years. The trustees and the sponsor, with the support of the Scheme Actuary, agree the assumptions used to value the liabilities and a Schedule of Contributions required to eliminate any funding deficit. The funding assumptions incorporate a margin for prudence over and above the expected cost of providing the benefits promised to members, taking into account the sponsor’s covenant and the investment strategy of the scheme. Similar arrangements apply in the other territories where the Group sponsors defined benefit pension schemes. The last funding valuation of the Main section was at 31 December 2017 and next funding valuation is due at 31 December 2020, to be agreed by 31 March 2022.
Non-taxable items 47 134 136 Taxable foreign exchange movements (27) 27 (57) Losses brought forward and utilised 14 11 10 Increase/(reduction) in carrying value of deferred tax asset in respect of: - UK losses 7 (30) (317)
Weighted average number of shares (millions) Weighted average number of ordinary shares outstanding during the year 12,009 11,867 11,692 Effect of dilutive share options and convertible securities 52 69 51
For cash flow hedging relationships RBS determines that there is an economic relationship between the hedged item and hedging instrument via assessing the initial and ongoing effectiveness by comparing movements in the fair value of the expected highly probable forecast interest cash flows with movements in the fair value of the expected changes in cash flows from the hedging interest rate swap. Hedge effectiveness is measured on a cumulative basis over a time period management determines to be appropriate. The method of calculating hedge ineffectiveness is the hypothetical derivative method. RBS uses the actual ratio between the hedged item and hedging instrument to establish the hedge ratio for hedge accounting. For fair value hedge relationships of interest rate risk, the hedged items are typically large corporate fixed-rate loans, government securities, fixed rate finance leases, fixed rate medium-term notes or preference shares classified as debt. The hedged risk is the risk of changes in the hedged items fair value attributable to changes in the benchmark interest rate embedded in the hedged item. This risk component is identified using the risk management systems of RBS. This risk component comprises the majority of the hedged items fair value risk.
Cash flow hedging Hedging assets Interest rate risk (£bn) 3.9 10.9 47.8 8.7 10.5 — — 81.8 Average fixed interest rate 1.87 1.44 1.13 2.00 1.43 — — 1.33 Hedging liabilities Interest rate risk (£bn) 8.6 18.9 34.1 5.1 0.4 0.8 — 67.9 Average fixed interest rate 0.54 0.56 1.07 1.34 3.96 4.31 — 0.94 Exchange rate risk (£bn) — — 5.8 4.7 2.0 — — 12.5 Average USD - £ rate — — 1.32 1.37 1.50 — — 1.37
Cash and balances at central banks — — — 98,337 — 98,337 Trading assets 85,991 — — — 85,991 Derivatives 157,876 2,967 — 160,843 Settlement balances — — — 2,517 — 2,517 Loans to banks - amortised cost (3) 11,517 11,517 Loans to customers - amortised cost 310,116 310,116 Other financial assets — 190 43,968 3,643 4,128 51,929 Intangible assets — — — — — 6,543 6,543 Other assets — — — — — 10,263 10,263
Notes: (1) Transfers between levels are deemed to have occurred at the beginning of the quarter in which the instruments were transferred. (2) For an analysis of debt securities, by issuer, measurement classification and analysis of asset backed securities, and derivatives, by type and contract, refer to
Capital and Risk management – Credit risk. (3) The determination of an instrument’s level cannot be made at a global product level as a single product type can be in more than one level. For example, a single name corporate credit default swap could be in level 2 or level 3 depending on whether the reference counterparty’s obligations are liquid or illiquid.
RBS uses consensus prices for the IPV of some instruments. The consensus service encompasses the equity, interest rate, currency, commodity, credit, property, fund and bond markets, providing comprehensive matrices of vanilla prices and a wide selection of exotic products.
Funding valuation adjustment (FVA) FVA represents an estimate of the adjustment that a market participant would make to incorporate funding costs and benefits that arise in relation to derivative exposures. FVA is calculated as a portfolio level adjustment.
Trading liabilities and Other financial liabilities Customer accounts DCF based on recoveries Correlation % (45) 99 (29) 86 Interest rate % (0.36) 1.74 (0.38) 2.61
Derivative assets and liabilities Credit derivatives DCF based on recoveries Credit spreads bps 18 500 0 500 Option pricing Correlation % (50) 80 (50) 80 Volatility % 47 80 38 80 Upfront points % 0 100 0 99 Recovery rate % 10 40 10 40 Price-based Price % 90 110
13 Financial instruments – maturity analysis continued Assets and liabilities by contractual cash flow maturity The tables below show the contractual undiscounted cash flows receivable and payable, up to a period of 20 years, including future receipts and payments of interest of financial assets and liabilities by contractual maturity. The balances in the following tables do not agree directly with the consolidated balance sheet, as the tables include all cash flows relating to principal and future coupon payments, presented on an undiscounted basis. The tables have been prepared on the following basis: Financial assets have been reflected in the time band of the latest date on which they could be repaid, unless earlier repayment can be demanded by RBS. Financial liabilities are included at the earliest date on which the counterparty can require repayment, regardless of whether or not such early repayment results in a penalty. If the repayment of a financial instrument is triggered by, or is subject to, specific criteria such as market price hurdles being reached, the asset is included in the time band that contains the latest date on which it can be repaid, regardless of early repayment.
Liabilities by contractual maturity Bank deposits 7,417 21 13,785 2,003 — 59 Settlement balance 3,066 — — — — — Other financial liabilities 1,736 7,226 10,724 11,658 9,316 2,029 Subordinated liabilities 131 637 1,476 7,532 1,737 1,422 Other liabilities (2) 2,152 — — — — —
14 Loan impairment provisions Loan exposure and impairment metrics The table below summarises loans and related credit impairment measures on an IFRS 9 basis at 31 December 2018 and 1 January 2018 and on an IAS 39 basis at 31 December 2017.
 For the life of the loan - all models produce a term structure to allow a lifetime calculation for assets in Stage 2 and Stage 3.
Intangible assets other than goodwill are reviewed for indicators of impairment. In 2018 £37 million (2017 - £29 million) of previously capitalised software was impaired primarily as a result of software which is no longer expected to yield future economic benefit.
US$750 million 6.8% dated notes 2042 (partial redemption) Ineligible — 360
Liquidity facilities/loan commitments 2,138 213 2,351 2,117 455 2,572 Guarantees 3 10 13 229 5 234 25 Asset transfers Transfers that do not qualify for derecognition RBS enters into securities repurchase, lending and total return transactions in accordance with normal market practice which includes the provision of additional collateral if necessary. Under standard terms in the UK and US markets, the recipient has an unrestricted right to sell or repledge collateral, subject to returning equivalent securities on settlement of the transaction.
Own credit (405) (90) Defined benefit pension fund adjustment (394) (287) Cash flow hedging reserve 191 (227) Deferred tax assets (740) (849) Prudential valuation adjustments (494) (496) Goodwill and other intangible assets (6,616) (6,543) Expected losses less impairments (654) (1,286) Foreseeable ordinary and special dividends (1,326) — Other regulatory adjustments (105) 28
As part of the settlement with the Federal Reserve, NatWest Markets Plc and NatWest Markets Securities Inc. entered into a cease and desist order (the FX Order). In the FX Order, which is publicly available and will remain in effect until terminated by the Federal Reserve, NatWest Markets Plc and NatWest Markets Securities Inc. agreed to take certain remedial actions with respect to FX activities and certain other designated market activities, including the creation of an enhanced written internal controls and compliance program, an improved compliance risk management program, and an enhanced internal audit program. NatWest Markets Plc and NatWest Markets Securities Inc. are obligated to implement and comply with these programs as approved by the Federal Reserve, and are also required to conduct, on an annual basis, a review of applicable compliance policies and procedures and a risk-focused sampling of key controls.
FCA review of RBS’s treatment of SMEs In 2014, the FCA appointed an independent Skilled Person under section 166 of the Financial Services and Markets Act 2000 to review RBS’s treatment of SME customers whose relationship was managed by RBS’s Global Restructuring Group (GRG) in the period 1 January 2008 to 31 December 2013.
On 18 December 2018, the FCA published its final report containing a number of findings, including that personal current accounts are an important source of competitive advantage for major banks. Following the review, the FCA is to continue to monitor retail banking models, analyse new payments business models and undertake exploratory work to understand certain aspects of SME banking.
Enforcement proceedings and investigations in relation to Coutts & Co Ltd In February 2017, the Swiss Financial Market Supervisory Authority (FINMA) took enforcement action against Coutts & Co Ltd with regard to failures of money laundering checks and controls on certain client accounts that were connected with the Malaysian sovereign wealth fund, 1MDB, and were held with Coutts & Co Ltd. FINMA accordingly required Coutts & Co Ltd to disgorge profits of CHF 6.5 million. There are two administrative criminal proceedings pending before the Swiss Finance Department against two former employees of Coutts & Co Ltd. In addition, the Monetary Authority of Singapore (MAS)’s supervisory examination of Coutts & Co Ltd’s Singapore branch revealed breaches of anti-money laundering requirements. MAS imposed on Coutts & Co Ltd financial penalties amounting to SGD 2.4 million in December 2016.
Net cash (outflow)/inflow from financing 144 (414) 2,236 (2,258) (5,747) (3,606)
Operating profit/(loss) before tax 2,341 1,471 (5,416) Write-back/(write-down) of investment in subsidiaries 293 (562) 6,106 Gain on redemption of investment in Group undertakings — — (298) Interest on subordinated liabilities 438 497 509 Elimination of foreign exchange differences 399 (713) 1,506 Profit on disposal of investments in subsidiaries — (47) — Provision: expenditure in excess of charges (60) (748) — Gain on redemption of own debt — (239) — Other non-cash items 427 562 1,247
The classification and measurement and impairment requirements were applied retrospectively by adjusting the opening balance sheet at the date of initial application, with no requirement to restate comparative periods.
Liabilities Amounts due to subsidiaries - amortised cost 479 117 596 2 111 113 Derivatives with subsidiaries - - designated hedges 58 252 310 31 182 213 - economic hedges 3 132 135 39 32 71 Other financial liabilities - debt securities in issue - amortised cost 1,322 15,495 16,817 12 9,110 9,122 - designated as at fair value through profit or loss 2 2 4 76 4 80 Subordinated liabilities 55 7,886 7,941 318 7,546 7,864
Esme Loans Ltd BF FC (19) Patalex III Productions Ltd BF FC (94)
Lombard Business Leasing Ltd BF FC (24) R.B. Leasing (September) Ltd BF FC (94)
Lombard Corporate Finance (7) Ltd BF FC (94) RBS AA Holdings (UK) Ltd BF FC (19)
Airside Properties ASP Denmark AS BF FC (51) Hatros 1 AS BF FC (46)
BD Lagerhus AS BF FC (46) KB Eurohill BF FC (45)
Minster Corporate Services Ltd BF FC (70) RBS Holdings N.V. BF FC (67)
Nordisk Renting OY BF FC (47) RBS Services India Private Ltd SC FC (59)
BGF Group Ltd BF EAA PC 24 (9) Isobel AssetCo Ltd BF FC FC 75 (30)
RB Investments 5 Ltd FC FC 100 (19) Ulster Bank Commercial Services (NI) Ltd FC FC 100 (13)
NatWest Security Trustee Company Ltd FC FC 100 (19) RBS Trustees Ltd FC FC 100 (16)
The legal and political uncertainty and any actions taken as a result of this uncertainty, as well as new or amended rules, could have a significant impact on the Group’s operations or legal entity structure, including attendant restructuring costs, level of impairments, capital requirements, regulatory environment and tax implications and as a result may adversely impact the Group’s profitability, competitive position, viability, business model and product offering.
If the Group is unable to offer competitive, attractive and innovative products that are also profitable, it will lose market share, incur losses on some or all of its activities and lose opportunities for growth. In this context, the Group is investing in the automation of certain solutions and interactions within its customerfacing businesses, including through artificial intelligence. Such initiatives may result in operational, reputational and conduct risks if the technology used is defective, or is not fully integrated into the Group’s current solutions or does not deliver expected cost savings. The investment in automated processes will likely also result in increased short-term costs for the Group.
As a result, borrower and counterparty credit quality may cause accelerated impairment charges under IFRS 9, increased repurchase demands, higher costs, additional write-downs and losses for the Group and an inability to engage in routine funding transactions.
In particular, the Group is required to comply with regulatory requirements in respect of the implementation of the UK ring-fencing regime and to ensure operational continuity in resolution; the steps required to ensure such compliance entail significant costs, and also impose significant operational, legal and execution risk. Serious consequences could arise should the Group be found to be noncompliant with such regulatory requirements. Such changes may also result in an increased number of regulatory investigations and proceedings and have increased the risks relating to the Group’s ability to comply with the applicable body of rules and regulations in the manner and within the time frames required.
The legal and regulatory actions specifically referred to below are, in the Group’s view, the most significant legal and regulatory actions to which the Group is currently exposed. However, the Group is also subject to a number of ongoing reviews, investigations and proceedings (both formal and informal) by governmental law enforcement and other agencies and litigation proceedings, relating to, among other matters, the offering of securities, conduct in the foreign exchange market, the setting of benchmark rates such as LIBOR and related derivatives trading, the issuance, underwriting, and sales and trading of fixed-income securities (including government securities), product mis-selling, customer mistreatment, anti-money laundering, antitrust and various other compliance issues. Legal and regulatory actions are subject to many uncertainties, and their outcomes, including the timing, amount of fines or settlements or the form of any settlements, which may be material and in excess of any related provisions, are often difficult to predict, particularly in the early stages of a case or investigation, and the Group’s expectation for resolution may change.
The company agreed to reimburse HM Treasury for its expenses incurred in connection with the Acquisitions.
ADR Depositary Bank BNY Mellon Shareowner Services PO Box 505000 Louisville, KY 40233-5000