Further information on environmental, social, employee and human rights matters, together with detailed information on our sustainability performance can be found on our Sustainable Banking web pages on rbs.com
(3) Scotland: £2 million plus turnover of the three largest banks.
Dear shareholders, 2019 was another year of progress for the Bank, set against ongoing political and economic uncertainty. Further cost reduction, increased lending to our personal and business customers and more dividends for our shareholders are all good outcomes. I am also very pleased that we appointed Alison Rose as Group CEO. Alison brings a wealth of experience from many different roles in the Group and the Board and I look forward to continuing to work with her as we strive to improve the Bank for our customers.
Notes: 1. Climate positive refers to an organisation capturing more carbon than it emits over a given period of time. 2. Percentage of aggregate UK & RoI mortgage book exposure. 3. Pursuant to Climate and Sustainable Finance Inclusion Criteria, available on RBS.com.
Re-focus and re-size NatWest Markets to meet the needs of customers – expected to be capital ratio accretive.
Return on tangible equity of 9.4% for 2019 and 4.7% excluding FX recycling gains.
We support commercial customers and large finance projects and also offer financing, risk management and trading solutions through our NatWest Markets business.
Our business model We earn income from interest gained on loans to our personal, business and commercial customers, as well as fees from customer transactions and other services.
Empowering customers to make better financial decisions and achieve their goals
Since the Bank brought its Entrepreneur Accelerator network in-house in 2018, a minimum of 1,390 jobs have been created by businesses supported through the Accelerator programme. 1,000 of these jobs were created between January and December 2019 (*).
We are helping customers to get onto the property ladder 3. How we create value for our customers and society Our long term success is dependent on serving our customers well and generating value for society through our products, services and facilities.
Using our market leading app, customers can set up a savings goal, download statements, choose how to repay large credit card purchases and view details of their credit cards, current accounts and savings with other banks. 7 million customers use our app across personal and business banking and almost three quarters of active current account customers use online or mobile banking. Reflecting the change in customer behaviour, we also launched our digital only offering, Bò, in the Apple App and Google Play stores.
At Ulster Bank we are empowering our colleagues to innovate with a ‘digitalfirst ’ mind-set to create future solutions for our customers.
In Q3 2019 a trading support 'bot' (Scout) was launched onto the Symphony collaboration platform, giving clients instant responses to requests for the latest bond prices while improving our efficiency.
We also use independent experts to measure our customers’ trust in the bank. Each quarter we ask customers to what extent they trust or distrust their bank to do the right thing. The score is a net measure of those customers that trust their bank (a lot or somewhat) minus those that distrust their bank (a lot or somewhat).
Source: Ipsos MORI FRS 6 month rolling data. Latest base sizes: 2,829 for NatWest (England & Wales); 451 for Royal Bank of Scotland (Scotland). Based on the question: “How likely is it that you would recommend (brand) to a relative, friend or colleague in the next 12 months for current account banking?” Base: Claimed main banked current account customers. Source: Coyne Research 12 month rolling data. Question: “Please indicate to what extent you would be likely to recommend (brand) to your friends or family using a scale of 0 to 10 where 0 is not at all likely and 10 is extremely likely”. Latest base sizes: 352 Northern Ireland; 1,424 Republic of Ireland.
• As at the 31 December 2019 we have on aggregate 9% BAME/non-white colleagues in our top four leadership layers in the UK. We employ 15% BAME/non-white staff across the UK.
• We have flexible working practices in place across the organisation and externally we are again a Top Ten Employer for Working Families in 2019.
Note: We report to reflect our organisational (CEO) levels. This method more accurately describes our gender balance at leadership/pipeline levels. As well as being more reflective of our organisational structure, this enables comparison to be made externally. This also includes NatWest Holdings CEO-1 level.
Develop our climate risk scenario modelling and stress testing capabilities. Carry out climate scenario and stress testing analysis, in particular as part of the 2021 climate risk Biennial Exploratory Scenario (BES) exercise (starting H2 2020). This will develop understanding of how climate risk interacts with key exposures.
b. Accelerating the speed of transition: (i) support our UK & RoI mortgage customers to increase their residential energy efficiency and incentivise purchasing of the most energy efficient homes, with an ambition that 50% of our mortgage book has an EPC or equivalent rating of C or above by 2030.
Sustainable energy funding and financing: Noted below is the funding provided to customers during 2018 and 2019 to fulfil our three year commitment to provide £10 billion of funding and financing to the sustainable energy sector by 2020.
Culture & People Risk There is a risk that RBS lacks sufficient capability or capacity at a senior level to deliver, or adapt to, change. People risk is monitored closely and plans are in place to support retention of key roles, with wider programmes supporting engagement and training for all employees. Ensuring a healthy culture remains a core priority and a multi-year programme focused on enhancing culture, including risk culture, is ongoing.
The Board is collectively responsible for promoting the long-term success of RBSG plc, driving both shareholder value and contribution to wider society. Its role is to provide leadership of RBSG plc within a framework of prudent and effective controls which enables risk to be assessed and managed.
The full Governance report is on pages 62 to 111 of the 2019 Annual Report and Accounts.
In February 2019, the Banking Standards Board presented a summary of their 2018 culture assessment report on RBS, and in October 2019, the Board considered another set of encouraging results from the annual colleague opinion and 2019 Banking Standards Board surveys.
This section of the Strategic Report describes how the directors have had regard to the matters set out in section 172(1) (a) to (f), and forms the directors’ statement required under section 414CZA, of The Companies Act 2006.
The results of internal and regulatory stress tests (which include consideration of the top and emerging risks within the scenario design).
On 16 June 2019, the merger of Alawwal bank and SABB was completed, with NWM N.V. receiving an aggregate 10.8% shareholding in SABB on behalf of itself and its consortium partners.
Cash and balances at central banks 77,858 88,897 98,337 74,250 79,404 Trading assets 76,745 75,119 85,991 86,660 103,972 Derivatives 150,029 133,349 160,843 246,981 262,514 Loans to banks and customers - amortised cost 337,636 318,036 321,633 320,016 297,020 Settlement balances 4,387 2,928 2,517 5,526 4,116 Other financial assets 61,452 59,485 51,929 48,637 47,004 Other assets 14,932 16,421 16,806 16,586 21,378 Total assets 723,039 694,235 738,056 798,656 815,408
Interest receivable (1,2) 11,375 11,049 326 3% Interest payable (1,2) (3,328) (2,393) (935) 39% Net interest income 8,047 8,656 (609) (7%)
Performance ratios Return on equity (1) 9.6% 24.7% (15.1%) Net interest margin 2.47% 2.67% (0.20%) Cost:income ratio 74.4% 56.7% 17.7%
 Commercial Banking continues to focus on increasing customer interactions through digital channels. In 2019, NatWest became the first UK bank to launch biometric secure authentication for all business payments via Bankline mobile. Conversation volumes with our chat bot Cora have increased to c.16,500 per month since inception in December 2018.
 Excluding strategic, litigation and conduct costs, operating expenses decreased by £17 million, or 3.7%, primarily reflecting lower back office operations costs.
 Net loans to customers increased by £1.2 billion, or 8.4%, mainly due to mortgage lending, relative to an increase in RWA’s of £0.7 billion, or 7.4%.
Loans to customers (amortised cost) - corporate 11.1 10.2 0.9 9% - mortgages 2.6 2.7 (0.1) (4%) - other 0.4 0.4 — — Total Net loans to customers (amortised cost) 14.1 13.3 0.8 6%
Risk and control During 2019 the Board continued its focus on strategic risks and conducted deep dives on financial crime and the political and economic environment. There was also a Board teach-in on climate risk and the Board approved RBS’s high-level plan for addressing the financial risks related to climate change, a step forward in terms of building a more sustainable Bank. The Board held a recovery planning fire drill which tested the management of a scenario presenting conflicts of interest between the RBSG plc Board and its subsidiaries. The Board, supported by the Group Board Risk and Group Audit Committees, continues to monitor RBS’s overall control environment.
Non-executive director independence The Board considers that the Chairman was independent on appointment and that all current non-executive directors are independent for the purposes of the Code. By the time Brendan Nelson stepped down from the Board on 25 April 2019, he had served for 9 years and 24 days. In that respect alone, Mr Nelson did not meet the independence criteria set out in the Code. Notwithstanding Mr Nelson’s length of service, the Board determined that Mr Nelson continued to be independent in character and judgement, offering a strong contribution to Board discussions and debate until he stepped down from the Board on 25 April 2019.
Board Committees In order to provide effective oversight and leadership, the Board has established a number of Board committees with particular responsibilities. Please refer to page 45 of the Strategic Report for more details. Board committee terms of reference are available on rbs.com.
The DINEDs attend RBSG plc Board meetings in an observer capacity.
 There was clear appetite amongst Board members to have more visibility of top executive talent.
Private Banking and as Deputy Chief Executive Officer of NatWest Holdings Limited. Alison’s appointment to the Board as CEO took effect on 1 November 2019.
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 Group boards: RBSG plc, NWH Ltd, NWB Plc, RBS plc and Ulster Bank Limited. A copy of the Boardroom Inclusion Policy is available on rbs.com>about us.
As GAC Chairman I am responsible for overseeing the performance of the internal audit function and ensuring its independence. I am pleased to confirm that this year’s evaluation of the function found it to be operating effectively with its independence recognised as a key area of strength.
The Committee considered that it continued to operate effectively and identified some areas for potential enhancement primarily relating to timing of prior executive governance and timescales for review of papers. The outcomes of the evaluation have been reported to the Board and the Committee will track progress during 2020.
Opinions – Internal Audit provided the GAC with quarterly opinion reports setting out its view of the risk and control environment and risk and control awareness of each business and function, and the risks which could impact the bank achieving its targets. Internal Audit also outlined material and emerging concerns identified through their audit work. During 2019 Financial Crime and Payments Processing were noted by Internal Audit as requiring continued focus by management and these were therefore also key areas of scrutiny by the GAC. In addition, Internal Audit reviewed RBSG plc’s Pillar 3 reporting and whistleblowing process, which were both found to be effective. Annual Plan and Budget – GAC considered and approved Internal Audit’s 2019 plan and budget at the end of 2018 and progress updates and changes to the plan were provided to the GAC periodically throughout 2019. At the end of 2019 the GAC considered and approved Internal Audit’s plan and budget for 2020. The Committee was satisfied that Internal Audit had adequate budget and resources to deliver its plan. Internal Audit Charter and Independence – The GAC reviewed and approved the Internal Audit Charter and noted the Chief Audit Executive’s independence statement. Visits – Together with the BRC, GAC participated in two visits to Internal Audit during 2019. A variety of issues impacting the Internal Audit function were discussed, including: Quality Assurance, staff engagement, strategic priorities and future readiness. Performance – The Chief Audit Executive continued to report to the GAC Chairman, with a secondary reporting line to the CEO for administrative purposes. The GAC assessed the annual performance (including risk performance) of the function and Chief Audit Executive. The Chief Audit Executive’s remuneration was also determined by the GAC Chairman with input from the Chief Executive. Evaluation – The 2019 evaluation of the Internal Audit function was carried out internally. Key stakeholders across the bank, including the GAC members, attendees and the external auditors provided feedback. The Chief Audit Executive discussed the findings of the evaluation both with the GAC Chairman and the GAC. The overall findings were very positive and the Internal Audit function was found to be operating effectively. Some areas for development were identified in respect of succession planning, communications with stakeholders, future strategy and articulation of required improvements to the control environment. These are being progressed by Internal Audit management and overseen by the GAC.
Audit Partner – Jonathan Bourne has been EY’s lead audit partner for RBS since 2016, Mr Bourne attended each meeting of the GAC in 2019. Mr Bourne will rotate off the RBS Group audit after the 2020 financial results are published. During 2019 the GAC discussed lead audit partner rotation, reviewed potential successors and agreed on the lead audit partner for 2021. External Audit Reports – EY reported to the GAC each quarter on their audit work and related conclusions, including the appropriateness of judgements made by management and their compliance with international financial reporting standards. The GAC also reviewed EY’s annual management letter. Audit Plan and fees – The GAC considered updates on EY’s 2019 plan and approved the 2019 audit fees including the fee for the 2019 interim results. The GAC was authorised by shareholders at the last Annual General Meeting to fix the remuneration of the external auditors. Annual Evaluation – An internal evaluation was carried out at the GAC’s request to assess the independence and objectivity of the External Auditor and the effectiveness of the audit process during 2019. The GAC members, attendees, business and functional Finance Directors and key members of the Finance team were consulted as part of the evaluation. The evaluation assessed the external auditor’s mindset and culture, skills, character and knowledge, quality control and judgement. The evaluation found that the External Auditor was operating effectively and with objectivity. A number of recommendations for continuous improvement were identified, including in relation to communication, reporting and legal entity focus which are being implemented by the External Auditor and overseen by the GAC. Following the evaluation the GAC recommended that the Board seek the reappointment of EY as external auditor at the next annual general meeting. FCA Client Asset Rule Opinions – During 2019 the external auditor presented the results of its assurance procedures on compliance with the FCA’s Client Asset Rules for RBS’ regulated legal entities for the year ended 31 December 2018. The GAC also considered the CASS Audit plan for 2019, the findings of which will be reported to the GAC once the audit is complete. External Auditor Report to the PRA – The GAC considered EY’s written auditor report to the PRA under supervisory statement SS1/16 for the year ended 2018. The GAC also considered the scope of the 2019 written auditor report which the GAC will receive in 2020. FRC AQR Review – During 2019 the FRC undertook a review of EY’s audit of RBS’s financial statements for the year ended 31 December 2018. The findings and the actions EY will take in response to those findings were considered by the GAC; the GAC was satisfied that none of the findings were significant and noted that the FRC had accepted EY’s response to the review.
Further details of the non-audit services 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.
Letter from Baroness Noakes Chairman of the Group Board Risk Committee
Membership BRC comprises four independent nonexecutive directors. The details of the members and their skills and experience are set out on pages 62 and 63.
With shareholder, regulatory and societal expectations intensifying, embedding sustainable banking principles and targets within RBS Group’s broader strategic agenda will be critical. Our renewed Committee focus in 2019 - going beyond traditional environmental, social and governance matters – sought to ensure that the SBC continues to play a forward-looking role.
Group SBC has four non-executive directors as members and three non-executive directors from our ring-fenced bank board observing, along with management attendees. More details of membership and attendance at meetings can be found on page 66 of the Governance Report.
Conclusion Through the SBC, my fellow directors and I have had the opportunity to help shape RBS Group’s future sustainable banking strategy and test management’s response to these important issues. I want to take the opportunity to thank the Committee members, attendees and presenters for their continued contribution and support in 2019.
We have prioritised areas where we are making the most progress to understand what is working and lessons learned - for example the transformation of the customer mortgage acquisition and renewal journey. By introducing paperless mortgages for direct customer and brokers, and Introducing Marge, a mortgage digital assistant to assist mortgage call centre agents by retrieving and providing accurate information quickly, the time taken to issue a mortgage offer to a customer and confirm approval has been significantly reduced. . Beyond the core – New technologies are enabling new paradigms and business models in financial services, and the committee continues to spend time with management looking at priorities for investing in and scaling up new business models that have the potential to meet our customers’ needs in new ways. Examples this year included:  Bó, our digital bank, designed to help people ‘Do Money Better’. Bó was launched to the market in November 2019;  Tyl by NatWest, our innovative new approach to merchant acquiring, replacing Worldpay referrals. Launched in May 2019, customers can now use its market leading capability; and
Letter from Robert Gillespie Chairman of the Group Performance and Remuneration Committee “I believe the existing remuneration policy has served RBS well. Only a small number of changes are proposed to align with the latest investor guidance and market practice.”
The Committee has listened to feedback from some shareholders asking for more clarity on how LTI awards are determined. While not a change to policy as such, enhancements have been made to the disclosures in this report to provide further rationale for the factors the Committee has taken into account when determining LTI awards.
Remuneration arrangements were set within the terms of the existing policy with a base salary of £1,100,000 per annum, pension at 10% of base salary in line with the wider RBS workforce and a fixed share allowance (FSA) at 100% of base salary.
The salary for Ms Rose represented a 10% increase on Mr McEwan’s salary which had been unchanged since his appointment as CEO in 2013, and was significantly lower than his predecessor. If Mr McEwan had received a salary increase in line with the wider workforce while in role, his salary would have been around 18% higher (£1.18m), by the end of 2018.
 Costs reduced by £310 million during 2019, ahead of target
 Regular and special dividend payments made to shareholders during 2019
 Employee engagement remains high but customer performance remains a challenging area 2017 LTI award vesting outcome Performance has been assessed for LTI awards granted in 2017, following the completion of the performance period at the end of 2019. This was the last grant of awards under the previous LTI construct prior to approval of the current remuneration policy at the 2017 AGM. While the performance cycle has completed, the shares will vest in tranches up to 2024 and remain subject to malus and clawback provisions to ensure recipients maintain a long-term focus in their decision-making.
Retention 12 month retention period applied to each vesting**. No change.
No policy currently to adjust awards. Flexibility has been added that will allow LTI awards to be granted using an adjusted share price to reflect the absence of the right to receive dividends during the vesting period.
LTI awards are subject to:  a one year pre-grant performance period;  a pre-vest performance assessment at the end of a three year period, with vesting taking place from years three to seven after grant;  malus provisions prior to vesting and clawback which applies for seven (and potentially up to ten) years from the date of award; and
The vesting level of the award can vary between 0% and 100% of the original number of shares granted, depending on performance.
The Committee retains discretion to make minor amendments to the Directors’ Remuneration Policy to reflect changing legal or regulatory requirements or guidelines (including but not limited to any PRA or FCA revisions to their remuneration rules and the EBA remuneration guidelines). For the avoidance of doubt, no material changes would be made to the advantage of directors without reverting to shareholders for approval.
(3) The executive directors receive a monthly cash allowance and can choose to participate in the company’s defined contribution pension arrangements. (4) The 2019 value relates to LTI awards granted in 2017 with the performance assessed at the end of December 2019 as set out below. No discretion was exercised by the Committee as a result of the share price changing over the performance period. The estimated value above is £148,778 lower than the value of the shares at the time of grant, as a result of the share price falling from £2.4142 to £2.25 over the period.
RBS – Annual Report and Accounts 2019 91 2017 LTI award – final assessment of performance measures (audited) 2017 LTI vesting amounts included in the total remuneration table LTI awards were granted in March 2017 to Ross McEwan and also to Alison Rose and Katie Murray in respect of their roles prior to becoming executive directors. The performance period ended on 31 December 2019 and the performance conditions have been assessed as set out on the previous page and below. The awards will vest between March 2020 and March 2024 and remain subject to malus and clawback provisions.
Ross McEwan 7 March 2019 1,650 625,712 Between 0% - 100% with no set minimum vesting
Scores from the Banking Standards Board assessment on culture:  culture target of 78
While the in year target of 10% was not met, good progress was made towards the longer term 2025 target.
Achieve CET1 ratio target for RBS Group and NWH Group, with appropriate repatriation of capital to the RBS Group.
Progress on the number of women in senior roles across the top three layers of RBS Group.
Based on achieving the inclusion target for RBS Group and NWH Group, as measured through the RBS ‘Our View’ colleague survey.
Chairman and non-executive directors’ annual fees for 2020 The fees are unchanged from 2019.
Ross Alison Katie Howard Frank Alison Patrick Morten Robert Brendan Baroness Mike Mark Lena
Group. This is considered to be the most representative comparator group as it covers the majority of employees and the CEO is based in the UK.
We identify MRTs for four key ‘institutions’ within the RBS Group: The Royal Bank of Scotland Group plc; NatWest Holdings Limited; NWM Plc; and The Royal Bank of Scotland International (Holdings) Limited. The MRT criteria are applied for each of these institutions, and consequently some MRTs are identified in relation to one or more of these entities.
Following further review against overall performance and conduct, the CEO will make a final recommendation to the Committee, informed by all the previous steps in the process and her strategic view of the business. The Committee will then make an independent decision on the final bonus pool taking all of these earlier steps into account.
 Those responsible for managing balance sheet and liquidity and funding positions across the business.
Statement of compliance RBS Group is committed to high standards of corporate governance, business integrity and professionalism in all its activities.
RBSG plc’s auditors have audited the effectiveness of RBS’s internal control over financial reporting and have given an unqualified opinion.
The final and special dividends recommended by directors are subject to shareholders’ approval at the Annual General Meeting on 29 April 2020. If approved, payment will be made on 4 May 2020 to shareholders on the register at the close of business on 27 March 2020. The ex-dividend date will be 26 March 2020.
Directors’ indemnities In terms of section 236 of the Companies Act, Qualifying Third Party Indemnity Provisions have been issued by the company to its directors, members of the RBS Group and NWH Executive Committees, individuals authorised by the PRA/FCA, certain directors and/or officers of RBS subsidiaries and all trustees of RBS pension schemes.
During 2019, a number of enhancements to the risk management framework were developed in advance of full implementation of a new enterprise-wide risk management framework beginning in 2020. There was a significant management focus on the new framework, including enhancements to appetite, the three lines of defence model and the governance of certain risk types. These were presented to the senior risk governance committees and the RBSG plc Board, resulting in final approval of the new framework in December 2019.
Second line of defence The second line of defence comprises the Risk function and is independent of the first line.
 Risk appetite – by gaining a better understanding of the drivers of, and the underlying risks associated with, risk appetite.
Reverse stress testing is also carried out in order to identify circumstances that may lead to specific, defined outcomes such as business failure. Reverse stress testing allows potential vulnerabilities in the business model to be examined more fully.
Traded market risk RBS carries out daily market risk stress testing to identify vulnerabilities and potential losses in excess of, or not captured in, value-at-risk. The calculated stresses measure the impact of changes in risk factors on the fair values of the trading and fair value through other comprehensive income portfolios.
RBS is also participating in the United Nations Environment Programme Finance Initiative focusing on analysis of how physical and transition risks could affect the agriculture and real estate sectors.
 Tier 2 capital. Tier 2 capital is RBS Group’s supplementary capital and provides loss absorption on a gone concern basis. Tier 2 capital absorbs losses after Tier 1 capital. It typically consists of subordinated debt securities with a minimum maturity of five years.
 RBS continued to strengthen and de-risk its capital position; CET1 ratio remains ahead of the c14% target. The directors have recommended a final dividend of 3p per ordinary share, and a further special dividend of 5p per ordinary share, which are both subject to shareholders’ approval at the Annual General Meeting in April 2020.
 Impact assessment captures input from across RBS Group including from businesses.
Bank specific Pillar 2A (3) 1.9% 2.6% 3.4% Total (excluding PRA buffer) (4) 10.7% 12.9% 15.7%
(2) Global Systemically Important Financial Institutions (G-SIFIs), as designated by the Financial Stability Board (FSB), are subject to an additional capital buffer of between 1% and 3.5%. In November 2018 the FSB announced that RBS is no longer a G-SIB. From 1 January 2020, RBS is released from this global buffer requirement.
Leverage ratios The table below summarises the minimum ratios of capital to leverage exposure under the binding PRA UK leverage framework applicable for RBS Group. The CRR2 amendments to the CRR will introduce a binding 3% Tier 1 minimum capital leverage ratio for Group, sub-groups and individual legal entities from 28 June 2021.
LAC as a ratio of RWAs 33.3% 30.7% LAC as a ratio of CRR leverage exposure 9.3% 9.0%
Senior debt roll-off profile (1) 31 December 2019 H1 2020 H2 2020 2021 2022 2023 & 2024 2025 & later
Capital, liquidity and funding risk continued RWAs by segment The table below analyses the movement in end-point CRR RWAs by segment during the year.
Bank deposits 4,192 660 545 1,291 6,688 11,169 38 — 17,895 — 17,895 Bank repos 2,213 200 5 180 2,598 — — — 2,598 — 2,598 Customer repos 1,765 — — — 1,765 — — — 1,765 — 1,765 Customer deposits 346,430 10,020 5,377 3,506 365,333 2,101 21 27 367,482 — 367,482 Personal 176,129 3,382 1,586 2,027 183,124 1,210 — — 184,334 — 184,334 Corporate 127,019 3,266 2,182 983 133,450 556 4 27 134,037 — 134,037 NBFI 43,282 3,372 1,609 496 48,759 335 17 — 49,111 — 49,111 Settlement balances 4,069 — — — 4,069 — — — 4,069 — 4,069 Trading liabilities — — — — — — — — — 73,949 73,949 Derivatives — 1 2 — 3 4 4 11 22 146,857 146,879 Other financial liabilities 577 4,157 3,361 3,820 11,915 10,455 13,112 9,738 45,220 — 45,220 CPs and CDs 339 1,533 1,075 1,325 4,272 3 3 — 4,278 — 4,278 Medium-term notes 188 2,622 1,033 749 4,592 10,452 10,212 8,598 33,854 — 33,854 Covered bonds 50 2 1,253 1,746 3,051 — 2,897 — 5,948 — 5,948 Securitisations — — — — — — — 1,140 1,140 — 1,140 Subordinated liabilities 8 13 36 103 160 2,393 4,931 2,495 9,979 — 9,979 Lease liabilities 21 34 47 92 194 313 246 1,070 1,823 — 1,823 Other liabilities (2) 2,109 — — — 2,109 — — — 2,109 — 2,109 Total financial liabilities 361,384 15,085 9,373 8,992 394,834 26,435 18,352 13,341 452,962 220,806 673,768
UK PB 12 37 110 159 150 1 — 151 138 (36) (110) (8) 1 (9) — (8) UB RoI 2 6 10 18 18 — — 18 16 (6) (10) — — (1) 1 — CB 38 45 19 102 135 1 — 136 97 (44) (19) 34 1 45 (12) 34 Private Banking 5 6 4 15 28 — — 28 23 (6) (4) 13 (2) 5 10 13 RBSI 6 5 3 14 30 — — 30 24 (5) (3) 16 1 2 13 16 NWM 18 4 1 23 13 1 — 14 (5) (3) (1) (9) (2) (6) (1) (9) Centre — — — — 2 — — 2 2 — — 2 2 — — 2 Total 81 103 147 331 376 3 — 379 295 (100) (147) 48 1 36 11 48
For lower risk transactions below specific thresholds, credit decisions can be approved through self-sanctioning within the business. This process is facilitated through an auto-decision making system, which utilises scorecards, strategies and policy rules. Such credit decisions must be within the approval authority of the relevant business sanctioner.
 Revolving products use the existing Basel models as a basis, with appropriate adjustments incorporating a term structure based on time to default.
Presentation of interest in suspense recoveries In March 2019, the IFRS Interpretations Committee (IFRIC) issued an agenda decision on the presentation of unrecognised interest when a credit-impaired financial asset (commonly referred to as a Stage 3 financial asset) is subsequently paid in full or is no longer creditimpaired. This concluded that the difference arising from the additional interest recovered must be recognised as a reversal of impairment rather than within interest revenue. This affects both recognition and the reversal of the ECL allowance.
 Equity shares of £0.9 billion (2018 - £0.5 billion) as not within the IFRS 9 ECL framework by definition.
 Commercial Banking ECL provisions – ECL balances reduced slightly with increases in Stage 1 and Stage 2 offset by a decrease in Stage 3. Despite increased ECL charges, primarily due to a small number of material individual provisions, model enhancements and increased economic uncertainty, the ECL
Credit risk – Banking activities continued Segmental loans and impairment metrics (audited)
 The overall credit risk profile of the Personal portfolio, and its performance against credit risk appetite, remained stable during 2019.
 Regional mortgage analysis – 43% of the stock of lending was in Greater London and the South East (2018 – 42%). The average weighted LTV for these regions was 53% (2018 – 51%) compared to 57% for all regions.
 RBS continues to hold post model adjustments (PMAs) on a temporary basis ahead of the underlying model parameter changes being implemented, as well as on certain portfolio segments where management judge additional ECL is required. The impact of any change in PMAs during the year is reported under changes in risk parameters, as are any impacts arising from changes to the underlying models. Refer to the Governance and post model adjustments section for further details.
 Improvements in underlying risk metrics which are reflected in changes to risk parameters in Stage 1 and Stage 2 were offset by model enhancements and increases related to economic uncertainty.
Wholesale trigger (1) PD movement 940 50.1 5,617 64.2 281 59.3 8 36.4 6,845 61.5 PD persistence 57 3.0 171 2.0 4 0.8 — — 232 2.1 Risk of credit loss 321 17.1 1,964 22.4 103 21.7 — — 2,388 21.5 Forbearance support provided 65 3.5 209 2.4 — — — — 274 2.5 Customers in collections 9 0.5 43 0.5 — — — — 52 0.5 Other reasons (3) 251 13.4 525 6.0 85 17.9 14 63.6 875 7.9 Days past due >30 234 12.5 224 2.6 1 0.2 — — 460 4.1
Counterparty mark-to-market netting (122,697) (122,697) (106,762) (106,762) Cash collateral (18,685) (17,296) (17,937) (15,227) Other financial collateral (4,292) (1,276) (4,469) (3,466) Net exposure 4,355 5,610 4,181 3,442
Risk governance The Group Pension Committee is chaired by the Chief Financial Officer. During 2019, it received its authority from the Group Executive Committee and formulated RBS’s view of pension risk. The Group Pension Committee is a key component of RBS’s approach to managing pension risk and it reviews and monitors risk management, asset and liability strategy and financing issues on behalf of RBS. It also considers investment strategy proposals from the Trustee of the Main section.
Among other procedures, we assessed the reasonableness of revenue forecasts by evaluating the underlying business strategies, comparing to expected market trends and considering anticipated balance sheet growth. We obtained an understanding of the strategic review of the Group and we considered its expected impact on the forecasts and the extent to which decisions had been factored into the forecasts, where appropriate, in accordance with the relevant accounting standards. This included the assessment of any accounting impact for the 2019 reporting period (e.g. impairment of assets, hedge accounting and provisions) and evaluation of the adequacy of the disclosure of events occurred after the reporting period. We also inspected the findings from the review performed by management including their own sensitivity analysis of the forecasts.
 We are satisfied that the disclosures appropriately reflect the sensitivity of the carrying value of investments in subsidiaries and goodwill to certain reasonable alternative outcomes. As there are a number of other possible outcomes and it would be impracticable to estimate the effect of all of them, the directors have disclosed the uncertainty that other possible outcomes within the next financial year could require an adjustment to the carrying amount of investments in subsidiaries and goodwill.
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
Key observations communicated to the Group Audit Committee We are satisfied that the accounting treatment of foreign currency translation differences and the recycling of FX reserves in connection with the above transactions is reasonable and in accordance with IFRS. We reported the following to the Group Audit Committee:  There is significant judgement in the interpretation of the requirements of IAS21 for the recycling of FX reserves; and
In the prior year, our auditor’s report included key audit matters in relation to the financial impact of structural reform as it was the year of implementation. We did not consider this to be a key audit matter in the current year.
Total assets 95% 5% - 100% Total equity 91% 8% 1% 100% Total income 93% 6% 1% 100%
 The non-audit services prohibited by the FRC’s Ethical Standard were not provided to the Group or the parent company and we remain independent of the Group and the parent company in conducting the audit
Interest receivable 11,375 11,049 11,034 Interest payable (3,328) (2,393) (2,047) Net interest income 1 8,047 8,656 8,987 Fees and commissions receivable 3,359 3,218 3,338 Fees and commissions payable (848) (861) (883) Income from trading activities 932 1,507 634 Loss on redemption of own debt — — (7) Other operating income 2,763 882 1,064 Non-interest income 2 6,206 4,746 4,146 Total income 14,253 13,402 13,133 Staff costs (4,018) (4,122) (4,676) Premises and equipment (1,259) (1,383) (1,565) Other administrative expenses (2,828) (3,372) (3,323) Depreciation and amortisation (1,176) (731) (808) Impairment of other intangible assets (44) (37) (29) Operating expenses 3 (9,325) (9,645) (10,401) Profit before impairment losses 4,928 3,757 2,732 Impairment losses 14 (696) (398) (493) Operating profit before tax 4,232 3,359 2,239 Tax charge 7 (432) (1,208) (731) Profit for the year 3,800 2,151 1,508
Note: (1) On 17 April 2018 RBS Group agreed a Memorandum of Understanding (MoU) with the Trustees of the RBS Group Pension Fund in connection with the requirements of ring-fencing. NWM Plc could not continue to be a participant in the Main section and separate arrangements were required for its employees. Under the MoU, NWB Plc made a contribution of £2 billion on 9 October 2018 to strengthen funding of the Main section in recognition of the changes in covenant. Also under the MoU, NWM Plc made a £53 million contribution to the NWM section in Q1 2019.
Accounting policy changes effective 1 January 2019 Adoption of IFRS 16 Refer to Accounting policy 9 and Note 22 for details of the adoption of IFRS 16.
The recoverable amount of an asset that does not generate cash flows that are independent from those of other assets or groups of assets, is determined as part of the cashgenerating unit to which the asset belongs. A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. For the purposes of impairment testing, goodwill acquired in a business combination is allocated to each of RBS Group’s cash-generating units or groups of cash-generating units expected to benefit from the combination. The recoverable amount of an asset or cash-generating unit is the higher of its fair value less cost to sell or its value in use. Value in use is the present value of future cash flows from the asset or cash-generating unit discounted at a rate that reflects market interest rates adjusted for risks specific to the asset or cash-generating unit that have not been taken into account in estimating future cash flows.
Classification by product relies on specific designation criteria which are applicable to certain classes of financial assets or circumstances where accounting mismatches would otherwise arise. Classification by business model reflects how RBS Group manages its financial assets to generate cash flows. A business model assessment determines if cash flows result from holding financial assets to collect the contractual cash flows, from selling those financial assets, or both.
 Multiple economic scenarios (MES) – the central, or base, scenario is most critical to the ECL calculation, independent of the method used to generate a range of alternative outcomes and their probabilities.
Hedge relationships are formally designated and documented at inception in line with the requirements of IAS 39 Financial instruments – Recognition and measurement. The documentation identifies the hedged item, the
23. Shares in Group entities RBSG plc’s investments in its subsidiaries are stated at cost less any impairment.
RBS – Annual Report and Accounts 2019 215 3 Operating expenses continued The fair value of options granted in 2019 was determined using a pricing model that included: expected volatility of shares determined at the grant date based on historical volatility over a period of up to five years; expected option lives that equal the vesting period; expected dividends on equity shares; and risk-free interest rates determined from UK gilts with terms matching the expected lives of the options.
4 Segmental analysis Reportable segments The directors manage RBS primarily by class of business and present the segmental analysis on that basis. This includes the review of net interest income for each class of business. Interest receivable and payable for all reportable segments is therefore presented net. Segments charge market prices for services rendered between each other; funding charges between segments are determined by RBS Treasury, having regard to commercial demands. The segment performance measure is operating profit/(loss).
Analysis of net fees and commissions Banking Bank RoI Banking Banking International Markets & other Total 2019 £m £m £m £m £m £m £m £m
The schemes do not invest directly in RBS Group but can have exposure to RBS Group. The trustees of the respective UK schemes are responsible for ensuring that indirect investments in RBS Group do not exceed the 5% regulatory limit.
RBS – Annual Report and Accounts 2019 221 5 Pensions continued Main section All schemes
Fair value of plan assets 46,555 43,806 44,652 43,824 30,703 51,925 48,752 49,746 49,229 34,708 Present value of plan obligations 39,669 35,466 37,937 38,851 30,966 44,115 39,607 42,378 43,990 35,152 Net surplus/(deficit) 6,886 8,340 6,715 4,973 (263) 7,810 9,145 7,368 5,239 (444)
The main sources of ineffectiveness for interest rate risk hedge accounting relationships are:  The effect of the counterparty credit risk on the fair value of the interest rate swap which is not reflected in the fair value of the hedged item attributable to the change in interest rate (fair value hedge).
Amortised Other MFVTPL (1) FVOCI (2) cost assets Total £m £m £m £m £m
RBS – Annual Report and Accounts 2019 233 11 Financial instruments - classification continued RBS Group's financial assets and liabilities include: 2019 2018 £m £m
The reduction in valuation reserves was primarily driven by a combination of market moves, trade close-out activity and risk reduction together with a reallocation of product and deal specific reserves that are now included within modelled trade valuations.
Level 3 Favourable Unfavourable Level 3 Favourable Unfavourable £m £m £m £m £m £m
Financial assets Cash and balances at central banks 77.9 Settlement balances 4.4 Loans to banks 10.7 10.7 — 6.2 4.5 Loans to customers 326.9 324.0 — 11.0 313.0 Other financial assets - securities 11.5 11.6 5.9 2.8 2.9
The maturity of guarantees and commitments is based on the earliest possible date they would be drawn in order to evaluate RBS Group's liquidity position.
At 1 January 2019 695 536 783 990 3,004 Implementation of IFRS 16 on 1 January 2019 (3) — — — (170) (170) ECL impairment charge — — — 29 29 Transfer (to)/from accruals and other liabilities — (3) — 15 12 Currency translation and other movements — (15) (6) (19) (40) Transfer — 35 (35) — — Charge to income statement 900 141 88 434 1,563 Releases to income statement — (48) (111) (161) (320) Provisions utilised (439) (332) (293) (337) (1,401) At 31 December 2019 1,156 314 426 781 2,677
At 1 January 2018 11,965 11,964,565 Shares issued 84 84,040 At 1 January 2019 12,049 12,048,605 Shares issued 45 45,304 At 31 December 2019 12,094 12,093,909
Notes: (1) Includes impairment of right of use assets of £86 million. (2) Includes right of use asset for plant and equipment of £23 million and depreciation of £5 million. (3) Contractual cashflows of lease liabilities is shown in Note 13.
Held by third Held by Assets parties RBS (1) Total Assets parties RBS (1) Total £m £m £m £m £m £m £m £m 2,377 3,038 Note: (1) Debt securities retained by RBS may be pledged with central banks.
In the primary action, filed in December 2010, the trustee is asking the bankruptcy court for leave to file an amended complaint, seeking to clawback a total of US$276.3 million in redemptions that NWM N.V. allegedly received from certain Madoff feeder funds and certain swap counterparties. NWM N.V. is opposing the motion for leave to file an amended complaint and otherwise will seek dismissal of the claims. In the second action, filed in October 2011, the trustee seeks to recover an additional US$21.8 million. In November 2016, the bankruptcy court dismissed this case on international comity grounds, and that decision was appealed. On 25 February 2019, the United States Court of Appeals for the Second Circuit reversed the bankruptcy court’s decision. If the U.S. Supreme Court declines to review the matter, the case will return to the bankruptcy court for further proceedings.
/ advisory duties were breached. One of the three claims is being appealed to the Supreme Court, one is being remitted from the Supreme Court to the Court of Appeal for reconsideration of one aspect, and one remains to be heard before the lower court.
Systematic Anti-Money Laundering Programme assessment In December 2018, the FCA commenced a Systematic Anti-Money Laundering Programme assessment of RBS Group. The FCA provided its written findings to RBS Group on 28 June 2019, and RBS Group responded on 8 August 2019. On 28 August 2019, the FCA instructed RBS Group to appoint a Skilled Person to provide assurance on financial crime governance arrangements in relation to two financial crime change programmes. RBS Group is cooperating with the Skilled Person’s review, which is expected to conclude during Q1 2020. It is not yet possible to assess the likely impact of these matters.
Review and investigation of treatment of tracker mortgage customers in Ulster Bank Ireland DAC In December 2015, the Central Bank of Ireland (CBI) announced that it had written to a number of lenders requiring them to put in place a robust plan and framework to review the treatment of customers who had been sold mortgages with a tracker interest rate, or with a tracker interest rate entitlement. The CBI stated that the intended purpose of the review was to identify any cases where customers’ contractual rights under the terms of their mortgage agreements were not fully honoured, or where lenders did not fully comply with various regulatory requirements and standards regarding disclosure and transparency for customers. The CBI required Ulster Bank Ireland DAC (UBI DAC), a member of RBS Group incorporated in the Republic of Ireland, to participate in this review. UBI DAC submitted its phase 2 report to the CBI in March 2017, identifying impacted customers. The redress and compensation phase (phase 3) has now concluded although an appeals process is currently anticipated to run until at least the end of 2020.
The executive directors may participate in the company's long-term incentive plans, executive share option and sharesave schemes and details of their interests in the company's shares arising from their participation are given in the Directors' remuneration report. Details of the remuneration received by each director are also given in the Directors' remuneration report.
US$150 million 8.00% undated notes 2012 Tier 2 116 119 8 Analysis of changes in financing during the year
The following table details related undertakings that are not active (actively being dissolved)
Staff expenses (4,018) (4,122) (4,676) Premises and equipment (1,259) (1,383) (1,565) Other administrative expenses (2,828) (3,372) (3,323) Administrative expenses (8,105) (8,877) (9,564) Depreciation and amortisation (1,176) (731) (808) Impairment of other intangible assets (44) (37) (29) Total operating expenses (9,325) (9,645) (10,401)
Year ended 31 December 2017* Operating expenses (3,241) (676) (2,602) (529) (219) (2,201) (933) (10,401) Operating lease depreciation — — 142 — — — — 142 Adjusted operating expenses (3,241) (676) (2,460) (529) (219) (2,201) (933) (10,259) Total income 5,282 604 4,679 678 389 1,050 451 13,133 Operating lease depreciation — — (142) — — — — (142) Adjusted total income 5,282 604 4,537 678 389 1,050 451 12,991 Cost:income ratio 61.4% 111.9% 54.2% 78.0% 56.3% 209.6% nm 79.0%
Net interest margin 1.79% 1.98% 2.13% Bank net interest margin (RBS NIM excluding NWM) 1.99% 2.09% 2.25%
A failure in the RBS Group’s risk management framework could adversely affect the RBS Group, including its ability to achieve its strategic objectives. Risk management is an integral part of all of the RBS Group’s activities and includes the definition and monitoring of the RBS Group’s risk appetite and reporting on the RBS Group’s risk exposure and the potential impact thereof on the RBS Group’s financial condition. Financial risk management is highly dependent on the use and effectiveness of internal stress tests and models and ineffective risk management may arise from a wide variety of factors, including lack of transparency or incomplete risk reporting, unidentified conflicts or misaligned incentives, lack of accountability control and governance, lack of consistency in risk monitoring and management or insufficient challenges or assurance processes. Failure to manage risks effectively could adversely impact the RBS Group’s reputation or its relationship with its regulators, customers, shareholders or other stakeholders.
If the RBS Group does not adequately embed climate risk into its risk framework to appropriately measure, manage and disclose the various financial, transition and physical risks it faces associated with climate change, or fails to implement its new strategy on climate change and adapt its business model to the changing regulatory requirements and market expectations on a timely basis, it may have a material and adverse impact on the RBS Group’s level of business growth, its competitiveness, profitability, prudential capital requirements, ESG ratings, credit ratings, cost of funding, reputation, results of operation and financial condition.
Any offers or sale, or expectations relating to the timing thereof, of a substantial number of ordinary shares by HM Treasury, or any associated directed buyback activity by the RBS Group, could affect the prevailing market price for the outstanding ordinary shares of RBSG plc.
If the RBS 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 RBS Group is investing in the automation of certain solutions and interactions within its customer-facing 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 RBS 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 RBS Group.
If the RBS Group is unable to raise the requisite amount of regulatory capital or MREL, downstream the proceeds of MREL to subsidiaries, as required, in the form of internal MREL, or to otherwise meet its regulatory capital, MREL and leverage requirements, it may be exposed to increased regulatory supervision or sanctions, loss of investor confidence and constrained or more expensive funding and be unable to make dividend payments on its ordinary shares or maintain discretionary payments on capital instruments.
Non-cumulative preference shares 31 March, 30 June 30 September and 31 December 2020
Ordinary shares (2019 final) 4 May 2020 (2020 interim) (1) September 2020
Clone firms A ‘clone firm’ uses the name, firm registration number (FRN) and address of a firm or individual who is FCA authorised. The scammer may claim that the genuine firm's contact details on the FCA Register (Register) are out of date and then use their own details, or copy the website of an authorised firm, making subtle changes such as the phone number. They may claim to be an overseas firm, which won’t always have full contact and website details listed on the Register.