Essential reading 01 What we have achieved 02 Chairman’s statement 04 Group Chief Executive’s review 06 Our markets 07 Q&As on progress 08 Board of directors and secretary 10 Executive Committee 12 Our strategic plan and progress 14 Roadmap to recovery 16 How our businesses work together 18 Clearly defined financial targets 20 Divisional review 22 UK Retail 24 UK Corporate 26 Wealth 28 Global Banking & Markets 30 Global Transaction Services 32 Ulster Bank 34 US Retail & Commercial 36 RBS Insurance 38 Business Services & Central Functions 40 Non-Core Division & APS
Our strategy involves the introduction of new management disciplines to ensure that the RBS of tomorrow will be fundamentally different from the RBS of yesterday – in risk, in focus on customers and in accountability. Our new Board Risk Committee is a good example of the changes we have already set in motion. It will regularly analyse the risk profile of the Group, identify any longer term threats and make recommendations to the Board as appropriate.
The Group is justly proud of its MoneySense programme, now in its sixteenth year, which strives to increase financial capability and inclusion. This programme has a special focus on schools, with 600 RBS employees delivering new lessons to over one-third of a million pupils each year.
We do not expect to receive any net payment under the APS or to have to convert contingent capital into equity, and we target an exit from the arrangements by 2012/13, subject to regulatory approval. They do, however, provide valuable tail risk protection whilst we exit the remaining excess risk exposures and until economic recovery is completely established.
These policies quickly had a calming effect on asset prices. Global equities stabilised in March 2009 and have since risen by c.65% (FTSE +45%, S&P 500 +55%). Similarly, house prices started to rise in the spring, and are presently about 5% and 10% above their troughs in the US and UK, respectively.
Paul Geddes (age 40) Chief Executive, RBS Insurance Paul Geddes graduated from Oxford in 1990, where he read Politics, Philosophy and Economics. His career started at Procter & Gamble, in the UK and Europe. He entered retailing in 1997, holding senior roles in Kingfisher and GUS Groups before joining the RBS Group in 2004 as Managing Director, Products and Marketing, Retail Banking. He was appointed CEO, Retail Banking in December 2006 and CEO, UK Retail in February 2009, before taking overall responsibility for some of the UK’s best-known insurance brands, including Direct Line, Churchill, Privilege and Green Flag as CEO, RBS Insurance in August 2009. Paul is a Fellow of the Chartered Institute of Bankers in Scotland and a Trustee of the Dewar Arts Awards.
The Group’s loan:deposit ratio, net of provisions, improved to 135% in 2009 from 151% in 2008. The Core loan:deposit ratio was 104% compared to 118% in 2008. Wholesale unsecured funding of less than one year duration has declined to £250 billion from £343 billion in 2008. Liquidity reserves increased by £81 billion to £171 billion during 2009.
GBM’s total third party assets, excluding derivatives, were down 17%, or 13% at constant exchange rates, compared with 31 December 2008, driven by a 43% reduction in loans and advances as customers took advantage of favourable capital market conditions to raise alternative forms of finance to bank debt. This reduction was partially offset by an increase in liquid assets. GBM’s risk-weighted assets decreased 19%, or 15% at constant exchange rates, reflecting the fall in third party assets and the Group’s continued focus on reducing its risk profile and balance sheet usage.
Target 2013 Leading UK franchise with global reach, providing growth and substantial funding to Group.
Citizens Bank Our financial services products and services are distributed through the
• Our Business Services Division is a centrally-run function that allows our customer-facing Divisions to reduce costs by exploiting economies of scale.
• GTS/GBM – We have established Global Network Banking (GNB) to position RBS as the network bank of choice for our corporate clients. GNB offers product connectivity and a seamless service to clients across our international network. It does this by providing expert, local relationship management across a number of countries in Europe, the Middle East, Asia-Pacific and the Americas regions to our international clients. In the UK, we have established an international network advisory team to enhance the global capability of our UK corporate clients.
The risk that the value of an asset or liability may change as a result of a change in market risk factors.
We recognise that there’s strong competition on the high street and we need to help restore the reputation of The RBS Group. We intend to do this by becoming the UK’s most Helpful and Sustainable bank with a strategic programme to: • re-engage our customers
We have also strongly supported government actions to keep business moving. Under the Enterprise Finance Guarantee (EFG), the government guarantees 75% of a loan to firms with a turnover of up to £25 million. We have led the field, offering loans worth more than £283 million to over 2,500 SMEs under the scheme. By early January 2010, £258 million of that had been drawn down, 42% of the total drawn under the EFG from all banks.
These actions show that we take serving our customers seriously. Without being complacent, it’s working. Business & Commercial Banking and Corporate & Institutional Banking both maintained their market-leading customer satisfaction scores. This tells us that our people were out there doing the right things for customers, despite the challenges we faced.
Initiatives like this have proved successful at Coutts, and we are now starting to roll them out across the RBS Coutts business.
Coutts continued to invest in groundbreaking research to enhance its client proposition. In November, we published the Coutts Million Pound Donors report, in association with the Centre of Philanthropy at the University of Kent. It showed the resilience of philanthropy despite economic difficulties.
We made sure that our clients are at the heart of that strategy. Throughout the year we continued to support them in a number of ways including advisory services, market execution, risk management and the provision of capital.
The key to our success was a relentless focus on clients. We implemented a global priority client initiative, which aligned services across GBM and helped further build sustained competitive advantage across our core product areas.
Our Top Five ranking in global trade finance was confirmed by a number of awards: • Third in Western Europe trade services and second bank globally for Documentary Processing from the Global Trade Review; • Best Supply Chain Finance Provider, Western Europe and Best Trade Finance Bank, Netherlands from Global Finance; • Third Best Online Trade Provider and Third Best Bank for Export Finance from Trade & Forfaiting Review; • Best Deal 2009 for J Sainsbury from Global Trade Review; • 2009 Transaction Banking Deal of the Year for J Sainsbury (UK – Global) from Trade Finance; and
An important element of that programme was the merging of the First Active and Ulster Bank businesses in the Republic of Ireland. The programme, which was completed in February 2010, saw the integration of the First Active branch network and operations with that of Ulster Bank and the transfer of all First Active customers to Ulster Bank. As a result of the merger programme, Ulster Bank’s presence throughout Ireland is now 238 branches (146 in the Republic of Ireland, 92 in Northern Ireland) and we now serve our 1.9 million customers under one brand across the island.
Our aim is to earn our customers’ loyalty and serve as their primary banking partner, providing local, helpful service and global resources. We will be a top-tier leader in our markets, consistently perform for our shareholders and invest in our colleagues and the community. If we achieve this, we’ll become a leading super-regional bank.
Of course, while online banking is important for some customers, others like to come to a branch and speak to us. As a new twist in expanding our network of Citizens and Charter One in-store branches, we opened our first branch inside a Dunkin’ Donuts coffee and baked goods shop. The new location in Bellingham, Massachusetts, is part of an extensive in-store network with a variety of retail partners, mainly in supermarkets, that includes more than 475 locations in 12 states.
We regularly used the expertise and global reach of the RBS Group to support our customers. Other RBS Group entities, including RBS Securities, collaborated with Citizens Bank, Charter One and RBS Citizens in a number of high-profile bond issues and loan syndications during the year.
This is the largest personal lines insurer in the UK. Brands like Direct Line, Churchill and Green Flag are household names. They have helped us become the UK’s largest motor insurer and the number two household insurer. Market leading positions like that don’t happen by accident. We’ve earned them because we focus on what our customers need.
As part of the settlement we reached with the European Commission, we will sell RBS Insurance during the next four years. We hadn’t wanted to do that. It is an excellent business. We saw it as an important part of the Group’s future.
Business Services also plays a key role in restructuring and lowering the Group’s cost base and manages a sizeable, and in some areas long overdue, investment programme. During 2009, Business Services was able to fund new technology and property investments from increased efficiencies and synergies generated from across the Group. Business Services is reducing its headcount by 9,000 over the period 2009-2010, intensively working with employees and various internal stakeholders, including unions and social partners. By providing our people with active support throughout the process, we have been able to limit the number of compulsory redundancies.
Finance Greater transparency and openness are as essential to the Group’s journey towards self-sufficiency and regaining investor confidence. During 2009, we began to deliver highly detailed, quarterly interim management statements. Analysts and investors have welcomed our increased disclosure.
Human Resources To help align our executives’ contribution to delivering our strategic plans and meet new regulatory requirements, we developed and implemented a new Executive Performance Assessment (EPA) framework. The framework is a balanced scorecard approach and focused on the five key areas of Strategic Progress, Business Delivery and Financial Performance, Customers’ Expectations, Risk, Efficiency and Control and People Management.
We are focusing our work on five key themes, which we know from ongoing consultation to be of particular importance to our many stakeholders.
In late 2009, we began a process of reviewing the policies and procedures we apply to our lending decisions with regard to ESE risk issues. These policies are aimed at higher risk sectors in which the bank conducts business, such as oil and gas, and mining and metals. The ESE Risk Policy Framework will further strengthen the process of ensuring these issues are taken into consideration in lending and credit provision decisions.
Acquisition of ABN AMRO On 17 October 2007, RFS Holdings B.V. (‘RFS Holdings’), a company jointly owned by RBS, Fortis Bank Nederland (Holding) N.V. (‘Fortis’) and Banco Santander S.A. (‘Santander’) (together the ‘Consortium Members’) and controlled by RBS, completed the acquisition of ABN AMRO Holding N.V. (‘ABN AMRO’).
IAS 1 (Revised 2007) ‘Presentation of Financial Statements’ has required the Group to present a third balance sheet (31 December 2007) as a result of the restatement of the Group’s income statement following the implementation of IFRS 2 (see below). A fourth balance sheet (31 December 2006) has not been presented as there is no material impact on that period.
The pro forma and statutory results for 2008 have been restated for the amendment to IFRS 2 ‘Share-based Payment’. This has resulted in an increase in staff costs amounting to £169 million for 2008 with no material effect on earlier periods.
If the stabilisation options were to be effected in respect of the companies HM Treasury is required to make certain compensation orders. The order HM Treasury is required to make will depend on the stabilisation power adopted. For example in the event the Bank of England were to transfer some of the business of a relevant entity to a bridge bank, the Treasury would have to make a resolution fund order and a third party compensation order including pursuant to the Banking Act (Third Party Compensation Arrangements for Partial Property Transfers) Regulations 2009. However, there can be no assurance that compensation would be assessed to be payable or that holders of the securities would recover any compensation promptly and/or equal to any loss actually incurred.
To the extent government support schemes are cancelled, changed or withdrawn in a manner which diminishes their effectiveness, or to the extent such schemes fail to generate additional liquidity or other support in the relevant markets in which such schemes operate, the Group, in common with other banking groups, may continue to face limited access to, have insufficient access to, or incur higher costs associated with, funding alternatives, which could have a material adverse impact on the Group’s business, financial condition, results of operations and prospects or result in a loss of value in its securities.
Business review management. In addition, as the provider of the APS, HM Treasury has a range of rights that other shareholders do not have. These include rights under the terms of the APS over the Group’s remuneration policy and practice, including the right (through UKFI) to consent to the shape and quantum of the bank’s aggregate variable bonus pool for the 2009 performance year. The manner in which HM Treasury or UKFI exercises HM Treasury’s rights as majority shareholder or in which HM Treasury exercises its rights under the APS could give rise to conflict between the interests of HM Treasury and the interests of other shareholders. The Board has a duty to promote the success of the company for the benefit of its members as a whole.
The recoverability and regulatory capital treatment of certain deferred tax assets recognised by the Group depends on the Group’s ability to generate sufficient future taxable profits and there being no adverse changes to tax legislation, regulatory requirements or accounting standards.
Operating expenses Operating expenses decreased from £54,202 million in 2008 to £21,478 million of which integration and restructuring costs were £1,286 million compared with £1,357 million in 2008. Write-down of goodwill and other intangible assets was £363 million compared with £32,581 million in 2008.
• The credit quality of the monolines has continued to deteriorate and the level of CVA held against exposures to monoline counterparties has increased from 52% to 62% during the year. This was driven by a combination of wider credit spreads and lower recovery rates.
Further analysis of credit market exposures (1) Risk and capital management Market turmoil exposures 184 Valuation aspects Financial statements Note 11 Financial instruments 278
• Mortgage growth was due to good retention of existing customers and new business sourced predominantly from the existing customer base. Gross mortgage lending market share increased to 12% from 7% in 2008, with the Group on track to exceed its Government targets on net lending by £3 billion.
Capital and balance sheet Total assets 114.9 121.0 Loans and advances to customers – gross
Impairments increased by £17 million over 2008 reflecting some isolated difficulties in the UK and offshore mortgage books (representing mortgages for second properties for expatriates). Provisions as a percentage of lending to customers increased slightly to 0.25%.
Performance ratios Return on equity (1) 30.7% (8.4%) Net interest margin 1.38% 1.34% Cost:income ratio 42.3% 146.9%
In an often volatile market environment, GBM responded quickly to its clients’ needs to strengthen their balance sheets and to take advantage of the attractive environment for debt and equity issues. RBS participated in the five largest equity issues worldwide in 2009, and in six out of the ten largest debt capital markets transactions.
Net interest income 1,775 1,726 Net fees and commissions 714 664 Other non-interest income 235 197 Non-interest income 949 861 Total income 2,724 2,587 Direct expenses
Retirement benefit liabilities increased by £1.2 billion, 74%, to £2.7 billion, with net actuarial losses of £3.8 billion, arising from lower discount rates and higher assumed inflation, partially offset by curtailment gains of £2.1 billion due to changes in prospective pension benefits.
Equity minority interests decreased by £4.7 billion, 22%, to £16.9 billion. Equity withdrawals of £3.1 billion, due to the disposal of the investment in the Bank of China attributable to minority shareholders and the redemption, in part, of certain trust preferred securities, exchange rate movements of £1.4 billion, the recycling of related available-for-sale reserves to income, £0.5 billion, and dividends paid of £0.3 billion, were partially offset by attributable profits of £0.3 billion.
Net cash flows from investing activities of £54 million relate to the net sales and maturities of securities of £2,899 million and a net cash inflow of £105 million in respect of other acquisitions and disposals less the net cash outflow on disposals of property, plant and equipment of
Enhancements have been made to a number of the risk frameworks, including: • A new credit approval process has been introduced during the year, based on a pairing of business and risk managers authorised to approve credit. This replaced the former credit committee process; • Exposure to higher risk countries has been reduced and a new risk limits framework has been implemented across the Group; • Single name and sector wide credit concentrations continue to receive a high level of attention and further enhancements to the frameworks were agreed in the fourth quarter of the year; • In addition to the move to value-at-risk (VaR) based on a 99% confidence level, from 95%, the Group has improved and strengthened its market risk limit framework increasing the transparency of market risk taken across the Group’s businesses in both the trading and non-trading portfolios; • The Group’s funding and liquidity profile is supported by explicit targets and metrics to control the size and extent of both short-term and long-term liquidity risk; and
Executive Credit Group Formed to replace the Advances Committee and the Group Chief Executive (ECG) Group Credit Committee, the ECG decides on requests Head of Restructuring and Risk for the extension of existing or new credit limits on behalf Group Chief Risk Officer of the Board of Directors which exceed the delegated Group Chief Credit Officer authorities of individuals throughout the Group as Chief Executive Officer from each division determined by the credit approval grid. The Head of Group Finance Director Restructuring and Risk or the Group Chief Credit Officer must be present along with at least one other member to ensure the meeting is quorate.
Independence underpins the approach to risk management, which is reinforced throughout the Group by appropriate reporting lines. Risk Management and Group Treasury functions are independent of the revenue generating business. As part of the move towards greater functional independence, the divisional Chief Risk Officers have a direct reporting line to the Head of Restructuring and Risk as well as to their divisional CEOs.
Should the Uncapped Amount be higher than those of the underlying assets (ignoring the Scheme), the capital requirements for the Scheme are capped at the level of the requirements for the underlying assets (‘Capped Amount’). Where capped, the Group apportions the Capped Amount up to the level of the First Loss as calculated above; any unused Capped Amount after the First Loss capital deduction will be taken as RWAs for the Group’s share of covered losses.
Adjustments to the regulatory capital calculation can be made for either currency or maturity mismatches. These occur where there is a difference between the currency or maturity of the protection and that of the underlying asset. These mismatches will have an impact upon the timing of the removal of the cap and level of regulatory capital benefit on the Uncapped Amount, but this effect is not material.
Regulatory risk The risks arising from regulatory changes Risk of regulatory changes. and enforcement.
Counterparty credit risk exposure measurement models calculate the market driven credit risk exposure for products where the exposure is not based solely upon principal and interest due. These models are most commonly used for derivative and other traded instruments where the amount of credit risk exposure may be dependent upon one or more underlying market variables such as interest or foreign exchange rates. These models drive internal credit risk activities such as limit and excess management.
The arrears rate increased significantly from 0.9% at 31 December 2008 to 1.5% at 31 December 2009. In part, this reflects the contraction of the portfolio caused by fewer new loans added, Citizen choosing to exercise its option to sell certain mortgages to the secondary market under long-term agreements, and higher run-off or pay-down rates across all residential products.
The decrease in asset valuations has placed pressure on the portfolio with more clients seeking renegotiations of LTV covenants in the context of granting structural enhancements or equity injections. The average LTV is 91% while the average interest coverage ratios for GBM and UK Corporate originated investment portfolios (Core and Non-Core combined) are 1.60 times and 1.64 times, respectively.
Comprising: Impairment losses on available-for-sale securities 111 698 809 7 816 981 22
(2) Excludes impairments of available-for-sale securities of £816 million (2008 – £981 million; 2007 – £22 million).
Group before Group before Group before RFS Holdings RFS Holdings RFS Holdings minority minority minority interest Group interest Group interest Group £m £m £m £m £m £m
Note: (1) Excluding items in the course of collection of £2,533 million (2008 – £2,888 million).
Cash flow management The short-term maturity structure of the Group’s assets and liabilities is managed daily to ensure that all material or potential cash flows, undrawn commitments and other contingent obligations can be met. The primary focus of the daily management activity is to ensure access to sufficient liquidity to meet cash flow obligations within key time horizons, including out to one month ahead and FSA target horizons such as 90 days.
• The credit spread VaR increased significantly during May 2009 due to the purchasing of additional protection against the risk of counterparty failure on CDPCs exposures. As this counterparty risk is itself not in VaR these hedges have the effect of increasing the reported VaR.
It is the Group’s policy to minimise the sensitivity to changes in interest rates in its retail and commercial businesses and, where interest rate risk is retained, to ensure that appropriate resources, measures and limits are applied.
The Group’s asset sensitive position has increased in 2009. The primary contributors to the change are enhanced modelling of embedded deposit floors, active position management to benefit from the impact of a tightening US monetary policy regime by Citizens Financial Group and the impact of not fully hedging the interest rate exposure related to the APS capital proceeds which were received in late December.
Risk, capital and liquidity management 167RBS Group Annual Report and Accounts 2009
Note: (1) Excludes equity exposures held-for-trading purposes and by insurance/assurance entities.
• Reinsurance risk management: is used to protect against adverse claims experience on business which exceeds internal risk appetite. The Group uses various types of reinsurance to transfer risk that is outside the Group’s risk appetite, including individual risk excess of loss reinsurance, catastrophe excess of loss reinsurance and quota share reinsurance.
The Operational Risk Policy Standards are supported by the following key operational risk management techniques: • Risk and control assessments: business units identify and assess operational risks to ensure that they are effectively managed, prioritised, documented and aligned to risk appetite; • Scenario analysis: scenarios for operational risk are used to assess the possible impact of extreme but plausible operational risk loss events. Scenario assessments provide a forward looking basis for managing exposures that are beyond the Group’s risk appetite; • Loss data management: each business unit’s internal loss data management process captures all operational risk loss events above certain minimum thresholds. The data is used to enhance the adequacy and effectiveness of controls, identify opportunities to prevent or reduce the impact of recurrence, identify emerging themes, enable formal loss event reporting and inform risk and control assessments and scenario analysis. Escalation of individual events to senior management is determined by the seriousness of the event. Operational loss events are categorised under the following headings: – Clients, products and business practices; – Technology and infrastructure failures; – Employment practices and workplace safety; – Internal fraud; – External fraud; – Execution, delivery and process management; – Malicious damage; and – Disaster and public safety.
Risk, capital and liquidity management 171RBS Group Annual Report and Accounts 2009
Each business unit must manage its operational risk exposure within an acceptable level, testing the adequacy and effectiveness of controls and other risk mitigants (for example, insurance) regularly and documenting the results. Where unacceptable control weaknesses are identified, action plans must be produced and tracked to completion.
Information security The Group is committed to protecting customer and Group information with regard to loss of confidentiality, integrity and availability. All employees and agents of the Group are responsible for the protection of Group assets, systems and information. All customer information is treated as confidential and appropriate security is applied to protect the information.
Operational risk events by category – % of total by value The charts below show a similar distribution of losses by value across the risk categories, captured at the date the event occurred and updated as losses crystallise.
The largest of the schemes, and the main source of pension obligation risk, is the RBS Group Pension Fund. In October 2006, this scheme was closed to new employees. In November 2009, the Group confirmed that it was making changes, proposed in August 2009, to the RBS Group Pension Fund and a number of other defined benefit schemes, with a view to controlling the cost and the risk of operating these pension plans. The main change was the introduction of a yearly limit of 2% (or inflation if lower) to the amount of any salary increase that will count for pension purposes.
Trigger events (subject to specific rules detailed in the terms of the APS) comprise: • failure to pay: the counterparty to the covered asset has (subject to specified grace periods) failed to pay an amount due under the terms of its agreement with the Group.
Covered assets Roll forward to 31 December 2009 The table below details the movement in covered assets in the year.
UK Retail (1) Mortgages: assets with a higher loan-to-value (LTV) and in higher risk segments (e.g. LTV >97% on general book, LTV >85% on buy-to-let book), and those assets in arrears (at 31 December 2008).
The Scheme rules are designed to allow for data correction over the life of the Scheme, and the Group has a grace period during 2010 to implement processes to capture triggers and restate quarterly claims statements to HMT retrospectively.
Other divisions n/a 99.4 99.4 Group before APS benefit 127.6 438.2 565.8
(2) UK Corporate leveraged finance does not include lending to sponsors but, reflects certain loans to corporate customers per Scheme rules.
Residential mortgages 14,092 253 14,345 (140) 14,205 Consumer finance 38,101 4,574 42,675 10,586 53,261 personal loans 7,986 2,610 10,596 2,613 13,209 business and commercial loans 30,115 1,964 32,079 7,973 40,052 Commercial real estate finance 28,777 1,656 30,433 1,704 32,137 Leveraged finance 16,045 4,425 20,470 2,806 23,276 Lease finance 1,229 232 1,461 68 1,529 Project finance 1,601 44 1,645 172 1,817 Structured finance 6,884 7,677 14,561 614 15,175 structured loans 625 17 642 29 671 RMBS 1,251 1,657 2,908 55 2,963 CMBS 1,281 466 1,747 (6) 1,741 CDOs & CLOs 1,568 4,641 6,209 119 6,328 other ABS 2,159 896 3,055 417 3,472 Loans 34,375 3,039 37,414 17,528 54,942 Bonds (6) 545 156 701 (3) 698 Derivatives 12,510 6,834 19,344 14,146 33,490 monoline insurers 2,607 6,335 8,942 10,852 19,794 other counterparties 9,903 499 10,402 3,294 13,696
• available-for-sale reserves on debt securities of £1,113 million (2008 – £1,315 million).
Residential Consumer Commercial Leveraged Lease Project Structured Covered mortgages finance real estate finance finance finance finance Loan Bonds Derivative amount £m £m £m £m £m £m £m £m £m £m £m
Risk, capital and liquidity management 187RBS Group Annual Report and Accounts 2009
(2) Fair value hierarchy levels 2 and 3 as defined by IFRS.
• The majority of the current exposure is to sub-investment grade monoline counterparties. Nearly all such counterparties were down-graded during the year.
Credit valuation adjustment at 1 January 2009 (5,988) Credit valuation adjustment at 31 December 2009 (3,796) Decrease in credit valuation adjustment 2,192 Net debit relating to realisation, hedges, foreign exchange and other movements (3,290) Net debit relating to reclassified debt securities (1,468) Net debit to income statement (1) (2,566)
Credit valuation adjustment at 1 January 2009 (1,311) Credit valuation adjustment at 31 December 2009 (499) Decrease in credit valuation adjustment 812 Net debit relating to hedges, foreign exchange and other movements (1,769) Net debit to income statement (income from trading activities) (957)
CVA attributable to other counterparties The CVA for all other counterparties is calculated on a portfolio basis reflecting an estimate of the amount a third party would charge to assume the credit risk.
– The CVA is calculated on a portfolio basis and reflects an estimate of the losses that will arise across the portfolio due to counterparty defaults. It is not possible to perfectly hedge the risks driving the CVA and this leads to differences between CVA and hedge movements. Differences also arise between realised default losses and the proportion of CVA held in relation to individual counterparties.
• £13.4 billion (2008 – £16.0 billion) in third party, multi-manager funds. These funds offer multi-manager and fund of funds’ products across bond, equity, hedge fund, private equity and real estate asset classes. In January 2010, the Group entered into a sale agreement with Aberdeen Asset Management plc for assets of £13.3 billion in these funds.
The reported results of the Group are also sensitive to the accounting policies, assumptions and estimates that underlie the preparation of its financial statements. Details of the Group’s critical accounting policies and key sources of accounting judgments are included in the Accounting policies on pages 255 to 257.
The Group already has a range of policies and processes that extend through the employee life-cycle including recruitment, flexible working and support for ill-health and disability-related absence. Diversity performance is monitored and reviewed at Group and divisional executive level. This commitment extends beyond the Group as part of the community support and supplier relationships.
Bruce Van Saun was appointed as a director on 1 October 2009.
Philip Scott was appointed as a director on 1 November 2009.
Directors’ indemnities In terms of section 236 of the Companies Act 2006, Qualifying Third Party Indemnity Provisions have been issued by the company to directors, members of the Executive and Management Committees of the Group and FSA Approved Persons.
Policy and practice on payment of creditors The Group is committed to maintaining a sound commercial relationship with its suppliers. Consequently, it is the Group’s policy to negotiate and agree terms and conditions with its suppliers, which includes the giving of an undertaking to pay suppliers within 30 days of receipt of a correctly prepared invoice submitted in accordance with the terms of the contract or such other payment period as may be agreed.
Notes: (1) Became a member of the Nominations Committee on 6 February 2009.
(6) Became a member of the Remuneration Committee on 6 February 2009.
PricewaterhouseCoopers conducted an external review of the effectiveness of the Audit Committee in 2005. In 2009, the Group Audit Committee performance evaluation was conducted externally by Spencer Stuart as part of the Board and Senior Committee evaluation process. The evaluation used detailed questionnaires and individual meetings were held with each member. Amongst the areas reviewed were the role of the Board and Committees, composition, meetings and processes, performance and reporting, and external relationships. The Board has considered and discussed reports on the outcomes of the evaluations and is satisfied with the way in which the evaluations have been conducted, the conclusions and the actions being progressed.
Board Risk Committee Report Following publication of the Walker review’s initial recommendations in July 2009, the Board approved the creation of a Board Risk Committee. Terms of Reference for the Board Risk Committee, which are compliant with the final Walker review recommendations published on 26 November 2009, are available at www.rbs.com. The terms of reference will be considered annually by the Board Risk Committee and approved by the Board.
• reporting to the Board, identifying any matters within its remit in respect of which it considers that action or improvement is needed and making recommendations as to the steps to be taken.
Short-term incentives The policy in respect of short-term incentives is to reward good financial and non-financial performance that supports the business strategy, taking into account the Group’s risk appetite and personal contribution in a clear and reasonable way against targets that are specific, measurable, set at the beginning of the year and communicated to the employees.
For the most senior roles, vesting will be based partly on divisional or functional performance and partly on performance across RBS Group. From a behavioural perspective, the Remuneration Committee must also be satisfied that financial results have been achieved without excessive risk. The Remuneration Committee will consider both the financial performance and risk information and assess whether it considers that the outcome driven by the metrics on which the vesting of share awards depends is appropriate against this context; • for awards granted in 2010, performance will be measured over a three year period, and the Remuneration Committee will review this approach for future years’ awards; and
Philip Hampton has voluntarily agreed that he will retain at least half of the vested shares for a further period of 12 months after the vesting date. This reflects his personal commitment to driving the Group’s performance over the longer term.
Group Finance Director – Bruce Van Saun On joining the Group, Bruce Van Saun was made a conditional share award of 1,810,611 shares under the MPP and options over 905,306 shares under the ESOP. Both awards will vest on 8 September 2012, the third anniversary of him joining the Group, and are subject to performance conditions.
Stephen Hester In the event that Stephen Hester’s employment is terminated by the company (other than by reason of his personal underperformance), the following will apply. First, he will be entitled to receive a payment in lieu of notice to the value of base salary, bonus and benefits (including pension contributions). Secondly, any share awards granted to him to replace bonus and share awards he forfeited on leaving The British Land Company PLC will vest immediately on such termination.
Notes: (1) Performance bonus payable in respect of performance during 2009 which will be awarded under the 2010 deferral plan and deferred until 2012. The performance bonus for Bruce Van Saun reflects his performance since joining the Group in October 2009, including completion of the APS, year end budget, capital planning and preparation for disposals.
Performance criteria for ESOP and MPP awards granted to executive directors in 2009 Awards are subject to relative and absolute TSR measures, both weighted equally. The performance measures apply to both ESOP and MPP awards made in 2009.
Comparator companies Weighting 1. Lloyds Banking Group 200% 2. Barclays 3. Banco Santander 150% 4. HSBC 5. Standard Chartered 7. Deutsche Bank 8. J. P. Morgan Chase 9. BNP Paribas 50% 10. Bank of America 11. Societe Generale 12. Credit Agricole 13. Credit Suisse Group 14. Royal Bank of Canada 15. Wells Fargo 16. National Australia Bank 17. BBVA 18. UBS 19. The Toronto Dominion Bank 20. Unicredito Italiano
Gordon Pell will retire from the Group at the end of March, shortly after his normal pension age of 60, and the pension value above has been calculated on this basis. His pension at retirement will be based on his 39 years of service with Lloyds TSB and with the Group, part of which has been funded by a transfer payment from a Lloyds TSB pension plan.
3 Operating expenses 261 4 Pension costs 263 5 Auditors’ remuneration 266 7 Profit attributable to preference shareholders and paid-in equity holders 267 8 Ordinary dividends 268 9 Profit dealt with in the accounts of the company 268 10 Earnings per ordinary and B share 269 11 Financial instruments 270 12 Financial assets – impairments 292 14 Debt securities 297 15 Equity shares 299 16 Investments in Group undertakings 300 17 Intangible assets 301 18 Property, plant and equipment 304 19 Prepayments, accrued income and other assets 306 20 Discontinued operations and assets and 306 liabilities of disposal groups 21 Settlement balances and short positions 308 22 Accruals, deferred income and other liabilities 308 23 Deferred taxation 309 24 Insurance business 310 25 Subordinated liabilities 317 26 Minority interests 324 27 Share capital 325 30 Collateral and securitisations 330 31 Capital resources 331 32 Memorandum items 332 33 Net cash (outflow)/inflow from operating activities 337 34 Analysis of the net investment in business 338 interests and intangible assets 35 Interest received and paid 339 36 Analysis of changes in financing during the year 340 37 Analysis of cash and cash equivalents 340 38 Segmental analysis 341 39 Directors’ and key management remuneration 346 40 Transactions with directors and key management 347 41 Related parties 347 42 Post balance sheet events 348
Matters on which we are required to report by exception We have nothing to report in respect of the following: Under the Companies Act 2006 we are required to report to you if, in our opinion: • adequate accounting records have not been kept by the company, or returns adequate for our audit have not been received from branches not visited by us; or
(Loss)/profit for the year (2,323) (34,542) 7,712 Other comprehensive income: Available-for-sale financial assets 2,016 (7,406) (1,289) Cash flow hedges 684 (1,456) (564)
Investments in Group undertakings 16 — — — 64,766 42,196 43,542
Ordinary shares issued in respect of placing and open offer, net of £95 million expenses 1,047 — — 1,047 — — Ordinary shares issued in respect of rights issue, net of £246 million expenses — 10,469 — — 10,469 — Ordinary shares issued in respect of capitalisation issue — (101) — — (101) — Expenses of placing and open offer — (265) — — (265) — Other shares issued during the year — 46 6,257 — 46 6,257 Bonus issue of ordinary shares — — (1,576) — (1,576) Preference shares redeemed during the year (4,995) — 159 (4,995) — 159
Acquired goodwill, being the excess of the cost of an acquisition over the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the subsidiary, associate or joint venture acquired, is initially recognised at cost and subsequently at cost less any accumulated impairment losses. Goodwill arising on the acquisition of subsidiaries and joint ventures is included in the balance sheet category ‘Intangible assets’ and that on associates within their carrying amounts. The gain or loss on the disposal of a subsidiary, associate or joint venture includes the carrying value of any related goodwill.
Impairment losses are recognised in profit or loss and the carrying amount of the financial asset or group of financial assets reduced by establishing an allowance for impairment losses. If, in a subsequent period, the amount of the impairment loss reduces and the reduction can be ascribed to an event after the impairment was recognised, the previously recognised loss is reversed by adjusting the allowance. Once an impairment loss has been recognised on a financial asset or group of financial assets, interest income is recognised on the carrying amount using the rate of interest at which estimated future cash flows were discounted in measuring impairment.
The types of instruments include: – Foreign exchange: spot foreign exchange contracts, currency swaps and options, emerging markets and related hedges and funding.
The Group also provides post-retirement benefits other than pensions, principally through subscriptions to private healthcare schemes in the UK and the US and unfunded post-retirement benefit plans. Provision for the costs of these benefits is charged to the income statement over the average remaining future service lives of eligible employees. The amounts are not material.
Notes on the accounts 265RBS Group Annual Report and Accounts 2009
(2) The amount that would have been taken to AFS reserves if reclassification had not occured is £(73) million.
• Price volatilities and correlations – volatility is a measure of the tendency of a price to change with time. Correlation measures the degree to which two or more prices or other variables are observed to move together. If they move in the same direction there is positive correlation; if they move in opposite directions there is negative correlation. Volatility is a key input in valuing options and the valuation of certain products such as derivatives with more than one underlying variable that are correlation-dependent. Volatility and correlation values are obtained from broker quotations, pricing services or derived from option prices.
• Recovery rates/loss given default – these are used as an input to valuation models and reserves for ABS and other credit products as an indicator of severity of losses on default. Recovery rates are primarily sourced from market data providers or inferred from observable credit spreads.
On initial recognition of financial assets and liabilities valued using valuation techniques incorporating information other than observable market data, any difference between the transaction price and that derived from the valuation technique is deferred. Such amounts are recognised in profit or loss over the life of the transaction; when market data become observable; or when the transaction matures or is closed out as appropriate. At 31 December 2009, net gains of £204 million (2008 – £102 million; 2007 – £72 million) were carried forward in the balance sheet. During the year net gains of £127 million (2008 – £89 million; 2007 – £67 million) were deferred and £25 million (2008 – £65 million; 2007 – £10 million) recognised in the income statement.
Netting is applied across risk buckets where there is market evidence to support this. For example calendar netting and cross strike netting effects are taken into account where such trades occur regularly within the market. Netting will also apply where long and short risk in two different risk buckets can be closed out in a single market transaction at less cost than via two separate transactions (closing out the individual bucketed risk in isolation).
Debt securities RMBS RMBS where the underlying assets are US agency-backed mortgages and there is regular trading are generally classified as level 2 in the fair value hierarchy. RMBS are also classified as level 2 when regular trading is not prevalent in the market, but similar executed trades or third-party data including indices, broker quotes and pricing services can be used to substantiate the fair value. RMBS are classified as level 3 when trading activity is not available and a model with significant unobservable data is utilised.
For CLOs originated and still held by the Group, the fair value is determined using a correlation model based on a Monte Carlo simulation framework. The main model inputs are credit spreads and recovery rates of the underlying assets and their correlation. A credit curve is assigned to each underlying asset based on prices, from thirdparty dealer quotes, and cash flow profiles, sourced from an industry standard model. Losses are calculated taking into account the attachment and detachment point of the exposure. Where the correlation inputs to this model are not observable CLOs are deemed to be level 3.
The Group has a right to terminate the APS at any time provided that the Financial Services Authority has confirmed in writing to HMT that it has no objection to the proposed termination. On termination the Group must pay HMT the higher of the regulatory capital relief received and £2.5 billion less premiums paid plus the aggregate of amounts received from the UK Government under the APS. In consideration for the protection provided by the APS, the Group paid an initial premium of £1.4 billion on 31 December 2009. A further premium of £700 million is payable on 3 December 2010 and subsequently annual premiums of £500 million until the earlier of 2099 and the termination of the agreement.
Currency translation and other adjustments (330) (78) (122) (530) 1,441 137 Acquisition of subsidiaries — — — — — 2,221 Disposal of subsidiaries (65) — — (65) (178) — Net increase in provisions of discontinued operations — — — — — 46
Exchange rate contracts in cash flow hedge relationships hedge future foreign currency cash inflow and outflows; mainly principal and interest on foreign currency loans.
The company holds other debt securities issued by a Group undertaking of £1,286 million, classified as loans and receivables.
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield 2009 £m % £m % £m % £m % £m %
Unquoted equity investments whose fair value cannot be reliably measured are carried at cost and classified as available-for-sale financial assets. They include capital stock (redeemable at cost) in the Federal Home Loan Bank and the Federal Reserve Bank of £0.8 billion (2008 – £0.9 billion; 2007 – £0.5 billion) that the Group’s banking subsidiaries in the US are required to hold; and a number of individually small shareholdings in unlisted companies. Disposals in the year generated losses of £21 million (2008 – nil; 2007 – £0.5 million gain).
The CGUs of the Group, excluding RFS Holdings minority interest where the goodwill arising is significant, principally on the acquisitions of NatWest, ABN AMRO, Charter One and Churchill are as follows: 17 Intangible assets continued Group
The recoverable amount of RBS Insurance, based on a 3% (2008 – 3%) and a 13.9% (2008 – 14.6%) pre tax discount rate, exceeded the carrying amount by over £3 billion (2008 – £3 billion) and was insensitive to a reasonably possible change in key assumptions.
Accumulated impairment, depreciation and amortisation: At 1 January 2009 — 422 79 492 1,916 1,635 4,544 Transfers to disposal groups — — — (7) (31) — (38) Currency translation and other adjustments — (1) — (11) (48) (69) (129) Disposal of subsidiaries — (1) — — (14) — (15) Write-off of property, plant and equipment — 5 — 5 — — 10 Disposals and write-off of fully depreciated assets — — — (2) (126) (419) (547)
Valuations are carried out by qualified surveyors who are members of the Royal Institution of Chartered Surveyors, or an equivalent overseas body. The valuation as at 31 December 2009 for a significant majority of the Group’s investment properties was undertaken with the support of external valuers.
Currency translation and other movements 78 Disposal of subsidiaries (4) Charge to income statement 482 Releases to income statement (57) Provisions utilised (159)
Outstanding claims provisions are not discounted for the time value of money except for claims settled by periodic payments under the Courts Act 2003. Total reserves for claims settled prior to the year end by periodic payment are £91.6 million (2008 – £29.0 million) gross and £26.1 million (2008 – £3.6 million) net of reinsurance. The corresponding undiscounted amounts are £275.7 million (2008 – £85.0 million) gross and £61.8 million (2008 – £12.1 million) net of reinsurance. The category of claims subject to periodical payments is motor liability. The rate of interest used for the calculation of present values is 4.14% being the 40-year gilt rate as at October 2009. The average interval between the date of the last future cash flow being discounted and the end of the financial year is 49.8 years. Reserves include provision for claims that may be settled in due course by periodic payments under the Courts Act 2003.
The associated liabilities are: Linked contracts and participating bonds classified as insurance contracts 4,175 4,189 4,398 Linked contracts classified as investment contracts 5,053 5,208 5,432
The company US$400 million 6.4% subordinated notes 2009 (redeemed April 2009) — 278 202
US$50 million floating rate subordinated notes 2013 36 36 26 €1,000 million floating rate subordinated notes 2013 — — 744
First Active plc £60 million 6.375% subordinated bonds 2018 (callable April 2013) 66 66 65
Following redemption of the non-cumulative sterling preference shares of £1 each, the authorised ordinary share capital of the company was increased by £5 million through the creation of 20 million new ordinary shares of 25p each (see below).
B shares and dividend access share In December 2009, the company entered into an acquisition and contingent capital agreement with HM Treasury. HM Treasury agreed to acquire at 50p per share 51 billion B shares with a nominal value of 1p each and a Dividend Access Share with a nominal value of 1p; these shares were issued to HM Treasury on 22 December 2009. Net proceeds were £25.1 billion. HM Treasury also agreed to subscribe for up to 16 billion further B shares with a nominal value of 1p each at 50p per share subject to certain conditions including the Group's core tier 1 capital ratio falling below 5%. The fair value of the consideration payable by the company on entering into this agreement amounted to £1,458 million; of this £1,208 million has been debited to the contingent capital reserve.
Gross finance Other Present Gross finance Other Present lease amount income movements value amount income movements value rentals
The fair value (and carrying value) of securities transferred under repurchase transactions included within debt securities on the balance sheet were £66.9 billion (2008 – £80.6 billion; 2007 – £107.7 billion). All of these securities could be sold or repledged by the holder. Securities received as collateral under reverse repurchase agreements amounted to £74.0 billion (2008 – £89.3 billion), of which £73.0 billion (2008 – £49.0 billion) had been resold or repledged as collateral for the Group’s own transactions.
Tier 1 Ordinary and B shareholders’ equity 69,890 45,525 Minority interests 16,895 21,619 Adjustment for: – Goodwill and other intangible assets (17,847) (20,049) – Goodwill and other intangible assets of discontinued businesses (238) — – Unrealised losses on available-for-sale debt securities 1,888 3,687 – Reserves arising on revaluation of property and unrealised gains on available-for-sale equities (207) (984) – Reallocation of preference shares and innovative securities (656) (1,813) – Other regulatory adjustments (1,184) (362) Less expected loss over provisions (2,558) (770) Less securitisation positions (1,353) (663) Less APS first loss (5,106) — Core Tier 1 capital 59,524 46,190
Property, plant and equipment Contracts to buy, enhance or maintain investment properties — 7 9 Contracts to buy assets to be leased under operating leases (2) 2,724 6,063 1,350 Other capital expenditure 89 128 201
In particular there is continuing political and regulatory scrutiny of the operation of the retail banking and consumer credit industries in the United Kingdom and elsewhere. The nature and impact of future changes in policies and regulatory action are not predictable and are beyond the Group’s control but could have an adverse impact on the Group’s businesses and earnings.
The outcome of these investigations is not known, but they may have an impact on the consumer credit industry in general and, therefore, on the Group’s business in this sector.
Securitisation and collateralised debt obligation business The New York State Attorney General has issued subpoenas to a wide array of participants in the securitisation and securities industry, focusing on the information underwriters obtained as part of the due diligence process from the independent due diligence firms. RBS Securities Inc. has produced documents requested by the New York State Attorney General, principally related to loans that were pooled into one securitisation transaction and will continue to cooperate with the investigation. More recently, the Massachusetts Attorney General has issued a subpoena to RBS Securities Inc. seeking information related to residential mortgage lending practices and sales and securitisation of residential mortgage loans. These respective investigations are in the early stages and therefore it is difficult to predict the potential exposure from any such investigation. The company and its subsidiaries are cooperating with these various investigations and requests.
Operating (loss)/profit before tax (2,595) (40,836) 9,832 (1,286) (10,017) 2,372 Operating (loss)/profit before tax on discontinued activities (101) 4,208 68 — — — Decrease/(increase) in prepayments and accrued income 433 (921) (662) — — (1)
Amortisation of purchased intangible assets — — — — (443) — (443) Write-down of goodwill and other intangible assets — — — (32,581) — — (32,581) Integration and restructuring costs — — — (1,321) (36) — (1,357)
As at 31 December 2009 and 2008 balances with the UK Government and UK Government controlled bodies were: Central Banks, financial Central Banks, financial government corporations government corporations
Asset protection scheme On 22 December 2009, the Group entered into an agreement (the Asset Protection Scheme (APS)) with HM Treasury (HMT), acting on behalf of the UK Government, under which the Group purchased credit protection over a portfolio of specified assets and exposures (covered assets) from HMT. The portfolio of covered assets has a par value of £282 billion. The protection is subject to a first loss of £60 billion and covers 90% of subsequent losses. Once the first loss has been exhausted, losses and recoveries in respect of assets for which a trigger event – failure to pay, bankruptcy or restructuring – has occurred are included in the balance receivable under the APS. Receipts from HMT will, over time, amount to 90% of cumulative losses (net of 90% of cumulative recoveries) on the portfolio of covered assets less the first loss amount. The Group has a right to terminate the APS at any time provided that the Financial Services Authority has confirmed in writing to HMT that it has no objection to the proposed termination. On termination the Group must pay HMT the higher of the regulatory capital relief received and £2.5 billion less premiums paid plus the aggregate of amounts received from the UK Government under the APS. In consideration for the protection provided by the APS, the Group paid an initial premium of £1,400 million on 31 December 2009. A further premium of £700 million is payable on 31 December 2010 and subsequently annual premiums of £500 million until the earlier of 2099 and the termination of the agreement.
The Group also participates in a number of schemes operated by the Bank of England and the UK Government and made available to eligible banks and building societies.
Loans and advances to customers – net 728,393 874,722 828,538 466,893 417,226
UK based companies and branches Certificates of deposit 23,076 7,475 9,236 13 39,800 Other time deposits 62,623 7,665 5,939 12,359 88,586
Overseas based companies and branches Certificates of deposit 32,263 1,666 1,316 — 35,245 Other time deposits 111,542 13,498 7,983 15,641 148,664 Total 229,504 30,304 24,474 28,013 312,295
The UK authorised banks in the Group include the Royal Bank, NatWest, Coutts & Co and Ulster Bank Limited. Wholesale activities, other than Group Treasury activities, are concentrated in the Group’s Global Banking & Markets and Corporate Banking divisions, and are undertaken under the names of the Royal Bank and NatWest. UK retail banking activities are managed by the UK Retail division. The exception is Ulster Bank Limited, which is run as a separate division within the Group. Ulster Bank Group will move to a single brand in the Republic of Ireland, with First Active merging with Ulster Bank. Ulster Bank Limited provides banking services in Northern Ireland while the banking service in the Republic of Ireland is provided by Ulster Bank Ireland Limited and (for the time being) First Active plc, which are primarily supervised by the Irish Financial Regulator.
Preference Share Subscription Agreement Pursuant to a Preference Share Subscription Agreement effective as of 13 October 2008 between the company and HM Treasury, HM Treasury subscribed for, and the company allotted and issued to HM Treasury, the preference shares for a total consideration of £5 billion. The company and HM Treasury agreed that applications would be made to the UKLA for the preference shares to be admitted to the Official List and to the London Stock Exchange for the preference shares to be admitted to trading on the London Stock Exchange. Pursuant to the Preference Share Subscription Agreement, the company agreed to pay the costs and expenses of both parties in relation to the negotiation of the Preference Share Subscription Agreement and the subscription for, and allotment and issue of, the preference shares (including, without limitation, any stamp duty or stamp duty reserve tax). HM Treasury was entitled to novate its rights under the Preference Share Subscription Agreement to any entity that is owned, directly or indirectly, by HM Treasury.
The company may, subject to certain conditions, at any time terminate the Contingent Subscription in whole or in part, with the consent of the FSA. The company is required to pay an annual fee, for the Contingent Period, in relation to the Acquisitions and the Contingent Subscription of £320 million less four per cent. per annum of the value of any B shares subscribed for under the Contingent Subscription. Such fee is payable in cash or, with HM Treasury’s consent, by waiving certain UK tax reliefs that are treated as deferred tax assets or through a further issue of B shares to HM Treasury. The annual fee ceases to be payable on termination of the Contingent Subscription and if the company terminates the Contingent Subscription in part, the fee will reduce proportionately.
During the life of the APS, the company will pay HM Treasury a nonrefundable annual fee (payable in advance) of £700 million per annum for the first three years of the APS and £500 million per annum until the earlier of (i) the date of termination of the APS and (ii) 31 December 2099. The annual fee can, subject to HM Treasury’s consent, be paid wholly or partly by means of the waiver of certain UK tax reliefs that are treated as deferred tax assets or funded by the issuance of additional B shares to HM Treasury.
372 Shareholder enquiries 373 Capital gains tax 373 Analyses of ordinary shareholders 374 Trading market 377 Dividend history 378 Taxation for US Holders 382 Exchange controls 382 Memorandum and Articles of Association 382 Incorporation and registration 382 Code of conduct 383 Glossary of terms 388 Important addresses 388 Principal offices
Annual General Meeting 28 April 2010 at 1pm Edinburgh International Conference Centre, The Exchange, Morrison Street, Edinburgh
Core Tier 1 capital ratio – core Tier 1 capital as a percentage of riskweighted assets.
Credit default swap (CDS) is a contract where the protection seller receives premium or interest-related payments in return for contracting to make payments to the protection buyer upon a defined credit event in relation to a reference financial asset or portfolio of financial assets. Credit events usually include bankruptcy, payment default and rating downgrades.
Loan impairment provisions – are established to recognise incurred impairment losses on a portfolio of loans classified as loans and receivables and carried at amortised cost. It has three components: individually assessed loan impairment provisions, collectively assessed loan impairment provisions and latent loss provisions.
Probability of default (PD) – the likelihood that a customer will fail to make full and timely repayment of credit obligations over a one year time horizon.
Residential mortgage backed securities (RMBS) are asset-backed securities for which the underlying asset portfolios are residential mortgages.