Annual Report and Accounts 2017
Becoming simple, safe
and customer focused
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RBS is a UK-based banking and financial services company,
headquartered in Edinburgh.
RBS provides a wide range of products and services to
personal, commercial and large corporate and institutional
customers through its two main subsidiaries, The Royal Bank
of Scotland and NatWest, as well as through a number of
other well-known brands including Ulster Bank and Coutts.
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02
Strategic Report
Detailed information
Governance
Business review
Capital and risk management
Financial statements
Additional information
Risk factors
Shareholder information
Abbreviations and acronyms
Glossary of terms
Index
Important addresses
2017 performance highlights
Chairman’s statement
Chief Executive’s review
2017 performance summary
Segmental highlights
Looking forward
Our business model and strategy
Our Strategy
Our Structure
Our Brands
Building a more sustainable bank
Our approach
Our Values
Our Stakeholders
Our Colleagues
Our Customers
Our operating environment
Key influences in our operating environment
Key economic indicators
Risk overview
Governance at a glance
Viability statement
Approval of Strategic Report
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06
09
12
14
17
19
19
21
23
24
26
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28
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44
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49
The Strategic Report for the year ended 31 December 2017 set out on pages
1 to 49 was approved by the Board of directors on 22 February 2018.
By order of the Board.
Aileen Taylor
Company Secretary
22 February 2018
Chairman
Howard Davies
Executive directors
Ross McEwan
Ewen Stevenson
Non-executive directors
Frank Dangeard
Alison Davis
Morten Friis
Robert Gillespie
Penny Hughes
Yasmin Jetha
Brendan Nelson
Baroness Noakes
Mike Rogers
Mark Seligman
Dr Lena Wilson
50
117
149
229
357
372
404
408
409
416
419
03
2017
performance
highlights
RBS reported an operating profit before tax of £2,239 million
for 2017 and an attributable profit of £752 million, its first
‘bottom-line’ profit in ten years.
RBS delivered against its targets to increase income,
reduce costs and use less capital across its businesses. In
addition, RBS made substantive progress on resolving its
remaining legacy issues. Net loans and advances growth
of 2.2% across PBB, CPB and RBSI was lower than target,
however, the bank made greater progress than anticipated
on RWA reductions.
Common Equity Tier 1 (CET1) ratio of 15.9% increased by
2.5 percentage points during 2017 and remains ahead of
our 13% target.
We retain our target of achieving a sub 50% cost:income
ratio and above 12% return on equity by 2020.
2017 performance highlights
04
Strength and sustainability
£2,239 million
Operating profit before tax
£752 million
Profit attributable to ordinary shareholders
2.13%
Net interest margin
15.9%, up 2.5% points
Common Equity Tier 1 ratio (1)
2.2%
Return on tangible equity
94%
Reduction in Crit 1 IT incidents since 2014(2)
Simplifying the Bank
£810 million
Reduction in adjusted operating expenses (3)
Supporting sustainable growth
2.2%
Net growth in PBB, CPB and RBSI customer loans
£33.9 billion
Gross new mortgage lending in UK PBB, Ulster Bank RoI,
Private Banking and RBSI
3,830
People supported through our enterprise programmes (5)
Customer experience
5.5 million
Active mobile app users
No.1 Commercial Bank NPS
Our Commercial Bank ahead of its main competitors
for customer advocacy
58.2%, down from 66.0%
Cost:income ratio - adjusted (4)
Employee engagement
83%, up 7 points
Employee engagement score
£200.9 billion, down 12%
44%
Risk-weighted assets
Female representation in our top c.5000 roles
Notes:
(1) Based on end-point Capital Requirements Regulation (CRR) Tier 1 capital and leverage exposure under the CRR Delegated Act.
(2) Criticality 1 incidents are defined as having an adverse impact on segment’s customers, employees or third parties.
(3) Operating expenses excluding litigation and conduct costs £1,285 million (2016 - £5,868 million), restructuring costs £1,565 million (2016 - £2,106 million), and VAT
recoveries of £86 million (2016 - £227 million).
(4) Operating expenses excluding litigation and conduct costs £1,285 million (2016 - £5,868 million), restructuring costs £1,565 million (2016 - £2,106 million). Operating lease
depreciation included in income of £142 million (December 2016 - £141 million). Income excluding own credit adjustments £69 million loss (2016 – £180 million gain), loss on
redemption of own debt £7 million (2016 – £126 million), and strategic disposals £347 million (2016 - £164 million).
(5) Includes people supported through the following enterprise programmes during 2017: The Prince’s Trust, Skills & Opportunities Fund and Entrepreneurial Spark.
05
Chairman’s statement
Howard Davies
Chairman
06
Chairman’s
statement
2017 was another year in which we saw the bank
move closer to achieving sustainable profitability.
Our share price increased 20%
in the year, outperforming other
main UK banks. We also welcomed
the UK Treasury announcement in
November 2017 to potentially restart
the privatisation process by the end
of March 2019. This announcement
showed confidence in our strategic
approach, the progress that we have
made in making the bank safer and in
a position to succeed as we approach a
new era of disruption in banking.
The bank made an operating profit
before tax of £2,239 million, and an
attributable profit of £752 million, the
first full year profit since 2007.
Progress in resolving legacy issues
We resolved a number of major legacy
issues during the year. The Competition
Directorate of the European
Commission announced that it had
agreed a revised scheme to satisfy
the remaining State Aid obligations
which were imposed on the bank in
2009. The new scheme replaces the
need to divest the business formerly
described as Williams & Glyn, and
involves the creation of a capability fund
to benefit challenger banks, alongside
incentivised transfers of some of our
small business customers. The scheme
is not only practical, it will enhance
competition.
Another potentially damaging
reputational risk was the 2008 Rights
Issue litigation. That has now been
resolved. The settlement announced in
June 2017 brought the proceedings to
an end.
In 2017 we continued with the run down
of our non-core bank, with legacy risk
weighted assets, excluding Alawwal,
reducing by £12.6 billion in the year.
Given its reduced scale, in December
we announced the wind-up of this
division, with the remainder of the
assets now folded back mainly into
NatWest Markets.
We also settled an action with the
Federal Housing Finance Agency
related to this bank’s participation in the
US subprime mortgage market in the
run up to the financial crisis.
There is, however, one major piece of
litigation we need to resolve in relation
to our past subprime mortgage activity,
with the Department of Justice in the
United States. At this point we cannot
say when that issue will be closed,
as the timing is not in our gift, but we
continue to hope to resolve it in the
coming months.
The treatment of some of our small
business customers between 2008 and
2013 has been under scrutiny, and
has received significant political and
media attention. The Financial Conduct
Authority (FCA) published a summary
report into the historical operation of
our former Global Restructuring Group
(GRG) and the full report by Promontory
was published by the Treasury Select
Committee on 20 February 2017. The
most serious allegations made against
the bank in an earlier report by Dr.
Lawrence Tomlinson were not upheld.
Promontory stated that “they did not
find that defaults were engineered to
transfer business simply to generate
revenue for RBS”. However, the bank
was strongly criticised in the report and
we acknowledge that we could have
done better for many small business
customers in GRG. I again apologise
for the mistakes that were made during
that time. The attitudes to customers
displayed by some staff were not
acceptable, and communication with
clients was often poor. We have, as a
result, refunded complex fees to many
customers and established a complaints
scheme which is overseen by an
independent third party - retired High
Court judge Sir William Blackburne, who
is working through our cases. The FCA
have described this as an appropriate
response to these findings. We have
provided a sum of £400 million for these
redress schemes.
Economy and Regulation
In 2017 the UK economy continued to
grow, albeit below its long-term trend
rate. Inflation is currently running at
around 3%, above the Bank of England’s
2% target. In its latest outlook the Bank
of England has indicated that rates may
have to rise somewhat sooner, and to a
somewhat greater extent that they had
previously anticipated. The Monetary
Policy Committee believes that inflation
will still be above target three years
from now when they expect price
pressures to be mounting, necessitating
a monetary tightening.
Surveys of business confidence
increasingly point to longer term
uncertainty over how businesses will
structure their operations, once the
UK leaves the EU. The depreciation of
sterling pushed up inflation but provided
a boost to UK exporters, giving them
the opportunity to reduce prices in
overseas markets or to boost margins.
With the International Monetary Fund
(IMF) and Organisation for Economic
Co-operation and Development (OECD)
pointing to improving global growth
prospects in 2018, the UK economy
could gain from this favourable
tailwind, albeit the scale of these gains
is uncertain. In recent weeks, sterling
has appreciated against the dollar, but
remains weak against the euro.
In terms of regulation it was good
to receive clarity on one of the most
significant reforms following the
financial crisis. The Basel Committee
scrutinised the way in which banks
assess risk on their balance sheet, with
the aim of bringing more consistency
and tighter controls. The impact on RBS
of the package announced in December
2017 is likely to be small and we are well
positioned for when the new rules come
into force in 2022.
We are also on track to meet our
ring-fencing obligations by 2019. The
majority of the bank will be within the
ring-fence, so I will chair the Boards of
the Group and the ring-fenced bank.
We are well advanced in the process of
securing the legal permissions we need
to transfer some of our customers to the
most appropriate post ring-fenced legal
entity. This will allow us to continue to
serve them with little or no change to
their day-to-day banking. The services
they use (their local branch, sort code,
account numbers and where relevant
Relationship Manager) will not change
as a result of the Ring-Fencing Transfer
Scheme and they will not need to do
anything differently.
Brexit
While there is some more clarity on the
regulatory environment, the political
context remains uncertain, especially
in relation to Brexit. Since our business
is largely UK-focused, the impact on
RBS is not as significant as it is on many
other banks. However, in common with
them, we are preparing contingency
plans to maintain our Western
European business. One option is to
use our existing banking licence in the
Netherlands to provide continuity of
service from NatWest Markets to our
EU customers.
Changing customer behaviour
and disruption
Our operating environment is also
changing. The UK financial services
sector is experiencing its most
significant period of disruption for some
time. More accessible data, cheaper
technology, new competition regulation
and shifting customer expectations
are the key drivers of change and
are creating new challenges and
opportunities for incumbent banks.
These drivers are enabling new
challenger banks to compete more
effectively, from a lower cost base,
and we have to respond. There will be
more external partnerships with others
than we have seen before as we offer
new products and services. In 2017 we
created a Technology and Innovation
Committee of the Board to oversee
and monitor RBS’s strategic direction
in what has become one of the most
important areas of focus for the bank.
The Committee is chaired by Alison
Davis. Frank Dangeard and a new
Board member, Yasmin Jetha, have also
been appointed as members.
We also announced a significant
reduction in our branch network. The
decision to close a branch is always a
difficult one to make, and is never taken
lightly. However, customer behaviour
is changing, with more customers
choosing mobile and online over
traditional branch counters, and we
must respond to these changes. This
shift in behaviour, combined with our
partnership with the Post Office, mobile
branches and Community Bankers,
means there are now more ways to
bank than ever before.
Our branches will remain key outlets
for customers and we are investing in
those that remain, to reflect the way
customers want to use them, typically
for financial advice related to buying a
home or starting a business rather than
for routine transactional banking.
Colleague engagement, diversity
and inclusion
We are making good progress
in improving the culture of the
organisation. Our annual colleague
sentiment survey scores are the highest
they have been in ten years and there is
generally a more positive outlook from
colleagues across the bank.
In 2017 we were recognised as the
‘Diverse Company of the Year’ at
the National Diversity Awards; a Top
10 Employer for Working Families; a
Times Top 50 Employer for Women and
retained a gold rating for our work on
Race in Business in the Community’s
Race for Opportunity benchmark. We
also have a Black, Asian and Minority
Ethnic (BAME) focus on recruitment,
talent identification and promotion,
and have introduced explicit targets for
BAME representation at senior levels
in 2018.
Today, for the first time, we have also
published details of the average pay gap
between male and female colleagues
in the bank, which is 37.2%. Gender
pay is markedly different to equal pay
which looks at the difference in pay
between men and women for similar
roles. We are confident that we pay
our employees fairly and keep our HR
policies and processes under regular
review to ensure we do so.
Our gender pay gap reflects an under
representation of women at senior
levels. That is not a satisfactory position
and we know that we still have much to
do to narrow the gap. We are therefore
putting more impetus behind our work
to achieve a better gender balance.
We are strongly committed to having
more female colleagues in senior
positions across the organisation. In
2015 we set ourselves a target to have
at least 30% of roles in the three most
senior levels of each of our businesses
07
Chairman’s statement
08
filled by women by 2020. Our latest
figures show we are now at 37% on
aggregate, and on track to achieve 40%
by 2020. Furthermore, 44% of our top
5000 roles are occupied by women and
we are aspiring to achieve full gender
balance at all levels of our business
by 2030.
Building a sustainable bank
We are committed to running the bank
as a more sustainable business, serving
today’s customers in a way that also
safeguards future generations.
In 2017, RBS publicly committed to
support the Financial Stability Board’s
Task Force on Climate-related Financial
Disclosures (TCFD) – a voluntary set
of guidelines encouraging consistent
climate-related disclosures in annual
reporting. We also improved our position
in a number of rankings – for example
achieving 13th in top 100 organisations
in the Stonewall Workplace Equality
Index and maintained inclusion in the
FTSE4GOOD index and high scores in
the CDP climate index.
Our volunteering and fundraising
partnerships also continue to make
a difference for the communities
we serve. In 2017, our employees
supported a wide variety of charities
by raising £4.3m in giving through their
giving and fundraising efforts. We also
won the Platinum award for Payroll
Giving and the Payroll Giving Award for
the Most Successful Sustained Scheme;
3,454 charities received funding.
Shareholder engagement
This year, we have increased the overall
level of our non-financial disclosures in
our Strategic report by featuring our
performance highlights against each of
our key influences we have described.
We have introduced a new section,
entitled Our Stakeholders, which
describes our stakeholder groups and
our approach to managing key topics
of interest such as climate change.
As well as encouraging a more open
culture internally, the Board has also
made a considered effort to listen to
the views of all shareholders. In 2017
we hosted two retail shareholder
events in London and Edinburgh. Those
events provided shareholders with the
opportunity to share their views on
our progress and our future initiatives
directly with members of the Board
and executive committee. Individual
shareholders’ views on our plans to
build a better bank are important to us.
The Board has, during 2017, as
in previous years, run a series of
stakeholder engagement sessions with
representatives from a wide variety
of different organisations to discuss
key topics such as financial capability
and technological disruption with
members of our Board and senior
executives. This is helping us to make
better informed decisions and ensure
our future strategy addresses emerging
sustainability risks and opportunities.
We will continue to run these events in
future years. Board members have also
visited business customers, and will
undertake more such visits around the
country this year.
Board Changes
In 2017 Mark Seligman and Yasmin
Jetha joined the Board and have
already brought a wealth of experience
and fresh perspectives to our
discussions. Mark became the Senior
Independent Director at the end of
the year. Sadly, John Hughes, who
joined in June 2017, had to step down in
September 2017 for health reasons.
Dr Lena Wilson was appointed as a non-
executive director on 1 January 2018.
Lena brings strong commercial and
public sector experience to the Board,
having previously served as Chief
Executive of Scottish Enterprise and
Senior Investment Advisor to The World
Bank. With effect from 1 January 2018,
Sandy Crombie stepped down from
the Board and Penny Hughes has told
us that she does not plan to stand for
re-election at the 2018 Annual General
Meeting. I would like to thank both
Sandy and Penny for their outstanding
commitment and huge contributions
to RBS over a number of years. Sandy
was, as Senior Independent Director, a
great support to my predecessor and to
me. Penny has led the Remuneration
and, later, the Sustainable Banking
Committee with great enthusiasm.
We wish them both well for the future.
Conclusion
Overall, the Board believes that in 2017
we have made further progress in
resolving the legacy issues which have
hung over the bank for too long. We still
have important issues to resolve and
tough decisions to make, particularly
on cost control, but in 2017 we made
several important steps in the right
direction. Thank you for your patience
as we continue the bank’s turnaround.
Ross McEwan
Chief Executive
Chief
Executive’s
review
Putting the past behind us.
Investing for the future.
In 2017 we continued to make good progress
in building a simpler, safer and more customer
focused bank. I am pleased to report to
shareholders that the bank made an operating
profit before tax of £2,239 million in 2017, and
for the first time in ten years we have delivered a
bottom Iine profit of £752 million.
We have achieved profitability through
delivering on the strategic plan that
was set out in 2014. The first part of this
plan was focused on building financial
strength by reducing risk and building
a more sustainable cost base. So far,
we have reduced our risk-weighted
assets by £228 billion and today can
report a Common Equity Tier 1 ratio
of 15.9% up from 8.6% in 2013. Our
financial strength is now much clearer.
Over the same period we have reduced
operating costs by £3.9 billion. We still
have more to do on cost reduction,
however this reflects the progress we
have made in making the bank more
efficient.
A clear indication of the outstanding
progress we have made is that from the
first quarter of 2018, we will no longer
report adjusted financials.
At the same time as building financial
strength, we have also made progress
with the legacy of our past and
improving our core bank. We have
delivered on this by resolving a number
of our litigation and conduct issues. This
includes reaching settlements last year
with FHFA in respect of our historical
Retail Mortgage Backed Securities
(RMBS) activities and with claimants
in relation to our 2008 Rights Issue. In
2017 we also continued to run down our
legacy assets. The wind-up of our non-
core division, Capital Resolution in 2017,
was an important moment.
As part of the support we received in
2008 and 2009, the bank was mandated
to meet certain requirements under a
State Aid restructuring plan. In 2017,
we received approval for an alternative
remedies package, which replaced our
original plan to divest of the business
formally known as Williams & Glyn. This
is a good solution, both for improving
competition in the UK SME banking
market, and for shareholders.
With this solution in place and currently
being implemented, the number of
legacy issues the bank faces has
reduced. However, we have one major
legacy issue that we have yet to resolve
which is with the US Department of
Justice. The timing of the resolution of
this issue is not in our control.
09
Chief Executive’s review
The bank has received significant media
attention for its treatment of some small
business customers between 2008 and
2013. To those customers who did not
receive the experience they should have
done while in GRG we have apologised.
We accept that we got a lot wrong in
how we treated customers in GRG
during the crisis. However, these were
complex and subjective cases with
each case having unique facts about
what was the right thing to do. The
bank welcomes the FCA’s confirmation
that the most serious allegations made
against the bank have not been upheld
and that the steps the bank announced
in November 2016 to put things right for
customers are appropriate.
We have made significant progress in
improving our culture since then.
Today this bank is a simpler and safer
organisation, with colleagues now fully
focused on our customers.
I want to thank our colleagues for their
commitment and resolve during what
has been a difficult chapter in the bank’s
history. Our most recent colleague
survey, Our View, reported the highest
engagement levels in ten years. We
also recently won the ‘Employee
Engagement Company of the Year’
at the UK Employee Engagement
Awards. This shows that our culture is
improving. This bank is now more open,
less hierarchical and more focused on
our customers. Our colleagues serve
and support millions of customers
across the UK and Republic of Ireland
every day, it is vital to our success that
they feel engaged and motivated.
Investing to transform our business
When I started as CEO in 2014 the bank
was far too complex. We operated in
38 countries, with over 5,000 systems
supporting hundreds of different
products. In our credit card business
alone we offered 55 different card
designs, as the organisation had grown
we had added complexity which
distracted us from our key stakeholder,
the customer. Our customers want a
bank which protects their safety and
security, and is also responsive to
their needs.
Today we have exited 26 countries
and now have a more focused product
set, underpinned by almost half the
number of systems we previously had.
Simplification will continue to be a key
focus for the organisation in 2018.
10
We are going through all of our end-to-
end customer processes to ensure they
are fit for purpose.
Our mortgage application journey is
experienced by thousands of customers
every day. With one of our strategic
aims being to grow in this market,
the benefits of simplification and
automation in this area are vast. Given
this, in 2017 NatWest was the first UK
bank to offer paperless mortgages.
Customers can now apply for a
completely digital mortgage which uses
the latest technology to securely share
and verify documents online. With this
new proposition, mortgage offers can
now be made within 11 days, down
from 23 days before. The process also
eliminates close to 4.3 million sheets of
paper a year, reducing our impact on
the environment.
The opportunities created by greater
simplification and automation, in terms
of improved controls, cost reduction
and a better customer experience,
are significant for this bank.
As well as transforming our processes
and products, in 2017 we continued to
reap the benefits of refocusing our main
customer-facing brands. With each
now speaking to a unique constituency
of customers, we are better placed
to differentiate ourselves from our
competitors. With NatWest for England
and Wales, Royal Bank of Scotland,
for Scotland and Ulster Bank for the
island of Ireland – we truly are a bank of
brands in the UK and the Republic
of Ireland.
Customer driven change
Listening and responding to our
customers is helping us to get closer
to meeting our goal to be No.1. In light
of this we have continued with the roll
out of Closed Loop Feedback in 2017.
Today, within 24 hours of an interaction
taking place, customers can provide
specific, actionable feedback directly to
the teams that serve them, empowering
colleagues to listen, learn from and
act on what our customers are telling
us. With our complaints volumes down
9% on the previous year, and our Net
Promoter scores improving in half of
our chosen customer segments, we
continue to see the benefits of customer
driven change in this bank. We still
have a lot of work to do to meet our
2020 ambition of being the number
one bank for customer service,
trust and advocacy.
Listening to our customers is not only
reducing complaints, it’s also driving
product and service improvements.
In our commercial bank for instance,
in response to customers’ demand for
greater speed and efficiency, we have
developed self service account opening.
Through this channel more than 90% of
our new to bank commercial customers
are able to initiate account openings
themselves and, crucially, are doing
it 30 minutes faster than if they used
telephony. Customers told us this
was a pain point for them and we
have responded.
Listening to our customers and
investing to simplifying our processes is
helping us build a bank which is lower
cost, and competitive in our target
markets – improving outcomes for both
customers and shareholders.
We are committed to running the
bank as a more sustainable business,
serving today’s customers in a way
that also helps future generations. As
technological, social and environmental
changes shape the world, it’s important
to stay connected with evolving
customer needs, our shareholders and
the wider expectations of society. One
of the ways in which we are doing this
is through our Board-level stakeholder
engagement programme where we
proactively listen, learn and engage
with our stakeholders to improve the
way we do business.
Supporting the UK economy
While transforming the bank, we have
continued to support the UK economy.
In 2017 we extended £33.9 billion in
new mortgage lending, helping grow
our mortgage market share for the fifth
consecutive year. We continue to target
growth in our mortgage market share
in 2018.
We are also the biggest supporter of
UK business. Our commercial bank
grew lending in our target markets,
this commitment supported both
recognised household names and
fledgling start-ups. Our commitment
to business goes beyond simple
financing, our Entrepreneurial Spark
programme continued to grow in 2017
and has supported over 3,800 new
businesses since 2012 with award-
winning facilities and an outstanding
support network. Our work is also being
recognised externally. In 2017 NatWest
was awarded Best Business Bank in
the UK by the National Association of
Commercial and Finance Brokers.
Throughout 2017 NatWest Markets
has continued to deepen its customer
relationships by providing global
market access and innovative and
tailored solutions. As well as increasing
employee engagement and improving
the control environment, the business
has made material progress to realise
cost and operating efficiencies.
Responding to technological change
The financial services industry is going
through one of the most significant
periods of change we have seen in
many years, and we are responding.
Like other industries, the digital
revolution has naturally led to lower
footfall in our branches. Branch
transactions are down 40% on 2013,
as increasingly our customers prefer
the convenience and ease of digital
banking. Given this we have made
some difficult, but necessary, decisions
around the scale of our branch network
in 2017. This does not mean we are not
supporting our customers. In fact we
are providing customers more ways to
bank than ever before, be that through
a visit to their local Post Office, a visit
from one of our 39 mobile branches,
which visit over 600 towns and villages
on a weekly basis, meeting one of
our 100 community bankers, a digital
appointment with one of our video
bankers, logging on to internet banking
platform, or banking on the go with
our market leading mobile app. Our
customers have never had as many
channels through which to undertake
their banking.
For the first time we now have more
active mobile users than users online, a
clear indication of the direction of travel
of our customers’ banking preferences.
Our ambition is for the standard
of service we provide to always be
outstanding, no matter how our
customers choose to interact with us.
In 2018 our branches will increasingly
focus providing specialised expertise
and advice as well as on helping
customers tap into the wealth of ease
and efficiency they can experience
through using our digital channels.
In our commercial bank, we are
supporting customers shift to mobile
through building our online service
Bankline service into an app. Currently,
90,000 commercial customers are
active on Bankline. In the future we
expect this to move increasingly to
mobile. In 2018, we will also launch
Bankline mobile for our larger
commercial customers. This new
service will act as a companion to our
current Bankline on-line technology.
Initially, customers will be able to view
transactions and send payments with
biometric approval. In the coming
quarters we will further expand the
scope of what Bankline Mobile offers.
Embracing the latest in digital
innovation
We know that we cannot stand still
on innovation as our competitors
certainly are not. Over the last few
years we have invested in building our
partnerships and scouting networks
across the globe to ensure we are at
the cutting edge of technology. We have
developed some excellent partnerships
and one area we have advanced
significantly in is Artificial
Intelligence (AI).
By harnessing the latest in computer
learning and speech recognition, in
partnership with IBM, we have built
an AI chatbot, called Cora. Cora is
helping our customers with many of
their most common queries. Crucially
Cora is available 24/7, has no ‘wait-time’
to serve a customer and can handle
an unlimited number of queries at the
same time. Since Q1 2017 Cora has
handled over four hundred thousand
conversations responding to over two
hundred different questions.
In partnership with Soul Machines, we
are investing now to build an evolution
of Cora for 2018, giving her a visual
avatar acting as the interface with our
customers. Initial trials are proving a
success with customers telling us that
using Cora made them less concerned
about converting to our other digital
channels. While many customers felt
empowered to be more direct in their
questioning of Cora, as they felt much
safer and more secure with her.
Through digital innovation we will serve
customers more efficiently, be more
responsive to their needs and at the
same reduce costs in the business and
build a more solid control environment.
Looking forward
In the past our legacy has dominated
our corporate story. In 2017 our
financial strength improved and we
continued to put the past behind
us. We are entering a new phase of
transforming the core bank through
technology innovation and end-to-end
process re-engineering. Our future
will be high tech and high touch, which
means lower cost, high quality digital
services with human expertise available
when required.
Conclusion
I would like to thank shareholders for
their continued support. We welcome
the indication in the Chancellor’s
budget statement about the potential to
restart share sales during the fiscal year
2018/2019, again this is a further proof
of the progress we have made.
We recognise our responsibility towards
the society we serve and operate in. It is
only by supporting our customers and
communities to succeed that we will
be become a more sustainable bank. I,
together with my management team,
view this as a core part of our ambition
to be No.1 for customer service, trust
and advocacy.
As the number of our legacy issues
reduces, and our business performance
improves, the investment case for this
bank is clearer, and the prospect of us
rewarding our shareholders is getting
closer.
“ In 2017 we continued to make good
progress in building a simpler, safer
and more customer focused bank.”
11
2017 performance summary
Delivery against our 2017 targets
Strategy goal
Strength and sustainability
Customer experience
Simplifying the bank
Supporting growth
Employee engagement
2017
performance
summary
RBS reported its first ‘bottom-line’ profit in ten years
2017 operating profit of £2,239 million, an increase of £6,321 million
compared with 2016.
Adjusted operating profit(1,2) increased by 31.1% to £4,818 million.
2017 attributable profit of £752 million.
4.0% increase in adjusted income(1) and an 8.1% reduction in adjusted
operating expenses(2) driving a 12.1% improvement in operating
leverage.
Net interest margin (NIM) reduced by 5 basis points to 2.13%
compared with 2016.
Supported the UK economy through a £6.0 billion, or 2.2%(3), increase
in net lending across PBB, CPB and RBSI. Whilst behind our 3% target,
this represents strong growth in a competitive environment.
2017 target
2017
Maintain bank CET1
ratio of 13%
CET1 ratio of 15.9%; up 250
basis points from 2016
Significantly increase NPS or maintain
No.1 in chosen customer segments
We have achieved target in half our key
customer segments and Commercial
Banking remains ahead of its main
competitors. Trust has improved for both
NatWest and Royal Bank of Scotland
Reduce adjusted operating expenses
by at least £750 million
Adjusted operating expenses down
£810 million, or 9.6%, excluding
VAT recoveries(2)
Net 3% growth on total PBB,
CPB and RBSI loans to customers
Net customer loans in PBB, CPB,
and RBSI up 2.2%(3) for the year
Improve employee
engagement
Employee engagement improved by 7
points to 83, 1 point above the GFS norm
Notes:
(1) Income excluding own credit adjustments £69 million loss (2016 - £180 million gain), loss on redemption of own debt £7 million (2016 - £126 million) and strategic disposals £347 million ( 2016 - £164 million).
(2) Operating expenses excluding litigation and conduct costs £1,285 million (2016 - £5,868 million), restructuring costs £1,565 million (2016 - £2,106 million) and VAT recoveries of £86 million (2016 - £227 million).
(3) Excluding transfers. See notes on page 15 for further details.
12
Continued track record of delivery
against our stated objectives
Significant capital build
throughout 2017
CET1 ratio increased by 250 basis
points to 15.9%, despite absorbing
significant additional legacy costs.
IFRS 9 adoption on 1 January 2018
increased CET1 by a further 30
basis points.
Prioritising transformation
acceleration
Increased investment and
innovation spend focused
on achieving higher levels of
digitisation and automation.
Faster repositioning of the bank’s
existing distribution network and
technology platforms towards
mobile, cloud based platforms and
virtualisation.
Grow income: Adjusted income
increased by £490 million, or 4.0%.
Cut costs: Excluding VAT
recoveries, adjusted operating
expenses reduced by £810 million(2),
or 9.6%.
Reduce capital usage: Excluding
volume growth, RWAs reduced
by £20.8 billion across PBB
(£0.6 billion), CPB (£12.9 billion),
RBSI (£4.4 billion) and NatWest
Markets core (£2.9 billion), already
achieving our 2018 target.
Resolve legacy issues:
During 2017, RBS:
Wound up the former Capital
Resolution business. Legacy RWAs
now represent around 11% of total;
Received formal approval from
the European Commission for its
alternative remedies package in
respect of the business previously
described as Williams & Glyn; and
Reached settlement with the
Federal Housing Finance Agency
(FHFA) and the California State
Attorney General in the US and
resolved the 2008 rights issue
shareholder litigation.
Building a more sustainable bank
Our Board Sustainable Banking
Committee hosted four stakeholder
engagement sessions, inviting a
broad mix of stakeholders to share
their perspective on key issues
with us.
RBS is a founding partner with the
National Trading Standards Scam
Team on their ‘Friends Against
Scams’ initiative.
RBS was recognised by InfraDeals
as the leading lender to the UK
renewables sector by number of
transactions over the past six years
(2012- 2017).
We helped over one million
customers with a free Financial
Health Checks to help customers
organise their finances and
achieve their financial goals.
We supported over 3,830
people through our enterprise
programmes. This includes the
following enterprise programmes:
Entrepreneurial Spark, Prince’s
Trust and Skills & Opportunities
Fund.
15 minutes to apply
for a business account
The process of applying for an account with us is
now quicker than ever for our business customers.
Using our new online service, business customers
who are new to the bank can open their account
at a time and place to suit them, and the whole
process can be completed in less than the time it
takes to enjoy a coffee break.
85% of new customers have opened accounts via
our self-service offering since it became available
in 2017, benefiting from a simpler, more efficient
process that frees up more time for the things that
really matter – like running a business.
13
Segmental
highlights
RBS continues to deliver on its plan to build a strong, simple and
fair bank for both customers and shareholders. During 2017
RBS’s activities were organised on a franchise basis as follows;
Personal & Business Banking (PBB) comprising two reportable
segments, UK Personal & Business Banking (UK PBB) and Ulster
Bank RoI; Commercial & Private Banking (CPB) comprising two
reportable segments, Commercial Banking and Private Banking;
RBS International and NatWest Markets.
For more details refer to the Business Review on pages 130 to 148.
UK Personal & Business Banking
Ulster Bank RoI
Ulster Bank RoI reported an adjusted operating profit of
€109 million and an adjusted return on equity of 3.6% in
2017. Adjusted income decreased by €8 million, or 1.1%,
primarily reflecting a reduction in income on free funds,
partially offset by one-off items, higher lending income
and reduced funding costs.
Gross new lending increased by 3.4% from €2.5 billion in
2016 to €2.6 billion. Further cost efficiencies have been
achieved, with adjusted expenses reducing by €43 million
in 2017.
Ulster Bank RoI was amongst the first banks in Ireland
to introduce Apple Pay and Android Pay, and now over
70% of our customers are actively using our digital
proposition, increased from 58% of our active customer
base in 2016. We continue to reposition capital, with
REILs down by 9.8% to €3.7 billion, representing 15.9% of
gross customer loans, compared with 17.5% in 2016.
UK PBB now includes the business previously described
as Williams & Glyn. Adjusted operating profit of £3,084
million was 18.4% higher than in 2016, including a
£185 million debt sale gain. Income increased by 5.7%
to £6,477 million supported by a 5.9% increase in net
loans and advances, which more than offset margin
contraction. Adjusted operating expenses were 7.1%
lower than 2016 reflecting reduced headcount and
lower back-office operations costs. Adjusted return on
equity increased to 30.7% in 2017 from 25.1% in 2016.
There are a range of variables that could impact near to
medium term returns, including RWA inflation as a result
of a change in Bank of England mortgage risk weighting.
Gross new mortgage lending was £31.0 billion, with
market share of new mortgages at approximately 12%,
supporting growth in stock share to approximately
10%. Mortgage approval share in Q4 2017 decreased to
approximately 12%, from around 14% in Q3 2017, and
mortgage new business margins were 14 basis points
lower in the quarter, in part reflecting intense price
competition in the market.
UK PBB continues to invest in its digital offering and now
has 5.5 million customers regularly using its mobile app,
20% higher than December 2016, and in 2017 was the
first bank to launch a paperless mortgage journey.
14
Commercial Banking
Private Banking
Commercial Banking includes selected assets from the
former Capital Resolution business from 1 October 2017.
Adjusted operating profit of £1,308 million was 2.7%
higher than 2016 and adjusted return on equity remained
broadly stable at 8.2%. Income increased by 2.0% due to
increased volumes in targeted segments and deposit
re-pricing benefits.
Adjusted operating expenses reduced by 6.3% reflecting
operating model simplification and productivity
improvements, including a 16.4% reduction in front office
headcount. Commercial Banking net impairment losses
of £362 million increased by £156 million and reflecting a
small number of single name impairments.
Adjusting for transfers (1), net lending decreased by £4.9
billion in 2017, as growth in targeted segments has been
more than offset by active management of the lending
book, achieving gross RWA reductions of £12.5 billion.
With the successful launch of our entrepreneur
accelerator hub in London we now have 12 business
accelerators throughout the UK. Across these hubs, over
3,800 start ups have benefitted from our support, which
has helped them raise £255 million of investment while
creating over 8,000 jobs.
Private Banking now includes the Collective Investment
Funds business transferred from UK PBB on 1 October
2017. Adjusted operating profit increased by £78 million,
or 52.3%, to £227 million and adjusted return on equity
increased to 11.3% from 7.8%. Adjusting for transfers,
income increased by £12 million due to higher lending
volumes and an £8 million gain on a property sale,
partially offset by margin pressure. A 12.9% reduction in
adjusted operating expenses was supported by an 11.8%
reduction in front office headcount.
Net loans and advances increased by 10.7% to £13.5
billion and assets under management increased by
14.4%, adjusting for transfers (2).
We continue to focus on delivering the best customer
experience, including investing in digital by launching
Coutts Invest and an enhanced mobile experience, and
we were awarded Best Private Bank in the UK at the
Global Private Banking Awards 2017.
RBS International (RBSI)
NatWest Markets
RBSI reported an adjusted operating profit of £184
million, 5.6% lower than 2016. Income increased by 4.0%
driven by increased lending and deposit volumes and
re-pricing actions on the deposit book. Adjusted
operating expenses increased by 19.5% reflecting
increased operational costs associated with becoming
a non ring-fenced bank. Despite this, adjusted return on
equity remained robust at 12.6%.
RWAs of £5.1 billion reduced by £4.4 billion compared
with 2016 reflecting the benefit of receiving regulatory
approval for RBSI to adopt an advanced internal ratings
based approach on the wholesale corporate book.
Notes:
(1) Shipping and other activities which were formerly in Capital Resolution were transferred
from NatWest Markets on 1 October 2017, including net loans and advances to
customers of £2.6 billion and RWAs of £2.1 billion. Commercial Banking transferred
whole business securitisations and relevant financial institution’s (RFI) to NatWest
Markets during December 2017, including net loans and advances to customers of £0.8
billion and RWAs of £0.6 billion. Comparatives were not re-presented for these transfers.
(2) UK PBB Collective Investment Funds (CIFL) business was transferred from UK PBB
on 1 October 2017, including total income in Q4 2017 of £11 million and assets under
management of £3.3 billion. Private Banking transferred Coutts Crown Dependency
(CCD) to NatWest Markets during Q4 2017, including total income of £2 million and
assets under management of £1.3 billion. Comparatives were not re-presented for these
transfers.
(3) Shipping and other activities which were formerly in Capital Resolution were transferred
to Commercial Banking on 1 October 2017, including RWAs of £2.1 billion. Whole
business securitisations and relevant financial institutions (RFI) were transferred
from Commercial Banking during December 2017, including RWAs of £0.6 billion.
Comparatives were not re-presented for these transfers.
(4) Transfers include £0.4 billion loans and advances transferred from Commercial Banking
to UK PBB during 2017 to better align Business banking customers. Comparatives were
not re-presented for these transfers.
Following the closure of the former Capital Resolution
business in Q4 2017, NatWest Markets now includes
legacy run-off assets alongside its core businesses.
An operating loss of £977 million was reported in 2017,
including a profit of £41 million in the core business.
Adjusted operating loss of £264 million, compared with
£1,231 million in 2016. Adjusted income in the core
business increased by 9.5% to £1,665 million, largely
driven by Rates as the business navigated markets well.
Legacy disposal losses, other adjustments and
impairments of £513 million were incurred in 2017,
compared with £825 million in 2016. Adjusted operating
expenses reduced by 26.7% reflecting a significant
reduction in the legacy business, as it moved towards
closure, and cost reductions in the core business.
RWAs decreased by £15.3 billion, adjusting for transfers,
to £52.9 billion primarily reflecting legacy business
reductions. At the end of 2017 the legacy business within
NatWest Markets had RWAs of £14.0 billion, excluding
RBS’s stake in Alawwal Bank, a reduction of £10.9 billion,
adjusting for transfers (3), over the course of the year.
15
Video banking –
a different way
to bank
Today’s busy lifestyles mean visiting a
branch is not convenient for everyone.
So we are developing alternative ways
for customers to bank with us.
Our new Video Banking service lets
customers chat face-to-face with a
senior personal banker – at a time and
location to suit them, whether they
are at home, at work or on the move.
Appointments are available from
9am- 8pm Monday to Friday and
9am-3pm on Saturday.
Video Banking Manager David Hunter
explains; “We connect with the
customer using a live video link and can
discuss and arrange anything from a
personal loan, credit card or overdraft,
to opening a current or savings account,
or setting up a meeting with a
mortgage adviser.”
16
2017 performance summary
Looking forward
2018 Outlook(1)
We reiterate our medium term outlook
on both return on tangible equity and
cost:income ratio. We also now intend
to accelerate the transformation of
the bank which necessitates increased
investment and innovation spend
together with additional restructuring
costs. As a result operating costs,
excluding restructuring and litigation
and conduct costs, will reduce
compared with 2017, but the rate of cost
reduction will be materially lower than
in 2017. We expect to incur restructuring
charges of around £2.5 billion across
2018 to 2019 cumulatively, of which
c.£0.3 billion relates to the completion of
the State Aid remedy and reintegration
of the former Williams & Glyn (W&G)
business into UK PBB. This is compared
to previous guidance of around £1
billion excluding the impact of W&G,
with around two thirds of the remaining
c.£1.2 billion increase being driven by
costs associated with the accelerated
transformation.
RBS continues to deal with a range of
significant risks and uncertainties in
the external economic, political and
regulatory environment and manage
both conduct-related investigations and
litigation, including relating to RMBS.
Substantial additional charges and
costs may be recognised in the
coming quarters.
With the introduction of IFRS 9,
impairments are expected to be more
volatile and we continue to remain
mindful of potential downside risks,
particularly from single name and
sector driven events. The consensus
view of Brexit suggests a weaker
UK economy in the short to medium
term. With the current high level of
UK household debt and real wage
compression, any increases in
unemployment and interest rates
present a threat to retail impairment
rates. In wholesale portfolios further
softening of GDP growth would be
expected to impact credit losses
negatively. We retain our guidance that
through the cycle losses would be in the
range of 30-40bps.
By the end of 2018, we expect Bank
RWAs to be lower by £5-10 billion. This
is despite model uplifts in Commercial
Banking in 2018 which are expected to
drive some RWA inflation. The majority
of the gross RWA reductions will be
within NatWest Markets legacy assets,
including the benefit of the anticipated
merger between Alawwal Bank and
Saudi British Bank, and Commercial
Banking.
RBS Group capital and funding issuance
plans for 2018 focus on issuing
£4-6 billion MREL-compliant securities.
We do not currently anticipate the need
for either AT1 or Tier 2 issuances. As in
2017, we will continue to target other
funding markets to diversify our funding
structure. In support of the ring-fencing
requirements and to build up RBS Plc (to
be renamed NatWest Markets Plc) as a
standalone non ring-fenced bank, we
anticipate issuing £2-4 billion of senior
unsecured issuance from this entity in
addition to continued reliance on short
term funding.
In the near to medium term, we would
expect the bank to maintain a CET1
ratio in excess of our 13% target given
a range of variables that are likely to
impact us over the coming years. These
include:
potential final costs of a resolution
with the US Department of Justice;
future potential pension
contributions and the interplay
with capital buffers for the bank
for investment risk being run in the
pension plan;
RWA inflation as a result of IFRS 16,
Bank of England mortgage floors
and Basel 3 amendments;
expected increased and pro-cyclical
impairment volatility as a result of
IFRS 9; and
the collective impact of these items
on our stress test results
We remain committed to restarting
capital distributions when permitted,
with resolution with the US Department
of Justice being a key milestone to
enable this.
Medium term outlook
We retain our target of achieving a sub
50% cost:income ratio and above 12%
return on equity by 2020.
While we expect operating costs to
reduce each year from 2018 to 2020,
given the increased level of investment
and innovation spend expected over the
coming years we are no longer guiding
to an absolute 2020 cost base.
The NatWest Markets segment balance
sheet as at end 2017 is broadly similar
to the expected target balance sheet of
the NatWest Markets Plc after the ring-
fence transfer schemes to be carried
out during 2018. In preparation for the
UK ring-fencing regime, the previously
reported operating segments were
realigned in Q4 2017 and a number of
business transfers completed. These
changes included the NatWest Markets
segment absorbing the former Capital
Resolution segment (other than for
certain shipping and portfolio assets).
Notwithstanding a planned capital
reduction exercise in July 2018, by 2020
this entity is targeting a capital base
with a consolidated end state CET1 of
14%, a leverage ratio greater than 4%
and a total capital ratio of at least twice
the CET1 ratio, including the benefit
of downstreamed internal MREL.
By 2020, NatWest Markets targets a
RWA position of c.£35 billion including
legacy assets, with the legacy assets
generating minimal associated income,
and an overall cost base of around
£1 billion.
Trading update
Overall, RBS has had a positive start
to 2018.
Note:
(1) The targets, expectations and trends discussed in this section represent management’s current expectations and are
subject to change, including as a result of the factors described in this document and in the Risk Factors on pages 372 to
402. These statements constitute forward looking statements, refer to Forward Looking Statements on page 407.
17
Cora
How bots are changing banking
Artificial Intelligence (AI) is fundamentally changing how customers
interact with services across a number of industries from
healthcare to journalism and even manufacturing.
Banking is no different, and that is why, in partnership with IBM, we
have introduced Cora – our helpful, digital assistant – for Royal Bank
of Scotland, NatWest and Ulster Bank customers. Cora answers
questions from customers 24/7, freeing up colleagues’ time, so they
can help customers with more complex queries. Customers can
find Cora across our digital channels whenever they need help.
Whether that is when they are using online banking, or browsing
our websites, she is there to solve the tricky questions.
Jane Howard, MD Personal Banking says: “The great thing about
Artificial Intelligence is that it’s a machine that learns the more you
interact with it. This has the opportunity to be game-changer for
banking as we strive to offer a better service for our customers.”
18
Our business model and strategy
Our business
model and strategy
Our Strategy
Our ambition is to become number one for
customer service, trust and advocacy as we meet
the aspirations and needs of our retail, business,
commercial, corporate and institutional customers.
Our core businesses are centred around the UK
and Republic of Ireland markets with a focused
international capability.
We are building a better bank for our customers, and one that will deliver sustainable
returns for shareholders. Our purpose is to serve customers well, and to do so, we
are becoming a safe, simple, customer-focused UK and Ireland bank.
Our plan
Underpinning that ambition is our
blueprint for success. This is our
plan which drives our strategic
decision making.
RBS is continuing to build a bank that
is easy to do business with, and meets
customers’ continually evolving needs.
Draft: v4 16/02/2018
Our plan focuses on delivering
excellent customer service through
all of our brands.
Creating lasting relationships
with our customers, who advocate
for our bank, is the key to generating
sustainable value.
Our blueprint for
lasting success
Our blueprint for
lasting success
No.1
for customer
service, trust
and advocacy
Serve customers well
Serving
customers
Working
together
Doing the
right thing
Thinking
long term
Our Ambition
Our Purpose
Our Values
Our Brands
Our Priorities
Strength
and
sustainability
Customer
experience
Simplifying
the bank
Supporting
sustainable
growth
Employee
engagement
Our 2020
Goals
CET1 ratio 13%
RoTE ≥12%
No.1 for
service, trust
and advocacy
Cost:income
ratio < 50%
Leading market
positions in
every franchise
engagement in
upper quartile of
Global Financial
Services (GFS) norm
Employee
19
Our business model and strategy
Our 2020 vision
The bank of 2020 will be high tech and high touch, which means lower cost, high
quality digital services with human expertise available when required. This will be
underpinned by a clear commitment to our customers, shareholders and other
stakeholders.
2020
A leading UK retail and
commercial bank with
a focused financial
markets division
Strong brands and
market positions
Growing in attractive
chosen markets
Track record of cost and
risk reduction
Improving returns and
capital generation
Significant distribution
potential
Resilient Balance Sheet with
improving efficiency
13% CET1 Ratio
Balanced, stable
and improving
income generation
Customer
led, digital
enabled
model
Reinvestment
Sustainable returns
above cost of capital
12% + ROTE
Significant
capital return potential
to shareholders
Improving productivity
Sub 50% C:I Ratio
Our priorities
Strength and sustainability
We remain focused on building a strong
and stable bank. We have continued
to improve the fundamentals, by
increasing our capital strength, building
a robust liquidity position and balancing
our loan to deposit ratio. As one of the
UK’s largest banks we understand the
importance of supporting the UK’s
economic and social development.
Through our balance sheet lending and
range of sustainable banking initiatives,
we are working to improve outcomes
for all stakeholders.
20
Customer experience
Supporting sustainable growth
We are investing in our people, service,
and product proposition to ensure we
provide market leading technology
and signature customer experiences,
through a wide variety of channels.
A strong sustainable business grows
with its customers. We continue to
support our customers through offering
products and services which meet
their needs.
Simplifying the bank
Employee engagement
Streamlining of processes and
removing unnecessary complexity
lowers our operating costs, and makes
our customer interactions more
straightforward.
Engaged colleagues lead to engaged
customers. At RBS we are committed
to investing in our colleagues and
creating leaders who inspire and
empower their teams.
Our business model and strategy
Our Structure
We have four customer franchises, and each is underpinned
by a range of distinct brands, which are the route through
which we engage with our customers.
Personal and
Business Banking (PBB)
With a branch network and mobile,
telephone and online banking propositions
PBB provides services in the UK and the
Republic of Ireland. Through a simple
range of products PBB meets the needs of
our retail banking, mass affluent and small
business customers.
Asset-backed
lending
Business
lending
Credit
cards
Current
accounts
Currencies
Financing
Our
products
Our
brands
Commercial and
Private Banking (CPB)
CPB serves our commercial and high net
worth customers in the UK and Western
Europe. Commercial Banking supports
our corporate clients by providing
comprehensive commercial banking and
financing services with sector expertise.
Our Private Banking business offers high
net worth clients private banking, wealth
planning and investment management
services.
Unitised
funds
Secured Personal
loans
Saving
accounts
Rates
Portfolio
management
Payments
Liquidity
management
RBS International (RBSI)
RBSI supports personal, commercial, and
financial institution customers through
branches in Jersey, Guernsey, Isle of Man
and Gibraltar. RBSI also supports financial
institution customers through wholesale
branches in Luxembourg and London,
both opened in 2017.
Our Functions & Services
Financial
planning
Invoice
financing
Insurance
NatWest Markets
NatWest Markets offers corporate and
institutional customers global market
access, providing them with financing and
risk management solutions, built around
rates, currencies and financing products.
Finance
Human
Resources
Risk
Communications
& Marketing
Legal
Services
Corporate Governance & Regulatory Affairs
Internal Audit
Services provide business-aligned technology, operations
and property services across the bank.
These teams define functional strategy and the financial
plan to support the franchises and other functions.
It is also accountable for technology risk, payments,
data, change management and the bank’s fraud and
security functions.
Most functions are a mix of control, expertise and
advisory. All common support activities across the
organisation are included.
21
Pain-free small business
accounting
Research in 2017 showed that only half of our one million
small-business customers used accounting software, and
that cash flow management was one of their biggest
pain points.
We wanted to help make their lives easier, so we have
partnered with FreeAgent, an Edinburgh-based Fintech
that provides accounting software which lets small-
business owners track their finances and report their
taxes digitally.
Now all of our small-business customers can sign up to
FreeAgent using their existing business banking login
details. The process is safe, secure and completely paper-
free, and the software helps to make financial reporting
and cash flow management quick and easy.
22
Our business model and strategy
Our Brands
Our brands are our main connection with
customers. Each takes a clear and differentiated
position that will help us strengthen our
relationships with our customers, stand out in
the market, and build the value of our brands.
NatWest serves customers in England and
Wales, supporting them with their banking
needs, at all stages in their lives.
Royal Bank of Scotland is committed
to serving Scottish communities and
English commercial business.
Ulster Bank operates both in the
Republic of Ireland and Northern Ireland.
Exceptional service sits at the heart of
Coutts, a business that has been built on
understanding the needs of their private
and commercial clients.
Lombard is the UK’s largest provider of
asset finance, helping to take businesses
to the next level with a forward-looking
entrepreneurial approach.
Adam & Company provides progressive
private banking, tailoring its services and
solutions to match each client and their
unique needs.
Child & Co is one of the oldest private banks
in the UK, providing bespoke banking
services from the legal heart of London.
Drummonds has served private banking
customers for over 300 years, providing
a discreet and professional service.
As the bank of the British Armed Forces,
Holt’s prides itself on understanding the
complexities of serving in the military
and providing a personalised service.
Isle of Man Bank is the ‘community bank’
and the island’s oldest native bank,
offering retail, private and business
banking services to local customers.
RBS International is one of the world’s
leading offshore banks, operating under
three distinct brands – RBS International,
NatWest and Isle of Man Bank.
NatWest Markets offers its customers global
market access, providing them with trading,
risk management and financing solutions
through its trading and sales operations.
2323
Our business model and strategy
Building a more sustainable bank
Our long term success is dependent on our ability to generate
value for society by providing products, services and facilities
that are useful to people and the communities in which we
operate. Our value creation model is a simplified way of
showing how this works, including the way we use resources,
skills and relationships to deliver value for all our stakeholders.
One of the ways by which we meet the expectations of our shareholders is by delivering the best possible service for
customers to meet their needs. At the same time, we recognise our responsibility towards society as a whole. It is only
by supporting our customers and communities to succeed that we will be become a more sustainable bank.
Our key resources and relationships
RBS provides financial services to individuals and businesses, primarily in the UK and Ireland. We rely on financial,
human and intellectual, social and relationship, infrastructure and natural capital to do so. We leverage these
forms of capital through our expertise, technology and customer focus across our different brands. This helps to
improve the quality of customer service. We also seek to create sustainable value for our shareholders and other
stakeholders, including customers, employees, and civil society.
Inputs
Financial
£
Natural
We make use of shareholder capital
and other forms of financial capital,
including £367.0 billion in customer
deposits.
Social and Relationship
19 million customers in the UK and
Republic of Ireland.
690 GWh of energy consumed and
8,700 tonnes of paper used in 2017.
The bank has reduced total carbon
emissions linked to energy and
business travel by 39% since 2014.
The electricity we buy in the UK is from
renewable sources, further reducing
our environmental impact.
Infrastructure
Human and Intellectual
We now have a trained TechXpert in
every branch to help our customers get
the most from our digital services. We
also provide telephony and webchat
and self service options like ATMs and
Cash Deposit Machines. Our customers
also have access to our fleet of mobile
branches covering more than 600
communities every week, and 11,500
Post Office branches where they can
carry out every day transactions face-
to-face.
A capable, caring and motivated
workforce of 71,924 (permanent
headcount). We recruited 216
graduates and 255 apprentices.
Over 64,600 employees underwent
training by the Chartered Banker
Professional Standards Board
(CB:PSB), with 94% of applicable
employees achieving the CB:PSB
Foundation Standard
Almost 3,000 leaders participated
in ‘Determined to Lead’, our core
management system for the bank to
support our leaders putting our values
into practice every day.
How we earn income
Our purpose is to serve our
customers well
We earn income by providing lending
and deposit services to our customers.
We incur operating expenses in
providing these services, and accept
risk; including credit risk, liquidity risk
and currency risk.
The operating profit generated by
the bank is either re-invested to
improve products and services for our
customers or returned to shareholders.
Building a safe and customer-focused
bank is central to our ability to
create value.
The main source of our income is the
interest income earned from loans and
advances to our personal, business
and commercial customers. We also
earn fees from transactions and other
services provided to our customers.
We pay interest to customers and
other investors who have placed
deposits with us and bought our debt
securities. The difference between
these is our net interest income. We
also pay benefits to our customers,
through loyalty products such as our
Reward Account.
24
How we create value for customers and society
Sustainable Energy
Protecting customers’ money
Supporting business
We have over twenty-five years
experience in supporting the
sector. We were recognised by
InfraDeals as the leading lender
to the UK renewables sector by
number of transactions over the
past six years (2012-2017).
Tax payments
Payment of £1.46 billion in tax
to the UK Government, which
supports central government and
local authority spending.(1)
Empowering customers
Following a successful pilot we
launched FreeAgent, free cloud-
based accounting software which
helps small and medium sized
enterprises keep track of their
finances and report taxes digitally.
We are making good progress in
using artificial intelligence to help
customers to get answers to simple
questions without needing to go
to a branch or use an automated
telephone service.
We now have 5.5 million active
users regularly enjoying the speed
and convenience of our mobile
banking app.
Customers can also now tell
us about travel plans, make
international payments, manage
helpful alerts, message us at
anytime and get personalised
notifications through the app.
Keeping money safe and accessible
for our depositors, including
preventing 485,000 cases of
attempted fraud amounting to
£244 million in the UK. There has
been a sustained improvement
in the number of customers
impacted by fraud in 2017 with
a 26% reduction from 2016.(2)
We completed over one million
Financial Health Checks with our
personal, private and business
customers.
Helping customers
Offering lending advice and
services to individuals. Supporting
customers with financial life
events, including £33.9 billion of
gross new mortgage lending to
help our customers buy homes.
Enterprise
We supported over 3,830
people through our enterprise
programmes.(3)
We are determined to make
the bank a great place to work
We launched ‘Building a great
place to work’ to outline our
commitment to giving our
employees a fulfilling job, fair
pay, excellent training and
good leadership.
Providing working capital and
lending to help businesses meet
their goals, including £28.8 billion
in lending to small and medium-
sized enterprises across England,
Scotland and Wales.(4)
Supporting local communities
Our Skills & Opportunities
Fund distributed £2.5 million to
110 organisations that support
people from disadvantaged
communities to access the skills
and opportunities they need to
build their financial capability skills
or to start or develop a new
business in 2017.(5)
£
MoneySense
MoneySense is the longest running
bank-led financial education
programme in the UK, which has
helped over five million young
people learn about money for
over 23 years.
Our programme is designed to help
teachers and parents equip young
people with the financial skills they
need to manage their money now
and in adulthood.
Life saving skills
Over 40,000 colleagues completed
CPR training. Three colleagues
have since had to apply their
training, which helped save
three lives.
Notes:
(1) Comprises £443 million corporate tax, £504 million irrecoverable VAT, £237 million bank levies and £273 million employer payroll taxes.
(2) Data relates to reported attempted fraud cases and prevented third party losses in the UK (not including policy declines for debit cards).
(3) Includes people supported through the following enterprise programmes during 2017: The Prince’s Trust, Skills & Opportunities Fund and Entrepreneurial Spark.
(4) SME lending balances in over 9,854 postcode sectors across England, Scotland and Wales.
(5) Data is compiled by Project North East (PNE) and is based on the total spend allocated by each Regional Board.
25
Our approach
26
Our approach
Our Values
Our Values guide our actions every day, in every part
of our business. The values are the foundation of how
we work at RBS.
Doing the right thing
Working together
We do the right thing.
We take risk seriously and manage
it prudently.
We prize fairness and diversity and
exercise judgment with thought
and integrity.
We care for each other and work best
as one team.
We bring the best of ourselves to work
and support one another to realise
our potential.
Serving customers
Thinking long term
We exist to serve customers.
We earn their trust by focusing on their
needs and delivering excellent service.
We know we succeed only when our
customers and communities succeed.
We do business in an open, direct and
sustainable way.
TechXperts
As our customers’ lives change,
so to does the way they choose
to interact with us. One in five
customers already exclusively uses
digital channels for their everyday
banking, and this number is only
expected to rise.
Based in our UK branches, our
TechXperts are helping more
customers to understand how
mobile and online banking can help
them make the most of technology
to do their banking in a way that is
convenient for them.
Zac Hamoudi is one of the Bank’s
1,200 TechXperts. “We see
customers not fully confident with
how to get the most out of their
online banking,” he explains. “It’s
about supporting them. We might
have customers who are finding it
difficult to visit a branch. It can make
their lives so much easier to do their
banking online. Just working with
people for 30-minute online lessons
can have a positive impact.”
27
Our approach
Our Stakeholders
RBS exists to serve customers well and we put our customers at the heart of
everything we do. This means having an understanding of our impact across
all stakeholders of the bank. Understanding who our stakeholders are and their
views helps inform our overall strategy. Below is an overview of some of
our stakeholder groups.
Topic Specialists
Includes consumer groups, non-
governmental organisations, and
academics. They research, advocate
and campaign to influence change on
behalf of customers, communities and
the environment.
Customers
All individual and
business customers,
past, present
and future
Media & Public Voices
Includes journalists and social
media influencers. They bring issues
affecting customers, communities and
the environment to public attention
through multiple channels.
Investors
Includes UK Financial Investments,
retail and institutional investors.
They are interested in financial and
non-financial performance in the
short, medium and long term.
Bank Representatives
Includes employees, suppliers,
and partners. They are responsible
for product and service delivery and
are the face of our brands.
Policy Makers
Includes politicians, government and
regulators. They take issues through
consultations and into policy reform.
They make recommendations,
regulations and the law.
We have provided three examples below of how we work with different stakeholder groups:
Shareholder engagement sessions
Individual shareholder views on
our plans to build a better bank are
important to us.
In 2017 we hosted events in Edinburgh
and London for our retail shareholders.
A diverse group, selected by postcode,
were invited to learn more about
our business and participate in an
interactive Q&A session with a panel
of senior management and Board
members.
These events gave those in attendance
the opportunity to hear from different
parts of RBS, ask questions about
progress so far and learn more about
our plans for the future. We set up
market stalls on topics of interest
including customer experience,
innovation and security. They could talk
with employees from different parts of
the bank on progress and our plans for
the future.
Additionally, we held four external
stakeholder engagement sessions with
our Sustainable Banking Committee
on Financial Capability, UK Housing,
Climate Risks and Technology
Innovation for Social Good.
28
Working together to tackle fraud
and scams
To help our customers protect
themselves against fraud and scams
we have been working with various
partners across the industry.
NatWest sponsored the production
of a Code of Practice on protecting
customers from financial harm. The
specification, launched in November
2017, included input from Financial
Fraud Action UK, the National Trading
Standards Scams Team, the Office of
the Public Guardian, the Metropolitan
Police, and two other major UK banks.
NatWest continue to support ‘Friends
Against Scams’ run by National Trading
Standards and in 2017 trained over
20,000 colleagues. In 2018 we will be the
official bank partner of the One Million
Friends Against Scams initiative.
Closed Loop feedback
We are listening, learning and acting
on our customers’ feedback. We have
taken customer feedback on board and
acted on it. Closed loop feedback is
about continuously seeking customer
feedback and closing the loop on the
issues that our customers raise with us.
Examples include:
“It would be good if you could diarise
payments”. Customers can now make
diarised payments via their mobile app.
“Customers living abroad are unable to
use the mobile app with an international
number”. Customers can now use
our mobile app in various countries
including Australia, Gibraltar, Hong
Kong, New Zealand, Singapore and
South Africa.
“I want all audio statements to have a
braille section that allows the customer
to know who and what the audio tape
is for and what month this relates to”.
All our audio statements now have
a date so that customers can easily
differentiate between them.
In addition, as part of our net promoter
system in 2017 we sent out 11.5 million
survey invites, with 875,500 responses.
option to discuss the matter face-to-
face or by video.
We are working hard to develop new
services to respond to the changing
needs and expectations of our
customers. All our personal customers
can bank with us using our mobile
app and online banking services and
we have Bankline for business and
commercial customers. We also provide
a 24/7 webchat service for personal
customers, telephony and secure text
messaging for when customers want to
contact us quickly, digitally and securely.
Closing branches is always a difficult
decision and one we do not take lightly.
When these decisions are made, we
look at each branch and take into
account a range of factors including,
how customers are choosing to bank
with us; how often customers are using
the branch; the impact on customers
who currently use the branch; other
options available to customers including
online, mobile, telephony, webchat,
cash machines, video banking and local
Post Offices and, the proximity of our
other branches, including our network
of mobile branches and local transport
routes and timetables.
We know that for some customers, in
particular vulnerable customers, closing
branches can be unsettling. We are
committed to ensuring that we support
all customers with these changes.
We aim to provide six months notice
before we close a branch (the industry
norm is 12 weeks) and we proactively
contact our regular branch users and
vulnerable customers to talk to them
about our decision and the options
available to them.
Our national contract with the Post
Office means that customers can
undertake everyday banking in any
of the 11,500 Post Offices throughout
the UK. In many areas, we operate
mobile branches, which bring our
banking services direct to local
communities, many of which have
not had a branch before.
We acknowledge that some of our
customers are not comfortable with
using online or mobile banking, and for
those customers who would value some
support we have created a specialist
taskforce of TechXperts who are
dedicated to supporting our customers
with training and support with digital
skills. Our TechXperts support
customers with the varied ways to bank
and for example accompany customers
to the local Post Office to show them
how their banking can be done.
We have introduced a number of roles to
provide personal, face-to-face banking
services in communities, assisting
customers with access to our non-
cash services, offering support with
financial planning and education. Our
Community Bankers base themselves
in places like libraries, local businesses
and community centres so as to best
serve local communities. Business
Growth Enablers focus on our small
business customers. They are specially
trained to help source advice that will
help local businesses with banking
support, as well as harnessing their own
network to support business needs.
Business Growth Enablers work with
industry partners to run free events
for customers on issues such as fraud,
scams and digital tax returns.
Changing face of banking
Since 2014, customers are choosing to
do their banking in different ways that
suit them and reflect what they do in
everyday life. The number of customers
using our branches across the UK has
fallen by 40% and during the same
period mobile banking transactions
increased by 73%; in the first half of
2017, there were 1.1 billion mobile and
online transactions carried out by our
customers.
We are committed to ensuring that
our customers have a wide range of
ways in which they can bank with us.
Every customer is individual and that
is why customers can choose from a
combination of digital, telephone and
face-to-face banking options, each
designed to suit their preferences and
needs. Customers might carry out
simple everyday transactions using
our mobile app but still preferring to
speak to someone over the phone or
via webchat for other banking queries.
For more complex needs, such as a
Financial Health Check or mortgage
advice, customers value having the
Community Bankers - taking
the branch to our customers
As more and more customers choose to use mobile banking
instead of traditional branch counters, our branch network needs
to change. Our Community Bankers are ensuring that we can still
play an active role in communities, even when we no longer have a
dedicated building.
Our team of Community Bankers take the branch to the places
where it is convenient for our customers, including libraries, rugby
clubs and church halls. They also deliver community events on
fraud, scams and online security, to help people keep their
money safe.
Aby Evans is a Community Banker on the Kent coast. “I run regular
drop in clinics in the local libraries,” she explains. “Although I’m not
in a bank building, customers know where and when they can find
me each week.
“I wear a purple branded fleece and I get stopped in the street
because people spot me and want to ask a quick question. It’s really
nice to feel part of the community.”
29
Our approach
Climate change
We recognise climate change is a
significant global issue and we fully
support the objectives of the Paris
Climate Agreement and the emissions
reductions strategies set by the UK
and devolved governments. We
have publicly pledged our support for
the Financial Stability Board’s (FSB)
Taskforce on Climate-related Financial
Disclosures (TCFD) and we have
included more detail on our approach
to the TCFD recommendations in the
Additional Information section of the
2017 Annual Report and Accounts.
We also plan to announce further
details of our long term approach to
climate change.
We believe there is a need to support
our customers to reduce their
emissions, save energy and manage
their costs. Over the last decade, we
have become one of the leading lenders
to the UK Sustainable Energy market,
with expertise and services designed for
customers from small businesses up to
large corporations. RBS was recognised
by InfraDeals as the leading lender to
the UK renewables sector by number
of transactions over the past six years
(2012- 2017).
As we have refocused our business on
the UK, Ireland and Western Europe,
we’ve also substantially reduced our
lending to carbon intensive parts of the
global economy such as coal mining
and oil extraction. Our total exposure
to the oil and gas industry, for example,
now accounts for just 0.5% of our
lending exposures. In 2017 we did not
directly finance any new coal mining
or coal power projects. More details of
our lending to the energy sector will be
published on our Sustainable Banking
webpages on rbs.com in April 2018.
Relative to our size, our operational
footprint from serving our customers
is quite small, but still significant. Our
primary emissions impact comes from
the energy used to heat, cool and power
our buildings and data centres. We
have set targets using a science-based
method in order to align our efforts
to reduce emissions with the climate
science that sits behind the Paris
Climate Agreement. Our target for 2020
is to reduce our direct carbon emissions
by 45% from a 2014 baseline and at the
end of 2017 we had already recorded
a 39% reduction. The table below
provides more detail.
We have also set 2020 targets to reduce
water use by 10% and paper use by
60%, whilst continuing to target zero
waste to landfill. We engage colleagues,
suppliers and customers in these efforts
and in 2017, 3,200 colleagues logged
over 24,000 activities to reduce our
environmental impact via our green
reward app. More information on our
targets and initiatives can be found
on the Sustainable Banking webpages
at rbs.com.
GHG Emissions
2014
(Baseline)
2016
2017
Change 2014
to 2017 (%)
Location-based CO2e emissions (Scope 1, 2 and Business
Travel) (tonnes)
512,583
388,648
311,583
-39%
Scope 1* CO2e emissions (tonnes)
36,857
29,131
27,172
-26%
Scope 2** Market-based*** CO2e emissions (tonnes)
391,105
159,629
76,197
-81%
Scope 2 Location-based CO2e emissions (tonnes)
370,374
270,481
215,959
-42%
Scope 1 and 2 Location-based CO2e emissions per FTE (tonnes)
4.16
3.32
3.18
-24%
Scope 3**** CO2e emissions from business travel (tonnes)
105,352
89,036
68,452
-35%
We have reported on all emission sources under the Companies Act 2006 (Strategic Report and Directors’ Reports) Regulations 2013. To our knowledge there are no material
omissions. Independent Limited assurance has been provided by Ernst & Young LLP over total reported CO2e emissions (tonnes) (Scope 1*,2** and 3*** location based
emissions). Our reporting year runs from October 2016 to September 2017.
These emissions have been calculated using the methodology advised in the Greenhouse Gas Protocol revised edition (2004). The boundary of reporting is set as all entities and
facilities either owned or under operational control. Emissions factors used are from UK Government’s GHG Conversion factors (DEFRA), IEA, or relevant local authorities.
*Scope 1: Emissions from fluorinated gas loss and fuel combustion in RBS premises/vehicles. **Scope 2: Emissions from electricity, district heating and district cooling used in
RBS premises. *** market-based emissions have been calculated using the GHG Protocol guidelines. ****Scope 3: Emissions associated with business travel (air, rail and road)
by RBS employees.
30
NatWest Markets energises
the SSE Green bond deal
NatWest Markets continues to build its presence in the
sustainable finance market with an active role on the issuance
of a landmark Green bond by SSE.
SSE, one of the UK’s leading energy suppliers, issued its first
Green bond raising EUR600 million, the largest ever Green
bond by a UK company. It will use the proceeds to re-finance
existing environmentally-friendly projects, in particular
onshore windfarms.
SSE has invested around GBP 3.2 billion in renewable energy
since 2010 and has the largest renewable energy capacity in
the UK and Ireland.
31
Our approach
slavery, servitude, forced or compulsory
labour and human trafficking together
under one piece of legislation. In 2017
we published our first annual statement
on the MSA on rbs.com. This built
upon our interim statement which was
published in December 2016 and our
existing policy framework.
Our approach is underpinned by
Our Values and Our Standards. For
employees this is via the RBS Code of
Conduct ‘Our Code’. Our Code includes
a clear commitment to respect human
rights, supported by the Yes Check,
a tool to guide good decision making.
Employees are consulted on key aspects
of their working environment, and they
can utilise a confidential helpline to
discuss any matters of concern.
Our commitment to the international
progress of human rights includes
upholding the principles of the United
Nations Global Compact since 2003.
We are committed to the
implementation of the United Nations
Guiding Principles on Business and
Human Rights and participate with
our peers in groups such as the Thun
Group and United Nations Environment
Programme Finance Initiative. We
have been adopters of the Equator
Principles since their inception in 2003
to manage social and environmental
risks, including human rights, in project-
related transactions.
We have sector-specific Environmental,
Social and Ethical (ESE) risk policies
(available at rbs.com/sustainable) which
include human rights considerations
for high-risk sectors. For customers
outside these sectors, our general
ESE risk concerns policy ensures due
diligence is carried out on clients when
human rights risks are identified. We
expect our customers to share our
commitment to respecting human
rights within their operations.
Human rights and Modern
Slavery Act
RBS takes a proactive approach to
upholding our commitment to respect
human rights and our approach is
centred on identifying and mitigating
potential human rights risks across
our business and our wider sphere of
influence. The Modern Slavery Act
2015 (MSA) forms part of our approach
to human rights as this regulation brings
together the serious criminal offences of
Our Customers
Our People
Our Suppliers
We are aware that as a High Street
bank we come into contact with
millions of customers, some of whom
may be victims of modern slavery.
Our relationship with our customers
is governed by a wide range of
risk considerations, including our
Anti-Money Laundering (AML) and
Environmental, Social, and Ethical
(ESE) risk assessments on current or
new customers, to consider whether
any of their activities carry human
rights infringements.
All of our people are recruited legally
and must meet the 1998 Immigration
Act requirements.
RBS is a fully accredited Living Wage
Employer. We gained accreditation in
2014. RBS’ commitment as a Living
Wage accredited employer applies to
everyone working for the bank in the
UK and has been extended to staff
who are employed via suppliers
(e.g. cleaning, security and catering
staff). Employees are regularly
consulted on their working conditions
and a confidential helpline is available
at all times.
We expect our suppliers to uphold the
same values and commitments that
we have made in relation to social and
environmental impacts. Adherence to
these policies is required as part of our
supply chain tendering process and
within our supplier contracts.
Our Sustainable Procurement Code
sets out the international human
rights commitments we expect of
the companies that we work with,
including labour standards and
non-discrimination.
32
Our approach
Top 10 Employer
for Working
Families
‘Diverse
Company of the
Year’ – National
Diversity Awards
‘Employer of the
Year’ – Scottish
Icon Awards
Platinum Ranking
– Opportunity
Now
Times Top 50
Employer for
Women
Bloomberg Global
Gender Equality
Index
Rated a Top
Global Stonewall
Employer
Gold Rating
– Race for
Opportunity
Silver Rating
– Business
Disability Forum
Standard
13 in Stonewall
Workplace
Equality Index
Our Colleagues
Engaging our colleagues is critical to
delivering on our strategy and ambition as a
bank. Being better for our colleagues means
we are better for our customers, and this
makes us a better bank.
Creating a Healthy Culture
Building a healthy culture that
embodies Our Values is one of our core
priorities. Our Values guide the way we
identify the right people to serve our
customers well, and how we manage,
engage and reward our colleagues.
Our Values are at the heart of both Our
Standards, the bank-wide behavioural
framework and Our Code, the bank-
wide Code of Conduct.
Our values are integral to the way
we behave and do business and we
continue to reinforce them in our
systems, policies and processes,
communications training and
leadership role modelling.
We set ourselves clear cultural
priorities each year and manage these
through our Executive Committee.
We monitor our progress against
our goals. We gather feedback from
our colleagues through our listening
strategy, and through metrics and key
performance indicators to assess our
progress and respond accordingly.
We do this along with feedback from
regulators and industry bodies.
Almost 60,000 colleagues completed
our most recent colleague opinion
survey. The results were the most
positive we’ve seen in recent times and
showed we’re changing the culture of
the bank for the better. Key measures
of engagement, leadership and our
culture have improved significantly,
and we’re now above the global
financial services norm in the majority
of our survey categories. The results
are encouraging, and show that our
hard work is paying off. However, we
recognise that we have more to do to
make this a stronger bank and a great
place to work.
We encourage colleagues to tell
us what they think via the annual
colleague survey and our regular
comments boards. When colleagues
wish to report concerns relating to
wrong doing or misconduct they can
raise concerns via Speak Up, the
bank’s whistleblowing service. In 2017
289 cases were raised compared to
213 in 2016.
Performance and Reward
Our approach to performance
management provides clarity for
our colleagues about how their
contribution links to our ambition and
all our colleagues have goals set across
a balanced scorecard of measures.
Further progress has been made
in making sure employees are paid
fairly for the work they do and are
supported by simple and transparent
pay structures. More employees have
moved to a purely fixed pay construct
during the year, allowing them to
concentrate on providing excellent
customer service. We will continue to
make further changes in 2018 which
will result in over half of our employees
being on a purely fixed pay construct
making their pay fairer and easier to
understand.
We are confident that we pay our
employees fairly. We keep our HR
policies and processes under review
to ensure we do so.
Our rates of pay continue to exceed
the Living Wage and changes have
been introduced to ensure people
performing the same roles are paid
more consistently.
More information on our remuneration
policies can be found in the 2017
Annual Report and Accounts.
Learning
‘Determined to lead’ (Dtl), our core
leadership programme is now
embedded as business as usual.
Dtl provides consistent tools to lead
and engage our colleagues and is
33
Our approach
transforming the way we operate.
In 2017 a further 3,000 leaders
participated in the programme.
2017 saw over 16,000 colleagues
undertake stage one of Service
Excellence training, our customer
service programme. This first
module introduces our Core Service
Behaviours and provides an awareness
of the tools and techniques that will
help us to deliver the best possible
service, every time.
We continue to work closely with
the Chartered Banker Institute and
Chartered Banker Professional
Standards Board (CB:PSB) to
professionalise our colleagues. In 2017
we again achieved an Excel rating
in the CB:PSB Foundation Standard
review , and remain one of only two
CB:PSB member firms to have secured
‘Earned Autonomy’.
We also offer a wide range of additional
learning opportunities.
Health and Wellbeing
Wellbeing is a strong pillar in making
the bank a great place to work. In
2017 our wellbeing programme
successfully delivered against three
wellbeing pillars; Physical, Mental,
Social and we have started to put in
place support against our fourth area
of Financial Wellbeing. For the third
year running we participated in the
Global Challenge (formerly GCC) and
with 34,000 colleagues taking part we
won the Global Challenge 1st Most
Active Organisation Financial Industry.
Building on this success, we embraced
the rapid acceleration of digital
wellbeing and are one of the few large
organisations to pilot a digital wellbeing
platform.
During 2017 we have continued to
support Time to Change (removing the
stigma of mental health) and actively
Grade
CEO – 1
CEO – 2
CEO – 3
CEO – 4
Target population (CEO – 3 and above)
Executive Employees
Directors of Subsidiaries
34
and here we are making good
progress. We have a positive
action approach in place, tailored
by business, according to the
specific challenges they face. As we
continue to increase the proportion
of women working in senior roles,
we expect our gender pay gap
will lessen.
u During 2017, we continued to roll out
unconscious bias learning to all our
colleagues to create a solid platform
for the wider inclusion agenda. 70%
of colleagues have now participated
in unconscious bias training since it
was introduced in 2015.
u We have plans in place for all
segments of our pan-bank
disability plan. It addresses areas
for improvement including branch
access, accessible services,
improving colleague adjustment
processes and inserting disability
checkpoints into our key processes
and practices.
u We continue to focus on building
an ethnically diverse RBS. Our
plan focuses on positive action and
includes reciprocal mentoring,
targeted development workshops
and leadership programmes and
ensuring we have a Black, Asian
and Minority Ethnic (BAME)
focus on recruitment, talent
identification and promotion. We will
introduce explicit targets for BAME
representation at senior levels
in 2018.
u Our LGBT agenda continues to
deliver a better experience for our
LGBT colleagues and customers.
We have processes in place to
support updating gender and title
on customers’ banking records and
to support colleagues undergoing
gender transition. And, we continue
to support our c.20,000-strong
colleague networks.
encouraged open dialogue across
the bank to support Mental Health in
the Workplace. We were successful
in running bankwide major online
campaigns to support Mental Health
Awareness Week and World Mental
Health Day.
As we continue to support our
colleagues through change we
have fully utilised the services of our
Employee Assistance Programme.
Inclusion
Building a more inclusive RBS is
essential for our customers and
colleagues.
Our inclusion policy applies to all
our colleagues globally to make sure
everyone feels included and valued,
regardless of their background.
u As at 31 December 2017, our
permanent headcount was 71,924.
49% were male and 51% female.
u We continue to work towards our
target of having at least 30% senior
women in our top three leadership
layers across each Function and
Franchise by 2020. As at the
31 December 2017 we have, on
aggregate, 37% women in our top
three leadership layers, and our
pipeline (around 5000 of our most
senior roles) has 44% women. We
are on track to have a fully balanced
workforce at all levels of the
organisation by 2030.
u RBS plc’s gender pay gap in Great
Britain is 37.2% (median 36.5%).
The figures also show a gender
bonus gap of 64.4% (median 36.6%).
u A key driver behind the gap is the
fact that we have more men in
senior roles (which attract higher
pay) than women. In order to
close the gender pay gap, we must
continue to improve our gender
balance in our most senior roles,
#Women
#Men
%Women
5
35
232
1,309
272
9
66
397
1,681
472
36
35
37
44
37
Male
90 (76%)
184 (80%)
Female
28 (24%)
45 (20%)
There were 347 senior managers (in accordance with
the definition contained within the relevant Companies
Act legislation), which comprises our executive
population and individuals who are directors of our
subsidiaries. The RBS Board of directors has fourteen
members, consisting of nine male and five female
directors.
Helping young people
keep their money safe
Were you thinking about identity theft, fraud or insurance
as a youngster? Probably not, but thanks to MoneySense
– our flagship financial education programme for 5 to 18
year olds – today’s young people are becoming a lot more
financially aware.
MoneySense has been helping young people towards
a better financial future for more than 23 years and
the varied content aims to help them to understand the
changing nature of fraud and how they can protect
themselves. A range of resources for each age group are
available including quizzes, videos and worksheets.
These resources help teach pupils about money safety in
the real world and how to avoid the dangers of fraud in a
fun and interactive way.
MoneySense content also looks at a wide range of financial
dilemmas including budgeting for a party, choosing a
mobile phone contract and understanding when it is
important to have insurance.
MoneySense has now reached more than five million
young people and over 5,000 colleagues from across the
bank have signed up as MoneySense volunteers to help
deliver workshops in schools.
MoneySense resources are used in 66% of secondary
schools across the UK and Ireland.
35
Our approach
Our Customers
RBS remains committed to achieving its target of being the
number one bank for customer service, trust and advocacy by 2020.
Customer
In 2017 we made it our goal to significantly
increase NPS or maintain number one
in our chosen customer segments. This
strategy was implemented to support the
overall aim of being the number one bank
for customer service, trust and advocacy
by 2020.
0-10 scale with 10 indicating ‘extremely
likely’ and 0 indicating ‘not at all likely’.
Customers scoring 0 to 6 are termed
detractors and customers scoring 9 to 10
are termed promoters. The net-promoter
score (NPS) is established by subtracting
the proportion of detractors from the
proportion of promoters.
We use independent surveys to track the
progress we are making to achieve our
goals in each of our markets and to also
measure our customers’ experience.
To measure advocacy, customers
are asked how likely they would be to
recommend their bank to a friend or
colleague, and respond based on a
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).
Our Commercial Banking NPS has
remained stable during 2017 and remains
ahead of its main competitors. In England
& Wales, NPS for NatWest Personal
Banking has also remained stable and we
have met our target for customer trust.
In Scotland, while we have not met our
target for customer trust for Royal Bank
of Scotland, it has increased strongly year
on year. We do recognise that significant
work is required to improve our customer
experience and we continue our work
to resolve the ongoing reputational and
legacy issues.
NatWest (England & Wales) (1)
Royal Bank of Scotland (Scotland) (1)
Ulster Bank (Northern Ireland) (2)
Ulster Bank (Republic of Ireland) (2)
NatWest (England & Wales) (3)
Royal Bank of Scotland (Scotland) (3)
NatWest (England & Wales)
Royal Bank of Scotland (Scotland)
Q4
2016
13
(4)
(16)
(7)
(2)
(5)
20
55%
13%
Q3
2017
12
(13)
(4)
(6)
(10)
(14)
21
59%
22%
Q4
2017
12
(6)
(5)
(7)
(7)
(15)
21
57%
27%
NPS: Personal Banking
NPS: Business Banking
NPS: Commercial Banking (4)
Trust(5)
Notes:
Source: GfK FRS 6 month rolling data. Latest base sizes: NatWest (England & Wales) (3361) Royal Bank of Scotland (Scotland) (440). 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. Latest base sizes: Ulster Bank NI (294) Ulster Bank RoI (275) 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”.
Source: Charterhouse Research Business Banking Survey, YE Q4 2017. Based on interviews with businesses with an annual turnover up to £2 million. Latest base sizes: NatWest
England & Wales (1245), RBS Scotland (437). Question: “How likely would you be to recommend (bank)”. Base: Claimed main bank. Data weighted by region and turnover to be
representative of businesses in Great Britain.
Source: Charterhouse Research Business Banking Survey, YE Q4 2017. Commercial £2m+ in GB (RBSG sample size, excluding don’t knows: (904). Question: “How likely would you be
to recommend (bank)”. Base: Claimed main bank. Data weighted by region and turnover to be representative of businesses in Great Britain.
Source: Populus. Latest quarter’s data. Measured as a net of those that trust RBS/NatWest to do the right thing, less those that do not. Latest base sizes: NatWest, England & Wales
(948), RBS Scotland (203).
(1)
(2)
(3)
(4)
(5)
36
Taking paper out of
the mortgage process
Our new paperless mortgage process is saving our
customers time and money. Documents which were
previously received by post can now be uploaded in seconds
via a safe, temporary portal. Signatures can also be
provided digitally, so customers no longer have to sign paper
documents and post them back to us.
As well as being much more convenient for customers, the
new process is also more environmentally friendly (saving
around 4.3 million sheets of paper a year) and much more
efficient. By removing the need for paper documents, which
need to be sent through the postal system, we are now able
to complete the appointment to offer in less than half the
time than before, from 23 working days to 11 on average.
37
Our operating environment
Our operating
environment
Key influences in our
operating environment
Our ability to serve customers and
create value for the long term is heavily
influenced by the environment in which
we operate. Every year we assess
the importance of these influences
both in terms of their relevance to our
stakeholders (including customers,
investors, UK government, employees
and civil society) and their potential
commercial impact on us.
external stakeholder engagement
and review of internal and external
sources. These considerations have
the potential to influence our ability to
serve customers and create value for
the long term. They carry both risks
and opportunities, driven by a mixture
of direct commercial impact and
stakeholder interest as a result of wider
societal trends.
An assessment of the most
important influences in our operating
environment are detailed below. The
influences have been identified through
various means, including, internal and
In the following pages, each influence is
briefly described together with selected
highlights in 2017 and with guidance on
where you can find more information
on that key influence.
Long term and
emerging considerations
Financial
capability
Social inequality
and financial
exclusion
Executive pay
h
g
H
i
t
s
e
r
e
t
n
l
i
r
e
d
o
h
e
k
a
t
S
Support for
enterprise
Climate
change
Diversity, equality
and inclusion
Current priority considerations
Trust in the
banking sector
Privacy
Conduct
Banking
regulation
Housing
Skills and capability of staff
UK infrastructure
Commercial impact
Health of the UK
and global economy
Political landscape
Competition
and innovation
Changing customer
needs
High
Critical considerations that support our ambition to be No.1 for customer service, trust and advocacy
Customer
service
Employee engagement
and wellbeing
Ethics, culture
and integrity
Operational
competence
Strength and
stability
38
Influences explained and where to find out more.
Where to find
out more
Chairman
and CEO
review
2017
Performance
Summary
Business
model and
strategy
Our
Stakeholders
Our
Colleagues
Our
Customers
Key
economic
indicators
Risk
overview
Sustainable
Banking pages
on rbs.com
Key Influences
Definition
Selected highlights in 2017
Critical considerations that support our ambition to be No.1 for customer service, trust and advocacy
Where to find
out more
Customer
service
Employee
wellbeing &
engagement
Ethics, culture
and integrity
Delivering excellent customer
service is essential for the banking
sector to build trust. Maintaining
and growing a loyal and satisfied
customer base requires an
appropriate digital and physical
presence and clear distribution
strategy.
Employee engagement and
satisfaction is highly correlated
with overall performance. A
key determinant of the bank’s
success will be ensuring all of its
employees are clear on their roles
and responsibilities, capable and
feel motivated to do the best job
possible.
Professional integrity is a key
governance consideration in
the banking sector. Services
provided must satisfy the highest
professional standards, avoid
conflicts of interest, bias, or
negligence, and ensure that all
stakeholders, including employees,
contractors and business partners,
are treated fairly and equally.
Operational
competence
Delivering appropriate digital
infrastructure is important to
ensure a ‘technically-able’ bank
that supports its long-term future.
Cyber security is also a vital part
of providing a safe and secure
banking service. Banks need to
proactively identify and manage
risks and efficiencies in their
operations and facilities.
Strength and
stability
Banks need to demonstrate their
ability to survive financial stress
arising from economic turmoil, and
potential large scale fines and legal
cases resulting from historic events.
They must also demonstrate they
have sufficient capital, liquidity and
resilience as well as the ability to
generate sufficient returns.
• Approximately 5.5 million active users regularly benefit from
the speed and convenience of our mobile banking app with
+51 net promoter score.
• Closed Loop Feedback provides us real-time feedback from
our customers which we are listening to, learning from and
acting on every day.
• Rolled out a Service Excellence programme, to further
improve our customer service.
• Our View, the bank’s annual employee feedback survey
showed that engagement is up by seven percentage points to
83% compared with 2016, the highest level since 2002.
• Launched ‘Building a great place to work’ to support our
commitment to giving our employees a fulfilling career, fair
pay, relevant training and good leadership.
• Actively supported Mental Health Awareness Week, enabling
employees to speak more openly about mental health and
support each other.
•
Improved our position in the latest Banking Standards Board
(BSB) survey, which seeks to promote high standards of
behaviour and competence across the UK banking industry.
RBS improved in all nine BSB survey categories compared
with 2016 results and in quartile performance against its
peer group.
• Employed the greatest number of UK employees with
professional banking qualifications. RBS employs more
bankers with a professional banking qualification from the
Chartered Banker Institute than any other UK financial
institution. Members are required to comply with the
annual CPD requirements of the professional body. The
Chartered Banker Institute is the UK’s only and world’s oldest
professional body for banking.
• ‘Speak Up’, our whistleblowing service, received 289
reports compared to 213 reports in 2016. The service
allows employees to raise concerns in a safe and supportive
environment so that potential issues can be addressed quickly
and effectively.
• RBS is a founding partner of ‘Friends Against Scams’, the
•
National Trading Standards Scams Team’s fraud and scams
awareness initiative. More than 20,000 colleagues have
completed the relevant training.
Improved the in-branch digital experience with TechXperts
in every branch to advise and support customers on how to
have a secure online banking experience. The in-branch wi-fi
capability has also been improved.
• There has been a sustained improvement in the number of
customers impacted by fraud with a 26% reduction compared
with 2016.
• Resilient, simple and efficient systems are critical to building
the number one bank for customer service, trust and
advocacy. Our systems are available 99.9% of the time.
• The CET1 ratio increased by 250 basis points to 15.9% in 2017
despite absorbing significant additional legacy costs.
• RWAs reduced by £27 billion (12%), ending the year at
£201 billion (from £228 billion in 2016). This reduction was
driven by NatWest Markets, where RWAs fell by £16.8 billion
due to the continued run-off of the legacy business and
mitigation activities in the core business, together with active
management of the lending book in Commercial Banking.
• A key milestone in our ring-fencing journey was achieved
through the application to the Court of Session in Edinburgh to
initiate a ‘Ring-Fencing Transfer Scheme’ so as to carry out a
legal transfer of some of our business.
39
Our operating environment
Key Influences
Definition
Selected highlights in 2017
Where to find
out more
Current Priority Considerations
Banking
regulation
Banks continue to operate in an
environment where regulatory
change is frequent and increasingly
complex requiring significant time
and resources.
Conduct
Banks remain focused on putting in
place measures to prevent issues
related to conduct. At the same
time, legacy conduct issues, such
as RMBS, continue to have major
financial and reputational impacts.
• RBS continues to deliver on its plan to build a strong, simple
and fair bank for both customers and shareholders. To support
this, and in preparation for the UK ring-fencing regime, the
previously reported operating segments were realigned in Q4
2017 and a number of business transfers completed. Refer to
the Report of the directors for further details.
• NatWest Markets aligned the majority of Functions and
Services employees in 2017 in preparation for operating as a
non-ring-fenced bank.
• RBS Group published a Tax Strategy.
• Regulatory changes that RBS worked on in 2017 included
MiFID II / MiFIR, Open Banking and reform of capital and
liquidity regulations.
• A settlement with the Federal Housing Finance Agency (FHFA)
and the California State Attorney General in the US was
reached.
• The 2008 rights issue shareholder litigation was resolved.
Competition and
Innovation
The banking sector is going through
a period of rapid change with
regulatory and technological trends
converging to increase competition.
Together with accelerating
innovation, the UK implementation
of the Open Banking Standards
raises the potential for significant
disruption of the traditional banking
business model.
• Partnered with FreeAgent, an Edinburgh-based Fintech
•
that provides online accounting software, to help our small
business customers track their finances and report their taxes
digitally.
Introduced a chat bot called ‘Cora’ that answers questions
from customers 24/7, freeing up colleagues time so that
they can help customers with more complex queries. Cora
currently handles over 100,000 customer conversations per
month across our web and online channels.
• Plans are in place for Open Banking, including customer
education around security awareness.
Diversity,
equality &
inclusion
The inclusion agenda is quickly
moving up the corporate agenda
and driving the need to foster
corporate cultures that value
diversity, teamwork, quality
leadership and training.
• Made progress against our 2020 targets on our four priorities:
Lesbian, Gay, Bisexual, Transgender (LGBT), Gender
Balanced, Disability Smart, Ethnically Diverse.
• Supported the International Day of Persons with Disability
sharing stories across the bank and with customers.
• Recorded an increase in the total number of female leaders
within our top three senior layers, including the appointment
of two new female non-executive board directors.
• RBS was named a Times Top 50 employer for Women and
rated as a Stonewall Top Global Employer.
Health of the
UK and global
economy
The outlook for the UK and global
economy remains uncertain due
to a number of factors including:
the UK’s vote to leave in the
EU referendum, wider political
instability, an extended period of
low interest rates, high debt levels
and delays in normalising monetary
policy.
• The UK economy grew by 1.8% in 2017, down slightly from 1.9%
in 2016, below the long-run average of more than 2%.
• The main development in 2017 was higher inflation. Along with
weak wage growth it meant that households’ incomes were
squeezed.
• The eurozone economy was 2.7% larger in the final quarter
of 2017 than in the same period of 2016, up from 1.8% in 2016.
Unemployment fell but remained high at 8.7%.
• US growth accelerated to 2.3%. The job market remained
buoyant with 1.8 million jobs added during the year and the
unemployment rate falling to 4.1%.
•
In 2017 NatWest Markets announced its plan to repurpose the
existing licence in the Netherlands in the event of loss of EU
passporting as a result of the UK’s departure from the EU.
• We engage the UK Government and opposition political parties
to understand their priorities for the sector.
Political risks continue to evolve
with the UK’s vote to leave in
the EU referendum creating
significant economic, political and
regulatory uncertainty. Heightened
geopolitical tensions and rising
populism in advanced economies
have also contributed towards a
rise in uncertainty.
Political
landscape
40
Our operating environment
Key Influences
Definition
Selected highlights in 2017
Where to find
out more
Privacy
Skills and
capability
of staff
As a bank our customers not only
trust us with their finances but
also with their information. It is
therefore important that we deal
with their information the right
way. By doing the right thing in
meeting the privacy expectations
of our employees, customers and
shareholders we build confidence,
which in turn builds trust and
therefore has a tangible influence
on delivering the bank’s ambition to
be No.1 for customer service, trust
and advocacy.
Financial services companies face
competition for skilled employees,
in particular with specific skillsets
(e.g. IT). As the industry transforms
to more digital banking, the need
for such skills may become more
acute.
Support for
enterprise
Trust in the
banking sector
A healthy economy needs a pipeline
of new and growing businesses
to spur innovation and growth.
Entrepreneurs, start-ups and
small businesses require particular
support in terms of financing and
building market share.
Trust in traditional large UK
banks often lags behind smaller
competitors and new market
entrants. Rebuilding trust remains a
key challenge.
Housing
Demand for housing in some
parts of the UK and Republic of
Ireland outstrips supply, reducing
affordability and harming family
disposable incomes.
• The bank takes privacy and the protection of customers
and employee data very seriously, and has worked with
other banks to make sure it is factored into the Open Baking
architecture.
• The new General Data Protection Regulation (GDPR)
comes into effect on 25 May 2018 and brings a new era in
safeguarding personal data by businesses.
• The bank has been preparing for GDPR since April 2016.
• The GDPR grants new and enhanced rights for individuals
in relation to their personal information and, as 25 May
approaches, the bank will communicate more fully with
customers and clients about these changes and how they
can exercise their rights.
• Delivered the Entrepreneurial Development Academy, a
programme designed in partnership with E-Spark, specifically
for RBS employees to develop an entrepreneurial mindset.
Over 5,900 employees participated in the programme.
• Over 64,600 employees underwent training by the Chartered
Banker Professional Standards Board (CB:PSB) with 94% of
applicable staff achieving the CB:PSB Foundation Standard.
Introduced a new tool to help our people learn and develop for
example career development days and mobile learning.
• RBS was recognised as a Top 5 Apprentice UK Employer.
•
• Rolled out ESME, a digital platform which offers SMEs the
ability to digitally obtain loans quickly, potentially within an
hour, on a 24/7 basis.
• Launched Pitch App to help entrepreneurs communicate with
impact.
• Entrepreneurial Spark opened an accelerator hub in London,
our 12 accelerators are now in every region of the UK.
• Customer trust in NatWest in England & Wales has met its
2017 target of 57%, improving from 55% at Q4 2016 to 57%
at Q4 2017.
• Trust in RBS in Scotland has increased strongly year on year
(from 13% in Q4 2016 to 27% in Q4 2017) but remains behind its
target of 38% for 2017.
• Our Board Sustainable Banking Committee hosted
stakeholder engagement sessions and two retail shareholder
events.
• Board Sustainable Banking Committee held a stakeholder
engagement session on housing, inviting a variety of external
stakeholder groups to share their perspectives with us.
• Your Mortgage Awards 2016 - 2017: Best First-Time Buyer
Mortgage Lender, Best Bank.
• What Mortgage Awards 2017: Best National Bank, Best
Lender Customer Service.
• Gross new mortgage lending of £33.9 billion in UK PBB,
Ulster Bank RoI, Private Banking and RBSI.
Long term and emerging considerations
Changing
customer needs
Customer needs are changing and
different types of customer often
have significantly different banking
needs. In order to be attractive
and useful, financial products
and services need to fit in with
customers’ lives and be flexible
to differing levels of digital and
financial understanding.
• 68% of our personal customers are active across our mobile
and online banking platforms.
• Launched Strategic Account Opening meaning our personal
customers can open an account in five minutes.
• Launched the UK’s first ever paperless mortgage - customers
can now apply for a completely digital mortgage which uses
the latest technology to securely share and verify documents
online.
• Our Home Insurance Quote and Buy system gives customers
cover in less than fifteen minutes.
• One of the first large UK banks to launch robo-investment
advice service through NatWest Invest.
41
Key Influences
Definition
Selected highlights in 2017
Where to find
out more
Climate change
Executive pay
Financial
capability
Social inequality
& financial
exclusion
UK
infrastructure
The Paris Agreement provides a
framework by which the world will
seek to prevent dangerous climate
change but further challenges
remain. Climate change presents
both physical and transition risks.
The transition to a low carbon
economy is also presenting
opportunities for low carbon
sectors of the economy. There are
also increasing regulatory and
stakeholder expectations of banks
to address climate change.
• RBS has pledged its support to the Task Force on Climate-
related Financial Disclosures (TCFD).
• Board Sustainable Banking Committee held a stakeholder
engagement session on Climate risk, inviting a variety of
external stakeholders groups to share their perspectives
with us.
• We have been recognised by InfraDeals as the leading lender
to the UK renewables sector by number of transactions over
the past six years (2012- 2017).
• Set a new carbon reduction target using a ‘science-based’
method, aligning our ambition with the Paris Climate
Agreement.
Shareholders, employees and
the general public have shown
increasing concerns about the
inequality in pay in large companies
between senior executives and the
general workforce.
• Bonus pools have fallen by around 75% since 2010, aligned
with the restructuring that has taken place and the actions
taken by Group Performance and Remuneration Committee.
Remuneration is allocated over a multi year basis, with the
ability to apply malus and clawback to encourage good
behaviours and a long-term focus.
•
Introduction of a new policy for Executive Directors in 2017,
with significantly lower maximum award levels and with
increased shareholding requirements.
• MoneySense, our financial education programme for 5 to 18
year olds, won Digital Information Product of the Year (PPA
Digital Awards) in recognition of how it has adapted to the
digital age with engaging and interactive content to support
teachers and parents.
• Completed over one million Financial Health Checks in 2017.
• Helped over 680,000 customers in financial hardship find a
solution to their debt problem.
• Provided over 27,500 customers with ‘breathing space’
•
•
and extra time for them to find support and to put in place a
repayment arrangement.
Innovative Citizens Advice partnership, where Citizens Advice
colleagues are located within one of our Specialist Support
teams providing independent advice to over 900 of our most
vulnerable customers.
In partnership with the Money Advice Trust, we developed
industry leading Addictions Training for our colleagues and
use across the sector.
• Banks like RBS have a key role supporting this investment,
through lending and sourcing global capital markets financing.
A customer’s ability to manage
money well, both day to day and
through significant life events,
and their ability to handle periods
of financial difficulty. It focuses
on developing financial skills
and knowledge, attitudes, and
motivation, which can help
customers avoid falling into financial
difficulty and can improve their
financial health and well being.
The increasing gap between rich
and poor and the rising cost of living
means many UK consumers find
themselves in precarious financial
situations and are struggling
to manage their money day to
day. This, with future economic
uncertainty, may well lead to
increased bad debt and over
indebtedness. In addition millions
do not have access to mainstream
financial services such as free
ATMs, credit, and banking products
together with lack of digital footprint
and skills and are forced to rely on
high-cost products.
The UK has a significant need
for new infrastructure, such as
energy, transport and project
finance. Banks have an important
role in supporting infrastructure
investment across the UK.
Independent assurance
The Royal Bank of Scotland Group plc appointed Ernst & Young
LLP to provide limited independent assurance over selected
sustainability content within the Strategic Report (“the Report”),
as at and for the period ended 31 December 2017. The assurance
engagement was planned and performed in accordance with the
International Standard for Assurance Engagements (ISAE) 3000
Revised, Assurance Engagements Other Than Audits or Reviews
of Historical Financial Information.
These procedures were designed to conclude on:
• The consistency of selected narrative claims on sustainability
with underlying performance information, and;
• The accuracy and completeness of the sustainability
performance indicators listed below:
Value (£) of attempted fraud prevented in the UK
Total gender balance in top 3 senior layers
Total number of people supported through our
enterprise programmes
% personal customers who are digitally active
Total number of Financial Health Checks
Banking Standards Board survey results
% of staff who received CB:PSB standards certification
Total scope 1 and 2 location based CO2e emissions and
Scope 3 emissions from business travel.
An unqualified opinion was issued and is available on
rbs.com, along with further details of the scope, respective
responsibilities, work performed, limitations and conclusions.
Keeping the UK
economy moving
Whether it’s supporting tourism or business, and creating
local jobs, airports provide an essential service and play a
vital role in the UK economy.
We’re helping to support infrastructure projects right across
the UK, including airports. By giving them access to the
funding they need to invest in their future and enhance
the passenger experience, we’re playing our part keeping
people, goods – and the economy – moving.
We’ve helped Gatwick with seven bond issuances – including
its September issue of £350 million 22-year bonds; prepared
Manchester Airports Group for its first bond issuance since
2014, and provided long-term debt financing for Leeds
Bradford and London Luton airports.
Reflecting on the support he received in 2017, Neil Thompson,
Chief Financial Officer for Manchester Airport Group says:
“We were delighted to work with NatWest for the launch of
this important bond transaction. The bond will form a key
part of the company’s capital structure to fund future growth
of Manchester Airport Group’s airports.”
43
Key economic indicators
The UK economy grew by 1.8% in 2017, down
slightly from 1.9% in 2016. That was below
the long-run average of more than 2%.
In a healthy job market, the number of
people in work increased by around
400,000 and unemployment fell to 4.3%,
the lowest rate since 1975. As a result of
the 17% fall in the value of sterling that
began in 2015, inflation accelerated,
peaking at 3.1%. Higher inflation
was one reason the Monetary Policy
Committee (MPC) voted to increase
Bank Rate to 0.5% in November.
With wage growth of around 2.5%,
households’ spending power was
squeezed. Business profitability
remained strong and business
investment grew by 1.7% in the year to
the third quarter. House price inflation
remained around 5%.
Summary
The main development in 2017 was
higher inflation. Along with weak wage
growth it meant that households’
incomes were squeezed. As a result,
household spending grew by 1.0% in the
year to the third quarter and retail sales
volumes increased by 1.4% in the year
to December. While some households
curbed their spending others ran down
their savings – the saving ratio reached
a record low of 4.0% in the first quarter
– and consumer credit grew by 9.5%
in the twelve months to December.
Employment continued to rise strongly
but wage growth remained modest for
most of the year, meaning domestically-
generated inflationary pressures were
muted. However, the MPC judged that
the pace of growth – including the still-
improving labour market – combined
with what it judges to be a slower rate
of potential expansion would have
resulted in higher than acceptable
inflation had it not raised Bank Rate.
In indicating that Bank Rate would rise
further, the Committee emphasised that
subsequent increases would be gradual
and limited. At the year’s end, markets
believed that Bank Rate would be at or
close to 0.75% in December 2018.
The Republic of Ireland appears to
have grown strongly. Unemployment
continued to fall, ending the year
at 6.2%, its lowest rate since 2008.
Consumer price inflation remained
subdued at 0.4%. House price inflation
accelerated to around 12% from 9.0% in
2016. This returned prices to their 2009
level and still almost one-quarter below
the peak in nominal terms.
The eurozone economy was 2.7% larger
in the final quarter of 2017 than in the
same period of 2016, up from 1.8% in
2016. Unemployment fell but remained
high at 8.7%. While inflation increased to
1.4% it remained short of the European
Central Bank’s target of “at or below”
2%. The ECB continued to provide
stimulus through low interest rates
and quantitative easing. It announced
in October that it would reduce the
amount of its monthly asset purchases
while extending the period during which
it will make purchases until at least
September 2018.
US growth accelerated to 2.3%. The
job market remained buoyant with
1.8 million jobs added during the year
and the unemployment rate falling to
4.1%. However, wage growth remained
modest and consumer price inflation
was well below the Fed’s 2% target.
However, the central bank continued
to tighten policy with three rate rises
during the year, taking the Fed Funds
Target Rate to 1.25% - 1.50%.
In China, growth was broadly stable at
6.9%. This was in part a consequence
of continued stimulus, which resulted
in a further rise in indebtedness.
Recognising this, the authorities took
steps to limit the growth of credit.
Our operating environment
UK gross domestic
product growth (%)
1.9
1.8
2016
2017
Unemployment rate,
UK (%)
4.8
4.3
2016
2017
Number of people
in employment,
UK (thousands)
31,792
32,207
2016
2017
44
Our operating environment
Risk overview
Effective risk management is at the heart of the successful
development and execution of the RBS strategy
An emphasis on strong risk
management has a key role in
positioning RBS to prepare for, and
respond to, developments in the wider
competitive, economic and regulatory
environment. Risk appetite is set in line
with overall strategy and approved by
the Board. Current and emerging risks,
that could materially affect the delivery
of the strategy, are identified and
managed through the risk management
framework.
Progress in 2017
RBS continued to make progress against
its strategic objectives by reducing risk
and strengthening both the balance
sheet and the capital position.
There was a strong focus during 2017
on developing an enhanced operating
model for the risk management
function. This work aims to ensure the
function continues to meet the needs
of our evolving business as well as the
structural requirements of the UK’s
ring-fencing legislation.
The merger of parts of the former
Conduct & Regulatory Affairs function
with RBS’s Risk function took effect on
1 January 2017. This integration was
designed to take advantage of synergies
between the two functions. Work
continued through the year to optimise
these. In addition, there continued to be
an emphasis on refining the risk appetite
framework throughout 2017. As well
as consolidating the progress made in
previous years, further advances were
made to enhance the framework in line
with RBS’s structural reform. Significant
emphasis was placed on reviewing the
current measures, along with associated
limits and triggers, for each of our
material risks and further embedding
the reporting of risk profile compared to
risk appetite across RBS.
Risk culture continued to be at the
forefront of our activity as RBS moves
towards its aim of making risk simply
part of the way colleagues work and
think. In support of this, during 2017
the RBS-wide action plan focused
on building clarity, and developing
capability. Work to standardise risk
culture assessment and reporting has
enabled progress to be measured across
RBS as well as at an individual franchise
and function level. In turn, this informed
the risk culture element of performance
reviews for RBS’s Executive Committee.
and other banking services. During
2017, oversight of the implementation
programme was executed in parallel
with a strategic assessment of the
threats and opportunities in the mid-
to long-term. Robust analysis and
oversight will continue as the
landscape evolves.
Throughout 2017, work continued
to consolidate enhancements to
the operational risk management
framework. The framework plays a
key role in helping RBS maintain a
safe and secure environment for its
customers and is central to the overall
risk management strategy. There was
an ongoing focus on risk and control
assessment, particularly relating to
the most material products, processes
and services. Significant progress
was made in strengthening the fraud
defence framework and reducing fraud
losses as a result of the successful
implementation of various tactical and
strategic solutions. The emphasis on
understanding and managing the risks
relating to RBS’s transformation agenda
remained a key theme during the year.
Cyber Security
In an increasingly digital landscape
across the industry, cyber security
continued to be a priority issue in
2017. RBS has a multi-layered defence
approach and continues to invest in its
defences as the external threat evolves.
As part of this ongoing focus, a number
of enhancements were made during the
year ranging from improved protection
of IT systems to mandatory awareness
training for all employees. RBS has
continued to participate in industry-
wide initiatives to monitor and anticipate
developments, identify vulnerabilities
and share best practice. However,
ongoing vigilance will be essential as the
threat continues to evolve.
Open Banking
RBS welcomes the Competition &
Markets Authority initiative to provide
consumers with more choice and more
control over their money and financial
information by making it easier to
compare the details of current accounts
Innovation
RBS continues to embrace innovation
in the field of financial technology.
From the roll-out of the award-winning
NatWest and Royal Bank of Scotland
mobile app in 2011 to the launch, in 2017,
of the NatWest Invest online investment
advice service, developments with
the potential to improve the banking
experience are an integral element
of the customer service proposition.
Strong risk oversight has kept the
security agenda at the forefront of these
developments. Throughout the year
RBS continued to focus on innovation
while emphasising the importance of
safety and protection for customers.
Financial Crime
Financial Crime was a key area of
focus during 2017. The function
continues to monitor the external
environment and developments that
could affect or change RBS’s exposure
to financial crime risk. In particular
there was a focus on the anti-money-
laundering control environment, with
additional enhancements to policies
and procedures to address the new
regulatory requirements of the Fourth
Money Laundering Directive. There
was also a strong emphasis on the
implementation of proportionate and
risk-focused customer due diligence
standards – with an increased focus
on the management of higher-risk
customer segments. While progress
was made during the year, more work
is required and RBS continues on its
journey of improvement in respect
of these controls. Enhancements
to sanctions screening were also
introduced.
Anti-Bribery & Corruption (ABC)
RBS is committed to ensuring it acts
responsibly and ethically, both when
45
Our operating environment
pursuing its own business opportunities
and when awarding business.
Consequently it has embedded
appropriate policies, mandatory
procedures and controls to ensure
its employees, and any other party
it does business with, understand
these obligations and abide by them,
whenever they act for, or on behalf of,
RBS. The requirements of RBS’s ABC
Policy apply to all RBS employees and
non-employees, in every part of the
business. All employees are required
to complete ABC training on an annual
basis, with targeted training appropriate
for certain roles.
RBS considers ABC risk in its business
processes where there could be a risk
of offering an improper advantage
or being perceived to do so. This
includes, but is not limited to, corporate
donations, charitable sponsorships,
political activities and commercial
sponsorships.
To mitigate against bribery and
corruption risks, RBS’s ABC policy and
supporting mandatory procedures
require employees to assess bribery
and corruption risk, and conduct
the appropriate level of ABC due
diligence on business activities. Where
appropriate, there is a requirement
for ABC contract clauses in written
agreements. In adopting this approach,
RBS aims to protect the interests
of its customers, shareholders and
employees.
Reputational Risk
Reputational risk issues can develop
from either strategic choices or
conduct issues and may even arise
from customer activity. RBS continues
to remain alert to the reputational risk
it is exposed to – both in its day-to-
day business and as a result of legacy
issues. During 2017, further work was
done to enhance the reputational risk
framework and embed it across all
business lines. This work will continue
in 2018 as RBS continues to evolve its
risk management practice to meet the
challenges of the changing external
environment.
Key Metrics
Risk-weighted assets (RWAs)
RWAs reduced by £27 billion (12%),
ending the year at £201 billion (from
£228 billion in 2016). This reduction
was driven by NatWest Markets,
where RWAs fell by £16.8 billion due
to the continued run-off of the legacy
46
business and mitigation activities in
the core business, together with active
management of the lending book in
Commercial Banking.
against RBS relating to those securities
was withdrawn. Further details on these
issues can be found in the Litigation,
Investigations & Reviews section.
Common Equity Tier 1 ratio
The CET1 ratio increased by 250 basis
points to 15.9% in 2017. This was well
above the 13% target and reflected
the profit in the year and the RWA
reductions in NatWest Markets and
Commercial Banking.
Leverage ratios
The leverage ratio increased by 20 basis
points to 5.3% during 2017 reflecting the
increase in the CET1 position. The Bank
of England leverage ratio increased by
50 basis points as a result of increased
central bank reserves which are
excluded from the leverage exposure
measure.
Stress testing
Under the hypothetical adverse
scenario in the Bank of England 2017
stress test, RBS’s low-point CET1
ratio was below the CET1 ratio hurdle
rate and the systemic reference
point. Calculated after the impact of
management actions, RBS’s CET1 ratio
was above the minimum requirement.
The Tier 1 leverage ratio remained
above the minimum requirement
throughout the test.
As a result of the steps RBS had already
taken to strengthen its capital position,
a revised capital plan was not required
by the PRA.
Liquidity and funding
RBS maintained a robust liquidity and
funding risk profile in 2017. Its loan-to-
deposit ratio was 88% at 31 December
2017, compared with 91% in 2016. The
latest Internal Liquidity Adequacy
Assessment Process (ILAAP) showed
that RBS is in a strong position to
withstand liquidity stress scenarios. It
suggested that RBS’s liquidity portfolio
was large enough to cover more than
168% of the expected outflows in the
worst of three severe scenarios.
Litigation and conduct
Litigation and conduct costs of £1,285
million included a £664 million provision
in relation to various investigations
and litigation matters relating to RBS’s
issuance and underwriting of residential
mortgage-backed securities (RMBS)
and additional PPI provision of £175
million. In July 2017 RBS reached a
settlement with the Federal Housing
Finance Agency (FHFA), as a result of
which the FHFA’s outstanding litigation
Climate risk
While no climate-related risks have
been identified that would have a
major impact on RBS’s strategy over
a five-year horizon, RBS manages
and monitors a number of associated
threats. These include physical impacts,
such as flooding, as well as the impact
of climate-related regulation, though
exposure to the sectors most vulnerable
to climate risks, or climate-related
regulation, has significantly reduced
(for example RBS exposure to the power
and oil & gas sectors has fallen to 1.2%
of total lending exposures in 2017).
RBS supports the work of the Financial
Stability Board’s Task Force on Climate-
Related Financial Disclosures (TCFD).
Adoption of the TCFD recommendations
is an important step forward in pricing
climate-related risks and opportunities
as the transition to a low-carbon
economy – under the terms of the Paris
Climate Agreement – progresses.
Top and emerging risks
RBS employs a continuous process
for identifying and managing its
top and emerging risks. These are
defined as scenarios that could have
a significant negative impact on
RBS’s ability to operate. A number
of scenarios attracted particular
attention in 2017. The factors discussed
below and elsewhere in this report
should not be regarded as a complete
and comprehensive statement of all
potential risks and uncertainties
facing RBS.
Refer to the Risk Factors section on
pages 372 to 402.
Macro-economic and
political risks
RBS remains vulnerable to changes
and uncertainty in the external
economic and political environment,
which have intensified in the past year.
Stress testing and scenario planning
is used extensively to inform strategic
planning and risk mitigation relating
to a range of macroeconomic and
political risks. Scenarios identified as
having a potentially material negative
impact on RBS include: the impact of
the UK’s exit from the EU; a second
Scottish independence referendum;
a UK recession including significant
Our operating environment
falls in house prices; global financial
market volatility linked to advanced
economy interest rate increases or
decreases; a protracted period of low
interest rates in the UK; vulnerabilities in
emerging market economies resulting
in contagion in RBS’s core markets; a
eurozone crisis; and major geopolitical
instability.
Risks related to the competitive
environment
RBS’s target markets are highly
competitive, which poses challenges
in terms of achieving some strategic
objectives. Moreover, changes in
technology, customer behaviour and
business models in these markets
have accelerated. RBS monitors
the competitive environment and
associated regulatory technological
strategy development and makes
adjustments as appropriate.
Impact of cyber attacks
Cyber attacks are increasing in
frequency and severity across the
industry. RBS has participated in
industry-wide cyber attack simulations
in order to help test and develop defence
planning. To mitigate the risks, a
number of control enhancements have
been delivered as part of a bank-wide
security programme. This has improved
the protection of IT systems and data
for both employees and customers.
Further enhancements are underway
and planned to ensure RBS continues
to maintain an effective control
environment as the cyber threats evolve.
Regulatory and legal risks
Future litigation and conduct charges
could be substantial. RBS is involved in
a number of litigation and investigations
matters, including: ongoing class action
litigation, securitisation and mortgage-
backed securities related litigation,
investigations into foreign exchange
trading and rate-setting activities,
continuing LIBOR-related litigation and
investigations, and investigations into
the treatment of small and medium-
sized business customers in financial
difficulty, anti-money laundering,
sanctions, mis-selling (including
mis-selling of payment protection
insurance products). Settlements may
result in additional financial penalties,
non-monetary penalties or other
consequences, which may be material.
More detail on these issues can be found
in the Litigation, Investigations and
Reviews and Risk Factors sections of
the 2017 Annual Report and Accounts.
To prevent future conduct from resulting
in similar impacts, RBS continues to
embed a strong and comprehensive risk
and compliance culture.
Failure of information technology
systems
RBS’s information technology systems
are complex. As such, recovering from
failure is challenging. To mitigate these
risks, a major investment programme
has significantly improved the resilience
of the systems and further progress is
expected. System sustainability has
improved as we continue to simplify
and modernise our infrastructure and
applications.
An increase in obligations to support
pension schemes
The value of pension scheme assets
may not be adequate to fund pension
scheme liabilities. The actuarial deficit in
the RBS pension schemes may therefore
increase, requiring RBS to increase its
current and future cash contributions.
An acceleration of certain previously-
committed pension contributions
was made in Q1 2016 to reduce this
risk. Depending on the economic and
monetary conditions and longevity of
scheme members prevailing at that
time, the actuarial deficit may increase
at subsequent valuations and is also
expected to be affected by ring-fencing.
Operational and execution risks
Increased losses may arise from a
failure to execute major projects
successfully. These currently include the
transformation plan, the restructuring
of NatWest Markets, compliance
with structural reform requirements
including the statutory ring-fencing
requirements implemented as a result
of the Independent Commission on
Banking and the implementation of
obligations under the policy framework
for resolution (including Operational
Continuity in Resolution). These
support the delivery of a robust control
environment and the embedding of
a strong and pervasive customer-
centred organisational and risk culture,
which are essential to meet RBS’s
strategic objectives. These projects
cover organisation structure, business
strategy, information technology
systems, operational processes and
product offerings. RBS continues to
work to implement change in line with its
project plans while assessing the risks
to implementation and is taking steps to
mitigate those risks where possible.
Risks to income, costs and business
models arising from regulatory
requirements
RBS is exposed to the risk of further
increases in regulatory capital
requirements as well as risks related
to new regulations that could affect its
business models.
RBS considers and incorporates the
implications of proposed or potential
regulatory activities in its strategic and
financial plans.
Inability to recruit or retain
suitable staff
There is a risk that RBS lacks sufficient
capability or capacity at a senior level
to deliver – or to adapt to – change.
RBS monitors people risk closely and
has plans in place to support retention
of key roles, with wider programmes
supporting engagement and training
for all employees.
47
Governance at a glance
Governance
at a glance
Our Board
The Board has fourteen directors comprising the Chairman, two
executive directors and eleven independent non-executive
directors, one of whom is the Senior Independent Director.
Biographies for each director can be found on pages 51 to 55.
The Board is collectively responsible for the long-term success
of RBS and delivery of sustainable shareholder value. Its role is
to provide leadership of RBS within a framework of prudent
and effective controls which enables risks to be assessed
and managed.
In 2017, the Board and committee evaluation process was
conducted internally by the Deputy Secretary and Director,
Corporate Governance, and overseen by the Company
Secretary.
Board of directors
Chairman
Executive directors
Howard Davies
Ross McEwan
Ewen Stevenson
Non-executive directors
Frank Dangeard
Brendan Nelson
Baroness Noakes
Mike Rogers
Mark Seligman
(Senior Independent Director)
Dr Lena Wilson
Alison Davis
Morten Friis
Robert Gillespie
Penny Hughes
Yasmin Jetha
Company Secretary
Aileen Taylor
Our Board committees
In order to provide effective
oversight and leadership, the
Board has established a number of
Board committees with particular
responsibilities. The work of the
Board committees is discussed in
their individual reports. The terms of
reference for each of these committees
is available on rbs.com.
The full Governance report is on pages
50 to 105 of the 2017 Annual Report
and Accounts.
Group Audit Committee
Assists the Board in discharging its
responsibilities for monitoring the
quality of the financial statements of
RBS. It reviews the accounting policies,
financial reporting and regulatory
compliance practices of RBS and RBS’s
systems and standards of internal
controls, and monitors the work of
internal audit and external audit.
Board Risk Committee
Provides oversight and advice to the
Board on current and potential future
risk exposures of RBS and future risk
strategy. It reviews RBS’s compliance
with approved risk appetite and
oversees the operation of the RBS
Policy Framework and submissions
to regulators.
Sustainable Banking Committee
Provides support to the Board in
overseeing actions being taken by
management to run a sustainable
long term business, with specific
focus on culture, people, customer,
brand and environmental social and
ethical issues.
Group Performance and
Remuneration Committee
Responsible for approving
remuneration policy and reviewing the
effectiveness of its implementation.
It also considers senior executive
remuneration and makes
recommendations to the Board on the
remuneration of executive directors.
Group Nominations and
Governance Committee
Assists the Board in the selection and
appointment of directors. It reviews
the structure, size and composition of
the Board, and the membership and
chairmanship of Board committees.
It considers succession planning
taking into account the skills and
expertise which will be needed on the
Board in future. Its remit also includes
governance oversight.
Technology and Innovation
Committee
The Technology and Innovation
Committee was established in August
2017 and is responsible for assisting the
Board in overseeing and monitoring
execution of the Group’s strategic
direction in relation to technology
and innovation.
Executive Committee
The Board is supported by the
Executive Committee comprising
the executive directors and other
senior executives. It supports the
Chief Executive in managing RBS’s
businesses. It reviews and debates
relevant items before consideration
by the Board. It is responsible for
developing and delivering RBS’s
strategy and it monitors and manages
financial performance, capital
allocation, risk strategy and policy, risk
management, operational issues and
customer issues.
UK Corporate
Governance Code
Throughout the year ended 31
December 2017, RBS has complied
with all of the provisions of the UK
Corporate Governance Code issued
by the Financial Reporting Council
dated April 2016 except in relation
to provision (D.2.2) that the Group
Performance and Remuneration
Committee should have delegated
responsibility for setting remuneration
for the Chairman and executive
directors. RBS considers that this
is a matter which should rightly be
reserved for the Board.
48
Viability statement
Viability statement
In accordance with provision C.2.2 of the UK
Corporate Governance Code, the Board of
Directors (the “Board” of RBSG (the “bank”))
have assessed the viability of the bank taking
into account the current position of the bank,
the Board’s assessment of the bank’s prospects,
and the bank’s principal risks, as detailed in
the strategic report on pages 46 and 47. The
Board’s assessment is further informed by
the application of regulatory standards of
capital and liquidity adequacy and stress test
thresholds under extreme conditions.
The Board consider a period of three
years to be an appropriate period
for the assessment to be made. This
period is within the bank’s strategic
plan and regulatory and internal
stress testing periods.
The bank’s business and strategic
plans provide long term direction and
are reviewed on, at least, an annual
basis, including multi-year forecasts
showing the expected financial position
throughout the planning horizon.
The base case plan indicates that the
bank will have sufficient capital and
liquidity resources over the three year
assessment period.
The bank’s base case plan is also tested
in a series of extreme stress scenarios
as part of internal and external
stress testing. Results from the stress
scenarios, including management’s
response, are used as part of the
Internal Capital Adequacy
Assessment Process (ICAAP) and
the Internal Liquidity Adequacy
Assessment Process (ILAAP). These
processes are summarised in the
Capital and Risk Management section
of the Annual Report and Accounts on
pages 157 to 165.
Assessments of the risks of the
greatest concern are captured through
the bank’s processes for continuously
identifying and effectively managing
the principal top and emerging
risks, as detailed on page 46 and
47 of the strategic report. These
assessments provide a view on the
impact of the top risks crystallising,
both individually and in combination.
These risks are outlined in the Risk
Overview and further discussed in
the Risk Factors, both contained in
the Annual Report and Accounts on
pages 150 and 156 and 372 to 402,
respectively, and include political,
legal, macroeconomic, regulatory,
operational and execution risks.
On the basis of this robust assessment
of the principal risks facing the bank,
the Board’s review of the business
and strategic plans and other matters
considered and reviewed during the
year, and the results of the stress
tests undertaken, the Board has a
reasonable expectation that the bank
will be able to continue in operation
and meet its liabilities as they fall due
over the period of the assessment.
49
comp
Governance
Our Board
Corporate governance
Report of the Group Nominations and Governance Committee
Report of the Group Audit Committee
Report of the Board Risk Committee
Report of the Sustainable Banking Committee
Directors’ Remuneration Report
Compliance report
Report of the directors
Statement of directors’ responsibilities
Page
51
57
63
65
73
81
83
106
109
116
50
Our Board
Chairman
Executive directors
Chief Executive
Howard Davies
Nationality: British
Date of appointment: 14 July 2015 (Board),
1 September 2015 (Chairman)
Experience: Howard was Deputy Governor of the
Bank of England from 1995 to 1997 and Chairman
of the UK Financial Services Authority from 1997
to 2003. Howard was Director of the London
School of Economics and Political Science from
2003 until May 2011. He is also Professor of
Practice at the Paris Institute of Political Science
(Sciences Po).
Howard was chair of the UK Airports Commission
between 2012 and 2015 and is also the author of
several books on financial subjects.
External appointment(s):
Independent director of Prudential plc and
chair of the Risk Committee
Member of the Regulatory and Compliance
Advisory Board of Millennium Management
LLC
Chair of the International Advisory Council
of the China Securities Regulatory
Commission
Member of the International Advisory
Council of the China Banking Regulatory
Commission
Committee membership(s):
Group Nominations and Governance
Committee (Chairman)
UBI DAC Board Oversight Committee
(Chairman)
External appointment(s):
None
Committee membership(s):
Executive Committee (Chairman)
Ross McEwan
Nationality: New Zealand
Date of appointment: 1 October 2013
Experience: Ross became Chief Executive of The
Royal Bank of Scotland Group in October 2013.
Between August 2012 and September 2013, he
was Chief Executive Officer for UK Retail, joining
from Commonwealth Bank of Australia where he
was Group Executive for Retail Banking Services
for five years. Prior to this he was Executive
General Manager with responsibility for the branch
network, contact centres and third party mortgage
brokers.
Ross has more than 25 years experience in the
finance, insurance and investment industries. Prior
to Commonwealth Bank of Australia, he was
Managing Director of First NZ Capital Securities.
He was also Chief Executive of National Mutual
Life Association of Australasia Ltd/AXA New
Zealand Ltd.
External appointment(s):
None
Committee membership(s):
Executive Committee
Chief Financial Officer
Ewen Stevenson
Nationality: British/New Zealand
Date of appointment: 19 May 2014
Experience: Prior to his current role, Ewen was at
Credit Suisse for 25 years where he was latterly
co-Head of the EMEA Investment Banking Division
and co-Head of the Global Financial Institutions
Group. He has over 20 years of experience
advising the banking sector while at Credit Suisse.
Ewen has a Bachelor of Commerce and
Administration majoring in Accountancy and a
Bachelor of Law from Victoria University of
Wellington, New Zealand.
51
Our Board
Independent non-executive directors
Frank Dangeard
Nationality: French
Date of appointment: 16 May 2016
Experience: Previously, Frank served as a non-
executive director of Crédit Agricole CIB, EDF,
Home Credit, Orange, Sonaecom SGPS, and as
Deputy Chairman and acting Chairman of Telenor
ASA. During his executive career he held various
roles at Thomson S.A., including Chairman and
Chief Executive Officer, and was Deputy Chief
Executive Officer of France Telecom. Prior to that
he was Chairman of SG Warburg France and a
Managing Director of SG Warburg.
Frank is a graduate of HEC and IEP in Paris and
of the Harvard Law School in the US.
Alison Davis
Nationality: British/USA
Date of appointment: 1 August 2011
Experience: Previously, Alison served as a
director of City National Bank, First Data
Corporation, Xoom, Presidio Bank, Diamond
foods and a non-executive director and chair of
the board of LECG Corporation. She has also
worked at McKinsey & Company, AT Kearney, as
Chief Financial Officer at Barclays Global
Investors (now BlackRock) and as managing
partner of Belvedere Capital, a private equity firm
focused on buy-outs in the financial services
sector.
Alison is a graduate of Cambridge University and
Stanford Business School.
Morten Friis
Nationality: Norwegian
Date of appointment: 10 April 2014
Experience: Previously, Morten had a 34 year
financial services career and held various roles at
Royal Bank of Canada and its subsidiaries
including Associate Director at Orion Royal Bank,
Vice President, Business Banking and Vice
President, Financial Institutions. In 1997, he was
appointed as Senior Vice President, Group Risk
Management and served as the Chief Credit
Officer then Chief Risk Officer from 2004 to 2014.
He was also previously a Director of RBC Bank
(USA), Westbury Life Insurance Company, RBC
Life Insurance Company and of RBC Dexia
Investor Services Trust Company.
External appointment(s):
Non-executive director of the RPX
Corporation
Non-executive director of Symantec
Corporation
Committee membership(s):
Board Risk Committee
Technology and Innovation Committee
External appointment(s):
Non-executive director and member of
the audit and compensation committees
of Unisys Corporation
Non-executive director, and member of
the audit committee of Fiserv Inc
Non-executive director and chair of the
audit committee of Ooma Inc
Committee membership(s):
Technology and Innovation Committee
(Chairman)
Group Performance and Remuneration
Committee
Sustainable Banking Committee
External appointment(s):
Member of the Board of Directors of The
Canadian Institute for Advanced
Research
Member of the Board of Directors of the
Harvard Business School Club of
Toronto
Non-executive director of Jackson
National Life Insurance Company
Committee membership(s):
Group Audit Committee
Board Risk Committee
52
Our Board
Independent non-executive directors
Robert Gillespie
Nationality: British
Date of appointment: 2 December 2013
Experience: Robert began his career with Price
Waterhouse (now PricewaterhouseCoopers) where
he qualified as a chartered accountant. He then
moved into banking joining SG Warburg, specialising
in corporate finance, and was appointed as Co-Head
and Managing Director of its US investment banking
business in 1989. Following the acquisition in 1995
of Warburg by Swiss Bank Corporation (which
subsequently merged with UBS), he then held the
roles of Head of UK Corporate Finance, Head of
European Corporate Finance and Co-Head of its
global business and CEO of the EMEA region. He
relinquished his management roles at the end of
2005, and was appointed Vice Chairman of UBS
Investment Bank. Robert left UBS to join Evercore
Partners, from where he was seconded to the UK
Panel on Takeovers and Mergers, as Director
General, from 2010 to 2013.
Penny Hughes, CBE
Nationality: British
Date of appointment: 1 January 2010
Experience: Previously a non-executive director and
chairman of the corporate compliance and
responsibility committee of Wm Morrison
Supermarkets plc. Other former non-executive
directorships include Skandinaviska Enskilda
Banken AB, Home Retail Group plc, Vodafone
Group plc, Reuters Group PLC, Cable & Wireless
Worldwide plc and The Gap Inc. Penny spent the
majority of her executive career at Coca-Cola where
she held a number of leadership positions, latterly as
President, Coca-Cola Great Britain and Ireland.
External appointment(s):
Independent board director at Ashurst LLP
Chairman of Council at the University of
Durham
Chairman of the Boat Race Company
Limited
Director of Social Finance Limited
Committee membership(s):
Group Nominations and Governance
Committee
Group Performance and Remuneration
Committee (Chairman)
Sustainable Banking Committee
GRG Board Oversight Committee
External appointment(s):
Non-executive Chairman of The Gym
Group plc. Also chair of the nominations
and member of the audit, risk and
remuneration committees
Non-executive director, chairman of the
remuneration committee and member of
the audit and nomination committees of
Superdry plc
Non-executive Chairman of IQSA Group
Limited
Committee membership(s):
Sustainable Banking Committee
(Chairman)
Board Risk Committee
GRG Board Oversight Committee
Group Nominations and Governance
Committee
53
Our Board
Independent non-executive directors
Yasmin Jetha
Nationality: British
Date of appointment: 21 June 2017
External appointment(s):
Non-executive director of Guardian Media
Group plc
Non-executive director of Nation Media
Group (East Africa)
Independent panel member of the Cabinet
Office Major Projects Review Group
Committee membership(s):
Sustainable Banking Committee
Technology and Innovation Committee
External appointment(s):
Non-executive director and Chairman of
the audit committee and member of the
remuneration and chairman’s committees
of BP plc
Member of the Financial Reporting Review
Panel
Committee membership(s):
Group Audit Committee (Chairman)
Group Nominations and Governance
Committee
Board Risk Committee
GRG Board Oversight Committee
(Chairman)
UBI DAC Board Oversight Committee
External appointment(s):
Deputy Chairman, Ofcom
Committee membership(s):
Board Risk Committee (Chairman)
Group Audit Committee
GRG Board Oversight Committee
Group Nominations and Governance
Committee
UBI DAC Board Oversight Committee
Experience: Previously a non-executive director
designate of Williams & Glyn. During her
executive career, Yasmin held Chief Information
Officer roles at Bupa and the Financial Times,
where she became the Chief Operating Officer.
She previously had a career spanning nearly 20
years at Abbey National PLC, latterly serving as
an Executive Director on the board.
Brendan Nelson
Nationality: British
Date of appointment: 1 April 2010
Experience: Brendan was global Chairman,
financial services for KPMG. He previously held
senior leadership roles within KPMG including as
a member of the KPMG UK board from 1999 to
2006 and as vice-Chairman from 2006 until his
retirement in 2010. He was Chairman of the
Audit Committee of the Institute of Chartered
Accountants of Scotland from 2005 to 2008.
President of the Institute of Chartered
Accountants of Scotland 2013/14.
Baroness Noakes, DBE
Nationality: British
Date of appointment: 1 August 2011
Experience: Baroness Noakes is an experienced
director on UK listed company boards with
extensive and varied political and public sector
experience. A qualified chartered accountant,
she previously headed KPMG’s European and
International Government practices and has
been President of the Institute of Chartered
Accountants in England and Wales. She was
appointed to the House of Lords in 2000 and has
served on the Conservative front bench in
various roles including as shadow treasury
minister between 2003 and May 2010.
Previously held non-executive roles on the Court
of the Bank of England, Hanson, ICI, Severn
Trent, Carpetright, John Laing and SThree.
54
Our Board
Independent non-executive directors
External appointment(s):
Non-executive Chairman of Aegon UK
Director of Experian plc and Chairman-
designate of its Remuneration
Committee
Committee membership(s):
Group Performance and Remuneration
Committee
Sustainable Banking Committee
External appointment(s):
Senior Independent Director of
Kingfisher plc
Non-Executive Director and chairman of
the audit committee of Smiths Group plc
Committee membership(s):
Group Nominations and Governance
Committee
Group Performance and Remuneration
Committee
UBI DAC Board Oversight Committee
External appointment(s):
Non-Executive Director of Intertek Group
plc, and member of its audit and
nomination committees.
Non-Executive Director of Scottish
Power Renewables Limited
Committee membership(s):
Sustainable Banking Committee
Mike Rogers
Nationality: British
Date of appointment: 26 January 2016
Experience: Mike has extensive experience in
retail banking and financial services. Mike joined
Barclays in 1986 where he undertook a variety of
roles in the UK and overseas across business
banking, wealth management and retail banking.
Mike was Managing Director of Small Business,
Premier Banking and UK Retail Banking and was
latterly Chief Executive of Liverpool Victoria
Group for 10 years.
Mark Seligman
Nationality: British
Date of appointment: 1 April 2017
(Senior Independent Director since
1 January 2018)
Experience: Mark, is a former senior investment
banker with broad financial services knowledge,
has substantial FTSE 100 Board experience
gained in various industry sectors, including as a
Committee Chair and Senior Independent
Director.
During his executive career, he held various
senior roles at Credit Suisse/BZW (including
Deputy Chairman, CSFB Europe and Chairman,
UK Investment Banking, CSFB); and previously
SG Warburg (ultimately as Managing Director,
Head of Advisory).
He has also previously served as a non-
executive Director of BG Group plc and as
Deputy Chairman of G4S plc.
Dr Lena Wilson, CBE
Nationality: British
Date of appointment: 1 January 2018
Experience: Experience: Lena is an experienced
CEO with an international career, who spent a
significant proportion of her executive career with
Scottish Enterprise, latterly as Chief Executive
from 2009 until 2017. Prior to that, Lena held the
role of Senior Investment Advisor to The World
Bank in Washington DC. Dr Wilson is a visiting
Professor at the University of Strathclyde and
has previously served as a member of Scotland's
Financial Services Advisory Board and as Chair
of Scotland's Energy Jobs Taskforce. In June
2015 she received a CBE for services to
economic development in Scotland.
55
Our Board
Chief Governance & Regulatory Officer and Board Counsel
Aileen Taylor
Nationality: British
Date of appointment: 1 May 2010
(Company Secretary)
Aileen is a fellow of the Chartered Institute
of Bankers in Scotland and a member of
the European Corporate Governance
Council. She is also a member of the FCA’s
Listing Authority Advisory Panel.
Experience: A qualified solicitor, Aileen joined
RBS in 2000. She was appointed Deputy Group
Secretary and Head of Group Secretariat in
2007, and prior to that held various legal,
secretariat and risk roles including Head of
External Risk (Retail), Head of Regulatory Risk
(Retail Direct) and Head of Legal and
Compliance (Direct Line Financial Services).
Executive Committee
The Board is supported by the Executive Committee comprising the executive directors and other senior executives. Details of the
composition of the Executive Committee and biographies of its members can be found at rbs.com>about us>board and
governance>ceo and board>executive committee.
56
Corporate governance
Chairman’s introduction
The corporate governance report provides an overview of key
roles and responsibilities of the Board, how the Board spent its
time in 2017 and how we communicate with shareholders. Board
effectiveness and performance evaluation are also covered.
As mentioned in my Chairman’s Statement on page 6, during
2017 the Board has considered a number of key strategic,
financial, regulatory and risk matters together with
legacy issues such as Williams & Glyn; Global Restructuring
Group (GRG); and various litigation matters including the 2008
shareholders’ rights issue litigation. The Board has also been
able to spend time focussing on forward-looking matters,
including ring-fencing preparations; innovation; technology; and
culture. The establishment of the Board’s Technology and
Innovation Committee will further support our focus on the
Group’s future strategic direction.
During 2017 we made a number of changes to our Board and
committee composition, to support our preparations for ring-
fencing and to ensure orderly succession planning. Further
details are set out below under Board and committee changes.
On 28 July 2017, the Group Board Directors were appointed to
the Board of Ulster Bank Limited (UBL) and the existing Directors
of UBL stepped down. This common board and committee
structure with Group, RBS plc and NatWest promotes
simplification and efficiencies.
I and my fellow directors are committed to observing high
standards of corporate governance, integrity and professionalism.
Our statement of compliance with the UK Corporate Governance
Code (the Code) can be found on page 106.
I would like to take this opportunity to thank my fellow Directors
for their continued commitment and dedication throughout 2017.
Howard Davies, Chairman of the Board
The Board
The Board has fourteen directors comprising the Chairman, two
executive directors and eleven independent non-executive
directors, one of whom is the Senior Independent Director.
Biographies for each director and details of which Board
committees they are members of can be found on pages 51 to
56. The Board considers that the Chairman was independent on
appointment and that all non-executive directors are independent
for the purposes of the Code.
Board and committee changes
A number of changes were made to Board and committee
composition during 2017, as follows:
Mark Seligman was appointed as a non-executive director
on 1 April 2017.
Yasmin Jetha was appointed as a non-executive director on
21 June 2017, and became a member of the Sustainable
Banking Committee with effect from 3 August 2017.
With effect from 3 August 2017 Baroness Noakes, Penny
Hughes and Mark Seligman were appointed members of the
Group Nominations & Governance Committee and Alison
Davis stepped down.
On 1 September 2017 the Technology and Innovation
Committee was established with Alison Davis as Chairman
and Yasmin Jetha and Frank Dangeard as members.
John Hughes was also appointed as a non-executive director on
21 June 2017, but unfortunately resigned on 1 September 2017
due to health reasons.
Also, with effect from 1 January 2018:
Sandy Crombie stepped down as a non-executive director
of RBS, and as Senior Independent Director and Chairman
of the Group Performance & Remuneration Committee;
Mark Seligman assumed the role of Senior Independent
Director and became a member of the Group Performance
& Remuneration Committee;
Robert Gillespie assumed the role of Chairman of the
Group Performance & Remuneration Committee; and
Dr Lena Wilson joined the board as a non-executive
director.
Dr Wilson became a member of the Sustainable Banking
Committee with effect from 31 January 2018.
In addition, with effect from close of business of the 2018 Annual
General Meeting, Penny Hughes will step down as a non-
executive director of RBS and Chairman of the Sustainable
Banking Committee. Mike Rogers will assume the role of
Chairman of the Sustainable Banking Committee.
Roles and responsibilities
The Board
The Board is collectively responsible for the long-term success of
RBS and delivery of sustainable shareholder value. The terms of
reference include a formal schedule of matters specifically
reserved for the Board’s decision and are reviewed at least
annually. They are available at rbs.com>about.
A number of Board members are designated as “Senior
Managers” under the PRA and FCA’s Senior Managers’ Regime
The role profiles of relevant directors reflect their regulatory
responsibilities and they receive ongoing support to ensure they
can demonstrate the reasonable steps they have taken to meet
their responsibilities. This support includes a practical handbook
for non-executive directors on the Senior Managers’ Regime.
Chairman
The role of Chairman is distinct and separate from that of the
Chief Executive and there is a clear division of responsibilities
with the Chairman leading the Board and the Chief Executive
managing RBS business day to day.
57
Corporate governance
The Chairman’s key responsibilities are to:
provide strong and effective leadership to the Board;
ensure the Board is structured effectively, observes the
highest standards of integrity and corporate governance,
and sets the tone from the top in terms of culture and
values;
build an effective and complementary Board with an
appropriate balance of skills and personalities, and as
Chairman of the Group Nominations and Governance
Committee consider succession planning for Board
appointments;
foster open and inclusive discussions at each Board /
Committee meeting which challenge executives, where
appropriate;
in conjunction with the Chief Executive and Company
Secretary, ensure that members of the Board receive
accurate, timely and clear information to enable the Board to
lead RBS, take sound decisions and monitor effectively the
performance of executive management;
ensure that the performance of individual directors and of
the Board as a whole and its committees is evaluated
regularly; and
ensure RBS maintains effective communication with
shareholders and other stakeholders.
Chief Executive
The Chief Executive has responsibility for all of RBS’s business
and acts in accordance with the authority delegated by the Board.
The Chief Executive’s key responsibilities are to:
exercise executive accountability for the RBS businesses
delivering operational management and oversee the full
range of activities of the customer businesses and functions;
develop, drive and deliver the strategy approved by the
Board;
drive and deliver performance against financial plans, acting
in accordance with authority delegated by the Board;
consult regularly with the Chairman and Board on matters
which may have a material impact on RBS;
lead the culture and values of RBS, creating an environment
where employees are engaged and committed to good
customer outcomes;
lead, manage and develop RBS’s senior leadership team,
ensuring professional capability is developed and that
succession coverage meets the needs of RBS;
ensure RBS has effective frameworks and structures to
identify, assess and mitigate risks; and
in conjunction with the Chairman and Company Secretary,
ensure the Board receives accurate, timely and clear
information.
Senior Independent Director
Throughout 2017 Sandy Crombie, as Senior Independent
Director, acted as a sounding board for the Chairman and as an
intermediary for other directors when necessary. He was also
available to shareholders to discuss any concerns they may
have, as appropriate. Mark Seligman assumed the role and
responsibilities of Senior Independent Director with effect from 1
January 2018.
Non-executive directors
Along with the Chairman and executive directors, the non-
executive directors are responsible for ensuring the Board fulfils
its responsibilities under its terms of reference. The non-
executive directors combine broad business and commercial
experience with independent and objective judgement and they
provide independent challenge to the executive directors and the
leadership team. The balance between non-executive and
executive directors enables the Board to provide clear and
effective leadership across RBS’s business activities.
The standard terms and conditions of appointment of non-
executive directors are available on rbs.com or from RBS
Corporate Governance and Regulatory Affairs.
Board Committees
In order to provide effective oversight and leadership, the Board
has established a number of Board committees with particular
responsibilities. Refer to page 48 of the Strategic Report for more
details. The terms of reference are available on rbs.com.
The GRG Board Oversight Committee was established in 2015 in
relation to the Financial Conduct Authority review of the treatment
of SME customers and continued to meet during 2017. The
Committee oversees and provides advice to the Board in relation
to the review, the external independent review of GRG instigated
by the Group and other matters generally related to GRG.
The US Risk Committee was disbanded in May 2017 following
the closure of the Connecticut branch.
A Board Oversight Committee was established in September
2017 in order to provide oversight of required enhancements to
the governance and risk management practices within Ulster
Bank Ireland DAC (UBI DAC), reporting to the Board, as
appropriate.
The NatWest Markets Working Group has continued to oversee
the transition towards establishment of the board of NatWest
Markets Plc which will be stood up in 2018.
Company Secretary
Aileen Taylor is the Company Secretary. Aileen also leads the
Bank’s Regulatory Affairs function.
The key responsibilities of the Company Secretary include:
working closely with the Chairman to ensure effective
functioning of the Board and appropriate alignment and
information flows between the Board and its committees,
including the Executive Committee. This includes Board
succession planning, induction, and professional
development;
providing support and advice to the Board on a broad range
of strategic, governance, legal and regulatory issues;
executive responsibility for Chairman/non-executive director
search and appointment process;
management of RBS’s profile with key stakeholders,
including oversight of relations with key influencers and
regulators;
defining and delivering the corporate governance and
regulatory affairs strategy across RBS; and
the provision of professional support to the Board and its
committees and leading on implementation of
recommendations from the annual Board evaluation.
58
Principal areas of Board focus during 2017
In advance of each Board meeting, the directors are provided
with comprehensive papers.
At each scheduled Board meeting the directors received reports
from the Chairman, Chief Executive, Chief Financial Officer,
Chief Risk Officer, Chief Operating Officer, Chief Administration
Officer, Franchise CEOs, General Counsel and the Board
Committee Chairmen. Other relevant senior executives attend
Board meetings to present reports to the Board as appropriate.
This provides the Board with an opportunity to engage directly
with management on key issues and supports the Board’s
succession planning activity.
An overview of the principal areas of Board focus during 2017 is
set out below.
Customer & Culture
Banking Standards Board assessments
customer service
open banking and innovation
branch network strategy
payments strategy
customer metrics
branding, communications and marketing updates
overseeing culture and quarterly culture updates
external fraud update
annual financial budget and plan
capital strategy and planning
Internal Capital Adequacy Assessment Process
Individual Liquidity Adequacy Assessment Process
dividend planning and policy
pension strategy
tax strategy
Finance
mergers and acquisition strategy
recovery and resolution planning
results and analysts’ presentations
IFRS 9 accounting policies
legal entity capability and plans
Corporate governance
Conflicts of interests
RBS has procedures in place to ensure that the Board’s
management of conflicts of interest and its powers for authorising
certain conflicts are operating effectively. On appointment, each
director is provided with RBS’s guidelines for referring conflicts of
interest to the Board. Each director is required to notify the Board
of any actual or potential situational or transactional conflict of
interest and to update the Board with any changes to the facts
and circumstances surrounding such conflicts.
Situational conflicts can be authorised by the Board in
accordance with the Companies Act 2006 and the company’s
Articles of Association. The Board considers each request for
authorisation on a case by case basis and has the power to
impose conditions or limitations on any authorisation granted as
part of the process.
Details of all directors’ conflicts of interest are recorded in a
register which is maintained by the Company Secretary and
reviewed annually by the Board.
Board meetings
In 2017, 9 Board meetings were scheduled and individual
attendance by directors at these meetings is shown in the table
below.
In addition to the 9 scheduled meetings, 9 additional meetings
and committees of the Board were held, including meetings to
consider and approve financial statements. The Chairman and
the non-executive directors meet at least once per year without
executive directors present.
Howard Davies
Ross McEwan
Ewen Stevenson
Frank Dangeard
Alison Davis
Morten Friis
Robert Gillespie
Penny Hughes
Yasmin Jetha (1)
Brendan Nelson
Baroness Noakes
Mike Rogers
Mark Seligman (2)
Former Directors
Sandy Crombie (3)
John Hughes (4)
Attended/
scheduled
9/9
9/9
9/9
9/9
9/9
9/9
9/9
9/9
5/5
9/9
9/9
9/9
6/6
9/9
2/2
Notes:
(1) Appointed to the Board on 21 June 2017.
(2) Appointed to the Board on 1 April 2017.
(3) Stepped down from the Board with effect from 1 January 2018.
(4) Appointed to the Board on 21 June 2017 and stepped down from the Board on 1
September 2017.
59
Corporate governance
Strategy
annual Board strategy offsite and deep dives into each of
the franchises
Brexit implications and response planning
structural reform, including ring-fencing and legal entity
transfers
transformation programme
Williams & Glyn alternative remedies package and re-
integration
Risk & Conduct
stress testing
risk appetite governance and framework
annual review of strategic risk appetite
preventing the facilitation of tax evasion
Legal, Regulatory & Governance
Annual Report and Accounts
AGM arrangements
Board appointments
Board policies, including Board Appointments and
Boardroom Inclusion
Board and Committee evaluations
annual PRA presentation to the Board
external auditor evaluation
Individual Accountability Regime: embedding and ring-
fencing implications
internal audit evaluation
Modern Slavery Act
Human Resources
internal employee survey results
executive director remuneration proposals
executive director performance and pay review
executive succession planning
health and safety
The Board also visited the RBS International (“RBSI”) business in
Jersey in September 2017. The agenda included a deep dive on
the RBSI business, strategy, risks and challenges, and directors
also met with key customers and local businesses.
In October 2017, an event for subsidiary non-executive directors
provided a useful opportunity for subsidiary non-executive
directors to gain a broader knowledge of the Group and
education on areas of interest as well as providing a deeper
understanding of their roles and responsibilities within the Group.
A Board reception was also held at Gogarburn in October 2017,
during which directors were able to meet and spend time with
RBS customers, stakeholders and other influencers.
Board effectiveness
Skills and experience of the Board
The Board is structured to ensure that the directors provide RBS
with the appropriate balance of skills, experience and knowledge
as well as independence. Given the nature of RBS’s businesses,
experience of banking and financial services is clearly of benefit,
and we have a number of directors with substantial experience in
that area. The Board also benefits from directors with experience
in other fields.
The table below illustrates the breadth of skills and experience on
the Board.
Retail banking
Broad financial services
Commercial & Private
Banking
Markets/investment
Banking
Government and regulatory
Mergers and acquisitions
Corporate restructuring
Stakeholder management
Chief executive
experience
Finance and
accountancy
Risk
Technology
(infrastructure)
Digital and innovation
Operations
Change management
Consumer facing
Board committees also comprise directors with a variety of skills
and experience so that no undue reliance is placed on any
individual.
Induction and professional development
Each new director receives a formal induction on joining the
Board, which is co-ordinated by the Company Secretary. This
includes visits to RBS’s major businesses and functions and
meetings with directors and senior management. Meetings with
external auditors, counsel and stakeholders are also arranged as
appropriate. An illustrative list of the meetings arranged during a
new director’s induction programme is set out below:
Chairman
Chief Executive
Chief Financial Officer
Senior Independent Director
Other non-executive
directors
Company Secretary
Chief Risk Officer
Chief Marketing Officer
Chief Operating Officer
RBS Treasurer
Chief Audit Executive
Chief Legal Officer and
General Counsel
Chairmen and CEOs of
principal subsidiaries
Franchise Chief Executive
Officers
Deputy Chief Financial
Officer
Chief Accountant
Head of RBS Tax
Chief Human
Resources
Officer
Chief Administrative
Officer
Head of Investor
Relations
Head of Public and
Consumer Affairs
Head of Recovery and
Resolution Planning
Director of Strategy &
Corporate Development
Director of
Transformation
Head of Restructuring
Chief Economist
External Auditors
External Counsel
Regulators
Business visits (UK and
overseas)
60
Corporate governance
The directors have access to a wide range of briefing and training
sessions and other professional development opportunities.
Internal training relevant to the business of RBS is also provided.
Business visits are arranged as part of the Group Audit
Committee and Board Risk Committee schedule (details of which
can be found on pages 67 and 74) and all non-executive
directors are invited to attend. Non-executive directors are also
welcome to attend the stakeholder engagement sessions run by
the Sustainable Banking Committee (further details of which are
on page 82).
Directors undertake the training they consider necessary to assist
them in carrying out their duties and responsibilities as directors.
Directors may also request individual in-depth briefings from time
to time on areas of particular interest.
During 2017, the directors received updates on a range of
subjects to enhance their knowledge, including:
RBS customer service excellence programme training
Financial Crime and anti-money laundering training,
including Criminal Finances Act 2017
Embracing Innovation and Disruption
Diversity and inclusion
UK Corporate Governance Reform agenda
Stakeholder engagement
Remuneration developments
General Data Protection Regulation
Reporting on Payment Practices and Performance
Regulations 2017
Structural Reform
In addition, all directors have access to an online resources
portal, which contains internal policy information and external
briefing notes on topical subjects, to support their professional
development and competence.
The Company Secretary maintains continuing professional
development logs. These are reviewed regularly between the
Chairman and each director individually, to assist in identifying
future training and development opportunities that are specific to
the individual director’s requirements.
Information
All directors receive accurate, timely and clear information on all
relevant matters and have access to the advice and services of
the Company Secretary. In addition, all directors are able, if
necessary, to obtain independent professional advice at the
company’s expense.
Time commitment
It is anticipated that non-executive directors will allocate sufficient
time to RBS to discharge their responsibilities effectively and will
devote such time as is necessary to fulfil their role. Directors
have been briefed on the limits on the number of other
directorships that they can hold under the requirements of the
fourth Capital Requirements Directive (CRD IV).
Each director is required to advise RBS as early as possible and
to seek the agreement of the Board before accepting additional
commitments that might affect the time the director is able to
devote to his or her role as a non-executive director of RBS. The
Board monitors the other commitments of the Chairman and
directors and is satisfied that they are able to allocate sufficient
time to enable them to discharge their duties and responsibilities
effectively. The time commitment currently required of our non-
executive directors continues to be significant.
Election and re-election of directors
In accordance with the provisions of the Code, all directors stand
for election or re-election by shareholders at the company’s
Annual General Meeting. In accordance with the UK Listing
Rules, the election or re-election of independent directors also
requires approval by a majority of independent shareholders.
Performance evaluation
In accordance with the Code, an external evaluation of the Board
takes place every three years. An internal evaluation takes place
in the intervening years. The most recent external evaluation of
the Board was conducted in 2015.
Progress following the 2016 evaluation
A number of actions were progressed during 2017 in response to
the findings of the 2016 performance evaluation, overseen by the
Group Nominations & Governance Committee.
These included further enhancement of the Board’s composition
with the appointments of Mark Seligman and Yasmin Jetha, and
the introduction of a Board Appointment Policy to support
succession planning. Work continued on improving the quality of
information provided to the directors and the 2017 Board agenda
reflected directors’ feedback on agenda balance and priorities.
The Board continued to dedicate significant time to culture and
customers, and this focus will continue into 2018. In conclusion,
the specific actions identified during the 2016 evaluation have
been appropriately addressed, and where high level themes
remain relevant, these have been appropriately incorporated into
the 2017 action plan.
2017 Performance evaluation process
In 2017, the Board and committee evaluation process was
conducted internally by the Deputy Secretary and Director,
Corporate Governance, and overseen by the Company
Secretary.
The Deputy Secretary and Director, Corporate Governance
undertook a formal and rigorous evaluation by:
preparing surveys that were completed by each director and
holding interviews with each director;
discussing the key themes and recommendations for action
with the Chairman; and
recommending the key themes and proposed actions to the
Board.
61
Corporate governance
Outcomes of the 2017 performance evaluation
The conclusion of the 2017 performance evaluation was that the
Board operated effectively throughout the year and fulfilled its
remit as set out in its terms of reference.
Positive feedback was provided in relation to the operation of the
Board, including its composition, focus of the agenda, the
Chairman’s leadership, meeting dynamics and the support the
Board receives.
Key themes and findings arising from the evaluation included:-
Strategy
As legacy matters reach their conclusion, the Board has an
opportunity to devote more of its time to discussing forward
looking strategy.
Customers
Acknowledging the work of the Sustainable Banking Committee
in this area, the general consensus was that there is scope for
even greater focus on customers at Board level.
Risk
Noting the work of the Board Risk Committee, it was agreed that
continued Board focus on major strategic risks should remain a
priority.
Engagement with management
It was agreed that the Board provides effective challenge and
oversight to management and the importance of continuing to
balance the Board’s challenge / oversight role with providing
appropriate support to management was also highlighted.
Executive succession planning
There is appetite at Board level for greater focus on Executive
Committee succession and talent development.
Board information and time commitment
Acknowledging the progress made during 2017, it was noted that
there remains room for improvement in length and timeliness of
papers. The length of committee meetings was also raised in the
context of directors’ time commitment.
Next steps
A detailed action plan has been developed in response to the
themes and findings during the 2017 evaluation, and its
implementation will be overseen by the Group Nominations &
Governance Committee during 2018.
Individual director and Chairman effectiveness reviews
The Chairman met with each director individually to discuss their
own performance and ongoing professional development and
also shared peer feedback provided as part of the evaluation
process. Separately, the Senior Independent Director sought
feedback on the Chairman’s performance from the non-executive
directors, executive directors and key external stakeholders and
discussed it with the Chairman.
Relations with investors
The Chairman is responsible for ensuring effective
communication with shareholders. The company communicates
with shareholders through the Annual Report and Accounts and
by providing information in advance of the Annual General
Meeting. Individual shareholders can raise matters relating to
their shareholdings and the business of RBS at any time
throughout the year by letter, telephone or email via rbs.com/ir.
Shareholders are given the opportunity to ask questions at the
Annual General Meeting and any General Meetings held or can
submit written questions in advance. The Senior Independent
Director and the chairmen of the Board committees are available
to answer questions at the Annual General Meeting.
During 2017, RBS also held events in Edinburgh and London for
our retail shareholders. Further details can be found on page 28
of the Strategic Report.
Communication with the company's largest institutional
shareholders is undertaken as part of the Investor Relations
programme:
the Chief Executive and Chief Financial Officer meet
regularly with UKFI, the organisation set up to manage the
Government’s investments in financial institutions, to
discuss the strategy and financial performance of the
business. The Chief Executive and Chief Financial Officer
also undertake an extensive annual programme of meetings
with the company’s largest institutional shareholders;
the Chairman independently meets with RBS’s largest
institutional shareholders annually to hear their feedback on
management, strategy, business performance and corporate
governance. Additionally, the Chairman and Senior
Independent Director met with the governance
representatives of a number of institutional shareholders
during the year;
the Senior Independent Director is available if any
shareholder has concerns that they feel are not being
addressed through the normal channels; and
the Chairman of the Group Performance and Remuneration
Committee consults with major shareholders in respect of
the Group’s remuneration policy.
Throughout the year, the Chairman, Chief Executive, Chief
Financial Officer and Chairman of the Group Performance and
Remuneration Committee communicate shareholder feedback to
the Board. The directors also receive reports reviewing share
price movements and performance against the sector. Detailed
market and shareholder feedback is provided to the Board after
major public announcements such as a results release. The
arrangements in place are to ensure that directors develop an
understanding of the views of major shareholders.
The Investor Relations programme also includes communications
aimed specifically at its fixed income (debt) investors. The Chief
Financial Officer and/or the RBS Treasurer give regular
presentations to fixed income investors to discuss strategy and
financial performance. There is also a separate section on the
RBS website for fixed income investors which includes
information on credit ratings, securitisation programmes and
securities documentation. Further information is available at
rbs.com/ir.
62
Report of the Group Nominations and Governance Committee
Letter from Howard Davies
Chairman of the Group Nominations and Governance
Committee
Dear Shareholder,
As Chairman of the Board and Chairman of the Group
Nominations and Governance Committee I am pleased to
present our report on the committee's activity during 2017.
Role and responsibilities
The Group Nominations and Governance Committee was
constituted in January 2016 and assumed the responsibilities of
the previous Group Nominations Committee to review the
structure, size and composition of the Board, and membership
and chairmanship of Board Committees. In addition, the
Committee monitors the Group’s governance arrangements to
ensure that best corporate governance standards and practices
are upheld and considers developments relating to banking
reform and analogous issues affecting the Group in the markets
where it operates. The Committee makes recommendations to
the Board in respect of any consequential amendments to the
Group’s operating model.
The Committee engages with external consultants, considers
potential candidates and recommends appointments of new
directors to the Board.
The terms of reference of the Group Nominations and
Governance Committee are reviewed annually, approved by the
Board and are available at rbs.com.
Principal activity during 2017
As highlighted in the Board’s 2016 performance review, the
Committee acknowledges the tenure of a number of the current
Board directors and therefore made succession planning a
priority in 2017.
In addition to recruitment, the Committee continues to oversee
the process to reach agreement with the PRA in respect of a
governance model that is compatible with ring-fencing legislation.
Ring-fencing also gives rise to a requirement to recruit additional
non-executive directors to the boards of our material regulated
subsidiaries, which the Committee has overseen.
The Committee has overseen the establishment of the Group’s
Technology and Innovation Committee, which was constituted on
1 September 2017 with a remit to assist the Board in overseeing
and monitoring execution of the Group’s strategic direction in
relation to technology and innovation.
Membership and meetings
For most of 2017, the Group Nominations and Governance
Committee comprised the Chairman of the Board and four
independent non-executive directors. In August 2017, the
Committee composition was amended to include the Senior
Independent Director, as well as the Chairmen of the Board Risk
Committee, Group Audit Committee, Group Performance &
Remuneration Committee and Sustainable Banking Committee.
Alison Davis stood down from the Committee in August 2017,
simultaneous with her appointment as Chairman of the
Technology and Innovation Committee. Sandy Crombie stepped
down from the Committee with effect from 1 January 2018.
The Committee holds at least four scheduled meetings per year
and also meets on an ad hoc basis as required. In 2017, there
were seven meetings. Individual attendance by directors at these
meetings is shown in the tables below.
Howard Davies (Chairman)
Robert Gillespie
Penny Hughes (1)
Brendan Nelson
Baroness Noakes (2)
Mark Seligman (3)
Former Members
Sandy Crombie (4)
Alison Davis (5)
Attended/
scheduled
7/7
7/7
1/2
7/7
2/2
2/2
7/7
4/4
(1) Became a member of the committee on 3 August 2017. Did not attend meeting in
September due to a clash with an external commitment in place prior to
appointment.
(2) Became a member of the committee on 3 August 2017
(3) Became a member of the committee on 3 August 2017
(4) Stood down from the Board with effect from 1 January 2018.
(5) Stood down from the committee on 3 August 2017
Consideration of new non-executive directors
Both JCA Group and Spencer Stuart have been engaged during
this year to support the search for new non-executive directors.
JCA Group and Spencer Stuart do not provide search services to
any other part of RBS. During 2017, the Committee considered a
number of potential candidates. In April 2017, June 2017 and
January 2018 respectively, Mark Seligman, Yasmin Jetha and Dr
Lena Wilson, were appointed to the Board as non-executive
directors.
Tenure of non-executive directors
The tenure of non-executive directors is set out below.
The Committee has spent time considering the Group’s
arrangements in respect of legal entity governance. This work
continues and is complementary to the Group’s preparations for
the implementation of ring-fencing legislation.
0 – 3 years
3 – 6 years
6+ years
Attended/
scheduled
46%
18%
36%
100%
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Report of the Group Nominations and Governance Committee
Board and Committee membership
As previously mentioned, Mark Seligman joined the board as a
non-executive director on 1 April 2017 and was subsequently
appointed to the Group Nominations and Governance Committee
on 3 August 2017. Mark brings broad financial services
knowledge to the Board, having substantial FTSE 100 Board
experience gained in various industry sectors. Mark assumed the
role of Senior Independent Director with effect from 1 January
2018. Yasmin Jetha joined the Board as a non-executive director
on 21 June 2017 and was subsequently appointed to the
Sustainable Banking Committee on 3 August 2017 and the
Technology and Innovation Committee on 1 September 2017.
Yasmin brings a fresh skillset to the Board from her career as a
Chief Information Officer in the consumer and media sectors
coupled with extensive experience in financial services. Dr Lena
Wilson was appointed to the Board as a non-executive director
on 1 January 2018. Lena brings strong commercial and public
sector experience to the Board, having previously served as
Chief Executive of Scottish Enterprise and Senior Investment
Advisor to The World Bank.
Performance evaluation
The annual review of the effectiveness of the Board and its senior
Committees, including the Group Nominations and Governance
Committee, was conducted internally in 2017. The Committee
has considered and discussed the outcomes of the evaluation
and accepts the findings. Overall the review concluded that the
Group Nominations and Governance Committee operated
effectively. However, certain recommendations for action were
recognised including the need to: regularly engage with the
external search firm to provide clarity and guidance on RBS’s
expectations of information to be provided to the Committee; and
rebalance the agenda of the Committee to ensure greater focus
on strategic issues, including director performance and board and
senior management succession.
The outcomes of the evaluation have been reported to the Board
and the Committee will track progress during the year.
Boardroom diversity and inclusion
RBS values and promotes inclusion in all areas of recruitment
and employment. We’re proud to be building an inclusive bank.
The Board understands the need for a diverse mix of talented
directors to effective decision-making.
Boardroom Inclusion Policy
The Board approved a revised Boardroom Inclusion Policy in
February 2018 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 Boardroom Inclusion Policy currently applies
to the most senior RBS boards: The Royal Bank of Scotland
Group plc, The Royal Bank of Scotland plc, National Westminster
Bank Plc and Ulster Bank Limited. A copy of the Boardroom
Inclusion Policy is available on rbs.com>about us.
Objectives and targets
The Boardroom Inclusion Policy contains a number of
measurable objectives, targets and ambitions reflecting the
Board’s ongoing commitment to inclusion progress.
The Policy’s objectives exist to ensure that the Board, and any
Committee to which it delegates nominations responsibilities,
follows an inclusive process when making nomination decisions.
That includes ensuring that the nomination process is based on
the principles of fairness, respect and inclusion, that all
nominations and appointments are made on the basis of
individual competence, skills and expertise measured against
identified objective criteria and that searches for Board
candidates are conducted with due regard to the benefits of
diversity and inclusion.
Targets and ambitions
The Board aims to meet the highest industry standards and
recommendations wherever possible. This includes, but is not
limited to, aspiring to meet the targets set by the Hampton-
Alexander Report: FTSE100 Women Leaders (33% female
representation on the board) and the Parker Report: Beyond 1 by
’21 (at least one director from an ethnic minority background on
the board) by the recommended target dates, 2020/2021. The
policy supports our bank-wide ambition to aim for a 50/50 gender
balance across all levels of the organisation by 2030.
Monitoring and reporting
The Board currently meets the Parker target and, following the
appointment of Dr Lena Wilson on 1 January 2018, now meets
the Hampton-Alexander target with female representation on the
Board reaching 36%. The Board’s composition as at 31
December 2017 against the stated targets is set out below:
Female
Male
Ethnic minority background
Non-ethnic minority background
2017
29%
71%
100%
1
13
14
Inclusion and diversity progress, including information about the
appointment process, will continue to be reported in the Group
Nominations and Governance Committee’s report in the RBS
Annual Report. The balance of skills, experience, independence,
knowledge and diversity on the Board, and how the Board
operates together as a unit is reviewed annually as part of the
Board evaluation. Where appropriate, findings from the
evaluation will be considered in the search, nomination and
appointment process.
Further details on RBS’s approach to diversity can be found on
pages 111 and 112.
Howard Davies
Chairman of the Group Nominations and Governance Committee
22 February 2018
64
Report of the Group Audit Committee
Letter from Brendan Nelson,
Chairman of the Group Audit Committee
“Our primary
focus is the
integrity and
quality of RBS’s
financial
statements”
Dear Shareholder,
The Group Audit Committee (GAC) has responsibility for
monitoring and reviewing RBS’s financial reports and disclosures,
its accounting policies and practices and standards of internal
control. This report provides an overview of the issues
considered and debated by the GAC during 2017 and our
expected priorities for 2018.
Accounting and financial reporting
The GAC’s primary focus is the integrity and quality of RBS’s
financial statements, comprising quarterly, interim and full year
results announcements and supporting documentation, in
addition to the 2017 annual report and accounts.
Throughout 2017 the GAC received detailed reports from
management on the key assumptions and judgements
underpinning RBS’s financial results. The GAC also received
quarterly reports from both the internal and external auditors. The
GAC provided robust challenge and detailed feedback on the
financial results and in my role as Chairman of the GAC I
reported to the Board on the GAC’s discussions. On behalf of the
GAC, I also confirmed the GAC’s recommendation of the
financial results to the Board for approval.
RBS resolved a number of significant legacy issues during 2017,
in particular the settlement of the UK shareholder litigation and
the US Federal Housing Finance Agency litigation and reaching
agreement with the EC and HMT regarding the bank’s remaining
state aid obligations. The GAC was closely engaged on all of
these issues in order to ensure they were appropriately disclosed
and provided for.
The GAC also reviewed judgements in relation to asset and
credit impairments. The value of goodwill, deferred tax and RBS’s
investments in subsidiaries were all key areas of focus during
2017 and the impact of macro economic risks, including
developments in relation to Brexit, on the credit environment was
a discussion topic throughout the year.
The GAC invested considerable time during 2017 reviewing and
discussing the key assumptions, judgements and processes
behind RBS’s IFRS 9 calculations, in anticipation of the
accounting standard coming into effect on 1 January 2018.
Significant work undertaken by management, together with close
scrutiny from the GAC allowed RBS to disclose the estimated
impact of IFRS 9 in its H1 2017 interim results announcement.
In H2 2017 we then provided guidance on the drafting of the
IFRS 9 Transition Report, which is published alongside this
report, and explains the pillars of IFRS 9 compared with IAS 39
and the updated impact on RBS.
The ring-fencing programme was a crucial work stream for the
bank in 2017 and, in Q3, the GAC considered the basis of
preparation of the financial information included within the Ring-
fencing Transfer Scheme that was ultimately presented to Court
and recommended this to the Board for approval. The GAC kept
existing provisions for liabilities such as those in relation to PPI
and GRG under close review throughout the year to ensure that
they continued to be appropriate. Additional litigation and conduct
charges were taken in Q4 2017 in relation to PPI, UBI DAC
customer redress and RMBS (US residential mortgage-backed
securities matters) with oversight from the GAC. We also
considered the suitability of significant loan impairment charges
in Q3 and Q4 2017 and a revised strategy for Non-Performing
Lending Assets in UBI DAC.
Systems of internal control
RBS made substantial progress in improving its control
environment during 2017. The GAC, in conjunction with the
Board Risk Committee (BRC), oversees RBS’s control
environment. In particular, we monitor the systems of internal
control relating to financial management, financial reporting and
accounting issues. During the year we received bi-annual
updates on the control environment certification process,
quarterly reports on internal controls over financial reporting plus
updates from the internal and external auditors on the control
environment. Most areas of the bank succeeded in obtaining an
improved control environment rating by the year end and the
GAC will continue to oversee this work over the coming months.
In order to support a robust control environment and to ensure
that RBS promotes a culture of doing the right thing, an effective
and accessible whistleblowing process is vital. RBS has
whistleblowing procedures in place and the GAC receives regular
updates on the whistleblowing framework. As GAC chair, I act as
RBS’s whistleblowing champion and met regularly with the
whistleblowing team to discuss developments, trends and
proposed changes to RBS’s whistleblowing framework. In March
2017, I issued a communication to all staff emphasising the
importance of this process and encouraging staff to participate.
An audit of the bank’s internal whistleblowing service was
completed during the year which concluded that the process is
well controlled.
External audit
Having completed their first year as RBS’s external auditors in
2016, Ernst & Young LLP (EY) have continued to build and
embed their knowledge of the bank during 2017. EY attended
each meeting of the GAC in 2017, providing quarterly audit
reports and updates on various other bespoke topics. EY’s input
has been invaluable in assisting the GAC’s deliberations
throughout 2017 and the year-end audit period and I would like to
thank them for their contributions.
65
Report of the Group Audit Committee
Key priorities for 2018
Looking forward to 2018, the GAC will continue to ensure the
integrity of the financial statements of both RBS and its
subsidiaries. The changes that will be introduced to reporting
structures as a result of the ring-fencing programme will be a key
focus and we will continue to monitor the impact of the economic
environment on RBS’s credit portfolio and financial results. The
GAC will also review Internal Audit’s validation of control
environment ratings and will strive to ensure that recent
improvements in the control environment are sustained.
As ever, I would like to thank all GAC members and attendees for
their continued support and dedication during 2017, in particular
Sandy Crombie who stepped down from the Board at the end of
the year. I would personally like to thank Sandy for his extremely
valuable contribution to the work of the GAC over the years.
Brendan Nelson
Chairman of the Group Audit Committee
22 February 2018
66
Report of the Group Audit Committee
Report of the Group Audit Committee
Membership
The Group Audit Committee is comprised of independent non-
executive directors.
Meetings and visits
The GAC held seven scheduled meetings during 2017, four of
which were held shortly in advance of submission of the quarterly
financial statements to the Board.
Brendan Nelson (Chairman)
Morten Friis
Baroness Noakes
Former Member
Sandy Crombie
Attended/
scheduled
7/7
7/7
7/7
7/7
John Hughes was also a member of the GAC during his tenure
as a director from 21 June until 1 September 2017. During this
period John Hughes attended one scheduled meeting of the
GAC. Sandy Crombie stepped down from the Committee with
effect from 1 January 2018.
Brendan Nelson, Morten Friis and Baroness Noakes are also
members of the BRC. Sandy Crombie was Chairman of the
Group Performance and Remuneration Committee throughout
2017. Brendan Nelson and Sandy Crombie were also members
of the Group Nominations and Governance Committee. Baroness
Noakes was also appointed as a member of the Group
Nominations and Governance Committee with effect from 1
September 2017. This cross committee membership helps
facilitate effective governance across all finance, risk and
compensation issues. It also helps to ensure that agendas are
aligned and that overlap of responsibilities is avoided where
possible.
The members of GAC are selected with a view to the expertise
and experience of the GAC as a whole and with proper regard for
the key issues and challenges facing RBS.
The Board is satisfied that all GAC members have recent and
relevant financial experience and that each member of the GAC
is independent as defined in the SEC rules under the US
Securities Exchange Act of 1934 (the “Exchange Act”) and
related guidance. The Board has further determined that Brendan
Nelson, Committee Chairman, and Baroness Noakes are both
‘financial experts’ for the purposes of compliance with the
Exchange Act Rules and the requirements of the New York Stock
Exchange, and that they have competence in accounting and
auditing as required under the Disclosure Guidance and
Transparency Rules. Full biographical details of GAC members
are set out on pages 51 to 56.
During 2017 GAC meetings were attended by: the Group
Chairman; the Chief Executive; the Chief Financial Officer; the
Deputy Chief Financial Officer; the Chief Accountant; the Chief
Legal Officer and General Counsel; and the Internal and External
Auditors. Other executives, subject matter experts and external
advisers were also invited to attend, as required, to present and
advise on reports commissioned by the GAC. The GAC also met
privately with the external auditors and separately with Internal
Audit management.
Purpose of the Group Audit Committee
The GAC’s responsibilities are set out in more detail in its terms
of reference which are reviewed annually by the Committee and
approved by the Board. These are available on: rbs.com.
During 2017, in conjunction with members of the BRC, members
of the GAC took part in an annual programme of visits to
businesses and control functions in order to gain a deeper
understanding of the risks and issues they face. This programme
comprised:
a visit to each of Services CAO and Services COO;
a visit to Commercial & Private Banking;
a visit to NatWest Markets; and
a visit to Finance.
two visits to Risk, Conduct and Restructuring;
two visits to Internal Audit;
In addition to these business and functional visits, the GAC and
BRC also undertook a teach-in session on IFRS 9 and visited the
bank’s operations in Poland. During the visit to Poland the GAC
and BRC received updates on the control environment in the
Global Hub Europe, met with key leaders and talent and with the
external audit team in Poland.
Allocation of Group Audit Committee agenda time during 2017
was as follows:
Financial affairs of the group
Standards of internal control
Internal audit
External audit
Regulatory relationships and
compliance
Governance and procedural
Total
42%
19%
18%
13%
4%
4%
100%
Performance evaluation
The performance of the GAC is evaluated annually, and at least
once every three years is facilitated by an external party.
Following an externally facilitated evaluation in 2015, the
evaluation of the GAC’s performance in 2017 was conducted
internally. The evaluation process involved the completion of
questionnaires by both GAC members and members of
management and follow up interviews to discuss the findings.
The Board and the GAC have considered and discussed the
outcomes of this evaluation. Overall the evaluation concluded
that the GAC operated effectively during 2017. A small number of
recommendations for improvement were made in relation to the
length and timeliness of Committee papers, the length of
meetings and the schedule of visits, which were approved by the
GAC and the Board. Progress against these actions will be
tracked in 2018 and reported back to the GAC and the Board.
The GAC conducts an annual evaluation of both the external
auditor and the Internal Audit function each year. The 2017
evaluations found that EY were performing the audit of RBS
effectively and that Internal Audit continued to operate effectively
during the year. Further details are provided in the report below.
67
Report of the Group Audit Committee
Matters considered by the Committee in 2017
Matters considered and action taken by the Committee
Key area
Accounting and financial reporting
Accounting
judgements and
reporting issues
considered in the
preparation of
financial reports
The Group Audit Committee focused on a number of salient judgements and reporting issues in the preparation of
the financial results throughout 2017, including the quarterly, half year and full year results and the Annual Report
and Accounts. In particular, the Committee considered, discussed and, where appropriate, challenged:
provisions and disclosures relating to ongoing regulatory, litigation and conduct issues including: US RMBS
investigations and litigation; the UK shareholder action; Payment Protection Insurance claims including
whether changes were required as a result of FCA advertising campaigns; the FCA’s investigation into RBS’
former Global Restructuring Group; and the CBI’s review of Irish Tracker mortgages. During 2017 RBS has
recognised £1.3 billion of litigation and conduct provisions;
the adequacy of loan impairment provisions, focusing in particular on judgements and methodology applied to
provisions. The Committee was satisfied that the overall loan impairment provisions and underlying
assumptions and methodologies were reasonable and applied consistently;
the key judgements made in interpreting IFRS 9, the key features of the IFRS 9 impairment process and the
impact of IFRS 9 on the bank’s financial results, capital, stress testing and earnings volatility together with the
IFRS 9 Transition Report, which is published alongside this report;
valuation methodologies and assumptions for financial instruments carried at fair value including RBS’s credit
market exposures and own liabilities assessed at fair value;
judgements made by management in relation to the carrying value of intangible assets including in particular
goodwill, and RBS’s investment in subsidiaries within the stand-alone parent company accounts.
management’s assessment of the adequacy of internal controls over financial reporting, and identified
deficiencies. The GAC noted significant deficiencies in relation to user-access to the general ledger system
and the process around provisions for restructuring costs and action is being taken by management to improve
these processes. There were no Material Weaknesses reported in relation to RBS Group at the year-end;
the quality and transparency of financial and risk disclosures;
the viability statement in the 2017 report and accounts and the going concern basis of accounting including
consideration of evidence of RBS’s capital, liquidity and funding position. The GAC considered the process to
support the assessment of principal risks; assessed the company’s prospects in the light of its current position
and the identified principal risks; challenged the evidence to support some of the statements made; and
reviewed the disclosure on behalf of the Board. The GAC supported the viability statement and the directors’
going concern conclusion. (Refer to the Report of the Directors for further information); and
the comprehensive review process which supports the GAC and the Board in reaching the conclusion that the
disclosures in the annual report and accounts, taken as a whole, are fair, balanced and understandable and
provided the information necessary for shareholders to assess the company’s position and performance,
business model and strategy. The review process included: central co-ordination of the annual report and
accounts by the Finance function with guidance on requirements being provided to individual contributors;
review of the annual report and accounts by the Executive Disclosure Committee prior to consideration by the
GAC; and a management certification process which required members of the Executive Committee and other
senior executives to provide confirmation following their review of the annual report and accounts that they
considered them to be fair, balanced and understandable. This process was also undertaken in respect of the
half year and quarterly results announcements. The External Auditor also considered the fair balanced and
understandable statement as part of the audit process.
Ring-fencing
Having considered the above, the Committee recommended the quarterly, interim and full year results
announcements and the Annual Report and Accounts, together with supporting documentation (including Pillar 3
reports, financial supplements and investor presentations) to the Board for approval.
In Q3 2017, the Committee considered the basis of preparation and governance of the pro forma financial
information, including the adjustments made, and forecast information that was included within the Ring-fencing
Transfer Scheme and recommended this to the Board for approval.
68
Report of the Group Audit Committee
Key area
Matters considered and action taken by the Committee
Systems of internal control
Annual Risk and
Control report
Considered the effectiveness of RBS’s internal control system, including any significant failings or weaknesses.
The GAC also considered RBS’s disclosure on internal control matters in conjunction with the related guidance
from the Financial Reporting Council subsequent to review by the Board Risk Committee.
Control
Environment
Certification
Considered the outputs of bi-annual self-assessments of the robustness of the internal control environment for
RBS’s customer-facing businesses, and its support and control functions. This informs the control environment
disclosure in the annual report and accounts. Most areas reported an improved Control Environment Certification
rating by the year end and the remaining areas are expected to report an improved rating during 2018.
Management’s plans to address certain control issues are covered in more detail in the report of the Board Risk
Committee on page 75.
Three lines of
Defence
Received a report on RBS’s three lines of defence model, including accountabilities under each of the lines of
defence, the impact of ring-fencing governance and actions taken to improve the understanding and
effectiveness of the model across RBS.
Whistleblowing
Complaints
Received updates on whistleblowing activity and the performance of RBS’s whistleblowing service, monitored the
effectiveness of the whistleblowing framework and enquired as to any trends or themes. Also received updates on
communications and awareness activity relating to whistleblowing and testing of the framework.
The GAC Chairman acts as RBS’s Whistleblowing Champion, in line with PRA and FCA regulations. This role
carries the responsibility for ensuring and overseeing the integrity, independence and effectiveness of the firm’s
whistleblowing arrangements. As part of this role the GAC Chairman meets regularly with the internal
whistleblowing team. During 2017 he also met with RBS’s external whistleblowing supplier and with the internal
resourcing team responsible for the RBS’s relationship with that external supplier. An audit of RBS’s internal
whistleblowing service was completed during the year by Internal Audit which concluded that the process is well
controlled and that management understand the risks they need to manage. A small number of improvements
were also recommended and management has committed to address these by 31 October 2018.
Updates were provided to the GAC on customer complaints, including the complaints process, compliance with
complaints policy and any emerging themes. The GAC is focused in particular on complaints relating to
accounting, internal accounting controls or auditing matters; or submitted directly to the Chief Executive Officer,
his executive team, or the Chairman.
Ledger
Transformation
Programme
Received updates in relation to the delivery of RBS’s new general ledger which was implemented in August 2017.
The new ledger replaces previous legacy systems and supports new functionality such as discrete legal entity
views and multi-currency accounting on a single ledger platform. The implementation of the new ledger was an
important step in improving the Finance function’s control environment.
Taxation
Reviewed RBS’s tax position, including a deep dive in October 2017 which covered: UK corporate tax compliance;
tax provisions; the status of RBS’s relationship with HMRC; deferred tax assets; the RBS Tax operating model;
and external tax developments including making tax digital.
Legal Reports
Considered quarterly reports on the most significant legal risks and developments affecting RBS, including the
Notifiable Event
Process
Sarbanes-Oxley
Act of 2002
Internal audit
Reports and
Opinions
status of ongoing major litigation and investigations, privacy issues and relevant legislative and regulatory
changes.
Received bi-annual reports on control breaches which are captured by RBS’ notifiable event process. Under this
process all Board directors were alerted to the most significant breaches.
Considered RBS’s compliance with the requirements of the Sarbanes-Oxley Act of 2002, and was satisfied in this
respect. The GAC noted Significant Deficiencies in relation to user-access to the general ledger system and the
processes around provisions for restructuring costs and action being taken by management to improve these
processes. Remediation of a significant deficiency previously identified in relation to its subsidiary, NatWest Bank,
in connection with legal entity recharge accounting was monitored during 2017 and downgraded in December
2017. No Material Weaknesses were reported in RBS Group at the year-end. Provided oversight of the drive to
continue to improve SOX processes and received a number of updates in this regard.
Received quarterly reports and opinions from Internal Audit throughout 2017. These reports and opinions updated
the GAC on Internal Audit’s view of the progress made in improving RBS’s risk and control environment and risk
and control awareness by reference to the relevant ratings for each business and function, and the risks which
may impact the bank achieving its targets. Internal Audit also provided updates on the audit plan and any
anticipated changes to the plan and outlined material and emerging concerns identified through their audit work.
In addition, Internal Audit reported on items including: Pillar 3 reporting; RBS’s Global Systemically Important
Bank status; and the whistleblowing process.
69
Report of the Group Audit Committee
Key area
Matters considered and action taken by the Committee
Internal audit continued
Annual Plan and
Budget
Internal Audit
Charter and
Independence
Considered and approved Internal Audit’s plan for 2017, which is focussed on RBS’s highest risks. An interim
update on performance against the plan was provided to GAC at the end of H1 2017. The GAC also considered
Internal Audit’s budget and was satisfied that this was sufficient to allow Internal Audit to deliver the plan.
Updates to Internal Audit’s charter were approved by GAC. The updates aligned the charter with the language of
the October 2016 revisions to the Institute of Internal Auditors International Professional Practice Framework and
the latest version of Internal Auditor’s methodology, which was updated in April 2017. The GAC also confirmed the
independence of Internal Audit.
Visits
Chief Audit
Executive
Annual
Evaluation
During two visits to Internal Audit in 2017, the GAC received updates on a variety of issues impacting the Internal
Audit function, including: resourcing; bench strength; succession planning; quality assurance; strategic priorities;
changes to the function’s structure and opinion approach in anticipation of ring-fencing; and the 2018 Audit Plan.
The Chief Audit Executive continued to report to the Chairman of the GAC, with a secondary reporting line to the
Chief Executive for administrative purposes. The GAC assessed the annual performance (including risk
performance) of the Chief Audit Executive.
The annual review of the effectiveness of Internal Audit was undertaken internally in 2017. Feedback on Internal
Audit was provided by GAC members and attendees (including the external auditors), chairmen of subsidiary audit
committees, key members of franchise and function risk committees and other key members of management. The
evaluation concluded that Internal Audit had operated effectively during the year. Certain recommendations were
made to aid continuous improvement within the function including continuing to bolster succession planning and
bench strength, increasing connectivity between Internal Audit teams and sharing best practice. These
recommendations will be implemented during 2018 and progress will be tracked by the GAC.
Relationship with regulators
Regulatory
Relationships
Received regular reports on the status of RBS’s relationships with its key regulators. The GAC Chairman also
attended continuous assessment meetings with the PRA and FCA, a trilateral meeting with the PRA, a meeting
with the FRC as well as two meetings with UK Financial Investments Limited during 2017.
External audit
External Audit
Reports
Audit Plan and
fees
Annual
Evaluation
CASS Opinions
External Audit
Report to the
PRA
Jonathan Bourne has been EY’s lead audit partner for RBS since EY assumed the role of external auditor in
March 2016. Jonathan Bourne attended each meeting of the GAC throughout 2017 and 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.
Received updates in relation to the external auditor’s 2017 plan and approved the 2017 audit fees including the
fee for the 2017 interim results. The GAC was authorised by shareholders at the last Annual General Meeting to
fix the remuneration of the external auditors.
Conducted an internal evaluation to assess the independence and objectivity of the External Auditor and the
effectiveness of the audit process during 2017. Questionnaires were issued to the GAC members, attendees, the
Finance Officers of the Franchises and Functions and key members of the Finance team. The evaluation
assessed in particular the external auditor’s mindset and culture, skills, character and knowledge, quality control
and judgement. The evaluation highlighted that the objectivity, independence and integrity of the lead audit partner
and the audit team is highly rated by both the GAC and management and concluded that the external auditor was
operating effectively. A small number of recommendations for continuous improvement were identified including
enhancements to reporting; adding value by analysis and suggested management actions; and the pre-planning of
audits which will be reviewed by the external auditor. Following the evaluation the GAC recommended that the
Board seek the reappointment of EY as external auditor at the next annual general meeting.
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 2016. The GAC also considered the CASS
Audit plan for 2018, the findings of which will be reported to the GAC once the audit is complete.
The GAC considered EY’s 2016 report to the PRA under supervisory statement SS1/16 which set out the PRA’s
expectation for auditors to provide written reports to the PRA concerning the audits of major banks and building
societies, as set out in chapter 8 of the Auditors Part of the PRA rulebook. The report responded to specific
questions posed by the PRA relating broadly to credit impairment, hedge accounting, trading/valuation, forecasting
and conduct. GAC also discussed the questions received from the PRA in relation to the report required for 2017.
Independence of
the previous
external auditor
As RBS’s previous external auditor, Deloitte LLP (Deloitte) have an ongoing role to consent to the release of their
prior period audit opinions for US reporting purposes, the GAC considered the processes and procedures whereby
Deloitte were able to re-establish their independence in order to do so.
70
Report of the Group Audit Committee
Key area
Matters considered and action taken by the Committee
Audit and non-audit services
Non-audit service
policy
In order to comply with the Sarbanes-Oxley Act of 2002 and the EU Audit Regulation, RBS has a policy in place
in relation to the engagement of the external auditors to perform audit and non-audit services (the policy). The
GAC reviews the policy at least annually to ensure it remains fit for purpose. In accordance with the policy, all
audit services and permitted non-audit services must be approved before the engagement commences.
Under the policy certain services are classed as Audit-Related Services and these may be approved by the
Deputy Chief Financial Officer, on behalf of the GAC, up to a limit of £100,000 each financial quarter.
Engagements for Audit-Related Services in excess of this quarterly limit require the approval of the GAC
Chairman. All Audit-Related Services are reported to the GAC quarterly. The GAC has also delegated authority to
the Deputy Chief Financial Officer to approve the provision of services by the external auditor to non-consolidated
subsidiaries of RBS within an annual cap and to approve engagements with the external auditor where RBS has
limited or no influence in the selection process. All such engagements are reported to the GAC each quarter.
For all other permitted non-audit service engagements, where the fee is below £5,000 approval by the Deputy
Chief Financial Officer is required. Where the fee is above £5,000 but below £100,000 approval by the GAC
Chairman is required. For engagements where the fee is expected to exceed £100,000 a competitive tender
process must be held and approval of the full GAC is required. In addition all engagements must be approved by
the Deputy Chief Financial Officer and by Supply Chain Services. All such ad hoc approvals of non-audit services
are ratified by the GAC each quarter.
During 2017, the external auditors were approved under the policy to undertake the following significant
engagements:
to carry out (i) a review of RBS’s OFAC compliance policies and procedures and their implementation for
RBS’s global business lines; and (ii) and appropriate risk focussed sampling of U.S. dollar payments, as
required in connection with the 2013 Cease and Desist Order issued to RBS by the by Board of Governors
of the Federal Reserve;
the annual client money (CASS) audit as required by the FCA;
the annual audit of the bank’s LIBOR submissions as agreed with the US Commodity Futures Trading
Commission and the FCA;
the audit of note issuance in Scotland and Northern Ireland and in respect of notes in circulation as
requested by the Bank of England;
work in respect of reporting for RBS NV in respect of COREP and FINREP returns performed over and
above normal regulatory reporting;
reporting to the PRA on matters related to the audit;
the sustainability audit; and
overseas regulatory reporting.
The decision to approve the engagement of the external auditor for the services noted above was due to factors
including synergies and efficiencies relating to the audit work, their existing knowledge of RBS which allowed
work to commence quickly and with minimal disruption and the benefits in maintaining consistency between
similar engagements. In each case the GAC was satisfied that the engagement did not impact the external
auditor’s independence. The total value of non-audit services fees during the year was 15.1% of the audit fee.
The policy also includes certain safeguards in relation to engagements with RBS’s previous external auditor,
Deloitte who have an ongoing role to consent to the release of their prior period audit opinions for US reporting
purposes and may therefore require to re-establish their independence. During 2017 Deloitte were approved
under the policy to carry out the following significant engagements:
setting of a framework for documentation review to be undertake in connection with an attestation made to
the National Futures Association in relation to record keeping and reporting;
provision of financial advice in relation to the disposal of a business in which RBS held a shareholding;
71
Report of the Group Audit Committee
Key area
Matters considered and action taken by the Committee
Audit and non-audit services continued
an independent review of UBI DAC compliance with the Code of Conduct Mortgage Arrears requested by
the Central Bank of Ireland;
provision of resource support to help support RBS’s Technology teams with understanding and
implementing an end to end technology delivery framework and embed these new ways of working within
Technology teams;
review of the financial position of a customer to allow Senior Lenders, including RBS, to work with the
customer on a medium term restructuring solution;
support to the businesses and Finance Central SOX team in documenting the end to end processes
underlying statutory financial reporting, confirming the associated risk and mitigating suite of SOX controls ;
to build an iOS application for an Entrepreneurial Spark concept
quality assurance services for RBS’s customer due diligence remediation programme;
development of an initial proposition and development roadmap for a new digital platform that will enable us
to launch, test and refine innovative offerings for both customers and non-customers;
development of a risk assessment process, control framework and review framework in relation to new
corporate tax offences under the Criminal Finances Act;
as the skilled person to continue to support the Bank’s ring-fencing programme under ICB; and
to support the Bank in implementing new technologies to create excellent customer experiences, contribute
to a strong cost:income ratio and simplify business processes.
Further details of the non-audit services that are prohibited and permitted under the policy can be found on
rbs.com. Information on fees paid in respect of audit and non-audit services carried out by the External Auditor
can be found in Note 5 on the consolidated accounts.
Brendan Nelson
Chairman of the Group Audit Committee
72
Report of the Board Risk Committee
Letter from Baroness Noakes
Chairman of the Board Risk Committee
“A key part of RBS
becoming a simpler,
safer and customer
focused bank is
excellent risk
management”
Dear Shareholder,
A key part of RBS becoming a simpler, safer and customer
focused bank is excellent risk management. The Board Risk
Committee (BRC) plays an important role in overseeing how well
RBS manages its risks. The purpose of this report is to describe
how the BRC discharged this responsibility during 2017.
2017 has been another busy year for the BRC and our detailed
report, which follows, sets out the detail of what we have done. I
would like to focus on two key areas, both of which are driven by
regulatory requirements.
Ring-fencing and Resolution
RBS, in common with other large banks, is required to deliver
both ring-fencing and key parts of its resolution plans by the
beginning of 2019.
The separation of our core UK and European banking business
from activities that are required to be outside the ring-fence
involves many complex activities including: legal restructuring of
the RBS group; detailed analysis and transfer arrangements for
individual customers and products; and changes to the way in
which we manage the business.
In parallel with this RBS needs to have plans acceptable to the
regulators which allow RBS to be dealt with effectively in the
event of financial failure. An important part of this is Operational
Continuity in Resolution (OCIR) which is aimed at ensuring that
the ring-fence bank has all the systems and resources it needs to
operate. This in turn requires much more formality and structure
around the way that individual parts of RBS trade with each other
through inter-group agreements and these agreements are a key
part of how we deliver ring-fencing as well.
The BRC has responsibility for overseeing the delivery of these
programmes and the management of the associated execution
and delivery risks on behalf of the Board. We reviewed the ring-
fencing programme at every meeting and receive reports from an
integrated assurance programme. In H2 2017, the BRC
supported the incorporation of OCIR requirements within the
ring-fencing programme in recognition of the interdependencies.
We will monitor closely the delivery of the residual elements of
RBS’s Resolution Planning separately.
Capital and Liquidity
Capital and liquidity are important areas for risk management in
any bank and the regulatory requirements are intensifying,
particularly in the context of ring-fencing.
The Committee devoted considerable time this year to stress
testing. The 2017 Bank of England exercise incorporated a
requirement to undertake two stress scenarios (an Annual
Cyclical Scenario (ACS) and a Biennial Exploratory Scenario
(BES)) followed by a further two IFRS 9 exercises on non-credit
card and credit card exposures. The BRC reviewed the various
components and stages of these exercises and recommended
that the Board approve them.
We also conducted detailed reviews of the Internal Capital
Adequacy Assessment Process (ICAAP) and Internal Liquidity
Adequacy Assessment Process (ILAAP) returns for the Group. In
preparation for ring-fencing, the Committee also oversaw the
preparation of an ICAAP for the future ring-fenced bank and both
an ICAAP and ILAAP for RBS’s future NatWest Markets
subsidiary which will sit outside the ring-fence.
Other Work
Our detailed report sets out what we have done in other areas
during the year. The more material areas have been:
Risk appetite: we continued the work of earlier years to
oversee the extension and refinement of RBS’s
comprehensive risk appetite framework, including its
cascade to our key franchises and preparation for ring-
fencing.
Control environment: Strengthening the control environment
has been a key part of the RBS’s transformation
programme. Significant progress was made in almost all
parts of RBS but not enough to get the overall control
environment to where it needs to be.
Transformation programme: we continued to oversee the
complex programme of bank-wide initiatives. This includes
the delivery of a number of key regulatory requirements. In
recognition of the improvements made to the effectiveness
of the programme, we were able to reduce our detailed
involvement compared with prior years.
Key Priorities for 2018
Successful delivery of ring-fencing and OCIR will continue to be a
key focus area in 2018 given the regulatory deadline of 1 January
2019. Our focus will shift from legal compliance to ensuring that
we have the right risk management and oversight processes to
underpin the new structures. I expect that we will continue to
focus on the control environment – in particular the parts of the
business which still need to improve long term sustainability.
I would like to end by extending my gratitude to my fellow
Committee members and to the bank’s senior leadership team for
their support and dedication to the business of the Committee
during 2017.
Baroness Noakes
Chairman of the Board Risk Committee
22 February 2018
73
The Committee also held in-depth sessions on risk reporting and
held a teach-in on both capital and IFRS 9 requirements. A ‘no
formal agenda’ session was held with members of the BRC to
enable open discussion about the key risks and threats to the
organisation independently of the issue management and
procedural matters which necessarily form a material component
of the BRC agenda.
Performance Evaluation
The annual review of the effectiveness of the Board and its senior
Committees, including the Board Risk Committee, was conducted
internally in 2017. The Committee has considered and discussed
the outcomes of this evaluation and accepts the findings. Overall
the review concluded that the Board Risk Committee continued to
operate effectively.
However, certain recommendations for enhancing the operation
of the Committee were identified, including: increased legal entity
focus; devolving greater oversight to executive fora to reduce the
pressure on Committee time; and further enhancement in the
quality of information presented to the Committee to ensure it is
concise, with key matters of judgement clearly highlighted.
Recognising that RBS has now addressed several legacy issues,
it was agreed that the Committee should look to re-focus to be
more forward looking, and dedicate less time to remediation and
operational issues.
The outcomes of the evaluation have been reported to the Board
and the Committee will track progress on its 2018 priorities during
the year.
Allocation of Board Risk Committee agenda time:
Current risk profile and issues
Change agenda and large projects
Process, policies and risk appetite
Regulatory returns and stress testing
Accountability and Remuneration
Governance & Procedural
Risk, conduct and regulatory affairs focus
sessions
Franchise and function focus sessions
Total
22%
10%
13%
14%
6%
7%
7%
21%
100%
Report of the Board Risk Committee
Report of the Board Risk Committee
The role and responsibilities of the Board Risk Committee
The Board Risk Committee assumes responsibility on behalf of
the Board to provide oversight of current and potential risk
exposures and future risk strategy, including the determination of
risk appetite and tolerance, and to promote a culture of risk
awareness within RBS. A large part of the Board Risk
Committee’s work is the review of reports and regulatory
submissions on behalf of the Board and recommending them for
approval. Where this is the case, the Report below is annotated
with an asterix (*).
The Committee’s responsibilities are set out in more detail in its
terms of reference which are reviewed annually by the
Committee and approved by the Board. These are available on
RBS’s website: rbs.com.
Membership
The Board Risk Committee is comprised of independent non-
executive directors. Details of the skills and experience of each of
the Committee members are set out in their biographies on
pages 51 to 55.
Baroness Noakes (Chairman)
Frank Dangeard
Morten Friis
Penny Hughes
Brendan Nelson
Attended/
scheduled
9/9
9/9
9/9
9/9
9/9
Brendan Nelson is chairman of the Group Audit Committee of
which Baroness Noakes and Morten Friis are also members.
Penny Hughes is chairman of the Sustainable Banking
Committee. This common membership across Committees helps
to ensure effective governance across the committees.
Committee meetings are also attended by the RBS Chairman,
relevant executives, (including the Chief Executive, Chief
Financial Officer, Chief Risk Officer, Chief Conduct & Regulatory
Affairs Officer, Chief Legal Officer and General Counsel and
Chief Audit Executive), and the lead partner of the External
Auditor. External advice is sought by the Committee, where
appropriate.
Meetings and visits
Nine scheduled meetings and six ad hoc meetings were held in
2017. The ad hoc meetings were required to consider: the results
of various phases of internal and external stress tests; review of
ICAAP and ILAAPs and reverse stress testing results; and the
processes supporting the formal documentation required for the
Ring-fencing Transfer Scheme.
In 2017, members of the Committee undertook a programme of
visits to various businesses and control functions including bi-
annual visits to Risk, Conduct and Restructuring function in
conjunction with members of the Group Audit Committee. The
purpose and scope of this programme is discussed in detail in the
Report of the Group Audit Committee on page 67.
74
Report of the Board Risk Committee
Matters considered by the Committee in 2017
Key area
Matters considered and action taken by the BRC
Risk Profile
Reporting
External
developments
The Committee provided oversight of RBS’s risk profile relative to RBS’s strategy and risk appetite
through the review of key emerging and identified top risks impacting RBS’s businesses and
operations as presented in the Risk & Conduct Management Quarterly Report, and supplemented by
short form reports at all other meetings.
Received verbal updates from the Chief Risk Officer at each meeting highlighting the most current
and material risks impacting RBS.
A focused session on enhancement of risk reporting was held in October 2017 which resulted in a
number of recommendations on content and presentation in the Risk & Conduct Management
Quarterly Report. The Committee will monitor how the changes are being implemented through 2018.
Received updates from Executive Risk Forum (ERF) and Technical ERF and discussed any
emerging risks and issues escalated, in particular those areas where BRC had devolved detailed
oversight to those fora.
Received reports from the Chief Risk Officer at each meeting highlighting external developments with
the potential to affect the bank’s ability to meet its strategic objectives or continue its operations.
Particular focus was placed on political developments and stability, including Brexit preparedness and
the potential impact of the UK and certain EU elections; prospective EU capital requirements; UK
economic resilience - inflation, interest rates; unemployment and the level of consumer indebtedness;
the UK base rate increase; and global sanctions.
BRC also received a report on new and emerging threats including established risks such as
competition but also risks posed as a result of digitisation.
General Counsel’s
report
The General Counsel reported to the Committee at each meeting on current and emerging key legal
developments and significant litigation risks affecting the bank. RBS’s plans to comply with the
General Data Protection Regulation were kept under review.
Regulatory Affairs
and Developments
Introduced a new report during 2017 covering material regulatory interactions, communications and
developments to ensure a stronger focus on the areas of key regulatory interest. Reviewed the
governance and assurance supporting material regulatory representations and attestations and
considered RBS’s strategic plans against the key themes in the FCA Risk Outlook and Business
Plan.
Control Environment
Business and
subsidiary risk
committees
A Board Oversight Committee (BOC) has been established to oversee required enhancements to the
governance and risk management practices in UBI DAC and, where appropriate, the BRC will work in
conjunction with the BOC to understand implications for RBS processes.
Received bi-annual reports on the control environment of the franchises and functions and monitored
the route and achievability of being within appetite by end of 2017. Sought management’s assurance
that appropriate measures were in place to ensure that the businesses could continue to operate
safely, where control weaknesses had been identified.
Particular focus has been placed on areas where the control environment requires enhancement. The
BRC has devolved detailed review and challenge of management plans to remediate and strengthen
the conduct and control environment across the NatWest Markets franchise to Technical ERF. We
received reports on those discussions and actions being taken, paying particular attention to the
robustness of issue closure and downgrade; interdependencies; and sustainability.
Technical ERF is also overseeing in detail, management’s plans to return the control environment
within UBIDAC to a within risk appetite position, ensuring identified best practices are applied as
adopted and learned through Nat West Markets remediation. BRC will receive regular updates on
those discussions through 2018.
The Committee is also monitoring closely the programme to deliver required improvements to
customer due diligence processes as well as remediation work. We will review progress on a
quarterly basis in 2018 given the programme’s criticality to attaining a satisfactory control
environment Bank-wide.
Received quarterly reports from the Chairman of the US Risk Committee to the point of its retirement
in May 2017. The US Risk Committee was established to provide oversight of the risk management
framework of RBS’s combined US operations. Following closure of its Connecticut Branch, alternative
governance processes, commensurate with the scale of RBS’s residual US activity were established.
The BRC retains oversight of key regulatory submissions.
Received quarterly reports from the chairmen of franchise risk committees and those of certain
principal subsidiaries outlining risk profile relative to risk appetite and any control weaknesses and
remediation plans. In 2018, this reporting mechanism will be extended to all material regulated
subsidiaries.
75
Report of the Board Risk Committee
Key area
Matters considered and action taken by the BRC
Major Programmes
Transformation
Kept the execution risk of the bank-wide transformation programme under review receiving regular
updates from the programme team on progress, including independent opinions from Risk, Conduct
and Restructuring function and Internal Audit. BRC encouraged the development of a reporting
dashboard to track outcomes more effectively.
Reviewed management’s lessons learned from oversight of the programme in 2016 and actions
being taken to address findings.
Transitioned reporting to quarterly, reflective of the progress made to clearly report and track
deliverables; the improving status of the programme; and the increased alignment between
management, Risk, Conduct and Restructuring function and Internal Audit.
Where underlying programmes were reported to be losing traction, BRC took specific reports on
delivery. Specifically, BRC received reports on the progress of RBS to achieve Merchant compliant
position under the Payment Card Industry Data Security Standard (PCI DSS) and considered
challenges to delivery of the Future Clearing Model programme.
Following the announcement of the European Commission’s decision to approve HMT’s alternative
remedy package in September 2017, the BRC considered implementation plans to establish the
required schemes, including critical path dependencies/progress towards operational readiness.
Reviewed plans to reintegrate the business previously described as Williams & Glyn into RBS’s retail
business including controls and safeguards to ensure appropriate oversight of the portfolio and the
timing of transition.
Williams & Glyn
Ring-fencing
Developed a programme of detailed quarterly reporting on the ring-fencing implementation
programme, supplemented by shorter updates at intervening meetings given the considerable volume
of activity and criticality of the deliverable.
Considered the key execution risks in the programme and oversaw key regulatory deliverables.
Reviewed the Ring Fence Transfer Scheme documentation and Skilled Person Report, including the
required management representation letter and regulatory attestation. The Skilled Person also
attended relevant meetings to update on its findings. Latterly, the BRC supported the integration of
Operational Continuity in Resolution delivery within the programme given the interdependencies with
ring-fencing activity. Throughout, the Committee sought to ensure the programme remained focussed
on the delivery of ring-fencing over discretionary strategic deliverables.
Received opinions from Risk, Conduct and Restructuring function and Internal Audit on progress.
Oversaw the appointment of KPMG as independent third party assurance provider and received the
outputs of the work undertaken. An integrated assurance approach was adopted in the period, the
scope of which was reviewed by the BRC to ensure effective assurance activity across Risk, Conduct
and Restructuring function, Internal Audit and KPMG.
The Committee increased its oversight of Resolution Planning to quarterly and requested that this be
classified as a major programme within risk reporting. This was reflective of the requirement to
ensure adequate legal entity focus; pan-bank engagement; regulatory scrutiny and interdependency
of elements with the ring-fencing deliverables. Latterly, the BRC supported management’s decision to
transfer OCIR elements to the ring-fencing programme so as to increase the pace of delivery and
demonstrate congruence with ring-fencing. The Committee reviewed outputs of a third party
benchmarking review of RBS’s progress as compared to peers and will monitor actions being taken in
response. A re-baselined plan will be reviewed in early 2018.
Reviewed the draft 2017 Recovery Plan in June 2017.*
Recovery and
Resolution Planning
76
Report of the Board Risk Committee
Key area
Matters considered and action taken by the BRC
Enterprise Wide Risk
Risk appetite
Reviewed the risk appetite governance framework; provided feedback on the mechanism for
managing and escalating breaches of risk appetite and providing oversight of the cascade of risk
appetite.*
Considered an annual refresh of the Risk Appetite Framework and received an update on the
guidance and support that would be provided to the business throughout 2017 to ensure that the
Framework was consistently embedded across the organisation.
Following work undertaken in 2016 to transition to a position where the Board/BRC played a greater
role in the approval of risk appetite for RBS’s most significant risks, it was agreed that this would take
place on a phased basis. The BRC reviewed qualitative risk appetite statements and certain
quantitative risk appetite measures relating to Market Risk and Credit Risk, being those measures
where the Board would wish to be informed if those limits were exceeded (Board Risk Measures).*
Considered a report on the approach to risk appetite under structural reform (reflecting the future
legal entity status of the Group). The BRC reviewed the proposed cascade of strategic risk appetite
limits for the legal entities within and outwith the future ring-fenced structure. It was noted that
process and limits would continue to be refined in 2018.*
Reviewed escalated breaches of risk appetite and action being taken in response.*
Reviewed the annual refresh of risk appetite for strategic risks and made suggestions for
refinements.*
Reviewed the cascade of risk appetite for strategic and material risks to franchises and functions and
received a report on the alignment of risk appetite, ‘top to bottom’ across the organisation.
Considered various detailed risk appetite statements and associated metrics for material risks.
Reviewed work being undertaken across RBS to improve risk culture including the status of the
various ongoing bank-wide risk culture initiatives. Considered the outputs of a PwC review of
progress in strengthening and embedding risk culture and discussed the actions identified that would
have the greatest impact on risk culture.
Reviewed management’s proposed framework to measure risk culture maturity against target state
and considered the outcome of the assessment of progress against agreed performance criteria.
Undertook an annual review of the client pricing process against regulatory requirements to ensure
that the pricing of liabilities and assets takes into account the bank’s business model and risk
strategy.
Risk Culture
Client Pricing for
Assets and Liabilities
Three Lines of
Defence
Received an update on the work being undertaken to improve the effectiveness of the three lines of
defence model within RBS, including actions being taken to improve understanding of roles and
accountabilities under each of the lines of defence.
RDAR
Monitored progress towards full compliance with the Basel Principles on Effective Risk Data Aggregation
and Reporting (RDAR) and undertook an annual review of the RDAR framework.*
Risk Assurance
Received quarterly reports from the Risk Assurance team, on issues highlighted by reviews conducted in
each of the franchises.
77
Report of the Board Risk Committee
Key area
Matters considered and action taken by the BRC
Operational, Credit and Market Risk
Credit, Market and
Operational risk MI
Reviewed the bank’s risk profile relative to credit, market and operational risk, and examined detailed
management information (MI) within the quarterly Risk Management Report in this regard.
Operational Risk
Change capacity - Discussed the change risk profile of the bank and the prioritisation and impact of
mandatory change programmes and considered opinion as to whether RBS had the required
resource, processes and systems to deliver its change portfolio within agreed timescales. Reporting
on change capacity has now been incorporated within routine quarterly risk reporting.
Risk and Control Assessments - monitored management’s progress to complete and refresh these
assessments which are intended to provide an end to end perspective of the risk and control profile
across the businesses. Considered scope of the exercise and impact of the outputs on risk profile.
Undertook a review of the adequacy and effectiveness of the Risk Policy Framework and considered
work being undertaken to reduce the volume of exceptions to policy and remediation in areas of non-
compliance.
Reviewed the statutory Annual Risk and Control Disclosure regarding the internal control system in
RBS prior to its review by the Group Audit Committee.*
Received bi-annual reports on Resilience and Security which considered in particular, Cyber Risk;
internal and external fraud and records management.
Considered the statement of risk appetite for operational risk together with a new suite of metrics.
Oversaw the Executive Credit Group (ECG) receiving a summary of the decisions made by the ECG
in the period. Reviewed the most material credit decisions made in 2017 and examined trends in the
market. The BRC requested more data on declined requests and explanation of risk/return relative to
each decision.
Reviewed a revised governance framework for large credit exposure decisions, designed to enhance
the level of Committee and Board oversight.*
Reviewed a suite of Credit Risk Board Risk Appetite Measures.* Undertook a deep dive on the
mortgage portfolio with a focus on drivers of growth and controls and received a report on Non-
Performing Loans and Provision Coverage.
Credit Risk
Market Risk
Held a teach-in on the impact of the Fundamental Review of the Trading Book and the impact of the
new regulation.
Reviewed a suite of Market Risk Board Risk Appetite Measures.*
78
Report of the Board Risk Committee
Key area
Matters considered and action taken by the BRC
Conduct and Financial Crime
Financial Crime
Reviewed the annual Group Money Laundering Reporting Officer’s Annual Report.*
Received regular updates on financial crime risk, with a particular focus on the customer due
Conduct risk
diligence remediation programme, including scope, accountability, the timescale to return to appetite
and impact on bank-wide control environment.
Considered the Financial Crime risk appetite statement and associated limits and measures.
Assessed progress to meet the requirements of the European Deposit Guarantee Scheme and
approved the required compliance statements for submission to the PRA.*
Received a report on how RBS surveillance processes and controls operated, in particular how these
benchmarked to peers, and considered required enhancements.
Received reports on Conduct Risk Appetite and performance, including action being taken to improve
bank-wide conduct risk profile.
Reviewed a revised statement of risk appetite and metrics which concentrated on customer outcomes
as the Committee had previously requested.
While a Board Oversight Committee (BOC) had been established to oversee required enhancements
to the governance and risk management practices in UBI DAC, where appropriate, the BRC will work
in conjunction with the BOC to understand the implications for RBS processes.
Reviewed reports relating to the 2015 US Cease & Desist Order.
Received an annual report on oversight of operational compliance of RBS and NatWest with FCA
Client Asset Rules (CASS) and compliance with CASS resolution pack rules.*
Capital and Liquidity Risk
Stress Testing
Considered the 2017 Bank of England Stress Tests, comprising, for the first time, two stress
scenarios – the Annual Cyclical Scenario (ACS) and the Biennial Exploratory Scenario (BES). The
Committee reviewed the scenario expansion and expansion of market risk factors and considered
key assumptions and judgements and reviewed the outputs and management actions.*
Reviewed the Bank of England IFRS 9 stress tests on non-credit card and credit card exercises
including the assurance provided by Internal Audit and confirmation that management had
undertaken robust review.*
Reviewed the 2017 budget and stress test results (including IFRS 9) and 2017 ICAAP Stress Test
Scenarios together with opinions from Risk and Internal Audit.*
Considered 2018 budget and stress test results including Risk and Internal Audit opinions.*
Reviewed reverse stress testing results.
Oversaw enhancements to the bank’s stress testing capability, in particular the remediation actions
taken in response to the PRA review of stress testing capability. Work being undertaken to strengthen
and validate models and improve supporting governance was a key focus.
Reviewed the RBS Group and pro forma NatWest Markets Plc ILAAP and ICAAP, with particular
focus on assumptions and areas of judgement and considered associated Risk and Internal Audit
opinions.*
Reviewed the NatWest Markets ILAAP and ICAAP, and accompanying Internal Audit Report.* These
are the first such regulatory submissions and the documents will continue to be refined and tailored
during 2018.
ICAAP and ILAAP
Other capital and
liquidity coverage
Reviewed the risk profile of the Treasury Function in a focus session held to understand better its
position relative to risk appetite, emerging trends, threats and regulatory developments over the
following year.
Considered the bank’s usage of the Bank of England Term Funding Scheme, noting that the
Monetary Policy Committee decision to close the drawdown period on 28 February 2018 had no
material impact on the bank’s funding and liquidity plans.
Considered conduct liquidity stress scenario analysis in detail.
Undertook a teach-in on capital with a focus on legal entities (including the operation of external and
internal MREL), future RWA developments and capital headwinds (Basel 3 amendments, PRA
mortgage floors, IFRS 16).
Reviewed pension strategy and oversaw interactions with the Pension Trustees.
79
Report of the Board Risk Committee
Key area
Matters considered and action taken by the BRC
Accountability and Remuneration
Accountability and
Remuneration
Continued to provide oversight over the risk dimension of performance and remuneration arrangements,
working closely with the Group Performance and Remuneration Committee. The Report of the Group
Performance and Remuneration Committee on pages 83 to 105 includes further detail on how risk is
taken into account in remuneration decisions. Key matters considered by the Committee included:
accountability recommendations in respect of significant material events and high earners;
the risk and control objectives of members and attendees of the bank’s Executive Committee, with
additional focus on underlying objectives for the Chief Risk Officer;
an assessment of the risk/conduct performance of members and attendees of the Bank’s Executive
Committee, with recommendations made to the Group Performance and Remuneration Committee
as appropriate to inform its decision on pay and awards;
an assessment of the risk/conduct performance of the Bank and its businesses, with
recommendations made to the Group Performance and Remuneration Committee to inform its
decision on adjustments to the annual bonus pools;
performance conditions for the bank’s Long Term Incentive Plans and assessment of proposed
vesting levels to ensure risk management/conduct performance is fairly reflected in vesting
outcomes; and
the proposed Executive Director Future Remuneration Policy as detailed on pages 87 to 88 from a
risk and control perspective.
* Items that were reviewed by BRC prior to recommendation to the Board
Baroness Noakes
Chairman of the Board Risk Committee
80
Report of the Sustainable Banking Committee
Letter from Penny Hughes
Chairman of the Sustainable Banking Committee
“We remain
committed to
building a
sustainable bank that
is great for our
stakeholders.”
Dear Shareholder,
I am pleased to report on the progress made by the Sustainable
Banking Committee (SBC) during another busy year for RBS.
The Committee has retained its forward looking, strategic outlook
focusing on its five priority areas: culture; customers; people;
brand & communications; and environmental, social and ethical
(ESE) issues.
The Sustainable Banking Committee plays an important role on
behalf of the Board in considering the long term challenges RBS
will face, and how we can be proactive in tackling those as well
as meeting our ambition for customers. With this remit, the areas
the Committee focused its efforts on during 2017 were:
technology and open banking;
building a healthy culture;
challenging management on progress towards reaching
number one for customer service, trust and advocacy; and
converting doing the right thing into good customer
outcomes.
We have made good progress this year and below are some of
the highlights of our achievements:
an enhanced stakeholder engagement programme;
a dedicated session on Personal & Business Banking’s plan
to improve Net Promoter Scores and reduce complaints;
continuing the integration of sustainable banking into our
core businesses and enhancing disclosure of integrated
reporting elements in the Strategic Report;
supporting and challenging management to make tangible
progress on culture;
development of a sustainable banking dashboard to provide
the Committee with a consolidated view on RBS’s
performance in respect of key priorities such as the
customer, culture and our reputation, to monitor progress
against becoming a truly sustainable bank;
supporting management in setting more ambitious
environmental targets given the excellent progress RBS
made in respect of previous targets set on carbon, paper
and water;
encouraging management to consider and understand
external benchmarks, surveys and ratings and the insights
those provide in terms of RBS’s reputation and experience
for customers;
a focus on people, with the Committee holding a spotlight
session on the wellbeing agenda, being engaged on our
inclusion strategy and the employee value proposition; and
being consulted on the Modern Slavery Act statement prior
to it being published for the first time last year.
In August 2017 we were delighted to welcome Yasmin Jetha as a
member of the Committee. Yasmin brings a fresh perspective
and enthusiasm for the work that we do. In January 2018 we then
welcomed Dr Lena Wilson as a member and with her strong
public sector and commercial background is a valuable addition
to the Committee.
The efforts to build a responsible and sustainable business are
recognised through independent and external measures. Some
examples include:
Culture
Our own measurement surveys correlate with the progress
being recognised by the Banking Standards Board culture
assessment. We need to maintain momentum and be
diligent in identifying and taking action in weaker areas.
Customers
With clearer customer segmentation in place, good progress
is being made in meeting the needs and expectations of
NatWest and RBS Premier customers and those customers
looking to buy a home. The significant trend to online is
supported by our leading mobile app and digital banking
propositions for business and commercial customers.
People
It is pleasing that RBS is recognised for being an attractive
employer and has been rated a Top Global Stonewall
Employer. The Committee recognises the importance of
making RBS a great place to work.
Brand & Communications
The Committee recognises the importance of the brand
strategy. It is pleasing to see the progress made in key
metrics, with brand reputation of NatWest and Royal Bank of
Scotland reaching a 5 year high in July 2017.
ESE Issues
While we saw a drop in our Dow Jones Sustainability Index
rating this year we have retained our place in the
FTSE4GOOD index and achieved a leadership category
listing in the Carbon Disclosure Project Index (A-) for the
second year running.
My thanks go to the Committee members and attendees for their
contribution and support throughout the year. I am also delighted
that the proactive work being done by our Sustainable Banking
team has been recognised externally, with the award of
Sustainability Team of the Year at the Ethical Corporate
Responsible Business Awards.
As you will have seen earlier in the report, I intend to stand down
as a director of RBS in the coming months. I have thoroughly
enjoyed my time as Chairman of SBC and have been pleased by
the progress and positive changes that are underway as we
remain committed to building a sustainable bank that is focused
on delivering for a diversity of stakeholders. I look forward to
handing over the role of Committee Chairman to Mike Rogers
who has been an engaged and valuable member of SBC since
2016.
Penny Hughes
Chairman of the Sustainable Banking Committee
22 February 2018
81
Report of the Sustainable Banking Committee
Report of the Sustainable Banking Committee
Meetings
The Sustainable Banking Committee held six scheduled
Committee meetings in 2017 which were attended by the
Chairman, senior representatives from the customer-facing
franchises as well as Human Resources, Sustainability, Risk,
Conduct & Restructuring, Communications & Marketing, and the
Chief Economist.
Stakeholder engagement
The Committee runs a proactive engagement programme and in
2017 met with twenty external stakeholders. The purpose is to
listen and understand where RBS could do more.
Performance evaluation
The annual review of the effectiveness of the Board and its senior
Committees, including the SBC, was conducted internally in
2017. The SBC has considered and discussed the outcomes of
this evaluation and accepts the findings. Overall the review
concluded that the SBC continued to operate effectively.
The feedback from both members and attendees was very
positive, although there was some room for improvement in the
information received by the SBC. It was suggested that the scope
of SBC could be reviewed to ensure its role is clearly defined and
understood as its remit has evolved over the last year.
In 2017 we held four such external engagement sessions
covering the following topics:
The outcomes of the evaluation have been reported to the Board
and the Committee will track progress during the year.
how digital tools and programmes can enhance financial
capability and the opportunity for RBS to take a leadership
role in this area;
housing affordability and the role RBS could play in helping
to address the housing crisis;
how RBS could develop its approach and strategies to
manage climate change risk; and
the risks and opportunities that technological disruption
brings.
We enhanced our engagement programme in 2017 gaining first
hand insight into digital and FinTech centred transformation and
its impact on customer behaviour. This was complemented by an
additional session with management on open banking. This is an
increasing area of interest and focus for RBS and it is important
that SBC has a detailed understanding of the opportunities and
issues this presents.
The Committee also recognises the importance of engaging with
a wide range of stakeholders so members visited Business
Banking and Mortgages during 2017, providing valuable frontline
colleague and customer insight. We also hosted a lunch with
representatives from our Employee Led Networks. This allowed
the Committee to hear first hand what it feels like to work for
RBS. The themes from this session were reported to the Board to
provide insight into the issues facing our employees.
Following the sessions opportunities for follow up, further
engagement and challenge to management are identified. In
December, we welcomed back a number of our past
stakeholders to share the progress made and to continue
engagement.
Membership
During 2017 The Sustainable Banking Committee consisted of
five independent non-executive directors. The Chairman and
members of the SBC, together with their attendance at
scheduled meetings in 2017, are shown below.
Role and responsibilities of the Sustainable Banking
Committee
Authority is delegated to the SBC by the Board and the SBC
reports and makes recommendations to the Board as required.
The terms of reference of the SBC are available on rbs.com and
these are reviewed annually and approved by the Board. A
regular report on the activities of the SBC in fulfilling its
responsibilities is provided to the Board.
The principal responsibilities of the SBC are shown below:
Culture and People
to receive a regular culture measurement report to monitor
progress of embedding the Board approved culture;
to understand areas of the business where there is an
opportunity to improve, supporting and challenging
management on their plans;
to receive updates on what RBS is doing in areas such as
wellbeing and inclusion, which form part of how it feels to
work here;
Customer
to oversee customer centricity priorities and how RBS is
supporting and engaging with key customer segments;
to oversee progress being made to achieve the long term
target of being number one for customer service, trust and
advocacy in each of our chosen businesses;
to receive updates on complaints including understanding
how management is addressing the root causes and how
that impacts the customer experience;
Brand & Communications
to oversee the brand strategy in embedding the bank of
brands approach focusing on building equity in our customer
brands;
to oversee actions being taken by management to manage
RBS’s reputation with reference to how RBS is viewed by
our customers, consumers and related interest groups;
Penny Hughes (Chairman)
Alison Davis
Robert Gillespie
Mike Rogers
Yasmin Jetha(1)
Notes:
Attended/
scheduled
6/6
6/6
6/6
6/6
3/3
(1) Appointed to the Committee with effect from 3 August 2017.
ESE Issues
to consider RBS’s environmental strategy and progress
against its environmental targets;
to understand what RBS is doing for financial capability and
how we operate in our communities; and
our wider sustainable banking strategy.
82
Directors’ Remuneration Report
Annual statement from the Chairman of the Group Performance
and Remuneration Committee
At a glance summary of executive directors’ remuneration
Summary of the executive directors’ remuneration policy approved at the 2017 AGM
Policy implementation – 2018 remuneration arrangements
Key features of the remuneration policy
Wider employee considerations
Group-wide remuneration policy, fair pay and the views of employees
Remuneration process and adjustments for risk, malus and clawback
Annual report on remuneration
Total remuneration paid to executive directors for 2017
Assessment of long-term incentive (LTI) awards
LTI awards granted during 2017
Performance assessment framework for 2018 LTI awards
Payments to past directors
Total remuneration paid to the Chairman and non-executive directors for 2017
Implementation of policy in 2018
Directors’ interests in shares and shareholding requirements
Total Shareholder Return (TSR) performance
Pay comparisons
The Committee and its principal activities during 2017
Shareholder voting on the remuneration policy
Other Remuneration Disclosures
Pay for employees below Board
Remuneration policy for all employees
Remuneration of Material Risk Takers
Page
84
86
85
86
87
89
90
91
91
92
93
95
95
96
97
98
98
99
100
101
102
104
83
Directors’ Remuneration Report
Annual statement from Robert Gillespie
Chairman of the Group Performance and Remuneration
Committee
“the new policy
creates a simpler
way of aligning the
interests of
executives with
shareholders”
Dear Shareholder,
This is my first report as Chairman of the Committee and I would
like to start by thanking my predecessor, Sandy Crombie, for all
his hard work. Sandy joined the Committee in 2009 and served
as Chairman from 2014 until the end of 2017, helping to oversee
a great number of positive changes in remuneration practices at
RBS. He was also instrumental in introducing a new directors’
remuneration policy at the 2017 AGM.
I would also like to thank shareholders for their feedback during
the development of the policy and for the high level of support
received at the AGM. It is right that RBS should continue to be at
the forefront of pay reforms and I believe the new policy creates a
simpler way of aligning the interests of executives with
shareholders. It continues our restrained approach to executive
pay and is in line with the growing consensus for companies to
develop more tailored remuneration arrangements.
We have moved to a long-term incentive structure with much
lower maximum potential awards and where the performance of
our executives is assessed on what they reasonably should be
expected to achieve, while operating within our risk appetite. This
helps to create more predictable outcomes and encourages safe
and secure growth.
The policy also supports our cultural aim of making sure that
remuneration encourages the right behaviours. Executives are
required to build up larger shareholdings and retain them for
longer. This creates stronger alignment with the experience of
shareholders both during and after employment.
Implementation of policy for executive directors in 2018
No changes are being made at this time to the fixed pay
arrangements for executive directors. Variable pay continues to
be delivered entirely in shares as long-term incentive (LTI)
awards with no annual bonus. Members of the Executive
Committee are on a similar remuneration construct.
The first LTI awards under the new policy will be granted in early
2018, following an assessment of performance over 2017. The
assessment determined that overall performance had been
strong, particularly in relation to financial and people & culture
measures, but a modest downwards adjustment was considered
appropriate as the desired risk and customer performance had
not been achieved in full. Details of the assessment against the
objectives and the award levels can be found in the report.
A further assessment will be undertaken after three years to
ensure that sustainable performance has been delivered prior to
vesting. Subject to this assessment, the shares will vest in equal
amounts over years three to seven from the date of grant,
followed by an additional 12 month retention period post vesting.
Financial performance and pay decisions for 2017
It is clear we have a strong underlying business capable of
generating profits and sustainable returns for shareholders.
Income has risen, costs have fallen and our capital strength has
improved further during the year. A number of legacy issues were
settled in 2017 including the rights issue litigation and the Federal
Housing Finance Agency settlement relating to RMBS. In
addition, approval was obtained for the alternative remedies
package for the business previously described as Williams &
Glyn. Efforts continue to be made to resolve the outstanding
RMBS litigation though the timetable for resolution is outside of
the control of management.
For executive directors, performance has been assessed for the
long-term incentive plan granted in 2015 following the end of the
performance period. The vesting reflects improvements in the
Economic Profit, CET1 ratio and people measures, with
adjustments in areas where performance did not meet targets
over the three year period, such as total shareholder return.
In terms of other pay decisions, the bonus pool for 2017 is
£342m, which is £1m lower than 2016, reflecting our transition to
simpler and more stable pay structures. The average bonus
amounts remain relatively modest with 68% of all bonuses
awarded amounting to £5,000 or less. Immediate cash bonuses
continue to be limited to £2,000. Since 2010, the bonus pool has
reduced by around 75% as a result of decisions taken by the
Committee and the move towards a smaller bank with a culture
focused on service excellence rather than sales.
Broader pay policy
The Committee also oversees the broader employee pay policy.
We continue to make good progress in ensuring that employees
are paid fairly and are supported by simple and transparent pay
structures. Over the last two years we have removed variable pay
for frontline and clerical employees with increases to their fixed
pay instead, which provides greater certainty. As a result, 26,500
employees are compensated solely by fixed pay and benefits.
Our rates of pay exceed the Living Wage and changes have
been introduced so that people performing similar roles are paid
more consistently.
We believe that having an engaged and inclusive workforce is a
key part of a successful business. I am greatly encouraged by the
latest employee engagement score which has risen significantly
during 2017 and is now above the Global Financial Services
norm. We are confident that we pay our employees fairly. We
keep our HR policies and processes under review to ensure we
do so. Gender Pay Gap information is also being included for the
first time as part of the Strategic Report section, along with the
steps we are taking to address the position.
Looking ahead
Arrangements will be put in place in 2018 to provide additional
oversight of remuneration across key RBS entities post ring-
fencing. In addition, the government’s proposed governance and
executive pay reforms are due to be finalised in the coming
months. We welcome the proposals and are currently considering
the most effective mechanisms to supplement our existing
channels for the employee voice to be heard at Board level.
We remain strong supporters of reforms aimed at improving the
effectiveness and transparency of pay structures. I look forward
to working with the Committee in considering how we can
continue to develop remuneration practices at RBS.
Robert Gillespie
Chairman of the Group Performance and Remuneration
Committee
22 February 2018
84
Directors’ Remuneration Report
Summary of the remuneration policy for executive directors approved at the 2017 AGM
This page provides a summary of the key design features of the approved policy followed by an outline of how the policy will be
implemented for executive directors in 2018.
Aligned with strategic
thinking and building a
strong simple and fair
bank
LTI awards released
over eight years with
malus and clawback for
a long-term view of
performance
Aligns executives with
shareholders predominantly
through holding shares, both
during and after
employment
Helps to ensure
remuneration
encourages good
behaviours and embeds
the right culture
A policy
designed for
RBS and its
circumstances
The maximum LTI award
has been greatly reduced,
while shareholding
requirements have been
significantly increased
Underperformance or risk
failings would impact the
vesting level or lead to a
cancellation in the case of
significant issues
Performance assessed on
factors that executive directors
would reasonably be expected
to achieve, encouraging safe
and secure growth
While offering reduced
maximum pay, the construct is
designed to be more highly
valued by executives due to
more predictable outcomes
Change in maximum remuneration opportunity under the new policy
6,000
5,000
4,000
s
0
0
0
£
3,000
2,000
1,000
0
Chief Executive
5,246
c. 40% reduction in
max. variable pay
2,870
1,000
376
1,000
4,126
1,750
1,000
376
1,000
Previous Policy
New Policy
6,000
5,000
4,000
s
0
0
0
£
3,000
2,000
1,000
0
Chief Financial Officer
c.30% reduction in
max. variable pay
4,211
2,305
800
306
800
3,506
1,600
800
306
800
Previous Policy
New Policy
Salary
Pension & Benefits
Fixed Share Allowance
LTI Award (maximum)
Salary
Pension & Benefits
Fixed Share Allowance
LTI Award (maximum)
85
Directors’ Remuneration Report
Policy implementation – 2018 remuneration arrangements
The salary, benefits, pension and fixed share allowance arrangements remain unchanged from 2017. The LTI award to be granted in
2018 is the first award under the new policy, with a significantly lower maximum award level and a pre-grant assessment based on
performance during 2017. A further assessment will also take place three years after grant to consider if sustainable performance has
been delivered or if anything has come to light that would impact the vesting level or lead to a cancellation of the award.
Ross McEwan
£1,000,000
£26,250
£350,000
£1,000,000
Salary
Standard benefits
Pension
Fixed share allowance
2018 LTI award
(after pre-grant assessment set out below)
£1,575,000
Ewen Stevenson
£800,000
£26,250
£280,000
£800,000
£1,440,000
Pre-grant performance assessment for 2018 LTI awards
A summary of the assessment is set out below and further details can be found in the annual report on remuneration. The Committee
assessed performance against pre-set objectives for 2017, across the core areas of Finance, Risk & Operations, Customers and People
& Culture. The Committee considered whether the executive directors had achieved what would reasonably have been expected over
the period and then applied its judgement without reference to formulaic targets and weightings.
Financial
Strong financial performance
with all of the pre-grant
objectives met for 2017.
Cost savings of £810m were
achieved against a target of
£750m, the core franchises
achieved adjusted RoTE that
met the target of at least 11%
and the CET1 ratio was
15.9% against the target of
13%.
Risk & Operations
Continued improvements in risk
profile and culture. There was
an increase in the number of
franchises and functions
achieving the desired control
rating of 2, although this hadn’t
been reached across every
area.
Work is well underway in
readiness for ring-fencing and
the required legal entity
changes. The programme
remains on track with the
critical path still delivering to
plan.
Customers
NPS performance during 2017
was on-target in 4 of our 6
chosen customer segments.
While progress had been
made, there was still some
room for improvement on NPS
scores in certain segments.
Customer Trust performance
was ahead of target in 2 out of
the 5 chosen segments with
improvements in 2 further
segments.
People & Culture
Employee engagement and
leadership scores increased
significantly in 2017, with RBS
above the Global Financial
Services norm. Employee
engagement was up 7 points
on 2016 and was our highest
score to date.
Improvements were also made
in the assessment of culture
under the Banking Standards
Board survey together with
satisfactory progress towards
our target of >30% women in
‘senior roles’ by 2020.
After considering all the factors above, and taking into account input provided by the Board Risk Committee and the Sustainable
Banking Committee, the Committee determined that strong overall performance had been achieved in 2017. All financial objectives
had been met or exceeded along with significant improvement across people & culture measures. However, while progress had been
made across all areas, the Committee concluded that a modest reduction would be appropriate to recognise that the desired risk and
customer performance had not been achieved in full. As a result, the Committee determined that a 10% reduction should be applied
under the pre-grant assessment for the Chief Executive and the Chief Financial Officer.
Timing of remuneration payments
Variable
pay
pre-grant
assessment
based on
performance
over 2017
Fixed
pay
LTI award
granted in
2018
Fixed share
allowance
Pension &
benefits
Salary
further
assessment at
the end of three
years before
vesting
20%
20%
20%
20%
20%
vests over 2021 to 2025
with a 12 month retention
period post vesting
33%
33%
33%
shares released
over three years
Year
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
The percentage vesting boxes in the diagram above show when the share awards are released following the end of the applicable vesting and retention periods.
86
Directors’ Remuneration Policy
Key features of the remuneration policy for executive directors
The Directors’ Remuneration Policy was approved by shareholders at the AGM on 11 May 2017. The policy will apply until the 2020
AGM unless changes are required which mandate a revised policy be submitted to shareholders for approval. The table below
summarises the key features of the policy for executive directors. In the event of any conflict the approved policy, which can be found
under the Board and Governance section of rbs.com, takes precedence over the information set out below.
Element of pay
Salary
To provide a competitive
level of fixed cash
remuneration and aid
recruitment and retention of
high performing individuals.
Fixed share allowance
To provide fixed pay that
reflects the skills and
experience required and
responsibilities for the role.
Benefits
To provide a range of
flexible and market
competitive benefits that are
valued and assist individuals
in carrying out their duties
effectively.
Pension
To encourage planning for
retirement and long-term
savings.
Variable pay award
(long-term incentive)
To support a culture where
individuals are rewarded for
the delivery of sustained
performance, taking into
account RBS’s strategic
objectives.
Delivery in shares with the
ability to apply malus
adjustments and clawback
further supports longer-term
alignment with
shareholders’ interests.
Operation
Maximum potential value
Paid monthly in cash and reviewed annually.
The rates for 2018 are unchanged:
Chief Executive - £1,000,000
Chief Financial Officer - £800,000
A fixed allowance paid entirely in shares. The shares vest
immediately subject to any deductions for tax and are
released in equal tranches over a three year retention
period.
Future salary increases will not normally be
greater than the average salary increase for
RBS employees over the period. Other than
in exceptional circumstances, the salary will
not increase by more than 15% over the
course of this policy.
An award of shares with an annual value of
up to 100% of salary at the time of award.
Executive directors can select from a range of standard
benefits including: company car; private medical cover; life
assurance; and critical illness insurance. Executive directors
are also entitled to travel assistance in connection with
company business including the use of a car and driver.
RBS will meet the cost of any tax due on the benefit. Further
benefits including relocation costs may be offered in line
with market practice. RBS may also put in place certain
security arrangements for executive directors.
Set level of funding for standard benefits
(currently £26,250) which is subject to
review.
The total value of benefits provided is
disclosed each year in the annual report on
remuneration.
Provision of a monthly cash pension allowance based on a
percentage of salary. Opportunity to use the cash to
participate in a defined contribution pension scheme.
35% of salary for current executive directors.
25% of salary for new executive directors.
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 prior to vesting and clawback which applies for
seven (and potentially up to ten) years from the date of
award; and
a 12 month post-vesting retention period.
Performance will be assessed in the areas of Finance, Risk
& Operations, Customers and People & Culture to
determine whether the executive has achieved what would
reasonably have been expected in the circumstances. Risk
& Control and Stakeholder Perception underpins will also
apply which may lead to downwards adjustment.
The maximum award for current directors is:
Chief Executive - 175% of salary.
Chief Financial Officer - 200% of salary.
Prior performance will be taken into account
when determining the value of the award at
the time of grant.
The vesting level of the award can vary
between 0% and 100% dependent on the
delivery of sustained performance.
Shareholding requirements
To ensure executive
directors build and continue
to hold a significant
shareholding over the long
term.
Unvested shares from LTI awards will count on a net of tax
basis towards meeting the shareholding requirement once
the pre-vest performance assessment has taken place.
Directors can dispose of up to 25% of the net of tax shares
received until the shareholding requirement is met.
Chief Executive - 400% of salary.
Chief Financial Officer - 250% of salary.
87
Directors’ Remuneration Policy
Remuneration for the Chairman and non-executive directors
Element of pay Operation
Fees
To reflect the
required skills,
experience and
time
commitment.
Fees are paid monthly in cash and reviewed regularly. Additional
fees may be paid for new Board Committees provided these are
not greater than fees payable for the existing Board Committees.
No variable pay is provided so that the Chairman and non-
executive directors can maintain appropriate independence.
Benefits
To provide a
level of benefits
in line with
market practice.
Reimbursement of reasonable out-of-pocket expenses. The
Chairman and non-executive directors are entitled to travel
assistance in connection with company business including the use
of a car and driver. RBS will meet the cost of any tax due on the
benefit. Other benefits may be offered in line with market practice.
The Chairman receives private medical cover.
Maximum potential value
The rates for the year ahead are set out in the
annual report on remuneration.
Other than in exceptional circumstances, fees
will not increase by more than 15% over the
course of the policy.
The value of the private medical cover
provided to the Chairman and any other
benefits will be in line with market rates and
disclosed in the annual report on
remuneration.
Other policy elements
Provision
Recruitment
policy
Operation
The policy on the recruitment of new directors aims to be competitive and to structure pay in line with the framework
applicable to current directors, based on the elements of pay detailed in the policy table, recognising that some
adjustment to quantum within that framework may be necessary to secure the preferred candidate. A buy-out policy
exists to replace awards forfeited or payments foregone which is in line with regulatory requirements. The
Committee will minimise buy-outs wherever possible and ensure they are no more generous than, and on
substantially similar terms to, the original awards or payments they are replacing.
Notice and
termination
provisions
Executive directors
RBS or the executive director is required to give 12 months’ notice to the other party to terminate the executive
director’s employment. There is discretion for RBS to make a payment in lieu of notice (based on salary only) which
is released in monthly instalments. The executive director must take all reasonable steps to find alternative work
and any remaining instalments will be reduced as appropriate to offset income from any such work.
Chairman and non-executive directors
The Chairman and the non-executive directors do not have service contracts, they have letters of appointment.
They do not have notice periods and no compensation would be paid in the event of termination of appointment,
other than standard payments payable for the period served up to the termination date.
On an annual basis, all directors stand for election or re-election by shareholders at the company’s AGM. Non-
executive directors appointed prior to 2017 do not have a set term as the letter of appointment operates on a rolling
basis. From 2017 onwards, new non-executive directors have been appointed for an initial term of three years,
commencing from the first election by shareholders. At the end of this period, further terms may be agreed, subject
to an overall maximum tenure of nine years. The non-executive directors with terms of appointment that will
currently expire unless otherwise renewed at the end of three years are: Mark Seligman (2020 AGM), Yasmin Jetha
(2021 AGM) and Dr Lena Wilson (2021 AGM).
Legacy
arrangements
RBS can continue to honour any previous commitments or arrangements entered into with current or former
directors that may have different terms, including terms agreed prior to appointment as an executive director.
Treatment of
outstanding
employee share
plan awards on
termination
Share awards will be treated in accordance with the relevant plan rules as approved by shareholders. In line with
the remuneration policy approved by shareholders at the 2017 AGM, LTI awards made in 2018 onwards will involve
a significant reduction in maximum opportunity and will not be subject to pro rating for time in good leaver
circumstances, for the reasons set out below.
RBS is unusual in having no annual bonus, and bonus awards would typically not be subject to pro rating for time. In
addition, the impact of regulatory requirements effectively constrains the granting of LTI awards in the year of
joining. The combination of these factors means that pro rating of time for good leavers results in executives
potentially receiving no variable pay award either for the year of joining or in the final year of employment. This is
not consistent with our aim of driving shareholder alignment within our pay construct. Removal of pro rating
therefore helps to ensure that executive directors are motivated and retain an appropriate long-term focus up to the
point of departure. It also creates higher levels of shareholding for up to eight years post departure meaning
executives can be held accountable for, and are financially exposed to, the long-term consequences of their actions.
Individuals will qualify for good leaver treatment if they leave due to ill-health, injury, disability, death, retirement (as
agreed with RBS), redundancy, the employing company ceasing to be a member of RBS, transfer of the employing
business, or any other reason if and to the extent the Committee decides in any particular case.
88
Directors’ Remuneration Report
Wider employee considerations
The group-wide remuneration policy applies to all employees. Consistent with our executive remuneration principles, the aim is to
deliver a simple and transparent pay policy which promotes the long-term success of RBS. The policy supports a culture where
employees are rewarded for delivering sustained performance in line with our risk appetite and for demonstrating the right conduct and
behaviours. Further details on the group-wide policy can be found on page 102 to 103.
We are committed to building a motivated and inclusive workforce that is engaged and passionate about achieving our ambition. A
summary is set out below on some of the initiatives that have taken place to: simplify pay; ensure fair pay; take employees’ views into
account; and deliver a great place to work.
Simplifying pay
Providing a simple pay structure supports employees in doing the
right thing for customers, allowing them to concentrate on
providing excellent customer service.
Fair pay
RBS will only achieve its ambitions if employees believe the pay
they receive is appropriate for the work they do.
Steps we have taken to simplify pay since 2015 include:
the removal of incentives for frontline employees in UK PBB
and Ulster Bank Republic of Ireland.
the removal of discretionary bonus for all Clerical employees
in the UK and Republic of Ireland in 2017 and extending this
to equivalent roles in India and Poland from 1 January 2018.
the removal of discretionary bonus for the vast majority of
Appointed employees in the UK and the Republic of Ireland
from 1 January 2018.
in all the above cases, an appropriate adjustment has been
made to fixed pay instead.
reducing the number of salary ranges by around 50%.
removing the long-term incentive element of pay for
employees below Executive Committee level.
Steps we have taken to ensure fairness include:
setting rates of pay that exceed the Living Wage Foundation
Benchmarks.
ensuring that people doing similar roles are paid consistently.
implementing a more transparent approach by moving more
employees to published salary ranges.
investing in pay levels in recent years, focusing mostly on our
junior employees, while not increasing fixed pay for our
executive directors.
We are confident that we pay our employees fairly. We keep our
HR policies and processes under review to ensure we do so.
Our Gender Pay Gap information has been published and can be
found in the ‘our colleagues’ section of the Strategic Report.
Great place to work
RBS provides a range of resources and supporting tools to make
sure individuals are capable and motivated to perform at their
best.
Views of employees
Our main listening tool is the biannual employee opinion survey
which collects views on a range of topics including pay,
engagement, wellbeing, inclusion and leadership.
Some of the elements of great place to work include:
inclusion - employee led groups play a key role in influencing
our inclusion strategy. Over 70% of employees have been
trained to tackle unconscious bias and the inclusion score
from our employee opinion survey is significantly above the
Global Financial Services norm.
flexible working - supporting a positive attitude to flexible
working patterns to reflect personal preferences where this
can be accommodated.
wellbeing - support for good physical, mental and financial
health.
excellent training - support with learning, professional
development and further qualifications.
good leadership - equipping managers to help their teams
flourish - including our Determined to lead programme which
won the Princess Royal training award in 2017.
RBSelect - employees can choose from a range of flexible
benefits to help with financial planning and lifestyle choices.
share ownership - opportunity in the UK and Republic of
Ireland to participate in employee share plans, with
Sharesave 2017 seeing a 26% increase in participation.
volunteering - employees are provided with time off to work
with charities and local communities.
Further details on our employee initiatives and successes can be
found in the ‘our colleagues’ section of the Strategic Report.
The 2017 results showed improvement in the majority of
categories. The number of employees who believe they are paid
fairly for the work they do increased significantly during the year
and is above the Global Financial Services norm.
We also have a number of other mechanisms through which we
communicate with employees such as:
regular engagement with employee representatives including
Unite in Great Britain and Offshore, the Financial Services
Union in Ulster Bank and our European Employee Council.
question and answer sessions throughout the year to allow
employees to hear from, and provide feedback to, members
of the Executive Committee and other senior staff.
in November 2017, the Chief Executive held his first live
streaming question and answer session with employees
across RBS and over 150 questions were submitted.
visits by Board members to business areas to hear directly
from employees.
support for employee-led networks which helps raise
awareness and influence strategy in a number of areas.
Proposed reforms to the UK Corporate Governance Code build on
the theme of ensuring the employee voice is heard at Board level.
We are supportive of the proposals and are currently considering
the most appropriate options to enhance our existing channels for
employee engagement.
89
Directors’ Remuneration Report
How risk is reflected in our remuneration process
RBS’s approach to remuneration and related policies promotes
effective risk management through a clear distinction between
fixed remuneration, which reflects the role undertaken by an
individual, and variable remuneration, which is directly linked and
reflective of performance and can be risk-adjusted. Fixed pay is
set at an appropriate level to avoid incentives that are adverse to
sound risk management.
Focus on risk is achieved through clear risk input into objectives,
performance reviews, the determination of variable pay pools and
incentive plan design as well as the application of malus and
clawback. The Committee is supported in this by the Board Risk
Committee (BRC) and the RBS Risk, Conduct and Restructuring
function.
A robust process is used to assess risk performance. A range of
measures are considered, specifically the overall Risk Profile;
Credit, Regulatory and Conduct Risk; Operational Risk;
Enterprise Risk; and Market Risk. Consideration is also given to
overall Risk Culture. RBS’s remuneration arrangements are in
accordance with regulatory requirements and the steps we take
to ensure appropriate and thorough risk adjustment are also fully
disclosed and discussed with the PRA and the FCA.
Variable pay determination
For the 2017 performance year, RBS operated a robust multi-
step process which is a control function led assessment to
determine performance and therefore the appropriate bonus pool
by franchise and function. At multiple points throughout the
process, reference is made against Group-wide business
performance (from both affordability and appropriateness
perspectives) and the need to distinguish between go-forward
franchises and resolution activities.
The process considers a balanced scorecard of performance
assessments at the level of each franchise or support function.
The assessments are made across financial, customer and
people measures. Risk and conduct assessments at the same
franchise or functional level are then undertaken to ensure that
performance achieved without appropriate consideration of risk
culture and risk and conduct controls is not inappropriately
rewarded.
BRC reviews any material risk and conduct events and, if
appropriate, an underpin may be applied to the individual
business and function bonus pools or to the overall bonus pool.
BRC may recommend a reduction of a bonus pool if it considers
that risk and conduct performance is unacceptable or that the
impact of poor risk management has yet to be fully reflected in
the respective inputs.
Following further review against overall performance and
conduct, the Chief Executive will make a final recommendation to
the Committee, informed by all the previous steps in the process
and his 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.
The assessment process for LTI awards to executive directors is
founded on the balanced scorecard approach used for the multi-
step bonus pool process, reflecting a consistent risk management
performance assessment.
Accountability review process and malus/clawback
The accountability review process was introduced in 2012 to
identify any material risk management, control and general policy
breach failures and ensure accountability for those events. This
allows RBS to respond in instances where new information would
change the variable pay decisions made in previous years and/or
the decisions to be made in the current year.
Under the accountability review process RBS can apply:
Malus - to reduce (to zero if appropriate) the amount of any
unvested variable pay awards prior to payment;
Clawback - to recover awards that have already vested; and
In-year reductions - to adjust variable pay that would have
otherwise been awarded for the current year.
Any variable pay awarded to Material Risk Takers from 1 January
2015 onwards is subject to clawback for seven years from the
date of grant. For awards made in respect of the 2016
performance year onwards, this period has been extended to ten
years for executive directors and other Senior Managers under
the Senior Managers Regime where there are outstanding
internal or regulatory investigations at the end of the normal
seven year clawback period.
Circumstances in which RBS may apply malus, clawback or in-
year reduction include:
the individual being culpable, responsible or ultimately
accountable for conduct which results in significant financial
losses for RBS;
the individual failing to meet appropriate standards of fitness
and propriety;
reasonable evidence of an individual’s misbehaviour or
material error;
RBS or the individual’s relevant business unit suffering a
material failure of risk management; and
for malus and in-year reduction only, circumstances where
there has been a material downturn in financial
performance.
The above list of circumstances is not exhaustive and RBS may
consider any further circumstances that it feels appropriate.
During 2017 a number of issues and events were considered
under the accountability review framework. The outcomes
covered a range of actions including: reduction and forfeiture of
unvested awards through malus; dismissal with forfeiture of
unvested awards; and suspension of awards pending further
investigation. In addition, reductions have also been applied to
current year variable pay awards.
90
Annual report on remuneration
Annual report on remuneration
The sections audited by the company's auditors, Ernst and Young LLP, are as indicated.
Total remuneration paid to executive directors for 2017 (audited)
Ross McEwan
Ewen Stevenson
Salary
Fixed share allowance (1)
Benefits (2)
Pension (3)
Total fixed remuneration
Annual bonus
Long-term incentive award (4)
Total remuneration
2017
£000
1,000
1,000
113
350
2,463
n/a
1,024
3,487
2016
£000
1,000
1,000
127
350
2,477
n/a
1,225
3,702
2017
£000
800
800
26
280
1,906
n/a
1,418
3,324
2016
£000
800
800
26
280
1,906
n/a
—
1,906
Notes:
(1) The value of the fixed share allowance is based on 100% of salary and, as part of fixed remuneration, it is not subject to any performance conditions.
(2)
Includes standard benefit funding of £26,250 per annum with the remainder for Ross McEwan in 2017 being travel assistance in connection with company business (£67,006),
relocation expenses (£17,065) consisting of a flight allowance and assistance with tax return preparation, and home security arrangements. The 2016 benefits figure for Ross
McEwan has been amended to include a value for tax return preparation and home security arrangements during that year.
(3) The executive directors receive a monthly cash allowance to help fund pension arrangements but do not participate in the company’s defined benefit pension schemes. The
executive directors can choose to participate in the company’s defined contribution pension arrangements.
(4) The 2017 value relates to an LTI award granted in 2015. Performance has been assessed over the three year period to 31 December 2017 as set out below together with an
estimate of the vesting value. The award will vest in two equal tranches in March 2019 and March 2020. The value for 2016 has been amended from the estimated value of
£1,030,000 provided in the 2016 report to reflect the actual value on the vesting date in March 2017.
2015 LTI – final assessment of performance measures (audited)
An assessment of performance of each relevant element was provided by internal control functions and PwC assessed relative Total
Shareholder Return (TSR) performance against a peer group of comparator banks.
Performance for minimum
vesting
Vesting at
minimum
Performance for
maximum (100%)
vesting
Actual Performance
Vesting
outcome
Weighted
Vesting %
(£500 million)
25%
£500 million
£613 million
100%
25%
TSR at median
20%
TSR at upper
quartile
Vesting between 0% - 100%
can be qualified by Committee discretion
CET1 ratio target: 13% (or above)
Cost:income ratio target (go-forward bank basis): 56%
(or below)
Customers & People
(25%)
Split across advocacy, trust and
employee engagement
Net Promoter Score (NPS) – 6.25%
Net Trust Score (NTS) – 6.25%
Engagement Index (EI) – 12.5%
Vesting between 0% - 100%
can be qualified by Committee discretion
NPS target: Gap to number 1 of 6.0
NTS target: NatWest 55, RBS 42
EI target: within 2 points of Global Financial Services
(GFS) norm
Initial vesting outcome
Final vesting outcome post application of underpin
Below median
0%
0%
CET1 ratio: 15.9%
Cost:income ratio: 55%
100%
25%
NPS Gap to number 1
of 15.5
0%
NTS: NatWest 59
RBS 22
70%
68%
17%
EI: 1 point above
GFS norm
100%
67%
60%
Performance Measures
(and weightings)
Economic Profit
(25%)
Relative TSR
(25%)
Safe & Secure Bank
(25%)
CET1 ratio - 12.5%
Cost:income ratio – 12.5%
Economic Profit was based on the go-forward basis and defined as operating profit after tax and preference share charges less tangible
net asset value multiplied by the cost of equity. The companies in the relative TSR group for this award were: Barclays, Lloyds Banking
Group, HSBC, Standard Chartered, BBVA, BNP Paribas, Crédit Agricole, Credit Suisse Group, Deutsche Bank, Santander, Société
Générale, UBS, Unicredito. For the Trust metric of the Customers & People section, the NatWest target was met while the RBS target
had been missed. The 70% vesting for this element was calculated in line with the weightings of the brands, split 70%/30% for
NatWest/RBS, based on the relative revenues of the respective brands.
In making its final judgement, the Committee considered the overall context of performance, noting positive progress on Economic Profit
which had exceeded the stretch target and the strong CET1 ratio and took into account input received from the Board Risk Committee.
Significant improvement had also been achieved in employee engagement scores which again had exceeded target. However, the
Committee also noted that the NPS, Trust for the RBS brand and relative TSR targets had been missed. Taking all circumstances into
account, the Committee determined it would be appropriate to apply the underpin and reduce the final vesting outcome from 67% to
60%.
91
Annual report on remuneration
2015 LTI vesting amounts included in the total remuneration table (audited)
The executive directors were granted an LTI award in March 2015. The performance conditions ended on 31 December 2017 and have
been assessed as set out on the previous page. The average share price over the last three months of the financial year has been used
to estimate the value. While the performance conditions have been assessed, the shares will not vest until March 2019 and March 2020.
Performance category
Economic Profit
Relative TSR
Safe & Secure Bank
Customers & People
Maximum shares for performance assessment
Initial outcome following assessment (67% vesting)
Final outcome post application of underpin (60% vesting)
% vesting
100%
0%
100%
68%
Maximum
shares (1)
154,624
154,624
154,624
154,624
618,496
Ross McEwan
Ewen Stevenson
Shares
due to vest
154,624
—
154,624
105,145
414,393
371,098
Estimated
value (2)
Maximum
shares (1)
214,121
214,121
214,121
214,121
856,484
£1,024,230
Shares
due to vest
214,121
—
214,121
145,602
573,844
513,890
Estimated
value (2)
£1,418,336
Notes:
(1) The maximum number of shares is calculated in line with the underlying award structure. Each performance category could vest up to 100% of the maximum number of shares
subject to the approved policy and the regulatory cap. For the 2015 award, the number of shares capped at grant was 417,486 for Ross McEwan and 578,128 shares for Ewen
Stevenson. In both cases the vesting outcomes fall within the respective cap.
(2) Based on a RBS share price of £2.76, the average over the three month period from October to December 2017.
2016 and 2017 LTI awards to executive directors – current assessment (audited)
The table represents an early indication of potential vesting outcomes only based on the position at 31 December 2017. Details of the
final performance assessment at the end of the three year period and any use of discretion will be disclosed in the remuneration report
for the relevant year. The Committee may consider the proximity of legacy items to the executive directors when assessing the vesting
level.
Performance measure
Weighting
Performance for
minimum vesting
Vesting at
minimum
Performance for
maximum vesting
Vesting at
maximum
2016 LTI award
current assessment
2017 LTI award
current assessment
Economic Profit
25%
Minimum economic
profit targets
25%
Relative TSR
25%
TSR at median of
comparator group
20%
Performance
ahead of the
Strategic
Plan
TSR at upper
quartile of
comparator
group
100%
Currently tracking
behind target
Currently favourable
to target
100%
Below median
performance for
vesting
Currently upper
quartile performance
for vesting
Safe & Secure Bank
25%
Target ranges set for:
CET1 ratio and
Cost:income ratio
Customers & People
25%
Target ranges set for:
Net Promoter Score,
Net Trust Score and
Employee Engagement
LTI awards granted during 2017 (audited)
Vesting between 0% – 100%
qualified by Committee discretion
taking into account the margin by
which targets have been missed
or exceeded and any other
relevant factors
CET1 ratio is in
range for vesting.
CET1 ratio is in
range for vesting.
Cost:income ratio
currently tracking
behind target
Customer
measures
currently behind
target with People
measure in range
for vesting
Cost:income ratio
currently in range for
vesting
Customers & People
measures broadly
tracking in range for
vesting
Grant date
Face value of
award (£000s)
Number of shares
awarded (1)
% vesting at minimum and
maximum
Ross McEwan
7 March 2017
2,870
1,188,800
Ewen Stevenson
7 March 2017
2,305
954,768
Between 0% - 100%
with minimum vesting
as set out above
Performance
Requirements (2)
Conditional share awards subject to
performance conditions, as set out above,
measured over the three year period from
1 January 2017 to 31 December 2019
Notes:
(1) The number of shares awarded was calculated in line with the regulatory cap that limits variable pay to the level of fixed pay and for this award equated to approximately 287%
of salary, The award price of £2.4142 was calculated based on the average share price over five business days prior to the grant date.
(2) Subject to the achievement of performance conditions, the awards are eligible to vest in four tranches with 50% vesting in 2021 and the remaining 50% split over 2022 to 2024.
Malus provisions will apply up until vesting and clawback provisions will also apply for a period of seven years from the date of grant, extended to ten years if events are under
investigation at the end of the seven year period.
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Annual report on remuneration
Performance assessment framework for LTI awards granted from 2018 onwards
For each of the core performance areas, the Committee will consider whether the executive director has achieved what would
reasonably have been expected over the relevant period. The Committee will follow a robust process to review performance against
pre-set objectives relevant to RBS’s strategic aims, but will apply its judgement without reference to formulaic targets and weightings.
Performance will be assessed taking into account circumstances applying over the period. Risk & Control and Stakeholder Perception
underpins will also apply under which the Committee, with input from the Board Risk Committee and Sustainable Banking Committee,
can consider if there are any other factors that would lead to a downwards adjustment (for example if the achievements are not
considered sustainable, or were achieved through excessive risk taking).
The majority of the performance variation will normally take place under the pre-grant assessment, with a further pre-vest assessment to
check whether, taking all circumstances into account, a threshold level of sustainable performance has been delivered. Overall, the
achievement of reasonable or ‘target’ performance expectations will deliver full, or nearly full, payout of the LTI awards, as long as
executives deliver good, sustainable performance. This approach reflects the significantly reduced level of awards compared to the
previous policy, creating more predictable outcomes and encouraging safe and secure growth within risk appetite. Each year, the
performance factors will be determined in light of RBS’s priorities for that year.
Pre-grant assessment for LTI awards to be made in 2018
Core area Objectives for 2017
Financial
Achieve a cost reduction of at least £750 million.
Reasonable performance against budget for the
core franchises with adjusted RoTE of at least
11%. CET1 ratio of 13% or more.
RBS blended risk profile of 2; Franchise/
Function control environment rated within
appetite at 2, or minimum 3 tracking to 2 within
12 months.
Pre-grant assessment in January 2018
Strong financial performance with all targets exceeded for 2017.
Year on year cost savings of £810 million were achieved,
adjusted RoTE was above the target and the CET1 ratio was
15.9%.
Continued improvements in risk profile with an increase in the
number of franchises and functions rated at 2. While progress
had been made, the ultimate desired control rating hadn’t been
reached across every franchise and function.
Risk &
Operations
Risk Culture to be rated at 3 (Proactive) on a
blended basis, with strong tone from the top.
Risk Culture was assessed overall as Proactive with a small
number of exceptions.
Strong oversight of ring-fencing, ensuring timely
remediation of issues and maintain delivery as
planned.
Customers
Increase or maintain number 1 for Net Promoter
Scores and increase Trust Scores in our chosen
segments.
Improvement in employee engagement and
leadership scores.
People &
Culture
Year on year improvement from the Banking
Standards Board (BSB) assessment.
Progress towards target of >30% women in
‘senior roles’ by 2020
Work is well underway in readiness for ring-fencing and the
required legal entity changes. The programme remains in line
with plan for delivery.
NPS performance during 2017 was on-target in 4 out of 6
customer segments. While progress had been made, there was
still room for improvement on NPS scores and on closing the gap
to number 1 in certain segments. Trust was ahead of target in 2
out of the 5 segments with improvements in 2 further segments.
Engagement score increased 7 points and the leadership score
increased 5 points since 2016, with both above the Global
Financial Services norm. The employee opinion survey showed
the best results for 10 years.
Scores from the BSB survey improved on all items compared to
2016, demonstrating an improved culture throughout the
business.
Satisfactory progress had been made. The target population (top
three leadership layers) had increased to 37%, representing an
8% increase since targets were introduced at the end of 2014.
Outcome of the assessment
The Committee also received advice from the Board Risk Committee and the Sustainable Banking Committee in making its final
assessment. After considering all the factors above, the Committee determined that good performance and progress towards our long-
term goals had been achieved in 2017. Performance had been very strong in relation to financial and people & culture measures but, on
balance, a 10% reduction was considered appropriate as risk and customer performance was not fully at the desired level. The resulting
award levels are set out below.
Chief Executive
Chief Financial Officer
Maximum LTI award level
£1,750,000
£1,600,000
2018 LTI award level
after pre-grant assessment
£1,575,000
£1,440,000
93
Annual report on remuneration
Pre-vest assessment for 2018 LTI awards
In addition to the pre-grant assessment detailed on the previous page, a further assessment of performance will take place three years
after grant, in 2021, prior to vesting. It is intended to be a look-back at the performance year for which the LTI award was granted to
consider whether anything has come to light that would impact the vesting level. The over-arching principle is that delivery of a threshold
level of sustainable performance will result in no further adjustment prior to vesting. Once the vested amount has been approved, malus
and clawback provisions will continue to apply.
The pre-vest assessment allows the Committee to make a balanced assessment of performance in the round rather than relying on
formulaic adjustments. It is to provide comfort that sustainable performance has been delivered since the award, and that nothing new
has come to light which might call into question the original award. Adjustments will also be made in the event of underperformance or
required risk adjustment.
Factors considered in assessing pre-vest performance
Four core questions will be considered as part of the pre-vest assessment under the themes of Finance; Customers; People; and Risk &
Control. When assessing the performance of the year for which the award was made, “knowing what we know now” and taking into
account all circumstances, has RBS:
(1) Remained safe and secure, taking into account our financial results and capital position?
(2) Been a good bank for customers taking into account our customer and advocacy performance?
(3) Operated in an environment in which risk is seen as part of the way we work and think?
(4) Operated in a way that reflects our stated values?
In addition, the Committee will consider the potential application of Risk & Control and Stakeholder Perception underpins following
advice from the Board Risk Committee and Sustainable Banking Committee. This provides scope to consider significant risk,
stakeholder or reputational matters not already captured in the performance assessment.
In determining the final vesting level of the award, the Committee will consider both individual and collective performance which means
that there may be different vesting levels by participant. If a threshold level of sustainable performance has been delivered then no
further assessment is required and the award vests in full.
Objectives for Performance Year 2018 (for the pre-grant assessment of LTI awards to be made in 2019)
The table below forms the basis of the pre-grant assessment for LTI awards to be made in early 2019. Further details on the 2018
objectives and targets and the assessment of performance against these will be set out in the 2018 Directors’ Remuneration Report.
Core area
Description of 2018 Objectives
Measures for assessing pre-grant performance for 2019 LTI awards
Achieve planned reduction in operating expenses
Financial &
Business
Delivery
Risk &
Control
Run a safe and secure bank
Reasonable performance against budget and RoTE target
Achieve CET1 ratio target
Implement ring-fencing
Delivery of ring-fencing requirements to satisfy the 1 January 2019
implementation, ensuring timely remediation of issues throughout.
Improve governance and control environment
Franchise and function control environment
to meet the required rating within appetite
Material progress towards
our desired risk culture
Achieve the desired Risk Culture rating with strong tone from the top
Customer &
Stakeholder
Achieve planned progress towards becoming
number 1 for customer service, trust and
advocacy by 2020 in chosen customer
segments and brands
Net Promoter Score to evidence progress towards or maintaining the
number 1 position in our chosen segments and brands
Provide clarity, build capability and
motivate our people
Year on year improvement in scores from employee engagement
and leadership indices
People &
Culture
Build up and strengthen a healthy culture
Culture measured against position in Culture index
Progress towards 2020 target of number of women in ‘senior roles’
(at least 30% for each franchise and function)
Progress towards 2025 target of number of Black Asian Minority
Ethnic (BAME) UK employees in the top four layers of RBS
(at least 14% for each franchise and function)
94
Annual report on remuneration
Payments for loss of office (audited)
No payments for loss of office were made to directors during 2017.
Payments to past directors (audited)
There are no payments to past directors to disclose for 2017.
Total remuneration paid to the Chairman and non-executive directors for 2017 (audited)
The US Risk Committee was stood down in May 2017. The Board established a Technology and Innovation Committee with effect from
1 September 2017. This demonstrates the importance the Board places on overseeing and monitoring RBS's strategic direction in
relation to technology and innovation. Fees for non-executive directors sitting on the NatWest Markets Working Group, which considers
transitional arrangements in preparation for the establishment of the NatWest Markets Board, were brought into line with the other main
Board Committees. A Board Oversight Committee was established in September 2017 in order to provide oversight of required
enhancements to the governance and risk management practices within Ulster Bank Ireland DAC reporting to the Board, as
appropriate. Fees were payable for this Committee with effect from 1 October 2017.
The total fees paid during 2017 are set out below.
Chairman (composite fee)
c
Howard Davies (1)
Board
£000
77
77
77
77
77
Non-executive
directors (2)
Sandy Crombie (3)
Frank Dangeard
Alison Davis (4)
Morten Friis (3)
Robert Gillespie
John Hughes (5)
Penny Hughes (4)
77
42
Yasmin Jetha (5)
Brendan Nelson
77
Baroness Noakes (3)(4) 77
77
Mike Rogers
Mark Seligman (4)(5)
59
Noms &
Gov
£000
15
GAC
£000
30
RemCo
£000
60
BRC
£000
SBC
£000
TIC
£000
NWM
£000
GRG
BOC
£000
15
UBI DAC
BOC
£000
4
Other
£000
30
30
60
30
30
30
30
10
15
5
15
5
5
30
30
30
30
60
30
30
60
13
30
18
10
20
30
15
10
15
30
15
4
4
4
11
5
Fees
2017
£000
750
Fees
2017
£000
231
135
167
148
197
—
187
65
216
196
137
68
2016
£000
750
Fees
2016
£000
223
58
147
159
210
—
178
—
211
192
88
—
Benefits
2017
£000
11
2016
£000
8
Benefits
2017
£000
30
3
30
42
11
—
11
2
23
16
16
4
Benefits
2016
£000
38
4
21
39
10
—
8
—
31
8
11
—
Total
2017
£000
761
Total
2017
£000
261
138
197
190
208
—
198
67
239
212
153
72
2016
£000
758
Total
2016
£000
261
62
168
198
220
—
186
—
242
200
99
—
Notes:
(1) The benefits column for Howard Davies includes private medical cover.
(2)
In line with market practice, non-executive directors are reimbursed expenses incurred in connection with travel and attendance at Board meetings. HMRC has confirmed that it
deems these expenses as taxable where the Board meetings take place at the company’s main offices in London and Edinburgh. The value in the benefits column above,
including restated amounts for 2016, is the value of the assistance provided together with the associated tax liability which RBS settles on behalf of the non-executive directors.
(3) Under the ‘Other’ column, Sandy Crombie received fees as the Senior Independent Director. Morten Friis and Baroness Noakes received fees in respect of the US Risk
Committee until it was stood down on 11 May 2017.
(4) Alison Davis stepped down from the Nominations and Governance Committee and Penny Hughes, Baroness Noakes and Mark Seligman were appointed to the Nominations
and Governance Committee during the year.
(5) Mark Seligman joined the Board on 1 April 2017 and Yasmin Jetha joined the Board on 21 June 2017. John Hughes joined the Board on 21 June 2017 but stepped down with
effect from 1 September 2017 due to health reasons. Mr Hughes made a voluntary decision to repay the fees that he received for this period.
Key to table:
Noms & Gov
GAC
RemCo
BRC
SBC
TIC
NWM
GRG BOC
UBI DAC BOC
Group Nominations and Governance Committee
Group Audit Committee
Group Performance and Remuneration Committee
Board Risk Committee
Sustainable Banking Committee
Technology and Innovation Committee
NatWest Markets Working Group
Board Oversight Committee for the GRG business areas
Board Oversight Committee for the Ulster Bank Ireland business
95
Annual report on remuneration
Implementation of remuneration policy in 2018
Details of remuneration to be awarded in 2018 to executive directors are set out below. The salary, benefits, pension and fixed share
allowance arrangements are unchanged from 2017. The LTI award is due to be granted in March 2018 following the pre-grant
assessment of performance over 2017. Details of the assessment are set out on page 93. Subject to a further pre-vest assessment of
performance at the end of three years, the award will vest in equal amounts between years three to seven from the date of grant. LTI
awards are also subject to malus during the vesting period and clawback provisions for a period of seven years from the date of grant,
extended to ten years if events are under investigation at the end of the normal seven-year clawback period.
Executive directors’ remuneration to be awarded in 2018
Salary
Standard benefits
Pension
35% of salary
Fixed share allowance
100% of salary (1)
LTI award following
pre-grant assessment
Chief Executive
£1,000,000
£26,250 (2)
£350,000
£1,000,000
£1,575,000
Chief Financial Officer
£800,000
£26,250 .
£280,000
£800,000
£1,440,000
Notes:
(1) Fixed share allowance will be payable broadly in arrears, currently in two instalments per year, and the shares will be released in equal tranches over a three year period.
(2) Amount shown relates to standard benefit funding. Executive directors are also entitled to benefits in line with the stated policy including assistance with travel and security
arrangements and the Chief Executive is entitled to a flight allowance and assistance with tax return preparation as part of his relocation arrangements. The value of benefits will
be disclosed each year in the total remuneration table.
Chairman and non-executive directors’ fees for 2018
The level of fees for attendance at Board and Board Committee meetings remains unchanged from 2017. A summary of the annual fees
payable for 2018 is set out below.
Chairman (composite fee)
Non-executive director basic fee
Senior Independent Director
Board Risk Committee
Group Audit Committee
Group Performance and Remuneration Committee
Sustainable Banking Committee
Technology and Innovation Committee
NatWest Markets Working Group
GRG Board Oversight Committee
Ulster Bank Ireland DAC Board Oversight Committee
Group Nominations and Governance Committee
£750,000
£80,000
£30,000
Member
Chairman
£30,000
£60,000
Member
Chairman
Member
Member
£15,000
£30,000
£15,000
£15,000
Other directorships
Agreement from the Board must be sought before directors accept any additional roles outside of RBS. Procedures are in place to make
sure that regulatory limits on the number of directorships held are complied with. The Board would also consider whether it was
appropriate for executive directors to retain any remuneration receivable in respect of any external directorships, taking into account the
nature of the appointment.
Neither of the executive directors holds a non-executive director role at any other company at this time. Details of the directorships held
by other directors can be found in the biographies section of the corporate governance report.
96
Annual report on remuneration
Directors’ interests in RBS shares and shareholding requirements
The shareholding requirement is to hold shares to the value of 400% of salary for the Chief Executive and 250% of salary for the Chief
Financial Officer. Unvested shares from LTI awards will count on a net of tax basis towards meeting the shareholding requirement once
the pre-vest performance assessment has taken place, at the end of the three year period. Once the respective retention periods have
passed, directors are permitted to dispose of up to 25% of the shares received until the shareholding requirement is met. As set out
below, the executive directors exceeded the shareholding requirement as at 31 December 2017. There are no shareholding
requirements for non-executive directors.
Shareholding requirements for executive directors
Ross McEwan
£5,145,791
£4,000,000
Ewen Stevenson
£3,068,953
£2,000,000
0
2,000,000
4,000,000
6,000,000
0
2,000,000
4,000,000
Value of shares held Current requirement
Value of shares held Current requirement
Notes:
(1)
(2)
Ross McEwan holds 201,189 shares from his 2015 and 2016 fixed share allowances that are included in the total shares beneficially owned below but these have been
excluded from the shareholding requirements calculation as he will transfer these shares to charity at the end of the retention period.
Value of shares held is based on the share price of £2.78 as at 31 December 2017. During the year ended 31 December 2017, the share price ranged from £2.15 to £2.86.
Share interests held by directors (audited)
Ross McEwan
Ewen Stevenson
Howard Davies
Sandy Crombie
Frank Dangeard
Alison Davis
Morten Friis
Robert Gillespie
John Hughes
Penny Hughes
Yasmin Jetha
Brendan Nelson
Baroness Noakes
Mike Rogers
Mark Seligman
Shares owned
at 31 December 2017
(or date of cessation if earlier)
2,052,193
1,103,940
41,000
20,000
-
20,000
20,000
25,000
-
562
-
12,001
41,000
-
20,000
Unvested long-term incentive awards
(subject to performance conditions)
2,793,493
2,485,320
The interests shown above include shares held by persons closely associated with the directors. As at 22 February 2018, there were no
changes to the directors' interests in shares shown above. John Hughes stepped down from the Board on 1 September 2017 and did
not hold any RBS shares at the date of cessation. Sandy Crombie stepped down from the Board with effect from 1 January 2018. Dr
Lena Wilson joined the Board with effect from 1 January 2018 and as at 22 February 2018 she did not hold any RBS shares.
Directors’ interests under the company’s share plans (audited)
Long-term incentive awards
Ross McEwan
Ewen Stevenson
Awards
granted
in 2017
Awards held at
1 January 2017
915,193
417,486
1,187,207
2,519,886
288,257 (1)
578,128
952,424
1,818,809
1,188,800
1,188,800
954,768
954,768
Award
price
£
Awards
lapsed in
2017
3.28 402,684
3.74
2.26
2.41
402,684
3.27
3.74
2.26
2.41
Awards
vested
in 2017
512,509
Market price
on vesting
£
Value on
vesting
£
2.39 1,224,897
Awards held at
31 December
2017
—
Expected vesting date
512,509
288,257
2.39
688,934
417,486 06.03.19 – 06.03.20
1,187,207 08.03.20 – 08.03.21
1,188,800 07.03.21 – 07.03.24
2,793,493
—
578,128 06.03.19 – 06.03.20
952,424 08.03.20 – 08.03.21
954,768 07.03.21 – 07.03.24
288,257
2,485,320
Note:
(1) Award granted to Ewen Stevenson on appointment in May 2014 to replace awards forfeited on leaving Credit Suisse.
97
Annual report on remuneration
Total Shareholder Return (TSR) performance
The graph below shows the performance of RBS over the past nine years in terms of TSR compared with that of the companies
comprising the FTSE 100 Index. This index has been selected because it represents a cross-section of leading UK companies. The
TSR for FTSE UK banks for the same period has been added for comparison. Source: Datastream
300
250
200
FTSE 100
150
FTSE UK Banks
RBS
100
50
0
2008 YE
2009 YE
2010 YE
2011 YE
2012 YE
2013 YE
2014 YE
2015 YE
2016 YE
2017 YE
Chief Executive pay over same period
Total remuneration (£000s)
Annual bonus against
maximum opportunity
LTI vesting rates against
maximum opportunity
2009
2010
2011
2012
1,647
0%
3,687
85%
1,646
0%
1,646
0%
2013 (1)
393 (RM)
1,235 (SH)
0%
2014
1,878
2015
3,492
2016
3,702
2017
3,487
n/a
n/a
n/a
n/a
0%
0%
0%
0%
0%
73%
62%
56%
89%
Notes:
(1) 2013 remuneration includes Stephen Hester (SH) as Chief Executive for the period to 30 September and Ross McEwan (RM) for the period from 1 October to 31 December.
(2) Figures have been amended where appropriate to reflect any restatement of prior year amounts, for example, to reflect the actual rather than estimated value of LTI vestings as
part of the total remuneration figure and any revisions to the value of benefits provided.
(3) The maximum opportunity is set according to the approved policy and, for LTI awards granted in 2015 and onwards, the regulatory cap.
Change in Chief Executive pay compared with employees
The table below shows the percentage change in remuneration for the Chief Executive between 2016 and 2017 compared with the
percentage change in the average remuneration of RBS employees based in the UK. In each case, remuneration is based on salary,
benefits and annual bonus. The Chief Executive also receives a fixed share allowance as part of his fixed pay and this remains
unchanged over the period.
Chief Executive (1)
UK employees (2)
Salary
2016 to 2017 change
0%
3.91%
Benefits
2016 to 2017 change
0%
3.32%
Annual Bonus
2016 to 2017 change
n/a
10.69%
Notes:
(1) Executive directors are not eligible for an annual bonus. Standard benefit funding for executive directors remained unchanged between 2016 and 2017. The benefits for the
Chief Executive excludes other benefits such as travel assistance in connection with company business and relocation benefits, the value of which is disclosed each year in the
total remuneration table.
(2) The data represents full year average salary costs of the UK based employee population, which covers the majority of RBS employees and is considered to be the most
representative comparator group. The increase in the average annual bonus is driven in part by the one time impact of the removal of LTI eligibility for employees below the
Executive Committee in 2017, with these employees now eligible for an annual discretionary bonus award only.
98
Annual report on remuneration
Relative importance of spend on pay
The table below shows a comparison of remuneration expenditure against other distributions and charges.
Remuneration paid to all employees (1)
Distributions to holders of ordinary shares
Distributions to holders of preference shares and paid-in equity (2)
Taxation and other charges recognised in the income statement:
- Social security, Bank levy and Corporation tax
- Irrecoverable VAT and other indirect taxes incurred by RBS (3)
2017
£m
4,217
—
628
1,100
533
2016
£m
4,670
—
1,697
747
697
change
(10%)
—
(63%)
47%
(24%)
Notes:
(1) Remuneration paid to all employees represents total staff expenses per Note 3 to the Financial Statements, exclusive of social security and other staff costs.
(2)
(3)
Includes final payment relating to the Dividend Access Share of £1,193 million in 2016.
Input VAT and other indirect taxes not recoverable by RBS due to it being partially exempt.
The items above have been included as they reflect the key stakeholders for RBS and the major categories of distributions and charges
made by RBS.
Consideration of matters relating to directors’ remuneration
Membership of the Group Performance and Remuneration
Committee
All members of the Committee are independent non-executive
directors. The Committee held seven scheduled meetings in
2017 and a further three ad hoc meetings.
Summary of the principal activity of the Committee in 2017
In addition to its usual business activities, in 2017 the Committee
was actively involved in developing the new directors’
remuneration policy with key stakeholders. Set out below is a
summary of the Committee’s other key considerations throughout
the year.
Alison Davis
Robert Gillespie
Mike Rogers
Former member
Sandy Crombie (Chairman)
Attended/
scheduled
7/7
7/7
6/7
First half of 2017
2016 performance reviews and remuneration arrangements
for executive directors, Executive Committee members and
attendees, and high earners.
Executive Committee members’ 2017 objectives.
Development of the future pay construct for Executive
Committee members.
7/7
Approval of variable pay allocations and the 2016 Directors’
Mike Rogers was unable to attend one of the meetings due to
personal reasons. Sandy Crombie stepped down from the
Committee and the Board with effect from 1 January 2018. At the
same time, Robert Gillespie assumed the role of Chairman of the
Committee and Mark Seligman became a member of the
Committee.
The role and responsibilities of the Committee
The Committee is responsible for:
approving the remuneration policy for all employees and
reviewing the effectiveness of its implementation;
reviewing performance and making recommendations to the
Board on remuneration arrangements for executive directors;
approving remuneration arrangements for members and
formal attendees of the Executive Committee (including
control function heads) and employees with total annual
compensation which exceeds an amount determined by the
Committee, currently £1 million; and
setting the remuneration framework and principles for
employees identified as Material Risk Takers falling within the
scope of UK regulatory requirements.
In mitigating potential conflicts of interest, directors are not
involved in decisions regarding their own remuneration and
remuneration advisers are appointed by the Committee rather
than management. The terms of reference of the Committee are
reviewed annually and available on rbs.com.
Remuneration Report.
Review of the vesting levels for LTI awards granted in 2014
and the interim assessment of 2015/16 LTI awards.
Updates on changes in regulation and the regulatory
attestation process.
Review of domestic and international peer group pay and
remuneration disclosures.
Progress update on the Committee’s performance evaluation.
Review of pay outcomes for 2016.
Second half of 2017
Half-year and year end performance reviews for executive
directors, Executive Committee members and attendees.
Executive Committee members’ annual common objectives
for 2018.
Simplification of the pay construct for individuals below
Executive Committee level.
Review of retirement and leaver policies.
Annual review of external advisers to the Committee.
Remuneration governance across legal entities, international
locations and the impact of ring-fencing.
External stakeholder engagement plan.
Approval of the 2017 employee Sharesave offer.
Review of draft Directors’ Remuneration Report for 2017.
Risk / remuneration process review.
The annual evaluation of the Committee’s performance.
99
Annual report on remuneration
Performance evaluation process
The Committee has considered the findings of the annual review
of the effectiveness of the Committee. This year the evaluation
process was conducted internally by the Deputy Secretary and
overseen by the Company Secretary.
PwC also provides professional services in the ordinary course of
business including assurance, advisory, tax and legal advice to
RBS subsidiaries. There are processes in place to ensure the
advice received by the Committee is independent of any support
provided to management.
The feedback was very positive with most issues being rated
either excellent or good. Positive comments were received on the
Committee’s composition and how effective the Committee had
been on focusing on ‘big picture’ issues as well as external
themes and developments. The new executive director pay
construct was seen as a good example of the Committee being
forward thinking and innovative.
The fees paid to PwC for advising the Committee in relation to
directors’ remuneration were charged on a time/cost basis until
September 2017. A fixed fee structure has operated from
October 2017 onwards to cover standard services with any
exceptional items charged on a time/cost basis. The fees for
2017 in relation to directors’ remuneration amounted to £170,476
excluding VAT (2016 - £214,706).
While the quality of information was generally considered to be
good, some responses indicated there was scope for better
comparative data and context. A number of Committee members
and attendees suggested that, while the right things were on the
agenda and meetings were well run, further consideration should
be given to the number of meetings during the year.
The overall conclusion was that the Committee operated
effectively during 2017 and fulfilled its remit as set out in its terms
of reference. Actions were agreed as part of the evaluation and
progress will be tracked and reported to the Committee
biannually.
Advisers to the Committee
PricewaterhouseCoopers LLP (PwC) was appointed as the
Committee’s remuneration advisers on 14 September 2010. A
formal review of potential advisers was undertaken in 2017. This
considered the ability of the providers to offer high quality advice
and strategic thinking, the strength and depth of the personnel
and the associated level of fees. Following the review, the
Committee agreed to retain the services of PwC. The Committee
will continue to review the performance of its advisers each year.
PwC is a signatory to the voluntary code of conduct in relation to
remuneration consulting in the UK.
As well as receiving advice from PwC in 2017, the Committee
took account at meetings of the views of the Chairman; the Chief
Executive; the Chief Financial Officer; the Chief HR Officer; the
Director of Reward, Pension & Benefits; the Company Secretary;
and the Chief Risk Officer. The Committee also received input
from the Board Risk Committee, the Group Audit Committee and
the Sustainable Banking Committee.
Statement of shareholder voting
The tables below set out the voting by shareholders on the
resolutions to approve the Annual Report on Remuneration and
the Directors’ Remuneration Policy at the AGM on 11 May 2017.
Annual Report on Remuneration – 2017 AGM
Against
Total votes cast
173,420,916
(0.40%)
For
43,612,488,456
(99.60%)
43,785,909,372 14,256,744
Withheld
Directors’ Remuneration Policy – 2017 AGM
Total votes cast
For
42,143,861,332
(96.33%)
Against
1,603,968,780
(3.67%)
43,747,830,112 40,411,396
Withheld
Shareholder dilution
The company meets its employee share plan obligations through
a combination of new issue shares and market purchase shares.
In line with the Investment Association’s Principles of
Remuneration, RBS’s employee share plans contain monitored
limits that govern the number of shares that may be issued to
satisfy share plan awards.
Robert Gillespie
Chairman of the Group Performance and Remuneration
Committee
22 February 2018
100
Other Remuneration Disclosures
This section contains a number of voluntary disclosures on remuneration as well as disclosures which are required in accordance with
Article 450 of the Capital Requirements Regulation. This section should be read in conjunction with both the Directors’ Remuneration
Report and the Annual Report on Remuneration (pages 84 to 100).
Remuneration of the eight highest paid senior executives below Board (1)
Executive 1
£000
Executive 2
£000
Executive 3
£000
Executive 4
£000
Executive 5
£000
Executive 6
£000
Executive 7
£000
Executive 8
£000
Fixed pay (cash)
Fixed allowances
Annual bonus
Long-term incentive awards (vested value)
Total remuneration (2)
650
650
—
638
700
700
—
437
738
738
—
346
800
800
—
109
800
800
—
109
600
600
—
365
1,938
1,837
1,822
1,709
1,709
1,565
450
225
—
—
675
381
166
—
73
620
Notes:
(1) Remuneration earned in 2017 for eight members of the Executive Committee.
(2) Disclosure includes prior year long-term incentive awards which vested during 2017. The amounts shown reflect the value of vested awards using the share price on the day the
awards vested.
Employees that earned total remuneration of over €1 million in
2017 represent just 0.1% of our employees. This number reduces
to 68 employees if we exclude pension and benefit funding.
These employees include those who manage major businesses
and functions with responsibility for significant assets, earnings or
areas of strategic activity and can be grouped as follows:
The Chief Executives responsible for each area and their
direct reports.
Employees managing large businesses within a franchise.
Income generators responsible for high levels of income
including those involved in managing trading activity and
supporting clients with more complex financial transactions,
including financial restructuring.
Those responsible for managing our balance sheet and
liquidity and funding positions across the business.
Employees who managed the successful disposal of assets
in Capital Resolution, reducing RBS’s capital requirements.
All staff total remuneration
the average salary for all employees is £32,785
12,445 employees earn between £50,000 and £100,000
5,025 employees earn between £100,000 and £250,000
934 employees earn total remuneration over £250,000
Total remuneration by band for all employees earning >€1
million
€1.0m - €1.5m
€1.5m - €2.0m
€2.0m - €2.5m
€2.5m - €3.0m
€3.0m - €3.5m
€3.5m - €4.0m
€4.0m - €4.5m
€4.5m - €5.0m
€5.0m - €6.0m
Total
Number of
employees
2017
50
18
9
2
1
1
1
0
1
83
Notes:
(1) Total remuneration in the table above includes fixed pay, pension and benefit
funding and variable pay.
(2) Executive directors are not included. The table is based on an exchange rate where
applicable of €1.141 to £1 as at 31 December 2017.
101
Other Remuneration Disclosures
Our remuneration policy for all employees
The remuneration policy supports the business strategy and is designed to promote the long-term success of RBS. It aims to reward
employees for delivering good performance provided this is achieved in a manner consistent with our values and within acceptable risk
parameters. The remuneration policy applies the same principles to all employees, including Material Risk Takers (MRTs), with some
minor adjustments to the policy where necessary to comply with local regulatory requirements. The key elements of the policy are set
out below.
Element of pay Objective
Base salary
To provide a competitive level
of fixed cash remuneration.
Operation
Base salaries are reviewed annually and should reflect the talents, skills and
competencies that the individual brings to the business.
Role-based
allowance
To provide fixed pay that
reflects the skills and
experience required for the
role.
Role-based allowances are a fixed allowance which form an element of the
employee’s overall fixed remuneration for regulatory requirements and are based
on the role the individual performs.
The allowances are pre-determined, permanent, and can only be adjusted or
cancelled if an employee relinquishes the role or responsibilities which made
them eligible for the allowance. They are not intended to be adjusted other than
where there is a change of role.
They are delivered in cash and/or shares depending on the level of the allowance
and the seniority of the recipient. Shares are subject to an appropriate retention
period, not less than six months.
Benefits
and pension
To provide a range of flexible
and competitive benefits.
In most jurisdictions, employee benefits or a cash equivalent are provided from a
flexible benefits account.
Annual bonus
To support a culture where
employees recognise the
importance of serving
customers well and are
rewarded for superior
performance.
Pension forms part of fixed remuneration and RBS does not as a rule award
discretionary pension benefits.
The annual bonus pool is based on a balanced scorecard of measures including
Financial, Customers, People and Risk & Conduct measures. Allocation from the
pool depends on performance of the franchise or function and the individual.
Individual performance assessment is supported by a structured performance
management framework. This is designed to assess performance against longer
term business requirements across a range of financial and non-financial metrics
as well as an evaluation of adherence to internal controls and risk management.
The performance measures are set in line with the business strategy and typically
include: financial measures such as return on equity; cost:income ratio; expenses
and headcount (dependent on the franchise / function); net promoter score and/or
customer satisfaction to assess customer advocacy; and internal survey results to
assess progress in employee engagement.
Risk and conduct performance is also taken into account. Control functions are
assessed independently of the business units that they oversee.
For awards made in respect of the 2017 performance year, immediate cash
awards continue to be limited to a maximum of £2,000. In line with regulatory
requirements, a significant proportion of annual bonus awards for our more senior
employees is deferred and includes partial delivery in shares.
The deferral period varies from three years for standard MRTs, rising to five years
for individuals identified as Risk Manager MRTs and seven years for Senior
Managers under the UK’s Senior Managers Regime. All awards are subject to
malus and clawback provisions. For MRTs, a minimum of 50% of any annual
bonus is delivered in shares and a twelve month retention period will apply post
vesting in line with regulatory requirements.
102
Other Remuneration Disclosures
Element of pay Objective
Long-term
incentive
awards
To support a culture where
good performance against a
full range of measures will be
rewarded. To encourage the
creation of value over the
long term and to align
rewards with the returns to
shareholders.
Operation
RBS provides certain employees in senior roles with long-term incentive awards.
For awards made in respect of the 2017 performance year, the population
receiving long-term incentive awards will be limited to executive directors and
members of the RBS Executive Committee.
Awards will be subject to pre-grant and pre-vest performance assessments that
consider progress against Financial, Risk & Operations, Customers and People &
Culture measures, aligned with RBS’s strategic aims. Vesting will take place over
a three to seven year period following grant.
The number of shares that vest under the award may vary between 0% -100%
depending on the performance achieved. Awards are subject to malus and
clawback provisions and a twelve month retention period applies post vesting.
Shareholding
requirements
To promote long-term
alignment between senior
executives and shareholders.
Executive directors and members of the Executive Committee are required to
build up and hold a shareholding equivalent to a percentage of salary. There is a
restriction on the number of shares that individuals can sell until the requirement
is met.
Other share
plans
To offer employees in certain
jurisdictions the opportunity to
acquire shares.
Employees in certain countries are eligible to contribute to share plans which are
not subject to performance conditions.
Criteria for identifying MRTs
The European Banking Authority has issued criteria for identifying MRT roles, those staff whose professional activities have a material
influence over RBS’s performance or risk profile. The criteria are both qualitative (based on the nature of the role) and quantitative (for
example those who exceed the stipulated total remuneration threshold based on the previous year’s total remuneration).
The qualitative criteria can be summarised as: staff within the management body; senior management; other staff with key functional or
managerial responsibilities; staff, individually or as part of a Committee, with authority to approve new business products or to commit to
credit risk exposures and market risk transactions above certain levels. The quantitative criteria are: individuals earning €500,000 or
more in the previous year; individuals in the top 0.3% of earners in the previous year; individuals who earned more than the lowest paid
identified staff per the qualitative criteria, subject to specific exceptions in the criteria. In addition to the qualitative and quantitative
criteria, RBS has applied its own minimum standards to identify roles that are considered to have a material influence over its risk
profile.
Personal hedging strategies
In accordance with UK regulatory requirements and internal dealing rules that apply to employees, the conditions attached to
discretionary share-based awards prohibit the use of any personal hedging strategies to lessen the impact of a reduction in value of
such awards. These conditions are explicitly acknowledged and accepted by employees when any share-based awards are granted.
103
Other Remuneration Disclosures
Remuneration of MRTs
The quantitative disclosures below are made in accordance with
Article 450 of the EU Capital Requirements Regulation in relation
to 637 employees who have been identified as MRTs.
1. Number of MRTs by business area
Variable remuneration awarded for 2017 performance
Variable remuneration consisted of a combination of annual
bonus and long-term incentive awards, deferred over a three to
seven year period in accordance with regulatory requirements.
Under the RBS bonus deferral structure, immediate cash awards
are limited to £2,000 per employee.
Number of beneficiaries
Board Executive Directors
Board Non-Executive Directors
NatWest Markets
Personal & Business Banking
Commercial & Private Banking
Corporate Functions
Internal Control Functions
All Other Business Areas
Senior
management
2
0
1
1
1
2
1
2
Other
MRTs
0
12
248
71
91
96
73
36
Total
2
12
249
72
92
98
74
38
Total
10
627
637
2. Aggregate remuneration expenditure
Aggregate remuneration expenditure in respect of 2017
performance was as follows:
Number of beneficiaries
Board Executive Directors
Board Non-Executive Directors
NatWest Markets
Personal & Business Banking
Commercial & Private Banking
Corporate Functions
Internal Control Functions
All Other Business Areas
Total
Senior
management
10
£m
7.3
—
3.4
2.5
3.1
2.7
1.7
5.9
Other
MRTs
627
£m
—
2.7
Total
637
£m
7.3
2.7
166.7
170.1
21.3
34.2
37.8
23.4
20.0
23.8
37.3
40.5
25.1
25.9
26.5
306.1
332.6
3. Amounts and form of fixed and variable remuneration
Fixed remuneration consisted of salaries, allowances, pension
and benefit funding.
Fixed remuneration
Number of beneficiaries
Board Executive Directors
Board Non-Executive Directors
NatWest Markets
Personal & Business Banking
Commercial & Private Banking
Corporate Functions
Internal Control Functions
All Other Business Areas
Total
Senior
management
10
£m
4.3
—
1.9
1.4
1.8
1.6
1.7
3.5
Other
MRTs
627
£m
—
2.7
Total
637
£m
4.3
2.7
101.1
103.0
15.7
22.0
25.6
17.3
12.9
17.2
23.7
27.2
18.9
16.3
Long-term incentive awards vest subject to the extent to which
performance conditions are met and can result in zero payment.
Annual bonus
Number of beneficiaries
Senior
management
—
Board Executive Directors
Board Non-Executive Directors
NatWest Markets
Variable remuneration (cash)
Deferred remuneration (bonds)
Deferred remuneration (shares)
Personal & Business Banking
Variable remuneration (cash)
Deferred remuneration (bonds)
Deferred remuneration (shares)
Commercial & Private Banking
Variable remuneration (cash)
Deferred remuneration (bonds)
Deferred remuneration (shares)
Corporate Functions
Variable remuneration (cash)
Deferred remuneration (bonds)
Deferred remuneration (shares)
Internal Control Functions
Variable remuneration (cash)
Deferred remuneration (bonds)
Deferred remuneration (shares)
All Other Business Areas
Variable remuneration (cash)
Deferred remuneration (bonds)
Deferred remuneration (shares)
Other
MRTs
515
£m
—
—
0.44
5.02
60.15
65.61
0.19
1.11
4.26
5.55
0.14
1.52
10.61
12.27
0.29
1.85
10.02
12.16
0.11
1.18
4.88
6.17
0.06
0.74
6.34
7.14
Total
515
£m
—
—
0.44
5.02
60.15
65.61
0.19
1.11
4.26
5.55
0.14
1.52
10.61
12.27
0.29
1.85
10.02
12.16
0.11
1.18
4.88
6.17
0.06
0.74
6.34
7.14
Total
108.90
108.90
Long-term incentives
Number of beneficiaries
Board Executive Directors
Board Non-Executive Directors
NatWest Markets
Personal & Business Banking
Commercial & Private Banking
Other
MRTs
—
Senior
management
9
£m
3.02
—
1.50
1.05
1.30
1.15
—
2.40
Total
9
£m
3.02
—
1.50
1.05
1.30
1.15
—
2.40
Total
10.42
10.42
104
16.1
197.2
213.3
Corporate Functions
Internal Control Functions
All Other Business Areas
6. Ratio between fixed and variable remuneration
The variable component of total remuneration for MRTs at RBS
shall not exceed 100% of the fixed component. Based on the
information disclosed below, the average ratio between fixed and
variable remuneration for 2017 is approximately 1 to 0.56. The
majority of MRTs are based in the UK.
Ratio of fixed to variable
Number of beneficiaries
Board Executive Directors
Board Non-Executive Directors
NatWest Markets
Personal & Business Banking
Commercial & Private Banking
Corporate Functions
Internal Control Functions
All Other Business Areas
Consolidated
Senior
Management
9
ratio
Other
MRTs
515
ratio
Total
524
ratio
1 to 0.7
— 1 to 0.7
—
1 to 0
1 to 0
1 to 0.79
1 to 0.65
1 to 0.65
1 to 0.73
1 to 0.35
1 to 0.38
1 to 0.74
1 to 0.56
1 to 0.57
1 to 0.74
1 to 0.48
1 to 0.49
1 to 0
1 to 0.36
1 to 0.33
1 to 0.69 1 to 0.55
1 to 0.58
1 to 0.65
1 to 0.55
1 to 0.56
7. Discount Rate 2017
Under CRD IV regulations, a notional discount is available which
allows variable pay to be awarded at a level that would otherwise
exceed the 1:1 ratio, provided that at least 25% of variable pay is
delivered ‘in instruments’ (shares) and deferred over five years.
The discount rate was not used for remuneration awarded in
respect of the 2017 performance year.
Other Remuneration Disclosures
4. Outstanding deferred remuneration through 2017
The table below includes deferred remuneration awarded or paid
out in 2017 in respect of prior performance years. Deferred
remuneration reduced during the year relates to long-term
incentives lapsed when performance conditions are not met,
long-term incentives and deferred awards forfeited on leaving
and malus adjustments of prior year deferred awards and long-
term incentives.
Category of deferred
remuneration
Unvested from prior year
Awarded during year
Paid out
Reduced from prior years
Unvested at year end
Senior
Management
£m
36.5
16.2
7.1
3.9
41.7
Other
MRTs
£m
159.3
122.5
97.8
16.5
167.5
Total
£m
195.8
138.7
104.9
20.4
209.2
5. Guaranteed Awards (including ‘Sign-on’ awards) and
Severance Payments
RBS does not offer ‘Sign-on awards’. Guaranteed awards may
only be granted to new hires in exceptional circumstances in
compensation for awards foregone in their previous company and
are limited to the first year of service. No new hire guarantees
were made in respect of the 2017 performance year.
Severance payments and / or arrangements can be made to
employees who leave RBS in certain situations, including
redundancy. Such payments are determined by a pre-
determined formula set out within the relevant social plans,
policies, agreements or local laws. Where local laws permit,
there is a cap on the maximum amount that can be awarded.
No severance payments were made during the financial year in
excess of contractual payments, local policies, standards or
statutory amounts, other than two exceptions. One payment of
£45,500 was made to a former employee in Corporate Functions
as a payment in lieu of contractual pension entitlements and
one payment of £3,600 was made to a former employee in
Commercial & Private Banking as a small variation of standard
terms. Where required, remuneration is constrained within the
limit of variable to fixed remuneration in accordance with EBA
rules.
105
Compliance report
Statement of compliance
RBS is committed to high standards of corporate governance,
business integrity and professionalism in all its activities.
Throughout the year ended 31 December 2017, RBS has
complied with all of the provisions of the UK Corporate
Governance Code issued by the Financial Reporting Council
dated April 2016 (the “Code”) except in relation to provision
(D.2.2) that the Group Performance and Remuneration
Committee should have delegated responsibility for setting
remuneration for the Chairman and executive directors. RBS
considers that this is a matter which should rightly be reserved for
the Board and this is an approach RBS has adopted for a number
of years. Remuneration for the executive directors is first
considered by the Group Performance and Remuneration
Committee which then makes recommendations to the Board for
consideration. This approach allows all non-executive directors,
and not just those who are members of the Group Performance
and Remuneration Committee, to participate in decisions on the
executive directors’ and the Chairman’s remuneration and also
allows the executive directors to input to the decision on the
Chairman’s remuneration. The Board believes this approach is
very much in line with the spirit of the Code and no director is
involved in decisions regarding his or her own remuneration. We
do not anticipate any changes to our approach on this aspect of
the Code. Information on how RBS has applied the main
principles of the Code can be found in the Corporate governance
report on pages 50 to 105. A copy of the Code can be found at
www.frc.org.uk.
RBS has also implemented the recommendations arising from
the Walker Review and complied in all material respects with the
Financial Reporting Council Guidance on Audit Committees
issued in September 2012 and April 2016.
Under the US Sarbanes-Oxley Act of 2002, specific standards of
corporate governance and business and financial disclosures and
controls apply to companies with securities registered in the US.
RBS complies with all applicable sections of the US Sarbanes-
Oxley Act of 2002, subject to a number of exceptions available to
foreign private issuers.
Internal control
The Board of Directors is responsible for the system of internal
controls that is designed to maintain effective and efficient
operations, compliant with applicable laws and regulations. The
system of internal controls is designed to manage, or mitigate,
risk to an acceptable residual level rather than eliminate it
entirely. Systems of internal control can only provide reasonable
and not absolute assurance against material misstatement, fraud
or loss.
Ongoing processes for the identification, evaluation and
management of the principal risks faced by RBS operated
throughout the period from 1 January 2017 to 22 February 2018,
the date the directors approved the Annual Report & Accounts.
These processes include the semi-annual Control Environment
Certification process which requires senior members of the
executive and management to assess the adequacy and
effectiveness of their internal control frameworks and certify that
their business or function is compliant with the requirements of
Sarbanes-Oxley Section 404 and the UK Corporate Governance
Code Section C2. The policies that govern these processes –
and reports on internal controls arising from them – are reviewed
by the Board and meet the requirements of the Financial
Reporting Council’s Guidance On Risk Management Internal
Control & Related Financial & Business Reporting issued in
September 2014.
RBS operates a three lines of defence model, which provides a
framework for responsibilities and accountabilities across the
organisation. As part of its second line of defence role, the Risk
function oversees and challenges the firm-wide management of
risk and the efficacy of the related controls. In addition, the Risk
function is responsible for developing material risk policies and
strategic frameworks for the business to use.
The effectiveness of RBS’s internal controls is reviewed regularly
by the Board, the Group Audit Committee and the Board Risk
Committee. Internal Audit undertakes independent assurance
activities and provides reports to the Board and executive
management on the quality and effectiveness of governance, risk
management and internal controls to monitor, manage and
mitigate risks in achieving the bank’s objectives. In addition, the
Board receives a risk management report at each scheduled
Board meeting. Executive management committees in each of
the RBS businesses also receive regular reports on significant
risks facing their business and how they are being controlled.
Details of the bank’s approach to risk management are given in
the Capital & Risk Management section.
In recent years, RBS has made progress in strengthening its
control environment. Throughout 2017, there was a sustained
focus on consolidating progress and driving further improvements
across each of the franchises and functions. In particular, this
resulted in measurable improvement in the Personal & Business
Banking (PBB) franchise and the Chief Administration Office
(CAO) among others. Work also continued to develop and
enhance both the risk appetite framework and the operational risk
management framework in support of a robust and holistic control
approach. In parallel with this, further progress was made in
embedding a consistent end-to-end risk and control assessment
process. While more work is required, and the journey of
improvement will continue, significant steps forward have been
made in terms of developing, enhancing and embedding a strong
and dynamic risk culture across RBS.
The remediation of known control issues remained an important
focus of the Group Audit Committee and the Board Risk
Committee during 2017. For further information on their oversight
of remediation of the most significant issues, please refer to the
Report of the Group Audit Committee and the Report of the
Board Risk Committee.
106
The New York Stock Exchange
As a foreign private issuer with American Depository Shares
representing ordinary shares, preference shares and debt
securities listed on the New York Stock Exchange (the “NYSE”),
RBS is not required to comply with all of the NYSE standards
applicable to US domestic companies (the “NYSE Standards”)
provided that it follows home country practice in lieu of the NYSE
Standards and discloses any significant ways in which its
corporate governance practices differ from the NYSE Standards.
RBS is also required to provide an Annual Written Affirmation to
the NYSE of its compliance with the mandatory applicable NYSE
Standards.
The Group Audit Committee fully complies with the mandatory
provisions of the NYSE Standards (including by reference to the
rules of the Exchange Act) that relate to the composition,
responsibilities and operation of audit committees. In April 2017
RBS submitted its required annual written affirmation to the
NYSE confirming its full compliance with those and other
applicable provisions. More detailed information about the Group
Audit Committee and its work during 2017 is set out in the Group
Audit Committee report on pages 65 to 72.
RBS has reviewed its corporate governance arrangements and is
satisfied that these are consistent with the NYSE Standards,
subject to the following departures: (i) NYSE Standards require
the majority of the Board to be independent. The NYSE
Standards contain different tests from the Code for determining
whether a director is independent. RBS follows the Code’s
requirements in determining the independence of its directors
and currently has 9 independent non-executive directors, one of
whom is the senior independent director (ii) The NYSE
Standards require non-management directors to hold regular
sessions without management present and that independent
directors meet at least once a year. The Code requires the
Chairman to hold meetings with non-executive directors without
the executives present and non-executive directors are to meet
without the Chairman present at least once a year to appraise the
Chairman’s performance and RBS complies with the
requirements of the Code. (iii) The NYSE Standards require that
the nominating/corporate governance committee of a listed
company be composed entirely of independent directors.
Compliance report
The Group Audit Committee has received confirmation that
management has taken, or is taking, action to remedy significant
failings or weaknesses identified through RBS’s control
framework. The Group Audit Committee and the Board Risk
Committee will continue to focus on such remediation activity,
particularly in view of the transformation agenda.
While not being part of the bank’s system of internal control, the
bank’s independent auditors present to the Group Audit
Committee reports that include details of any significant internal
control deficiencies they have identified. Further, the system of
internal controls is also subject to regulatory oversight in the UK
and overseas. Additional details of regulatory oversight are given
in the Capital & Risk Management section.
Internal control over financial reporting
RBS is required to comply with Section 404 of the US Sarbanes-
Oxley Act of 2002 and assess the effectiveness of internal control
over financial reporting as of 31 December 2017.
RBS has assessed the effectiveness of its internal control over
financial reporting as of 31 December 2017 based on the criteria
set forth by the Committee of Sponsoring Organizations of the
Treadway Commission in the 2013 publication of ‘Internal Control
- Integrated Framework'.
Based on its assessment, management has concluded that, as of
31 December 2017, RBS’s internal control over financial
reporting is effective.
RBS’s auditors have audited the effectiveness of RBS’s internal
control over financial reporting and have given an unqualified
opinion.
Management's report on RBS’s internal control over financial
reporting will be filed with the Securities and Exchange
Commission as part of the 2017 Annual Report on Form 20-F.
Disclosure controls and procedures
As required by US regulations, management (including the Chief
Executive and Chief Financial Officer) have conducted an
evaluation of the effectiveness and design of RBS’s disclosure
controls and procedures (as defined in the Exchange Act rules)
as at 31 December 2017. Based on this evaluation, management
(including the Chief Executive and Chief Financial Officer)
concluded that RBS’s disclosure controls and procedures were
effective as of the end of the period covered by this annual
report.
Changes in internal control
There was no change in RBS’s internal control over financial
reporting that occurred during the period covered by this report
that has materially affected, or is reasonably likely to materially
affect, RBS’s internal control over financial reporting.
107
Compliance report
The Chairman of the Board is also the Chairman of the Group
Nominations and Governance Committee, which is permitted
under the Code (since the Chairman was considered
independent on appointment). The terms of reference of the
Group Nominations and Governance Committee differ in certain
limited respects from the requirements set out in the NYSE
Standards, including because the Group Nominations and
Governance Committee does not have responsibility for
overseeing the evaluation of management (iv) The NYSE
standards require that the compensation committee of a listed
company be composed of entirely of independent directors.
Although the members of the Group Performance and
Remuneration Committee are deemed independent in
compliance with the provisions of the Code, the Board has not
assessed the independence of the members of the Group
Performance and Remuneration Committee and the Group
Performance and Remuneration Committee has not assessed
the independence of any compensation consultant, legal counsel
or other adviser, in each case, in accordance with the
independence tests prescribed by the NYSE Standards.
The NYSE Standards require that the compensation committee
must have direct responsibility to review and approve the Chief
Executive’s remuneration.
As stated at the start of this Compliance Report, in the case of
RBS, the Board, rather than the Group Performance and
Remuneration Committee, reserves the authority to make the
final determination of the remuneration of the Chief Executive (v)
The NYSE Standards require listed companies to adopt and
disclose corporate governance guidelines. Throughout the year
ended 31 December 2017, RBS has complied with all of the
provisions of the Code (subject to the exception described above)
and the Code does not require RBS to disclose the full range of
corporate governance guidelines with which it complies (vi) The
NYSE Standards require listed companies to adopt and disclose
a code of business conduct and ethics for directors, officers and
employees, and promptly disclose any waivers of the code for
directors or executive officers. RBS has adopted a code of
conduct which is supplemented by a number of key policies and
guidance dealing with matters including , among others, anti-
bribery and corruption, anti-money laundering, sanctions,
confidentiality, inside information, health, safety and environment,
conflicts of interest, market conduct and management records.
This code of conduct applies to all officers and employees and is
fully aligned to the PRA and FCA Conduct Rules which apply to
all directors. The Code of Conduct is available to view on RBS’s
website at rbs.com.
This Compliance report forms part of the Corporate governance
report and the Report of the directors.
108
Report of the directors
The directors present their report together with the audited
accounts for the year ended 31 December 2017.
Group structure
The company is a holding company owning the entire issued
ordinary share capital of The Royal Bank of Scotland plc, the
principal direct operating subsidiary undertaking of the company.
Details of the principal subsidiary undertakings of the company
are shown in Note 7 on page 340. A full list of subsidiary
undertakings of the company is shown in Note 15 on pages 344
to 356.
Following placing and open offers in December 2008 and in April
2009, HM Treasury (HMT) owned approximately 70.3% of the
enlarged ordinary share capital of the company. In December
2009, the company issued a further £25.5 billion of new capital to
HMT in the form of B shares. HMT sold 630 million of its holding
of the company’s ordinary shares in August 2015. In October
2015 HMT converted its entire holding of 51 billion B shares into
5.1 billion new ordinary shares of £1 each in the company.
At 31 December 2017, HMT’s holding in the company’s ordinary
shares was 70.5%.
RBS Group ring-fencing
The UK ring-fencing legislation requiring the separation of
essential banking services from investment banking services will
take effect from 1 January 2019.
To comply with these requirements it is RBS’s intention to place
the majority of the UK and Western European banking business
in ring-fenced banking entities under an intermediate holding
company. NatWest Markets Plc (NatWest Markets) will be a
separate non ring-fenced bank and The Royal Bank of Scotland
International (Holdings) Limited (RBSI Holdings) will also be
placed outside the ring-fence, both as direct subsidiaries of
RBSG.
The final ring-fenced legal structure and the actions to be taken
to achieve it, remain subject to, amongst other factors, additional
regulatory, Board and other approvals as well as employee
information and consultation procedures. All such actions and
their respective timings may be subject to change, or additional
actions may be required, including as a result of external and
internal factors including further regulatory, corporate or other
developments.
On 1 January 2017, RBS made a number of key changes to the
legal hierarchy of its subsidiaries to support the move towards a
ring-fenced structure. As part of continuing preparation to deliver
a fully compliant ring-fencing structure by 1 January 2019, it
plans to undertake a further series of actions as follows:
November 2017
On 21 November 2017, The Royal Bank of Scotland plc (RBS
plc) applied to the Court of Session in Edinburgh (the Court) to
initiate a “Ring-Fencing Transfer Scheme” (RFTS) under the
Financial Services and Markets Act 2000, including:
Transfer its UK retail & commercial banking business to
Adam & Company PLC (Adam);
Transfer its covered bonds in issue and Mentor business to
National Westminster Bank Plc (NatWest); and
Transfer branches and other properties to either NatWest or
Adam.
The RFTS is expected to take effect over the weekend of 28-30
April 2018. At the same time, RBS plc will be renamed “NatWest
Markets Plc”, Adam will be renamed “The Royal Bank of Scotland
plc” and assume banknote-issuing responsibility.
May 2018
In May 2018, RBS intends to commence, in the Court, a second
RFTS to transfer certain derivatives from NatWest to NatWest
Markets Plc (former RBS plc). If approved by the Court, the
transfers are expected to be implemented in August 2018.
July 2018
In July 2018, RBS plans to restructure the NatWest Markets Plc
(former RBS plc) capital structure via a Court approved capital
reduction. As part of this restructure, the shares in NatWest
Holdings Limited, which owns the ring-fenced sub-group, will be
distributed to RBSG. This will separate the ring-fenced sub-group
from the non-ring-fenced entities, as required by the ring-fencing
legislation.
January 2019
Once the RFTS, other restructuring and the ring-fencing
legislation is in force:
Ring-fenced activities
RBS plc (former Adam) will manage the RBS branded
banking business in its UK branch network;
NatWest will continue to manage NatWest branded banking
business and its branch network in the UK and Western
Europe;
NatWest will operate as the shared service provider to the
rest of the Group and will act as the market-facing arm for
the ring-fenced banking group’s payments and hedging
activities;
Adam will continue to be a trading name of RBS plc (former
Adam) and will continue to operate its private banking and
wealth management activities;
Coutts & Company will continue its private banking and
wealth management activities; and
Ulster Bank Limited and Ulster Bank Ireland DAC will
continue to operate in Northern Ireland and the Republic of
Ireland respectively.
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Report of the directors
Non-ring-fenced activities
NatWest Markets Plc (former RBS plc) will continue to
undertake RBS’s trading and investment banking activities;
and
RBS International Limited (RBSI), along with Isle of Man
Bank, will continue to serve the markets and customers it
serves today. In addition, RBSI becomes the focal point for
funds banking activity through its recently opened London
branch.
Segmental reporting
Segmental reorganisation and business transfers
RBS continues to deliver on its plan to build a strong, simple and
fair bank for both customers and shareholders. To support this,
and in preparation for the UK ring-fencing regime, the previously
reported operating segments were realigned in Q4 2017 and a
number of business transfers completed.
Segmental reorganisation
The previously reported operating segments are now realigned
and comparatives have been re-presented as follows:
The former Williams & Glyn reportable operating segment
has been integrated into the UK PBB reportable segment;
The former Capital Resolution reportable operating segment
has been integrated into the NatWest Markets reportable
segment, with the exception of the costs in relation to the
RMBS claims, which have been transferred to the Central &
Other items reportable segment; and
The RBSI reportable operating segment is no longer
presented within the CPB franchise.
Business transfers
On 1 October 2017 the following changes were made to RBS’s
businesses, which impacts its financial reporting but where
comparatives have not been re-presented:
Shipping and other activities, which were formerly in Capital
Resolution, were transferred from the NatWest Markets
reportable segment to the Commercial Banking reportable
segment.
UK PBB Collective Investment Funds (CIFL) business was
transferred to the Private Banking reportable segment in
order to better serve customers.
The RBS International (RBSI) reportable operating segment
was aligned to the legal entity The Royal Bank of Scotland
International (Holdings) Limited. This predominantly involved
transfers from Private Banking, and Services and Functions
within Central items & other in preparation for the
implementation of the UK ring-fencing regime.
Commercial Banking whole business securitisations and
relevant financial institutions (RFI) were transferred to
NatWest Markets during December 2017. RFIs are
prohibited from being within the ring-fence due to their
nature and exposure to global financial markets. The move
is in preparation for the implementation of the UK ring-
fencing regime.
Reportable operating segments
Following the changes detailed the reportable operating
segments are as follows:
Personal & Business Banking (PBB) comprises two reportable
segments: UK Personal & Business Banking (UK PBB) and
Ulster Bank RoI. UK PBB serves individuals and mass affluent
customers in the UK together with small businesses (generally up
to £2 million turnover). UK PBB includes Ulster Bank customers
in Northern Ireland. Ulster Bank RoI serves individuals and
businesses in the Republic of Ireland (RoI).
Commercial & Private Banking (CPB) comprises two reportable
segments: Commercial Banking and Private Banking.
Commercial Banking serves commercial and corporate
customers in the UK and Western Europe. Private Banking
serves UK connected high net worth individuals.
RBS International (RBSI) serves retail, commercial, corporate
and financial institution customers in Jersey, Guernsey, Isle of
Man and Gibraltar and financial institution customers in
Luxembourg and London.
NatWest Markets offers corporate and institutional customers
global market access, providing them with trading, risk
management and financing solutions through its trading and
sales operations in London, Singapore and Stamford and sales
offices in Dublin, Hong Kong and Tokyo.
Central items & other includes corporate functions, such as RBS
treasury, finance, risk management, compliance, legal,
communications and human resources. Central functions
manages RBS capital resources and RBS-wide regulatory
projects and provides services to the reportable segments.
Balances in relation to legacy litigation issues and the
international private banking business are included in the relevant
periods.
Allocation of central balance sheet items
RBS allocates all central costs relating to Services and Functions
to the business using appropriate drivers, these are reported as
indirect costs in the segmental income statements. Assets (and
risk-weighted assets) held centrally, mainly relating to RBS
Treasury, are allocated to the business using appropriate drivers.
Results and dividends
The profit attributable to the ordinary shareholders of the Group
for the year ended 31 December 2017 amounted to £752 million
compared with a loss of £6,955 million for the year ended 31
December 2016, as set out in the consolidated income statement
on page 244.
The company did not pay a dividend on ordinary shares in 2015,
2016 or 2017.
In the context of prior macro-prudential policy discussions, the
Board decided to partially neutralise any impact on Core Tier 1
capital of coupon and dividend payments in respect of 2016 and
2017 Group hybrid capital instruments through equity issuances
of c.£300 million. Consequently, approximately £300 million was
raised each year in 2016 and 2017 through the issue of new
ordinary shares and the Board has decided a further £300 million
of new equity will be issued during the course of 2018 to again
partially neutralise the CET1 impact of coupon and dividend
payments.
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Report of the directors
Business review
Activities
RBS is engaged principally in providing a wide range of banking
and other financial services. Further details of the organisational
structure and business overview of RBS, including the products
and services provided by each of its operating segments and the
markets in which they operate are contained in the Business
review on pages 117 to 148. Details of the strategy for delivering
the company’s objectives can be found in the Strategic report.
Risk factors
RBS’s future performance and results could be materially
different from expected results depending on the outcome of
certain potential risks and uncertainties. Full details of these and
other risk factors are set out on pages 372 to 402.
The reported results of RBS are also sensitive to the accounting
policies, assumptions and estimates that underlie the preparation
of its financial statements. Details of RBS’s critical accounting
policies and key sources of accounting judgments are included in
Accounting policies on pages 251 to 263.
RBS’s approach to risk management, including its financial risk
management objectives and policies and information on RBS’s
exposure to market, credit, liquidity and funding risk, is
discussed in the Capital and risk management section.
Financial performance
A review of RBS’s performance during the year ended 31
December 2017, including details of each operating segment,
and RBS’s financial position as at that date is contained in the
Business review on pages 117to 148!Syntax Error, #.
RBS Holdings N.V. (formerly ABN AMRO Holding N.V.)
In 2017 NatWest Markets announced its plan to repurpose the
existing licence in the Netherlands. This proposed approach
should minimise disruption to the business and allow it to
continue to serve customers in the event of any loss of EU
passporting, as a result of the UK's departure from the EU.
NatWest Markets and RBS N.V are working together to ensure
the banking licence is maintained and the entity is made
operationally ready. In parallel, work continues to decrease the
RBS N.V. legacy assets and liabilities further.
Business divestments
Following the change of terms in respect of the business
previously described as Williams & Glyn and agreed with the
European Commission in September 2017, RBS will make a
£425 million contribution to a Capability and Innovation Fund to
be established to support competition in UK SME banking. The
agreed alternative remedy package also requires a £350 million
Incentivised Switching Scheme which will provide funding for
eligible challenger bodies to help them incentivise SME
customers to switch their accounts and loans from RBS. Should
the uptake within the Incentivised Switching Scheme not be
sufficient, RBS may be required to make a further contribution,
capped at £50 million.
HMT is establishing an Independent Body to administer the
Capability and Innovation fund and oversee and control the
incentivised switching scheme. Once established the
Independent Body, HMT and RBS will enter into the Framework
Agreement Deed and fund the remedies.
Employees
Our colleagues
As at 31 December 2017, RBS employed 71,200 people (full-time
equivalent basis, including temporary workers) throughout the
world. Details of related costs are included in Note 3 on the
consolidated accounts. The Board has considered ring-fencing
preparations during the year and in advance of the legislation
taking effect on 1 January 2019.
Engaging our colleagues is critical to delivering on our strategy
and ambition as a bank. Further details on our approach can be
found on page 33 and 34 of the strategic report.
Building a healthy culture
Building a healthy culture that embodies Our Values is one of
RBS’s core priorities.
Our Values guide the way RBS identify the right people to serve
our customers well, and how RBS manage, engage and reward
colleagues. They are at the heart of both Our Standards (the
bank wide behavioural framework) and Our Code (the bank wide
Code of Conduct).
Engaging our colleagues
RBS know that building an engaged, healthy and inclusive
workforce is crucial to achieving our ambition. Every year RBS
asks colleagues to share their thoughts on what it’s like to work
here via our annual colleague survey.
The 2017 results were the most positive we’ve seen in recent
times. Key measures of engagement, leadership and our culture
have improved significantly, and RBS are now above the global
financial services norm in the majority of our survey categories.
Rewarding our colleagues
RBS’s approach to performance management provides clarity for
our colleagues about how their contribution links to our ambition.
It recognises behaviour that supports our values and holds
individuals to account for behaviour and performance that does
not.
RBS have a focus on paying the right wage to colleagues and the
RBS rates of pay continue to exceed the Living Wage Foundation
Benchmarks.
Developing our colleagues
RBS continued to deliver ‘Determined to Lead’, which is the core
management system for the bank. It provides consistent tools to
lead and engage colleagues. This programme has continued in
2017 with over 3,000 leaders participating.
In 2017 we launched the next stage in Service Excellence
training, our customer service programme and had over 16,000
colleagues complete Level one.
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Report of the directors
Professionalising colleagues is important to RBS. We continue to
work closely with the Chartered Banker Institute (CBI) and
Chartered Banker Professional Standards Board (CB:PSB) to
offer RBS colleagues professional qualifications. In 2017 over
3,000 of colleagues completed their CBI qualification and 94%
achieved the CB:PSB Foundation Standard.
RBS also offer a wide range of additional learning opportunities.
The RBS disability plan for training, career development and
promotion of disabled persons employed by the company will
support us becoming a disability smart organisation, with upper
quartile performance, by 2018.
We continue to focus on building an ethnically diverse RBS. We
will introduce explicit targets for BAME representation at senior
levels in 2018.
Youth Employment
In 2017, we welcomed 471 people across the RBS Graduate and
Apprenticeship schemes as well as around 150 Summer Interns.
Our LGBTQ agenda continues to deliver a better experience for
our LGBTQ colleagues and customers. RBS have processes in
place to support updating gender and title on customers’ banking
records and to support colleagues undergoing gender transition.
Health and wellbeing of our colleagues
Wellbeing is a strong foundation for making RBS a great place to
work. For the third year running RBS participated in the Global
Challenge (formerly GCC) and with 34,000 colleagues taking part
we won the Global Challenge 1st Most Active Organisation
Financial Industry. Building on this success, we embraced the
rapid acceleration of digital wellbeing and are one of the few
large organisations to pilot a digital wellbeing platform.
During 2017 RBS has continued to support Time to Change
(removing the stigma of mental health) and actively encouraged
open dialogue across the bank to support Mental Health in the
Workplace. RBS were successful in running bankwide major
online campaigns to support Mental Health Awareness Week and
World Mental Health Day.
As RBS continue to support our colleagues through change we
have fully utilised the services of our Employee Assistance
Programme.
Employee consultation
RBS recognise employee representatives such as trade unions
and work councils in a number of businesses and countries.
There has been ongoing engagement and discussion with those
bodies given the scale of change taking place across RBS.
Management have continued to meet regularly with our European
Employee Council to discuss developments and update on the
progress of our strategic plans.
Inclusion
Building a more inclusive RBS is essential for our customers and
colleagues. Our inclusion policy standard applies to all
colleagues globally.
During 2017, RBS continued to roll out unconscious bias learning
to all colleagues (over 70,000 trained, to date) to create a solid
platform for the wider inclusion agenda.
RBS continue to work towards our goal of having at least 30%
senior women in our top three leadership layers across each
Franchise and Function by 2020 and to be fully gender balanced
(50/50) by 2030. We have a positive action approach in place,
tailored by business, according to the specific challenges they
face.
RBS have been recognised for our work on Equality, Diversity
and Inclusion by retaining our Platinum ranking from Opportunity
Now (gender), retaining our Gold ranking for Race for
Opportunity (race); retaining a position in the Times Top 50
Employers for Women; becoming a Top Global Employer in
Stonewall’s Global Equality Index (LGBT), Silver Status from The
Business Disability Forum and being rated a Top 10 Employer by
Working Families. In 2017 we were proud to be named ‘Diverse
Company of the Year’ at the National Diversity Awards and
winning Workplace Adjustments Innovation of the Year at the
Disability Smart Awards. RBS continue to support our c.20,000
strong employee-led networks.
Sustainability
The Sustainable Banking Committee’s role is to support the
Board in overseeing, supporting and challenging actions being
taken by management to run RBS as a sustainable business.
For more information on our approach and progress please read
the RBS Strategic Report. Further information is available on
rbs.com/sustainability.
Greenhouse gas emissions
Disclosures relating to greenhouse gas emissions are included in
the Strategic Report. These form part of the metrics and targets
of the RBS climate change strategy. This is reported in
accordance with the recommendations from the Financial
Stability Boards Task Force on Climate-related Financial
Disclosures (TCFD) on page 403. The RBS climate change
strategy is driven by a range of external and internal drivers with
oversight of climate related risks and opportunities through the
Sustainable Banking Committee.
Going concern
RBS’s business activities and financial position, the factors likely
to affect its future development and performance and its
objectives and policies in managing the financial risks to which it
is exposed and its capital are discussed in the Business review.
The risk factors which could materially affect RBS’s future results
are set out on pages 372 to 402. RBS’s regulatory capital
resources and significant developments in 2017 and anticipated
future developments are detailed in the Capital, liquidity and
funding section on pages 161 to 176. This section also describes
RBS’s funding and liquidity profile, including changes in key
metrics and the build up of liquidity reserves.
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Report of the directors
Having reviewed RBS’s forecasts, projections and other relevant
evidence, the directors have a reasonable expectation that RBS
and the company will continue in operational existence for the
foreseeable future. Accordingly, the financial statements of RBS
and of the company have been prepared on a going concern
basis.
Viability statement
Under the revised UK Corporate Governance Code the directors
are required to confirm that they have carried out a robust
assessment of the RBS’s principal risks and make a longer term
viability statement. This is set out in the Strategic Report on
page 49.
BBA disclosure code
RBS’s 2017 financial statements have been prepared in
compliance with the principles set out in the Code for Financial
Reporting Disclosure published by the British Bankers'
Association in 2010.The Code sets out five disclosure principles
together with supporting guidance. The principles are that RBS
and other major UK banks will provide high quality, meaningful
and decision-useful disclosures; review and enhance their
financial instrument disclosures for key areas of interest to
market participants; assess the applicability and relevance of
good practice recommendations to their disclosures
acknowledging the importance of such guidance; seek to
enhance the comparability of financial statement disclosures
across the UK banking sector; and clearly differentiate in their
annual reports between information that is audited and
information that is unaudited.
Enhanced Disclosure Task Force (EDTF)
The EDTF established by the Financial Stability Board, published
its report ‘Enhancing the Risk Disclosures of Banks’ in October
2012. All EDTF recommendations are reflected in the 2017
Annual Report and Accounts and Pillar 3 Report.
Corporate governance
The company is committed to high standards of corporate
governance. Details are given in the Corporate governance
report on pages 57 to 105. The Corporate governance report and
compliance report (pages 106 to 108) form part of this Report of
the directors.
Share capital
Details of the ordinary and preference share capital at 31
December 2017 and movements during the year are shown in
Note 25 on the consolidated accounts.
During 2017, the company allotted and issued a total of 119
million new ordinary shares of £1 each for the purposes of
ensuring 2017 coupon payments on discretionary hybrid capital
securities were partly neutralised from a Core Tier 1 capital
perspective.
The shares were allotted to UBS AG at the subscription prices
determined by reference to the average market prices during the
sale periods set out below.
Number of
shares sold
Subscription
price
Sale period
Gross proceeds
Share price
on allotment
33,376,695 239.6882 24/2/17 - 24/4/17 £80 million 249.3p
29,000,000 259.0457 28/4/17 – 30/6/17 £75 million 247.2p
56,634,740 256.0266 04/8/17 – 27/9/17 £145 million 270.8p
In the three years to 31 December 2017, the percentage increase
in issued share capital due to non-pre-emptive issuance
(excluding employee share schemes) for cash was 2.94%.
In addition the company issued 22 million new ordinary shares in
connection with employee share schemes in 2017.
In October 2015, HMT converted its entire holding of 51 billion B
shares into 5.1 billion new ordinary shares of £1 each.
In March 2016, the company paid a final dividend of £1.2 billion in
respect of the Dividend Access Share (DAS) held by HMT,
effecting the immediate retirement of the DAS which was
redesignated as a single B share and subsequently cancelled.
Authority to repurchase shares
At the Annual General Meeting in 2017 shareholders authorised
the company to make market purchases of up to 1,184,237,107
ordinary shares. The directors have not exercised this authority to
date. Shareholders will be asked to renew this authorisation at
the Annual General Meeting in 2018.
Additional information
Where not provided elsewhere in the Report of the directors, the
following additional information is required to be disclosed by Part
6 of Schedule 7 to the Large and Medium-sized Companies and
Groups (Accounts and Reports) Regulations 2008.
The rights and obligations attached to the company’s ordinary
shares and preference shares are set out in the company’s
Articles of Association, copies of which can be obtained from
Companies House in the UK or can be found at
rbs.com/about/board-and-governance.
On a show of hands at a general meeting of the company every
holder of ordinary shares and cumulative preference shares
present in person or by proxy and entitled to vote shall have one
vote. On a poll, every holder of ordinary shares or cumulative
preference shares present in person or by proxy and entitled to
vote shall have four votes for every share held. The notices of
Annual General Meetings and General Meetings specify the
deadlines for exercising voting rights and appointing a proxy or
proxies to vote in relation to resolutions to be passed at the
meeting.
The cumulative preference shares represent less than 0.008%
of the total voting rights of the company, the remainder being
represented by the ordinary shares.
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Report of the directors
There are no restrictions on the transfer of ordinary shares in the
company other than certain restrictions which may from time to
time be imposed by laws and regulations (for example, insider
trading laws).
Directors
The names and brief biographical details of the current directors
are shown on pages 51 to 56.
Pursuant to the Listing Rules of the FCA, certain employees of
the company require the approval of the company to deal in the
company’s shares.
The rules governing the powers of directors, including in relation
to issuing or buying back shares and their appointment are set
out in the company’s Articles of Association. It will be proposed at
the 2018 Annual General Meeting that the directors be granted
authorities to allot shares under the Companies Act 2006. The
company’s Articles of Association may only be amended by a
special resolution at a general meeting of shareholders.
The rights and obligations of holders of non-cumulative
preference shares are set out in Note 25 on the consolidated
accounts.
The company is not aware of any agreements between
shareholders that may result in restrictions on the transfer of
securities and/or voting rights. There are no persons holding
securities carrying special rights with regard to control of the
company. A number of the company’s employee share plans
include restrictions on transfers of shares while shares are
subject to the plans or the terms under which the shares were
awarded.
Under the rules of certain employee share plans, eligible
employees are entitled to acquire shares in the company, and
shares are held in trust for participants by The Royal Bank of
Scotland plc as Trustees. Voting rights are exercised by the
Trustees on receipt of participants’ instructions. If a participant
does not submit an instruction to the Trustee no vote is
registered.
The Royal Bank of Scotland Group plc 2001 Employee Share
Trust and The Royal Bank of Scotland Group plc 2007 US
Employee Share Trust hold shares on behalf of RBS’s employee
share plans. The voting rights are exercisable by the Trustees,
however, in accordance with investor protection guidelines, the
Trustees abstain from voting. The Trustees would take
independent advice before accepting any offer in respect of their
shareholdings for the company in a takeover bid situation.
Awards granted under the company’s employee share plans may
be met through a combination of newly issued shares and shares
acquired in the market by the company’s employee benefit trusts.
A change of control of the company following a takeover bid may
cause a number of agreements to which the company is party to
take effect, alter or terminate. All of the company’s employee
share plans contain provisions relating to a change of control.
Outstanding awards and options may vest and become
exercisable on change of control, subject where appropriate to
the satisfaction of any performance conditions at that time and
pro-rating of awards. In the context of the company as a whole,
these agreements are not considered to be significant.
Howard Davies, Frank Dangeard, Alison Davis, Morten Friis,
Robert Gillespie, Penny Hughes, Ross McEwan, Brendan
Nelson, Baroness Noakes, Mike Rogers and Ewen Stevenson all
served throughout the year and to the date of signing of the
financial statements.
Mark Seligman was appointed on 1 April 2017. Yasmin Jetha
was appointed 21 June 2017 and Dr Lena Wilson was appointed
on 1 January 2018.
All directors of the company are required to stand for election or
re-election annually by shareholders at the Annual General
Meeting and, in accordance with the UK Listing Rules, the
election or re-election of independent directors requires approval
by all shareholders and also by independent shareholders.
Directors’ interests
The interests of the directors in the shares of the company at 31
December 2017 are shown on page 97. None of the directors
held an interest in the loan capital of the company or in the
shares or loan capital of any of the subsidiary undertakings of the
company, during the period from 1 January 2017 to 22 February
2018.
Directors’ indemnities
In terms of section 236 of the Companies Act 2006 (the
“Companies Act”), Qualifying Third Party Indemnity Provisions
have been issued by the company to its directors, members of
the RBS Executive Committee, individuals authorised by the
PRA/FCA and certain directors and/or officers of RBS
subsidiaries.
In terms of section 236 of the Companies Act, Qualifying Pension
Scheme Indemnity Provisions have been issued to all trustees of
RBS pension schemes.
Post balance sheet events
Other than the matter disclosed on page 347, there have been no
significant events between the year end and the date of approval
of these accounts which would require a change to or disclosure
in the accounts.
Controlling shareholder
In accordance with the UK Listing Rules, the company has
entered into an agreement with HM Treasury (the ‘Controlling
Shareholder’) which is intended to ensure that the Controlling
Shareholder complies with the independence provisions set out
in the UK Listing Rules. The company has complied with the
independence provisions in the relationship agreement and as far
as the company is aware the independence and procurement
provisions in the relationship agreement have been complied with
in the period by the controlling shareholder.
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Report of the directors
Shareholdings
The table below shows shareholders that have notified RBS that
they hold more than 3% of the total voting rights of the company
at 31 December 2017.
Solicitor For The Affairs of Her
Majesty’s Treasury as Nominee
for Her Majesty’s Treasury
Ordinary shares
Number of shares
(millions)
8,434
% of share class
held
70.5
% of total
voting rights
held
70.5
As at 22 February 2018, there were no changes to the
shareholdings shown in the table above.
Listing Rule 9.8.4
In accordance with the UK Financial Conduct Authority’s Listing
Rules the information to be included in the Annual Report and
Accounts under LR 9.8.4, is set out in this Directors’ report with
the exception of details of contracts of significance under LR
9.8.4. (10) and (11) given in Additional Information on pages 370
and 371.
Political donations
At the Annual General Meeting in 2017, shareholders gave
authority under Part 14 of the Companies Act, for a period of one
year, for the company (and its subsidiaries) to make political
donations and incur political expenditure up to a maximum
aggregate sum of £100,000. This authorisation was taken as a
precaution only, as the company has a longstanding policy of not
making political donations or incurring political expenditure within
the ordinary meaning of those words. During 2017, RBS made no
political donations, nor incurred any political expenditure in the
UK or EU and it is not proposed that RBS’s longstanding policy of
not making contributions to any political party be changed.
Shareholders will be asked to renew this authorisation at the
Annual General Meeting in 2018.
Directors’ disclosure to auditors
Each of the directors at the date of approval of this report
confirms that:
(a) so far as the director is aware, there is no relevant audit
information of which the company’s auditors are unaware; and
(b) the director has taken all the steps that he/she ought to have
taken as a director to make himself/herself aware of any relevant
audit information and to establish that the company’s auditors are
aware of that information.
This confirmation is given and should be interpreted in
accordance with the provisions of section 418 of the Companies
Act.
Auditors
EY LLP are the auditors. The auditors, EY LLP, have indicated
their willingness to continue in office. A resolution to re-appoint
EY LLP as the company’s auditors will be proposed at the
forthcoming Annual General Meeting.
By order of the Board
Aileen Taylor
Company Secretary
22 February 2018
The Royal Bank of Scotland Group plc
is registered in Scotland No. SC45551
115
Statement of directors’ responsibilities
This statement should be read in conjunction with the responsibilities of the auditor set out in their report on pages 230 to 243.
The directors are responsible for the preparation of the Annual Report and Accounts. The directors are required by Article 4 of the IAS
Regulation (European Commission Regulation No 1606/2002) to prepare Group accounts, and as permitted by the Companies Act 2006
have elected to prepare company accounts, for each financial year in accordance with International Financial Reporting Standards as
adopted by the European Union. They are responsible for preparing accounts that present fairly the financial position, financial
performance and cash flows of the Group and the company. In preparing those accounts, the directors are required to:
make judgements and estimates that are reasonable and prudent; and
state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in
the accounts.
select suitable accounting policies and then apply them consistently;
The directors are responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial
position of the Group and to enable them to ensure that the Annual Report and Accounts complies with the Companies Act 2006. They
are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of
fraud and other irregularities.
The directors confirm that to the best of their knowledge:
the financial statements, prepared in accordance with International Financial Reporting Standards as adopted by the European
Union, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings
included in the consolidation taken as a whole; and
the Strategic Report and Directors’ report (incorporating the Business review) include a fair review of the development and
performance of the business and the position of the company and the undertakings included in the consolidation taken as a whole,
together with a description of the principal risks and uncertainties that they face.
In addition, the directors are of the opinion that the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable
and provides the information necessary for shareholders to assess the company’s position and performance, business model and
strategy.
By order of the Board
Howard Davies
Chairman
22 February 2018
Board of directors
Chairman
Howard Davies
Ross McEwan
Chief Executive
Ewen Stevenson
Chief Financial Officer
Executive directors
Ross McEwan
Ewen Stevenson
Non-executive directors
Frank Dangeard
Alison Davis
Morten Friis
Robert Gillespie
Penny Hughes
Yasmin Jetha
Brendan Nelson
Baroness Noakes
Mike Rogers
Mark Seligman
Dr Lena Wilson
116
Business Review
Presentation of information
Summary consolidated income statement
Analysis of results
Consolidated balance sheet
Cash flow
Segment performance
Page
118
119
120
125
127
130
117
Presentation of information
In the Report and Accounts, and unless specified otherwise, the
term ‘company’ or ‘RBSG’ means The Royal Bank of Scotland
Group plc, ‘RBS’, ‘RBS Group’ or the ‘Group’ means the
company and its subsidiaries, ‘the Royal Bank’ or ‘RBS plc’
means The Royal Bank of Scotland plc and ‘NatWest’ means
National Westminster Bank Plc.
Segmental reporting
RBS continues to deliver on its plan to build a strong, simple and
fair bank for both customers and shareholders. To support this,
and in preparation for the UK ring-fencing regime, the previously
reported operating segments were realigned in Q4 2017 and a
number of business transfers completed, for full details see the
Report of the directors.
Reportable operating segments
Following the Q4 2017 changes the reportable operating
segments are as follows, for full business descriptions see page
110 of the Report of the directors and Note 37 on the accounts:
Franchise
Personal & Business
Banking (PBB)
Reportable operating segment
UK Personal & Business Banking
(UK PBB)
Ulster Bank RoI
Commercial & Private
Banking (CPB)
Commercial Banking
Private Banking
Other reportable
segments
RBS International (RBSI)
NatWest Markets
Central items & other
Allocation of central balance sheet items
RBS allocates all central costs relating to Services and Functions
to the business using appropriate drivers, these are reported as
indirect costs in the segmental income statements. Assets (and
risk-weighted assets) held centrally, mainly relating to RBS
Treasury, are allocated to the business using appropriate drivers.
Key operating indicators
RBS prepares its financial statements in accordance with IFRS
as issued by the IASB and as adopted by the European Union,
which constitutes a body of generally accepted accounting
principles (‘GAAP’). This document contains a number of
adjusted or alternative performance measures, also known as
non-GAAP financial measures. These measures exclude certain
items which management believe are not representative of the
underlying performance of the business and which distort period-
on-period comparison. These measures include:
‘Adjusted’ measures of financial performance, principally
operating performance before: own credit adjustments; gain
or loss on redemption of own debt; strategic disposals,
restructuring costs, litigation and conduct costs. and write
down of goodwill;
Performance, funding and credit metrics such as ‘return on
tangible equity’, ‘adjusted return on tangible equity’ and
related RWA equivalents incorporating the effect of capital
deductions (RWAes), total assets excluding derivatives
(funded assets) and net interest margin (NIM) adjusted for
items designated at fair value through profit or loss (non-
statutory NIM), cost:income ratio, loan:deposit ratio and
REIL/impairment provision ratios. These are internal metrics
used to measure business performance;
Personal & Business Banking (PBB) franchise, combining
the reportable segments of UK Personal & Business
Banking (UK PBB) and Ulster Bank RoI, Commercial &
Private Banking (CPB) franchise, combining the reportable
segments of Commercial Banking and Private Banking; and
Cost savings progress and 2017 target calculated using
operating expenses excluding litigation and conduct costs,
restructuring costs, write down of goodwill, the impairment of
other intangible assets, the operating costs of the business
previously described as Williams & Glyn and the VAT
recoveries.
.
RBS Group ring-fencing
The UK ring-fencing legislation requiring the separation of
essential banking services from investment banking services will
take effect from 1 January 2019.
To comply with these requirements it is RBS’s intention to place
the majority of the UK and Western European banking business
in ring-fenced banking entities under an intermediate holding
company. NatWest Markets Plc (NatWest Markets) will be a
separate non ring-fenced bank and The Royal Bank of Scotland
International (Holdings) Limited (RBSI Holdings) will also be
placed outside the ring-fence, both as direct subsidiaries of
RBSG.
On 1 January 2017, RBS made a number of key changes to the
legal hierarchy of its subsidiaries to support the move towards a
ring-fenced structure. As part of continuing preparation to deliver
a fully compliant ring-fencing structure by 1 January 2019, it
plans to undertake a further series of actions. For further details
of these actions see the Report of the directors.
Business divestments
Citizens
RBS sold the final tranche of its interest in Citizens Financial
Group, Inc. during the second half of 2015. Consequently,
Citizens was classified as a disposal group at 31 December 2014
and presented as a discontinued operation until October 2015.
From 3 August 2015 until the final tranche was sold in October
2015, Citizens was an associated undertaking.
118
Business review
Summary consolidated income statement for the year ended 31 December 2017
Net interest income
Non-interest income
Total income
Operating expenses
Profit/(loss) before impairment (losses)/releases
Impairment (losses)/releases
Operating profit/(loss) before tax
Tax charge
Profit/(loss) from continuing operations
Profit from discontinued operations, net of tax
Profit/(loss) for the year
Memo:
Total income - adjusted (1)
Operating expenses - adjusted (2)
Operating profit - adjusted (1,2)
2017
£m
8,987
4,146
2016
£m
8,708
3,882
2015
£m
8,767
4,156
13,133
(10,401)
12,590
(16,194)
12,923
(16,353)
2,732
(493)
2,239
(824)
1,415
—
1,415
(3,604)
(478)
(4,082)
(1,166)
(5,248)
—
(5,248)
(3,430)
727
(2,703)
(23)
(2,726)
1,541
(1,185)
12,862
(7,551)
4,818
12,372
(8,220)
3,674
13,034
(9,356)
4,405
Notes:
(1) Excluding own credit adjustments, loss on redemption of own debt and strategic disposals. Tax on these items was a £24 million charge in 2017 (2016 - £90 million charge;
2015 - £15 million charge).
(2) Excluding restructuring costs, litigation and conduct costs and write down of goodwill. Tax on these items was £369 million in 2017 (2016 - £286 million; 2015 - £563 million).
119
Business review
Analysis of results
Segmental summary income statements
PBB
UK Ulster Bank
CPB
RoI Commercial Banking Private Banking
£m
£m
£m
RBS
International
£m
NatWest Central items
& other
Markets
£m
£m
2017
Total income - adjusted
Own credit adjustments
Loss on redemption of own debt
Strategic disposals
Total income
Operating expenses
Restructuring costs
Litigation and conduct costs
- adjusted
Operating expenses
Impairment (losses)/releases
Operating profit/(loss) - adjusted
Operating profit/(loss)
Return on equity (1)
Return on equity - adjusted (1,2)
Cost income ratio (3)
Cost income ratio - adjusted (2,3)
2016
Total income - adjusted
Own credit adjustments
Loss on redemption of own debt
Strategic disposals
Total income
Operating expenses
Restructuring costs
Litigation and conduct costs
- adjusted
Operating expenses
Impairment (losses)/releases
Operating profit/(loss) - adjusted
Operating profit/(loss)
Return on equity (1)
Return on equity - adjusted (1,2)
Cost income ratio (3)
Cost income ratio - adjusted (2,3)
2015
Total income - adjusted
Own credit adjustments
Loss on redemption of own debt
Strategic disposals
Total income
Operating expenses - adjusted
Restructuring costs
Litigation and conduct costs
Write down of goodwill
Operating expenses
Impairment (losses)/releases
Operating profit/(loss) - adjusted
Operating profit/(loss)
PBB
£m
6,477
—
—
—
6,477
(3,158)
(461)
(210)
(3,829)
(235)
3,084
2,413
607
(3)
—
—
604
(451)
(56)
(169)
(676)
(60)
96
(132)
23.7%
30.7%
59.1%
48.8%
(5.0%)
3.6%
111.9%
74.3%
6,127
—
—
—
6,127
(3,398)
(244)
(634)
(4,276)
(125)
2,604
1,726
573
3
—
—
576
(457)
(40)
(172)
(669)
113
229
20
16.2%
25.1%
69.8%
55.5%
0.7%
8.4%
116.1%
79.8%
6,033
—
—
—
6,033
(3,397)
(195)
(972)
—
(4,564)
(8)
2,628
1,461
550
—
—
—
550
(427)
(15)
13
—
(429)
141
264
262
Return on equity (1)
Return on equity - adjusted (1,2)
Cost income ratio (3)
Cost income ratio - adjusted (2,3)
13.5%
25.3%
75.7%
56.3%
10.6%
10.6%
78.0%
77.6%
678
—
—
—
678
(445)
(45)
(39)
(529)
(6)
227
143
389
—
—
—
389
(202)
(9)
(8)
(219)
(3)
184
167
1,090
(66)
—
26
1,050
(1,528)
(436)
(237)
(2,201)
174
(264)
(977)
6.4%
11.3%
78.0%
65.6%
11.2%
12.6%
56.3%
51.9%
(9.0%)
(3.7%)
nm
140.2%
657
—
—
—
657
(511)
(37)
(1)
(549)
3
149
111
374
—
—
—
374
(169)
(5)
—
(174)
(10)
195
190
1,106
187
—
(81)
1,212
(2,084)
(190)
(550)
(2,824)
(253)
(1,231)
(1,865)
137
—
(7)
321
451
47
(391)
(589)
(933)
(1)
183
(483)
nm
nm
nm
nm
120
(10)
(126)
245
229
335
(1,482)
(4,088)
(5,235)
—
455
(5,006)
Total
RBS
£m
12,862
(69)
(7)
347
13,133
(7,551)
(1,565)
(1,285)
(10,401)
(493)
4,818
2,239
2.2%
8.8%
79.0%
58.2%
12,372
180
(126)
164
12,590
(8,220)
(2,106)
(5,868)
(16,194)
(478)
3,674
(4,082)
5.6%
7.8%
83.6%
77.8%
13.8%
14.2%
46.5%
45.2%
(12.5%)
(8.7%)
nm
188.4%
nm (17.9%)
1.6%
nm
129.0%
nm
66.0%
nm
644
—
—
—
644
(518)
(73)
(12)
(498)
(1,101)
(13)
113
(470)
(27.7%)
4.9%
171.0%
80.4%
367
—
—
—
367
(156)
(4)
—
—
(160)
—
211
207
1,809
295
—
(38)
2,066
(3,006)
(1,831)
(404)
—
(5,241)
730
(467)
(2,445)
18.5%
18.9%
43.6%
42.5%
(11.2%)
(3.0%)
nm
166.2%
377
14
(263)
(119)
9
(51)
(744)
(2,142)
—
(2,937)
(54)
272
(2,982)
nm
nm
nm
nm
13,034
309
(263)
(157)
12,923
(9,356)
(2,931)
(3,568)
(498)
(16,353)
727
4,405
(2,703)
(4.7%)
11.0%
126.9%
71.4%
3,484
—
—
—
3,484
(1,814)
(167)
(33)
(2,014)
(362)
1,308
1,108
6.6%
8.2%
56.0%
50.0%
3,415
—
—
—
3,415
(1,936)
(108)
(423)
(2,467)
(206)
1,273
742
4.1%
8.4%
71.0%
54.8%
3,254
—
—
—
3,254
(1,801)
(69)
(51)
—
(1,921)
(69)
1,384
1,264
9.8%
10.9%
57.2%
53.3%
Notes:
(1) RBS’s CET 1 target is 13% but for the purposes of computing segmental return on equity (ROE), to better reflect the differential drivers of capital usage, segmental operating
profit after tax and adjusted for preference dividends is divided by average notional equity allocated at different rates of 14% (Ulster Bank RoI - 11% prior to 2017), 11%
(Commercial Banking), 14% (Private Banking - 15% prior to 2017), 16% (RBS International - 12% prior to November 2017) and 15% for all other segments, of the monthly
average of segmental risk-weighted assets incorporating the effect of capital deductions (RWAes). Return on equity is calculated using profit for the period attributable to
ordinary shareholders.
(2) Excluding own credit adjustments, (loss)/gain on redemption of own debt, strategic disposals, restructuring costs, litigation and conduct costs and write down of goodwill.
(3) Operating lease depreciation included in income (year ended December 2017 - £142 million; Q4 2017 - £35 million; year ended 31 December 2016 - £152 million, Q3 2017 - £35
million and Q4 2016 - £37 million).
120
Business review
Analysis of results continued
Net interest income
Interest receivable (1,2)
Interest payable (1,2)
Net interest income
Yields, spreads and margins of the banking business
Gross yield on interest-earning assets of the banking business (3)
Cost of interest-bearing liabilities of the banking business
Interest spread of the banking business (4)
Benefit from interest-free funds
Net interest margin of the banking business (2,5,6)
2017
£m
11,034
(2,047)
8,987
%
2.57
(0.69)
1.88
0.25
2.13
2016
£m
11,258
(2,550)
8,708
%
2.80
(0.94)
1.86
0.32
2.18
2015
£m
11,925
(3,158)
8,767
%
2.88
(1.11)
1.77
0.35
2.12
Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities.
Notes:
(1) Negative interest on loans and advances is classed as interest payable and on customer deposits is classed as internet receivable.
(2)
(3) Gross yield is the interest earned on average interest-earning assets of the banking book.
(4)
(5) For the purpose of net interest margin calculations, there was no increase in interest receivable (2016 - nil; 2015 - nil) and no increase in interest payable
Interest spread is the difference between the gross yield and the interest rate paid on average interest-bearing liabilities of the banking business.
(2016 - nil; 2015 - £15 million) in respect of interest on financial assets and liabilities designated as at fair value through profit or loss. Related interest-earning assets and
interest-bearing liabilities have been adjusted where applicable.
(6) Net interest margin is net interest income of the banking business as a percentage of interest-earning assets (IEA) of the banking business.
2017 compared with 2016
Net interest income of £8,987 million increased by £279 million
compared with 2016. The movement was principally driven by
higher mortgage volumes in UK PBB, up £185 million or 3.7%,
and deposit re-pricing benefits in Commercial Banking, up £143
million or 6.7%, partially offset by planned balance sheet
reductions in NatWest Markets.
The net interest margin (NIM) was 2.13% for 2017, 5 basis points
lower than 2016 reflecting increased liquidity, mix impacts and
competitive pressures on margin.
UK PBB NIM of 2.86% was 11 basis points lower than 2016
reflecting lower mortgage margins, asset mix and reduced
current account hedge yield, partially offset by savings re-pricing
benefits from actions taken in 2016 and following the Q4 2017
base rate increase.
Ulster Bank RoI NIM increased by 5 basis points to 1.67% driven
by a combination of improved deposit and loan margins, one-off
income adjustments and successful deleveraging measures in
2016 which have reduced the concentration of low yielding loans.
Commercial Banking NIM decreased by 2 basis points as active
re-pricing of assets and deposits has been more than offset by
asset margin pressure in a low rate environment.
Private Banking NIM decreased by 19 basis points to 2.47%
reflecting the competitive market and low rate environment,
partially offset by higher funding benefits on deposits following
the Q4 2017 base rate increase.
RBSI NIM remained stable at 1.36% as active re-pricing of
deposits has been offset by the low rate environment.
Structural hedges of £129 billion generated a benefit of £1.3
billion through net interest income for the year.
2016 compared with 2015
Net interest income of £8,708 million reduced by £59 million
compared with 2015 principally driven by a £126 million reduction
in legacy NatWest Markets business, in line with the planned
shrinkage of the balance sheet.
NIM was 2.18% for 2016, 6 basis points higher than 2015 as the
benefit associated with reductions in low yielding ‘non-core’
assets has been partially offset by modest asset margin pressure
and mix impacts across PBB, CPB and RBSI.
Average interest earning assets across the combined PBB, CPB
and RBSI increased by 10% on 2015, compared with a 3%
decline for RBS total, and represented 88% of total average
interest earning assets (2015 - 77%). NIM across PBB, CPB and
RBSI was 2.34%, 13 basis points lower than 2015.
UK PBB NIM decreased by 16 basis points to 2.97% reflecting
the impact of the overall portfolio mix being increasingly weighted
towards secured lending and mortgage customers switching from
standard variable rate (SVR) to lower rate products. During the
second half of 2016 SVR balances stabilised at approximately
12% of mortgage balances. Ulster Bank RoI NIM increased by 5
basis points to 1.62% driven by a continued reduction in the cost
of deposits and a reduced volume of low yielding liquid assets,
partly offset by reduced income on free funds.
Commercial Banking NIM fell by 12 basis points to 1.76% driven
by asset margin pressure in a competitive market and low rate
environment. Private Banking NIM reduced by 9 basis points to
2.66% principally driven by asset margin pressure. RBSI NIM fell
by 12 basis points to 1.36% reflecting asset and liability margin
pressures, partially offset by mitigating pricing actions.
Structural hedges of £123 billion generated a benefit of £1.3
billion through net interest income for the year. Around 73% of
these hedges are part of a five year rolling hedge programme
(with around 27% as part of a ten year hedge) that will
progressively roll-off over the coming years.
121
Business review
Analysis of results continued
Non-interest income
Fees and commissions receivable
Fees and commissions payable
Own credit adjustments
Income from trading activities
Loss on redemption of own debt
Strategic disposals
Other operating income
Total non-interest income
2017 compared with 2016
Non-interest income of £4,146 million increased by £264 million,
or 6.8%, compared with 2016, primarily reflecting a £185 million
debt sale gain in UK PBB and a £183 million increase in strategic
disposals gains, partially offset by an own credit adjustment loss
of £69 million compared with a gain of £180 million in 2016.
Net fees and commissions decreased by £80 million, or 3.2%,
compared with 2016 reflecting a £48 million reduction in UK PBB,
driven by increased cash back payments as the Reward
proposition continued to grow with customer accounts 26%
higher than 2016, and lower income in NatWest Markets.
Income from trading activities decreased by £117 million, or
14.3%, compared with 2016 primarily reflecting lower income in
NatWest Markets, down £247 million, or 29.8%, driven by
increased losses in the legacy business. A gain of £2 million for
volatile items under IFRS in 2017 compared with a charge of
£510 million in 2016. This movement was broadly offset by FX
losses of £183 million in 2017, compared with FX gains of £446
million in 2016, following the strengthening of sterling against the
US dollar.
Other operating income increased by £408 million primarily
reflecting increased NatWest Markets income and the debt sale
gain in UK PBB.
2017
£m
3,338
(883)
(69)
703
(7)
347
717
4,146
2016
£m
3,340
(805)
180
820
(126)
164
309
3,882
2015
£m
3,742
(809)
309
806
(263)
(157)
528
4,156
2016 compared with 2015
Non-interest income was £3,882 million, a reduction of £274
million, or 6.6%, compared with 2015. The legacy NatWest
Markets business non-interest income reduced by £775 million
reflecting planned asset disposal, including £572 million of
disposal losses compared with £367 million in 2015, and a
funding valuation adjustment of £170 million. In addition, we
recognised a charge of £510 million for volatile items under IFRS
compared with a £15 million gain in 2015. Partially offsetting, we
reported a strategic disposal gain of £164 million, compared with
a loss of £157 million in 2015, a loss on redemption of own debt
of £126 million, compared with £263 million in 2015, an FX gain
of £349 million following the significant weakening of sterling
against the dollar and a £97 million foreign exchange reserve
recycling gain.
Net fees and commissions decreased by £398 million, or 13.6%,
compared with 2015 reflecting the planned asset run-down in the
legacy NatWest Markets business, £168 million, a reduction in
NatWest Markets core business, £175 million, and a £33 million
reduction in UK PBB, driven by lower credit card interchange fees
and increased cash back payments following the launch of the
Rewards account.
Income from trading activities increased by £14 million to £820
million as an £86 million increase in NatWest Markets income
has been partially offset by an increased charge for volatile items
under IFRS.
Other operating income reduced by £219 million principally
reflecting planned asset disposals in the legacy NatWest Markets
business.
122
Business review
Analysis of results continued
Operating expenses
Staff expenses
Premises and equipment
Other administrative expenses
Restructuring costs
Litigation and conduct costs
Administrative expenses
Depreciation and amortisation
Write down of goodwill
Write down of other intangible assets
Operating expenses
Cost:income ratio
Cost:income ratio - adjusted
Staff costs as a percentage of total income
2017 compared with 2016
Total operating expenses of £10,104 million were £5,793 million,
or 35.8%, lower than 2016 reflecting a £4,583 million reduction in
litigation and conduct costs, a £669 million, or 8.1%, reduction in
adjusted operating expenses and a £541 million reduction in
restructuring costs.
Excluding VAT recoveries, adjusted operating expenses have
reduced by £810 million for the year, ahead of our £750 million
targeted reduction, with approximately 45% of the total cost
reduction delivered across PBB, CPB, RBSI and the NatWest
Markets core business, adjusting for transfers.
Staff costs of £3,923 million were £559 million, or 12.5%, lower
than 2016 underpinned by a 6,600, or 8.5%, reduction in FTEs.
Restructuring costs of £1,565 million included: a £303 million
charge relating to the reduction in our property portfolio; a £319
million charge in NatWest Markets principally relating to the run-
down and closure of the legacy business; £221 million relating to
the business previously described as Williams & Glyn; £194
million in respect of implementing ring-fencing requirements; and
a £73 million net settlement relating to the RBS Netherlands
pension scheme.
Litigation and conduct costs of £1,285 million included: additional
charges in respect of settlement with Federal Housing Finance
Agency (FHFA) and the California State Attorney General and
additional RMBS related provisions in the US; a further provision
in relation to settling the 2008 rights issue shareholder litigation;
an additional £175 million PPI provision; and a £169 million
provision in Ulster Bank RoI for customer remediation and project
costs relating to tracker mortgages and other legacy business
issues.
2017
£m
3,923
1,218
1,710
1,565
1,285
9,701
684
—
16
10,401
79.0%
58.2%
29.9%
2016
£m
4,482
1,297
1,619
2,106
5,868
15,372
705
—
117
16,194
129.0%
66.0%
35.6%
2015
£m
4,896
1,483
2,124
2,931
3,568
15,002
778
498
75
16,353
126.9%
71.4%
37.9%
2016 compared with 2015
Operating expenses of £16,194 million were £159 million, or 1%,
lower than 2015 reflecting a £1,136 million, or 12%, reduction in
adjusted operating expenses and a £825 million, or 28%,
reduction in restructuring costs. In addition, 2015 included a £498
million write down of goodwill relating to Private Banking. Partially
offsetting the above, litigation and conduct costs increased by
£2,300 million.
Adjusted operating expenses reduced by £1,136 million, or 12%,
compared with 2015 to £8,220 million. Excluding expenses
associated with the business previously described as Williams &
Glyn, write down of intangibles and a £227 million VAT recovery,
adjusted expenses reduced by £985(1) million, or 11%, in excess
of our £800 million target. RBS has achieved a cumulative cost
reduction of £3.1 billion across 2014 - 2016.
Staff costs of £4,482 million were £414 million, or 8%, lower than
2015 underpinned by a 13,700, or 15%, reduction in FTEs.
Restructuring costs were £2,106 million for 2016, compared with
£2,931 million in 2015, and included a £750 million provision in
respect of the 17 February 2017 update on RBS’s remaining
State Aid obligation regarding the business previously described
as Williams & Glyn. In addition, £706 million of the remaining
restructuring costs relate to the business previously described as
Williams & Glyn, including £146 million of termination costs
associated with the decision to discontinue the programme to
create a cloned banking platform.
Litigation and conduct costs of £5,868 million included; a £3,107
million provision in relation to various investigations and litigation
matters relating to RBS’s issuance and underwriting of residential
mortgage-backed securities (RMBS), £601 million of additional
PPI provisions, a £400 million provision in respect of the FCA
review of RBS’s treatment of SMEs, an additional £169 million
charge in respect of the settlement with the National Credit Union
Administration Board to resolve two outstanding RMBS lawsuits
in the United States relating to residential mortgage backed
securities, a £172 million provision in Ulster Bank RoI, principally
in respect of remediation and programme costs associated with
an industry wide examination of tracker mortgages, and a
provision in respect of the UK 2008 rights issue shareholder
litigation.
123
Business review
Analysis of results continued
Impairment losses
New impairment losses/(releases)
Less: recoveries of amounts previously written-off
Losses/(releases) to income statement
Comprising:
Loan impairment losses/(releases)
Securities
Losses/(releases) to income statement
2017
£m
649
(156)
493
530
(37)
493
2016
£m
587
(109)
478
537
(59)
478
2015
£m
(552)
(175)
(727)
(853)
126
(727)
2017 compared with 2016
A net impairment loss of £493 million, 15 basis points of gross
customer loans, compared with £478 million in 2016.
2016 compared with 2015
A net impairment loss of £478 million, 15 basis points of gross
customer loans, compared with a net impairment release of £727
million in 2015.
UK PBB reported a net impairment charge of £235 million, or 14
basis points of gross customer loans, reflecting continued benign
credit conditions.
UK PBB reported a net impairment loss of £125 million compared
with £8 million in 2015.
Ulster Bank RoI reported a net impairment loss of €68 million
compared with a €138 million release in 2016. The charge for the
year included a provision relating to a change in the non
performing loan strategy to allow for further portfolio sales whilst
2016 included gains arising from the impact of asset disposals.
Commercial Banking net impairment losses of £362 million were
£156 million higher than 2016, reflecting a small number of single
name impairments.
NatWest Markets net impairment release of £174 million
compared with a net impairment loss of £253 million in 2016 and
mainly comprised releases relating to the legacy business.
REIL reduced by £1,406 million during 2017 to £8,904 million
principally reflecting reductions in NatWest Markets, as legacy
portfolios are run-down, and reductions across UK PBB and
Ulster Bank RoI. REIL represented 2.7% of gross customer
loans, compared with 3.1% in 2016.
Tax
Tax charge
Commercial Banking net impairment losses of £206 million were
£137 million higher than 2015 and comprised a small number of
single name impairments.
Ulster Bank RoI reported a net impairment release of €138 million
compared with €194 million in 2015. The 2016 impairment
release included a write back associated with the sale of a
portfolio of loans. REIL reduced by €0.6 billion driven by the
portfolio sale, partially offset by a widening of the definition of
loans which are considered to be impaired.
REIL reduced by £1,847 million during 2016 to £10,310 million
reflecting Capital Resolution run-down and a portfolio sale in
Ulster Bank RoI partially offset by an increase in the shipping
portfolio, foreign exchange movements and the implementation of
a revised mortgage methodology in Ulster Bank RoI.
REIL represented 3.1% of gross customer loans compared with
3.9% at 31 December 2015. Provision coverage was 43%
compared with 59% at 31 December 2015, with the reduction
largely driven by Ulster Bank RoI and the legacy NatWest
Markets business.
2017
£m
(824)
2016
£m
(1,166)
2015
£m
(23)
UK corporation tax rate
19.25%
20.00%
20.25%
2017 compared with 2016
The tax charge for the year ended 31 December 2017 is higher
than the UK statutory tax rate reflecting the impact of the banking
surcharge, non-deductible bank levy and conduct charges for
which no tax relief has been recognised, a reduction in the
carrying value and impact of UK tax rate changes on deferred tax
balances. These factors have been offset partially by the release
of tax provisions that reflect the reduction of exposures in
countries where RBS is ceasing operations.
2016 compared with 2015
The tax charge for the year ended 31 December 2016 reflects the
impact of the banking surcharge, non-deductible bank levy and
conduct charges for which no tax relief has been recognised, a
reduction in the carrying value and impact of UK tax rate changes
on deferred tax balances, and the release of tax provisions that
reflect the reduction of exposures in countries where RBS is
ceasing operations.
124
Business review
Consolidated balance sheet as at 31 December 2017
Assets
Cash and balances at central banks
Net loans and advances to banks
Reverse repurchase agreements and stock borrowing
Loans and advances to banks
Net loans and advances to customers
Reverse repurchase agreements and stock borrowing
Loans and advances to customers
Debt securities subject to repurchase agreements
Other debt securities
Debt securities
Equity shares
Settlement balances
Derivatives
Intangible assets
Property, plant and equipment
Deferred tax
Prepayments, accrued income and other assets
Assets of disposal groups
Total assets
Liabilities
Bank deposits
Repurchase agreements and stock lending
Deposits by banks
Customer deposits
Repurchase agreements and stock lending
Customer accounts
Debt securities in issue
Settlement balances
Short positions
Derivatives
Provisions for liabilities and charges
Accruals and other liabilities
Retirement benefit liabilities
Deferred tax
Subordinated liabilities
Liabilities of disposal groups
Total liabilities
Non-controlling interests
Owners’ equity
Total equity
Total liabilities and equity
Tangible net asset value per ordinary share (1)
Note:
(1) Tangible net asset value per ordinary share represents tangible equity divided by the number of ordinary shares in issue.
2017
£m
2016
£m
98,337
16,254
13,997
30,251
323,184
26,735
349,919
23,781
55,152
78,933
450
2,517
160,843
6,543
4,602
1,740
3,726
195
738,056
39,479
7,419
46,898
367,034
31,002
398,036
30,559
2,844
28,527
154,506
7,757
6,392
129
583
12,722
10
688,963
763
48,330
49,093
74,250
17,278
12,860
30,138
323,023
28,927
351,950
18,107
54,415
72,522
703
5,526
246,981
6,480
4,590
1,803
3,700
13
798,656
33,317
5,239
38,556
353,872
27,096
380,968
27,245
3,645
22,077
236,475
12,836
6,991
363
662
19,419
15
749,252
795
48,609
49,404
738,056
798,656
294p
296p
125
Business review
Commentary on consolidated balance sheet
2017 compared with 2016
Total assets of £738.1 billion as at 31 December 2017 were down
£60.6 billion, 7.6%, compared with 31 December 2016. This was
primarily driven by decreases in derivative assets, partly offset by
increased central bank deposits and loan growth in UK PBB and
Commercial Banking.
Cash and balances at central banks increased by £24.1 billion,
32.5%, to £98.3 billion. This was primarily due to increased
deposits received from the Bank of England Term Funding
Scheme (TFS).
Loans and advances to banks increased by £0.2 billion, 0.7%, to
£30.3 billion. Excluding reverse repurchase agreements and
stock borrowing (‘reverse repos’), which were up £1.1 billion,
8.5%, to £14.0 billion, bank placings declined £1.0 billion, 5.8%,
to £16.3 billion.
Loans and advances to customers decreased by £2.0. billion,
0.6%, to £349.9 billion. Within this, reverse repos were down £2.2
billion, 7.6%, to £26.7 billion. Customer lending increased by £0.2
billion, 0.1%, to £323.2 billion. This reflected increases across the
retail and commercial business, in particular in UK PBB mortgage
lending offset by the run-down of the NatWest Markets legacy
business.
Debt securities were up £6.4 billion, 8.8%, to £78.9 billion, mainly
due to increased holdings in UK and European government
securities in RBS Treasury.
Equity shares decreased by £0.2 billion, 28.6%, to £0.5 billion,
primarily due to the sale of RBS’s holding in EuroClear.
Settlement balances decreased by £3.0 billion, 54.5%, to £2.5
billion, primarily as a result of the run-down in the NatWest legacy
business.
Movements in the value of derivative assets, down £86.2 billion,
34.9%, to £160.8 billion, and liabilities, down £82.0 billion, 34.7%
to £154.5 billion, due to maturities, derivative mitigation activities,
buyouts in NatWest Markets and mark-to-market movement as
US dollar weakened against the Euro and Sterling.
Deposits by banks increased by £8.3 billion, 21.8%, to £46.9
billion, with increases in inter-bank deposits, up £6.2 billion,
18.6%, to £39.5 billion, primarily driven by amounts received
under the TFS, offset by reductions in the cash collateral held
against derivatives. Repurchase agreements and stock lending
(‘repos’), increased by £2.2 billion, 42.3%, to £7.4 billion,
primarily driven by increased process efficiencies and increased
trading activity partially offset by netting benefits in RBS Treasury
and NatWest Markets.
Customer accounts increased £17.0 billion, 4.5%, to £398.0
billion. Within this, repos increased £3.9 billion to £31.0 billion.
Excluding repos, customer deposits were up £13.1 billion, 3.7%,
to £367.0 billion, primarily reflecting growth in UK PBB, Ulster
Bank RoI and RBSI offset by run-down in the NatWest Markets
legacy business.
Debt securities in issue increased by £3.4 billion, 12.5%, to £30.6
billion reflecting new covered bond issuances offset by maturities
in RBS Treasury along with mark-to-market and foreign
exchange movements.
Short positions increased by £6.4 billion, 29.0%, to £28.5 billion
as a result of the increase in debt securities held.
Provisions for liabilities and charges decreased by £5.1 billion,
39.6%, to £7.8 billion, reflecting settlements being reached in
various litigation cases, most notably in relation to US residential
mortgage-backed securities claims.
Subordinated liabilities decreased by £6.7 billion, 34.5% to £12.7
billion, primarily as a result of the net decrease in dated and
undated loan capital with redemptions of £4.2 billion and £1.5
billion respectively, reflecting on-going liability management
activities.
Owners’ equity decreased by £0.3 billion, 0.6%, to £48.3 billion,
primarily driven by dividends paid and preference share
redemptions offset by the £1.4 billion profit for the year.
126
Business review
Cash flow
Net cash flows from operating activities
Net cash flows from investing activities
Net cash flows from financing activities
Effects of exchange rate changes on cash and cash equivalents
Net increase/(decrease) in cash and cash equivalents
2017
The major factors contributing to the net cash inflow from
operating activities of £38,741 million were an increase of
£42,147 million in operating assets and liabilities, operating profit
before tax of £2,239 million, other provisions charged net of
releases of £1,930 million, depreciation and amortisation of £808
million and interest on subordinated liabilities of £572 million.
These were partially offset by provisions utilised of £6,476 million,
loans and advances written-off net of recoveries of £1,054 million
and contributions to defined benefit pension schemes of £627
million.
Net cash outflows from investing activities of £6,482 million
related to the net outflows from purchase and sale of securities of
£5,556 million, the purchase of property, plant and equipment of
£1,132 million and £199 million outflows from disposals, offset by
net cash inflows from the sale of property, plant and equipment of
£405 million.
Net cash outflows from financing activities of £8,208 million relate
primarily to the redemption of subordinated liabilities of £5,747
million, redemption of debt preference shares of £748 million,
redemption of paid-in equity of £720 million, interest paid on
subordinated liabilities of £717 million and dividends paid of £612
million.
2016
The major factors contributing to the net cash outflow from
operating activities of £3,650 million were the elimination of
foreign exchange differences £6,518 million, contribution to
defined benefit schemes of £4,786 million, loans and advances
written-off net of recoveries of £3,586 million, operating loss
before tax of £4,082 million and other provisions utilised of
£2,699 million. These were partially offset by inflows from an
increase of £8,413 million in operating assets and liabilities, other
provisions charged net of releases of £7,216 million, interest on
subordinated liabilities of £845 million and depreciation and
amortisation of £778 million.
Net cash outflows from investing activities of £4,359 million
related to the net outflows from purchase and sale of securities of
£3,008 million, the purchase of property, plant and equipment of
£912 million and £886 million outflows from disposals, offset by
net cash inflows from the sale of property, plant and equipment of
£447 million.
Net cash outflows from financing activities of £5,107 million relate
primarily to the redemption of subordinated liabilities of £3,606
million, redemption of equity preference shares of £1,160 million,
the final payment to retire the Dividend Access Share of £1,193
million and interest paid on subordinated liabilities of £813 million.
These outflows were partly offset by the inflow from the issuance
of Additional Tier 1 capital notes of £2,046 million.
2017
£m
38,741
(6,482)
(8,208)
(16)
24,035
2016
£m
(3,650)
(4,359)
(5,107)
8,094
(5,022)
2015
£m
918
(4,866)
(940)
576
(4,312)
2015
The major factors contributing to the net cash inflow from
operating activities of £918 million were the increase of £8,589
million in operating assets and liabilities, other provisions charged
net of releases of £4,566 million, write down of goodwill and other
intangible assets £1,332 million and depreciation and
amortisation of £1,180 million. These were partially offset by
loans and advances written-off net of recoveries of £8,789
million, other provisions utilised of £2,202 million, elimination of
foreign exchange differences of £1,501 million, profit on sale of
subsidiaries and associates of £1,135 million, cash contribution to
defined benefit pension schemes of £1,060 million, decrease in
income accruals of £1,075 million and the operating loss before
tax of £937 million.
Net cash outflows from investing activities of £4,866 million
related to the net outflows from purchase of securities of £5,906
million and the purchase of property, plant and equipment of
£783 million, offset by inflows of £391 million from disposals,
primarily Citizens and net cash inflows from the sale of property,
plant and equipment of £1,432 million.
Net cash outflows from financing activities of £940 million relate
primarily to the redemption of subordinated liabilities of £3,047
million, redemption of preference shares of £1,214 million and
interest paid on subordinated liabilities of £975 million partly
offset by the proceeds of non-controlling interests issued of
£2,537 million and the issue of Additional Tier 1 capital notes of
£2,012 million
127
Business review
Financial summary
RBS's financial statements are prepared in accordance with IFRS. Selected data under IFRS for each of the last five years is presented
below.
Summary consolidated income statement
Net interest income
Non-interest income (1,2,3)
Total income
Operating expenses (4)
Profit/(loss) before impairment (losses)/releases
Impairment (losses)/releases
Operating profit/(loss) before tax
Tax charge
Profit/(loss) from continuing operations
Profit/(loss) from discontinued operations, net of tax (5)
Profit/(loss) for the year
Attributable to:
Non-controlling interests
Preference shareholders
Paid-in equity holders
Dividend access share
Ordinary shareholders
2017
£m
8,987
4,146
2016
£m
8,708
3,882
2015
£m
8,767
4,156
13,133
(10,401)
12,590
(16,194)
12,923
(16,353)
2,732
(493)
2,239
(824)
1,415
—
1,415
35
234
394
—
752
1,415
(3,604)
(478)
(4,082)
(1,166)
(5,248)
—
(5,248)
10
260
244
1,193
(6,955)
(5,248)
(3,430)
727
(2,703)
(23)
(2,726)
1,541
(1,185)
409
297
88
—
(1,979)
(1,185)
2014
£m
9,258
5,892
15,150
(13,859)
1,291
1,352
2,643
(1,909)
734
(3,445)
(2,711)
60
330
49
320
(3,470)
(2,711)
2013
£m
9,017
7,720
16,737
(17,466)
(729)
(8,120)
(8,849)
(186)
(9,035)
558
(8,477)
120
349
49
—
(8,995)
(8,477)
Notes:
(1)
(2)
(3)
(4)
(5)
Includes profit on strategic disposals of £347 million (2016 - £164 million profit; 2015 - £157 million loss; 2014 - £191 million profit; 2013 - £161 million profit).
Includes loss on redemption of own debt of £7 million (2016 - £126 million loss; 2015 - £263 million loss; 2014 - £20 million gain; 2013 - £175 million gain).
Includes own credit adjustments of £69 million loss (2016 - £180 million gain; 2015 - £309 million gain; 2014 - £146 million loss; 2013 - £120 million loss).
Includes no write down of goodwill in 2017 (2016 - nil; 2015 - £498 million; 2014 - £130 million; 2013 - £1,059 million).
Includes a gain of £1,117 million relating to the sell-down of Citizens in 2015 (2014 - £3,994 million loss).
Summary consolidated balance sheet
Loans and advances
Debt securities and equity shares
Derivatives and settlement balances
Other assets
Total assets
Owners' equity
Non-controlling interests
Subordinated liabilities
Deposits
Derivatives, settlement balances and short positions
Other liabilities
Total liabilities and equity
2017
£m
380,170
79,383
163,360
115,143
738,056
48,330
763
12,722
444,934
185,877
45,430
738,056
2016
£m
382,088
73,225
252,507
90,836
798,656
48,609
795
19,419
419,524
262,197
48,112
798,656
2015
£m
364,538
83,458
266,630
100,782
2014
£m
421,973
92,284
358,257
178,505
2013
£m
494,793
122,410
293,630
116,989
815,408
1,051,019
1,027,822
53,431
716
19,847
408,594
278,904
53,916
55,763
2,946
22,905
452,304
377,337
139,764
58,658
473
24,012
534,859
318,861
90,959
815,408
1,051,019
1,027,822
128
Business review
Other financial data
Share information
Basic and diluted earnings/(loss) per ordinary share from
continuing operations - pence (1)
Share price per ordinary share at year end - £
Market capitalisation at year end - £bn
Net asset value per ordinary share - £
Capital ratios
Return on average total assets (2)
Return on average total equity (3)
Return on average ordinary shareholders' equity (4)
Average total equity as a percentage of average total assets
Risk asset ratio - Tier 1 (5)
Risk asset ratio - Total (5)
2017
2016
2015
2014
2013
6.3
2.78
33.3
4.10
(59.5)
2.25
26.6
4.18
(27.7)
3.02
35.1
4.66
0.5
3.94
45.2
5.12
(85.0)
3.38
38.2
5.23
(0.2%)
(2.9%)
(4.0%)
0.1% (0.8%)
2.0% (10.2%)
1.9% (15.3%)
6.2%
7.0%
(0.7%)
(12.8%)
(14.7%)
5.5%
19.7% 17.7% 19.1% 13.2% 13.1%
23.9% 22.9% 24.7% 17.1% 16.5%
(0.3%)
(4.6%)
(6.5%)
6.0% 5.8%
Earnings ratio
Ratio of earnings to combined fixed charges and preference share dividends (5)
- including interest on deposits
- excluding interest on deposits
Ratio of earnings to fixed charges only (6)
- including interest on deposits
- excluding interest on deposits
1.58
2.25
2.05
4.37
(0.45)
(2.13)
0.17
(1.17)
1.52
2.61
(0.51)
(5.12)
(0.53)
(3.25)
0.19
(1.60)
1.67
3.58
(0.55)
(6.95)
Notes:
(1) None of the convertible securities had a dilutive effect in the years 2013 to 2017.
(2) Return on average total assets represents loss attributable to ordinary shareholders as a percentage of average total assets.
(3) Return on average total equity represents loss attributable to equity owners expressed as a percentage of average shareholder funds.
(4) Return on average ordinary shareholders' equity represents loss attributable to ordinary shareholders expressed as a percentage of average ordinary shareholders' equity.
(5) 2017, 2016, 2015 and 2014 are calculated on a PRA transitional basis; 2013 is calculated on a Basel 2.5 basis.
(6) For this purpose, earnings consist of income before tax and non-controlling interests, plus fixed charges less the unremitted income of associated undertakings (share of profits
less dividends received). Fixed charges consist of total interest expense, including or excluding interest on deposits and debt securities in issue, as appropriate, and the
proportion of rental expense deemed representative of the interest factor (one third of total rental expenses).
129
Business review
Segment performance
UK Personal & Business Banking
Income statement
Net interest income
Net fees and commissions
Other non-interest income
Non-interest income
Total income
Direct expenses
- staff costs
- other costs
Indirect expenses
Restructuring costs
- direct
- indirect
Litigation and conduct costs
Operating expenses
Operating profit before impairment losses
Impairment losses
Operating profit
Operating expenses - adjusted (1)
Operating profit - adjusted (1)
Analysis of income by product
Personal advances
Personal deposits
Mortgages
Cards
Business banking
Commercial
Other
Total income
Analysis of impairments by sector
Personal advances
Mortgages
Cards
Business banking
Commercial
Other
Total impairment losses
Loan impairment charge/(release) as a % of gross customer loans and advances
(excluding reverse repurchase agreements) by sector
Personal advances
Cards
Business banking
Commercial
Other
Total
Performance ratios
Return on equity (2)
Return on equity - adjusted (1,2)
Net interest margin
Cost:income ratio
Cost:income ratio - adjusted (1)
2017
£m
5,130
1,099
248
1,347
6,477
(773)
(259)
(2,126)
(79)
(382)
(210)
2016
£m
4,945
1,147
35
1,182
6,127
(832)
(320)
(2,246)
(46)
(198)
(634)
2015
£m
4,810
1,180
43
1,223
6,033
(950)
(297)
(2,150)
(66)
(129)
(972)
(3,829)
(4,276)
(4,564)
2,648
(235)
2,413
1,851
(125)
1,726
1,469
(8)
1,461
(3,158)
(3,398)
(3,397)
3,084
2,604
2,628
998
841
2,641
743
781
417
56
6,477
167
(42)
82
4
24
—
235
2.4%
2.1%
0.1%
0.3%
—
0.1%
23.7%
30.7%
2.86%
59.1%
48.8%
1,010
732
2,560
653
737
415
20
6,127
105
(20)
36
(11)
15
—
125
1.5%
0.9%
(0.2%)
0.2%
—
0.1%
16.2%
25.1%
2.97%
69.8%
55.5%
839
817
2,534
666
726
394
57
6,033
84
1
14
(79)
(1)
(11)
8
1.2%
0.3%
(1.5%)
—
(0.8%)
—
13.5%
25.3%
3.13%
75.7%
56.3%
Notes:
(1) Excluding restructuring costs and litigation and conduct costs.
(2) Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity based on 15% of the monthly average of
segmental RWAes, assuming 28% tax rate.
130
Business review
UK Personal & Business Banking continued
Capital and balance sheet
Loans and advances to customers (gross)
- personal advances
- mortgages
- cards
- business banking
- commercial
- other
Total loans and advance to customers (gross)
Loan impairment provisions
Net loans and advances to customers
Total assets
Funded assets
Risk elements in lending
Provision coverage (1)
Customer deposits
- personal current accounts
- personal savings
- business banking
- commercial
- other
Total customer deposits
Assets under management (excluding deposits)
Loan:deposit ratio (excluding repos)
Risk-weighted assets
- Credit risk (non-counterparty)
- Operational risk
Total risk-weighted assets
Note:
(1) Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.
2017
£bn
7.1
136.8
4.0
6.8
8.3
—
163.0
(1.3)
161.7
190.6
190.6
2.0
65%
49.6
92.8
23.9
14.3
—
180.6
4.1
90%
33.7
9.3
43.0
2016
£bn
6.9
128.0
4.2
6.3
8.8
—
154.2
(1.5)
152.7
181.4
181.4
2.4
65%
45.3
88.5
21.5
14.7
—
170.0
4.2
90%
33.0
9.3
42.3
2015
£bn
6.9
115.3
4.4
5.3
8.7
1.3
141.9
(2.1)
139.8
168.0
168.0
3.2
68%
40.9
86.6
19.6
12.7
2.1
161.9
4.3
86%
33.9
9.3
43.2
131
Business review
UK Personal & Business Banking continued
Serving our customers
UK PBB continues to invest in our digital channel offering and
now has 5.5 million customers regularly using our mobile app,
20% higher than December 2016, representing 68% digital
penetration of our active current account customers.
Digital sales volumes increased by 11% in 2017, while the
number of digital service transactions rose by 7% in the year as
the number of branch transactions fell by 9%, demonstrating the
changing behaviour of our customers. Further enhancements
were made during 2017, along with the introduction of a
‘TechXpert’ in every branch to support customers in the use of
digital banking tools. NatWest was awarded Best Banking App at
the British Bank Awards in 2017 and we continue to receive very
positive customer feedback.
Given the change in customer behaviour and expectations over
the past few years, we recently announced further branch
closures. We recognise that branch interactions are still important
for some customers and we have a significant branch network,
which we continue to upgrade and improve, as well as our
investment in mobile branches and Community Bankers in
addition to access to Post Office services to meet these customer
requirements.
UK PBB continued to deliver strong support to personal
customers with mortgage balance growth of 7.0% compared with
2016. We continued to drive improvements in our customer
mortgage experience, including being the first bank to launch a
paperless mortgage journey, with NatWest Intermediary
Solutions named Best Overall Lender at the 2017 Mortgage
Advice Bureau Awards. Personal unsecured loans also saw
balance growth of 7% compared with 2016 supported by an
improved customer experience, with increased mobile
functionality and simplified application processing resulting in
digital loan sales growth of 20% compared with 2016 and 50% of
sales transacted via this channel. Our overall personal unsecured
risk appetite remains consistent with 2016, with new business
quality stable on 2016.
The Reward proposition continued to grow with more than
1,450,000 customer accounts, 26% higher than December 2016.
We repositioned the Reward account proposition from 26 June
2017, including the introduction of minimum customer criteria,
supporting improved returns in the second half of 2017.
Our free Financial Health Check continues to provide personal
and business customers with advice on their financial position
and what options are open to them, including adoption of digital
banking. More than 1,300,000 Financial Health Checks have
been completed in 2017.
Our business banking segment continues to deliver customer
improvements with an enhanced digital offering, with 80% of
accounts opened during the last quarter of 2017 using this
channel, and a simplified new lending process for loans up to
£50,000, delivering same day loan approval and supporting
ongoing productivity improvements. Following a successful pilot
the FreeAgent accounting software rollout was extended in Q4
2017, with more than 8,300 customers now registered users.
Our business banking risk appetite remains consistent with 2016
with new business quality broadly stable on 2016.
2017 compared with 2016
Operating profit was £2,413 million compared with £1,726 million
in 2016. The increase was driven by higher income, lower
adjusted operating expenses and lower litigation and conduct
charges, partially offset by higher restructuring costs, largely
relating to the reduction in our property portfolio and costs
associated with the business previously described as Williams &
Glyn, and higher impairments. Return on equity increased to
23.7% from 16.2% in 2016.
Total income of £6,477 million was £350 million, or 5.7%, higher
than 2016, principally reflecting strong balance growth, savings
re-pricing benefits and a £185 million debt sale gain. Net interest
margin declined by 11 basis points to 2.86% driven by lower
mortgage margins, asset mix and reduced current account hedge
yield, partially offset by savings re-pricing benefits from actions
taken in 2016 and following the Q4 2017 base rate increase.
Adjusted operating expenses decreased by £240 million, or
7.1%, to £3,158 million compared with 2016 driven by a £59
million, or 7.1%, reduction in staff costs, with headcount down
8.3%, and a £181 million reduction in operational costs following
process and productivity improvements in service operations and
re-integration benefits in respect of the business previously
described as Williams & Glyn(1). Adjusted cost:income ratio
improved to 48.8% in 2017 compared with 55.5% in 2016.
The net impairment charge of £235 million, or 14 basis points of
gross customer loans, reflected continued benign credit
conditions. 2017 had lower recoveries partly as a result of the
debt sales undertaken, compared with 2016. Defaults remained
at very low levels across all portfolios compared to historic
trends, although slightly higher than in 2016.
Net loans and advances increased by £9.0 billion, or 5.9%, to
£161.7 billion as UK PBB continued to deliver support for both
personal and business banking customers. Gross new mortgage
lending in 2017 was £31.0 billion with market share of new
mortgages at approximately 12%, resulting in stock share of
approximately 10% at 31 December 2017 compared with 9.7% at
31 December 2016. Positive momentum continued across
business banking lending, with net balances up 3.0% compared
with 31 December 2016, adjusting for transfers(3).
Customer deposits increased by £10.6 billion, or 6.2%, to £180.6
billion, driven by strong personal current account and business
deposit growth.
UK PBB includes commercial income from the business
previously described as Williams & Glyn of approximately £417
million, gross loans and advances of £8.3 billion and deposits of
£14.3 billion. An estimated £70 million of the commercial income,
£1.7 billion of gross loans and advances and £1.8 billion of
deposits relates to mid-corporate customers not subject to the
European Commission alternative remedies package. 120,000 of
the remaining approximately 220,000 customers will be subject to
the remedies package.
132
Business review
UK Personal & Business Banking continued
2016 compared with 2015
Operating profit was £1,726 million, compared with £1,461 million
in 2015, and included a £634 million litigation and conduct
charge, principally in respect of additional PPI provisions.
Adjusted operating profit of £2,604 million was £24 million, or 1%,
lower than 2015 principally reflecting higher impairment losses,
partially offset by Net interest income.
Total income of £6,127 million increased by £94 million, or 2%,
compared with 2015, despite the lower rate environment
depressing earnings on current accounts and the impact of
regulatory changes impacting interchange fees. Net interest
income was robust, increasing by £135 million, or 3%, reflecting
continued strong asset growth combined with the active repricing
of our deposit book. This more than offset the impact of lower
current account hedge returns and lower mortgage margins. Net
interest margin declined by 16 basis points to 2.97% reflecting
the change in the overall portfolio mix and reduced mortgage
margins. During the second half of 2016 mortgage SVR balances
stabilised at approximately 12%, broadly in line with historical
levels.
Non-interest income reduced by £41 million, or 3%, principally
reflecting lower credit card interchange fees, following regulatory
changes introduced in 2015. In addition, cash back payments on
the Reward account have impacted fee income, however, we
have seen increased levels of customer engagement. Partially
offsetting, we recognised a £19 million debt sale gain in 2016.
Adjusted operating expenses remained the same. Direct staff
costs were £118 million, or 12%, lower driven by an 17%
reduction in headcount reflecting the continued movement to
digital channels, exiting of business lines with returns below
required levels and some centralisation of administrative
activities. This was partially offset by additional investment costs
of £102 million, including one-off intangible asset write-downs of
£56 million in 2016, together with a £21 million increase in
regulatory charges and increase in costs related to the business
previously described as Williams & Glyn.
The net impairment charge of £125 million reflects continued
benign credit conditions and compared with a £8 million charge in
2015, with the increase principally reflecting reduced portfolio
provision releases. The default driven charge was 13% lower,
excluding the business previously described as Williams &
Glyn(1), than 2015 with REIL 25% lower and provision coverage
remaining strong at 65%.
Net loans and advances of £152.7 billion increased by £12.9
billion, or 9%, compared with 2015 principally driven by mortgage
growth of 11%. We continue to see positive momentum across
business and personal unsecured lending, up by 6%, excluding
transfers(1), and 9% respectively.
We continue to build on our strong mortgage market position with
gross balances increasing by 11% to £128.0 billion compared
with 3% growth for the overall mortgage market. Gross new
lending in 2016 was £31.9 billion, representing a market share of
approximately 13% compared with a stock share of
approximately 9.7% at 31 December 2016, up from 8.9% in 2015.
New business margins were stable over 2016 whilst margins on
existing customers remortgaging have improved. Gross new
business banking lending to small and medium-sized enterprises
of £1.6 billion was up 43% compared with 2015. Personal loan
gross new lending of £2.7 billion was up 25% supported by the
launch of functionality for a customer to apply via the mobile app
combined with improvements to customer experience. We have
continued to take a cautionary risk approach to personal
unsecured lending. As a result, personal unsecured cards and
overdrafts balances have decreased by £0.3 billion, or 5%,
compared with 2015, and margins have widened.
Deposit balances performed strongly, increasing by £8.1 billion,
or 5%, to £170.0 billion driven by 11% growth in personal current
account balances. Personal savings balances increased 2%
despite repricing activity.
RWAs decreased by £0.9 billion, or 3%, to £33.0 billion due to
asset mix benefits and overall improved credit quality, largely
reflecting the current benign credit conditions, partly offset by
increased lending.
Notes:
(1)
(2)
(3)
The business previously described as Williams & Glyn was integrated in to the reportable operating segment UK PBB in Q4 2017 and prior year comparatives re-presented.
UK PBB Collective Investment Funds (CIFL) business was transferred to Private Banking on 1 October 2017. CIFL Business transfer included total income of £33 million and
total expenses of £9 million. Comparatives were not re-presented.
Transfers include £0.4 billion loans and advances transferred from Commercial Banking to UK PBB during 2017 to better align Business banking customers. Comparatives
were not re-presented.
133
Business review
Ulster Bank RoI
Income statement
Net interest income
Net fees and commissions
Other non-interest income
Own credit adjustments
Non-interest income
Total income
Direct expenses
- staff costs
- other costs
Indirect expenses
Restructuring costs
- direct
- indirect
Litigation and conduct costs
Operating expenses
Operating (loss)/profit before impairment (losses)/releases
Impairment (losses)/releases
Operating profit
Total income - adjusted (1)
Operating expenses - adjusted (2)
Operating profit - adjusted (1,2)
Average exchange rate - €/£
Analysis of income by business
Corporate
Retail
Other
Total income
Analysis of impairments by sector
Mortgages
Commercial real estate
- investment
- development
Other lending
Total impairment (losses)/releases
2017
€m
480
107
106
(4)
209
689
(218)
(76)
(222)
(31)
(33)
(192)
(772)
(83)
(68)
(151)
693
(516)
109
214
473
2
689
83
(7)
(4)
(4)
68
2016
€m
501
100
100
3
203
704
(252)
(68)
(239)
(46)
(2)
(211)
(818)
(114)
138
24
701
(559)
280
215
479
10
704
2015
€m
503
116
139
—
255
758
(220)
(116)
(251)
(17)
(4)
18
(590)
168
194
362
758
(587)
365
202
443
113
758
35
(100)
(30)
(25)
(118)
(138)
7
—
(101)
(194)
2017
£m
421
94
92
(3)
183
604
(191)
(66)
(194)
(27)
(29)
(169)
(676)
(72)
(60)
(132)
607
(451)
96
2016
£m
409
82
82
3
167
576
(207)
(55)
(195)
(38)
(2)
(172)
(669)
(93)
113
20
573
(457)
229
2015
£m
365
85
100
—
185
550
(160)
(85)
(182)
(12)
(3)
13
(429)
121
141
262
550
(427)
264
1.142
1.224
1.377
187
415
2
604
72
(6)
(3)
(3)
60
176
392
8
576
29
(24)
(20)
(98)
147
321
82
550
(73)
5
(1)
(72)
(113)
(141)
0.5%
Loan impairment charge/(release) as a % of gross customer
loans and advances (excluding reverse repurchase agreements) by sector
Mortgages
Commercial real estate
- investment
- development
Other lending
Total
Performance ratios
Return on equity (3)
Return on equity - adjusted (1,2,3)
Net interest margin
Cost:income ratio
Cost:income ratio - adjusted (1,2)
(5.0%)
3.6%
1.67%
111.9%
74.3%
(0.7%)
(4.0%)
(0.1%)
0.3%
0.2%
(0.5%)
0.5%
0.2%
(0.5%)
(3.8%)
(8.3%)
(2.6%)
(0.6%)
0.7%
8.4%
1.62%
116.1%
79.8%
0.8%
—
(1.9%)
(0.8%)
10.6%
10.6%
1.57%
78.0%
77.6%
(0.7%)
(3.0%)
(0.1%)
0.3%
(5.0%)
3.6%
1.67%
111.9%
74.3%
(3.4%)
(10.0%)
(2.5%)
(0.6%)
0.7%
8.4%
1.62%
116.1%
79.8%
0.7%
(0.5%)
(1.8%)
(0.8%)
10.6%
10.6%
1.57%
78.0%
77.6%
Notes:
(1) Excluding own credit adjustments.
(2) Excluding restructuring costs and litigation and conduct costs.
(3) Return on equity is based on segmental operating profit after tax adjusted for preference share dividends divided by average notional equity (based on 14% (11% prior to Q1
2017) of the monthly average of segmental risk-weighted assets incorporating the effect of capital deductions (RWAes)), assuming 15% tax rate up to and including FY 2016, nil
tax thereafter.
134
Business review
Ulster Bank RoI continued
Capital and balance sheet
Loans and advances to customers (gross)
Mortgages
Commercial real estate
- investment
- development
Other lending
Total loans and advances to customers (gross)
Loan impairment provisions
Mortgages
Commercial real estate
- investment
- development
Other lending
Total loan impairment provisions
Net loans and advances to customers
Total assets
Funded assets
Risk elements in lending
- mortgages
- commercial real estate
- investment
- development
- other lending
Total risk elements in lending
Provision coverage (1)
Customer deposits
Loan:deposit ratio (excluding repos)
Risk-weighted assets
- Credit risk
- non-counterparty
- counterparty
- Market risk
- Operational risk
Total risk-weighted assets
Spot exchange rate - €/£
2017
€bn
2016
€bn
17.3
17.9
1.0
0.1
4.9
23.3
0.8
0.3
4.5
23.5
(1.0)
(1.1)
—
—
(0.3)
(1.3)
22.0
27.7
27.6
3.4
—
—
0.3
3.7
34%
—
—
(0.3)
(1.4)
22.1
28.2
28.0
.
3.7
—
—
0.4
4.1
34%
2015
€bn
18.8
0.9
0.3
5.3
25.3
(1.4)
(0.2)
(0.1)
(0.9)
(2.6)
22.7
29.0
28.8
3.5
0.2
0.1
0.9
4.7
55%
2017
£bn
2016
£bn
2015
£bn
15.4
15.3
13.8
0.9
0.1
4.2
20.6
0.7
0.2
3.9
20.1
0.7
0.2
3.9
18.6
(0.9)
(0.9)
(1.1)
—
—
(0.2)
(1.1)
19.5
24.6
24.5
3.0
—
—
0.3
3.3
34%
—
—
(0.3)
(1.2)
18.9
24.1
24.0
3.1
—
—
0.4
3.5
34%
(0.1)
(0.1)
(0.6)
(1.9)
16.7
21.3
21.2
2.6
0.2
0.1
0.6
3.5
55%
19.8
111%
18.8
117%
17.8
127%
17.5
111%
16.1
117%
13.1
127%
18.9
0.1
0.1
1.1
20.2
19.7
0.1
—
1.3
21.1
24.6
0.1
—
1.7
26.4
16.9
0.1
0.1
0.9
18.0
16.9
0.1
—
1.1
18.1
18.1
0.1
—
1.2
19.4
1.127
1.168
1.362
Note:
(1) Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.
135
Business review
Ulster Bank RoI continued
Serving our customers
Gross new lending increased 3.4% on prior year primarily
reflecting higher commercial lending. The bank’s mortgage
lending exceeded €1 billion in 2017 supported by successful
home mover advertising campaigns and an improved customer
proposition.
Adjusted operating expenses of €516 million were 7.7% lower
than 2016 primarily due to continued progress in the delivery of
cost saving initiatives, as evidenced by a 12.9% reduction in
headcount, and lower pension costs. Adjusted cost:income ratio
of 74.3% compared with 79.8% in 2016.
Ulster Bank RoI has continued its journey to become number one
in the market for customer trust and advocacy. Investment in the
digital platform has focused on providing enhancements that
make it easier for customers to bank with us. Ulster Bank RoI
was amongst the first banks in Ireland to introduce Apple Pay
and Android Pay and now over 70% of our customers are actively
using our digital proposition, increased from 58% of our active
customer base in 2016.
In August, Ulster Bank RoI was the first in Ireland to launch Open
Banking. Using market-leading technology, Ulster Bank RoI gives
approved third parties limited access to a customer's account
balance and transaction history, if the customer approves access.
The bank has proactively helped to protect customers from fraud
and scams. Community Protection Advisers have run over 70
sessions across the country helping people understand how they
can keep themselves safe online and outlining how to identify
scams.
2017 compared with 2016
An operating loss of €151 million compared with a €24 million
profit in 2016 primarily reflecting a €206 million increase in
impairment losses, largely relating to a change in the non
performing loan strategy to allow for further portfolio sales.
Adjusted return on equity was 3.6% compared with 8.4% in 2016.
Adjusted income of €693 million was €8 million, or 1.1%, lower
than 2016 primarily reflecting a €53 million reduction in income
on free funds, partially offset by one off items, higher lending
income and reduced funding costs. Net interest margin of 1.67%
was 5 basis points higher than 2016 reflecting a combination of
improved deposit and loan margins, one-off income adjustments
and successful deleveraging measures in 2016 which have
reduced the concentration of low yielding loans.
A litigation and conduct provision of €192 million related to
customer remediation and project costs associated with legacy
business issues.
A net impairment loss of €68 million compared with a €138 million
release in 2016. The movement was driven by a provision
relating to a change in the non performing loan strategy to allow
for further portfolio sales, gains associated with asset disposals in
2016 and refinements to the mortgage provision models in 2017.
REILs were €3.7 billion, 9.8% lower than 2016 reflecting credit
quality improvements.
Ulster Bank RoI gross new lending was €2.6 billion in 2017, up
3.4% compared with 2016.
RWAs of €20.2 billion reduced by €0.9 billion, or 4.3%, compared
with 2016.
2016 compared with 2015
Operating profit decreased by €338 million to €24 million
compared with 2015 primarily due to an increase in litigation and
conduct costs of €229 million and a €56 million reduction in net
impairment releases. Adjusted operating profit of €280 million
was €85 million, or 23%, lower than prior year as a reduction in
adjusted operating expenses was more than offset by the non
recurrence of one-off income benefits in 2015 and lower
impairment releases.
Net interest income was stable year on year. Net interest margin
increased by 5 basis points to 1.62%, compared with 2015,
driven by a continued reduction in the cost of deposits and a
reduced volume of low yielding liquid assets, partly offset by
reduced income on free funds.
Non interest income decreased by €52 million, or 20%, principally
reflecting a one-off €33 million gain realised on the closure of a
foreign exchange exposure in 2015 and a €13 million interim
adjustment to the pricing of FX transactions between Ulster Bank
RoI and NatWest Markets in 2016, pending completion of a
detailed pricing review.
136
Business review
Ulster Bank RoI continued
Adjusted operating expenses reduced by €28 million, or 5%, to
€559 million reflecting a combination of progress made on cost
saving initiatives, the non recurrence of one off costs in 2015 and
one off accrual releases in 2016.
A realignment of costs within direct expenses contributed to an
increase in staff costs in 2016 with an offsetting reduction in other
costs. This reflects the reallocation of 660 staff from UK PBB to
align with current management responsibilities following the
separation of the Northern Ireland and Republic of Ireland
businesses. Excluding the reallocation from UK PBB and staff
supporting the tracker mortgage examination and asset disposal
programmes, headcount decreased by 9% year on year.
Litigation and conduct costs of €211 million principally reflects a
provision for remediation and programme costs associated with
an industry wide examination of tracker mortgages. Restructuring
costs increased by €27 million to €48 million, primarily driven by
costs associated with asset disposal activity.
A net impairment release of €138 million comprised write-backs
associated with asset disposals and benefited from improved
macroeconomic conditions.
The sale of a portfolio of loans contributed to a €0.6 billion, or
13%, reduction in risk elements in lending in 2016 to €4.1 billion.
This was partially offset by a widening of the definition of loans
which are considered to be impaired to include multiple
forbearance arrangements and probationary mortgages. The
provision coverage ratio reduced from 55% in 2015 to 34% in
2016 largely reflecting a further de-risking of the balance sheet
following recent asset sales of largely non-performing loans.
Whilst gross new lending increased 31% in 2016, net loans and
advances to customers decreased €0.6 billion, or 3%, as new
lending was offset by asset disposals and repayments. The low
yielding tracker mortgage portfolio declined by €1.0 billion, or 9%,
to €10.8 billion at 31 December 2016 supported by repayments
and asset disposals.
RWAs reduced by €5.3 billion or 20% during 2016 to €21.1 billion
driven by the sale of a portfolio of loans combined with
adjustments to the mortgage modelling approach and an
improvement in the macro economic environment. RWAs on the
tracker mortgage portfolio reduced by €3.3 billion, or 31%, during
2016 to €7.4 billion.
Loan:deposit ratio decreased 10 percentage points to 117% in
2016 supported by a €1.0 billion growth in deposits and reduced
net loans following recent asset sales.
137
Business review
Commercial Banking
Income statement
Net interest income
Net fees and commissions
Other non-interest income
Non-interest income
Total income
Direct expenses
- staff costs
- operating lease costs
- other costs
Indirect expenses
Restructuring costs
- direct
- indirect
Litigation and conduct costs
Operating expenses
Operating profit before impairment losses
Impairment losses
Operating profit
Operating expenses - adjusted (1)
Operating profit - adjusted (1)
Analysis of income by business
Commercial lending
Deposits
Asset and invoice finance
Other
Total income
Analysis of impairments by sector
Commercial real estate
Asset and invoice finance
Private sector services (education, health, etc)
Banks & financial institutions
Wholesale and retail trade repairs
Hotels and restaurants
Manufacturing
Construction
Other
Total impairment losses
Loan impairment charge as a % of gross customer loans and advances by sector
Commercial real estate
Asset and invoice finance
Private sector services (education, health, etc)
Wholesale and retail trade repairs
Hotels and restaurants
Manufacturing
Construction
Other
Total
Note:
(1) Excluding restructuring costs and litigation and conduct costs.
2017
£m
2,286
1,030
168
1,198
3,484
(467)
(142)
(90)
(1,115)
(48)
(119)
(33)
2016
£m
2,143
1,031
241
1,272
3,415
(522)
(141)
(94)
(1,179)
(25)
(83)
(423)
2015
£m
1,997
984
273
1,257
3,254
(483)
(141)
(97)
(1,080)
(52)
(17)
(51)
(2,014)
(2,467)
(1,921)
1,470
(362)
1,108
948
(206)
742
1,333
(69)
1,264
(1,814)
(1,936)
(1,801)
1,308
1,273
1,384
1,880
508
662
434
3,484
29
57
22
—
59
1
5
187
2
362
0.2%
0.4%
0.3%
0.8%
—
0.1%
9.4%
—
0.4%
1,875
474
712
354
3,415
4
35
8
2
15
27
3
18
94
206
—
0.2%
0.1%
0.2%
0.7%
—
0.8%
0.3%
0.2%
1,634
477
710
433
3,254
18
9
9
—
3
(2)
1
6
25
69
0.1%
0.1%
0.1%
—
(0.1%)
—
0.3%
0.1%
0.1%
138
Business review
Commercial Banking continued
Performance ratios
Return on equity (1)
Return on equity - adjusted (1,2)
Net interest margin
Cost:income ratio
Cost:income ratio - adjusted (2)
Capital and balance sheet
Loans and advances to customers (gross)
- Commercial real estate
- Asset and invoice finance
- Private sector services (education, health, etc)
- Banks & financial institutions
- Wholesale and retail trade repairs
- Hotels and restaurants
- Manufacturing
- Construction
- Other
Total loan and advances to customers (gross)
Loan impairment provisions
Net loans and advances to customers
Total assets
Funded assets
Risk elements in lending
Provision coverage (3)
Customer deposits (excluding repos)
Loan:deposit ratio (excluding repos)
Risk-weighted assets
- Credit risk (non-counterparty)
- Operational risk
Total risk-weighted assets
2017
%
6.6%
8.2%
1.74%
56.0%
50.0%
2016
%
4.1%
8.4%
1.76%
71.0%
54.8%
2015
%
9.8%
10.9%
1.88%
57.2%
53.3%
£bn
£bn
£bn
15.4
16.1
6.9
7.1
7.8
3.5
5.6
2.0
33.8
98.2
(1.2)
97.0
149.5
149.5
3.2
36%
98.0
99%
65.4
6.4
71.8
16.9
14.1
6.9
8.9
8.4
3.7
6.6
2.1
33.3
100.9
(0.8)
100.1
150.5
150.5
1.9
43%
97.9
102%
72.0
6.5
78.5
16.7
14.4
6.7
7.1
7.5
3.3
5.3
2.1
28.9
92.0
(0.7)
91.3
133.5
133.5
1.9
39%
88.9
103%
65.3
7.0
72.3
Notes:
(1) Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity based on 11% of the monthly average of
segmental RWAes, assuming 28% tax rate.
(2) Excluding restructuring costs and litigation and conduct costs.
(3) Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.
139
Business review
Commercial Banking continued
Serving our customers
Commercial Banking’s customer focused strategy is progressing
well, with our Commercial NPS standing at +21, significantly
ahead of our major UK bank competitors.
We continue to improve customer experience by becoming easier
to do business with through operational investment, process
simplification and digitisation. Account Opening improvements
have reduced the end-to-end process by approximately seven
days and customers can now take advantage of pre-approved
loans of up to £50,000 through a self-service application process.
Our existing Bankline platform is used by 90% of our active
customer base with over 400,000 payments processed every
day. We continue to upgrade our new best-in-class Bankline, and
have migrated around 25% of customers to the improved
platform
In supporting UK business growth, we have opened our 12th
Business Accelerator hub in London with our award winning
Entrepreneurial Spark partnership, supporting over 3,800
companies to date. For the ninth year running, Lombard won the
Business Moneyfacts Best Leasing and Asset Finance Provider
Award (2009 to 2017).
Commercial Banking is helping our customers achieve their goals
through the continued expansion of our innovative digital offering.
We continue to scale ESME, our digital 24/7 online lending
platform for SMEs, which has consistently high NPS scores over
70; we are building out a platform to help customers better
understand contracts; and we are deploying Artificial Intelligence,
such as embedding the new chatbot ‘Cora’ into Bankline.
2017 compared with 2016
Operating profit of £1,108 million compared with £742 million in
2016, primarily reflecting a reduction in litigation and conduct
costs. Adjusted operating profit of £1,308 million was £35 million,
or 2.7%, higher than 2016 reflecting lower adjusted operating
expenses and higher income, partially offset by higher
impairments. Adjusted return on equity remained broadly stable
at 8.2%.
Total income increased by £69 million, or 2.0%, to £3,484 million
primarily reflecting increased volumes in targeted segments and
re-pricing benefits on deposits. Net interest margin decreased by
2 basis points as active re-pricing of assets and deposits has
been more than offset by wider asset margin pressure in a low
rate environment.
Adjusted operating expenses of £1,814 million were £122 million,
or 6.3%, lower than 2016, reflecting operating model
simplification and productivity improvements, including a 16.4%
reduction in front office headcount, and a £25 million intangible
asset write-down in 2016. Adjusted cost:income ratio improved to
50.0% compared with 54.8% in 2016.
Net impairment losses of £362 million were £156 million higher
than 2016, reflecting a small number of single name impairments.
Adjusting for transfers(1), net loans and advances decreased by
£4.9 billion to £97.0 billion, compared with 2016, as growth in
targeted segments has been more than offset by active capital
management of the lending book.
Adjusting for transfers(1), RWAs decreased by £8.2 billion, or
10.4%, to £71.8 billion compared with 2016 reflecting active
capital management of the lending book, achieving £12.5 billion
of gross RWA reductions.
2016 compared with 2015
Operating profit was £742 million compared with £1,264 million in
2015 and included a £423 million litigation and conduct charge,
principally relating to a provision in respect of the FCA review of
RBS’s treatment of SMEs. Adjusted operating profit of £1,273
million was £111 million, or 8%, lower than 2015, mainly
reflecting increased impairments, partially offset by increased
income.
Total income increased by £161 million to £3,415 million.
Excluding the impact of transfers(2), income increased by £21
million, or 1%, reflecting higher asset and deposit volumes. Net
interest margin fell by 12 basis points to 1.76% driven by asset
margin pressure in a competitive market and low rate
environment.
Adjusted operating expenses of £1,936 million were £135 million
higher than 2015. Excluding business transfers, adjusted
operating expenses increased by £51 million reflecting a £25
million intangible asset write-down and increased investment
spend.
Net impairment losses increased by £137 million to £206 million
primarily reflecting a single name charge taken in respect of the
oil and gas portfolio.
Net loans and advances of £100.1 billion increased by £8.8
billion, or 10%, compared with 2015 reflecting increased
borrowing across a number of sectors.
RWAs were £78.5 billion, an increase of £6.2 billion compared
with 2015 reflecting asset growth partially offset by reduced RWA
intensity.
Note:
(1) Shipping and other activities which were formerly in Capital Resolution, were transferred from NatWest Markets on 1 October 2017, including net loans and advances to
customers of £2.6 billion and RWAs of £2.1 billion. Commercial Banking transferred whole business securitisations and relevant financial institution’s (RFI) to NatWest Markets
during December 2017, including net loans and advances to customers of £0.8 billion and RWAs of £0.6 billion. Comparatives were not re-presented for these transfers.
(2)The business transfers included impact on total income of £218 million (2015 - £79 million) and operating expenses of £109 million (2015 - £25 million).
140
Business review
Private Banking
Income statement
Net interest income
Net fees and commissions
Other non-interest income
Non-interest income
Total income
Direct expenses
- staff costs
- other costs
Indirect expenses
Restructuring costs
- direct
- indirect
Litigation and conduct costs
Write down of goodwill
Operating expenses
Operating profit/(loss) before impairment (losses)/releases
Impairment (losses)/releases
Operating profit/(loss)
Operating expenses - adjusted (1)
Operating profit - adjusted (1)
Analysis of income by business
Investments
Banking
Total income
Performance ratios
Return on equity (2)
Return on equity - adjusted (1,2)
Net interest margin
Cost:income ratio
Cost:income ratio - adjusted (1)
Capital and balance sheet
Loans and advances to customers (gross)
- Personal
- Mortgages
- Other
Total loans and advances to customers (gross)
Total assets
Funded assets
Assets under management (3)
Risk elements in lending
Provision coverage (4)
Customer deposits (excluding repos)
Loan:deposit ratio (excluding repos)
Risk-weighted assets
- Credit risk (non-counterparty)
- Operational risk
Total risk-weighted assets
2017
£m
464
179
35
214
678
(145)
(32)
(268)
(20)
(25)
(39)
—
(529)
149
(6)
143
(445)
227
119
559
678
6.4%
11.3%
2.47%
78.0%
65.6%
2017
£bn
2.3
8.2
3.0
13.5
20.3
20.3
21.5
0.1
34%
26.9
50%
8.1
1.0
9.1
2016
£m
449
181
27
208
657
(154)
(44)
(313)
(7)
(30)
(1)
—
(549)
108
3
111
(511)
149
97
560
657
5.6%
7.8%
2.66%
83.6%
77.8%
2016
£bn
2.3
7.0
2.9
12.2
18.6
18.5
17.0
0.1
30%
26.6
46%
7.5
1.1
8.6
2015
£m
436
186
22
208
644
(176)
(35)
(307)
(7)
(66)
(12)
(498)
(1,101)
(457)
(13)
(470)
(518)
113
86
558
644
(27.7%)
4.9%
2.75%
171.0%
80.4%
2015
£bn
2.7
6.5
2.0
11.2
17.0
17.0
13.9
0.1
28%
23.1
48%
7.6
1.1
8.7
Notes:
(1) Excluding restructuring costs and litigation and conduct costs and write down of goodwill.
(2) Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity based on 14% (15% prior to Q1 2017) of
the monthly average of segmental RWAes, assuming 28% tax rate.
(3) Comprises assets under management, assets under custody and investment cash.
(4) Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.
141
Business review
Private Banking continued
Serving our customers
Private Banking continues to focus on delivering the best
customer experience, with pro-active customer contact levels up
5% in the year. Our proposition has been extended to meet wider
customer needs with the launch of new products, including the
offset and 10-year tracker mortgages. The customer-centric
strategy is improving returns and enhancing service levels, and
we were awarded Best Private Bank in the UK at the Global
Private Banking Awards 2017. Coutts was also awarded the Best
Benefits or Loyalty Programme of the year for our Silk Card
proposition and Best Debit Card Programme of the Year for our
multi-currency debit card at the Card and Payments Awards
2018.
Private Banking has delivered top quartile investment
performance on the majority of discretionary portfolios and UK
multi-asset funds over the one, three and five year performance
periods. Coutts won Gold Awards at the Portfolio Adviser Wealth
Manager Awards 2018 for our Absolute Return portfolios and
Cautious portfolios.
Investing in digital has seen the launch of Coutts Invest, a cost-
effective, online investment solution, and delivery of an enhanced
mobile experience for clients. Coutts won the Service Innovation
Award at the Private Asset Manager Awards for the second
consecutive year for client security innovations such as CouttsID
and Behavioural Biometrics.
2017 compared with 2016
Operating profit increased by £32 million, or 28.8%, to £143
million compared with 2016 and return on equity increased from
5.6% to 6.4%. Adjusted operating profit of £227 million was £78
million, or 52.3%, higher than 2016 primarily reflecting lower
adjusted operating expenses and higher income. Adjusted return
on equity increased to 11.3% from 7.8% in 2016.
Adjusting for transfers(1), total income increased by £12 million to
£678 million due to increased lending volumes and an £8 million
gain on a property sale, partially offset by ongoing margin
pressure. Net interest margin fell 19 basis points to 2.47%
reflecting the competitive market and low rate environment.
Adjusted operating expenses of £445 million decreased by £66
million, or 12.9%, compared with 2016 largely reflecting
management actions to reduce costs, including an 11.8%
reduction in front office headcount. Adjusted cost:income ratio
improved to 65.6% compared with 77.8% in 2016.
Net loans and advances of £13.5 billion were £1.3 billion, or
10.7%, higher than 2016 principally driven by growth in
mortgages.
Adjusting for transfers(1), assets under management were £2.4
billion, or 14.4%, higher than 2016 at £21.5 billion, reflecting both
organic growth and favourable market conditions.
RWAs of £9.1 billion were £0.5 billion, or 5.8%, higher than 2016
primarily due to increased mortgage lending.
2016 compared with 2015
An operating profit of £111 million compared with an operating
loss of £470 million in 2015 which included a goodwill impairment
of £498 million. Adjusted operating profit of £149 million was £36
million, or 32%, higher than 2015 reflecting increased income,
lower adjusted operating expenses and lower impairments.
Total income increased by £13 million to £657 million primarily
reflecting higher asset volumes. Net interest margin fell by 9
basis points to 2.66% reflecting asset margin pressures.
Adjusted operating expenses of £511 million were £7 million, or
1%, lower than 2015 driven by reductions in the direct cost base,
with employee numbers down 10%, partially offset by increased
infrastructure costs absorbed following the sale of the
international business.
Net loans and advances of £12.2 billion increased by £1.0 billion
compared with 2015 driven by mortgages. Assets under
management of £17.0 billion were £3.1 billion higher compared
with 2015 reflecting underlying growth and equity index inflation.
In addition, investment cash balances were included in assets
under management for the first time in Q3 2016, excluding this,
growth was £2.0 billion.
Note:
(1) The UK PBB Collective Investment Funds (CIFL) business was transferred from UK PBB on 1 October 2017, including total income in Q4 2017 of £11 million and assets under
management of £3.3 billion. Private Banking transferred Coutts Crown Dependencies (CCD) to RBS International during Q4 2017, including total income of £2 million and assets
under management of £1.2 billion. Comparatives were not re-presented for these transfers.
142
Business review
RBS International
Income statement
Net interest income
Net fees and commissions
Other non-interest income
Non-interest income
Total income
Direct expenses
- staff costs
- other costs
Indirect expenses
Restructuring costs
- direct
- indirect
Litigation and conduct costs
Operating expenses
Operating profit before impairment losses
Impairment losses
Operating profit
Operating expenses - adjusted (1)
Operating profit - adjusted (1)
Performance ratios
Return on equity (2)
Return on equity - adjusted (1,2)
Net interest margin
Cost:income ratio
Cost:income ratio - adjusted (1)
Capital and balance sheet
Loans and advances to customers (gross)
- Corporate
- Mortgages
- Other
Total loans and advances to customers (gross)
Loan impairment provisions
Net loans and advances to customers
Total assets
Funded assets
Risk elements in lending
Provision coverage (3)
Customer deposits
Loan:deposit ratio (excluding repos)
Risk-weighted assets
- Credit risk (non-counterparty)
- Operational risk
Total risk-weighted assets
2017
£m
325
42
22
64
389
(61)
(25)
(116)
(5)
(4)
(8)
(219)
170
(3)
167
(202)
184
11.2%
12.6%
1.36%
56.3%
51.9%
2017
£bn
5.7
2.7
0.3
8.7
—
8.7
25.9
25.9
0.1
35%
29.0
30%
4.4
0.7
5.1
2016
£m
303
50
21
71
374
(45)
(17)
(107)
(2)
(3)
—
(174)
200
(10)
190
(169)
195
13.8%
14.2%
1.36%
46.5%
45.2%
2016
£bn
6.2
2.6
—
8.8
—
8.8
23.4
23.4
0.1
35%
25.2
35%
8.8
0.7
9.5
2015
£m
303
40
24
64
367
(42)
(16)
(98)
—
(4)
—
(160)
207
—
207
(156)
211
18.5%
18.9%
1.48%
43.6%
42.5%
2015
£bn
4.5
2.5
0.4
7.4
(0.1)
7.3
23.1
23.1
0.1
34%
21.3
35%
7.6
0.7
8.3
Notes:
(1) Excluding restructuring costs.
(2) Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity based on 16% (12% prior to November
2017) of the monthly average of segmental RWAes, assuming 10% tax rate.
(3) Provision coverage represents loan impairment provisions as a percentage of risk elements in lending.
143
RWAs of £5.1 billion reduced by £4.4 billion, or 46.3%, compared
with 2016, reflecting the benefit of receiving the Advanced
Internal Rating Based Waiver on the wholesale corporate book in
November 2017, in advance of becoming a bank outside the ring-
fence.
From 1st Jan 2018 RBS International will include the funds and
trustee depositary business transferred from Commercial
Banking, which generated around £150 million of income and £60
million of costs in 2017.
2016 compared with 2015
Operating profit decreased by £17 million to £190 million
principally reflecting increased impairment losses and operating
expenses. Adjusted operating profit of £195 million was £16
million lower than 2015.
Total income increased by £7 million to £374 million primarily
reflecting higher asset volumes. Net interest margin fell by 12
basis points to 1.36% reflecting asset margin pressures.
Adjusted operating expenses of £169 million were £13 million, or
8%, higher than 2015, reflecting a number of one-off charges.
A net impairment loss of £10 million was reported in 2016.
Net loans and advances of £8.8 billion increased by £1.5 billion
compared with 2015 reflecting balance draw-downs in the
corporate lending portfolio, mainly within the Funds sector.
Customer deposits of £25.2 billion grew by £3.9 billion compared
with 2015 principally reflecting the transfer of the Luxembourg
branch into RBSI from Capital Resolution during Q2 2016.
RWAs were £9.5 billion, an increase of £1.2 billion compared with
2015 reflecting asset growth.
Business review
RBS International continued
Serving our customers
RBS International continues to focus on meeting more of our
retail, commercial, corporate and financial institution customers’
needs. We are nearing the final stages of our transition to
becoming a non ring-fenced bank, and during 2017 we opened
new wholesale branches in Luxembourg and London, supporting
our financial institution customers in these important funds
banking jurisdictions.
Across our personal banking propositions we continue to
maintain our position as market leader in the Isle of Man and top
three market positions in Guernsey and Jersey. To better meet
our personal customers’ savings needs, we delivered a new suite
of fixed term deposits. At the same time we have supported over
1,900 customers buy new homes, exceeding £480 million of new
mortgages
Outside of our home jurisdictions, we have taken action to meet
more of the international needs of our customers. Our mobile app
now averages over one million log-ins per month, and has been
upgraded to open access to international customers, assisting in
our 14% increase in users.
For our commercial, corporate and financial institution customers,
we invested into the next generation of our agile eQ multi-
currency electronic banking platform, which brings enhanced
payment functionality and product suite. To meet our non-
personal customers savings needs, we delivered a new Notice
Account at the beginning of August 2017, and our customers
responded by depositing over £1 billion into the account.
2017 compared with 2016
Operating profit of £167 million decreased by £23 million, or
12.1%, compared with 2016 and return on equity decreased to
11.2% from 13.8%, reflecting increased operational costs
associated with the creation of a bank outside the ring-fence,
partially offset by higher income. Adjusted return on equity
decreased to 12.6% from 14.2% in 2016 and adjusted
cost:income ratio of 51.9% increased from 45.2% in 2016.
Total income increased by £15 million, or 4.0%, to £389 million
driven by increased average lending balances in 2017 and re-
pricing benefits on the deposit book.
Net loans and advances were broadly stable compared with 2016
and customer deposits increased by £3.8 billion to £29.0 billion
primarily reflecting increased short term placements in the Funds
sector.
144
Business review
NatWest Markets
Income statement
Net interest income
Net fees and commisions
Income from trading activities
Own credit adjustments
Strategic disposals
Other operating income/(loss)
Non-interest income
Total income
Direct expenses
- staff costs
- other costs
Indirect expenses
Restructuring costs
- direct
- indirect
Litigation and conduct costs
Operating expenses
Operating loss before impairment releases/(losses)
Impairment releases/(losses)
Operating loss
Of which:
Core operating profit/(loss)
Legacy operating loss
Total income - adjusted (1)
Operating expenses - adjusted (2)
Operating loss - adjusted (1,2)
Analysis of income by product
Rates
Currencies
Financing
Revenue share paid to other segments
Businesses transferred to Commercial Banking
Core income excluding OCA
Legacy
Total income - adjusted
Own credit adjustments
Strategic disposals
Total income
Performance ratios
Return on equity (3)
Return on equity - adjusted (1,2,3)
Net interest margin
Cost:income ratio
Cost:income ratio - adjusted (1,2)
nm = not meaningful
2017
£m
203
114
582
(66)
26
191
847
2016
£m
343
141
829
187
(81)
(207)
869
1,050
1,212
(677)
(287)
(564)
(319)
(117)
(237)
(2,201)
(1,151)
174
(977)
41
(1,018)
1,090
(1,528)
(264)
985
470
456
(246)
—
1,665
(575)
1,090
(66)
26
1,050
(358)
(119)
(1,607)
(75)
(115)
(550)
(2,824)
(1,612)
(253)
(1,865)
(386)
(1,479)
1,106
(2,084)
(1,231)
837
551
344
(211)
—
1,521
(415)
1,106
187
(81)
1,212
2015
£m
452
484
743
295
(38)
130
1,614
2,066
(644)
(324)
(2,038)
(424)
(1,407)
(404)
(5,241)
(3,175)
730
(2,445)
(837)
(1,608)
1,809
(3,006)
(467)
792
391
363
(237)
98
1,407
402
1,809
295
(38)
2,066
(9.0%)
(3.7%)
0.65%
nm
140.2%
(12.5%)
(8.7%)
0.91%
nm
188.4%
(11.2%)
(3.0%)
0.59%
nm
166.2%
Notes:
(1) Excluding own credit adjustments and strategic disposals.
(2) Excluding restructuring costs and litigation and conduct costs.
(3) Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity (based on 15% of the monthly average of
segmental risk-weighted assets incorporating the effect of capital deductions (RWAes)), assuming 28% tax rate.
145
Business review
NatWest Markets continued
Capital and balance sheet
Net loans and advances to customers (excluding reverse repos)
Loans and advances to banks (excluding reverse repos) (1)
Reverse repos
Securities
Cash and eligible bills
Other
Total assets
Funded assets
Customer deposits (excluding repos)
Bank deposits (excluding repos)
Repos
Debt securities in issue
Loan:deposit ratio (excluding repos)
Risk-weighted assets
- Credit risk
- non-counterparty
- counterparty
- Market risk
- Operational risk
Total risk-weighted assets
Of which:
Core RWAs
Legacy RWAs ex Alawwal
Alawwal
Note:
(1) Excludes disposal groups.
2017
£bn
22.7
7.5
38.6
25.5
19.3
5.1
277.9
118.7
14.8
13.0
28.4
5.1
153%
16.1
15.3
16.2
5.3
52.9
32.3
14.0
6.6
2016
£bn
30.2
7.9
38.8
25.3
18.1
8.2
372.5
128.5
17.9
21.3
27.3
6.7
169%
23.7
22.8
16.4
6.8
69.7
35.2
26.6
7.9
2015
£bn
39.7
12.8
38.9
29.9
27.4
8.0
416.8
156.7
31.7
21.4
35.2
7.6
125%
32.3
23.3
19.5
7.0
82.1
33.1
42.1
6.9
146
Business review
NatWest Markets continued
Serving our customers
NatWest Markets has put customers at the centre of the way it
does business. Since 2015 NatWest Markets has focused on the
core products and markets where it has a strong track record,
longstanding relationships and market leading positions.
NatWest Markets is making strong progress with its multi-year
transformation to build a business focused on delivering
sustainable returns.
Following the closure of the former Capital Resolution business in
2017, NatWest Markets now includes legacy run-off assets
alongside its core businesses. The business continues to focus
on customer service and trust in its core markets and technology
is enhancing the way NatWest Markets provides financial
solutions to its customers. This is demonstrated by a number of
industry awards and rankings:
No.1 for Gilts by Market Share – EMEA FIs (Source:
Greenwich Associates, European Fixed Income 2017 –
Government Bonds)
No.1 for FX Service Quality – UK Corporates (Source:
Greenwich Associates, European FX 2017)
Best bank for FX Prime Brokerage services (Source: FX
Week Best Bank Awards 2017)
Best bank for FX Post-Trade Services (Source: FX Week
Best Bank Awards 2017)
Top 2 for all European issuers in the Private Placement
market (Source: Dealogic Private Placement Report, Full
Year 2017)
Top 3 for GBP Denominated DCM in EMEA (Source:
Dealogic EMEA Review, Full Year 2017)
2017 compared with 2016
An operating loss of £977 million compared with £1,865 million in
2016. The core business operating profit increased by £427
million to £41 million reflecting lower litigation and conduct costs,
lower adjusted costs and higher income, partially offset by
increased restructuring costs reflecting back office restructuring
activity. Adjusted operating loss of £264 million, compared with
£1,231 million in 2016, reflecting lower adjusted costs and a net
impairment release of £174 million in 2017, compared with a
charge of £253 million in 2016.
Total income of £1,050 million compared with £1,212 million in
2016. In the core business, adjusted income increased by £144
million, or 9.5%, to £1,665 million, principally driven by Rates as
the business navigated markets well despite a lower level of
customer activity than in 2016, which benefited from favourable
market conditions following the EU referendum.
Adjusted operating expenses of £1,528 million were £556 million,
or 26.7%, lower than 2016. In the legacy business, adjusted
operating expenses decreased significantly reflecting a 77.7%
reduction in headcount as the business moved towards closure.
In the core business, adjusted operating expenses reduced as
the business continues to drive cost reductions. NatWest Markets
adjusted costs, excluding costs associated with the legacy
business, were £1,268 million compared to £1,320 million in
2016.
RWAs decreased by £15.3 billion, adjusting for transfers(1), to
£52.9 billion primarily reflecting reductions in the legacy business.
In the core business RWAs decreased by £3.1 billion to £32.3
billion reflecting lower counterparty credit risk through mitigation
activities and business initiatives. At the end of 2017 the legacy
business within NatWest Markets had RWAs of £14.0 billion,
excluding RBS’s stake in Alawwal Bank, a reduction of £10.9
billion, adjusting for transfers(1), over the course of the year.
Funded assets fell to £118.7 billion, a reduction of £7.3 billion,
adjusting for transfers(1), mainly reflecting disposal activity.
2016 compared with 2015
An operating loss of £1,865 million compared with an operating
loss of £2,445 million in 2015. The adjusted operating loss was
£1,231 million compared with a loss of £467 million in 2015,
primarily driven by lower adjusted income and increased
impairments partially offset by lower adjusted expenses.
Total income decreased by £854 million to £1,212 million.
Adjusted income in the Core business increased by £114 million,
or 8.1%, to £1,521 million. The increase was driven by Rates and
Currencies, reflecting sustained customer activity throughout the
year and favourable market conditions following the EU
referendum and subsequent central bank actions. Income in the
legacy business decreased due to the disposal losses of
£572 million, £205 million higher than 2015, including £259
million in respect of the shipping portfolio. In addition, the Legacy
business also incurred a funding valuation adjustment charge of
£170 million in 2016.
Operating expenses decreased from £5,241 million to £2,824
million in 2016, driven by lower restructuring costs and lower
adjusted expenses, primarily reflecting a 1,000 reduction in
headcount in the Legacy business.
Funded assets decreased by £28.2 billion compared with 2015 to
£128.5 billion, mainly reflecting disposal activity.
RWAs decreased by £12.4 billion compared with 2015 to £69.7
billion reflecting disposal activity partially offset by business
movements and the impact of the weakening of sterling.
Note:
(1) Shipping and other activities which were formerly in Capital Resolution, were transferred to Commercial Banking on 1 October 2017, including total funded assets of £3.3 billion,
net loans and advances to customers of £2.6 billion, and RWAs of £2.1 billion. Whole business securitisations and relevant financial institutions (RFI) were transferred from
Commercial Banking during December 2017, including net loans and advances to customers of £0.8 billion, and RWAs of £0.6 billion. Comparatives were not re-presented for
these transfers.
147
Business review
Central items & other
Central items not allocated
2017
£m
(483)
2016
£m
(5,006)
2015
£m
(2,982)
Funding and operating costs have been allocated to operating segments based on direct service usage, the requirement for market
funding and other appropriate drivers where services span more than one segment.
Residual unallocated items relate to volatile corporate items that do not naturally reside within a segment.
2017 compared with 2016
Central items not allocated represented a charge of £483 million
in 2017, compared with a £5,006 million charge in 2016, and
included litigation and conduct costs of £589 million, compared
with £4,088 million in 2016. Treasury funding costs were a
charge of £58 million, compared with a charge of £94 million in
2016. Restructuring costs in the year included £94 million relating
to the former Williams & Glyn business, compared with £1,399
million in 2016. In addition to a VAT recovery of £86 million,
compared with £227 million in 2016, a £156 million gain on the
sale of Vocalink and a £135 million gain in relation to the sale of
EuroClear(1).
2016 compared with 2015
Central items not allocated represented a charge of £5,006
million in 2016, compared with a £2,982 million charge in 2015,
and included restructuring costs of £1,482 million and litigation
and conduct costs of £4,088 million. Restructuring costs included
a £750 million provision in respect of the 17 February 2017
update on RBS’s remaining State Aid obligation regarding the
business previously described as Williams & Glyn. Treasury
funding costs were a charge of £94 million, compared with a gain
of £169 million in 2015, and included a £510 million charge for
volatile items under IFRS, due to reductions in long term interest
rates, and a £349 million foreign exchange gain, principally
associated with the weakening of sterling against the US dollar.
In addition, there was a £126 million loss on redemption of own
debt in 2016. These were partially offset by a VAT recovery of
£227 million and a £246 million gain on the sale of the stake in
VISA Europe.
Note:
(1)
The total gain in relation to the sale of Euroclear was £161 million, of which £135 million central items and £26 million NatWest Markets.
148
Capital and risk management
Risk management framework
Introduction
Risk culture
Risk governance
Risk appetite
Risk control frameworks and limits
Risk identification, measurement, treatment and mitigation
Risk and conduct assurance
Stress testing
Capital, liquidity and funding risk
Definition and sources
Key developments
Capital liquidity and funding management
Minimum requirements
Measurements
Credit risk: management basis
Definition and sources
Credit risk management function
Risk appetite, risk measurement and models
Risk mitigation
Portfolio assessment and monitoring summaries
Credit risk: balance sheet analysis
Financial assets
Loans, REIL and impairment provisions
Securities and available-for-sale reserves
Derivatives and valuation reserves
Market risk
Non-traded market risk
Traded market risk
Pension risk
Conduct risk
Operational risk
Business risk
Reputational risk
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Presentation of information
Except as otherwise indicated, information in the Capital and risk management section (pages 149 to 228) is within the scope of the
Independent auditor’s report.
149
Business review Capital and risk management
Risk management framework (unaudited)
Introduction
RBS operates an integrated risk management framework,
centred around the embedding of a strong risk culture, which is
designed to achieve the correct balance between prudential and
conduct obligations. Each element of the risk management
framework functions both individually and as part of a larger
continuum. The framework ensures the tools and capability are in
place to facilitate risk management and decision-making across
the organisation.
RBS’s strategy is informed and shaped by an understanding of
the risk landscape, including a range of significant risks and
uncertainties in the external economic, political and regulatory
environment. Identifying these risks and understanding how they
affect RBS informs risk appetite and risk management practice.
Risk appetite, which is supported by a robust set of principles,
policies and practices, defines our levels of tolerance for a variety
of risks.
It is a key element of RBS’s risk management framework and
culture, providing a structured approach to risk-taking within
agreed boundaries.
Effective governance, underpinned by our three lines of defence
model is essential to ensure the right decisions are being made
by the right people at the right time. Governance includes regular
and transparent risk reporting as well as discussion and decision-
making at senior management committees, which informs
management strategies across the organisation.
RBS aims to have the right tools in place to support effective risk
management. Having the appropriate capability, people and
infrastructure is central. This is supported by a strong emphasis
on systems, training and development to ensure threats are
anticipated and managed appropriately within the boundaries
determined by the agreed risk appetite.
RBS is able to absorb
shocks and is prepared to
manage new, emerging and
unforeseen risks
RBS’s strategy is
informed and shaped by
an understanding
of the risks it faces
RBS continually
improves how risk is
managed, by taking
action where
necessary
Stress &
scenario
analysis
Business
strategy
RBS identifies the
risks that arise as
a result of running
its business
and delivering
its strategy
Response
Risk
identification
Control
definition &
effectiveness
RBS has the
appropriate
policies and controls
embedded in the
business to
manage the
risks it takes
Measurement,
evaluation &
transparency
RBS understands
and communicates
the financial and
non-financial risks
it is taking
Risk
culture
Capability,
people &
infrastructure
Risk
appetite
Defining the level
of risk which RBS
is willing to accept
Governance
Ensuring RBS
is confident the right
decisions are
being taken, by the
right people, at
the right time
RBS has the tools and
capability to support
risk management and
decision-making across the
organisation
Measurement, evaluation and transparency are also fundamental
elements of the framework, providing robust analysis of the
materiality and likelihood of specific threats as well as supporting
understanding and communication of the financial and non-
financial risks RBS is exposed to.
RBS has a strong focus on defining the control environment to
ensure the effective operation of policies and processes
embedded in the customer-facing businesses, thus facilitating the
management of the risks they take in the course of their day-to-
day activities.
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Business review Capital and risk management
Risk management framework (unaudited) continued
RBS also has a strong focus on continually improving the way
risk is managed, particularly in terms of how threats are
anticipated or responded to, but also in terms of simplifying or
enhancing existing controls, policies and practice.
Essential to this is the ability to scan both the medium- and long-
term horizon for risks. Stress testing is used to quantify, evaluate
and understand the potential impact that changes to risks may
have on the financial strength of RBS, including its capital
position. In turn, the results of stress tests can be used to inform
and shape strategy.
Given the evolving external landscape, including the structural
reform required by the UK’s ring-fencing requirements, in 2017
there was an emphasis on enhancing both the risk culture and
risk appetite elements of the framework – as well as the
interconnectivity between framework components.
All RBS employees share ownership of the way risk is managed.
The businesses, the control and support functions, and Internal
Audit work together to make sure business activities and policies
are consistent with risk appetite; following the three lines of
defence model. RBS constantly monitors its risk profile against its
defined risk appetite and limits, taking action when required to
balance risk and return.
Risk culture
A strong risk culture is essential if RBS is to achieve its ambition
to build a truly customer-focused bank. RBS’s risk culture target
is to make risk simply part of the way that employees work and
think.
Such a culture must be built on strong risk practices and
appropriate risk behaviours must be embedded throughout the
organisation.
To achieve this, RBS is focusing on leaders as role models and
taking action to build clarity, continuing to develop capability and
motivate employees to reach the required standards of risk
culture behaviour, including:
Taking personal accountability and proactively managing
risk.
Respecting risk management and the part it plays in daily
work.
Understanding clearly the risks associated with individual
roles.
Aligning decision-making to RBS’s risk appetite.
Considering risk in all actions and decisions.
Escalating risks and issues early.
Taking action to mitigate risks.
Learning from mistakes and near-misses.
Challenging others’ attitudes, ideas and actions.
Reporting and communicating risks transparently.
To embed and strengthen the required risk culture, a number of
RBS-wide activities were undertaken in 2017. These included
ethical scenario training, mandatory Group Policy Learning, and
Managing Our Performance meetings designed to enhance risk
culture at a team and individual employee level.
To support a consistent tone from the top, senior management
regularly communicate the importance of the required risk
behaviours, linking them to the achievement of good customer
outcomes.
RBS’s target risk culture behaviours have now been embedded
into Our Standards. These are clearly aligned to the core values
of “serving customers”, “working together”, “doing the right thing”
and “thinking long term”. They act as a clear starting point for a
strong and effective risk culture because Our Standards are used
for performance management, recruitment and selection and
development.
Risk culture behaviour assessment is incorporated into
performance assessment and compensation processes for
enhanced governance staff. In Q1 2017, an objective aligned to
RBS’s risk culture target was set for the Executive Committee.
Activity against that objective over the year was integral to
performance reviews.
A risk culture measurement and reporting framework has been
developed, enabling RBS to benchmark both internally and
externally. The purpose of the framework is to assess progress in
embedding RBS’s target risk culture where risk is simply part of
the way we work and think. In 2017, external validation indicated
that good progress had been made against that objective
demonstrating that the continued focus and actions are moving
RBS towards its target risk culture.
Risk-based key performance indicators
RBS-wide remuneration policy ensures that the remuneration
arrangements for all employees reflect the principles and
standards prescribed by the PRA rulebook and the FCA
handbook.
Training
Enabling employees to have the capabilities and confidence to
manage risk is core to RBS’s learning strategy.
RBS offers a wide range of risk learning, both technical and
behavioural, across the risk disciplines. This training can be
mandatory, role-specific or for personal development.
Mandatory learning for all staff is focused on keeping employees,
customers and RBS safe. This is easily accessed online and is
assigned to each person according to their role and business
area. The system allows monitoring at all levels to ensure
completion.
Code of Conduct
Aligned to RBS’s values is the Code of Conduct (Our Code). The
code provides guidance on expected behaviour and sets out the
standards of conduct that support the values. It explains the
effect of decisions that are taken and describes the principles that
must be followed.
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Business review Capital and risk management
Risk management framework (unaudited) continued
These principles cover conduct-related issues as well as wider
business activities. They focus on desired outcomes, with
practical guidelines to align the values with commercial strategy
and actions. The embedding of these principles facilitates sound
decision-making and a clear focus on good customer outcomes.
They are also consistent with the people management and
remuneration processes and support a positive and strong risk
culture through appropriate remuneration structures.
A simple decision-making guide – the “YES check” – has been
included in the Code of Conduct. It is a simple set of five
questions, designed to ensure RBS values guide day-to-day
decisions:
Does what I am doing keep our customers and RBS safe
and secure?
Would customers and colleagues say I am acting with
integrity?
Am I happy with how this would be perceived on the
outside?
Is what I am doing meeting the standards of conduct
required?
In five years’ time would others see this as a good way to
work?
Each of the five questions is a prompt to think about how the
situation fits with RBS Group’s values. It ensures that employees
can think through decisions that do not have a clear answer, and
guides their judgements.
If conduct falls short of RBS’s required standards, the
accountability review process is used to assess how this should
be reflected in pay outcomes for those individuals concerned.
RBS’s approach to remuneration and related policies promotes
effective risk management through a clear distinction between
fixed remuneration – which reflects the role undertaken by an
individual – and variable remuneration, which is directly linked to,
and reflects performance and can be risk-adjusted. The Group
Performance & Remuneration Committee considers risk
performance and conduct when determining overall bonus pools.
Such pay decisions aim to reinforce the need for all employees to
demonstrate acceptable risk management practice.
Risk governance
Committee structure
The diagram illustrates the risk committee structure in 2017 and the main purposes of each committee.
Board
Reviews and approves the risk appetite
framework and risk appetite targets for
RBS’s strategic risk objectives.
Executive Committee
Manages and oversees all
aspects of RBS’s business and
operations.
Board Risk Committee
Executive Risk Forum
Pension Committee
Asset & Liability Management
Committee
Provides oversight and advice on: current
and potential future risk exposures, and
future risk strategy, including
determination of risk appetite and
tolerance; and the effectiveness of the
risk management framework.
Acts on all material and/or enterprise‐
wide risk and control matters
across RBS.
Considers the financial strategy, risk
management, balance sheet and
remuneration and policy implications
of RBS’s pension schemes.
Oversees the effective management
of the current and future balance
sheet in line with Board‐approved
strategy and risk appetite.
Functional risk
committees
Responsible for approval – or
recommendation to the Board for
approval – of certain risk appetite
measures. Includes Retail Credit Risk
Committee, Wholesale Credit Risk
Committee, Operational Risk Executive
Committee, Market and Treasury Risk
Committee, Financial Crime Executive
Steering Group, and Reputational
Risk Forum.
Technical Executive Risk Forum
Responsibilities include technical updates
and escalations from other Executive Risk
Forum sub‐committees, and annual deep‐
dives on significant risk frameworks.
Provisions Committee
Reviews and approves large credit
impairment charges or releases.
Capital Management & Stress
Testing Committee
Technical Asset & Liability
Management Committee
Challenges and reviews the
end‐to‐end capital
management process. It is the
focal point for prudential
regulatory requests regarding
asset quality reviews
and stress testing.
Responsible for setting the
limits, policies and controls
relating to financial balance
sheet risks, including funding
and liquidity, intra‐group
exposures, non‐traded market
risk and structural foreign
currency risks.
.
Business risk committees and
business provisions committees
Risk committees review and monitor all risks, providing guidance, recommendations and
decisions on risks affecting the businesses. Business provisions committees approve
individual specific provisions up to defined levels.
IFRS 9 Metrics Oversight Committee
Responsible for approving the
Significant Deterioration framework
and data rules for missing variables.
Note:
(1) The IFRS 9 Metrics Oversight Committee has delegated authority from the RBS Provisions Committee to approve the Significant Deterioration framework, the data rules for
missing variables, materiality decisions relating to the expected credit loss calculation, adjustments relating to the expected credit loss calculation if necessary, and changes in
expected credit loss provision calculation methodology.
152
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Risk management framework (unaudited) continued
Risk management structure
The diagram illustrates RBS’s risk management structure in 2017 and key risk management responsibilities.
Chief of Staff
Proactive support to the Chief Risk Officer (including Risk, Conduct &
Restructuring strategy)
Chief Credit Officer
Credit risk and control framework (including Personal and Wholesale)
Head of Restructuring
Manages RBS’s problem and potential problem Wholesale debt exposures
Director of Enterprise-Wide Risk
Enterprise-wide risk and control framework (including stress testing and risk
capital, risk appetite and framework, strategic and earnings risk, non-traded
market risk and risk model build)
Director of Risk & Conduct
Infrastructure
Risk and conduct capabilities (including information services,
transformation, control room and surveillance, and whistleblowing)
Director of Operational Risk
Operational risk and control framework (including business
processes, technology, data and organisation)
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Chief Risk Officer
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Head of Risk & Conduct Assurance
Independent challenge on the adequacy and effectiveness of risk and conduct
management practices and behaviour, model risk management and governance
Franchise Directors of Risk &
Conduct/Chief Risk Officers
Oversight and challenge to the business in their management of risk and conduct
Director of Financial Crime
Financial crime framework and standards, and oversight of implementation
Chief Executive
RBS Group General Counsel
Manages legal risk and provides legal advice on customer transactions and
products, acquisitions, disposals, joint ventures and intellectual property as well
as managing major litigation
Chief Governance
Officer and Board Counsel
Head of Regulatory Developments and
Head of Regulator & Control Function
Liaison
Regulatory advisory support across all customer businesses and management of
relationships with core regulators
Chief Financial
Officer
Treasurer
Notes:
(1) RBS risk management framework
Capital, liquidity and funding risk as well as recovery and resolution planning.
Treasury also participates in the Capital Management & Stress Testing
Committee
In 2017, the Chief Risk Officer (CRO) led Risk, Conduct & Restructuring. The CRO reported directly to the Chief Executive and had a dotted reporting line to the Board Risk
Committee, as well as a right of access, to the chairman of the Board Risk Committee.
Risk, Conduct & Restructuring was a function independent of the franchises, structured by risk discipline to facilitate the effective management of risk.
Risk, Conduct & Restructuring was organised into eight functional areas: Chief of Staff; Credit Risk; Restructuring; Enterprise-Wide Risk; Risk & Conduct Infrastructure;
Operational Risk; Risk & Conduct Assurance; and Financial Crime. There were also Directors of Risk & Conduct/Chief Risk Officers for each of the franchises and for Services.
Risk committees in the customer businesses and key functional risk committees oversaw risk exposures arising from management and business activities and focused on
ensuring that they were adequately monitored and controlled.
(2) Regulatory Affairs
In 2017, Regulatory Affairs was responsible for providing leadership of RBS’s relationships with its regulators. Regulatory Affairs is part of Corporate Governance & Regulatory
Affairs. Remediation & Complaints reports to the Services Chief Operating Officer.
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Business review Capital and risk management
Risk management framework (unaudited) continued
Three lines of defence
RBS uses the three lines of defence model to articulate
accountabilities and responsibilities for managing risk across the
organisation. The three lines of defence model is adopted across
the industry to support the embedding of effective risk
management and is expressed through a set of principles as
outlined below:
Risk appetite
Risk capacity defines the maximum level of risk RBS can assume
before breaching constraints determined by regulatory capital
and liquidity needs, the operational environment, and from a
conduct perspective. Articulating risk capacity helps determine
where risk appetite should be set, ensuring there is a buffer
between internal risk appetite and RBS’s ultimate capacity to
absorb losses.
Risk appetite defines the level and types of risk RBS is willing to
accept, within risk capacity, in order to achieve strategic
objectives and business plans. It links the goals and priorities to
risk management in a way that guides and empowers staff to
serve customers well and achieve financial targets.
Risk appetite framework
The risk appetite framework bolsters effective risk management
by promoting sound risk-taking through a structured approach,
within agreed boundaries. It also ensures emerging risks and
risk-taking activities that would be out of appetite are identified,
assessed, escalated and addressed in a timely manner.
To facilitate this, a detailed annual review of the framework is
carried out. The review includes:
Assessing the adequacy of the framework when compared
to internal and external expectations.
Ensuring the framework remains effective as a strong
control environment for risk appetite.
Assessing the level of embedding of risk appetite across the
organisation.
The Board approves the risk appetite framework annually.
First line of defence – Management and supervision
The first line of defence includes customer franchises,
Technology and Services as well as support and control functions
such as Human Resources, Communications & Marketing and
Finance. Responsibilities include:
Owning, managing and supervising, within a defined risk
appetite, the risks which exist in business areas and support
functions.
Ensuring appropriate controls are in place to mitigate risk,
balancing control, customer service and competitive
advantage.
Ensuring that the culture of the business supports balanced
risk decisions and compliance with policy, laws and
regulations.
Ensuring the business has effective mechanisms for
identifying, reporting and managing risk and controls.
Second line of defence – Oversight and control
The second line of defence includes Risk, Conduct &
Restructuring, RBS Legal, and the financial control element of
RBS’s Finance function. Responsibilities include:
Working with the businesses and functions to develop risk
and control policies, limits and tools for the business to use
in order to discharge its responsibilities.
Overseeing and challenging the management of risks and
controls.
Leading the articulation, design and development of risk
culture and appetite.
Analysing the aggregate risk profile and ensuring that risks
are being managed within risk appetite.
Providing expert advice to the business on risk
management.
Providing senior executives with relevant management
information and reports, and escalating concerns where
appropriate.
Third line of defence – Internal Audit
Responsibilities include:
Providing assurance to the Group Audit Committee that the
main business risks have been identified and effective
controls are in place to manage these risks.
Engaging with management to provide perspectives,
insights and challenge in order to influence the building of a
sustainable bank.
Providing independent assurance to the Financial Conduct
Authority, Prudential Regulation Authority, Central Bank of
Ireland and other key jurisdictional regulators on specific
risks and controls.
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Establishing risk appetite
Our priorities and long-term targets
Risk capacity
Risk appetite for strategic risks
Risk appetite for material risks
Legal entity
risk
appetite
statements
Franchise
risk
appetite
statements
Function
risk
appetite
statements
The effective communication of risk appetite is essential in
embedding appropriate risk-taking into RBS’s culture.
Risk appetite is communicated across RBS through risk appetite
statements. The risk appetite statements provide clarity on the
scale and type of activities that can be undertaken in a manner
that is easily conveyed to staff.
Risk appetite statements consist of qualitative statements of
appetite supported by risk limits and triggers that operate as a
defence against excessive risk-taking. They are established at
RBS-wide level for all strategic risks and material risks, and at
legal entity, franchise, and function level for all other risks.
The annual process of establishing risk appetite statements is
completed alongside the business and financial planning
process. This ensures plans and risk appetite are appropriately
aligned.
The Board sets risk appetite for our most material risks to help
ensure RBS is well placed to meet its priorities and long-term
targets even under challenging economic environments. It is the
basis on which RBS remains safe and sound while implementing
its strategic business objectives.
RBS’s risk profile is frequently reviewed and monitored to ensure
it remains within appetite and that management focus is
concentrated on all strategic risks, material risks and emerging
risk issues. Effective processes are in place for reporting risk
profile relative to risk appetite to the Board and senior
management.
Risk control frameworks and limits
Risk control frameworks and their associated limits are an
integral part of the risk appetite framework and a key part of
embedding risk appetite in day-to-day risk management
decisions. The risk control frameworks manage risk by
expressing a clear tolerance for material risk types that is aligned
to business activities.
The RBS policy framework directly supports the qualitative
aspects of risk appetite, helping to rebuild and maintain
stakeholder confidence in RBS’s risk control and governance. Its
integrated approach is designed to ensure that appropriate
controls, aligned to risk appetite, are set for each of the strategic
and material risks it faces, with an effective assurance process
put in place to monitor and report on performance.
Risk identification and measurement
Risk identification and measurement within the risk management
process comprise:
Regular assessment of the overall risk profile, incorporating
market developments and trends, as well as external and
internal factors.
Monitoring of the risks associated with lending and credit
exposures.
Assessment of trading and non-trading portfolios.
Review of potential risks in new business activities and
processes.
Analysis of potential risks in any complex and unusual
business transactions.
RBS has developed a risk directory which contains details of the
financial and non-financial risks that it faces each day. It provides
a common risk language to ensure consistent terminology is used
across RBS. The risk directory is subject to annual review. This
ensures that the directory continues to provide a comprehensive
and meaningful list of the inherent risks within the businesses.
Risk treatment and mitigation
Risk treatment and mitigation is an important aspect of ensuring
that risk profile remains within risk appetite. Risk mitigation
strategies are discussed and agreed with the businesses.
When evaluating possible strategies, costs and benefits, residual
risks (risks that are retained) and secondary risks (those caused
by the risk mitigation actions) are considered. Monitoring and
review processes are in place to track results.
Information about regulatory developments and discussions is
communicated to each customer-facing business and function.
This helps identify and execute any required mitigating changes
to strategy or to business models.
Early identification and effective management of changes in
legislation and regulation are critical to the successful mitigation
of conduct and regulatory risk. The effects of all changes are
managed to ensure timely compliance readiness. Changes
assessed as having a high or medium-high impact are managed
closely.
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Risk management framework (unaudited) continued
Top and emerging risks that may affect future results and
performance are reviewed and monitored. Action is taken to
mitigate potential risks as and when required. In depth analysis is
carried out, including the stress testing of exposures relative to
the risk.
The Risk & Conduct Assurance Committee ensures a consistent
and fair approach to all aspects of the team’s assurance review
activities. The committee also monitors and validates the ongoing
programme of reviews and tracks the remediation of the more
material review actions.
The Board Risk Committee, Asset & Liability Management
Committee and Executive Risk Forum provide governance and
oversight.
Risk and conduct assurance
Risk & Conduct Assurance is an independent second line of
defence function which provides assurance to both internal and
external stakeholders including the Board, senior management,
risk functions, franchises, Internal Audit and regulators.
The function has three main elements – assurance, model risk
and risk culture. Risk & Conduct Assurance teams perform
quality assurance on targeted credit, market, financial crime and
conduct risk activities. They also review selected key controls
and manage model risk governance and validation activities. In
addition, the Head of Risk & Conduct Assurance oversees the
delivery of work to embed and strengthen RBS’s desired risk
culture.
The Head of Risk & Conduct Assurance also oversees the three
lines of defence model, including relevant principles. For further
information refer to page 154.
Assurance
Qualitative reviews are carried out to assess various risk aspects
as appropriate, including: the quality of risk portfolios, the
accuracy of the Basel Model Inputs and related probability of
default/loss given default classifications, the quality of risk
management practices, policy compliance and adherence to risk
appetite. This can include testing the bank’s credit portfolios and
market risk exposures to assist in early identification of emerging
risks, as well as undertaking targeted reviews to examine specific
concerns raised either by these teams or by their stakeholders.
The adequacy and effectiveness of selected key controls owned
and operated by the Risk function are also tested (with a
particular focus on credit risk and market risk controls). The
team’s remit includes selected controls within the scope of
Section 404 of the US Sarbanes-Oxley Act 2002 as well as
selected controls supporting risk data aggregation and reporting.
Assurance is carried out on Anti-Money Laundering, Sanctions,
and Anti-Bribery & Corruption processes and controls. This helps
inform whether or not the financial crime control environment is
adequate and effective and whether financial crime risk is
appropriately identified, managed and mitigated. Assurance of
conduct policies is predominantly focused on the Risk, Conduct &
Restructuring-owned conduct policies. Targeted work is also
carried out to assist RBS in meeting its promises to customers as
well as its regulatory requirements.
Model risk
Model risk is the risk that a model is specified incorrectly (not
achieving the objective for which it is designed), implemented
incorrectly (an error in translating the model specification into the
version actually used), or being used incorrectly (correctly
specified but applied inappropriately).
RBS uses a variety of models as part of its risk management
process and activities. Key examples include the use of model
outputs to support risk assessments in the credit approval
process, ongoing credit risk management, monitoring and
reporting, as well as the calculation of risk-weighted assets.
Other examples include the use of models to measure market
risk exposures and calculate associated capital requirements, as
well as for the valuation of positions. The models used for stress-
testing purposes also play a key role in ensuring RBS holds
sufficient capital, even in stressed market scenarios.
Model Risk Governance
Model Risk Governance is responsible for setting policy and
providing a governance framework for all of RBS’s models and
related processes. It is also responsible for defining and
monitoring model risk appetite in conjunction with model owners
and model users, monitoring the model risk profile and reporting
on the model population as well as escalating issues to senior
management, through the Model Risk Forum, and the respective
franchise and function risk committees.
Model Risk Management
Model Risk Management performs independent model validation
for material models. It works with individual businesses and
functions to monitor adherence to model risk standards, ensuring
that models are developed and implemented appropriately and
that their operational environment is fit for purpose.
Model Risk Management performs reviews of relevant risk and
pricing models in two instances: (i) for new models or
amendments to existing models and (ii) as part of its ongoing
programme to assess the performance of these models.
Model Risk Management reviews may test and challenge the
logic and conceptual soundness of the methodology, or the
assumptions underlying a model. Reviews may also test whether
or not all appropriate risks have been sufficiently captured as well
as checking the accuracy and robustness of calculations. Based
on the review and findings from Model Risk Management, RBS’s
model or risk committees consider whether a model can be
approved for use. Models used for regulatory reporting may
additionally require regulatory approval before implementation.
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Risk management framework (unaudited) continued
Model Risk Management reassesses the appropriateness of
approved risk models on a periodic basis. Each periodic review
begins with an initial assessment. Based on the initial
assessment, an internal model governance committee will decide
to re-ratify a model or to carry out additional work. In the initial
assessment, Model Risk Management assesses factors such as
a change in the size or composition of the portfolio, market
changes, the performance of – or any amendments to – the
model and the status of any outstanding issues or scheduled
activities carried over from previous reviews.
Model Risk Management also monitors the performance of RBS’s
portfolio of models to ensure that they appropriately capture
underlying business rationale.
For more specific information relating to market risk models and
pricing models, refer to page 218.
Stress testing: capital management
Stress testing is a key risk management tool and a fundamental
component of RBS’s approach to capital management. It is used
to quantify, evaluate and understand the potential impact of
specified changes to risk factors on the financial strength of RBS,
including its capital position. Stress testing includes:
Scenario testing, which examines the impact of a
hypothetical future state to define changes in risk factors;
and
Sensitivity testing, which examines the impact of an
incremental change to one or more risk factors.
The process for stress testing consists of four broad stages:
Define
scenarios
Assess
impact
Calculate
results and
assess
implications
Develop and
agree
management
actions
Identify RBS-specific vulnerabilities and risks.
Define and calibrate scenarios to examine risks
and vulnerabilities.
Formal governance process to agree scenarios.
Translate scenarios into risk drivers.
Assess impact to positions, income and costs.
Impact assessment captures input from across
RBS.
Aggregate impacts into overall results.
Results form part of risk management process.
Scenario results are used to inform RBS’s
business and capital plans.
Scenario results are analysed by subject matter
experts and appropriate management actions are
then developed.
Scenario results and management actions are
reviewed and agreed by senior management
through executive committees including
Executive Risk Forum, Board Risk Committee
and the Board.
Stress testing is used widely across RBS. Key areas are
summarised in the diagram below:
Contingency
planning & management
actions
Financial
performance
assessment
(4)
Risk
Mitigation
Early
warning
indicators
(3)
Risk
Identification
Stress testing
usage within
RBS
Tail-risk
assessment
(2)
Risk
Appetite
(1)
Strategic
Financial
& Capital
Planning
Capital
adequacy
Earnings
volatility
Business
vulnerabilities
analysis
Sector review
& credit limit
setting
Specific areas that involve capital management include:
1) Strategic financial and capital planning: through assessing
the impact of sensitivities and scenarios on the capital plan
and capital ratios.
2) Risk appetite: through gaining a better understanding of the
drivers of – and the underlying risks associated with – risk
appetite.
3) Risk identification: through a better understanding of the
risks that could potentially impact RBS’s financial strength
and capital position.
4) Risk mitigation: through identifying actions that can be taken
to mitigate risks, or could be taken, in the event of adverse
changes to the business or economic environment. Risk
mitigation is substantially supplemented through RBS’s
recovery plan.
Regular reverse stress testing is also carried out. This examines
circumstances that can lead to specific, defined outcomes such
as business failure. Reverse stress testing allows RBS to
examine potential vulnerabilities in its business model more fully.
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Capital sufficiency: going concern forward-looking view
Going concern capital requirements are examined on a forward-
looking basis – including as part of the annual budgeting process
– by assessing the resilience of capital adequacy and leverage
ratios under hypothetical future states. A range of future states
are examined. In particular, capital requirements are assessed:
Based on a forecast of future business performance given
expectations of economic and market conditions over the
forecast period.
Based on a forecast of future business performance under
adverse economic and market conditions over the forecast
period. A range of scenarios of different severity may be
examined.
The examination of capital requirements under normal economic
and market conditions enables RBS to demonstrate how its
projected business performance allows it to meet all internal and
regulatory capital requirements as they arise over the plan
horizon. For example, RBS will assess its ability to issue loss-
absorbing debt instruments in sufficient quantity to meet
regulatory timelines. The cost of issuance will be factored into
business performance metrics.
Stress testing: liquidity
Liquidity risk monitoring and contingency planning
In implementing the liquidity risk management framework, a suite
of tools is used to monitor, limit and stress test the risks on the
balance sheet. Limit frameworks are in place to control the level
of liquidity risk, asset and liability mismatches and funding
concentrations.
Liquidity risks are reviewed at significant legal entity and
business levels daily, with performance reported to the Asset &
Liability Management Committee at least monthly. Liquidity
Condition Indicators are monitored daily which ensures any build-
up of stress is detected early and the response escalated
appropriately through recovery planning.
Internal assessment of liquidity
Under the liquidity risk management framework, RBS maintains
the Individual Liquidity Adequacy Assessment Process (ILAAP).
This includes assessment of net stressed liquidity outflows. RBS
considers a range of extreme but plausible stress scenarios on its
liquidity position over various time horizons, as outlined below.
Type
Description
The examination of capital requirements under adverse economic
and market conditions is assessed through stress testing.
Idiosyncratic
scenario
The results of stress tests are not only used widely across RBS
but also by the regulators to set specific capital buffers. RBS
takes part in a number of stress tests run by regulatory
authorities to test industry-wide vulnerabilities under crystallising
global and domestic systemic risks. In 2017, RBS took part in the
Bank of England stress test. Details of the stress test are set out
on page 160.
Internal assessment of capital adequacy
An internal assessment of material risks is carried out annually to
enable an evaluation of the amount, type and distribution of
capital required to cover these risks. This is referred to as the
Internal Capital Adequacy Assessment Process (ICAAP). The
ICAAP consists of a point-in-time assessment of RBS’s
exposures and risks at the end of the financial year together with
a forward-looking stress capital assessment. The ICAAP is
approved by the Board and submitted to the PRA.
The ICAAP is used to form a view of capital adequacy separately
to the minimum regulatory requirements. The ICAAP is used by
the PRA to make an assessment of RBS-specific capital
requirements through the Pillar 2 framework.
Capital allocation
RBS has mechanisms to allocate capital across its legal entities
and businesses which aim to optimise the utilisation of capital
resources taking into account applicable regulatory requirements,
strategic and business objectives and risk appetite.
The framework for allocating capital is approved by the Asset &
Liability Management Committee.
Governance
Capital management is subject to substantial review and
governance. Formal approval of capital management policies is
either by the Asset & Liability Management Committee or by the
Board on the recommendation of the Board Risk Committee.
The Board approves the capital plans, including those for key
legal entities and businesses as well as the results of the stress
tests relating to those capital plans.
Market-wide
scenario
Combined
scenario
The market perceives RBS to be suffering
from a severe stress event, which results
in an immediate assumption of increased
credit risk or concerns over solvency.
A market stress event affecting all
participants in a market through
contagion, counterparty failure and other
market risks. RBS is affected under this
scenario but no more severely than any
other participants with equivalent
exposure.
This scenario models the combined
impact of an idiosyncratic and market
stress occurring at once. The combined
scenario reflects the contingency that a
severe name-specific event occurs at
RBS in conjunction with a broader market
stress, causing wider damage to the
market and financial sector and severely
affecting funding markets and assets.
RBS uses the most severe combination of these to set the
internal stress testing scenario. The results of this enable RBS to
set its internal liquidity risk appetite, which complements the
regulatory liquidity coverage ratio requirement.
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Risk management framework (unaudited) continued
Stress testing: recovery and resolution planning
The RBS Group maintains a recovery plan that sets out credible
recovery options that could be implemented in the event of a
severe stress to restore its business to a stable and sustainable
condition, focusing on addressing the capital and liquidity position
of the RBS Group and its constituent legal entities.
The recovery plan sets out a range of triggers that activate the
implementation of the recovery plan and sets out the operational
plan for implementation of appropriate recovery options.
The recovery plan is a key component of risk management
including the framework for managing capital.
The recovery plan is prepared and updated annually and
approved by the Board. Following Board approval it is also
submitted to the PRA each year. The recovery plan is assessed
for appropriateness on an ongoing basis, and is maintained in
line with regulatory requirements.
Two significant legal entities, RBS Securities Inc. and The Royal
Bank of Scotland International Limited, maintained separate
recovery plans to address specific risks. These plans were
aligned to the 2017 RBS recovery plan to ensure they operated
consistently in the event of a stress scenario.
Resolution would be implemented if the RBS Group was
assessed by the UK authorities to have failed and the appropriate
regulator placed the RBS Group into resolution. The process of
resolution is owned and implemented by the Bank of England (as
UK Resolution Authority).
The RBS Group is working with UK and global regulators to
ensure that it is compliant with the principles of resolution
planning. This includes, but is not limited to, establishing
appropriate loss-absorbing capacity and ability to maintain
operational continuity in resolution, across all of RBS Group’s
main legal entities, including NatWest Bank Plc. Reflecting the
degree of change required to ensure RBS Group is resolvable, a
multi-year programme in place to develop resolution capability
and meet regulatory requirements.
Stress testing: market risk
Non-traded market risk
Non-traded exposures are reported to the PRA on a quarterly
basis as part of the Stress Testing Data Framework. The return
provides the regulator with an overview of RBS’s banking book
interest rate exposure, providing detailed product information
analysed by interest rate driver and other characteristics –
including accounting classification, currency and, counterparty
type.
Scenario analysis based on hypothetical adverse scenarios is
performed on non-traded exposures as part of the industry-wide
Bank of England and European Banking Authority stress
exercises. In addition, RBS produces its own internal scenario
analysis as part of the financial planning cycles.
Non-traded market risk exposures are capitalised through the
ICAAP. The process covers the following risk types: gap risk,
basis risk, credit spread risk, pipeline risk, structural foreign
exchange risk, prepayment risk and accounting volatility risk. The
ICAAP is completed with a combination of value and earnings
measures. The total non-traded market risk capital requirement is
determined by adding the different charges for each sub risk
type. The ICAAP methodology captures at least ten years of
historical volatility, produced with 99% confidence level.
Methodologies are reviewed by RBS Model Risk and the results
are approved by the Capital Management & Stress Testing
Committee.
Traded market risk
RBS undertakes 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
available-for-sale portfolios.
RBS conducts historical, macroeconomic and vulnerability-based
stress testing. Historical stress testing is a measure that is used
for internal management. Using the historical simulation
framework employed for value-at-risk, the current portfolio is
stressed using historical data since 1 January 2005. This
methodology simulates the impact of the 99.9 percentile loss that
would be incurred by historical risk factor movements over the
period, assuming variable holding periods specific to the risk
factors and the businesses.
Historical stress tests form part of the market risk limit framework
and their results are reported daily to senior management.
Macroeconomic stress tests are carried out periodically as part of
the bank-wide, cross-risk capital planning process. The scenario
narratives are translated into risk factor shocks using historical
events and insights by economists, risk managers and the first
line.
Market risk stress results are combined with those for other risks
into the capital plan presented to the Board. The cross-risk
capital planning process is conducted once a year, with a
planning horizon of five years. The scenario narratives cover both
regulatory scenarios and macroeconomic scenarios identified by
RBS.
Vulnerability-based stress testing begins with the analysis of a
portfolio and expresses its key vulnerabilities in terms of
plausible, vulnerability scenarios under which the portfolio would
suffer material losses. These scenarios can be historical,
macroeconomic or forward-looking/hypothetical. Vulnerability-
based stress testing is used for internal management information
and is not subject to limits. However, the results for relevant
scenarios are reported to senior management.
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Risk management framework (unaudited) continued
Regulatory stress testing
In 2017, the Group participated in a regulatory stress test conducted by the Bank of England. The scenario is hypothetical in nature and
does not represent a forecast of the Group’s future business or profitability. The results of the regulatory stress tests are carefully
assessed by the Group and form part of the wider risk management of the Group.
Bank of England stress test
Designed to assess the resilience of major UK banks to tail risk events. The severity of the test is related to
policymakers’ assessments of risk levels across markets and regions.
Scenario
The 2017 stress test examined the impact over five years of deep simultaneous recessions in the UK and global
economies, large falls in asset prices and a separate stress of misconduct costs. The economic scenario in the test
is more severe than the global financial crisis.
Under the 2017 Bank of England stress test, CET1 ratio reached a low point of 6.4%, below the hurdle rate of 6.7%.
Post the impact of management actions and the conversion of AT1 capital, the Group’s low point CET1 ratio
increased from 6.4% to 7.0%, meeting the hurdle rate but remained below the Systemic Reference Point of 7.4%.
Tier 1 leverage ratio was projected to be 3.7% under stress, above the 3.25% leverage hurdle rate. Post the impact
Results
The stress was based on an end of 2016 balance sheet starting position. Since then, RBS has taken a number of
of management actions and conversion of AT1 capital, the Tier 1 leverage ratio would have been 4.0%.
actions to improve its capital position stress resilience, including the on-going run-down of Capital Resolution RWAs,
the continued reduction in certain credit portfolios and the resolution of various litigation cases and regulatory
investigations.
In light of the steps that RBS has already taken to strengthen its capital position during 2017, the regulator did not
require RBS to submit a revised capital plan.
The 2017 Bank of England stress test results demonstrate that good progress has been made in transforming the
What
does this
mean?
balance sheet to being safe and sustainable.
The reduction in the CET1 ratio from the start point to the minimum stressed ratio before the impact of 'strategic'
management actions or AT1 conversion has improved from 1,000 basis points last year to 700 basis points this year
(pre-strategic management actions).
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Business review Capital and risk management
Capital, liquidity and funding risk
Definitions (unaudited)
Capital consists of reserves and instruments issued that are
available that have a degree of permanency and are capable of
absorbing losses. A number of strict conditions set by regulators
must be satisfied to be eligible to count as capital.
Capital adequacy risk is the risk that there is or will be insufficient
capital and other loss absorbing debt instruments to operate
effectively including meeting minimum regulatory requirements,
operating within Board approved risk appetite and supporting its
strategic goals.
Liquidity consists of assets that can be readily converted to cash
within a short timeframe at a reliable value. Liquidity risk is the
risk of being unable to meet financial obligations as and when
they fall due.
Funding consists of on-balance sheet liabilities that are used to
provide cash to finance assets. Funding risk is the risk of not
maintaining a diversified, stable and cost-effective funding base.
Liquidity and funding risks arise in a number of ways, including
through the maturity transformation role that banks perform. The
risks are dependent on factors such as:
Composition of sources and uses of funding;
The quality and size of the liquidity portfolio;
Maturity profile;
Wholesale market conditions; and
Depositor and investor behaviour.
Sources (unaudited)
Capital
The determination of what instruments and financial resources
are eligible to be counted as capital is laid down by applicable
regulation. Capital is categorised under two tiers (Tier 1 and Tier
2) according to the ability to absorb losses, degree of
permanency and the ranking of absorbing losses on either a
going or gone concern basis. There are three broad categories of
capital across these two tiers:
CET1 capital. CET1 capital must be perpetual and capable
of unrestricted and immediate use to cover risks or losses
as soon as these occur. This includes ordinary shares
issued and retained earnings.
AT1 capital. This is the second type of loss absorbing capital
and must be capable of absorbing losses on a going
concern basis. These instruments are either written down or
converted into CET1 capital when a pre-specified CET1
ratio is reached.
Tier 2 capital. Tier 2 capital is the 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.
Minimum requirement for own funds and eligible liabilities
(MREL)
In addition to capital, other specific loss absorbing instruments –
including senior notes issued by the Group – may be used to
cover certain gone concern capital requirements which, in the
EU, is referred to as MREL. Gone concern refers to the situation
in which resources must be available to enable an orderly
resolution, in the event that the Bank of England (BoE) deems
that the Group has failed.
Liquidity
RBS maintains a prudent approach to the definition of liquidity
resources. Liquidity resources are divided into primary and
secondary liquidity as follows:
Primary liquid assets include cash and balances at central
banks, treasury bills and other high quality government and
US agency bonds.
Secondary liquid assets are eligible as collateral for local
central bank liquidity facilities. These assets include own-
issued securitisations or whole loans that are retained on
balance sheet and pre-positioned with a central bank so that
they may be converted into additional sources of liquidity at
very short notice.
Funding
RBS’s primary funding sources are as follows:
Type
Description
Customer deposits
Wholesale markets
Term debt
Central bank
funding facilities
Licensed deposit-taking entities
operating as PBB, CPB and RBSI
franchises.
Short-term (less than 1 year) unsecured
money markets and secured repo
market funding.
Issuance of long-term (more than 1
year) unsecured and secured debt
securities.
The use of such facilities can be both
part of a wider strategic objective to
support initiatives to help stimulate
economic growth or as part of the
broader liquidity management and
funding strategy.
For further details on capital constituents and the regulatory
framework covering capital, liquidity and funding requirements,
please refer to the RBS Pillar 3 Report 2017 on pages 4 and 8.
For MREL refer to page 161.
Key developments in 2017 (unaudited)
RBS continued to strengthen and de-risk its capital position;
CET1 ratio remains ahead of the 13% target and increased
by 250 basis points in the year end to 15.9% (40 basis
points in Q4 2017), despite absorbing significant litigation
and conduct costs, restructuring costs and disposal losses.
IFRS 9 adoption on 1 January 2018 favourably impacts
CET1 by 30 basis points. RWAs reduced by £27.3 billion to
£200.9 billion reflecting the rundown of NatWest Markets
legacy assets and reductions across other businesses. In
addition, RBS was not required to submit a revised capital
plan following the 2017 Bank of England (BOE) stress
testing exercise.
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Business review Capital and risk management
Capital, liquidity and funding risk continued
CRR leverage ratio increased to 5.3% (2016 – 5.1%). UK
leverage ratio improved to 6.1% (2016 – 5.6%) reflecting
higher central bank balances which are excluded from the
UK framework.
During the year the BOE published indicative data on the
minimum amount of loss-absorbing resources for the larger
UK banks comprising MREL plus buffers. RBS is expected
to require loss-absorbing resources of 24.0% of RWAs by 1
January 2020, rising to 27.8% by 1 January 2022. Total loss
absorbing capital, based on RBS’s interpretation of the rules
and including the benefit of legacy securities, was 27.1% of
RWAs at 31 December 2017.
The liquidity portfolio increased by £22 billion in 2017 to
£186 billion, mainly within primary liquidity which is now
£124 billion (2016 – £95 billion). This build up in liquidity is
driven by TFS participation, increased deposits in the
franchises and Treasury issuance, offset by funding
maturities and calls of securities.
The rise in primary liquidity resulted in higher liquidity
coverage ratio (LCR) and stressed outflow coverage (SOC)
of 152% (2016 – 123%) and 168% (2016 – 139%)
respectively. The increase in LCR reflected preparations for
the settlement of litigation, the rise in the minimum
regulatory requirement from 90% to 100% on 1 January
2018 and preparations for ring-fencing.
The net stable funding ratio rose to 132% (2016 – 121%),
above the minimum target of 100%. The increase in NSFR
was primarily driven by increased available stable funding.
The regulatory agenda continues to rapidly evolve in the UK,
Europe and internationally. RBS manages its capital,
liquidity and funding to meet both current and future
regulatory requirements whilst ensuring that we continue to
serve customers well.
Capital management (unaudited)
Capital management ensures that there is sufficient capital and
other loss absorbing instruments to operate effectively including
meeting minimum regulatory requirements, operating within
Board approved risk appetite, maintaining its credit rating and
supporting its strategic goals.
Capital management is critical in supporting the businesses and
is enacted through an end to end framework across businesses
and the legal entities.
Capital planning is integrated into the Group’s wider annual
budgeting process and is assessed and updated at least monthly.
Regular returns are submitted to the PRA which include a two
year rolling forward view. Other elements of capital management,
including risk appetite and stress testing, are set out on pages
154 and 157.
Produce
capital
plans
Assess
capital
adequacy
Inform
capital
actions
Capital plans are produced for the Group, its
key operating entities and its businesses over
a five year planning horizon under expected
and stress conditions. Stressed capital plans
are produced to support internal stress
testing through the ICAAP or for regulatory
purposes.
Shorter term forecasts are developed
frequently in response to actual performance,
changes in internal and external business
environment and to manage risks and
opportunities.
Capital plans are developed to maintain
capital of sufficient quantity and quality to
support the Group’s business and strategic
plans over the planning horizon within
approved risk appetite, as determined via
stress testing, and minimum regulatory
requirements.
Capital resources and capital requirements
are assessed across a defined planning
horizon.
Impact assessment captures input from
across the Group including from businesses.
Capital planning informs potential capital
actions including managing capital through
buy backs, redemptions or through new
issuance to external investors or via internal
transactions.
Decisions on capital actions will be
influenced by strategic and regulatory
requirements, the cost and prevailing market
conditions.
As part of capital planning, the Group will
monitor its portfolio of external capital
securities and assess the optimal blend and
most cost effective means of financing.
Capital planning is one of the tools that the Group uses to
monitor and manage capital risk on a going and gone concern
basis, including the risk of excessive leverage.
Liquidity and funding management follows a similar process to
that outlined above for capital.
Liquidity portfolio management (unaudited)
The size of the portfolio is determined by referencing RBS’s
liquidity risk appetite. RBS retains a prudent approach to setting
the composition of the liquidity portfolio, which is subject to
internal policies and limits over quality of counterparty, maturity
mix and currency mix.
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Business review Capital and risk management
Treasury has commenced the transfer of the existing liquidity
portfolio from RBS plc into National Westminster Bank Plc (where
the majority of the UK DoLSub liquidity portfolio will be held post
ring-fencing) to ensure appropriate levels of liquidity are held in
both RBS plc and the UK DoLSub.
The size of the liquidity portfolio to be held by the future NatWest
Markets plc should not be considered comparable to that held by
the current RBS plc.
For further information, please refer to RBS Group ring-fencing
on page 109.
Funding risk management (unaudited)
RBS manages funding risk through a comprehensive framework
which measures and monitors the funding risk on the balance
sheet.
The asset and liability types broadly match. Customer deposits
provide more funding than customer loans utilise; repurchase
agreements are largely covered by reverse repurchase
agreements; interbank lending and funding largely nets off and
derivative assets are broadly netted against derivative liabilities.
Capital, liquidity and funding risk continued
RBS categorises its liquidity portfolio, including its locally
managed liquidity portfolios, into primary and secondary liquid
assets. The majority of the portfolio is centrally managed by RBS
Treasury, for which the RBS Treasurer is responsible. This
portfolio is held in the PRA regulated UK Domestic Liquidity
Subgroup (UK DoLSub) comprising RBS’s five licensed deposit
taking UK banks: The Royal Bank of Scotland plc, National
Westminster Bank Plc, Ulster Bank Limited, Coutts & Co and
Adam & Company PLC.
Two of RBS's significant operating subsidiaries, RBS N.V. and
Ulster Bank Ireland DAC, hold locally managed portfolios that
comply with local regulations that may differ from PRA rules.
The liquidity value of the portfolio is determined by taking current
market prices and applying a discount or haircut, to give a
liquidity value that represents the amount of cash that can be
generated by the asset.
Separate from the liquidity portfolio, RBS holds high quality
assets to meet payment systems collateral requirements; these
are managed by RBS Treasury.
Ring-fencing implications
As a result of the legal entity restructuring in response to the UK
government’s ring-fencing legislation, the current Royal Bank of
Scotland plc (expected to be renamed NatWest Markets plc at
the time of the RFTS during the first half of 2018) will separately
hold and manage its own liquidity portfolio outside of the ring-
fenced group. It will cease to form part of the UK DoLSub at a
point in time in the second half of 2018 (subject to regulatory
agreement). RBS International will begin to hold its own liquidity
portfolio and RBS N.V. and UBI DAC will continue to hold
separate liquidity to meet local regulatory requirements.
163
Business review Capital and risk management
Capital, liquidity and funding risk continued
Minimum requirements (unaudited)
Capital adequacy ratios
The Group is subject to minimum requirements in relation to the amount of capital it must hold in relation to its RWAs. The table below
summarises the minimum ratios of capital to RWAs that the Group is expected to have to meet once CRR is fully implemented by 1
January 2019. These ratios apply at the consolidated group level. Different minimum capital requirements may apply to individual legal
entities or sub-groups.
Minimum requirements
Type
CET1
Total Tier 1
Total capital
System wide
Pillar 1 minimum requirements
Capital conservation buffer
UK countercyclical capital buffer (1)
G-SIB buffer (2)
Pillar 2A(4)
Bank specific
Total (excluding PRA buffer)(5)
4.5%
2.5%
1.0%
1.0%
2.1%
6.0%
2.5%
1.0%
1.0%
2.9%
8.0%
2.5%
1.0%
1.0%
3.8%
11.1%
13.4%
16.3%
Notes:
(1) The countercyclical capital buffer (CCyB) applied to UK designated assets is set by the Financial Policy Committee (FPC). The UK CCyB may be set between 0% and 2.5% and
is linked to the state of the UK economy. The Bank of England’s Financial Policy Committee (FPC) increased the UK CCyB from 0.0% to 0.5%, with effect from June 2018;
subsequently in November 2017 the FPC announced a further increase to 1.0% effective November 2018. The estimated own funds impact for the Group, based on the CCyB
rate of 1.0% and 31 December 2017 exposures, was £1,343 million. Foreign exposures may be subject to different CCyBs depending on the CCyB rate set in the jurisdiction of
the foreign exposure.
(2) Globally systemically important banks (G-SIBs), as designated by the Financial Stability Board (FSB), are subject to an additional capital buffer of between 1% and 3.5%. Based
on the most recent determination of the FSB, the Group is subject to an additional capital requirement of 1.0%
(3) The Group will be subject to a systemic risk buffer (SRB) of between 0% and 3%. The SRB will apply from 1 January 2019 and will apply at the ring-fenced bank sub-group level
rather than at the consolidated group level. The SRB may require the Group to hold a minimum amount of capital at the consolidated group level beyond the levels set out in the
table above.
(4) From 1 January 2015, RBS has been required to meet at least 56% of its Pillar 2A capital requirement with CET1 capital and with balance with Additional Tier 1 and/or Tier 2
capital. Additional capital requirements under Pillar 2A may be specified by the PRA as a ratio or as an absolute value. The table sets out an implied ratio to cover the full value of
Pillar 2A requirements. The PRA has recently determined that the Pillar 2A capital requirement for 2018 remains unchanged.
(5) The Group may be subject to a PRA buffer requirement as set by the PRA. The PRA buffer consists of two components:
- A risk management and governance buffer that is set as a scalar of the Pillar 1 and Pillar 2A requirements. The scalar could range between 10% and 40%.
- A buffer relating to the results of the BoE concurrent stress testing results.
The PRA requires that the level of this buffer is not publicly disclosed.
(6) The capital conservation buffer, the countercyclical capital buffer, the G-SIB buffer and systemic risk buffer (where applicable) make up the combined buffer. If the Group fails to
meet the combined buffer requirement, it is subject to restrictions on distributions on CET1 instruments, discretionary coupons on AT1 instruments and on payment of variable
remuneration or discretionary pension benefits. These restrictions are calculated by reference to the Group’s Maximum Distributable Amount (MDA). The MDA trigger is below the
PRA buffer and MDA restrictions are not automatically triggered if the Group fails to meet its PRA buffer. The MDA is calculated as the amount of interim or year-end profits not
yet incorporated into CET1 capital multiplied by a factor ranging from 0 to 0.6 depending on the size of the CET1 shortfall against the combined buffer.
Leverage ratios
The table below summarises the minimum ratios of capital to leverage exposure under the PRA UK leverage framework that the Group
must meet. In November 2016, the European Commission published a package of legislative proposals (CRR 2) for the adoption of a
legally binding 3% of Tier 1 capital minimum leverage ratio with consideration of a leverage buffer ratio for G-SIBs once a final
international agreement had been reached. Different minimum requirements may apply to individual legal entities or sub-groups.
Type
Minimum ratio
UK countercyclical leverage ratio buffer
Additional leverage ratio buffer
Total
CET1
Total Tier 1
2.4375%
0.00%
0.35%
2.7875%
3.25%
0.00%
0.35%
3.60%
Notes:
(1) The countercyclical leverage ratio buffer is set at 35% of the Group’s CCyB. As noted above this buffer may be set between 0% and 2.5% and the Financial Policy Committee
(FPC) increased the rate from 0.0% to 0.5% effective June 2018; subsequently in November 2017 the FPC announced a further increase to 1% effective November 2018. The
applicable ratio for foreign exposures may be different. On 3 October 2017 the PRA, via revised policy statement (PS21/17), increased the Tier 1 leverage ratio requirement for
UK banks by 25 basis points to 3.25% (CET1 requirement of 2.4375%). The PRA minimum leverage ratio requirement is supplemented with a G-SIB additional leverage ratio
buffer, currently 0.175% under transitional arrangements (31 December 2016 – 0.13125%) increasing to 0.35% at the end point, and countercyclical capital buffer of 0.0%.
Liquidity and funding ratios
The table below summarises the minimum requirements for key liquidity and funding metrics, under the relevant legislative framework.
Type
Liquidity coverage ratio (LCR) (1)
Net stable funding ratio (NSFR) (2)
From 1 January 2017
From 1 January 2018
90%
N/A
100%
100%
Notes:
(1) On 1 October 2015 the LCR became the PRA’s primary regulatory liquidity standard. It is a Pillar 1 metric to which the PRA apply Pillar 2 add-ons. The minimum ratio above
excludes Pillar 2 add-ons.
(2) BCBS issued its final recommendations for the implementation of the net stable funding ratio in October 2014, proposing an implementation date of 1 January 2018 by which time
banks are expected to meet and maintain a ratio of 100%. In November 2016, the European Commission (EC) included a net stable funding ratio of 100% as part of the CRR 2
package of legislative proposals. The timing of a binding NSFR coming into force in the European Union and United Kingdom remains subject to uncertainty. In the meantime,
RBS uses the definitions from the BCBS guidelines, and its own interpretations, to calculate the NSFR. RBS’s ratio may not be comparable with those of other financial
institutions.
164
Business review Capital and risk management
Capital, liquidity and funding risk continued
Measurement
Capital and leverage: Key metrics (unaudited)
Capital, RWAs and capital adequacy ratios, on the basis of end-point Capital Requirements Regulation (CRR) and transitional rules,
calculated in accordance with PRA definitions, are set out below.
2017
2016
End-point
PRA transitional
End-point
PRA transitional
Capital
CET1
Tier1
Total
RWAs
Credit risk
- non-counterparty
- counterparty
Market risk
Operational risk
Total RWAs
Capital adequacy ratios
CET1
Tier 1
Total
Leverage ratios
Tier 1 capital (£bn)
CRR leverage exposure (£bn)
CRR leverage ratio (%)
Average Tier 1 capital (£bn) (2)
Average leverage exposure (£bn) (2)
Average leverage ratio (%) (2)
CRR basis (1)
£bn
32.0
36.0
42.8
144.7
15.4
17.0
23.8
200.9
%
15.9
17.9
21.3
2017
36.0
679.1
5.3%
36.4
692.5
5.3%
basis
£bn
32.0
39.6
47.9
144.7
15.4
17.0
23.8
200.9
%
15.9
19.7
23.9
39.6
679.1
5.8%
40.0
692.5
5.8%
CRR basis (1)
£bn
30.6
34.7
43.8
162.2
22.9
17.4
25.7
228.2
%
13.4
15.2
19.2
2016
34.7
683.3
5.1%
38.0
712.1
5.3%
basis
£bn
30.6
40.4
52.3
162.2
22.9
17.4
25.7
228.2
%
13.4
17.7
22.9
40.4
683.3
5.9%
43.7
712.1
6.1%
UK leverage ratio
Notes:
(1) CRR as implemented by the Prudential Regulation Authority in the UK, with effect from 1 January 2014. All regulatory adjustments and deductions to CET1 have been applied in
6.7%
6.1%
5.6%
6.6%
full for both bases with the exception of unrealised gains on available-for-sale securities which has been included from 2015 under the PRA transitional basis.
(2) Based on 3 month average of month end leverage exposure and Tier 1 Capital.
Measures in relation to end-point CRR basis, including RWAs, are based on the current interpretation, expectations, and understanding, of the CRR requirements, as well as further
regulatory clarity and implementation guidance from the UK and EU authorities (end-point CRR basis).
Capital base:
Own funds are based on shareholders’ equity. The adjustment arising from the application of the prudent valuation requirements to all assets measured at fair value, has been
included in full. Additional valuation adjustments relating to unearned credit spreads on exposures under the advanced internal ratings approach has been included in the
determination of the expected loss amount deducted from CET1. Where the deductions from AT1 capital exceed AT1 capital, the excess is deducted from CET1 capital. Based on
our current interpretations of the Commission Delegated Regulation issued in December 2013 on credit risk adjustments, RBS’s standardised latent provision has been reclassified to
specific provision and is not included in Tier 2 capital.
RWAs:
Current securitisation positions are shown as risk-weighted at 1,250%. RWA uplifts include the impact of credit valuation adjustments and asset valuation correlation on large
financial sector entities. RWAs reflect implementation of the full internal model method suite, and include methodology changes that took effect immediately on CRR implementation.
Counterparties which meet the eligibility criteria under CRR are exempt from the credit valuation adjustments volatility charges
Liquidity key metrics (unaudited)
The table below sets out the key liquidity and related metrics monitored by RBS.
Liquidity portfolio
Liquidity coverage ratio (1)
Stressed outflow coverage (2)
Net stable funding ratio (3)
Loan:deposit ratio
2017
£186bn
152%
168%
132%
88%
2016
£164bn
123%
139%
121%
91%
Notes:
(1) On 1 October 2015 the LCR became the PRA’s primary regulatory liquidity standard. It is a Pillar 1 metric to which the PRA apply Pillar 2 add-ons. The published LCR excludes
Pillar 2 add-ons. RBS calculates the LCR using its own interpretations of the EU LCR Delegated Act, which may change over time and may not be fully comparable with those of
other financial institutions.
(2) RBS's stressed outflow coverage (SOC) is measured by reference to the liquidity portfolio as a percentage of stressed contractual and behavioural outflows over three months
under the worst of three severe stress scenarios of a market-wide stress, an idiosyncratic stress and a combination of both in RBS’s ILAAP. This assessment is performed in
accordance with PRA guidance.
(3) BCBS issued its final recommendations for the implementation of the net stable funding ratio in October 2014, proposing an implementation date of 1 January 2018 by which
time banks are expected to meet and maintain a ratio of 100%. In November 2016, the European Commission (EC) included a net stable funding ratio of 100% as part of the
CRR 2 package of legislative proposals. The timing of a binding NSFR coming into force in the European Union and United Kingdom remains subject to uncertainty. In the
meantime, RBS uses the definitions from the BCBS guidelines, and its own interpretations, to calculate the NSFR. RBS’s ratio may not be comparable with those of other
financial institutions.
165
Business review Capital and risk management
Capital, liquidity and funding risk continued
Capital and leverage: Capital resources
Shareholders’ equity (excluding non-controlling interests)
Shareholders’ equity
Preference shares - equity
Other equity instruments
Regulatory adjustments and deductions
Own credit
Defined benefit pension fund adjustment
Cash flow hedging reserve
Deferred tax assets
Prudential valuation adjustments
Goodwill and other intangible assets
Expected losses less impairments
Other regulatory adjustments
CET1 capital
Additional Tier 1 (AT1) capital
Eligible AT1
Qualifying instruments and related share premium subject to phase out
Qualifying instruments issued by subsidiaries and held by third parties
AT1 capital
Tier 1 capital
Qualifying Tier 2 capital
Qualifying instruments and related share premium
Qualifying instruments issued by subsidiaries and held by third parties
Tier 2 capital
Total regulatory capital
2017
2016
End-point
CRR basis (1)
£m
PRA
transitional
basis (1)
£m
End-point
CRR basis (1)
£m
PRA
transitional
basis (1)
£m
48,330
(2,565)
(4,058)
41,707
(90)
(287)
(227)
(849)
(496)
(6,543)
(1,286)
28
(9,750)
48,330
(2,565)
(4,058)
41,707
(90)
(287)
(227)
(849)
(496)
(6,543)
(1,286)
28
(9,750)
48,609
(2,565)
(4,582)
41,462
(304)
(208)
(1,030)
(906)
(532)
(6,480)
(1,371)
(8)
48,609
(2,565)
(4,582)
41,462
(304)
(208)
(1,030)
(906)
(532)
(6,480)
(1,371)
(8)
(10,839)
(10,839)
31,957
31,957
30,623
30,623
4,041
—
—
4,041
4,041
3,416
140
7,597
4,041
—
—
4,041
4,041
5,416
339
9,796
35,998
39,554
34,664
40,419
6,396
369
6,765
6,501
1,876
8,377
6,893
2,268
9,161
42,763
47,931
43,825
7,066
4,818
11,884
52,303
Note:
(1) The Group’s Tier 1 grandfathering cap is set at £4.8 billion for 2017 (2016 - £5.8 billion).
The table below analyses the movement in end-point CRR CET1, AT1 and Tier 2 capital for the year.
At 1 January 2017
Profit for the year
Own credit
Share capital and reserve movements in respect of employee
share schemes
Ordinary shares issued
Foreign exchange reserve
Available-for-sale reserves
Goodwill and intangibles deduction
Deferred tax assets
Prudential valuation adjustments
Expected loss over impairment provisions
Capital instruments issued
Net dated subordinated debt/grandfathered instruments
Foreign exchange movements
Other movements
At 31 December 2017
CET1
£m
30,623
AT1
£m
4,041
Tier 2
£m
9,161
752
214
139
300
82
17
(63)
57
36
85
(1,968)
(428)
(285)
31,957
4,041
6,765
Total
£m
43,825
752
214
139
300
82
17
(63)
57
36
85
(1,968)
(428)
(285)
42,763
166
Business review Capital and risk management
Capital, liquidity and funding risk continued
Leverage exposure (unaudited)
The leverage exposure is based on the CRR Delegated Act.
Leverage
Derivatives
Loans and advances
Reverse repos
Other assets
Total assets
Derivatives
- netting
- potential future exposures
Securities financing transactions gross up
Undrawn commitments (analysis below)
Regulatory deductions and other adjustments
Leverage exposure
End-point CRR basis
2017
£bn
160.8
339.4
40.7
197.2
738.1
(161.7)
49.4
2.3
53.1
(2.1)
679.1
2016
£bn
247.0
340.3
41.8
169.6
798.7
(241.7)
65.3
2.3
58.6
0.1
683.3
Note:
(1) The UK leverage ratio excludes central bank claims from the leverage exposure where deposits held are denominated in the same currency and of contractual maturity that is
equal or longer than that of the central bank claims.
Weighted undrawn commitments (unaudited)
The table below provides a breakdown of weighted undrawn commitments.
Unconditionally cancellable credit cards
Other Unconditionally cancellable items
Unconditionally cancellable items (1)
Undrawn commitments <1 year which may not be cancelled
Other off-balance sheet items with 20% credit conversion factor (CCF)
Items with a 20% CCF
Revolving credit risk facilities
Term loans
Mortgages
Other undrawn commitments >1 year which may not be cancelled & off-balance sheet
Items with a 50% CCF
Items with a 100% CCF
Total
Note:
(1) Based on a 10% CCF.
2017
£bn
2.1
4.7
6.8
1.8
0.6
2.4
27.0
3.6
—
2.1
32.7
11.2
53.1
2016
£bn
2.4
7.7
10.1
1.8
0.9
2.7
27.2
3.1
0.1
3.3
33.7
12.1
58.6
167
Business review Capital and risk management
Capital, liquidity and funding risk continued
Loss absorbing capital (unaudited)
The following table illustrates the components of estimated loss absorbing capital (LAC) in RBSG plc and operating subsidiaries and
includes external issuances only. The table is prepared on a transitional basis, including the benefit of regulatory capital instruments
issued from operating companies, to the extent they meet MREL criteria. For further details regarding regulatory requirements in relation
to MREL, refer to page 161.
The roll-off profile relating to senior debt and subordinated debt instruments is set out on the next page.
CET1 capital (4)
Tier 1 capital: end-point CRR compliant AT1
of which: RBSG (holdco)
of which: RBSG operating subsidiaries (opcos)
Tier 1 capital: non end-point CRR compliant
of which: holdco
of which: opcos
Tier 2 capital: end-point CRR compliant
of which: holdco
of which: opcos
Tier 2 capital: non end-point CRR compliant
of which: holdco
of which: opcos
Senior unsecured debt securities issued by:
RBSG holdco
RBS opcos
Total
RWAs
Leverage exposure
LAC as a ratio of RWAs
LAC as a ratio of leverage exposure
2017
2016
Par
value (1)
£bn
32.0
Balance
sheet
value
£bn
32.0
Regulatory
LAC
Par
value (2)
value (3)
value (1)
£bn
32.0
£bn
32.0
£bn
30.6
Balance
sheet
value
£bn
30.6
Regulatory
LAC
value (2)
value (3)
£bn
30.6
£bn
30.6
4.0
—
4.0
3.5
0.1
3.6
6.5
2.3
8.8
0.3
2.1
2.4
4.0
—
4.0
3.6
0.1
3.7
6.5
2.4
8.9
0.4
2.3
2.7
9.3
14.4
23.7
74.5
9.2
14.7
23.9
75.2
4.0
—
4.0
3.5
0.1
3.6
6.4
0.5
6.9
0.1
1.5
1.6
—
—
—
4.0
—
4.0
2.6
0.1
2.7
4.9
0.5
5.4
0.1
2.0
2.1
8.3
—
8.3
48.1
54.5
200.9
679.1
27.1%
8.0%
4.0
—
4.0
5.5
0.3
5.8
6.9
6.0
4.0
—
4.0
5.6
0.3
5.9
7.0
6.4
4.0
—
4.0
5.5
0.3
5.8
6.9
4.0
4.0
—
4.0
4.0
0.3
4.3
5.3
5.6
12.9
13.4
10.9
10.9
0.4
2.5
2.9
6.9
14.8
21.7
77.9
0.4
2.7
3.1
6.8
15.0
21.8
78.8
0.2
2.1
2.3
—
—
—
0.1
2.1
2.2
5.0
—
5.0
53.6
57.0
228.2
683.3
24.9%
8.3%
Notes:
(1) Par value reflects the nominal value of securities issued.
(2) Regulatory capital instruments issued from operating companies are included in the transitional LAC calculation, to the extent they meet the MREL criteria.
(3) LAC value reflects RBS’s interpretation of the Bank of England’s policy statement on the minimum requirements for own funds and eligible liabilities (MREL), published in
November 2016. MREL policy and requirements remain subject to further potential development, as such RBS estimated position remains subject to potential change. Liabilities
excluded from LAC include instruments with less than one year remaining to maturity, structured debt, operating company senior debt, and other instruments that do not meet
the MREL criteria. Includes Tier 1 and Tier 2 securities prior to incentive to redeem.
(4) Corresponding shareholders’ equity was £48.3 billion (2016 - £48.6 billion).
(5) Regulatory amounts reported for AT1, Tier 1 and Tier 2 instruments are before grandfathering restrictions imposed by CRR.
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Business review Capital and risk management
Capital, liquidity and funding risk continued
Roll-off profile (unaudited)
The following table illustrates the roll-off profile and weighted average spreads of RBS’s major wholesale funding programmes.
Senior debt roll-off profile (1)
RBSG
- amount (£m)
- weighted average rate spread (bps)
RBS plc
- amount (£m)
- weighted average rate spread (bps)
RBS N.V.
- amount (£m)
- weighted average rate spread (bps)
Securitisation
- amount (£m)
- weighted average rate spread (bps)
Covered bonds
- amount (£m)
- weighted average rate spread (bps)
Total notes issued (£m)
Weighted average spread
Subordinated debt instruments roll-off profile (2)
RBSG (£m)
RBS plc (£m)
NatWest Plc (£m)
RBS N.V. (£m)
UBI DAC (£m)
Total (£m)
As at and
for year ended
31 December
Roll-off profile
2017
H1 2018
H2 2018
9,208
202
59
172
25
171
2019
1,289
205
2020
2021 & 2022
2023 & later
3
162
7
224
14,624
116
5,105
188
1,651
244
2,521
84
2,863
24
1,117
202
24
114
396
1,080
6,307
125
22
125
—
—
923
137
—
—
—
—
—
—
—
—
—
—
—
—
30,559
156
6,109
231
1,676
141
3,810
117
6,850
2,652
1,143
881
76
11,602
92
1,888
694
142
—
2,816
265
111
—
—
—
376
915
37
—
214
—
1,166
2
5
—
—
3,169
99
6,037
211
—
101
—
11
—
112
—
—
—
—
—
—
1,124
42
1,625
288
449
—
—
2,362
7,825
201
1,367
201
—
—
396
1,080
2,215
157
11,803
85
3,953
227
—
514
76
4,770
Notes:
(1) Based on final contractual instrument maturity.
(2) Based on first call date of instrument, however this does not indicate RBS’s strategy on capital and funding management. The table above does not include debt accounted Tier
1 instruments although those instruments form part of the total subordinated debt balance.
(3) The weighted average spread reflects the average net funding cost to RBS and is calculated on an indicative basis.
(4) The roll-off table is based on sterling-equivalent balance sheet values.
Risk-weighted assets (unaudited)
The table below analyses the movement in credit risk RWAs on the end-point CRR basis during the year, by key drivers.
At January 2017
Foreign exchange movement
Business movements
Risk parameter changes (1)
Methodology changes
Model updates
At 31 December 2017
Credit risk RWAs
Non-counterparty
£bn
Counterparty
£bn
Market
Operational
162.2
(0.6)
(10.2)
(2.4)
(4.3)
—
144.7
22.9
(0.6)
(7.0)
0.1
15.4
17.4
(0.6)
0.2
17.0
25.7
(1.9)
23.8
Note:
(1)
PD model changes relating to counterparty risks are included with risk parameter changes in line with EBA Pillar 3 Guidelines issued in December 2016.
Total
£bn
228.2
(1.2)
(19.7)
(2.3)
(4.3)
0.2
200.9
169
Business review Capital and risk management
Capital, liquidity and funding risk continued
RWAs by segment (unaudited)
The chart below illustrates the concentration of risk-weighted assets by segment.
The table below analyses the movement in end-point CRR RWAs by segment during the year.
Group 100%
Group
Credit Risk
Market Risk
Operational Risk
%
79.7
8.5
11.8
UK PBB
21.4%
UK PBB
Credit Risk
Market Risk
Operational Risk
%
16.8
-
4.6
Ulster Bank RoI
9.0%
Commercial Banking
35.7%
Private Banking
4.5%
Credit Risk
Market Risk
Operational Risk
%
8.6
-
0.4
Credit Risk
Market Risk
-
Operational Risk
%
32.6
-
3.2
Credit Risk
Market Risk
Operational Risk
%
4.0
-
0.5
RBS International
2.5%
Credit Risk
Market Risk
Operational Risk
%
2.2
-
0.3
Natwest
Capital Resolution
Markets
15.1%
26.4%
Credit Risk
Market Risk
Operational Risk
%
15.7
8.1
2.6
Williams & Glyn 4.2%
Central items & other
0.5%
Credit Risk
Market Risk
Operational Risk
%
‐
0.4
0.1
Total RWAs
At January 1 2017*
Foreign exchange movement
Business movements
Risk parameter changes (1)
Methodology changes
Model updates
At 31 December 2017
Credit risk
- non-counterparty
- counterparty
Market risk
Operational risk
Total RWAs
Ulster
Bank
RoI
£bn
18.1
0.5
—
(0.6)
—
—
18.0
16.9
0.1
0.1
0.9
18.0
UK PBB
£bn
42.3
—
0.6
0.1
—
—
43.0
33.7
—
—
9.3
43.0
Commercial
Banking
£bn
78.5
(0.4)
(3.9)
(2.4)
—
—
71.8
65.4
—
—
6.4
71.8
Private
Banking
£bn
8.6
—
0.5
—
—
—
9.1
8.1
—
—
1.0
9.1
RBSI
£bn
9.5
—
—
—
(4.4)
—
5.1
4.4
—
—
0.7
5.1
NatWest
Markets
£bn
69.7
(1.3)
(16.4)
0.6
0.1
0.2
52.9
16.1
15.3
16.2
5.3
52.9
Central
items
& other
£bn
1.5
—
(0.5)
—
—
—
1.0
0.1
—
0.7
0.2
1.0
Total
£bn
228.2
(1.2)
(19.7)
(2.3)
(4.3)
0.2
200.9
144.7
15.4
17.0
23.8
200.9
* Re-presented to reflect segment reorganisation.
Notes:
(1) Risk parameter changes relate to changes in credit quality metrics of customers and counterparties such as probability of default (PD) and loss given default (LGD) as well as
IRB model changes relating to counterparty credit risk (in line with EBA Pillar 3 Guidelines).
Key points (unaudited)
RWAs decreased by £27.3 billion during the year with
reductions across all risk types but primarily in non-
counterparty credit risk (£17.5 billion) driven by reduced
asset size and limit reductions in both NatWest Markets
and Commercial Banking.
The decrease in NatWest Markets primarily reflects
reductions in the legacy business as it moved towards
closure and lower counterparty credit risk resulting from
mitigation activities.
There has been a reduction in net lending in Commercial
Banking as a result of growth in targeted segments being
more than offset by active management of the lending
book.
During the year RBSI received regulatory approval to
adopt the advanced internal ratings based approach on
the wholesale corporate book, which led to an RWA
reduction of £4.4 billion.
In both UK PBB and Private Banking there has been
growth in mortgage lending which has increased RWAs.
Risk metric improvements in Ulster Bank RoI have been
offset by foreign currency movements.
170
Business review Capital and risk management
Capital, liquidity and funding risk continued
Liquidity portfolio
The table below shows the liquidity portfolio by product, liquidity value and carrying value. Liquidity value is lower than carrying value as
it is stated after discounts (or haircuts) applied to instruments by the Bank of England and other central banks.
31 December
2017
Liquidity value
2016
Average
31 December
Average
Cash and balances at central banks
Central and local government bonds
AAA rated governments
AA- to AA+ rated governments
and US agencies
Below AA rated governments
Local government
Primary liquidity
Secondary liquidity (2)
Total liquidity value
UK
DoLSub (1)
£m
Total
£m
91,377 2,280 93,657 76,386 79,425 66,598 2,542 69,140 56,772 59,489
Other
£m
Other
£m
UK
Total DoLSub (1)
£m
£m
UK
Total DoLSub (1)
£m
£m
UK
Total DoLSub (1)
£m
£m
2,760 1,184
3,944
4,074
5,049
3,936 1,331
5,267
3,692
4,539
24,084 2,149 26,233 20,849 22,717 19,348 1,244 20,592 18,757 21,106
—
—
— —
— —
237
—
—
—
—
—
237
—
—
—
—
—
—
—
26,844 3,333 30,177 24,923 27,766 23,284 2,812 26,096 22,449 25,645
118,221 5,613 123,834 101,309 107,191 89,882 5,354 95,236 79,221 85,134
683 68,690 65,588 66,774
411 62,555 61,577 62,114 68,007
62,144
180,365 6,024 186,389 162,886 169,305 157,889 6,037 163,926 144,809 151,908
Total carrying value
203,733 6,159 209,892
184,136 6,209 190,345
Notes:
(1) The PRA regulated UK DoLSub comprising RBS’s five licensed deposit-taking UK banks: The Royal Bank of Scotland plc, National Westminster Bank Plc, Ulster Bank Limited,
Coutts & Co and Adam & Company PLC. In addition, certain of RBS’s significant operating subsidiaries, RBS N.V. and Ulster Bank Ireland DAC, hold managed portfolios that
comply with local regulations that may differ from PRA rules.
(2) Comprises assets eligible for discounting at the Bank of England and other central banks.
The table below shows the liquidity value of the liquidity portfolio by currency.
Total liquidity portfolio
2017
2016
GBP
£m
138,985
128,614
USD
£m
11,491
9,582
EUR
£m
34,442
24,833
Other
£m
1,471
897
Total
£m
186,389
163,926
171
Business review Capital and risk management
Capital, liquidity and funding risk continued
Funding sources
The table below shows the carrying values of the principal funding sources based on contractual maturity.
By product
Deposits by banks
Derivative cash collateral
Other deposits (1)
Debt securities in issue
Commercial paper and certificates of deposit
Medium-term notes
Covered bonds
Securitisations
Subordinated liabilities
Notes issued
Wholesale funding
Customer deposits
Derivative cash collateral (2)
Financial institution deposits
Personal deposits
Corporate deposits
Total customer deposits
Total funding excluding repos
Total repos
Central and other banks
Other financial institutions
Other corporate
Short-term
less than
1 year
£m
12,404
7,480
19,884
4,637
2,316
987
—
7,940
2,383
10,323
30,207
10,279
52,284
173,314
127,708
363,585
393,792
38,421
7,419
25,480
5,522
2017
Long-term
more than
1 year
£m
Total
£m
—
19,595
19,595
12,404
27,075
39,479
—
4,637
16,902
19,218
5,321
396
22,619
10,339
32,958
52,553
6,308
396
30,559
12,722
43,281
82,760
Short-term
less than
1 year
£m
20,674
6,130
26,804
3,205
3,388
96
—
6,689
1,062
7,751
34,555
—
1,091
1,497
10,279
53,375
174,811
861
128,569
11,487
52,292
162,958
123,495
3,449
367,034
350,232
2016
Long-term
more than
1 year
£m
—
6,513
6,513
3
15,233
3,839
1,481
20,556
18,357
38,913
45,426
—
668
1,877
1,095
3,640
Total
£m
20,674
12,643
33,317
3,208
18,621
3,935
1,481
27,245
19,419
46,664
79,981
11,487
52,960
164,835
124,590
353,872
56,002
449,794
384,787
49,066
433,853
—
—
—
—
38,421
7,419
25,480
5,522
32,335
5,239
25,652
1,444
—
—
—
—
32,335
5,239
25,652
1,444
Total funding including repos
432,213
56,002
488,215
417,122
49,066
466,188
Notes:
(1) Includes £19.0 billion (2016 - £5.0 billion) relating to TFS participation and £1.8 billion (2016 - £1.3 billion) relating to RBS’s participation in central bank financing operations
under the European Central Bank’s Targeted Long Term Refinancing Operations.
(2) Cash collateral includes £9,113 million (2016 - £10,002 million) from financial institutions.
Key points
During 2017, RBS issued new debt securities of £12.2
billion including:
o
o
o
£3.6 billion of MREL-eligible senior debt by RBSG
plc, bring the total issuance in 2016 and 2017 to
£7.8 billion;
£2.4 billion of covered bonds by RBS plc, the first
such issuance for RBS since 2012; and
£1.1 billion of senior unsecured notes issued by
RBS plc to support the future standalone
operations of NatWest Markets plc.
o Other issuance of £5.1 billion, including MTNs,
commercial paper and CDs, and securitisations.
In 2017, subordinated debt securities of £5.7 billion and
senior unsecured debt securities of £9.0 billion were
redeemed or matured through the year.
Total wholesale funding increased by £2.8 billion in the
year to £82.8 billion, driven by increased TFS
participation of £14.0 billion in 2017, as well as issuance
activity, offset by calls and maturities of subordinated debt
and debt securities in issue. Short-term wholesale
funding, excluding derivative collateral, increased by £3.9
billion during 2017 to £17.8 billion driven largely by
issuance activity and new bank deposits.
Repos at 31 December 2017 increased by £6.1 billion to
£38.4 billion driven largely by strong demand in the
market for high quality securities.
Total reverse repos at 31 December 2017 were £1.1
billion lower at £40.7 billion (2016 - £41.8 billion). Fair
value of securities received as collateral for reverse repos
was £40.7 billion (2016 - £41.8 billion), of which £30.6
billion (2016 - £30.5 billion) had been rehypothecated for
RBS’s own transactions, in line with normal market
practice.
172
Business review Capital and risk management
Capital, liquidity and funding risk continued
Loan:deposit ratios and funding surplus/(gap)
The table below shows loans and advances to customers, customer deposits, loan:deposit ratios (LDR) and funding surplus/(gap).
UK PBB
Ulster Bank RoI
Commercial Banking
Private Banking
RBSI
NatWest Markets
Central items & other
17,541
111
18,930
2017
Loans and
advances to
customers (1)
£m
Customer
deposits (2)
£m
161,677
180,636
LDR
%
90
19,492
97,020
13,482
8,708
22,728
77
97,958
26,923
28,975
14,811
190
99
50
30
nm
nm
88
2016*
Loans and
advances to
customers (1)
£m
Customer
deposits (2)
£m
152,653
169,992
Funding
surplus/(gap) (3)
£m
18,959
(1,951)
938
100,069
13,441
20,267
(7,917)
113
12,157
8,774
30,184
256
16,109
97,886
26,560
25,176
17,883
266
43,850
323,023
353,872
LDR
%
90
117
102
46
35
nm
nm
91
Funding
surplus/(gap) (3)
£m
17,339
(2,821)
(2,183)
14,403
16,402
(12,301)
10
30,849
323,184
367,034
* Re-presented to reflect the segmental reorganisation.
Notes:
(1) Excludes reverse repo agreements and net of impairment provisions.
(2) Excludes repo agreements.
(3) Calculated as customer deposits less loans and advances to customers.
(4) nm = not meaningful.
Key points
The loan:deposit ratio was 88%, down from 91% at the
end of 2016 driven by deposit growth, primarily in UK
PBB and RBS International.
The table below shows RBS's principal funding sources.
Underlying loan growth in UK PBB, with smaller increases
in Ulster Bank RoI and Private Banking, was offset by
active management of the lending book in Commercial
Banking and reductions in NatWest Markets.
By currency
Deposits by banks (1)
Debt securities in issue
Certificates of deposit &
commercial papers
Medium-term notes (MTNs)
Covered bonds
Securitisations
Subordinated liabilities
Wholesale funding
% of wholesale funding
Customer deposits (1)
GBP
£m
24,874
USD
£m
1,375
894
1,234
2,356
396
4,880
872
79
7,185
—
—
7,264
7,930
30,626
37%
313,517
16,569
20%
15,668
2017
EUR
£m
12,874
3,664
9,996
3,952
—
17,612
3,912
34,398
42%
35,242
Other
£m
356
Total
£m
39,479
GBP
£m
11,143
USD
£m
2,423
—
803
—
—
803
8
4,637
19,218
6,308
396
30,559
12,722
1,401
1,457
1,134
175
4,167
962
1,167
1%
82,760
16,272
20%
100%
2,607 367,034 299,693
—
6,549
—
302
6,851
12,367
21,641
27%
17,791
2016
EUR
£m
17,827
1,807
9,512
2,801
1,004
15,124
5,176
38,127
48%
33,144
Other
£m
1,924
Total
£m
33,317
—
1,103
—
—
1,103
914
3,208
18,621
3,935
1,481
27,245
19,419
3,941
5%
79,981
100%
3,244 353,872
Total funding excluding repos
344,143
32,237
69,640
3,774 449,794 315,965
39,432
71,271
7,185 433,853
% of total funding
77%
7%
15%
1%
100%
73%
9%
16%
2%
100%
Note:
(1) Excludes repo agreements.
173
Business review Capital and risk management
Capital, liquidity and funding risk continued
Notes issued - residual maturity profile by note type
The table below shows RBS's debt securities in issue and subordinated liabilities by residual contractual maturity.
Debt securities in issue
2017
Less than 1 year
1-3 years
3-5 years
More than 5 years
Commercial
paper and CDs
£m
4,637
—
—
—
MTNs
£m
2,316
6,581
4,639
5,682
Total including disposal groups
4,637 19,218
2016
Less than 1 year
1-3 years
3-5 years
More than 5 years
Total
3,205
3
—
—
3,388
4,937
3,323
6,973
3,208 18,621
Covered
bonds
£m
987
3,146
—
2,175
6,308
96
871
1,883
1,085
3,935
Securitisations
£m
—
—
—
396
Total
£m
7,940
9,727
4,639
8,253
Subordinated
liabilities
£m
2,383
208
2,329
7,802
396 30,559
12,722
—
—
—
1,481
6,689
5,811
5,206
9,539
1,481 27,245
1,062
2,814
483
15,060
19,419
Total notes
in issue
£m
10,328
10,052
6,931
15,970
43,281
7,751
8,625
5,689
24,599
46,664
Total notes
in issue
%
24
23
16
37
100
17
18
12
53
100
Behavioural analysis (unaudited)
The contractual maturity of balance sheet assets and liabilities
reflects the maturity transformation role banks perform, lending
long-term but mainly obtaining funding through short-term
liabilities such as customer deposits. In practice, the
behavioural profiles of many liabilities show greater stability
and longer maturity than the contractual maturity. This is
particularly true of many types of retail and corporate deposits
which, despite being repayable on demand or at short notice,
have demonstrated very stable characteristics even in periods
of acute stress.
In its analysis to assess and manage asset and liability
maturity gaps, RBS determines the expected customer
behaviour through qualitative and quantitative techniques.
These incorporate observed customer behaviours over long
periods of time. This analysis is subject to governance through
RBS ALCo Technical committee down to a segment level.
The net behavioural funding surplus/(gap) and contractual
maturity analysis is set out below.
Loans to customers
Contractual maturity
Customer accounts
Net surplus/(gap)
Behavioural maturity
Net surplus/(gap)
Less than
1-5 Greater than
Less than
1-5 Greater than
Less than
1-5 Greater than
Less than
1-5 Greater than
1 year
years
5 years Total
1 year
years
5 years
Total
1 year
years
5 years Total
1 year
years
5 years Total
£bn
16
1
38
5
4
19
83
£bn
38
6
40
5
2
2
93
£bn
£bn
£bn
£bn
£bn
£bn
108 162
19
97
13
9
23
12
19
3
3
2
2
179
1
16
98 —
27 —
29 —
1
14
147 323
363
4
— 181
17
—
98
—
27
—
29
—
15
—
— 367
£bn
163
15
60
22
25
(5)
280
£bn
(36)
(5)
(40)
(5)
(2)
(1)
(89)
£bn
£bn
(108)
(12)
(19)
(3)
(3)
(2)
(147)
19
(2)
1
14
20
(8)
44
£bn
(4)
1
(8)
1
4
—
(6)
£bn
3
(2)
23
2
5
(7)
24
£bn
20
(1)
(14)
11
11
(1)
26
£bn
19
(2)
1
14
20
(8)
44
86
95
142 323
350
4
— 354
264
(91)
(142)
31
1
13
17
31
2017
UK PBB
UB RoI
CB
PB
RBSI
NWM
Total
2016
Total
* Re-presented to reflect the segmental reorganisation.
Key points (unaudited)
The net funding surplus has increased by £13 billion
during 2017 to £44 billion, largely driven by deposit
growth (mainly in UK PBB and RBSI International).
NatWest Markets lending reduction exceeded deposit
reduction, resulting in a lower funding gap in 2017.
Customer deposits and customer loans are broadly
matched from a behavioural perspective.
The net funding surplus in 2017 is concentrated in the
longer-dated buckets, reflecting the stable characteristics
of customer deposits and lending that is behaviourally
shorter dated.
174
Business review Capital and risk management
Capital, liquidity and funding risk continued
Contractual maturity
This table shows the residual maturity of financial instruments, based on contractual date of maturity. Held-for-trading (HFT) assets and
liabilities have been excluded from the maturity analysis due to their short-term nature and are shown in total in the table below.
Hedging derivatives are included in the relevant maturity bands.
Other than held-for-trading
Less than
6 months
Total
More than
excluding
2017
£m
£m
£m
£m
£m
£m
£m
£m
1 month 1-3 months 3-6 months
- 1 year
Subtotal
1-3 years
3-5 years
5 years
HFT
£m
HFT
£m
Total
£m
Cash and balances at
central banks
Bank reverse repos
Customer reverse repos
Loans to banks
Loans to customers
Personal
Corporate
Financial institutions
(excluding banks)
Debt securities
Equity shares
Settlement balances
Derivatives
98,337
1,674
1,133
8,470
32,495
4,375
24,354
3,766
1,053
—
2,517
281
—
478
902
503
7,999
2,458
4,616
925
2,451
—
—
—
—
—
273
246
— 98,337
2,152
—
2,308
—
9,365
—
8,570 18,461 67,525 52,616 41,256 146,467 307,864
— 98,337
2,152
—
2,308
—
9,272
53
—
—
—
—
—
—
—
93
—
11,845
24,427
6,889
98,337
13,997
26,735
16,254
15,320 323,184
3,346
4,236
6,162 16,341 21,242 18,134 120,084 175,801
8,056 41,262 27,164 21,630 24,026 114,082
39 175,840
2,474 116,556
988
4,243
9,922
4,210
1,492
2,357 17,981
12,807
30,788
2,101
—
—
—
3,171
—
—
832
78,933
8,776 10,893 10,474 21,309 51,452
450
421
2,517
2,517
2,967 157,876 160,843
27,481
29
—
—
2,517
1,113
—
—
1,337
421
—
183
—
—
334
Total financial assets
145,960 12,333 11,190 22,517 192,000 64,939 52,064 168,380 477,383 243,867 721,250
2016
Total financial assets
Bank repos
Customer repos
Deposits by banks
Customer accounts
Personal
Corporate
Financial institutions
(excluding banks)
Debt securities in issue
Settlement balances
Short positions
Derivatives
Subordinated liabilities
Other liabilities
127,389 12,117 13,626 23,230 176,362 65,422 50,577 160,870 453,231 328,852 782,083
2,988
6,669
5,474
338,997
166,758
122,399
49,840
1,521
2,844
—
—
5
2,186
200
—
477
7,196
2,771
1,661
2,764
2,442
—
—
212
37
—
201
—
137
3,288
1,407
1,445
436
2,182
—
—
289
2,058
—
3,389
—
6,669
—
1,337
7,425
3,413 352,894
2,378 173,314
712 126,217
323 53,363
1,614
—
—
—
283
—
7,759
2,844
—
501
2,383
2,186
1,497
455
568
9,518
—
—
1,188
208
—
—
—
—
—
3,448 16,007
67
2,520
—
—
3,389
—
—
6,669
127 27,007
40 355,521
— 174,811
40 126,712
7,419
4,030
31,002
24,333
12,472
39,479
11,513 367,034
— 174,811
1,857 128,569
67
— 53,998
9,656
63,654
4,333
—
—
526
2,329
—
7,842 29,452
2,844
—
—
—
1,356
7,802 12,722
2,186
30,559
1,107
2,844
—
28,527
28,527
3,571 150,935 154,506
12,722
2,186
—
—
—
Total financial liabilities
360,684 10,564
8,155
6,647 386,050 16,882 23,262 17,167 443,361 232,917 676,278
2016
Total financial liabilities
341,986
7,851
6,386
6,575 362,798 13,859 11,042 25,760 413,459 316,954 730,413
175
Business review Capital and risk management
Capital, liquidity and funding risk continued
Encumbrance
RBS evaluates the extent to which assets can be financed in a
secured form (encumbrance), but certain asset types lend
themselves more readily to encumbrance. The typical
characteristics that support encumbrance are an ability to
pledge those assets to another counterparty or entity through
operation of law without necessarily requiring prior notification,
homogeneity, predictable and measurable cash flows, and a
consistent and uniform underwriting and collection process.
Retail assets including residential mortgages, credit card
receivables and personal loans display many of these
features.
RBS categorises its assets into three broad groups, those that
are:
Already encumbered and used to support funding
currently in place through own-asset securitisations,
covered bonds and securities repurchase agreements.
Pre-positioned with central banks as part of funding
schemes and those encumbered under such schemes.
Not currently encumbered. In this category, RBS has in
place an enablement programme which seeks to identify
assets capable of being encumbered and to identify the
actions to facilitate such encumbrance whilst not affecting
customer relationships or servicing.
Balance sheet encumbrance
2017
Cash and balances
at central banks
Loans and advances
- banks
- residential mortgages
- UK
- Irish
- credit cards
- personal loans
- other
Reverse repos
Debt securities
Equity shares
Settlement balances
Derivatives
Intangible assets
PP&E
Deferred tax
Other assets
Total assets
2016
Total assets
Encumbered as a result of transactions with
Pre-positioned
Unencumbered assets not pre-positioned
counterparties other than central banks
& encumbered
with central banks
Covered
bonds &
Repos &
at central
Readily
Other
Cannot
assets held
securitisations Derivatives
similar (2)
Total (3)
banks (4)
available
available
be used
(1) £bn
£bn
£bn
£bn
£bn
(5) £bn
(6) £bn
(7) £bn
Total
£bn
Total
£bn
—
—
5.3
5.3
—
93.0
—
—
93.0
98.3
0.7
6.9
0.7
8.3
—
7.5
0.3
0.2
8.0
16.3
8.9
4.1
—
—
—
—
—
—
—
—
—
—
—
—
13.7
—
—
—
—
14.7
—
1.4
—
—
—
—
—
—
—
23.0
—
—
—
—
—
—
40.8
0.1
—
—
—
—
—
—
46.9
8.9
4.1
—
—
14.7
—
42.2
0.1
—
—
—
—
—
—
83.6
105.5
3.0
—
—
4.6
—
—
—
—
—
—
—
—
—
22.1
7.4
3.9
6.7
4.4
—
34.9
0.1
—
—
—
—
—
—
10.8
—
0.3
2.8
100.9
—
0.1
0.2
—
—
—
3.2
—
—
—
0.1
—
—
23.0
40.7
1.7
0.1
2.5
160.8
6.5
1.6
1.7
3.9
113.1
180.0
118.6
242.8
32.9
7.5
4.2
9.5
128.3
40.7
36.7
0.4
2.5
160.8
6.5
4.8
1.7
3.9
541.4
147.3
14.6
4.2
9.5
147.6
40.7
78.9
0.5
2.5
160.8
6.5
4.8
1.7
3.9
738.1
18.8
26.5
40.2
85.5
105.5
153.4
123.4
330.9
607.7
798.7
Notes:
(1) Covered bonds and securitisations include securitisations, conduits and covered bonds.
(2) Repos and other secured deposits, cash, coin and nostro balance held with the Bank of England as collateral against deposits and notes in circulation are included here rather
than within those positioned at the central bank as they are part of normal banking operations.
(3) Total assets encumbered as a result of transactions with counterparties other than central banks are those that have been pledged to provide security and are therefore not
available to secure funding or to meet other collateral needs.
(4) Assets pre-positioned at the central banks include loans provided as security as part of funding schemes and those encumbered under such schemes.
(5) Readily available for encumbrance: including assets that have been enabled for use with central banks but not pre-positioned; cash and high quality debt securities that form
part of RBS’s liquidity portfolio and unencumbered debt securities.
(6) Other assets that are capable of being encumbered are those assets on the balance sheet that are available for funding and collateral purposes but are not readily realisable in
their current form. These assets include loans that could be prepositioned with central banks but have not been subject to internal and external documentation review and
diligence work.
(7) Cannot be used includes:
(a) Derivatives, reverse repurchase agreements and trading related settlement balances.
(b) Non-financial assets such as intangibles, prepayments and deferred tax.
(c) Loans that cannot be pre-positioned with central banks based on criteria set by the central banks, including those relating to date of origination and level of documentation.
(d) Non-recourse invoice financing balances and certain shipping loans whose terms and structure prohibit their use as collateral.
In accordance with market practice, RBS employs securities recognised on the balance sheet, and securities received under reverse repo transactions as collateral for repos.
(8)
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Business review Capital and risk management
Forbearance.
Impairment provisioning and write-offs.
Credit risk: management basis
The following disclosures in this section are audited:
Portfolio overview by geographical area.
LTV distribution for mortgage lending.
Commercial real estate LTV distribution.
Definition
Credit risk is the risk of financial loss due to the failure of a
customer or counterparty to meet its obligation to settle
outstanding amounts.
Sources of credit risk (unaudited)
The principal sources of credit risk for RBS are lending, off-
balance sheet products, derivatives and securities financing, and
debt securities. RBS is also exposed to settlement risk through
foreign exchange, trade finance and payments activities.
Credit risk management function (unaudited)
Risk governance
The credit risk management function is led by the Chief Credit
Officer (CCO). The function’s activities include:
Approving credit limits for customers.
Defining concentration risk and implementing the credit risk
control framework.
Oversight of the first line of defence to ensure that credit risk
remains within the risk appetite set by the Board.
Developing and monitoring compliance with credit risk
policies.
Conducting RBS-wide assessments of provision adequacy.
The CCO has overall responsibility for the credit risk function and
chairs the Wholesale Credit Risk Committee as well as the Retail
Credit Risk Committee. These committees have authority for risk
appetite (within the appetite set by the Board), strategy,
frameworks and policy as well as oversight of RBS’s credit
profile. The RBS Provisions Committee has authority over
provisions adequacy and approves proposals from business
provisions committees in accordance with approval thresholds.
The RBS Provisions Committee is chaired either by the CCO or
the Head of Provisions & Restructuring Credit.
Controls
Credit policy standards are in place for both the Wholesale and
Personal portfolios. They are expressed as a set of mandatory
controls.
Risk appetite (unaudited)
RBS’s approach to lending is governed by comprehensive credit
risk appetite frameworks. The frameworks are closely monitored
and actions are taken to adapt lending criteria as appropriate.
Credit risk appetite aligns to the strategic risk appetite set by the
Board, which includes capital adequacy, earnings volatility,
funding and liquidity, and stakeholder confidence. The credit risk
appetite frameworks have been designed to reflect factors (e.g.
strategic and emerging risks) that influence the ability to operate
within risk appetite. Tools such as stress testing and economic
capital are used to measure credit risk volatility and develop links
between the credit risk appetite frameworks and risk appetite
limits. The frameworks are supported by a suite of policies and
transaction acceptance standards that set out the risk parameters
within which franchises must operate.
For Wholesale the four formal frameworks used, and their basis
for classification, are detailed in the following table.
Framework
Single name
concentration
Sector
Country
Product and asset
class
Basis for classification
Size
Other
Net exposure or
loss given default
for a given
probability of
default
Exposure (1)
Exposure (1)
Exposure –
net/gross
dependent on type
of risk and limit
definition.
Risk – based on
economic capital
and other
qualitative factors
Risk – based on
heightened risk
characteristics
Note:
(1) Potential exposure as defined on the following page.
The Personal credit risk framework sets limits that measure and
control the quality of both existing and new business for each
relevant franchise or business segment. The actual performance
of each portfolio is tracked relative to these limits and
management action is taken where necessary. The limits apply to
a range of credit risk-related measures including expected loss at
a portfolio level, expected loss in a given stress scenario,
projected credit default rates and the LTV ratio of the Personal
mortgage portfolios.
Risk identification and measurement (unaudited)
Credit stewardship
Risks are identified through relationship management and credit
stewardship of portfolios or customers. Credit risk stewardship
takes place throughout the customer relationship, beginning with
the initial approval. It includes the application of credit
assessment standards, credit risk mitigation and collateral,
ensuring that credit documentation is complete and appropriate,
carrying out regular portfolio or customer reviews and problem
debt identification and management.
Risk measurement
RBS uses current exposure and potential exposure as its
measures of credit risk exposure. Unless otherwise stated,
current exposure and potential exposure are reported:
Net of collateral – cash and gold collateral for all product
types as well as financial collateral for derivative and
securities financing products.
Net of provisions – credit valuation adjustments for
derivative and securities financing products; individual,
collective and latent provisions across all other product
types.
Exposures backed by guarantees are allocated to the guarantor
rather than the direct obligor. This does not affect the current or
potential exposure amount, but does affect allocations to
obligors, sectors, country and product and asset classes.
177
Business review Capital and risk management
Credit risk: management basis continued
The following table summarises the differences between current exposure and potential exposure across product types:
Product
Lending
Derivatives and securities
financing
Contingent obligations
Leases
Banking book debt securities
Trading book bonds
Equity securities
Settlement risk
Suretyships
Intra-group credit exposures
Current exposure
Potential exposure(1,2)
Drawn balances
Measured using the mark-to-market value after
the effect of enforceable netting agreements and
net of legally enforceable financial collateral.(3)
Issued amount of the guarantee or letter of credit
Legally-committed limits
Measured using scaled credit limit utilisation,
which takes into account mark-to-market
movements, any collateral held and expected
market movements over a specified horizon.(3)
Legally-committed amount
Net present value plus residual value
Purchase value less subsequent amortisation
Not reported as credit risk
Notes:
(1) Potential exposure includes all drawn exposure and all legally-committed undrawn exposure.
(2) Potential exposure cannot be less than current exposure.
(3) Current exposure and potential exposure for exchange-traded derivatives are defined as exposure at default.
Risk models (unaudited)
The output of credit risk models is used in the credit approval
process – as well as for ongoing assessment, monitoring and
reporting – to inform risk appetite decisions. These models are
divided into different categories. Where the calculation method is
on an individual counterparty or account level, the models used
will be probability of default (PD), loss given default (LGD), or
exposure at default (EAD). The economic capital model is used
for credit risk appetite setting.
Asset quality
Credit grades are assigned at legal entity level for Wholesale
customers.
All credit grades map to both an internal asset quality scale, used
for external financial reporting, and a master grading scale for
Wholesale exposures, which is used for internal management
reporting across portfolios. Accordingly, measures of risk
exposure may be aggregated and reported at differing levels of
detail depending on stakeholder or business requirements.
Performing loans are defined as AQ1-AQ9 (where the PD is less
than 100%) and non-performing loans as AQ10 (where the PD is
100%).
Risk mitigation (unaudited)
Risk mitigation techniques, as set out in the appropriate credit
policies, are used in the management of credit portfolios across
RBS. These techniques mitigate credit concentrations in relation
to an individual customer, a borrower group or a collection of
related borrowers. Where possible, customer credit balances are
netted against obligations. Mitigation tools can include structuring
a security interest in a physical or financial asset, the use of
credit derivatives including credit default swaps, credit-linked debt
instruments and securitisation structures, and the use of
guarantees and similar instruments (for example, credit
insurance) from related and third parties. To mitigate credit risk
arising from Personal mortgage lending, collateral is taken in the
form of residential property.
The key sectors where RBS provides asset-backed lending are
commercial real estate, shipping and residential mortgages.
Valuation methodologies are detailed below.
Commercial real estate valuations – RBS has a panel of
chartered surveying firms that cover the spectrum of geography
and property sectors in which RBS takes collateral. Suitable
valuers for particular assets are contracted through a single
service agreement to ensure consistency of quality and advice.
Valuations are commissioned when an asset is taken as security;
a material increase in a facility is requested; or a default event is
anticipated or has occurred. In the UK, an independent third-party
market indexation is applied to update external valuations once
they are more than a year old.
Shipping valuations – Vessel valuations are obtained using
several different independent sources. Valuations are usually
undertaken on a desktop basis, assuming a willing buyer and
willing seller. Most vessels are valued on a charter-free basis, but
in certain circumstances the valuations take account of longer
term committed charter income. Valuations are normally
performed on a quarterly basis. From time to time, particularly for
facilities showing increased signs of financial stress, a more
formal valuation or specialist advice will be obtained.
Residential mortgages
RBS takes collateral in the form of residential property to mitigate
the credit risk arising from mortgages. RBS values residential
property during the loan underwriting process by either
appraising properties individually or valuing them collectively
using statistically valid models. RBS updates residential property
values quarterly using the relevant residential property index
namely:
Region
UK
Northern
Ireland
Republic
of Ireland
Index used
Hal[x quarterly regional house price index
UK House Price Index (published by the Land
Registry)
Central Statistics Office residential property price
index
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Business review Capital and risk management
Credit risk: management basis continued
Counterparty credit risk
RBS mitigates counterparty credit risk arising from both
derivatives transactions and repurchase agreements through the
use of market standard documentation, enabling netting, and
through collateralisation.
Amounts owed by RBS to a counterparty are netted against
amounts the counterparty owes RBS, in accordance with relevant
regulatory and internal policies. This is only done if a netting
agreement is in place.
Risk assessment and monitoring (unaudited)
Practices for credit stewardship – including credit assessment,
approval and monitoring as well as the identification and
management of problem debts – differ between the Wholesale
and Personal portfolios.
Wholesale customers – including corporates, banks and other
financial institutions – are grouped by industry sectors and
geography as well as by product/asset class and are managed
on an individual basis.
A credit assessment is carried out before credit facilities are
made available to customers. The assessment process is
dependent on the complexity of the transaction.
For lower risk transactions below specific thresholds, credit
decisions can be approved through self-sanctioning within the
business. This is facilitated through an auto-decisioning system,
which utilises scorecards, strategies and policy rules to provide a
recommended credit decision. Such credit decisions must be
within the approval authority of the relevant business sanctioner.
For all other transactions credit is only granted to customers
following joint approval by an approver from the business and the
credit risk function. Credit risk management is organised in terms
of the complexity of the assessment rather than aligned to
franchises. The joint business and credit approvers act within a
delegated approval authority under the Wholesale Credit
Authorities Framework approved by the Executive Risk Forum.
The level of delegated authority held by approvers is dependent
on their experience and expertise. Only a small number of senior
executives hold the highest authority provided under the
Wholesale Credit Authorities Framework. Both business and
credit approvers are accountable for the quality of each decision
taken but the credit risk approver holds ultimate sanctioning
authority.
Transaction Acceptance Standards provide detailed transactional
lending and risk acceptance metrics and structuring guidance.
Transaction Acceptance Standards are one of the tools used to
manage risk appetite at the customer/transaction level and are
supplementary to the Credit Policy.
Where the customer is part of a group, the credit assessment
considers aggregated credit risk limits for the customer group as
well as the nature of the relationship with the broader group (for
example parental support) and its impact on credit risk.
Credit relationships are reviewed, and credit grades (PD and
LGD) re-approved, annually. The review process assesses
borrower performance, including reconfirmation or adjustment of
risk parameter estimates; the adequacy of security; compliance
with terms and conditions; and refinancing risk.
Personal customers are served through a lending approach that
entails making a large number of small-value loans. To ensure
that these lending decisions are made consistently, RBS
analyses credit information, including the historical debt servicing
behaviour of customers with respect to both RBS and their other
lenders. RBS then sets its lending rules accordingly, developing
different rules for different products.
The process is then largely automated, with customers receiving
a credit score that reflects a comparison of their credit profile with
the rule set. However, for relatively high-value, complex personal
loans, including some residential mortgage lending, specialist
credit managers make the final lending decisions.
Underwriting standards are monitored on an ongoing basis to
ensure they remain adequate in the current market environment
and are not weakened to sustain growth.
A key aspect of credit risk stewardship is ensuring that, when
signs of customer stress are identified, appropriate debt
management actions are applied.
Problem debt management
Wholesale (unaudited)
Early problem identification
Each segment has defined early warning indicators to identify
customers experiencing financial difficulty, and to increase
monitoring if needed. Early warning indicators may be internal,
such as a customer’s bank account activity, or external, such as
a publicly-listed customer’s share price. If early warning
indicators show a customer is experiencing potential or actual
difficulty, or if relationship managers or credit officers identify
other signs of financial difficulty they may decide to classify the
customer within the Risk of Credit Loss framework.
Risk of Credit Loss framework
The framework focuses on Wholesale customers whose credit
profiles have deteriorated since origination. Expert judgement is
applied by experienced credit risk officers to classify cases into
categories that reflect progressively deteriorating credit risk to the
bank. There are two classifications which apply to non-defaulted
customers within the framework – Heightened Monitoring and
Risk of Credit Loss. The framework also applies to those
customers that have met the bank’s default criteria (AQ10
exposures).
Heightened Monitoring customers are performing customers who
have met certain characteristics, which have led to material credit
deterioration. Collectively, characteristics reflect circumstances
that may affect the customer’s ability to meet repayment
obligations. Characteristics include trading issues, covenant
breaches, material PD downgrades and past due facilities.
179
Business review Capital and risk management
Credit risk: management basis continued
Sector specific characteristics also exist. Heightened Monitoring
customers require pre-emptive actions (outside the customer’s
normal trading patterns) to return or maintain their facilities within
the bank’s current risk appetite prior to maturity.
Risk of Credit Loss customers are performing customers who
have met the criteria for Heightened Monitoring and also pose a
risk of credit loss to the bank in the next 12 months, should
mitigating action not be taken or not be successful.
Once classified as either Heightened Monitoring or Risk of Credit
Loss, a number of mandatory actions are taken in accordance
with policies. This includes a review of the customer’s credit
grade, facility and security documentation and the valuation of
security. Depending on the severity of the financial difficulty and
the size of the exposure, the customer relationship strategy is
reassessed by credit officers, by specialist credit risk or
relationship management units in the relevant business or by
Restructuring.
Agreed customer management strategies are regularly monitored
by both the business and credit teams. The largest Risk of Credit
Loss exposures in RBS and in each business are regularly
reviewed by a Risk of Credit Loss Committee. The committee
members are experienced credit, business and Restructuring
specialists. The purpose of the committee is to review and
challenge the strategies undertaken for those customers who
pose the largest risk of credit loss to the bank.
Appropriate corrective action is taken when circumstances
emerge that may affect the customer’s ability to service its debt
(see Heightened Monitoring characteristics). Corrective actions
may include granting a customer various types of concessions.
Any decision to approve a concession will be a function of
specific country and sector appetite, the credit quality of the
customer, the market environment and the loan structure and
security. All customers granted forbearance are classified
Heightened Monitoring as a minimum.
Other potential outcomes of the relationship review are to: take
the customer off the Risk of Credit Loss framework; offer
additional lending and continue monitoring; transfer the
relationship to Restructuring if appropriate; or exit the relationship
altogether.
The Risk of Credit Loss framework does not apply to problem
debt management for Business Banking customers in UK PBB.
These customers are, where necessary, managed by specialised
problem debt management teams, depending on the size of
exposure or the Business Banking recoveries team where a loan
has been impaired.
Restructuring
For the Wholesale problem debt portfolio, customer relationships
are managed by the Restructuring team (this excludes customers
managed by PBB).
The purpose of Restructuring is to protect the bank’s capital.
Where practicable, Restructuring does this by working with
corporate and commercial customers to support their turnaround
and recovery strategies and enable them to return to mainstream
banking. Restructuring will always aim to recover capital in a fair
and efficient manner.
Specialists in Restructuring work with customers experiencing
financial difficulties and showing signs of financial stress.
Throughout Restructuring’s involvement the mainstream
relationship manager will remain an integral part of the customer
relationship, unless an exit strategy is deemed appropriate. The
objective is to find a mutually acceptable solution, including
restructuring of existing facilities, repayment or refinancing.
Where a solvent outcome is not possible, insolvency may be
considered as a last resort. However, helping the customer return
to financial health and restoring a normal banking relationship is
always the preferred outcome.
Personal (unaudited)
Personal customers experiencing financial difficulty are managed
by the Collections function. If the Collections function is unable to
provide appropriate support after discussing suitable options with
the customer, management of that customer moves into
Recoveries. If at any point in the Collections and Recoveries
process, the customer is identified as being potentially
vulnerable, the customer will be separated from the regular
strategy and supported by a specialist team to ensure the
customer receives appropriate support for their circumstances.
Collections
The Collections function takes over management of a customer
when the customer exceeds an agreed limit or misses a regular
monthly payment. Once in Collections the customer will be
supported by skilled debt management staff who will endeavour
to provide the customer with solutions based on current
circumstances and, where appropriate, any known future
changes to their financial position. Solutions include short-term
account restructuring, refinance loans and forbearance which can
include interest suspension and breathing space. In the event
that an affordable/sustainable agreement with a customer cannot
be reached, the debt will transition into Recoveries.
In the Republic of Ireland, the relationship may pass to a
specialist support team prior to any transfer to recoveries,
depending on the outcome of customer financial assessment.
Recoveries
The Recoveries function will issue a notice of intention to default
to the customer and, subsequently, a formal demand, while also
registering the account with the credit reference agencies where
appropriate. Following this, the customer’s debt may then be
placed with a third-party debt collection agency, or alternatively a
solicitor, in order to agree an affordable repayment plan with the
customer.
180
Business review Capital and risk management
Credit risk: management basis continued
Forbearance
Forbearance across RBS takes place when a concession is
made on the contractual terms of a loan/debt in response to a
customer’s financial difficulties. Concessions granted where there
is no evidence of financial difficulty, or where any changes to
terms and conditions are within current risk appetite, or reflect
improving credit market conditions for the customer, are not
considered forbearance.
The aim of forbearance is to support and restore the customer to
financial health while minimising risk. To ensure that forbearance
is appropriate for the needs and financial profile of the customer,
RBS applies minimum standards when assessing, recording,
monitoring and reporting forbearance.
Loans/debt may be forborne more than once, generally where a
temporary concession has been granted and circumstances
warrant another temporary or permanent revision of the loan’s
terms.
In the Personal portfolio, loans are considered forborne until they
meet the exit criteria set out by the European Banking Authority.
These include being classified as performing for two years since
the last forbearance event, making regular repayments and the
debtor being less than 30 days past due. Exit criteria are not
currently applied for Wholesale portfolios.
For Personal portfolios, forborne loans are separated into a
distinct population and reported on a regular basis until they exit
the forborne population.
Provisioning for Wholesale forbearance
Provisions for forborne loans are assessed in accordance with
normal provisioning policies (refer to impairment loss provision
methodology). The customer’s financial position and prospects as
well as the likely effect of the forbearance, including any
concessions granted, and revised PD or LGD gradings, are
considered in order to establish whether an impairment provision
is required.
Wholesale loans granted forbearance are individually assessed
in most cases and are not therefore segregated into a separate
risk pool.
Forbearance may result in the value of the outstanding debt
exceeding the present value of the estimated future cash flows.
This may result in the recognition of an impairment loss or a
write-off.
In the case of non-performing forborne loans, the loan
impairment provision assessment almost invariably takes place
prior to forbearance being granted. The amount of the loan
impairment provision may change once the terms of the
forbearance are known, resulting in an additional provision
charge or a release of the provision in the period the forbearance
is granted.
Types of forbearance
The type of forbearance offered is tailored to the customer’s
individual circumstances.
For performing loans, credit metrics are an integral part of the
latent provision methodology, and an extended emergence
period for forborne loans is applied.
In the Wholesale portfolio, forbearance may involve covenant
waivers, amendment to margin, payment concessions and loan
rescheduling (including extensions in contractual maturity),
capitalisation of arrears, and debt forgiveness or debt for equity
swap.
In the Personal portfolio forbearance may involve payment
concessions and loan rescheduling (including extensions in
contractual maturity), capitalisation of arrears and, in the
Republic of Ireland only, temporary interest-only conversions.
Forbearance is granted principally to customers with mortgages
and less frequently to customers with unsecured loans. This
includes instances where forbearance may be taken for
customers with highly flexible mortgages.
Monitoring of forbearance
In the Wholesale portfolio, all customers are assigned a PD and
related facilities an LGD. These are re-assessed prior to finalising
any forbearance arrangement in light of the loan’s amended
terms. The ultimate outcome of a forbearance strategy is
unknown at the time of execution. It is highly dependent on the
cooperation of the borrower and the continued existence of a
viable business or repayment outcome. Where forbearance is no
longer viable, RBS will consider other options such as the
enforcement of security, insolvency proceedings or both, albeit
these are options of last resort.
The transfer of wholesale loans from impaired to performing
status follows assessment by relationship managers and credit.
When no further losses are anticipated and the customer is
expected to meet the loan’s revised terms, any provision is
written off or released and the balance of the loan returned to
performing status. This course of action is not dependent on a
specified time period and follows the credit risk manager’s
assessment.
Provisioning for personal forbearance
The methodology used for provisioning in respect of Personal
forborne loans will differ depending on whether the loans are
performing or non-performing and which business is managing
them due to local market conditions.
Granting forbearance will only change the arrears status of the
loan in specific circumstances, which can include capitalisation of
principal and interest in arrears, where the loan may be returned
to the performing book if the customer has demonstrated an
ability to meet regular payments and is deemed likely to continue
to do so.
The loan would remain in forbearance for the defined probation
period and be subject to performance criteria including making
regular repayments and be less than 30 days past due.
Additionally for some forbearance types a loan may be
transferred to the performing book if a customer makes payments
that reduce loan arrears below 90 days (Ulster Bank RoI and UK
PBB collections function).
181
Business review Capital and risk management
Sensitivity of impairments to assumptions
Key assumptions relating to impairment levels are economic
conditions, the interest rate environment, the ease and timing of
enforcing loan agreements in varying legal jurisdictions and the
level of customer co-operation.
In addition, for secured lending, key assumptions relate to the
valuation of the security and collateral held, as well as the timing
and cost of asset disposals based on underlying market depth
and liquidity. Assessments are made by relationship managers
on a case-by-case basis for individually-assessed provisions and
are validated by credit teams. Impairments less than £1 million
are approved by credit officers under their delegated authority.
For individual impairments greater than £1 million, oversight is
provided by the RBS Provisions Committee.
Available-for-sale portfolios
Available-for-sale portfolios are also regularly reviewed for
evidence of impairment, including: default or delinquency in
interest or principal payments; significant financial difficulty of the
issuer or obligor; and increased likelihood that the issuer will
enter bankruptcy or other financial reorganisation.
Determining whether evidence of impairment exists requires the
exercise of management judgement. It should be noted that the
following factors are not, of themselves, evidence of impairment,
but may be evidence of impairment when considered with other
factors:
Disappearance of an active market because an entity’s
financial instruments are no longer publicly traded.
A downgrade of an entity’s credit rating.
A decline in the fair value of a financial asset below its cost
or amortised cost.
Write-offs
Impaired loans and receivables are written-off when there is no
longer any realistic prospect of recovery of part, or the entire
loan. For loans that are individually assessed for impairment, the
timing of write-off is determined on a case-by-case basis. Such
loans are reviewed regularly and write-offs may be prompted by
bankruptcy, insolvency, forbearance and similar events. For
details of the typical time frames, from initial impairment to write
off, for collectively assessed portfolios refer to the accounting
policies section on pages 255 and 256.
Amounts recovered after a loan has been written-off are credited
to the loan impairment charge for the period in which they are
received.
For the latent calculation, an extended emergence period is
applied to account for the impact of forbearance within the
portfolio. Additionally for portfolios with material forbearance,
forborne loans form a separate risk pool and use a different PD
model. The separate risk pool applies for the duration of the
forbearance arrangement and with exit from forbearance
segmentation dependent on meeting applicable probationary
periods and performance criteria:
UK PBB (excluding NI): The separate risk pool comprises all
forborne loans. The provisioning calculation uses the higher
of the observed default rates or PD.
Ulster Bank RoI: forborne and previously forborne
mortgages form separate risk pools. The PD model used is
calibrated separately for forborne loans, using information
on the historic performance of loans subject to similar
arrangements.
For non-performing loans, there is no difference in treatment with
the exception of Ulster Bank RoI, where forborne loans which
result in an economic loss to the group form a separate risk pool
and are subjected to specific provisioning treatments.
Impairment, provisioning and write-offs
In the overall assessment of credit risk, impairment, provisioning
and write-offs are used as key indicators of credit quality.
Impairment
A financial asset is impaired if there is objective evidence that the
amount, or timing, of future cash flows has been adversely
affected. Refer to accounting policies on pages 255 and 256 for
details of the quantification of impairment losses.
Days-past-due measures are typically used to identify evidence
of impairment. In both the Wholesale and Personal portfolios, a
period of 90 days past due is used. In sovereign portfolios, the
period used is 180 days past due. Indicators of impairment
include the borrower’s financial condition; a forbearance event; a
loan restructuring; the probability of bankruptcy; or evidence of
diminished cash flows.
Provisioning
The amount of an impairment loss is measured as the difference
between the asset carrying amount and the present value of the
estimated future cash flows discounted at the financial asset’s
original effective interest rate. The current net realisable value of
the collateral will be taken into account in determining the need
for a provision. This includes cash flows from foreclosure (less
costs of obtaining and selling the collateral), whether or not
foreclosure is probable. Impairment provisions are not recognised
where amounts due are expected to be settled in full on the
realisation of collateral.
RBS uses one of the following three methods to quantify the
provision required: individual, where the quantification method is
on a case-by-case assessment of future cash flows; collective, a
quantitative review of the relevant portfolio; and latent, where PD,
LGD, drawn balance and emergence period are considered in the
calculation.
182
Business review Capital and risk management
Credit risk: management basis continued
Portfolio summaries
The table below summarises current and potential exposure, by sector and asset quality. The table is unaudited except for forbearance,
which is audited.
Portfolio and asset quality as a percentage of total current exposure
Wholesale (1)
Banks and
other FIs Sovereigns (2)
%
31
—
—
—
%
7
1
—
—
8
31
Personal
%
25
11
—
1
37
Other
%
9
14
—
1
24
Total
%
72
26
—
2
100
24
10
1
1
36
9
1
—
—
10
26
—
—
—
26
11
16
—
1
28
70
27
1
2
100
2017
AQ1-AQ4
AQ5-AQ8
AQ9
AQ10
Exposure
Wholesale (1)
Banks and
Personal
£m
other FIs Sovereigns (2)
£m
£m
118,234 34,263
3,483
27
36
52,836
2,282
3,284
Other
£m
Total
£m
147,517 42,696 342,710
59 67,444 123,822
2,993
684
—
6,287
2,967
—
Total current exposure
176,636 37,809
147,576 113,791 475,812
Total potential exposure
182,492 68,038
148,457 171,858 570,845
Risk of Credit Loss (3)
Forbearance stock (4,5)
Flow into forbearance (4,6)
Of which:
- Performing
- Non-performing
Provisions (7)
n/a
4,461
649
274
375
2,065
88
13
11
10
1
71
—
—
—
—
—
—
571
3,385
1,640
1,196
444
1,678
659
7,859
2,300
1,480
820
3,814
2016
AQ1-AQ4
AQ5-AQ8
AQ9
AQ10
111,899 42,903
4,392
32
355
47,992
2,622
3,693
118,049 49,121 321,972
135 72,340 124,859
3,249
591
7,513
3,465
4
—
Total current exposure
166,206 47,682
118,188 125,517 457,593
Total potential exposure
172,607 84,300
119,056 185,291 561,254
Risk of Credit Loss (3)
Forbearance stock (4,5)
Flow into forbearance (4,6)
Of which:
- Performing
- Non-performing
Provisions (7)
Year-on-year movements
Foreign exchange impact
- increase/(decrease)
Current exposure
- constant currency basis
n/a
5,284
834
447
387
2,192
1
63
5
3
2
58
4
1
1
—
1
1
851
4,213
3,232
1,782
1,450
2,204
856
9,561
4,072
2,232
1,840
4,455
539
(578)
618
(758)
(179)
166,745 47,104
118,806 124,759 457,414
Includes exposure to central governments, central banks and sub-sovereigns such as local authorities.
Notes:
(1) Includes SME customers managed in the Business Banking segment of UK PBB who are assigned a sector under RBS’s sector concentration framework.
(2)
(3) Excludes Private Banking, Lombard and Invoice Finance exposures which are not material in context of the Risk of Credit Loss portfolio.
(4) Audited.
(5) Wholesale forbearance stock represents loans that have been subject to a forbearance event in the two years up to the reporting date. Personal forbearance is aligned to
European Banking Authority requirements.
(6) Completed during the year.
(7) Provision (including latent).
183
Business review Capital and risk management
Credit risk: management basis continued
Key points (unaudited)
Measured against RBS’s asset quality scale, as at 31
December 2017, 72% of total current exposure was rated
in the AQ1-AQ4 bands, equating to an indicative
investment grade rating of BBB- or above (2016 – 70%).
Across the Personal lending exposure, 67% was in the
AQ1-AQ4 category (67% as at 31 December 2016). The
loan-to-value (LTV) ratio of the mortgage portfolio was
57% (2016 – 58%).
The increase in current exposure in the Personal portfolio
mainly resulted from growth in UK mortgage lending and
was within risk appetite. For further information, refer to
page 185.
The UK unsecured lending portfolio remained broadly
stable in size.
The increase in current exposure across the Wholesale
portfolio reflected increases in the Sovereign sector
resulting from liquidity management activities. This was
offset by decreases in the Banks and other FIs portfolio,
which reflected receipt of higher collateral against traded
products and by decreases in Transport – particularly
Shipping – in line with the exit strategy for this sector.
Credit quality, measured against RBS’s asset quality
scales marginally improved across the Wholesale and
Personal portfolios, reflecting resilient market conditions
during the period.
The level of Wholesale and Personal provisions
decreased. This reflected progress in reducing defaulted
facilities. The Personal portfolio also benefited from
house price improvements.
Exposure classified as Risk of Credit Loss decreased
over 2017. This decrease was driven by the Shipping
sector as a result of the reclassification of customers to
Heightened Monitoring and portfolio disposals (refer to
page 190 for further information).
Wholesale forbearance decreased significantly over
2017. This was driven by lower levels of new forbearance
in the Commercial Real Estate and Shipping sectors.
Additionally a number of Shipping facilities which were
previously forborne were exited during 2017. (Refer to
page 190 for further information).
Loans totalling £1.4 billion were granted approval for
forbearance in 2017 but had not yet reached legal
completion at 31 December 2017 (2016 – £1.4 billion).
These exposures are referred to as “in process” and are
not included in the tables on the previous page. 71%
(£1.0 billion) of these “in process” exposures related to
non-performing customers and 29% (£0.4 billion) related
to performing loans. The principal types of arrangements
offered were payment concessions and loan
rescheduling.
£1.1 billion of wholesale forbearance related to payment
concessions and £0.5 billion to non-payment
concessions. Previously reported forbearance types are
classified as non-payment (covenant concessions,
release of security) and payment (payment concessions
and loan rescheduling, forgiveness of all or part of the
outstanding debt, variation in margin, standstill
agreements).
Portfolio overview – geography
The table below summarises both current and potential exposure, by geographic region.
Wholesale (1)
Wholesale (1)
2017
Personal
£m
Banks and
Other
other FIs Sovereigns (2) wholesale
£m
£m
£m
Current
exposure
£m
Personal
%
Banks and
Other
other FIs Sovereigns (2) wholesale
%
%
%
UK
RoI
Other Western Europe
US
RoW (3)
158,965 17,992
751
7,504
6,987
4,575
15,319
514
377
1,461
91,161 94,896 363,014
4,612 23,098
8,559 59,991
2,580 18,374
3,144 11,335
2,416
43,414
8,430
2,155
Total
2016
176,636 37,809
147,576 113,791 475,812
UK
RoI
Other Western Europe
US
RoW (3)
148,882 19,393
433
15,079
528
9,978
329 11,116
6,762
1,388
2,387
69,390 101,197 338,862
4,565 22,464
36,603 10,100 57,209
3,607 22,390
6,048 16,668
7,338
2,470
Total
166,206 47,682
118,188 125,517 457,593
33
3
—
—
—
36
34
3
—
—
—
37
4
—
2
1
1
8
4
—
2
2
1
9
19
1
9
2
—
31
15
1
8
2
1
27
20
1
2
1
1
25
22
1
2
1
1
27
Total
%
Potential
exposure
£m
76 413,378
5 24,502
13 86,866
4 31,497
2 14,602
100 570,845
75 391,369
5 23,771
12 86,660
5 38,177
3 21,277
100 561,254
Notes:
(1)
(2)
(3) RoW: Rest of world, which also includes supranationals such as the World Bank and exposure relating to ocean-going vessels which cannot be meaningfully assigned to
Includes SME customers managed in UK PBB Business Banking who are assigned a sector under RBS’s sector concentration framework.
Includes exposures to central governments, central banks and sub-sovereigns such as local authorities.
specific countries from a country risk perspective.
Key points (unaudited)
The growth in the portfolio is mainly driven by an increase in
UK exposures, which is in line with strategy and within risk
appetite.
Sovereign exposure in the UK and Western Europe
(predominantly Germany) increased and reflects liquidity
management transactions.
Exposure to the US and RoW decreased as RBS continued
to focus on its core markets. The movement includes RBS
exiting from the Shipping sector.
184
Business review Capital and risk management
Credit risk: management basis continued
Overview of the Personal portfolio split by product type and segment on a current exposure basis (unaudited)
Ulster
UK PBB Bank RoI
£m
£m
2017
Private
RBS
Banking International
£m
£m
Total
£m
Ulster
UK PBB Bank RoI
£m
£m
2016*
Private
RBS
Banking International
£m
£m
Total
£m
136,473 14,444 8,416
48 1,248
8,577
2,722 162,055 127,896 14,396 7,168
2,637 152,097
85
9,958
Mortgages
Year-on-year movement
Of which:
Interest only variable rate
Interest only fixed rate
Mixed (capital and interest only)
11,190
12,578
6,027
245 4,072
7 2,867
—
70
616 16,123
96 15,548
6,117
20
13,011
12,318
6,003
349 3,625
7 2,290
—
75
692
81
23
17,677
14,696
6,101
Buy-to-let
Provisions
REIL
Other lending (1)
Year-on-year movement
Provisions
REIL
Total lending
Year-on-year movement
Mortgage LTV ratios (2)
- Total portfolio
- Performing
- Non-performing
17,844 1,646 1,146
923 21,559
18,105 1,777
770
881
21,533
153
909
734 3,027
7
28
10,247
327
305 1,470
(260)
14
833
810
44
44
19
49
146,720 14,749 9,886
988
8,904
62
27
89
1,096
3,878
64 12,086
81
—
2
5
898
908
2,786 174,141
85 10,039
174
919
837 3,144
2
23
9,920
291 1,730
27
84
64
1,122
4,088
12,005
947
977
48
50
18
61
1
5
1,014
1,093
137,816 14,687 8,898
2,701 164,102
56% 69% 55%
56% 65% 55%
57% 88% 59%
58%
56%
122%
57%
57%
78%
56% 76% 54%
56% 72% 54%
60% 94% 62%
57%
55%
117%
58%
57%
79%
* Re-presented to reflect the segmental reorganisation.
Notes:
(1) Excludes loans guaranteed by a company and commercial real estate lending to personal customers.
(2) Weighted by current exposure gross of provisions.
Key points (unaudited)
The overall credit risk profile of the Personal portfolio, and
its performance against credit risk appetite, remained stable
during 2017.
The increase in Personal portfolio lending was primarily
driven by growth in mortgages; mainly in UK PBB.
New mortgage lending was broadly inline with the levels
seen in 2016. The portfolio was closely monitored against
an agreed set of risk appetite parameters, which included
loan-to-value, loan-to-income, buy-to-let, new-build
concentrations and credit quality. This ensured that the
portfolio remained appropriate for market conditions.
Underwriting standards were maintained during the period.
Most of the mortgage growth was in the owner-occupied
portfolio. In line with market trends, new mortgages in the
buy-to-let portfolio decreased as tax and regulatory changes
in the UK affected borrower activity.
The mortgage portfolio loan-to-value ratio remained largely
stable. The improvement in Ulster Bank RoI reflected house
price recovery.
Overall the proportion of mortgages by value on interest-
only and mixed terms (capital and interest only) reduced,
reflecting a move to repayment mortgages and repayment of
legacy mortgages. There was a marginal increase in interest
only mortgages in Private Banking which reflected increased
lending to high net worth individuals.
43% of mortgage lending was in London and the South East
(2016 – 44%). New business in this region reduced as a
result of lower demand for both buy-to-let and owner-
occupied properties. Average weighted loan-to-value for this
region was 51% (2016 – 55%).
Total provision and forbearance against mortgages
continued to decrease. This reflected the relatively low-
interest-rate environment in the UK and house price growth
as well as a focus on the ability of customers to repay in a
sustainable manner over the term of the facility.
Unsecured lending balances remained broadly stable
despite an upward trend in the wider UK market. Growth in
the unsecured loan portfolio was offset by declines in the
cards and overdrafts portfolios. The reduction in the cards
portfolio reflected RBS’s decision to abstain from the 0%
credit card balance transfer market.
The total provision for unsecured lending reduced, reflecting
the exit from defaulted debt.
185
Business review Capital and risk management
Credit risk: management basis continued
Overview of new mortgage lending on a current exposure basis as at drawdown (unaudited)
2017
Gross new mortgage lending (1)
Of which:
Interest only variable rate
Interest only fixed rate
Mixed (capital and interest only)
Owner occupied
Average LTV by weighted value
Buy-to-let
Average LTV by weighted value
2016*
Gross new mortgage lending (1)
Of which:
Interest only variable rate
Interest only fixed rate
Mixed (capital and interest only)
Owner occupied
Average LTV by weighted value
Buy-to-let
Average LTV by weighted value
UK PBB
£m
30,314
335
1,835
893
28,504
70%
1,810
62%
Ulster
Bank RoI
£m
890
6
1
—
875
75%
15
57%
Private
Banking
£m
2,243
902
874
—
1,904
63%
339
56%
RBS
International
£m
Total
£m
481
33,928
39
48
—
319
70%
162
62%
1,282
2,758
893
31,602
70%
2,326
61%
31,183
893
3,291
470
35,837
1,033
2,889
801
26,919
71%
4,264
62%
—
—
—
876
74%
17
59%
1,766
917
—
2,819
55%
472
54%
37
32
3
300
69%
170
62%
2,836
3,838
804
30,914
70%
4,923
61%
* Re-presented to reflect the segmental reorganisation.
Note:
(1) For 2016, Private Banking includes additional lending of £1.5 billion. Following a change in methodology, this additional lending is excluded from 2017 data.
Personal portfolio – forbearance on a current exposure basis
2017
Forbearance flow
Forbearance stock
Forbearance stock: arrears
Current
1-3 months in arrears
> 3 months in arrears
Provisions against forbearance stock
Forbearance type: (1)
Long-term arrangement (2)
Short-term arrangement (3)
2016*
Forbearance flow
Forbearance stock
Forbearance stock: arrears
Current
1-3 months in arrears
> 3 months in arrears
Provisions against forbearance stock
Forbearance type: (1)
Long-term arrangement (2)
Short-term arrangement (3)
UK PBB
£m
432
1,332
822
293
217
51
746
875
459
1,467
897
327
243
59
812
970
Ulster
Bank RoI
£m
181
3,101
1,536
387
1,178
792
1,048
2,053
316
3,709
2,077
473
1,159
790
1,249
2,460
Private
Banking
£m
31
7
RBS
International
£m
5
21
6
—
1
—
6
1
49
65
65
—
—
—
63
2
12
2
7
4
18
3
10
43
29
2
12
1
37
6
* Re-presented to reflect the segmental reorganisation.
Notes:
(1) Can include multiple arrangements.
(2) Capitalisation term extensions, economic concessions.
(3) Payment concessions, amortising payments of outstanding balances, payment holidays and temporary interest arrangements.
Total
£m
649
4,461
2,376
682
1,403
847
1,818
2,932
834
5,284
3,068
802
1,414
850
2,161
3,438
186
Business review Capital and risk management
Credit risk: management basis continued
Mortgage LTV distribution by segment on a current exposure basis
LTV ratio value (1)
<=50%
£m
50%
<=80%
£m
80%
<=100%
£m
100%
<=150%
£m
>150%
£m
Weighted
average LTV
%
Total
£m
Other
£m
Total
£m
2017
Total RBS
AQ1-AQ8
AQ9
AQ10
Of which:
UK PBB
AQ1-AQ8
AQ9
AQ10
Ulster Bank RoI
AQ1-AQ8
AQ9
AQ10
2016*
Total RBS
AQ1-AQ8
AQ9
AQ10
Of which:
UK PBB
AQ1-AQ8
AQ9
AQ10
Ulster Bank RoI
AQ1-AQ8
AQ9
AQ10
57,839
332
849
78,813
761
1,201
18,645
417
499
59,020
80,775
19,561
1,181
269
518
1,968
53 156,531
1,785
3,096
6
29
88 161,412
50,487
81
523
67,553
301
614
15,882
79
80
51,091
68,468
16,041
3,510
232
306
4,048
4,990
428
531
5,949
2,079
335
395
2,809
294
7
16
317
864
262
477
1,603
24 134,240
470
1,237
2
4
30 135,947
14
4
17
35
11,457
1,261
1,726
14,444
54,334
335
904
71,240
760
1,461
17,311
492
545
55,573
73,461
18,348
2,212
636
728
3,576
92 145,189
2,236
13
3,695
57
162 151,120
47,818
79
629
61,958
295
925
14,691
102
173
48,526
63,178
14,966
397
10
25
432
2,844
237
252
3,333
4,133
417
461
5,011
2,185
372
355
2,912
1,766
614
691
3,071
52 124,916
489
1,757
3
5
60 127,162
14
8
47
69
10,942
1,648
1,806
14,396
56
75
78
57
56
66
57
56
63
79
88
69
57
87
79
58
56
68
60
56
70
88
94
76
621 157,152
1,790
3,113
5
17
643 162,055
508 134,748
474
1,251
4
14
526 136,473
—
—
—
—
11,457
1,261
1,726
14,444
943 146,132
2,242
3,723
6
28
977 152,097
711 125,627
493
1,776
4
19
734 127,896
—
—
—
—
10,942
1,648
1,806
14,396
* Re-presented to reflect the segmental reorganisation.
Note:
(1) LTV is calculated on a current exposure basis, gross of provisions.
187
Business review Capital and risk management
Credit risk: management basis continued
UK PBB mortgage exposure by region and LTV on a current exposure basis
LTV ratio value
2017
South East
Greater London
Scotland
North West
South West
West Midlands
Rest of the UK
Total
2016*
South East
Greater London
Scotland
North West
South West
West Midlands
Rest of the UK
Total
<=50%
£m
14,603
13,589
2,849
4,124
4,181
2,577
9,168
50%
<=80%
£m
16,902
9,897
5,336
7,497
6,568
5,259
17,009
80%
<=100%
£m
2,728
1,322
2,415
2,118
1,054
1,499
4,905
51,091
68,468
16,041
13,955
13,729
2,955
3,651
3,826
2,277
8,133
15,955
9,328
5,290
6,848
6,005
4,729
15,023
2,181
939
1,918
2,362
995
1,396
5,175
48,526
63,178
14,966
100%
<=150%
£m
>150%
£m
Weighted
average LTV
%
Total
£m
10
3
42
9
9
6
238
317
13
4
46
21
13
7
328
432
—
—
—
—
—
—
30
34,243
24,811
10,642
13,748
11,812
9,341
31,350
30 135,947
—
—
—
—
—
—
60
32,104
24,000
10,209
12,882
10,839
8,409
28,719
60 127,162
53
48
63
59
56
61
60
56
53
47
61
61
56
61
62
56
Other
£m
96
113
35
62
40
42
138
Total
£m
34,339
24,924
10,677
13,810
11,852
9,383
31,488
526 136,473
155
160
51
74
62
48
184
32,259
24,160
10,260
12,956
10,901
8,457
28,903
734 127,896
* Re-presented to reflect the segmental reorganisation
Commercial real estate (CRE) (unaudited)
The CRE portfolio comprises exposures to entities involved in the development of, or investment in, commercial and residential
properties (including house builders but excluding housing associations, construction and building materials).
The sector is reviewed regularly at senior executive committees. Reviews include portfolio credit quality, capital consumption and
control frameworks.
CRE exposure by sub-sector on a current exposure basis (unaudited)
By geography and sub-sector (1)
Investment
Residential
Office
Retail
Industrial
Mixed/other
Development
Residential
Office
Retail
Industrial
Mixed/other
Total
UK
£m
4,173
2,944
5,318
2,377
4,635
19,447
3,008
114
249
49
66
3,486
22,933
2017
RoI
£m
222
233
41
35
190
721
112
—
4
—
3
119
840
Other
£m
28
599
130
14
158
929
151
—
2
—
—
153
Total
£m
4,423
3,776
5,489
2,426
4,983
UK
£m
3,762
3,173
4,802
2,657
6,141
21,097
20,535
3,271
114
255
49
69
3,758
3,127
149
168
39
11
3,494
1,082
24,855
24,029
2016
RoI
£m
70
128
48
30
253
529
133
26
—
3
20
182
711
Other
£m
37
574
58
52
234
955
44
—
2
13
—
59
Total
£m
3,869
3,875
4,908
2,739
6,628
22,019
3,304
175
170
55
31
3,735
1,014
25,754
Note:
(1) Geography splits are based on country of collateral risk.
188
Business review Capital and risk management
Credit risk: management basis continued
Key points (unaudited)
The majority of the CRE exposure is managed by
Commercial & Private Banking. The reduction in exposure
over the period is the result of the successful
implementation of distribution and capital market activity, in
line with business strategy.
The commercial real estate market performed far better in
2017 than had been expected by most at the start of the
year. Investment activity was 20% up on 2016 and just 10%
short of the record level reached in 2015. A notable factor
was the influx of capital from China, estimated at over £10
billion, equating for approximately 15% of the total market.
Much of this capital was targeted at the London office
market, helping to support values despite the ongoing risks
associated with exiting the European Union. The industrial
market was the standout performer, supported by growing
demand for logistics capacity. At the other end of the scale,
the retail sector continued to feel the effect of online sales
growth, with secondary shopping centres particularly at risk
from falling tenant demand.
As a result of wider ongoing economic uncertainty, tightened
underwriting standards were maintained, with further
tightening of appetite in certain asset classes and sub-
sectors throughout the year.
The core strategy for CRE in the Republic of Ireland is in
line with the wider Ulster Bank RoI strategy to support the
Irish economy with some controlled growth of the balance
sheet over the upcoming years, within risk appetite.
Commercial Banking UK investment portfolio by UK region on a current exposure basis (unaudited)
UK region
Greater London
Multiple locations (1)
South East
Midlands
North
Scotland
Rest of UK
Note:
(1) Lending secured against property portfolios with multiple assets across the UK.
CRE loan-to-value ratio on a current exposure basis
Loan-to-value
<= 50%
> 50% and <= 70%
> 70% and <= 90%
> 90% and <= 100%
> 100% and <= 110%
> 110% and <= 130%
> 130% and <= 150%
> 150%
Total with LTVs
Total portfolio average LTV (1)
Other (2)
Development (3)
2017
£m
3,535
2,753
1,512
1,520
1,465
960
829
%
27
22
12
12
12
8
7
2016
£m
3,816
2,976
1,650
1,767
1,635
1,006
915
%
27
22
12
13
12
7
7
2017
2016
AQ1-AQ9
£m
9,608
6,631
483
83
34
67
45
74
17,025
47%
3,023
3,610
AQ10
£m
54
105
81
21
16
407
23
31
738
119%
311
148
Total
£m
9,662
6,736
564
104
50
474
68
105
17,763
51%
3,334
3,758
AQ1-AQ9
£m
10,695
6,508
773
130
74
136
82
108
18,506
48%
2,356
3,555
AQ10
£m
53
120
124
41
24
357
28
61
808
113%
349
180
Total
£m
10,748
6,628
897
171
98
493
110
169
19,314
51%
2,705
3,735
23,658
1,197
24,855
24,417
1,337
25,754
Notes:
(1) Weighted average by current exposure gross of provisions.
(2) Relates predominantly to business banking, rate risk management products and unsecured corporate lending.
(3) Relates to the development of commercial and residential properties. LTV is not a meaningful measure for this type of lending activity.
189
Business review Capital and risk management
Credit risk: management basis continued
CRE asset quality on a current exposure basis (unaudited)
AQ1-AQ4
AQ5-AQ8
AQ9
AQ10
Total
Forbearance flow
Risk of Credit Loss
Provision (including latent)
Shipping on a current exposure basis (unaudited)
Exposure to the shipping sector is summarised below.
AQ1-AQ4
AQ5-AQ8
AQ9
AQ10
Total
Forbearance flow
Risk of Credit Loss
Provision
2017
£m
7,609
15,960
90
1,196
24,855
302
108
334
2017
£m
1,159
869
—
483
2,511
—
23
168
2016
£m
7,671
16,638
108
1,337
25,754
524
50
544
2016
£m
1,504
2,158
24
867
4,553
723
362
394
Key points (unaudited)
The majority of the Shipping portfolio relates to loans or
finance leases secured by ocean-going vessels. The
remaining exposure relates principally to Ports, Shipbuilding
and Inland Water Transport sub sectors. In line with RBS’s
exit strategy for this portfolio the reduction in exposure
during 2017 was largely driven by asset sales and debt
repayment on the ship finance product; with other exposure
remaining largely stable.
The key component of the AQ1-AQ4 exposure banding is a
portfolio of long-dated finance leases, financing ships to
investment-grade oil majors and shipping companies.
The most significant movement in exposure during 2017
was in the AQ5-AQ8 banding where the bulk of the ship
finance debt portfolio lies. The reduction in exposure was
mainly as a result of asset disposals resulting from the exit
strategy.
Continued progress in managing down the defaulted
portfolio resulted in lower AQ10 exposure, with very few new
transfers into the category during 2017.
The weakness in the dry bulk and container shipping
markets generated a high level of forbearance activity in
2016. However, a recovery in those markets – particularly in
dry bulk – during 2017 limited the flow into forbearance.
Fewer forbearance concessions were granted and these
related to smaller exposures. The market recovery – as well
as clients, in general, continuing to support their shipping
investments in terms of maintaining debt service and
security cover covenants – allowed RBS to remove a
number of transactions from risk of loss status during the
year.
190
Business review Capital and risk management
Credit risk: management basis continued
Balance sheet to current exposure bridge (unaudited)
The table below provides a bridge between the balance sheet and the related components of current exposure (CE).
Netting
and
Methodology
differences and
collateral (3) reclassifications (4)
£bn
£bn
Not within the
scope of
CE (5)
£bn
—
—
(3.4)
2017
Cash and balances at central banks
Reverse repurchase agreements and stock
borrowing (6)
Loans and advances
Debt securities
Equity shares
Settlement balances
Derivatives
Other assets (7)
Total assets
Contingent obligations
2016
Cash and balances at central banks
Reverse repurchase agreements and stock
borrowing (6)
Loans and advances
Debt securities
Equity shares
Settlement balances
Derivatives
Other assets (7)
Total assets
Contingent obligations
Balance
Within
the scope of
sheet market risk (1)
£bn
£bn
98.3
—
40.7
339.4
78.9
0.5
2.5
160.8
16.8
738.0
—
(0.3)
(27.4)
—
—
—
—
(27.7)
74.3
—
41.8
340.3
72.5
0.7
5.5
247.2
16.8
799.1
—
(0.2)
(24.4)
(0.2)
—
—
—
(24.8)
Disposal
groups (2)
£bn
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(34.2)
(21.6)
—
—
—
(149.5)
—
(205.3)
—
(39.4)
(24.4)
—
—
—
(226.8)
—
(290.6)
—
(9.0)
0.2
—
—
—
—
(8.9)
(0.6)
—
(8.4)
0.4
(0.5)
—
(1.4)
—
(10.5)
CE
£bn
94.9
2.2
304.6
51.6
—
—
11.3
1.3
465.9
9.9
475.8
(4.4)
(3.9)
—
(0.5)
(2.5)
—
(15.5)
(30.2)
(4.2)
69.5
—
(1.7)
—
—
(5.5)
—
(15.5)
(26.9)
2.4
305.6
48.5
(0.0)
—
19.0
1.3
446.3
11.3
457.6
Notes:
(1) The exposures in regulatory trading book businesses are subject to market risk and are hence excluded from current exposure.
(2) Amounts reclassified to balance sheet lines.
(3) Primarily includes:
- Reverse repos: reflects netting of collateral and cash legs.
- Loans and advances: cash collateral pledged with counterparties in relation to net derivative liability positions.
- Derivatives: impact of master netting arrangements.
(4) Primarily includes cash management pooling arrangements not allowed under IFRS for loans and advances.
- Settlement balances: exposure not included in current exposure measure
(5) Primarily includes cash in ATMs and branches; Other assets (see note below); and Settlement balances (not within the scope of current exposure).
(6) Balance sheet position shows reverse repurchase and stock borrowing position; current exposure position shows net reverse repurchase/stock borrowing and repurchase/stock
lending position.
(7) Balance sheet position includes intangible assets, property, plant and equipment, deferred tax, prepayments and accrued income and assets of disposal groups.
191
Business review Capital and risk management
Credit risk: balance sheet analysis
Current and Potential Exposures presented in Credit risk: management basis are used by Group Credit Risk Management for risk
management and monitoring. However, they exclude certain exposures, primarily trading securities and take account of legal netting
agreements that provide a right of legal set-off but do not meet the offset criteria in IFRS. The tables that follow are therefore provided to
supplement the disclosures in the Credit risk: management basis section, to reconcile to the balance sheet. The tables in this section
include balances relating to disposal groups, reflecting the total credit risk and losses faced by RBS. All the disclosures in this section
are audited.
Financial assets
Exposure summary and credit mitigation
The following table analyses financial asset exposures, both gross and net of offset arrangements, as well as credit mitigation and
enhancement.
IFRS Carrying Balance sheet
Exposure
post credit
Credit mitigation and
Real estate and other
offset (3) Cash (5) Securities (6) Residential (7) Commercial (7)enhancement (8) enhancement
£bn
£bn
Collateral (4)
£bn
£bn
£bn
£bn
£bn
2017
Cash and balances
at central banks
Reverse repos
Lending
Debt securities
Equity shares
Derivatives
Settlement balances
Total
Short positions
Net of short positions
2016
Cash and balances
at central banks
Reverse repos
Lending
Debt securities
Equity shares
Derivatives
Settlement balances
Total
Short positions
Net of short positions
Gross
exposure
£bn
98.4
84.7
340.6
78.9
0.5
177.9
3.2
784.2
(28.5)
755.7
74.3
73.5
340.9
72.5
0.7
298.1
7.0
867.0
(22.1)
844.9
offset (1)
£bn
value (2)
£bn
—
(44.0)
(1.1)
—
—
(17.1)
(0.7)
(62.9)
—
98.4
40.7
339.5
78.9
0.5
160.8
2.5
721.3
(28.5)
—
(0.3)
(27.9)
—
—
(128.3)
—
(156.5)
—
—
—
(0.9)
—
—
(20.3)
—
(21.2)
—
(62.9)
692.8
(156.5)
(21.2)
—
(31.7)
(0.6)
—
—
(51.1)
(1.5)
(84.9)
—
74.3
41.8
340.3
72.5
0.7
247.0
5.5
782.1
(22.1)
—
(1.1)
(29.8)
—
—
(197.3)
—
(228.2)
—
—
—
(0.8)
—
—
(28.7)
—
(29.5)
—
(84.9)
760.0
(228.2)
(29.5)
—
(40.4)
(3.3)
—
—
(5.9)
—
(49.6)
—
(49.6)
—
(40.7)
(3.5)
—
—
(8.4)
—
(52.6)
—
(52.6)
—
—
(174.2)
—
—
—
—
(174.2)
—
(174.2)
—
—
(154.3)
—
—
—
—
(154.3)
—
(154.3)
—
—
(45.0)
(0.1)
—
—
—
(45.1)
—
(45.1)
—
—
(52.8)
—
—
—
—
(52.8)
—
(52.8)
—
—
(2.1)
—
—
(6.3)
—
(8.4)
—
(8.4)
—
—
(2.1)
—
—
(12.6)
—
(14.7)
—
(14.7)
98.4
—
86.1
78.8
0.5
—
2.5
266.3
(28.5)
237.8
74.3
—
97.0
72.5
0.7
—
5.5
250.0
(22.1)
227.9
Notes:
(1) Relates to offset arrangements that comply with IFRS criteria and transactions cleared through and novated to central clearing houses, primarily London Clearing House and US
Government Securities Clearing Corporation. During 2016 and 2017, changes in the legal contracts with LCH and CME led to many derivatives cleared through that
counterparty being settled to market each day rather than being collateralised as previously. This led to the derecognition of the associated assets and liabilities.
(2) The carrying value on the balance sheet represents the exposure to credit risk by class of financial instrument.
(3) The amount by which credit risk exposure is reduced through arrangements, such as master netting agreements and cash management pooling, which give RBS a legal right to
set off the financial asset against a financial liability due to the same counterparty.
(4) RBS holds collateral in respect of individual loans and advances to banks and customers. This collateral includes mortgages over property (both personal and commercial);
charges over business assets such as plant, inventories and trade debtors; and guarantees of lending from parties other than the borrower. RBS obtains collateral in the form of
securities in reverse repurchase agreements. Cash and securities are received as collateral in respect of derivative transactions.
(5)
Includes cash collateral pledged by counterparties based on daily mark-to-market movements of net derivative positions with the counterparty.
(6) Represent the fair value of securities received from counterparties, mainly relating to reverse repo transactions as part of netting arrangements.
(7) Property valuations are capped at the loan value and reflect the application of haircuts in line with regulatory rules to indexed valuations. Commercial collateral includes ships
and plant and equipment collateral.
(8) Comprises credit derivatives (bought protection) and guarantees against exposures.
Key points
The majority of the £237.8 billion net exposure
comprises cash and balances at central banks,
unsecured commercial and personal bank lending and
sovereign debt securities.
Net exposure increased by £9.9 billion reflecting higher
cash placements with UK and Eurozone central banks
and higher debt securities
192
Business review Capital and risk management
Credit risk: balance sheet analysis continued
Sector concentration
The following table analyses financial assets by industry sector.
2017
Central and local government
Financial institutions - banks
- other (1)
Personal - mortgages
- unsecured
Property
Construction
Manufacturing
Finance leases and instalment credit
Retail, wholesale and repairs
Transport and storage
Health, education and leisure
Hotels and restaurants
Utilities
Other
Total gross of provisions
Provisions
Total
2016
Central and local government
Financial institutions - banks
- other (1)
Personal - mortgages
- unsecured
Property
Construction
Manufacturing
Finance leases and instalment credit
Retail, wholesale and repairs
Transport and storage
Health, education and leisure
Hotels and restaurants
Utilities
Other
Total gross of provisions
Provisions
Total
Lending
£m
Securities
Debt
£m
Equity
£m
Derivatives
£m
Other
financial
assets
£m
Reverse
repos
£m
1,308
13,997 16,264
25,407 30,832
— 163,010
— 14,587
— 33,381
3,798
—
—
8,862
— 12,019
— 12,300
4,241
—
4 11,337
6,049
—
—
4,172
16 17,726
4,684 63,070
4,062
9,895
—
—
155
2
888
2
33
198
23
18
49
566
40,732 343,262 78,961
(28)
(3,814)
—
—
4
325
—
—
2
—
107
—
—
—
—
—
—
21
1,806
20
89,972 98,337
2,352
61,824
—
—
15
1
—
797
10
106
28
884
—
—
16
311
—
549
553
5
—
31
46
2,564
39
1,431
459 160,843 100,854
—
—
(9)
Balance
sheet value
£m
70,888
222,636
130,635
163,010
14,603
34,335
3,916
10,769
12,021
12,660
4,988
11,922
6,098
6,831
19,799
725,111
(3,851)
Offset
£m
(3,356)
(94,912)
(67,267)
—
—
(1,234)
(632)
(1,583)
—
(1,434)
(717)
(757)
(168)
(1,673)
(3,102)
(176,835)
n/a
Exposure
post offset
£m
67,532
127,724
63,368
163,010
14,603
33,101
3,284
9,186
12,021
11,226
4,271
11,165
5,930
5,158
16,697
548,276
(3,851)
40,732 339,448 78,933
450 160,843 100,854
721,260
(176,835)
544,425
219
12,860 17,291
28,407 33,083
— 153,319
— 14,492
— 34,756
4,247
—
43
9,609
— 12,269
— 12,823
—
6,428
— 11,526
6,079
—
3,938
193
65 18,818
6,091 58,472
3,437
9,738
—
—
148
—
198
—
7
28
17
6
159
394
2,521
—
63
11 145,956 74,250
5,290
8
—
13
35
18
—
2
—
11
—
15
71
88,409
—
39
1,051
97
1,851
3
610
1,086
632
46
3,488
1,192
619
—
—
54
—
12
—
—
—
—
—
—
88
41,787 344,769 72,604
(82)
(4,455)
—
784 246,981 79,776
—
(81)
—
67,366
253,805
165,546
153,327
14,531
36,022
4,379
11,731
12,272
13,442
7,542
12,186
6,131
7,793
20,628
786,701
(4,618)
(5,188)
(149,941)
(91,395)
—
—
(1,111)
(779)
(1,083)
(3)
(1,610)
(971)
(648)
(181)
(1,603)
(2,324)
(256,837)
n/a
62,178
103,864
74,151
153,327
14,531
34,911
3,600
10,648
12,269
11,832
6,571
11,538
5,950
6,190
18,304
529,864
(4,618)
41,787 340,314 72,522
703 246,981 79,776
782,083
(256,837)
525,246
Note:
(1)
Includes loans made by consolidated conduits to asset owning companies.
193
Business review Capital and risk management
Credit risk: balance sheet analysis continued
Asset quality
The asset quality analysis presented below is based on internal
asset quality ratings which have ranges for the probability of
default. Customers are assigned credit grades, based on various
credit grading models that reflect the key drivers of default for the
customer type. All credit grades across RBS map to both an
asset quality scale, used for external financial reporting, and a
master grading scale for wholesale exposures used for internal
management reporting across portfolios. Debt securities are
analysed by external ratings and are therefore excluded from the
following table and are set out on pages 201 to 202.
The table that follows details the relationship between internal
asset quality (AQ) bands and external ratings published by
Standard & Poor’s (S&P), for illustrative purposes only. This
relationship is established by observing S&P’s default study
statistics, notably the one year default rates for each S&P rating
grade. A degree of judgement is required to relate the probability
of default ranges associated with the master grading scale to
these default rates given that, for example, the S&P published
default rates do not increase uniformly by grade and the historical
default rate is nil for the highest rating categories.
Internal asset
quality band
AQ1
AQ2
AQ3
AQ4
AQ5
AQ6
AQ7
AQ8
AQ9
AQ10
Probability of
default range
0% - 0.034%
0.034% - 0.048%
0.048% - 0.095%
0.095% - 0.381%
0.381% - 1.076%
1.076% - 2.153%
2.153% - 6.089%
6.089% - 17.222%
17.222% - 100%
100%
Indicative
S&P rating
AAA to AA
AA to AA-
A+ to A
BBB+ to BBB-
BB+ to BB
BB- to B+
B+ to B
B- to CCC+
CCC to C
D
The mapping to the S&P ratings is used by RBS as one of
several benchmarks for its wholesale portfolios, depending on
customer type and the purpose of the benchmark. The mapping
is based on all issuer types rated by S&P. It should therefore be
considered illustrative and does not, for instance, indicate that
exposures reported against S&P ratings either have been or
would be assigned those ratings if assessed by S&P. In addition,
the relationship is not relevant for retail portfolios, smaller
corporate exposures or specialist corporate segments given that
S&P does not typically assign ratings to such entities.
2017
Cash and balances at central banks
Banks
- Reverse repos
- Derivative cash collateral
- Bank loans
- Total
Customers
- Reverse repos
- Derivative cash collateral
- Customer loans
- Total
Settlement balances and
other financial assets
Derivatives
Undrawn commitments
Contingent liabilities
Total
Total %
AQ1-AQ4
£bn
98.3
AQ5-AQ8
£bn
—
12.1
6.7
8.9
27.7
26.0
14.5
186.3
226.8
2.2
153.4
78.7
8.8
595.9
1.9
0.2
0.5
2.6
0.7
0.2
108.7
109.6
0.1
7.4
45.6
2.2
167.5
AQ9
£bn
—
—
—
—
—
—
—
2.8
2.8
0.1
—
0.1
—
3.0
AQ10
£bn
—
Past due
£bn
—
Impaired
£bn
—
Impairment
provision
£bn
—
—
—
—
—
—
—
0.7
0.7
0.1
—
0.5
0.1
1.4
—
—
—
—
—
—
6.4
6.4
—
—
—
—
6.4
—
—
—
—
—
—
7.4
7.4
—
—
—
—
—
—
—
—
—
—
(3.8)
(3.8)
—
—
—
—
7.4
(3.8)
Total
£bn
98.3
14.0
6.9
9.4
30.3
26.7
14.7
308.5
349.9
2.5
160.8
124.9
11.1
777.8
76.6%
21.5%
0.4%
0.2%
0.8%
1.0% (0.5%)
100.0%
194
Business review Capital and risk management
Credit risk: balance sheet analysis continued
2016
Cash and balances at central banks
Banks
- Reverse repos
- Derivative cash collateral
- Bank loans
- Total
Customers
- Reverse repos
- Derivative cash collateral
- Customer loans
- Total
Settlement balances and
other financial assets
Derivatives
Undrawn commitments
Contingent liabilities
Total
Total %
AQ1-AQ4
£bn
74.3
AQ5-AQ8
£bn
—
11.1
6.5
10.0
27.6
28.3
16.8
180.6
225.7
5.1
234.2
88.6
9.2
664.7
1.4
0.2
0.4
2.0
0.6
0.2
109.2
110.0
0.3
12.8
49.3
2.7
177.1
AQ9
£bn
—
0.4
—
0.1
0.5
—
—
4.2
4.2
—
—
0.1
—
4.8
AQ10
£bn
—
Past due
£bn
—
Impaired
£bn
—
Impairment
provision
£bn
—
—
—
—
—
—
—
1.0
1.0
0.1
—
0.6
0.1
1.8
—
—
—
—
—
—
6.6
6.6
—
—
—
—
6.6
—
—
—
—
—
—
8.9
8.9
—
—
—
—
8.9
—
—
—
—
—
—
(4.5)
(4.5)
—
—
—
—
(4.5)
Total
£bn
74.3
12.9
6.7
10.5
30.1
28.9
17.0
306.0
351.9
5.5
247.0
138.6
12.0
859.4
77.3%
20.7%
0.6%
0.2%
0.7%
1.0%
(0.5%)
100.0%
195
Business review Capital and risk management
Credit risk: balance sheet analysis continued
Loans, REIL and impairment provisions
Risk elements in lending (REIL) comprises impaired loans and accruing loans past due 90 days or more as to principal or interest.
Impaired loans are all loans (including loans subject to forbearance) for which an impairment provision has been established; for
collectively assessed loans, impairment loss provisions are not allocated to individual loans and the entire portfolio is included in
impaired loans. Accruing loans past due 90 days or more comprise loans past due 90 days where no impairment loss is expected.
Loans and related credit metrics
The tables below analyse gross loans and advances (excluding reverse repos) and related credit metrics by reportable segment.
2017
UK PBB
Ulster Bank RoI
Commercial Banking
Private Banking
RBS International
NatWest Markets
Central items & other
Total
2016*
UK PBB
Ulster Bank RoI
Commercial Banking
Private Banking
RBS International
NatWest Markets
Central items & other
Total
£m
Gross loans to
Banks Customers
£m
500 162,957
20,623
98,182
13,514
8,743
22,902
77
2,447
697
109
29
7,490
4,992
16,264 326,998
2,418
504 154,190
20,130
582 100,914
12,188
111
8,812
18
30,988
7,871
256
5,787
REIL
£m
1,975
3,282
3,196
95
103
253
—
8,904
2,372
3,513
1,946
105
109
2,264
1
17,291 327,478 10,310
REIL as a %
of gross loans
to customers
%
1.2
15.9
3.3
0.7
1.2
1.1
—
Credit metrics
Provisions Provisions as a %
of gross loans
to customers
%
0.8
5.5
1.2
0.2
0.4
0.8
—
as a %
of REIL
%
65
34
36
34
34
69
—
Impairment
losses/
(releases)
£m
235
60
362
6
3
(137)
1
Amounts
written-off
£m
572
124
335
4
6
167
2
2.7
43
1.2
530
1,210
1.5
17.5
1.9
0.9
1.2
7.3
0.4
3.1
65
34
43
30
35
35
100
43
1.0
6.0
0.8
0.3
0.4
2.6
0.4
1.4
125
(113)
206
(3)
10
312
—
537
521
2,057
577
3
6
509
22
3,695
Provisions
£m
1,280
1,131
1,162
32
35
174
—
3,814
1,537
1,200
845
31
38
803
1
4,455
* Re-presented to reflect the segmental reorganisation.
Key points
UK PBB: mortgage growth of £8.8 billion was the principal
driver of the gross lending increase in 2017. Impairment
losses and write-offs were higher as debt flow into default
continues to increase, particularly for loans arising from
business written between Q4 2015 and mid 2016.
Commercial Banking: customer lending decreased by £2.7
billion as a result of active capital management offset by
growth in targeted segments. The increase in impairment
loss was largely driven by a small number of single name
impairments, principally in the second half of 2017.
Private Banking: lending growth of £1.3 billion primarily on
mortgages.
NatWest Markets: customer lending decreased by £8.0
billion primarily due to disposal activity.
Central items & other: Short term bank placings declined
£0.8 billion.
REIL were 2.7% of gross lending, down from 3.1% in
2016.This reflected the relatively low-interest-rate
environment in the UK and house price growth for personal
lending, along with disposal activity of legacy assets within
NatWest Markets.
Provisions coverage of REIL was stable at 43%, but within
that write offs, repayments and disposals in REIL were £1.2
billion and £2.7 billion compared with £3.7 billion and £3.3
billion a year ago.
Total provision fell by £0.6 billion to £3.8 billion principally in
legacy NatWest Markets. Commercial Banking provisions
increased by £236 million in Q4 2017 reflecting transfer of
legacy assets, including Shipping.
Amounts written off were significantly lower at £1.2 billion
compared to £3.7 billion in 2016, primarily in commercial
real estate which had £1.3 billion lower write offs in 2017,
principally in Ulster Bank RoI.
196
Business review Capital and risk management
Credit risk: balance sheet analysis continued
Impairment charge and provisions
The tables below analyse the categories of loan impairment losses/(releases) and provisions by reportable segment.
2017
UK PBB
Ulster Bank RoI
Commercial Banking
Private Banking
RBS International
NatWest Markets
Central items & other
Total
2016*
UK PBB
Ulster Bank RoI
Commercial Banking
Private Banking
RBS International
NatWest Markets
Central items & other
Total
Impairment losses/(releases)
Latent
£m
6
(4)
(6)
1
1
(12)
—
Collective
£m
212
72
32
—
—
(1)
—
315
(14)
Individual
£m
17
(8)
336
5
2
(124)
1
229
5
(8)
196
2
9
331
—
535
118
99
3
—
—
(2)
—
218
2
(204)
7
(5)
1
(17)
—
(216)
Impairment provision
Total
£m
235
60
362
6
3
(137)
1
530
125
(113)
206
(3)
10
312
—
537
Individual
£m
34
45
848
26
28
151
—
1,132
26
69
479
27
32
761
1
1,395
Collective
£m
1,035
1,010
229
—
—
18
—
2,292
1,306
1,053
278
—
—
23
—
2,660
Latent
£m
211
76
85
6
7
5
—
390
205
78
88
4
6
19
—
400
Total
£m
1,280
1,131
1,162
32
35
174
—
3,814
1,537
1,200
845
31
38
803
1
4,455
* Re-presented to reflect segmental reorganisation.
197
Business review Capital and risk management
Credit risk: balance sheet analysis continued
Sector and geographical concentration
The tables below analyse gross loans and advances to banks and customers (excluding reverse repos) and related credit metrics by
sector and geography based on the location of lending office. Ulster Bank RoI contributes a significant proportion of the European loan
exposure. Refer to Business review on page 134.
REIL
as a % of
gross loans
%
Credit metrics
Provisions
as a %
of REIL
%
Provisions
as a % of
gross loans
%
Impairment
losses/
(releases)
£m
Amounts
written-off
£m
REIL
£m
Provisions
£m
2017
Central and local government
Finance
Personal - mortgages (1)
- unsecured
Property
Construction
of which: commercial real estate
Manufacturing
Finance leases and instalment credit
Retail, wholesale and repairs
Transport and storage
Health, education and leisure
Hotels and restaurants
Utilities
Other
Latent
Total
Of which:
UK
Personal - mortgages
- unsecured
Property and construction
of which: commercial real estate
Other
Latent
Total
Europe
Personal - mortgages
- unsecured
Property and construction
of which: commercial real estate
Other
Latent
Total
Total banks
Gross
loans
£m
4,684
30,832
163,010
14,587
33,381
3,798
24,784
8,862
12,019
12,300
4,241
11,337
6,049
4,172
17,726
—
326,998
147,399
14,145
35,985
23,754
107,654
—
305,183
15,572
442
1,194
1,030
4,054
—
21,262
—
54
3,876
937
1,119
426
1,189
147
170
446
700
330
193
35
471
—
8,904
849
892
1,488
1,139
2,309
—
5,538
3,027
45
57
50
191
—
3,320
—
44
994
763
283
298
293
64
88
193
195
145
80
21
256
390
3,814
137
721
528
247
908
312
2,606
857
41
52
46
133
78
1,161
—
0.2
2.4
6.4
3.4
11.2
4.8
1.7
1.4
3.6
16.5
2.9
3.2
0.8
2.7
—
2.7
0.6
6.3
4.1
4.8
2.1
—
1.8
19.4
10.2
4.8
4.9
4.7
—
15.6
—
81
26
81
25
70
25
44
52
43
28
44
41
60
54
—
43
16
81
35
22
39
—
47
28
91
91
92
70
—
35
—
—
0.1
0.6
5.2
0.8
7.8
1.2
0.7
0.7
1.6
4.6
1.3
1.3
0.5
1.4
—
1.2
0.1
5.1
1.5
1.0
0.8
—
0.9
5.5
9.3
4.4
4.5
3.3
—
5.5
—
—
3
50
235
(82)
196
(76)
4
23
93
(32)
65
17
(18)
(10)
(14)
—
7
87
424
133
36
139
25
14
81
165
48
46
13
131
—
530
1,210
(22)
229
131
(71)
142
(7)
473
72
3
(9)
(5)
(9)
(6)
51
—
20
411
144
116
495
—
1,070
63
11
24
23
31
—
129
—
16,264
—
—
—
Note:
(1) Mortgages are reported in sectors other than personal mortgages by certain businesses based on the nature of the relationship with the customer.
For commentary on residential mortgages and commercial real estate see Credit risk management basis section
198
REIL
as a % of
gross loans
%
Credit metrics
Provisions
as a %
of REIL
%
Provisions
as a % of
gross loans
%
Impairment
losses/
(release)
£m
Amounts
written-off
£m
REIL
£m
Provisions
£m
Business review Capital and risk management
Credit risk: balance sheet analysis continued
2016
Central and local government
Finance
Personal - mortgages (1)
- unsecured
Property
Construction
of which: commercial real estate
Manufacturing
Finance leases and instalment credit
Retail, wholesale and repairs
Transport and storage
Health, education and leisure
Hotels and restaurants
Utilities
Other
Latent
Gross
loans
£m
6,091
33,083
153,319
14,492
34,756
4,247
26,265
9,609
12,269
12,823
6,428
11,526
6,079
3,938
18,818
—
1
61
4,091
1,113
1,370
264
1,407
173
139
283
1,388
381
211
95
740
—
1
51
1,019
900
489
137
511
90
79
182
422
129
107
50
399
400
Total customers
327,478
10,310
4,455
Of which:
UK
Personal - mortgages
- unsecured
Property and construction
of which: commercial real estate
Other
Latent
Total
Europe
Personal - mortgages
- unsecured
Property and construction
of which: commercial real estate
Other
Latent
Total
Total banks
137,427
14,198
37,942
25,311
115,833
—
305,400
15,548
265
1,055
947
3,920
—
20,788
943
1,060
1,543
1,323
3,133
—
6,679
3,144
52
85
78
279
—
3,560
143
853
537
426
1,299
318
3,150
872
46
84
78
165
83
1,250
—
0.2
2.7
7.7
3.9
6.2
5.4
1.8
1.1
2.2
21.6
3.3
3.5
2.4
3.9
—
3.1
0.7
7.5
4.1
5.2
2.7
—
2.2
20.2
19.6
8.1
8.2
7.1
—
17.1
100
84
25
81
36
52
36
52
57
64
30
34
51
53
54
—
43
15
80
35
32
41
—
47
28
88
99
100
59
—
35
—
0.2
0.7
6.2
1.4
3.2
1.9
0.9
0.6
1.4
6.6
1.1
1.8
1.3
2.1
—
1.4
0.1
6.0
1.4
1.7
1.1
—
1.0
5.6
17.4
8.0
8.2
4.2
—
6.0
1
(2)
222
138
(162)
8
(184)
13
8
39
419
8
13
(20)
68
(216)
537
(4)
132
(98)
(102)
666
(12)
684
226
5
(56)
(83)
(156)
(204)
(185)
2
17
290
396
1,485
153
1,483
90
12
169
301
75
116
2
587
—
3,695
3
362
676
600
629
—
1,670
287
11
933
878
665
—
1,896
17,291
—
—
—
—
—
—
—
Note:
(1) Mortgages are reported in sectors other than personal mortgages by certain businesses based on the nature of the relationship with the customer.
199
Business review Capital and risk management
Past due analysis
The table below shows loans and advances to customers that were past due at the balance sheet date but are not considered impaired.
Past due 1-29 days
Past due 30-59 days
Past due 60-89 days
Past due 90 days or more
Total
Past due analysis by sector
Personal
Property and construction
Financial institution
Other corporate
Total
2017
£m
3,535
902
456
1,481
6,374
3,731
667
24
1,952
6,374
2016
£m
3,852
753
512
1,445
6,562
3,577
1,020
94
1,871
6,562
Risk elements in lending
The table below analyses REIL between UK and overseas, based on the location of the lending office.
- UK
- overseas
Total
2017
2016
Impaired loans
£m
Accruing past due
£m
Impaired loans
£m
Accruing past due
£m
4,450
2,973
7,423
1,087
394
1,481
5,557
3,308
8,865
1,122
323
1,445
Notes:
(1) REIL are stated without giving effect to any security held that could reduce the eventual loss should it occur or to any provisions marked.
(2) For details on impairment methodology refer to Credit risk on page 182 and Accounting policy 15 Impairment of financial assets on pages 255 and 256.
2017
Private
RBS
Banking International
£m
£m
Risk elements in lending
The tables below analyse REIL by segment.
At 1 January*
Inter segment transfers
Currency translation and other adjustments
Additions
Transfers between REIL and
potential problem loans
Transfer to performing book
Repayments and disposals
Amounts written-off
UK
PBB
£m
2,372
—
—
1,227
(152)
(294)
(606)
(572)
Ulster
Bank Commercial
Banking
£m
RoI
£m
3,513
—
123
550
1,946
1,384
—
1,590
—
(336)
(444)
(124)
10
(283)
(1,116)
(335)
At 31 December
1,975
3,282
3,196
* Re-presented to reflect segmental reorganisation
105
—
—
28
(2)
—
(32)
(4)
95
Central
items
& other
£m
1
—
1
14
—
(1)
(13)
(2)
Total
£m
10,310
—
43
3,569
(129)
(959)
(2,720)
(1,210)
2016
Total
£m
12,157
—
1,013
5,306
(166)
(960)
(3,345)
(3,695)
NatWest
Markets
£m
2,264
(1,384)
(86)
98
8
(12)
(468)
(167)
109
—
5
62
7
(33)
(41)
(6)
103
253
—
8,904
10,310
200
Business review Capital and risk management
Credit risk: balance sheet analysis continued
Provisions
The tables below analyse provisions by segment.
UK
PBB
£m
RoI
£m
At 1 January*
Inter segment transfers
Currency translation
and other adjustments
Repayments and disposals
Amounts written-off
Recoveries of amounts
previously written-off
Charges/(releases) to income statement
Unwind of discount
1,537
—
1,200
—
—
—
(572)
117
235
(37)
8
—
(124)
12
60
(25)
At 31 December
1,280
1,131
1,162
* Re-presented to reflect segmental reorganisation
2017
2016
Ulster
Bank Commercial
Private
RBS
NatWest
Banking
£m
845
293
(7)
—
(335)
16
362
(12)
Banking International
£m
£m
31
—
—
—
(4)
—
6
(1)
32
38
—
—
—
(6)
1
3
(1)
35
Markets
£m
803
(293)
(27)
(5)
(167)
10
(137)
(10)
174
Central
items
& other
£m
1
—
—
—
(2)
—
1
—
—
Total
£m
4,455
—
Total
£m
7,139
—
(26)
(5)
(1,210)
480
—
(3,697)
156
530
(86)
109
537
(113)
3,814
4,455
Securities and available-for-sale reserves
Debt securities
The table below analyses debt securities by issuer and IAS 39 classifications. The other financial institutions category includes US
government sponsored agencies and securitisation entities, the latter principally relating to asset-backed securities (ABS). Ratings are
based on the lowest of Standard & Poor’s, Moody’s and Fitch.
2017
Held-for-trading (HFT)
Available-for-sale (AFS)
Loans and receivables (LAR)
Held-to-maturity (HTM)
Total
Of which US agencies
Short positions (HFT)
Ratings
AAA
AA to AA+
A to AA-
BBB- to A-
Non-investment grade
Unrated
Total
Available-for-sale
AFS reserves (gross of tax)
Gross unrealised gains
Gross unrealised losses
Of which:
less than 12 months
more than 12 months
Central and local government
UK
£m
US
£m
Other
£m
3,514
17,656
—
4,128
3,667 14,736
8,461 11,454
—
—
—
—
25,298 12,128 26,190
Banks
£m
1,844
2,218
—
—
4,062
Other financial
institutions
£m
Corporate
£m
2,746
3,784
3,501
—
974
108
142
—
Total
£m
27,481
43,681
3,643
4,128
10,031
1,224
78,933
Of which
ABS
£m
870
1,826
3,500
—
6,196
—
(3,490)
—
—
(2,501) (20,390)
—
(584)
333
(1,361)
—
(200)
333
(28,526)
—
—
—
—
25,298 12,128
—
—
—
—
—
—
—
—
9,130
4,183
8,966
3,526
385
—
25,298 12,128 26,190
2,502
396
452
442
210
60
4,062
6,354
1,538
1,053
406
446
234
27
180
259
538
171
49
18,013
43,723
10,730
4,912
1,212
343
10,031
1,224
78,933
4,320
455
995
138
256
32
6,196
108
44
119
703
(19)
(19)
—
67
(70)
(70)
—
324
(16)
(16)
—
6
8
(4)
(4)
—
125
24
(7)
(5)
(2)
—
1
(1)
(1)
—
402
1,127
(117)
(115)
(2)
11
12
—
—
—
201
Business review Capital and risk management
Credit risk: balance sheet analysis continued
2016
Held-for-trading (HFT)
Designated as at fair value (DFV)
Available-for-sale (AFS)
Loans and receivables (LAR)
Held-to-maturity (HTM)
Total
Of which US agencies
Short positions (HFT)
Ratings
AAA
AA to AA+
A to AA-
BBB- to A-
Non-investment grade
Unrated
Total
Available-for-sale
AFS reserves (gross of tax)
Gross unrealised gains
Gross unrealised losses
Of which:
less than 12 months
more than 12 months
Central and local government
UK
£m
US
£m
Other
£m
2,615
—
10,581
—
4,769
—
4,133 14,087
25
6,953 15,678
—
—
—
—
17,965 11,086 29,790
Banks
£m
821
—
1,852
—
—
2,673
Other financial
institutions
£m
Corporate
£m
2,299
2
4,072
3,774
—
10,147
549
—
118
194
—
861
Total
£m
24,504
27
39,254
3,968
4,769
72,522
Of which
ABS
£m
886
—
2,263
3,814
—
6,963
—
(2,644)
—
—
(4,989) (13,346)
—
(334)
386
(640)
—
(121)
386
(22,074)
—
—
—
17,965 11,086
—
—
—
—
—
—
—
—
— 11,478
5,533
9,727
2,737
315
—
17,965 11,086 29,790
1,610
481
238
155
69
120
2,673
6,024
720
2,128
698
458
119
10,147
36
34
150
378
31
232
861
19,148
35,819
12,243
3,968
873
471
72,522
3,993
244
1,627
645
381
73
6,963
79
(66)
190
768
(16)
56
(123)
504
(13)
(16)
—
(123)
—
(13)
—
5
8
(1)
(1)
—
144
93
(43)
(11)
(32)
(6)
2
(2)
(2)
—
346
46
1,431
(198)
(166)
(32)
75
(32)
(1)
(31)
Key points
HFT assets and short positions: UK government securities,
as well as European and Japanese government bonds,
increased in 2017 driven by client flow trading and market
making activity in NatWest Markets. US government
securities were down, both assets and short positions,
compared with 2016 due to lower client demand towards the
end of 2017.
AFS assets: The increase in 2017, largely within UK
government securities, was due to the liquidity portfolio
management, as gilts offered higher capital adjustment
returns relative to central bank cash balances.
202
Business review Capital and risk management
Credit risk: balance sheet analysis continued
Asset-backed securities
The table below summarises the ratings of asset-backed securities on the balance sheet.
2017
AAA
AA to AA+
A to AA-
BBB- to A-
Non-investment grade (2)
Unrated (3)
Total
2016
AAA
AA to AA+
A to AA-
BBB- to A-
Non-investment grade (2)
Unrated (3)
Total
RMBS (1)
Non-
conforming
£m
—
—
1
—
1
—
2
—
155
2
—
1
—
158
Prime
£m
1,255
408
500
83
159
5
2,410
654
52
460
84
182
5
1,437
Sub-prime
£m
—
—
—
—
—
—
—
—
—
—
—
8
—
8
CMBS (1)
£m
—
—
36
4
4
—
44
—
—
22
470
15
—
507
CDOs &
CLOs
£m
75
19
55
27
52
8
236
23
3
33
21
121
19
220
Other
ABS
£m
2,990
28
403
24
40
19
3,504
3,316
34
1,110
70
54
49
4,633
Total
£m
4,320
455
995
138
256
32
6,196
3,993
244
1,627
645
381
73
6,963
Notes:
(1) Residential mortgage-backed securities (RMBS) and commercial mortgaged-backed securities (CMBS) are securities that represent an interest in a portfolio of residential and
commercial mortgages respectively. Repayments made on the underlying mortgages are used to make payments to holders of the mortgage-backed securities (MBS). The risk
of the MBS will vary primarily depending on the quality and geographic region in which the underlying mortgage assets are located and the credit enhancement of the
securitisation structure. Several tranches of notes are issued, each secured against the same portfolio of mortgages, but providing differing levels of seniority to match the risk
appetite of investors. The most junior (or equity) notes will suffer early capital and interest losses experienced by the referenced mortgage collateral, with each more senior note
benefiting from the protection provided by the subordinated notes below. Additional credit enhancements may be provided to the holder of senior MBS notes.
The main categories of mortgages that serve as collateral to RMBS held by RBS are set out below and described in the Glossary on page 414. The US market has more
established definitions of differing underlying mortgage quality and these are used as the basis for RBS's RMBS categorisation.
(2) Comprises HFT £256 million (2016 - £282 million), AFS nil (2016 - £99 million) and LAR nil (2016 - nil).
(3) Comprises HFT £14 million (2016 - £25 million), AFS nil (2016 - nil) and LAR £18 million (2016 - £48 million).
Equity shares
The table below analyses holdings of equity shares for eurozone countries and other countries with balances of more than £50 million
by country, issuer and IAS 39 classification. The HFT positions are used mainly for economic hedging of debt issuances and equity
derivatives. The AFS balances are individually small holdings in unlisted companies, mainly acquired through debt for equity
transactions in Restructuring.
Countries
2017
Netherlands
Other
Total eurozone
UK
US
Other
Total
2016
Total
HFT
Other financial
institutions (2) Corporate
£m
£m
Banks
£m
—
—
—
1
—
—
1
—
1
1
4
—
—
5
—
4
4
19
—
—
23
Total
HFT
£m
—
5
5
24
—
—
29
AFS/DFV (1)
Other financial
Banks institutions (2) Corporate
£m
£m
£m
—
—
—
3
—
—
3
39
11
50
123
126
17
316
84
—
84
13
2
3
102
Total
AFS/DFV
£m
123
11
134
139
128
20
421
Total
£m
123
16
139
163
128
20
450
AFS
reserves
£m
2
2
4
(63)
38
3
(18)
10
132
24
166
—
460
77
537
703
19
Notes:
(1) Designated as at fair value through profit or loss balances are £134 million (2016 - £171 million), of which £47 million are other financial institutions (2016 - £142 million) and £87
million are corporate (2016 - £29 million).
(2) Includes government sponsored entities.
(3) HFT short positions of £1 million (2016 - £3 million) did not relate to non-periphery eurozone countries.
203
Business review Capital and risk management
Credit risk: balance sheet analysis continued
Derivatives
Summary and net uncollateralised exposures
The table below analyses derivatives by type of contract. The master netting agreements and collateral shown below do not result in a
net presentation on the balance sheet under IFRS.
2017
2016
Interest rate
Exchange rate
Credit
Equity and commodity
Balance sheet
Counterparty mark-to-market netting
Cash collateral
Securities collateral
Net exposure
Banks (1)
Other financial institutions (2)
Corporate (3)
Government (4)
Net exposure
UK
Europe
US
RoW
Net exposure
Asset quality of uncollateralised derivative assets
AQ1 - AQ4
AQ5 - AQ8
AQ9
AQ10
Net exposure
—
—
USD
£bn
GBP
£bn
Total
£bn
Other
£bn
Assets
£m
Notional
£bn
Liabilities
£m
352 1,598
9
2
Notional
Euro
£bn
2,512 4,311 4,317
579
29
1
Assets
£m
876 12,016 120,945 112,160 16,625 170,524
75,442
896 3,425
682
38
333
3
2,864 5,920 4,926 1,772 15,482 160,843 154,506 21,133 246,981
(197,288)
(28,742)
(8,435)
12,516
(128,287) (128,287)
(18,035)
(3,952)
4,232
(20,311)
(5,850)
6,395
41,681
558
107
39,211
531
156
4,445
42
21
—
—
Liabilities
£m
158,485
77,148
557
285
236,475
(197,288)
(20,417)
(11,048)
7,722
1,339
2,897
3,393
93
7,722
3,009
3,215
673
825
7,722
466
1,625
2,065
76
4,232
1,853
1,777
317
285
4,232
461
1,608
3,843
483
6,395
4,079
1,643
346
327
6,395
2017
£m
5,173
1,216
3
3
6,395
1,260
3,090
7,348
818
12,516
7,065
3,466
930
1,055
12,516
2016
£m
9,775
2,724
4
13
12,516
Notes:
(1) Transactions with certain counterparties with whom RBS has netting arrangements but collateral is not posted on a daily basis; certain transactions with specific terms that may
not fall within netting and collateral arrangements; derivative positions in certain jurisdictions for example China where the collateral agreements are not deemed to be legally
enforceable.
(2) Transactions with securitisation vehicles and funds where collateral posting is contingent on RBS’s external rating.
(3) Predominantly large corporate with whom RBS may have netting arrangements in place, but operational capability does not support collateral posting.
(4) Sovereigns and supranational entities with one way collateral agreements in their favour.
(5) The notional amount of interest rate derivatives include £7,400 billion (2016 - £9,724 billion) in respect of contracts cleared through central clearing counterparties. The
associated derivatives assets and liabilities including variation margin reflect IFRS offset of £17 billion (2016 - £51 billion) and £17 billion (2016 - £51 billion) respectively.
Key points
Interest rate derivative fair values decreased, reflecting the
upward shift in yields of US dollar, sterling and euro during
2017, as well as trade compression and novations to
clearing houses.
The decrease in foreign exchange derivative fair values
reflected US dollar depreciation against major currencies in
2017.
Derivative notionals decreased by 27%, mainly due to trade
compression cycle participation, maturities and buyouts, as
well as the effect of foreign exchange. This was offset by
new business.
Net asset and liability exposures both decreased in line with
the overall reduction in fair values. The corporate sector
reductions largely reflected disposal activity in legacy
NatWest Markets. The other financial sector reduction was
partially due to timing of collateral posting.
204
Business review Capital and risk management
Credit risk: balance sheet analysis continued
Valuation reserves
When valuing financial instruments in the trading book, adjustments are made to mid-market valuations to cover bid-offer spread,
liquidity and credit risk. The following table shows credit valuation adjustments (CVA) and other valuation reserves. CVA represents an
estimate of the adjustment to fair value that a market participant would make to incorporate the risk inherent in derivative exposures. For
details of CVA methodology, refer to Note 9 on the consolidated accounts: Financial instruments - valuation.
Funding valuation adjustments (FVA)
Credit valuation adjustments (CVA)
Bid-offer reserves
Product and deal specific
Valuation reserves
The table below analyses CVA relating to counterparties by rating and sector.
Ratings
AAA
AA to AA+
A to AA-
BBB- to A-
Non-investment grade and unrated
Counterparty
Banks
Other financial institutions
Corporate
Government
2017
£m
440
346
285
1,033
2,104
2017
£m
4
11
34
203
94
346
8
31
200
107
346
2016
£m
936
618
334
643
2,531
2016
£m
4
22
52
388
152
618
22
70
337
189
618
Key points
Both FVA and CVA were lower due to trade novations and
market movements in 2017.
Reduced funding levels and an increase in the level of
funding costs included within the discount rate applied to
derivative cash flows also contributed to the FVA reduction.
Credit spread tightening also contributed to the CVA
reduction.
The product and deal specific reserves increased primarily
on a limited number of uncollateralised derivatives after the
pricing impact of a significant novation in the second half of
2017 was incorporated into transactions of a similar nature.
Derivatives: settlement basis and central counterparties
The table below analyses the derivative notional and fair value by trading and settlement method.
Notional
Traded over the counter
Asset
Liability
Traded on
recognised Settled by central
counterparties
exchanges
£bn
£bn
Not settled
by central
counterparties
£bn
Traded on
recognised
exchanges
£m
Total
£bn
2017
Interest rate
Exchange rate
Credit
Equity and commodity
Total
2016
Interest rate
Exchange rate
Credit
Equity and commodity
Total
1,506
4
—
—
1,510
1,501
2
—
1
1,504
7,400
—
—
—
7,400
9,724
—
—
—
9,724
3,110
3,421
38
3
12,016 -
3,425 -
38 -
3 -
Traded
over the
counter
£m
Traded on
recognised
exchanges
£m
120,945 -
39,211 -
531 -
1
156
Traded
over the
counter
£m
112,160
41,681
558
106
6,572
15,482 -
160,843
1
154,505
5,400
4,443
42
20
16,625
4,445
42
21
9,905
21,133
—
—
—
—
—
170,524
75,442
682
333
246,981
—
—
—
4
4
158,485
77,148
557
281
236,471
205
Business review Capital and risk management
Market risk
RBS is exposed to non-traded market risk as a result of its
banking activities and to traded market risk through its trading
activities. It manages its non-traded and traded market risk
exposures separately. Each type of market risk is discussed
separately. The non-traded market risk section begins below. The
traded market risk section begins on page 214.
Pension-related activities also give rise to market risk. Refer to
page 220 for more information on risk related to pensions.
Non-traded market risk
The following disclosures in this section are audited:
Equity risk.
Internal banking book VaR.
Foreign exchange risk.
Definition
Non-traded market risk is the risk to the value of assets or
liabilities outside the trading book, or the risk to income, that
arises from changes in market prices such as interest rates,
foreign exchange rates and equity prices, or from changes in
managed rates.
Key developments in 2017 (unaudited)
During 2017, revised non-traded market risk appetite
metrics were approved by the Board and cascaded to the
franchises.
Political events during the year, notably elections in the UK,
France and the Netherlands, resulted in periods of market
volatility. UK and European interest rates remained at low
levels, although the Bank of England and the US Federal
Reserve began raising interest rates. These events did not
affect non-traded market risk management strategy during
the year.
Non-traded market risk VaR peaked at £83.1 million in H1
2017, mainly driven by an increase in bonds held within
Treasury’s liquidity portfolio, which was aimed at investing
surplus cash, rather than meeting increased liquidity
requirements. The appreciation of foreign currency bonds
within this portfolio, primarily US and German sovereign
debt, also contributed. The target allocation between cash
and bonds, which is determined by the cash requirement of
the liquid asset buffer, was reached in H1 2017 and
remained largely unchanged during H2 2017.
Positive sensitivity to higher interest rates increased by £275
million year on year in a 100-basis-point upward rate shift,
partly due to higher deposit volumes and changes in
assumptions relating to deposit margin retention in a higher
rate environment. Adverse sensitivity to lower rates also
increased, by £193 million in a 100-basis-point downward
shift, affected by the higher level of interest rates in the
central forecast.
RBS continued to invest in structural hedges in 2017, with
an average notional of £129 billion, managed directly by
Treasury. The disclosure now also shows the smaller
structural hedging programmes in Private Banking, RBS
International, UBI DAC and Ulster Bank Limited totalling an
average of £20 billion in 2017.
Sources of risk (unaudited)
The majority of RBS’s non-traded market risk exposure arises
from retail and commercial banking activities from assets and
liabilities that are not classified as held-for-trading.
Non-traded market risk is largely managed in line with the
following key categories: interest rate risk; credit spread risk;
foreign exchange risk; equity risk; and accounting volatility risk.
Interest rate risk
Non-traded interest rate risk (NTIRR) arises from the provision to
customers of a range of banking products that have differing
interest rate characteristics. When aggregated, these products
form portfolios of assets and liabilities with varying degrees of
sensitivity to changes in market interest rates. Mismatches in
these characteristics can give rise to volatility in net interest
income as interest rates vary.
NTIRR comprises three primary risk factors: gap risk, basis risk
and option risk. For more information, refer to page 207.
Credit spread risk
Credit spread risk arises from the potential adverse economic
impact of a move in the spread between bond yields and swap
rates, where the bond portfolios are accounted at fair value
through equity.
Foreign exchange risk
Non-traded foreign exchange risk exposures arise from two main
sources:
Structural foreign exchange risk – arising from the capital
deployed in foreign subsidiaries, branches and joint
arrangements and related currency funding where it differs
from sterling.
Non-trading book foreign exchange risk – arising from
customer transactions and profits and losses that are in a
currency other than the functional currency of the
transacting operation.
Equity risk
Non-traded equity risk is the potential variation in income and
reserves arising from changes in the values of equity positions.
Equity exposures may arise through strategic acquisitions,
venture capital investments and certain restructuring
arrangements.
Accounting volatility risk
Accounting volatility risk arises when an exposure is accounted
for at amortised cost but economically hedged by a derivative
that is accounted for at fair value. Although this is not an
economic risk, the difference in accounting between the exposure
and the hedge creates volatility in the income statement.
206
Business review Capital and risk management
Non-traded market risk continued
Risk governance (unaudited)
Responsibility for identifying, measuring, monitoring and
controlling the market risk arising from non-trading activities lies
with the relevant business, with second-line-of-defence oversight
provided by the Non-Traded Market Risk function, which reports
into the Director of Enterprise Wide Risk.
Risk positions are reported monthly to the Executive Risk Forum
(ERF) and quarterly to the Board Risk Committee, as well as to
the Asset and Liability Committee (ALCo) (monthly in the case of
interest rate, credit spread and accounting volatility risks and
quarterly in the case of foreign exchange and equity risks).
Market risk policy statements set out the governance and risk
management framework through effective identification,
measurement, reporting, mitigation, monitoring and control.
Risk appetite (unaudited)
RBS’s qualitative appetite is set out in the non-traded market risk
appetite statement.
Its quantitative appetite is expressed in terms of exposure limits.
These limits comprise both Board risk measures (which are
approved by the RBS Board on the recommendation of the Board
Risk Committee) and key risk measures (which are approved by
the ALCo).
These limits are cascaded further down the organisation as
required, as approved by the Technical Executive Risk Forum in
the case of the Board risk measures and by the ALCo in the case
of the key risk measures.
The limit framework at RBS level comprises value-at-risk (VaR),
stressed value-at-risk (SVaR), sensitivity and stress limits, and
earnings-at-risk limits.
The limits are reviewed to reflect changes in risk appetite,
business plans, portfolio composition and the market and
economic environments.
Risk assessment, monitoring and mitigation (unaudited)
Interest rate risk
Non-traded interest rate risk (NTIRR) factors are grouped into the
following categories:
Gap risk – which arises from the timing of rate changes in
non-trading book instruments. The extent of gap risk
depends on whether changes to the term structure of
interest rates occur consistently across the yield curve
(parallel risk) or differentially by period (non-parallel risk).
Basis risk – which captures the impact of relative changes in
interest rates for financial instruments that have similar
tenors but are priced using different interest rate indices, or
on the same interest rate indices but with different tenors.
Option risk – which arises from option derivative positions or
from optional elements embedded in assets, liabilities and/or
off-balance sheet items, where RBS or its customer can
alter the level and timing of their cash flows. Option risk can
be further characterised into automatic option risk and
behavioural option risk. One example of behavioural option
risk is pipeline risk. This is the risk of loss arising from
personal customers owning an option to draw down a loan
(typically a mortgage loan) at a committed rate. Changes in
interest rates can result in greater or fewer customers than
anticipated taking up the committed offer. The risk depends
on customer behaviour as the option will not automatically
be exercised.
Due to the long-term nature of many retail and commercial
portfolios and their varied interest rate repricing characteristics
and maturities, it is likely that net interest income will vary from
period to period, even if interest rates remain the same. New
business originated in any period will alter RBS’s interest rate
sensitivity if the resulting portfolio differs from portfolios originated
in prior periods, depending on the extent to which exposure has
been hedged.
In order to manage exposures within these limits, RBS
aggregates its interest rate positions and hedges them externally
using cash and derivatives, primarily interest rate swaps.
To ensure approved limits are not breached and that RBS
remains within its risk appetite, triggers at RBS and lower levels
have been set such that if exposures exceed a specified level,
action plans are developed by the front office, Market Risk and
Finance.
This task is primarily carried out by RBS Treasury, to which all
businesses except NatWest Markets transfer most of their
NTIRR. The main exposures and limit utilisations are reported to
the ALCo and the ERF monthly and to the Board Risk Committee
quarterly.
For further information on risk appetite, refer to page 154.
Risk controls and assurance (unaudited)
For information on risk controls and assurance, refer to page 156.
Credit spread risk
The bond portfolios primarily comprise high-quality securities that
are maintained as a liquidity buffer to ensure RBS can continue
to meet its obligations in the event that access to wholesale
funding markets is restricted.
Additionally other high-quality bond portfolios are held for
collateral purposes and to support payment systems.
Credit spread risk is monitored daily through sensitivities and
VaR measures. The dealing authorities in place for the bond
portfolios further mitigate the risk by imposing constraints by
duration, asset class and credit rating. Exposures and limit
utilisations are reported to senior management on a daily basis
as well as to the ERF monthly and the Board Risk Committee
quarterly.
207
Business review Capital and risk management
Non-traded market risk continued
Foreign exchange risk
The only material non-traded open currency positions are the
structural foreign exchange exposures arising from investments
in foreign subsidiaries, branches and associates and their related
currency funding. These exposures are assessed and managed
by RBS Treasury to predefined risk appetite levels under
delegated authority from the ALCo. Treasury seeks to limit the
potential volatility impact on RBS’s Common Equity Tier 1 (CET1)
ratio from exchange rate movements by maintaining a structural
open currency position. Gains or losses arising from the
retranslation of net investments in overseas operations are
recognised in equity reserves and reduce the sensitivity of capital
ratios to foreign exchange rate movements primarily arising from
the retranslation of non-sterling-denominated RWAs. Sensitivity
is minimised where, for a given currency, the ratio of the
structural open position to RWAs equals the CET1 ratio.
The sensitivity of this ratio to exchange rates is monitored
monthly and reported to the ALCo at least quarterly. Foreign
exchange exposures arising from customer transactions are sold
down by businesses on a regular basis in line with RBS policy.
Equity risk
Non-traded equity risk is the potential variation in the income and
reserves arising from changes in equity valuations. Any such risk
is identified prior to any investments and then mitigated through a
framework of controls.
Investments, acquisitions or disposals of a strategic nature are
referred to RBS’s Acquisitions and Disposals Committee (ADCo).
Once approved by ADCo for execution, such transactions are
referred for approval to the Board, the Executive Committee, the
Chief Executive, the Chief Financial Officer or as otherwise
required. Decisions to acquire or hold equity positions in the non-
trading book that are not of a strategic nature, such as customer
restructurings, are taken by authorised persons with delegated
authority under the credit approval framework.
Accounting volatility risk
Accounting volatility can be mitigated through hedge accounting.
The profit and loss impact of the derivatives can be mitigated by
marking the exposure to market. However, volatility will remain in
cases where accounting rules mean that hedge accounting is not
an option. Accounting volatility is reported to the ALCo monthly
and capitalised as part of the Internal Capital Adequacy
Assessment Process.
Risk measurement
The market risk exposures that arise as a result of RBS’s retail and commercial banking activities are measured using a combination of
value-based metrics (VaR and sensitivities) and earnings-based metrics, as explained in greater detail for each of the key non-traded
risk exposure types disclosed in this section.
The following table presents 1-day internal banking book VaR at a 99% confidence level, analysed by type of risk.
Interest rate
Euro
Sterling
US dollar
Other
Credit spread
Structural foreign exchange rate
Pipeline risk
Diversification (1)
Total
2017
2016
Average
£m
9.1
Maximum
£m
15.3
Minimum
£m
5.6
Period end
£m
5.6
Average
£m
9.6
Maximum
£m
19.3
Minimum
£m
4.7
Period end
£m
18.0
3.3
6.3
5.5
1.0
60.6
12.4
0.9
(19.2)
63.8
4.3
13.8
8.8
1.1
82.4
17.2
1.7
2.3
1.8
2.1
0.8
47.4
9.3
0.2
83.1
54.4
3.3
2.8
7.7
0.8
49.7
15.4
1.0
(17.3)
54.4
3.0
10.2
2.9
1.7
57.2
13.4
0.6
(23.7)
57.1
3.8
23.7
4.7
2.4
66.6
19.6
1.2
2.1
4.8
1.6
1.1
41.6
10.5
0.2
71.7
41.5
3.8
20.6
2.1
1.1
62.9
10.5
0.5
(20.2)
71.7
Note:
(1) RBS benefits from diversification across various financial instrument types, currencies and markets. The extent of the diversification benefit depends on the correlation between
the assets and risk factors in the portfolio at a particular time. The diversification factor is the sum of the VaR on individual risk types less the total portfolio VaR.
Key points
On an average basis, total non-traded VaR increased during
2017, chiefly due to the increase in bonds held within
Treasury’s liquidity portfolio, which was aimed at investing
surplus cash, whilst the duration and quality of the assets
remained largely unchanged. The increased investment in
bonds increased the valuation sensitivity to movements
between bond and swap rates as the bond portfolios are
hedged with interest rate swaps.
On a period-end basis, total non-traded VaR decreased,
driven by credit spread VaR, which fell due to refinements in
the source of the market data used for the VaR model. One
of the largest loss dates dropped out of the historical time
series for VaR during Q3 2017, which also contributed to the
decline.
The increase in structural foreign exchange rate VaR
towards the end of the year reflected higher euro-
denominated investments in subsidiaries, which are
expected to decline following a dividend paid by UBI DAC in
January 2018.
The year-on-year decline in sterling interest rate VaR, on
both a period-end and average basis, partly reflects the
impact of charges to equity recognised at year-end 2016 on
RBS’s structural hedge benchmark. The charges to equity
related mainly to increased provisions against prospective
RMBS fines. The equity structural hedge was reduced in
2016 and 2017. For more information on structural hedging,
refer to the following page.
208
Business review Capital and risk management
Non-traded market risk continued
Structural hedging (unaudited)
RBS has the benefit of a significant pool of stable, non and low
interest-bearing liabilities, principally comprising equity and
money transmission accounts. These balances are usually
hedged, either by investing directly in longer-term fixed-rate
assets or by the use of interest rate swaps, in order to provide a
consistent and predictable revenue stream.
After hedging the net interest rate exposure of the bank
externally, RBS Treasury allocates income to products or equity
in structural hedges by reference to the relevant interest rate
swap curve. Over time, the hedging programme has built up a
portfolio of interest rate swaps that provide a basis for stable
income attribution. The programme aims to track a time series of
medium-term swap rates, but the yield will be affected by
changes in product volumes and RBS’s capital composition.
The table below presents the incremental income allocation (above 3-month LIBOR), the average notional and the overall yield
(including 3-month LIBOR) associated with the product and equity hedges managed by Treasury.
Equity structural hedging
Product structural hedging
Total
2017
2016
Incremental
income
£m
Average
notional
£bn
Overall
yield
%
Incremental
income
£m
Average
notional
£bn
Overall
yield
%
628
680
1,308
28
101
129
2.48%
1.02%
1.34%
633
635
33
90
2.41%
1.20%
1,268
123
1.47%
The table below presents the incremental income associated with product structural hedges at segment level. These relate to the main
banking businesses except Private Banking, RBS International, UBI DAC and Ulster Bank Limited.
Net interest income - impact of product structural hedging (unaudited)
UK Personal & Business Banking
Commercial Banking
Other
Total
* Re-presented to reflect the segmental reorganisation.
2017
£m
440
235
5
680
2016*
£m
390
235
10
635
Key points (unaudited)
The overall yield (including 3-month LIBOR) fell compared to
31 December 2016, reflecting the lower volume of equity
hedges, new product hedges and maturing hedges
reinvested at lower market rates.
The fall in the average notional of the equity hedge reflects
the reduction in RBS’s equity base.
The increase in the average notional of the product hedge
reflected growth in current account and deposit balances
and increased hedging to reduce earnings sensitivity.
As at 31 December 2017, the 10-year and 5-year swap
rates were 1.21% and 0.98%, respectively. The market rate
matching the amortising structure of the total structural
hedge was 0.92%.
In addition to the hedges presented in the table above, other parts of the Group also maintain structural hedges. Hedges are transacted
with Treasury and generally have an amortised five-year profile. In aggregate, Private Banking, RBS International, UBI DAC and Ulster
Bank Limited maintained structural hedges against Treasury relating to equity and products, with an average notional of £20 billion for
2017. This resulted in £147 million incremental income allocation (above 3-month LIBOR) to the businesses in 2017, with an overall
yield of 0.83%. A significant proportion of the hedge is euro-denominated.
209
Business review Capital and risk management
Non-traded market risk continued
Interest rate risk (unaudited)
NTIRR can be measured from either an economic value-based or
earnings-based perspective, or a combination of the two. Value-
based approaches measure the change in value of the balance
sheet assets and liabilities over a longer timeframe, including all
cash flows. Earnings-based approaches measure the potential
short-term (generally one-year) impact on the income statement
of changes in interest rates.
RBS uses both approaches to quantify its interest rate risk: VaR
as its value-based approach and sensitivity of net interest income
(NII) as its earnings-based approach.
These two approaches provide different yet complementary
views of the impact of interest rate risk on the balance sheet at a
point in time. The scenarios employed in the NII sensitivity
approach incorporate business assumptions and simulated
modifications in customer behaviour as interest rates change. In
contrast, the VaR approach assumes static underlying positions
and therefore does not provide a dynamic measurement of
interest rate risk. In addition, while the NII sensitivity calculations
are measured to a 12-month horizon and thus provide a shorter-
term view of the risks on the balance sheet, the VaR approach
can identify risks not captured in the sensitivity analysis, in
particular the impact of duration and repricing risk on earnings
beyond 12 months.
Value-at-risk (unaudited)
VaR is a statistical estimate of the potential change in the market
value of a portfolio (and, thus, the impact on the income
statement) over a specified time horizon at a given confidence
level.
RBS’s standard VaR metrics - which assume a time horizon of
one trading day and a confidence level of 99% - are based on
interest rate repricing gaps at the reporting date. Daily rate
moves are modelled using observations over the last 500
business days. These incorporate customer products plus
associated funding and hedging transactions as well as non-
financial assets and liabilities such as property, plant and
equipment, capital and reserves. Behavioural assumptions are
applied as appropriate.
The non-traded interest rate risk VaR metrics for RBS’s retail and
commercial banking activities are included within the banking
book VaR table above. The VaR captures the risk resulting from
mismatches in the repricing dates of assets and liabilities.
It includes any mismatch between structural hedges and stable
non and low interest-bearing liabilities such as equity and money
transmission accounts as regards their interest rate repricing
behavioural profile.
Sensitivity of net interest income (unaudited)
Earnings sensitivity to rate movements is derived from a central
forecast over a 12-month period. A simplified scenario is shown
based on the period-end balance sheet assuming that non-
interest rate variables remain constant. Market-implied forward
rates are used to generate a base-case earnings forecast, which
is then subjected to interest rate shocks. The variance between
the central forecast and the shock gives an indication of
underlying sensitivity to interest rate movements.
The sensitivity of net interest income table below shows the
expected impact, over the next 12 months, to an immediate
upward or downward change of 25 and 100 basis points to all
interest rates. All yield curves are expected to move in parallel
with the exception that interest rates are assumed to floor at zero
per cent or, for euro rates, at the current negative rate.
The main driver of earnings sensitivity relates to interest rate
pass-through assumptions on customer products. The scenario
also captures the impact of the reinvestment of maturing
structural hedges at higher or lower rates than the base-case
earnings sensitivity and mismatches in the repricing dates of
loans and deposits.
However, reported sensitivities should not be considered
predictive of future performance. They do not capture potential
management action in response to sudden changes in the
interest rate environment. Actions that could reduce the net
interest income sensitivity and mitigate adverse impacts are
changes in pricing strategies on both customer loans and
deposits as well as hedging. Management action may also be
targeted at stabilising total income taking into account non-
interest income in addition to net interest income.
210
Business review Capital and risk management
Non-traded market risk continued
2017
+ 25 basis point shift in yield curves
− 25 basis point shift in yield curves
+ 100 basis point shift in yield curves
− 100 basis point shift in yield curves
2016
+ 25 basis point shift in yield curves
− 25 basis point shift in yield curves
+ 100 basis point shift in yield curves
− 100 basis point shift in yield curves
Euro
£m
13
(8)
53
(11)
4
(1)
9
(2)
Sterling
£m
151
(218)
664
(504)
79
(222)
436
(337)
US dollar
Other
£m
14
(13)
58
(49)
11
(11)
42
(30)
£m
—
(4)
—
(7)
2
(2)
13
(9)
Total
£m
178
(243)
775
(571)
96
(236)
500
(378)
Note:
(1)
In the 25 and 100 basis point downward shifts in yield curves, interest rates are floored at zero per cent, or at current negative rates.
The table above focused solely on the projected sensitivity of net interest income over the next 12 months. In the case of multi-year
forward projections, the negative impact of a downward change in rates or, conversely, the benefit of an immediate upward change in
interest rates to current market rates would be greater. This is because, over time a greater proportion of maturing structural hedges will
be reinvested at prevailing rates which may be higher or lower. Also, in the absence of dynamic assumptions relating to further
management actions, the variance to the base-case income forecast arising from margin compression or expansion on managed rate
products will continue to accrue.
The tables below show the net interest earnings sensitivity on a one-year, two-year and three-year forward-looking basis to a parallel
upward or downward shift in interest rates of 25 basis points. The projection is a simplified sensitivity in which the balance sheet is
assumed to be constant, with no change in customer behaviour or margin management strategy as a result of changes to the rates on
offer.
The benefit of structural hedges increases (or decreases) as greater volumes of maturing hedges are reinvested at higher (or lower)
rates over the three-year period.
Change in net interest earnings − 25 basis point upward shift in yield curves
2017
Structural hedges
Managed margin (1)
Other
Total
Change in net interest earnings − 25 basis point downward shift in yield curves
2017
Structural hedges
Managed margin (1)
Other
Total
Notes:
(1)
(2)
Year 1
Year 2 (2)
Year 3 (2)
£m
33
153
(8)
178
£m
100
170
—
270
£m
171
178
—
349
Year 1
Year 2 (2)
Year 3 (2)
£m
(33)
(220)
10
(243)
£m
(99)
(137)
—
(236)
£m
(171)
(121)
—
(292)
Primarily current accounts and savings accounts.
The projections for Years 2 and 3 consider only the main drivers of earnings sensitivity, namely structural hedging and margin management.
Key points (unaudited)
Earnings sensitivity to 25 and 100 basis-point upward
shifts in yield curves increased year on year, partly due to
higher deposit volumes. Additionally, more benefit from
higher rates was assumed to result from margin
management in 2017 than in 2016.
Sensitivity to a 100 basis-point downward shift in yield
curves rose year on year, partly affected by the higher
level of future interest rates in the central forecast.
Interest rates fall further in a 100 basis-point downward
shift in yield curves before they hit an assumed zero per
cent floor; as customer deposit rates are less affected by
the scenario, profit margins compress.
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Business review Capital and risk management
Non-traded market risk continued
Sensitivity of available-for-sale and cash flow hedging reserves to interest rate movements (unaudited)
While the projected sensitivity of net interest income is favourable to an upward shift in the yield curve and adversely sensitive to a
downward shift in the yield curve, the market valuation sensitivity of derivatives hedging retail and commercial structural interest rate
exposures is adversely sensitive to an upward shift in the yield curve and favourable to a downward shift in the yield curve. Many of the
derivatives are documented in cash flow hedge accounting relationships because they reduce the sensitivity of expected future cash
flows to unexpected changes in interest rates. If the derivative hedges are maintained to maturity, the immediate impact on the portfolio
value would lessen over time as derivative cash flows are settled (amongst other potential factors).
The information shown below comprises simplified scenarios in which all rates across the yield curve have instantaneously shifted
upwards or downwards by 25 basis points and 100 basis points and taxation effects have not been estimated. In this analysis, interest
rates have not been floored at zero. Note that a movement in the AFS reserve would have an impact on CET1 capital but a movement
in the cash flow hedge reserve would not be expected to do so. Volatility in both reserves affects tangible net asset value.
2017
+ 25 basis points
− 25 basis points
+ 100 basis points
− 100 basis points
2016
+ 25 basis points
− 25 basis points
+ 100 basis points
− 100 basis points
Available-for-sale
reserve
£m
Cashflow hedge
reserve
£m
(41)
42
(164)
167
(36)
35
(150)
135
(443)
448
(1,744)
1,819
(417)
422
(1,641)
1,714
Total
£m
(484)
490
(1,908)
1,986
(453)
457
(1,791)
1,849
Key point (unaudited)
The sensitivity of the available-for-sale reserve and the cash flow hedge reserve to upward and downward shifts in yield curves
remain relatively stable year on year. The increase in sensitivity of the available-for-sale reserve reflected the increase in bonds
held within Treasury’s liquidity portfolios.
Foreign exchange risk
The table below shows structural foreign currency exposures.
2017
US dollar
Euro
Other non-sterling
Total
2016
US dollar
Euro
Other non-sterling
Total
Net investments in
foreign operations
£m
Non-controlling
interests (NCI)
£m
Net investments in
foreign operations
excluding NCI (1)
£m
Net
investment
Structural foreign
currency exposures
hedges pre-economic hedges
£m
£m
766
7,160
2,493
10,419
(595)
6,085
3,366
8,856
—
61
645
706
—
(4)
761
757
766
7,099
1,848
9,713
(595)
6,089
2,605
8,099
(14)
(342)
(930)
(1,286)
(28)
(582)
(1,491)
(2,101)
752
6,757
918
8,427
(623)
5,507
1,114
5,998
Economic
hedges (2)
£m
(752)
(2,224)
(453)
(3,429)
—
(2,289)
(625)
(2,914)
Residual structural
foreign currency
exposures
£m
—
4,533
465
4,998
(623)
3,218
489
3,084
Notes:
(1) Non-controlling interests (NCI) represents the structural foreign exchange exposure not attributable to owners’ equity.
(2) Economic hedges mainly represent US dollar and euro preference shares in issue that are treated as equity under IFRS and do not qualify as hedges for accounting purposes.
They provide an offset to structural foreign exchange exposures to the extent that there are net assets in overseas operations available.
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Business review Capital and risk management
Non-traded market risk continued
Key points (unaudited)
The increase in net investments in foreign operations mainly
reflected investment taken to support RBS’s business in the
US. Net investments in euro-denominated operations also
increased in 2017. However, a dividend paid by UBI DAC in
January 2018 has reduced net investments in euro
operations by approximately £1.3 billion.
The reduction in net investment hedges mainly reflected the
reduction in hedges of other non-sterling investments in
foreign operations. Hedges are reduced as a result of the
reduction in net investments in other non-sterling foreign
operations due to disposals, dividends or other capital
repatriations.
Changes in foreign currency exchange rates affect equity in
proportion to structural foreign currency exposure. For
example, a 5% strengthening or weakening in foreign
currencies against sterling would respectively result in a
gain or loss of £0.4 billion in equity (2016 – a 5%
strengthening or weakening in foreign currencies against
sterling would respectively have resulted in a gain or loss of
£0.3 billion).
Equity risk
Equity positions are carried at fair value on the balance sheet based on available market prices where possible. In the event that market
prices are not available, fair value is based on appropriate valuation techniques or management estimates.
The table below shows the balance sheet carrying value of non-traded book equity positions.
Exchange-traded equity
Private equity
Other
2017
£m
41
243
136
420
The exposures may take the form of (i) equity shares listed on a recognised exchange, (ii) private equity shares defined as unlisted
equity shares with no observable market parameters or (iii) other unlisted equity shares.
Net realised gains arising from disposals
Unrealised gains included in Tier 1 or Tier 2 capital
Note:
(1)
Includes gains or losses on available-for-sale instruments only.
2017
£m
82
60
2016
£m
33
357
146
536
2016
£m
295
53
Key point
The reduction in equity shareholdings mainly reflected disposals of equity stakes in private equity and other equity investments.
Calculation of regulatory capital (unaudited)
Non-traded market risk exposures are capitalised through the
Internal Capital Adequacy Assessment Process (ICAAP). This
process covers the following risk types: gap risk, basis risk, credit
spread risk, pipeline risk, structural foreign exchange risk,
prepayment risk and accounting volatility risk. ICAAP is
performed using a combination of value-based and earnings-
based measures.
The total non-traded market risk capital requirement is
determined by adding the different charges for each sub risk
type. The ICAAP methodology captures at least ten years of
historical volatility and is produced to a 99% confidence level.
Methodologies are reviewed by Model Risk Management and
results are approved by the Capital Management and Stress
Testing Committee.
213
Business review Capital and risk management
Traded market risk
The following disclosures in this section are audited:
Internal VaR
Trading activities may also give rise to counterparty credit risk.
For information on the management of this risk, refer to the Credit
risk section on page 179.
Definition
Within trading books, traded market risk is the risk arising from
changes in fair value on positions, assets, liabilities or
commitments as a result of fluctuations in market prices.
Key developments in 2017 (unaudited)
During H1 2017, revised traded market risk appetite metrics
were approved by the Board and cascaded to the
franchises. In Q4 2017, the limits for NatWest Markets were
revised to accommodate trading book positions from the
legacy portfolio which has now been re-integrated into
NatWest Markets.
Political events during the year, including elections in the
UK, France and the Netherlands, resulted in periods of
market volatility. European interest rates remained at
historically low levels, although the Bank of England and US
Federal Reserve began raising interest rates.
Traded VaR increased on an average basis compared to
2016, but remained within risk appetite. This was partly
because the level of risk was reduced in H1 2016 as a result
of concerns over the stability of the financial sector, leading
to a lower average risk profile for that year. The risk profile
subsequently returned to a more normalised level.
Refinements to the VaR methodology used for certain credit
products also contributed to the increase.
Sources of risk (unaudited)
The primary objective of RBS’s trading activities is to provide a
range of financing, risk management and investment services to
its customers − including major corporations and financial
institutions around the world. From a market risk perspective, the
trading activities are focused on the following markets: rates;
currencies; securitised products; and traded credit.
RBS undertakes transactions in financial instruments including
debt securities, loans, deposits and equities, as well as securities
financing and derivatives.
Following the reintegration of legacy portfolios, traded market risk
now almost entirely resides in the NatWest Markets franchise.
The key categories of traded market risk are:
Interest rate risk – which is the risk that a position’s fair
value will change due to a change in the absolute level of
interest rates, in the spread between two rates, in the shape
of the yield curve or in any other interest rate relationship.
Credit spread risk – which is the risk that the value of a
position will change due to changes in the real or market-
perceived ability of a borrower to pay related cash flows or
obligations.
Foreign currency price risk – which is the risk that the fair
value of a position will change due to the change in foreign
currency rates, including gold.
Equity price risk – which is the risk that the fair value of a
position will change due to the change in equity prices.
Commodity price risk – which is the risk that the fair value of
a position will change due to the change in commodity
prices.
Risk governance (unaudited)
Responsibility for identifying, measuring, monitoring and
controlling the market risk arising from trading activities lies with
the relevant trading business, with second-line-of-defence
oversight provided by the Traded Market Risk function.
Traded market risk positions are reported monthly to the
Executive Risk Forum (ERF) and quarterly to the Board Risk
Committee.
Market risk policy statements set out the governance and risk
management framework through effective identification,
measurement, reporting, mitigation, monitoring and control.
Risk appetite (unaudited)
RBS’s qualitative appetite for traded market risk is set out in the
traded market risk appetite statement.
Its quantitative appetite is expressed in terms of exposure limits
in the form of Board risk measures (approved by the RBS Board
on the recommendation of the Board Risk Committee) and key
risk measures (approved by the Technical Executive Risk
Forum).
These limits are cascaded further down the organisation as
required, as approved by the Technical Executive Risk Forum.
The limit framework at RBS level comprises value-at-risk (VaR)
and stressed value-at-risk (SVaR). More details on these are
provided on the following pages.
The limit framework at trading unit level also comprises additional
metrics that are specific to the market risk exposures within its
scope. These additional metrics aim to control various risk
dimensions such as product type, exposure size, aged inventory,
currency and tenor.
For each trading business, a document known as a dealing
authority compiles details of all applicable limits and trading
restrictions.
The limits are reviewed to reflect changes in risk appetite,
business plans, portfolio composition and the market and
economic environments.
To ensure approved limits are not breached and that RBS
remains within its risk appetite, triggers at RBS and lower levels
have been set such that if exposures exceed a specified level,
action plans are developed by the front office and Traded Market
Risk.
For further information on risk appetite, refer to page 154.
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Business review Capital and risk management
Traded market risk continued
Risk controls and assurance (unaudited)
For information on risk controls and assurance, refer to page 156.
Risk identification and assessment (unaudited)
Identification and assessment of traded market risk is achieved
through gathering, analysing, monitoring and reporting market
risk information at desk, business, franchise and RBS-wide
levels. Industry expertise, continued system developments and
techniques such as stress testing are also used to enhance the
effectiveness of the identification and assessment of all material
market risks.
This is complemented by the New Product Approval process, in
which the market risk team participates to assess and quantify
the market risk associated with all proposed new products.
Risk monitoring (unaudited)
Traded market risk exposures are monitored against limits and
analysed daily by market risk reporting and control functions. A
daily report that summarises market risk exposures against the
limits at RBS, franchise, business and desk levels is sent to
senior management and market risk managers across the
function.
The Market Risk function also prepares daily risk reports that
detail exposures against a more granular set of limits and
triggers.
Limit reporting is supplemented with regulatory capital and stress
testing information as well as ad hoc reporting.
A risk review of trading businesses is undertaken weekly with
senior risk and front office staff. This includes a review of profit
and loss drivers, notable position concentrations and other
positions of concern.
Businesses’ profit and loss performance is monitored
automatically through loss triggers which, if breached, require a
remedial action plan to be agreed between the Market Risk
function and the front office. The loss triggers are set using both
a fall-from-peak approach and an absolute loss level.
In addition, as noted under Risk governance above, regular
updates on traded market risk positions are provided to the ERF
and Board Risk Committee.
Risk measurement
RBS uses a comprehensive set of methodologies and techniques
to measure traded market risk, namely VaR, SVaR and the
incremental risk charge. Risks that are not adequately captured
by VaR or SVaR are captured by the Risks not in VaR (RNIV)
framework to ensure that RBS is adequately capitalised for
market risk. In addition, stress testing is used to identify any
vulnerabilities and potential losses in excess of VaR and SVaR.
The key inputs into these measurement methods are market data
and risk factor sensitivities. Sensitivities refer to the changes in
trade or portfolio value that result from small changes in market
parameters that are subject to the market risk limit
framework. Revaluation ladders are used in place of sensitivities
to capture the impact of large moves in risk factors or the joint
impact of two risk factors.
These methods have been designed to capture correlation
effects and allow RBS to form an aggregated view of its traded
market risk across risk types, markets and business lines while
also taking into account the characteristics of each risk type.
Value-at-risk (unaudited)
For internal risk management purposes, VaR assumes a time
horizon of one trading day and a confidence level of 99%.
The internal VaR model – which captures all trading book
positions including those products approved by the regulator – is
based on a historical simulation, utilising market data from the
previous 500 days on an equally weighted basis.
The model also captures the potential impact of the following key
risk factors: interest rate risk; credit spread risk; foreign currency
price risk; equity price risk; and commodity price risk. These are
defined under Sources of risk.
When simulating potential movements in risk factors, a
combination of absolute, relative and rescaled returns is used,
depending on the risk factor.
The performance and adequacy of the VaR model are tested on
a regular basis through the following processes:
Back-testing – Internal and regulatory back-testing is
conducted on a daily basis. (For information on internal
back-testing, refer to page 217.)
Ongoing model validation – VaR model performance is
assessed both regularly and on an ad-hoc basis if market
conditions or book constitution change significantly.
Model Risk Management review – As part of the model
lifecycle, all risk models (including the VaR model) are
independently reviewed to ensure that the model is still fit for
purpose given current market conditions and book
constitution (refer to page 156).
215
Business review Capital and risk management
Traded market risk continued
1-Day 99% traded internal VaR (unaudited)
35
30
25
20
15
10
5
0
m
£
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Total Trading VaR
Interest Rate VaR
Credit Spread VaR
FX VaR
Equity VaR
Commodity VaR
Traded VaR (1-day99%)
The table below analyses 1-day 99% internal VaR for RBS’s trading portfolios, segregated by type of market risk exposure.
Interest rate
Credit spread
Currency
Equity
Commodity
Diversification (1)
Total
Average
£m
14.1
12.1
4.9
1.2
0.4
(12.8)
19.9
2017
Maximum
£m
Minimum
£m
Period end
£m
24.5
19.4
10.0
2.1
1.3
8.8
8.8
2.3
0.4
—
29.5
13.2
15.3
16.7
3.5
0.4
0.2
(15.3)
20.8
Average
£m
12.5
9.5
4.6
0.5
0.7
(10.8)
17.0
2016
Maximum
£m
Minimum
£m
Period end
£m
22.3
13.7
14.3
2.1
2.4
29.3
7.8
5.8
1.0
0.2
0.2
9.9
16.9
9.7
5.4
1.9
0.3
(10.4)
23.8
Note:
(1) RBS benefits from diversification as it reduces risk by allocating positions across various financial instrument types, currencies and markets. The extent of the diversification
benefit depends on the correlation between the assets and risk factors in the portfolio at a particular time. The diversification factor is the sum of the VaR on individual risk types
less the total portfolio VaR.
On a period-end basis, total traded VaR was in the middle of
the range for the year.
Key points
Traded VaR fluctuated throughout 2017, reflecting political
developments, market events, customer flows and other
macroeconomic factors.
On an average basis, total traded VaR increased in 2017
compared to 2016, but remained within risk appetite. This
was partly because the level of risk was reduced in H1 2016
as a result of concerns over the stability of the financial
sector, leading to a lower average risk profile for that year.
The risk profile subsequently returned to a more normalised
level. Refinements applied to the VaR methodology used for
certain credit products during 2017 also contributed to the
increase.
216
Business review Capital and risk management
Traded market risk continued
VaR back-testing (unaudited)
The main approach employed to assess the ongoing
performance of the VaR model is back-testing, which counts the
number of days when a loss exceeds the corresponding daily
VaR estimate, measured at a 99% confidence level.
Two types of profit and loss (P&L) are used in back-testing
comparisons: Actual P&L and Hypothetical (Hypo) P&L.
The Actual P&L for a particular business day is the firm’s actual
P&L for that day in respect of the trading activities, including any
intraday activities, adjusted by stripping out fees and
commissions, brokerage, and additions to and releases from
reserves that are not directly related to market risk.
The Hypo P&L reflects the firm’s Actual P&L excluding any intra-
day activities.
A portfolio is said to produce a back-testing exception when the
Actual or Hypo P&L exceeds the VaR level on a given day. Such
an event may be caused by a large market movement or may
highlight issues such as missing risk factors or inappropriate time
series. Any such issues identified are analysed and addressed
through taking appropriate remediation or development action.
Both Actual and Hypo back-testing exceptions are monitored.
The table below shows internal back-testing exceptions for a period of 250 days for 1-day 99% traded internal VaR vs. Actual and Hypo
P&L for major NatWest Markets businesses.
Description
Rates
Credit
Currencies
Securitised products
Back-testing exceptions
(from 16 January 2017)
Actual
—
2
—
1
Hypo
—
2
1
1
Key points (unaudited)
Statistically RBS would expect to see back-testing
exceptions 1% of the time over the 250-day period.
The number of exceptions observed in 2017 for major
businesses in NatWest Markets was broadly in line with this
expectation.
217
Business review Capital and risk management
Traded market risk continued
Stressed VaR (SVaR) (unaudited)
As with VaR, the SVaR methodology produces estimates of the
potential change in the market value of a portfolio, over a
specified time horizon, at a given confidence level. SVaR is a
VaR-based measure using historical data from a one-year period
of stressed market conditions.
The risk system simulates 99% VaR on the current portfolio for
each 250-day period from 2005 to the current VaR date, moving
forward one day at a time. The SVaR is the worst VaR outcome
of the simulated results.
This is in contrast with VaR, which is based on a rolling 500-day
historical data set. A time horizon of ten trading days is assumed
with a confidence level of 99%.
The internal traded SVaR model captures all trading book
positions.
10-day 99% trading internal SVaR (unaudited)
RBS
Period-
end
2017
£m
172
Period-
end
2016
£m
161
Key point (unaudited)
Traded SVaR fluctuated throughout 2017, reflecting political
developments, market events, customer flows and other
macroeconomic factors. On a period-end basis, traded
SVaR in 2017 remained at a similar level to 2016.
Risks not in VaR (RNIVs) (unaudited)
The RNIV framework is used to identify and quantify market risks
that are inadequately captured by the internal VaR and SVaR
models.
RNIV calculations form an integral part of ongoing model and
data improvement efforts to capture all market risks in scope for
model approval in VaR and SVaR.
Stress testing (unaudited)
For information on stress testing, refer to page 159.
Incremental risk charge (IRC) (unaudited)
The IRC model quantifies the impact of rating migration and
default events on the market value of instruments with embedded
credit risk (in particular, bonds and credit default swaps) that are
held in the trading book. It further captures basis risk between
different instruments, maturities and reference entities.
Model validation (unaudited)
RBS uses a variety of models to manage and measure market
risk. These include pricing models (used for valuation of
positions) and risk models (for risk measurement and capital
calculation purposes). They are developed and signed off in
NatWest Markets, with material models subject to independent
review by Model Risk Management.
For general information on the independent model validation
carried out by Model Risk Management, which applies also to
market risk models (including VaR models), refer to page 156.
Additional details relating to pricing and market risk models are
presented below.
Pricing models
Pricing models are developed by a dedicated front office
quantitative team, in conjunction with the trading desk. They are
used for the valuation of positions for which prices are not directly
observable and for the risk management of the portfolio.
Any pricing models that are used as the basis for valuing books
and records are subject to approval and oversight by asset-level
modelled product review committees.
These committees comprise representatives of the major
stakeholders in the valuation process - trading, finance, market
risk, model development and model review functions. Model
approval by such a committee requires review and approval by
these stakeholders, including independent model review by
Model Risk Management.
The review process includes the following steps:
The committees prioritise models for review by Model Risk
Management, considering the materiality of the risk booked
against the model and an assessment of the degree of
model risk, that is the valuation uncertainty arising from the
choice of modelling assumptions.
Model Risk Management quantifies the model risk, which
may include comparing front office model outputs with those
of alternative models independently developed by Model
Risk Management.
The sensitivities derived from the pricing models are
validated.
The conclusions of the review are used to inform risk limits
and by Finance to inform model reserves.
Risk models
All model changes are approved through model governance
committees at franchise level. Changes to existing models are
subject to Model Risk Management review and RBS follows
regulatory guidance for assessing the materiality of extensions
and changes to the internal model approach for market risk.
Model Risk Management’s independent oversight provides
additional assurance that RBS holds appropriate capital for the
market risk to which it is exposed.
In addition to Model Risk Management’s independent oversight,
the model testing team monitors the model performance for
market risk through back-testing, which is discussed in more
detail on page 217, and other processes.
218
Business review Capital and risk management
Traded market risk continued
Linkage to balance sheet (unaudited)
The table below analyses RBS’s balance sheet by non-trading and trading business.
2017
Non-trading
Trading
2016
Non-trading
Trading
Total business (1) business (2)
£bn
£bn
£bn
Total business (1) business (2)
£bn
£bn
£bn Primary risk factor
Assets
Cash and balances at central banks
Net loans and advances to banks
Net loans and advances to customers
Reverse repos
Debt securities
Equity shares
Derivatives
Settlement balances
Other assets
Total assets
Liabilities
Deposits by banks
Customer deposits
Repos
Debt securities in issue
Settlement balances
Short positions
Derivatives
Subordinated liabilities
Other liabilities
Total liabilities
98.3
16.3
323.2
40.7
78.9
0.5
160.8
2.5
16.9
738.1
39.5
367.0
38.4
30.6
2.8
28.5
154.5
12.7
15.0
689.0
98.3
9.3
307.9
4.5
51.4
0.4
1.6
—
16.9
490.3
27.0
355.2
10.1
28.0
—
—
1.5
12.7
15.0
449.5
—
7.0
15.3
36.2
27.5
0.1
159.2
2.5
—
247.8
12.5
11.8
28.3
2.6
2.8
28.5
153.0
—
—
239.5
74.3
17.3
323.0
41.8
72.5
0.7
247.2
5.5
16.4
798.7
33.3
353.9
32.3
27.3
3.6
22.1
236.5
19.4
20.9
749.3
74.2
10.4
304.9
4.1
48.0
0.5
3.0
0.1
16.4
461.6
12.6
340.7
5.0
22.9
0.1
—
1.9
19.4
20.9
423.5
0.1 Interest rate
6.9 Interest rate
18.1 Interest rate
37.7 Interest rate
24.5 Interest rate, credit spreads
0.2 Equities
244.2 Interest rate, credit spreads
5.4 Settlement risk
—
337.1
20.7 Interest rate
13.2 Interest rate
27.3 Interest rate
4.4 Interest rate
3.5 Settlement risk
22.1 Interest rate, credit spreads
234.6 Interest rate, credit spreads
— Interest rate
—
325.8
Notes:
(1) Non-trading businesses are entities that primarily have exposures that are not classified as trading book. For these exposures, with the exception of pension-related activities,
the main measurement methods are sensitivity analysis of net interest income, internal non-traded VaR and fair value calculations. For more information refer to pages 206 to
213.
(2) Trading businesses are entities that primarily have exposures that are classified as trading book under regulatory rules. For these exposures, the main methods used by RBS to
measure market risk are detailed under traded market risk measurement on pages 214 to 219.
(3) Foreign exchange risk affects all non-sterling denominated exposures on the balance sheet across trading and non-trading businesses, and therefore has not been listed in the
above tables.
219
Business review Capital and risk management
Pension risk (unaudited)
Definition
Pension obligation risk is the risk to RBS caused by its
contractual or other liabilities to, or with respect to, a pension
scheme (whether established for its employees or those of a
related company or otherwise). It is also the risk that RBS will
make payments or other contributions to, or with respect to, a
pension scheme because of a moral obligation or because RBS
considers that it needs to do so for some other reason.
Sources of pension risk
RBS has exposure to pension risk through its defined benefit
schemes worldwide. The five largest schemes, which represent
around 98% of RBS’s pension liabilities are: the Main Section of
The Royal Bank of Scotland Group Pension Fund (the Main
scheme), the AA Section of The Royal Bank of Scotland Group
Pension Fund, the Ulster Bank Pension Scheme, the Ulster Bank
Pension Scheme (Republic of Ireland), and the Royal Bank of
Scotland International Pension Trust. The Main scheme is the
principal source of pension risk. Further detail on RBS’s pension
obligations can be found in Note 4 on the consolidated accounts.
Pension scheme liabilities vary with changes in long-term interest
rates and inflation as well as with pensionable salaries, the
longevity of scheme members and legislation. Pension scheme
assets vary with changes in interest rates, inflation expectations,
credit spreads, exchange rates, and equity and property prices.
RBS is exposed to the risk that the schemes’ assets, together
with future returns and additional future contributions, are
insufficient to meet liabilities as they fall due. In such
circumstances, RBS could be obliged (or might choose) to make
additional contributions to the schemes, or be required to hold
additional capital to mitigate this risk.
Prior to 6 April 1997, individuals who contracted out of the UK
State Second Pension were entitled to a Guaranteed Minimum
Pension (GMP). Men accrued GMP at different rates to women.
The Government intends that GMP should be equalised but until
the mechanism is defined, pension funds are uncertain of their
obligations. In the meantime, no allowance is made for GMP
equalisation in the IAS 19 defined benefit obligations and risk
disclosures.
Key developments in 2017
A memorandum of understanding between Ulster Bank Ireland
DAC and Ulster Bank Pension Trustees Limited was agreed. A
contribution of €200 million was paid to the pension scheme and
the investment strategy amended to include more hedging
assets.
Throughout 2017, various pension risk stress-testing initiatives
were undertaken, focused both on internally-defined scenarios
and on scenarios to meet integrated Bank of England stress-
testing requirements. For more information on stress testing,
refer to the following page.
Pension risk management function
Risk governance
The Main scheme operates under a trust deed. The corporate
trustee, RBS Pension Trustee Limited, is a wholly owned
subsidiary of National Westminster Bank Plc. The trustee board
comprises six directors selected by RBS and four directors
representing members. The trustee is supported by RBS
Investment Executive Ltd (RIEL), which specialises in pension
investment strategy.
The Pension Committee, which is chaired by the RBS Chief
Financial Officer, acts as a sub-committee of the Executive
Committee and formulates RBS’s view of pension risk. The
Pension Committee considers mechanisms that could potentially
be used for managing risk within the funds as well as financial
strategy. The Pension Committee is a key component of RBS’s
approach to managing pension risk and it reviews and monitors
risk management, asset strategy and financing issues on behalf
of RBS. The Pension Committee also serves as a formal link
between RBS, RIEL and the trustee.
For further information on Risk governance, refer to page 152.
Risk appetite
Investment policy for the schemes is defined by the trustee with
input from RIEL where appropriate and other specialist advisers
employed by the trustee. While the trustee is responsible for the
management of the scheme assets, it consults with RBS on
material changes to the Main scheme’s risk appetite and
investment policy.
RBS maintains an independent view of the risk inherent in
pension funds, with an associated risk appetite, and has defined
metrics against which risk is measured. In addition to the scrutiny
provided by the Pension Committee, RBS undertakes regular
pension risk monitoring and reporting to the Board and the Board
Risk Committee on the material pension schemes that RBS has
an obligation to support.
Risk controls
A pension risk management framework is in place to provide
formal controls for pension risk reporting, modelling, governance
and stress testing. A pension risk policy – which sits within the
RBS policy framework – is also in place and is subject to
associated framework controls.
Risk identification and measurement
Pension risk reports are submitted to the Executive Risk Forum
and the Board Risk Committee four times a year in the Risk &
Conduct Management Quarterly Report. This includes an
assessment of the overall deficit or surplus position, estimated
capital requirements, and an assessment of the associated
assets and liabilities.
220
Business review Capital and risk management
Pension risk (unaudited) continued
RBS also undertakes stress tests and scenario analyses on its
material defined benefit pension schemes each year as part of its
risk measurement framework. These stress tests are also used to
satisfy the requests of regulatory bodies such as the Bank of
England. The stress testing framework includes pension risk
capital calculations for the purposes of the Internal Capital
Adequacy Assessment Process as well as additional stress tests
for a number of internal management purposes.
Pension stress tests take the form of both stochastic and
deterministic stresses over time horizons ranging from
instantaneous to seven years in duration. They are designed to
examine the behaviour of the pension schemes’ assets and
liabilities under a range of financial and demographic shocks. The
results of the stress tests and their consequential impact on
RBS’s balance sheet, income statement and capital position are
incorporated into the overall RBS-wide stress test results.
RBS Group plc is the parent of several entities that participate in the Main scheme, and which could be required to fund any deficit that
arises. The table below shows the sensitivity of the Main scheme’s assets and liabilities (measured according to IAS 19 ‘Employee
Benefits’). It includes changes in interest rates and equity values at the year-end, taking account of the current asset allocation and
hedging arrangements.
2017
Fall in nominal swap yields of 0.25% at all durations with no change in credit spreads or real swap yields
Fall in real swap yields of 0.25% at all durations with no change in credit spreads or nominal swap yields
Fall in AA credit spreads of 0.25% at all durations with no change in nominal or real swap yields
or other credit spreads
Fall in equity values of 10% (1)
2016
Fall in nominal swap yields of 0.25% at all durations with no change in credit spreads or real swap yields
Fall in real swap yields of 0.25% at all durations with no change in credit spreads or nominal swap yields
Fall in AA credit spreads of 0.25% at all durations with no change in nominal or real swap yields
or other credit spreads
Fall in equity values of 10% (1)
Note:
(1) Includes both quoted and private equity.
Increase in
net pension
Increase in Increase in
value of
assets/
liabilities (obligations)
£m
449
(40)
value of
assets
£m
1,199
1,289
£m
750
1,329
7
(909)
2,055
—
(2,048)
(909)
1,048
1,485
502
1,552
546
(67)
9
(905)
2,074
—
(2,065)
(905)
The chart below shows the pension liability cash flow profile, allowing for expected indexation of future payments. The majority of
expected cash flows (84%) are anticipated within the next 40 years. The profile will vary depending on the assumptions made regarding
inflation expectations and mortality.
2017
2016
s
w
o
l
f
h
s
a
c
y
t
i
l
i
b
a
i
l
f
o
n
o
i
t
r
o
p
o
r
P
25%
20%
15%
10%
5%
0%
0-10
11-20
21-30
31-40
41-50
Over 50
221
Business review Capital and risk management
Pension risk (unaudited) continued
Risk mitigation
The trustee has taken measures to mitigate inflation and interest
rate risks, both by investing in suitable financial assets and by
entering into inflation and interest rate swaps. The Main scheme
also uses derivatives to manage the allocation of the portfolio to
different asset classes and to manage risk within asset classes.
The assets of the Main scheme, which represented around 90%
of RBS’s pension plan assets at 31 December 2017, are invested
in a diversified portfolio. This includes quoted and private equity,
government and corporate fixed interest and index-linked bonds,
property and other alternative assets.
Future developments
The UK ring-fencing regime will require significant changes to the
structure of RBS’s existing defined benefit pension schemes.
From 2026 it will not be possible for any of the entities inside the
ring-fence (or their wholly-owned subsidiaries) to participate in
the same defined benefit pension scheme as entities outside the
ring-fence.
RBS is developing a strategy to meet these requirements. This
will require the agreement of the pension scheme trustee. RBS’s
intention is for the Main scheme to be supported by entities within
the ring-fence. This could result in the pension scheme trustee
concluding that the employer covenant (the ability of participating
employers to support the scheme) has been weakened as a
result of the entities outside the ring-fence no longer participating
in the pension scheme, and as a result requesting additional
contributions. Discussions with respect to the above issues are
ongoing with the trustee.
The last triennial valuation of the Main scheme had an effective
date of 31 December 2015. This valuation was concluded with
the acceleration of the nominal value of all committed
contributions in respect of past service (£4.2 billion), which was
paid in the first quarter of 2016.
The next triennial valuation will have an effective date of 31
December 2018. The expectation is that this will result in
additional contributions being agreed with the trustee. Under
current legislation, such agreement would need to be reached no
later than 31 March 2020.
The aggregate contributions RBS commits to will therefore
depend not only on the size of any deficit arising from the
triennial valuation (on assumptions that must be agreed with the
trustee), but also on the extent to which RBS needs to provide
additional mitigation for any perceived weakening in the covenant
as a result of ring-fence restructuring. The assumptions to be
agreed with the trustee will include the discount rate (the rate at
which future cash flows are discounted to arrive at a present
value of the total pension scheme liabilities) as well as a range of
other assumptions such as recent changes to life expectancy
projections.
The trustee estimates that, as at 30 June 2017, the Main scheme
had a surplus of £1.7 billion on the technical provisions
assumptions agreed for the 31 December 2015 triennial valuation
(the methodology for deriving these assumptions is shown in
Note 4 on the consolidated accounts). A 25 basis point (0.25%)
reduction in the technical provisions discount rate reduces the
surplus position by around £2.4 billion.
This sensitivity to the discount rate assumption is greater than the
sensitivity of the IAS 19 obligation of £2.0 billion to a 25 basis
point change in the discount rate, shown in Note 4 on the
consolidated accounts, as a result of two factors:
The technical provisions liability is greater than the IAS 19
obligation, meaning a proportionate change would have a
larger absolute impact.
Different assumptions are used for technical provisions (for
example longevity).
222
Business review Capital and risk management
Conduct risk (unaudited)
Definition
Conduct risk is the risk that the behaviour of RBS and its staff
towards customers, or in the markets in which it operates, leads
to unfair or inappropriate customer outcomes resulting in
reputational damage, financial loss or both. The damage or loss
may be the result of a failure to comply with (or adequately plan
for changes to) relevant official sector policy, laws, regulations, or
major industry standards, or of failing to meet the expectations of
customers or regulators.
Sources of conduct risk
Conduct risk exists across all stages of RBS’s relationships with
its customers – from the development of its business strategies,
to post-sales processes – and arises from a variety of activities.
These include product design, marketing and sales, complaint
handling, staff training, and handling of confidential insider
information. Conduct risk also arises if RBS does not take
effective action to prevent fraud, bribery and money laundering.
As set out in Note 31 on the consolidated accounts, RBS and
certain members of staff are party to legal proceedings and are
subject to investigation and other regulatory action in the UK, the
US and other jurisdictions.
Key developments in 2017
Parts of the Conduct & Regulatory Affairs function were merged
with the Risk function with effect from 1 January 2017.
Regulatory Affairs moved to Corporate Governance & Secretariat
while Remediation and Complaints moved to Services’ Chief
Operating Office. The change was designed to take advantage of
synergies across the risk, conduct and regulatory agendas.
RBS continued to remediate historical conduct issues, while also
focusing its customer-facing businesses and support functions
around the needs of its customers including the delivery of a
number of regulatory change programmes. Conduct and litigation
costs were £1.1 billion in 2017 compared with £5.9 billion in
2016.
The remediation of PPI continued, with the FCA confirming
August 2019 as the deadline for PPI mis-selling claims.
The FCA is reviewing the business models of UK retail
banks, building societies and credit unions, to understand
how recent changes are affecting competition and conduct
in the sector.
Following an enforcement notice from the Central Bank of
Ireland in respect of tracker mortgages, a significant
remediation programme was established.
Work progressed to meet the requirements of the revised
Markets in Financial Instruments Directive and Regulation
(MiFID II/MiFIR) in advance of their introduction in early
2018.
Work also progressed on the conduct-related aspects of the
UK’s ring-fencing requirements.
Changes were implemented to support compliance with the
second Payment Services Directive in advance of its
introduction in early 2018.
RBS updated its policies to reflect changes required in
relation to the 4th Money Laundering directive, which came
into force in H1 2017 to combat terrorist and criminal
financing.
The Criminal Finances Act 2017 came into force in H2 2017,
introducing a new corporate offence of failure to prevent the
facilitation of tax evasion. Policies and procedures in place
to prevent such activity were reviewed and enhanced.
Conduct risk management function
The management of conduct risk is based on seven key
elements, ensuring that conduct risk exposures are understood
and managed in accordance with agreed risk appetite.
RBS can clearly demonstrate
that its business model is
consistent with its strategy
and serves its customers well
while balancing the
commercial needs
Product profitability and
pricing structures are fair
and transparent
Product
Profitability
& Pricing
RBS can clearly demonstrate
that its products and services
are designed to meet
customer needs, their level
of complexity is appropriate
for the target market and
they work in the way
they are expected to
RBS’s governance,
policies and
Procedures
Ensure that
good customer
and conduct
outcomes are
achieved. RBS
abides by all
relevant laws
and regulations and
conflicts of interest
are managed
Business Model
& Strategy
RBS has no appetite
for actions that result
in inappropriate
outcomes for its customers
or breach legal or regulatory
requirements leading to
censure or financial
penalty
Product
Customer
Lifecycle
Governance
Financial
Crime
Competency,
Culture
& Reward
RBS’s customers are
sold products and
services appropriate
for their needs. Any
information or advice
provided is suitable,
relevant and
communicated in a
clear, fair way.
Delivery of after-sales
support meets
customer
expectations
RBS has robust
systems and controls
in place to prevent
financial crime
RBS colleagues are trained, managed
and rewarded to serve customers well
and deliver good outcomes. RBS’s
people act with integrity and understand
the impact of their decisions and
behaviors on customer outcomes
Risk governance
RBS defines appropriate standards of conduct and drives
adherence to those standards through its framework for
managing conduct risk. The Board and its senior committees
receive updates on conduct risk exposures and action plans
through regular reporting.
Key elements of the governance structure are set out below:
The Risk, Conduct & Restructuring Executive Committee
considers emerging material risks and issues, and
implements Board and Executive Committee risk
management policy decisions.
The Financial Crime Risk Executive Committee
(accountable to the Executive Risk Forum) ensures that the
customer-facing businesses and the Services function fulfil
strategic objectives by identifying and managing their
financial crime risks effectively.
Controls
Under the policy framework, there are 18 conduct policies. These
are designed to provide both high-level direction and stipulate
RBS-wide requirements. The policies provide the necessary
clarity to staff on their conduct obligations and ensure RBS meets
its regulatory obligations.
223
Business review Capital and risk management
Conduct risk (unaudited) continued
Risk assessments are used to identify material conduct risks and
inform key controls across all business areas. The risk
assessment process is designed to confirm risks are effectively
managed and prioritised. The process also ensures controls are
tested.
Risk monitoring and measurement
The Board and senior RBS committees receive updates on
conduct risk exposures and action plans through regular
reporting. The reporting is intended to be focused, forward-
looking and action-oriented.
Scenario analysis is used to assess the impact of extreme but
plausible conduct risks including financial crime. The scenarios
assess the exposures that could significantly affect RBS’s
financial performance or reputation and are an important
component in the operational risk framework and capital model.
Risk appetite
The conduct risk appetite framework was established in 2015 and
has been embedded across RBS.
RBS has no appetite
for actions that result
in inappropriate
outcomes for its
customers or breach
legal or regulatory
requirements leading
to censure or
financial penalty
Risk appetite
statements articulate
the level of risk which
functions and
franchises must not
exceed i.e. the RBS-
wide cascaded risk
appetite
Businesses
carried out self-
assessments with
RCR providing
oversight and
challenge
Qualitative
and
quantitative
management
information
linked to the
risk appetite
pillars
Policy Standard –
Zero Tolerance
Risk Appetite Statements
Conduct Performance
Assessment
pillars
Conduct Risk
Management Information
The conduct risk appetite framework and the Conduct
Performance Assessment, which forms part of it, facilitate a
consistent approach across RBS for assessing conduct risk.
The conduct risk appetite statements, in line with RBS-wide risk
appetite, articulate the levels of risk which franchises and
functions must not exceed. Where businesses are operating
outside conduct appetite, the problems are addressed through
agreed risk mitigation plans.
The Conduct Performance Assessment was run in Q1 and Q3
2017, reporting on risk exposures and the operating effectiveness
of controls across the businesses. During Q4 2017, the Conduct
Performance Assessment was discontinued, in advance of the
roll-out of a new approach in early 2018, providing a real-time
quantitative view, supported by qualitative assessment.
The most material conduct matters are reported to the
appropriate committees, including the Board, the Group Audit
Committee and Board Risk Committee.
An annual Money Laundering Reporting Officer’s Report is
submitted to the Board and shared with the FCA. This covers
RBS’s Anti-Money Laundering (AML) framework and the
operation and effectiveness of the systems and controls in place
to comply with AML laws and regulations. In addition, it covers
the systems and controls in place to prevent the financing of
terrorism and to ensure compliance with sanctions.
The Group Audit Committee is provided with a whistleblowing
report twice a year. The report comments on the operational
effectiveness of our whistleblowing framework, internally branded
as ‘Speak Up’, and any trends emerging from completed
investigations. It details cases by internal reporting categories
based on the RBS definition of whistleblowing included in the
Speak Up policy.
The Speak Up policy encompasses both the legislative definition
contained within the Public Interest Disclosure Act 1998 and the
regulatory definition within FCA and PRA regulations and
guidance. It extends these to include conduct or behaviour which
does not meet the expected standards documented in Our Code.
Each business in RBS has enhanced its use of management
information by linking it to the relevant Conduct risk appetite
statements. This is required to help ensure appropriate customer
outcomes are delivered and that the management information is
compliant with the Basel Committee on Banking Supervision’s
principles for effective risk data aggregation and risk reporting.
Risk mitigation
Information is communicated to each customer-facing business
and function about regulatory developments and discussions with
regulators. This helps identify and execute any required changes
to strategy or to business models.
Early identification and effective management of changes in
legislation and regulation are critical to the successful mitigation
of conduct risk. The effects of all changes are managed to ensure
timely compliance readiness. Changes assessed as having a
high or medium-high impact are managed closely.
Mandatory learning, across RBS, helps to ensure colleagues
have the information necessary to carry out their duties in a way
that complies with expected standards.
224
Business review Capital and risk management
Operational risk (unaudited)
Definition
Operational risk is the risk of loss resulting from inadequate or
failed internal processes, people and systems, or external events.
It arises from day-to-day operations and is relevant to every
aspect of the business.
Operational risk may directly affect customers, lead to financial
loss or damage RBS’s reputation (for example, cyber attacks, a
major IT systems failure or fraudulent activity). There can also be
a link between operational risk failures and conduct risk issues.
Sources of operational risk
Operational risk may arise from a failure to manage operations,
systems, transactions and assets appropriately. This can take the
form of human error, an inability to deliver change adequately or
on time, the non-availability of technology services, or the loss of
customer data. Fraud and theft are sources of operational risk, as
is the impact of natural and man-made disasters. It can also arise
from a failure to account for changes in law or regulations or to
take appropriate measures to protect assets.
Key developments in 2017
RBS continued to work to embed its enhanced operational risk
framework, improving links between risk appetite and risk
exposure and building a more robust control environment.
The year also saw a continued focus on the risks arising from the
execution of major projects, including: the Transformation
portfolio; the restructuring of NatWest Markets; preparations for
the implementation of the corporate structural reform agenda –
for example the Independent Commission on Banking’s ring-
fencing proposals, recovery and resolution planning, as well as
Brexit; the planned activities to meet the European Commission
state aid obligations; and, the effect on RBS’s control
environment due to cost reduction measures. These projects are
essential in order for RBS to achieve its strategic objectives.
Risk, Conduct & Restructuring ensured the associated risks to
these projects were assessed and understood with mitigating
activity in place wherever possible.
There was also a strong focus on RBS’s risk and control
assessment methodology. Following on from work carried out in
2016, the aim of this consistent, bank-wide methodology was to
enhance understanding of the risk profile for the most critical
products and services. In 2017, coverage was significantly
extended across RBS, with outputs used to inform Group-wide
reporting.
The external fraud threat remained high with data used by
organised crime gangs to deceive customers through social
engineering, and the continued evolution of financial malware. In
2017, there was an increase in fraud perpetrated by scams. RBS
has a bank-wide response plan to address the increased threat,
which focuses on profiling capabilities and educating customers
about fraud protection as well as continued work to drive and
support industry best practice. This aligned with fraud prevention
programmes across RBS, with the objective of mitigating the
effects of external fraud on customers and RBS itself. The plan
was successfully implemented and key strategic initiatives
enhanced RBS’s fraud prevention and detection capabilities,
enabling it to limit the effects of fraudulent activity on its
customers. As a result, RBS recorded a year-on-year decrease in
the number of its customers falling victim to fraud in 2017.
RBS continued to support an industry-led education initiative –
Take Five to Stop Fraud – which offers advice to help the public
protect themselves from preventable financial fraud. The initiative
is led by Financial Fraud Action UK Ltd and is being delivered in
conjunction with the Home Office, law enforcement and other
banks.
The information and cyber security risk facing RBS continued to
change in line with the constantly evolving threats. Internal
security improvement programmes progressed across RBS,
developing new and strengthening existing controls in order to
protect the Group and its customers. RBS continuously
developed and used proactive threat management and
intelligence processes to understand, manage and mitigate
credible threats.
RBS decommissioned a number of internet-facing websites to
reduce the attack surface visible to hackers and fraudsters.
Improvements were also made to prevent data leakage, secure
externally bound email, as well as enhance malware defences
and management of user access to key systems. Internal training
programmes continued to ensure all employees are fully aware of
the threats facing RBS and remain vigilant to unauthorised
attempts by internal or external parties to access systems and
data.
Operational risk management function
Risk governance
A strong operational risk management function is vital to support
RBS’s ambitions to serve its customers better. Improved
management of operational risk against a defined appetite
directly supports the strategic risk objective of improving
stakeholder confidence and is vital for stability and reputational
integrity.
The operational risk function, which is the second line of defence,
is tasked with delivering a robust operational risk management
framework and culture across RBS. The Director of Operational
Risk reports to the Chief Risk Officer.
225
Business review Capital and risk management
Operational risk (unaudited) continued
Operational risk is responsible for the design, development,
delivery and continuous improvement of the operational risk
management framework. The Operational Risk Policy is
incorporated into the RBS Policy Framework and provides
direction for the consistent identification, assessment,
management, monitoring and reporting of operational risk.
Through a network of oversight teams, the function seeks to
ensure the integrity of the framework, and manages overall
operational risk profile against risk appetite.
The Operational Risk Executive Committee (OREC), which is a
sub-committee of the Executive Risk Forum (ERF), acts on all
operational risk matters. OREC’s duties include reviewing
operational risk exposure against risk appetite; identifying and
assessing both current and emerging material operational risks;
reviewing and monitoring the operational risk profile; and
reviewing and approving material operational risk policy
management framework changes.
Risk appetite
The operational risk appetite framework supports effective
management of key operational risks. It expresses the level and
types of operational risk RBS is willing to accept in order to
achieve its strategic objectives and business plans.
RBS’s operational risk appetite is expressed through a set
of qualitative risk appetite statements and quantitative measures
which are defined at an aggregate, RBS-wide and individual
business level. Appetite covers RBS’s most material operational
risks, defined by a materiality assessment, which in turn
considers past, current and future risk exposures. Appetite
exposures for all material risks are regularly reported to business
risk committees, the OREC, ERF and Board Risk Committee.
The aggregation of operational risk appetite allows RBS to
monitor and report on its material risk exposures against
predetermined limits. This drives management intervention and
action at defined points, such as the breach of an early warning
trigger.
Above these sit an RBS-level operational risk appetite statement
which encompasses the full range of operational risks. This
drives the strategic risk measurement of stakeholder confidence
and is reviewed annually by the ERF. The statement is supported
by three simple measures: (i) the relationship between
operational risk losses and RBS’s gross income; (ii) metrics
covering control environment performance; and (iii) the
requirement for the material RBS-wide operational risks to be
managed within risk appetite.
Risk controls
The Control Environment Certification (CEC) process is a half
yearly self-assessment by the CEOs of RBS’s customer-facing
franchises and business units, as well as the heads of the
Group’s support and control functions. It gives an assessment on
the adequacy and effectiveness of the internal control
environment in a consistent and comparable manner, highlighting
areas where targeted effort is needed to meet the standards
required in order to create a safer and more secure bank for
customers. It covers material risks and the key controls that
underpin them, including financial, operational and compliance
controls, as well as supporting risk management frameworks.
The CEC outcomes, including forward-looking assessments for
the next two half-yearly cycles and the progress made to improve
the control environment, are reported to the Board, the Group
Audit Committee and the Board Risk Committee. They are also
shared with external auditors.
The CEC process helps to ensure compliance with the RBS
Policy Framework, Sarbanes-Oxley 404 requirements concerning
internal control over financial reporting (as referenced in the
Compliance report on page 106), and certain requirements of the
UK Corporate Governance Code.
Risk identification and measurement
Across all business areas, risk and control assessments are used
to identify and assess material operational and conduct risks and
key controls. To support identification of risk concentrations, all
risks and controls are mapped to the risk directory. Risk
assessments are refreshed at least annually to ensure they
remain relevant and capture any emerging risks.
The process is designed to confirm that risks are effectively
managed and prioritised in line with the stated risk appetite.
Controls are tested at the appropriate frequency to verify that
they remain fit-for-purpose and operate effectively.
During 2017, work continued to increase the coverage of the
enhanced end-to-end risk and control assessment methodology.
This approach, which strengthens understanding of the risk
profile of key products and services, is used to identify and
quantify the most material operational risks. Subject matter
experts and key stakeholders are engaged from across RBS to
underpin management action in line with RBS’s financial and
non-financial appetite statement. The results of the risk and
control assessments support RBS’s on-going journey to build on,
and enhance, its control environment.
Monitoring and reporting are part of RBS’s operational risk
management processes, which aim to ensure that risks are
identified, considered by senior executives, and managed
effectively. The most material operational risks and their position
relevant to risk appetite are regularly reviewed at the OREC,
along with any emerging risks and the actions taken to mitigate
them. These are also reported to the Board Risk Committee and
the ERF. Exposures specific to each business are communicated
through regular risk and control reports discussed at business
risk committees.
226
Business review Capital and risk management
Operational risk (unaudited) continued
RBS uses the standardised approach to calculate its operational
risk capital requirement. This is based on multiplying three years’
average historical gross income by coefficients set by the
regulator based on type of income.
As part of the wider Internal Capital Adequacy Assessment
Process an operational risk economic capital model is used as a
key capital benchmark. The model uses loss data and scenario
analysis inputs from the operational risk framework, plus external
loss data and certain other factors to provide a risk-sensitive view
of RBS’s operational risk capital requirement.
Scenario analysis is used to assess how extreme but plausible
operational risks will affect RBS. It provides a forward-looking
basis for evaluating and managing operational risk exposures.
Refer to the Capital, liquidity and funding risk section for
operational risk capital requirement figures.
Event and loss data management
The operational risk event and loss data management process
ensures RBS captures and records operational risk loss events
that meet defined criteria.
Loss data is used for regulatory and industry reporting and is
included in capital modelling when calculating economic capital
for operational risk.
The most serious events are escalated in a simple, standardised
process to all senior management, by way of a ‘Group Notifiable
Event Process’.
All losses and recoveries associated with an operational risk
event are reported against their financial accounting date. A
single event can result in multiple losses (or recoveries) that may
take time to crystallise. Losses and recoveries with a financial
accounting date in 2017 may relate to events that occurred, or
were identified in, prior years.
Percentage and value of events
At 31 December 2017, events aligned to the ‘clients, products
and business practices’ event category accounted for 84% of
RBS’s operational risk losses (compared to 98% in 2016). The
reduction reflects that the level of losses attributable to conduct-
related events has significantly reduced compared to prior years.
The reduction in conduct-related events also explains the
increase in the proportion of events in the ‘execution, delivery
and process management’ category.
Fraud
Clients, products and business practices (2)
Execution, delivery and process management
Employment practices and workplace safety
Technology and infrastructure failures
£m
2017
49
614
65
4
—
732
2016
48
5,411
40
5
1
5,505
Value of events
Proportion
2017
6%
84%
9%
1%
—
2016
1%
98%
1%
—
—
Volume of events (1)
Proportion
2017
2016
83%
7%
7%
3%
—
78%
11%
8%
3%
—
100%
100%
100%
100%
Notes:
(1)
(2)
The calculation in the above table is based on the volume and value of events where the associated loss is more than or equal to £10,000.
2016 has been restated from £6,282 million as a loss captured in 2016 has now been determined as a non-qualifying operational risk event.
Risk mitigation
Risks are mitigated through the application of key preventative and detective controls. This is an integral step in the risk assessment
methodology, which determines residual risk exposure. Control owners are accountable for the design, execution, performance and
maintenance of key controls.
These key controls are regularly assessed for adequacy and tested for effectiveness. The control testing results are monitored and,
where a material change in performance is identified, it results in a re-evaluation of the associated risk.
RBS purchases insurance to provide the business with financial protection against specific losses and to comply with statutory or
contractual requirements.
227
Business review Capital and risk management
Business risk (unaudited)
Definition
Business risk is the risk that RBS makes inappropriate business
or strategic choices or that RBS is not able to execute its chosen
strategy in line with its budget.
Sources of risk
Business risk arises as a result of RBS’s exposure to the macro-
environment, to the competitive environment, and to
technological changes. In addition, internal factors such as
volatility in sales volumes, and input costs, and other operational
risks such as RBS’s ability to assess the business operating
environment, or to execute its chosen strategy, contribute to
business risk.
Key developments in 2017
RBS continued to reduce its business risk profile by implementing
its strategic plan to shift the business mix towards the UK and
retail and commercial banking segments, with higher risk
activities in NatWest Markets curtailed.
RBS also continued with its simplification and cost reduction
programmes during 2017.
As negotiations on the prospective withdrawal of the UK from the
European Union have progressed, RBS has been closely
monitoring and assessing the operating environment and its
effect on business risk.
In July 2017, RBS reached a settlement with the Federal Housing
Finance Agency, paying US$5.5 billion to resolve claims in
relation to the issuance and underwriting of residential mortgage-
backed securities in the US. This was an important step forward
in resolving one of the most significant legacy matters facing
RBS.
In September 2017, RBS received final approval from the
European Commission for its alternative remedies package,
designed to promote competition for banking services to the SME
marketplace. This approval allows RBS to resolve its final State
Aid divestment obligation and brings clarity for customers and
staff.
Governance
The Board has ultimate responsibility for business risk and for
approving strategic plans, initiatives and changes to strategic
direction.
RBS’s strategic planning process is managed by Strategy and
Corporate Development. The Risk and Finance functions are key
contributors to strategic planning.
Business risk is reported, assessed and challenged at every
governance level within the organisation. Each franchise
monitors its financial performance relative to plans and reports
this on a regular basis to the finance directors of each franchise.
Risk mitigation
RBS operates a monthly rolling forecasting process to identify
projected changes in, or risks to, key financial metrics, and
ensures appropriate actions are taken.
Reputational risk (unaudited)
Definition
Reputational risk is the risk to RBS’s public image from a failure
to meet stakeholders’ expectations in relation to performance,
conduct or business profile. Stakeholders include customers,
investors, employees, suppliers, government, regulators, special
interest and consumer groups, media and the general public.
Sources of risk
Reputational risk can arise from the conduct of employees;
activities of customers and the sectors and countries in which
they operate; provision of products and transactions; as well as
operations and infrastructure.
Governance
Reputational risk has Board-level oversight reinforced by a
Reputational Risk Policy. The Board Risk Committee and
Sustainable Banking Committee are responsible for overseeing
how RBS manages its reputation. The Board’s oversight of
reputational issues is supported by the senior RBS-wide
Reputational Risk Forum (RRF) which opines on cases and
issues that represent a material reputational risk to the whole
organisation. The RRF, which has delegated authority from the
Executive Risk Forum (ERF), also acts as a central forum to
review sector or theme-specific reputational risk acceptance
positions, including environmental, social and ethical risk
positions, for example, in the Defence and Gambling sectors.
Risk appetite
RBS manages and articulates its appetite for reputational risk
through the implementation of a qualitative reputational risk
appetite statement and a committee-based governance
framework. This has improved the identification, assessment and
management of customers, transactions, products and issues
that present a material reputational risk, resulting in a greater
awareness and focus on the importance of this risk. Moreover,
RBS has seen a rise in the number of cases being referred to
franchise and group-wide reputational risk fora as a result of
increased awareness of the framework as well as training on
reputational risk.
Responsibility for the day-to-day management of business risk
lies primarily with the franchises, with oversight by the Finance
function. The franchises are responsible for delivery of their
business plans and the management of such factors as pricing,
sales volumes, marketing expenditure and other factors that can
introduce volatility into earnings.
Risk mitigation
Reputational risk is mitigated through the policy and governance
framework, with ongoing staff training to ensure early
identification, assessment and escalation of material issues.
Lessons learned from committee meetings have also improved
the way cases and issues are debated and decisions made.
Risk identification
Business risk is identified and managed at the product and
transaction level. Estimated revenue, costs and capital are key
considerations in the design of any new product or in any new
investment decision.
The most material threats to RBS’s reputation continued to
originate from historical and more recent conduct issues. As a
result, RBS has been the subject of investigations and reviews by
a number of its regulators, some of which have resulted in fines
and public censure. Refer to the Litigation, investigations and
reviews section of Note 31 on the consolidated accounts on page
313.
228
Financial statements
Independent auditor’s report
Consolidated income statement
Consolidated statement of comprehensive income
Consolidated balance sheet
Consolidated statement of changes in equity
Consolidated cash flow statement
Accounting policies
Notes on the consolidated accounts
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
Net interest income
Non-interest income
Operating expenses
Pensions
Auditor’s remuneration
Tax
Earnings per ordinary share
Financial instruments - classification
Financial instruments - valuation
Financial instruments - maturity analysis
Financial assets - impairments
Derivatives
Debt securities
Equity shares
Intangible assets
Property, plant and equipment
Prepayments, accrued income and other assets
Discontinued operations and assets and liabilities of
disposal groups
Short positions
Provisions for liabilities and charges
Accruals and other liabilities
Deferred tax
Subordinated liabilities
Non-controlling interests
Share capital
Other equity
Leases
Structured entities
Asset transfers
Capital resources
Memorandum items
Net cash flow from operating activities
Analysis of the net investment in business interests and
intangible assets
Interest received and paid
Analysis of changes in financing during the year
Analysis of cash and cash equivalents
Segmental analysis
Directors’ and key management remuneration
Transactions with directors and key management
Related parties
Post balance sheet events
Parent company financial statements and notes
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
Page
230
244
245
246
247
250
251
264
264
265
269
274
275
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279
289
291
292
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295
295
296
297
298
299
299
300
301
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229
Independent auditor’s report to the members of The Royal Bank of Scotland Group plc
Opinion
We have audited the financial statements (see table below) of The Royal Bank of Scotland Group plc (the Parent Company) and its
subsidiaries (together, the ‘Group’) for the year ended 31 December 2017. In our opinion:
the financial statements give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 31
December 2017 and of the Group’s profit for the year then ended;
the financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as
adopted by the European Union;
the Parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the European
Union and as applied in accordance with the provisions of the Companies Act 2006; and
the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the
Group financial statements, Article 4 of the IAS Regulation.
We have audited the financial statements of The Royal Bank of Scotland Group plc which comprise:
Group
•
•
•
Consolidated balance sheet as at 31 December 2017;
Consolidated income statement for the year then ended;
Consolidated statement of comprehensive income for the year
then ended;
Consolidated statement of changes in equity for the year then
ended;
Consolidated cash flow statement for the year then ended;
Accounting Policies on pages 251 to 263;
Related notes 1 to 41 to the financial statements;
Information identified as ‘audited’ in the Annual report on
remuneration on pages 83 to 105; and
Capital and risk management section of the Business review
except information identified as ‘unaudited’ on pages 149 to 228.
•
•
•
•
•
•
Parent Company
Balance sheet as at 31 December 2017;
Statement of changes in equity for the year then
ended;
Cash flow statement for the year then ended; and
Related notes 1 to 15 to the financial statements.
The financial reporting framework that has been applied in their preparation is applicable law and IFRSs as adopted by the European
Union and, as regards the Parent Company financial statements, as applied in accordance with the provisions of the Companies Act
2006.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our
responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements
section of our report below. We are independent of the Group and Company in accordance with the ethical requirements that are
relevant to our audit of the financial statements in the UK, including the Financial Reporting Council’s Ethical Standard as applied to
listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
Use of our report
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006.
Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them
in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to
anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have
formed.
230
Independent auditor’s report to the members of The Royal Bank of Scotland Group plc
Conclusions relating to principal risks, going concern and viability statement
In relation to the ISAs(UK) which require us to report to you whether we have anything material to add or draw attention to, we have
nothing to report in respect of the following information in the annual report:
•
•
•
•
•
the disclosures in the Annual Report and Accounts (set out on pages 372 to 402) that describe the principal risks and explain how
they are being managed or mitigated;
the directors’ confirmation (set out on page 49) in the Annual Report and Accounts that they have carried out a robust assessment
of the principal risks facing the entity, including those that would threaten its business model, future performance, solvency or
liquidity;
the directors’ statement (set out on page 112) in the financial statements about whether they considered it appropriate to adopt the
going concern basis of accounting in preparing them, and their identification of any material uncertainties to the entity’s ability to
continue to do so over a period of at least twelve months from the date of approval of the financial statements;
whether the directors’ statement in relation to going concern required under the Listing Rules in accordance with Listing Rule
9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit; or
the viability statement (set out on page 49) in the annual report as to how they have assessed the prospects of the entity, over
what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a
reasonable expectation that the entity will be able to continue in operation and meet its liabilities as they fall due over the period of
their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.
Separate opinion in relation to IFRSs as issued by the IASB
As explained in the accounting policies, in addition to complying with its legal obligation to apply IFRSs as adopted by the European
Union, the Group has applied IFRSs as issued by the International Accounting Standards Board (IASB). In our opinion the Group
financial statements comply with IFRSs as issued by the IASB.
Overview of our audit approach
Key Audit Matters
Audit scope
Materiality
Provisions for conduct, litigation and regulatory matters, customer remediation and claims.
Future profitability estimates impacting the recognition of deferred tax, impairment in goodwill and, in the
parent company accounts, investments in subsidiaries.
Impairment of loans and advances.
Valuation of financial instruments with higher risk characteristics including related income from trading
activities.
Hedge effectiveness testing including the impact on non-interest income.
Provision for restructuring costs.
Pension valuation and obligations.
IT access management.
The significant components of our audit cover the reportable segments identified in the financial
statements together with the central functions of the Group based in the UK and overseas and include
Finance, the Services function and Treasury.
We performed an audit of the complete financial information of four components and audit procedures
on specific balances for a further three components.
The components where we performed full or specific audit procedures accounted for 93% or more of
Group total income, equity and total assets.
Overall Group materiality has been set at £300 million which represents 0.6% of total equity.
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements
of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we
identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the
audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial
statements as a whole, and in our opinion thereon, and we do not provide a separate opinion on these matters.
231
Independent auditor’s report to the members of The Royal Bank of Scotland Group plc
Risk
Our response to the risk
Provisions for conduct, litigation and regulatory matters, customer remediation and claims
The continued litigious environment and the heightened
regulatory scrutiny gives rise to a high level of judgement in
determining appropriate provisions and disclosures. At the
year end, the Group has reported £7.8 billion (2016: £12.8
billion) of provisions for liabilities and charges, including
£5.8 billion (2016: £11.0 billion) for conduct and litigation
claims, including RMBS, PPI and the FCA review of RBS’s
treatment of SMEs as detailed in Note 20 of the financial
statements on page 299.
We tested the design and operating effectiveness of the Group’s key
controls over the identification, estimation, monitoring and disclosure
of provisions considering the potential for management override of
controls. The controls tested included those designed and operated
by management to identify and monitor claims, assess the
completeness and accuracy of data used to estimate provisions.
We examined the relevant regulatory correspondence to assess
developments in key cases, the Group’s complaint handling reports
and litigation reports to identify potentially material cases. For cases
where a provision was not recognised, we considered whether the
outcome was probable and reliably estimable in accordance with the
accounting criteria.
Management judgement is needed to determine whether an
obligation exists and a provision should be recorded at 31
December 2017 in accordance with the accounting criteria
set under IAS 37. This includes determining if:
It is probable that an economic outflow such as a
payment will occur; and
The amount of the payment (or other economic
outflow) can be estimated reliably.
The measurement of the provision is based on the best
estimate of the expenditure required to settle the present
obligation.
The most significant areas of judgement are:
Completeness of provisions recognised: judgement is
in the determination of whether an outflow in respect
of identified material conduct matters are probable or
can be estimated reliably;
Measurement of provisions recognised:
appropriateness of assumptions and judgements used
in the estimation of material provisions; and
Adequacy of disclosures of provision for liabilities and
charges and contingent liabilities.
For the significant provisions made, we understood, assessed and
challenged the provisioning methodology. We tested the underlying
data and assumptions used in the determination of the provisions
recorded, including expected claim rates, legal costs, and the timing
of settlement. We also considered peer bank settlements in similar
cases.
We sent external confirmations to the Group’s external counsel for
significant matters and corroborated management’s conclusion by
independently obtaining the underlying information used in estimating
the provisions.
Where appropriate, we involved our conduct risk specialists. For key
cases, we considered the regulatory developments and
management’s interaction with the Regulators and concluded on the
reasonableness of the assumptions used by management also by
comparing the results of our independently performed benchmarking
and sensitivity analysis. We also verified historical data and whether
they supported current estimates.
In addition, we attended key management meetings and reviewed the
minutes of legal and conduct provision committee meetings to
conclude on the effectiveness of management’s review controls and
the appropriateness of the conclusions reached
We tested the disclosure provided on conduct, litigation and
regulatory provisions to determine whether it complied with
accounting standards. Given the inherent estimation uncertainty and
the judgmental nature of these provisions, we evaluated the
appropriateness of the disclosure made in the financial statements.
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Key observations communicated to the Group Audit Committee
We are satisfied that the Group’s provisions for conduct, litigation and regulatory matters, customer remediation and claims are within
a reasonable range and recognised in accordance with IFRS. We did not identify any material unrecorded provisions.
We highlighted the following matters:
In assessing and evaluating the total US RMBS provision of £3.2 billion, management and the Board considered other industry
settlements and claims. It is a reasonable reflection of the Group’s current position given the prevailing uncertainty as to the
outcome of the remaining discussions with the US Department of Justice and other parties. The risk of future material additional
charges is appropriately disclosed in the financial statements.
The PPI provision remains sensitive to key assumptions, the most significant of which is future complaint volumes.
Management’s estimate was within our range of outcomes based on reasonable alternative assumptions.
The provision related to the FCA review of the Group’s treatment of SMEs is sensitive to a number of assumptions.
Management’s estimate is within an acceptable range based on the current information available to us.
Relevant references in the Annual Report and Accounts
Report of the Group Audit Committee (page 65)
Accounting policies (page 251)
Note 20 of the financial statements (page 299)
Risk
Future profitability estimates impacting the recognition of deferred tax and the impairment of goodwill and, in the parent company
accounts, investments in subsidiaries.
The recognition and carrying value of deferred tax assets,
goodwill and, in the parent company accounts, investments
in subsidiaries are based on estimates of future profitability
which require significant management judgement. At year
end the Group had reported Goodwill of £5.6 billion (2016:
£5.6 billion) and deferred tax assets of £1.7 billion (2016:
£1.8 billion). The parent company has reported investments
in subsidiaries of £47.6 billion (2016: £44.6 billion).
We tested the design and operating effectiveness of the Group’s key
controls around the preparation and review of the forecasts. We
tested the controls over the value in use model including the
significant assumptions, inputs, calculations, methodologies and
judgements.
Our response to the risk
In testing for impairment, the Group estimates the value in
use of its cash generating units based on the business
forecasts:
Revenue and cost forecasts impacted by the Group’s
transformation programme and reorganisation,
business and strategic changes underway and the
changing competitive environment;
Key assumptions used in the recoverability and
valuation assessments (discount rates, growth rates,
macroeconomic assumptions, etc.); and
Assumptions regarding the economic consequences of
Brexit and other political developments over an
extended period.
The recognition of deferred tax assets considers the future
profit forecasts of the legal entities as well as interpretation
of recent changes to tax rates and laws.
With the support of our valuation specialists, we tested whether key
macroeconomic assumptions used in the Group’s forecasting process
were reasonable. We evaluated how the discount rates and long term
growth rates used by management compared to peer practice,
external market data and corroborative calculations. We considered
the Group’s cost reduction programme and the extent to which
annual cost reductions had been met. We assessed the achievability
of future cost reduction plans including considering how these
compared to peer banks and the external commentary. We also
considered the results of the independent review of the forecasts
undertaken by the Risk function and management’s challenge of the
carrying values and key assumptions in relevant executive
committees of the Group.
We tested how previous management forecasts compared to actual
results to evaluate the accuracy of the forecasting process. We also
assessed how these forecasts impacted the carrying value of
deferred tax, goodwill and investments.
We evaluated how management considered alternative assumptions
and performed sensitivity analysis on the assumptions used. We
considered how key events, such as Banking Structural Reform and
Brexit impacted management’s estimates. We performed our own
scenario analysis for certain assumptions we considered could have
a significant impact on the results of the impairment tests.
With the support of our taxation specialists, we assessed the estimate
of future taxable profits to calculate the level of deferred tax assets
recognised on the balance sheet including the time horizon used for
recoverability of losses and other temporary differences.
In addition, we attended and observed management meetings where
key judgements were discussed, including those used in the value in
use model and the carrying value of deferred tax assets. We also
reviewed Board and Executive Committee minutes to assess the
effectiveness of management’s review process and the
appropriateness of the conclusions reached.
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Independent auditor’s report to the members of The Royal Bank of Scotland Group plc
Key observations communicated to the Group Audit Committee
We are satisfied that the carrying values of deferred tax assets, goodwill and, in the parent company accounts, investments in
subsidiaries are reasonable and the related disclosures are in compliance with IFRS. We highlighted the following:
Results of our sensitivity analysis of the value in use and headroom to changes in the key assumptions in the forecasts
including the long term growth rate, discount rate and factors impacting the underlying level of profitability both at a Group level
and for individual segments;
Sensitivity of the goodwill and the investment in subsidiaries to the Group’s forecast cost reduction and the impact of the amount
and timing of actual cost reductions achieved; and
Inherent uncertainty of the five year forecasts and the difficulty predicting revenue and costs over this period, particularly with
respect to the impact of Banking Structural Reform, the economic consequences of Brexit and other political developments, and
disruptions in the business model over an extended period.
Relevant references in the Annual Report and Accounts
Report of the Group Audit Committee (page 65)
Accounting policies (page 251)
Note 15 (page 295) and Note 22 (page 301) of the financial statements, and Note 7 (page 340) of the Parent company financial
statements.
Risk
Impairment of loans and advances
A significant degree of judgement is required to determine the
timing and amount of impairment to recognise with respect to
loans and advances. At year end the Group reported total gross
loans and advances of £384.0 billion (2016: £386.5 billion) and
impairment provisions of £3.8 billion (2016: £4.5 billion).
We have focused on the following significant judgements and
estimates which could give rise to material misstatement or
management bias:
Completeness and timing of recognition of loss events in
accordance with criteria set out in IAS 39;
For individually assessed provisions, the measurement of the
provision may be dependent on the valuation of collateral,
estimates of exit values and the timing of cash flows;
For modelled provisions measurement is primarily dependent
upon key assumptions relating to probability of default, ability
to repossess collateral and recovery rates; and
Completeness and valuation of post model adjustments.
Our response to the risk
We tested the design and operating effectiveness of key
controls focusing on the following:
Identification of loss events, including early warning and
default warning indicators;
Annual credit reviews;
Assessment and approval of individual impairment
provisions;
Governance including model validation and the
assessment of the suitability of models, appropriateness
of assumptions, consideration of post model adjustments
and approval of provisions; and
Completeness and accuracy of data input into models
and provision calculators.
In addition, we periodically attended and observed risk
committee and provision committee meetings.
For modelled provisions we tested data inputs and agreed a
sample of data used in the models and calculators to source
systems. We used our credit risk specialists to test the
assumptions and calculations. We evaluated the methodology
to establish model parameters and assessed the
appropriateness of the models used. We performed code
reviews for a sample of models and calculators.
Where possible, assumptions were benchmarked against Pillar
3, EBA stress tests and our internally developed ranges.
Where post model adjustments were made as a result of
limitations in existing models, we confirmed the extent of the
model shortcoming, recalculated and assessed the
appropriateness of the adjustment. Based on current economic
and market circumstances, we considered the need for sector
or systemic overlay adjustments.
In Ulster Bank RoI we specifically focused on key data inputs
and model parameters, including probabilities of modelled
outcome and collateral haircuts, and reviewed management’s
back testing of key assumptions.
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Independent auditor’s report to the members of The Royal Bank of Scotland Group plc
Risk
Impairment of loans and advances (continued)
Our response to the risk
To test the completeness of the identification of loans with loss
events we selected a sample of performing loans and
independently assessed whether any IAS 39 loss indicators
were present.
For loans individually assessed for impairment we based our
sample on factors including high risk sectors such as shipping,
construction, oil and gas and commercial real estate. With
input from our valuation specialists we formed an independent
view of collateral or exit values, cash flow assumptions and
exit strategies. We re-performed the discounted cash flow
calculations and compared our measurement outcome to that
prepared by management and investigated any differences
arising.
We assessed the appropriateness and presentation of
disclosures against relevant accounting standards.
Key observations communicated to the Group Audit Committee
We are satisfied that credit impairment provisions were reasonable and in compliance with IFRS. We highlighted the following:
Our testing of controls did not identify significant deficiencies.
Our testing of models and model assumptions did not highlight material differences. For individually assessed impairments, in a
few instances we reported judgemental differences in respect of the extent of the impairment identified, however none of these
differences were considered material.
Overall, we were satisfied with the completeness of the identification of loss events.
Relevant references in the Annual Report and Accounts
Report of the Group Audit Committee (page 65)
Accounting policies (page 251)
Note 11 of the financial statements (page 291)
Our response to the risk
Risk
Valuation of financial instruments with higher risk characteristics including related income from trading activities
The valuation of financial instruments with higher risk
characteristics involves both significant judgment and risk of
inappropriate revenue recognition through mis-marking. The
judgement in estimating fair value of these instruments can involve
complex valuation models and significant fair value adjustments
both of which may be reliant on data inputs where there is limited
market observability. At year end the Group reported level 3
assets £3.3 billion (2016: £4.5 billion) and level 3 liabilities £2.2
billion (2016: £3.0 billion).
We performed trade life-cycle product walkthroughs to confirm
our understanding of RBS’s process and controls in the area of
revenue recognition relating to financial instruments with
higher risk characteristics.
We tested the design and operating effectiveness of the
Group’s controls over financial instrument valuations, including
independent price verification, model approval/review,
collateral management, and income statement analysis and
reporting.
The potential risk of inappropriate recognition of revenue is most
likely to arise through the valuation of these instruments given the
level of management judgement involved.
The key judgements and estimates are:
Complex model-dependent valuations, which are aligned with
material pricing models as defined by the RBS Modelled
Product Review Committee. These include interest-rate
swaps linked to pre-payment behaviour and interest rate and
foreign exchange options with exotic features such as those
having multiple call dates or with a variable notional;
We performed further procedures as set out below for each
risk characteristic with involvement from our financial
instrument valuation and modelling specialists. These
procedures were performed at multiple points in the year to
validate the appropriateness of revenue recognition.
Our testing on complex model-dependent valuations involved
the specialist review of detailed model documentation and use
of internally developed EY challenger models to analyse and
challenge judgements and assumptions applied within each
relevant model.
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Independent auditor’s report to the members of The Royal Bank of Scotland Group plc
Risk
Valuation of financial instruments with higher risk characteristics including related income from trading activities (continued)
Our response to the risk
Pricing inputs and calibrations for illiquid instruments,
which are largely aligned with material positions defined
as level 3 within the Group’s IFRS 7 fair value hierarchy
disclosure. These include rarely traded debt securities,
and derivative instruments whose valuation is dependent
upon the correlation between certain interest rates or
uncertainty surrounding the discount rate associated
with complex collateral arrangements;
Fair value adjustments made to uncollateralised
derivatives to reflect funding risk, counterparty credit risk
and other product and deal specific considerations.
These include RBS’s Funding Valuation Adjustments
(FVA),Credit Valuation Adjustments (CVA) relating to
derivative counterparties whose credit spread is less
readily able to be determined, and material product and
deal specific adjustments on long dated uncollateralised
derivative portfolios; and
The manipulation of revenue recognition is most likely to
arise through the inappropriate valuation of these
instruments given the level of management judgement
involved.
Our re-pricing of instruments valued using illiquid pricing inputs
covered material products associated with this risk and the
results were compared to the valuations recorded by
management. For a sample of derivatives, our valuation
testing used independent models and data. For cash positions
analytical procedures were performed to validate the
population of identified illiquid positions and, prices of
comparable positions and other data points were used to
independently value these.
Our testing of fair value adjustments for counterparty credit,
funding risk and other product and deal specific considerations
on uncollateralised derivatives involved: (i) comparing
valuation judgements applied by management to our
knowledge of current industry practice through benchmarking
exercises (ii) re-valuing a sample of counterparty level FVA
and CVA calculations using independent models, (iii) testing
funding spreads to third party data and analysis of recent trade
activity to verify the drivers of differences between book value
and trade value, (iv) independent challenge of illiquid CVA
inputs and (v) testing assumptions of material product and deal
specific adjustments, including analysis of recent trade activity.
Where differences between our independent valuation and
management’s valuation were outside our thresholds, we
performed additional testing over each variance to support our
assessment of the appropriateness of the fair value. This work
included our own analysis of: (i) recent trade activity, involving
trade exits to back-test key valuation judgements, (ii) collateral
disputes and material differences with counterparty valuations,
(iii) income statement attribution, particularly unexplained
income statement in the year for the relevant instruments and
(iv) associated valuation adjustments e.g. model fair value
adjustments to reflect the associated uncertainty given lack of
market data.
Key observations communicated to the Group Audit Committee
We are satisfied that the fair value of financial instruments with higher risk characteristics and the recognition of related income is
reasonable and in accordance with IFRS.
We highlighted the following to the Group Audit Committee:
Our independent valuation of a sample of derivatives were either within our threshold or, where initially outside, were
corroborated by other data, for example, trade exit activity, valuation adjustments for model or data limitations, or benchmarking
to peer practice. Valuations of hard-to-price cash positions were within our thresholds; and
The Group’s recognition of fair value adjustments on uncollateralised derivatives is within a reasonable range of outcomes
based upon our testing procedures which included revaluation exercises, benchmarking to peer practice and experience from
recent trade activity.
Relevant references in the Annual Report and Accounts
Report of the Group Audit Committee (page 65)
Accounting policies (page 251)
Note 9 of the financial statements (page 279)
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Independent auditor’s report to the members of The Royal Bank of Scotland Group plc
Risk
Hedge effectiveness testing including the impact on non-interest income
The Group undertakes fair value and cash flow hedge accounting programs to
mitigate income statement volatility arising from the Group’s activities.
Hedge effectiveness testing for both of these programs is identified as a risk area
because the application of accounting rules and execution of hedge effectiveness
testing lead to significant adjustments to the balance sheet and income statement
which are inherently complex and involve some management judgement. These
adjustments impact non-interest income and there is an incentive to manipulate the
hedge effectiveness results, to avoid undesirable income statement volatility. Any
hedge ineffectiveness remains in the income statement.
While the majority of the Group process for hedge accounting is automated a risk
arises that management design an effectiveness testing methodology that does not
comply with IAS 39 requirements or manually override otherwise automated results
to influence the income statement impact.
Our response to the risk
We tested the design and operating
effectiveness of key controls including the
performance, review and approval of
monthly hedge effectiveness testing
performed by management.
We challenged the assumptions applied in
testing hedge effectiveness in accordance
with IAS 39.
With the support of our hedge accounting
specialists we independently re-performed a
sample of hedge effectiveness tests. This
included testing hedge relationships and
manual adjustments made to the
effectiveness assessment.
Key observations communicated to the Group Audit Committee
We are satisfied that the Group has appropriately applied hedge accounting in accordance with IFRS.
We highlighted that hedge ineffectiveness is correctly recorded in the income statement and we concurred with management’s
assessment that there are no hedge relationships that should have been discontinued. We concluded on the effectiveness of controls
in place over hedge accounting as at year end.
Relevant references in the Annual Report and Accounts
Report of the Group Audit Committee (page 65)
Accounting policies (page 251)
Note 12 of the financial statements (page 292)
Risk
Provision for restructuring costs
Transformation programmes as well as organisational
changes lead to impairment, restructuring provisions and
other severance payments. The timing and amount of
restructuring costs recognised depend on management
judgement to determine when the accounting criteria have
been met to support recognition in the current period. At
year end, the Group recorded total restructuring provisions
of £482 million (2016: £450 million).
Management judgement is needed to determine whether
an obligation exists and a provision should be recorded at
31 December 2017 in accordance with the accounting
criteria set under IAS 37. This includes determining if:
We tested the design and operating effectiveness of the Group’s key
controls around the recognition and measurement of these
restructuring costs. This included the review and approval of
provisions recorded by finance and the estimate of the costs to
record.
We enquired of management involved in transactions to verify a
proper understanding of the transactions and its impacts, both on
accounting and disclosures.
Our response to the risk
We obtained a breakdown of the direct and indirect restructuring
costs recorded during the year. We selected a sample of provisions
and restructuring costs and assessed them for compliance with IAS
37 by considering the criteria which outline when a constructive
obligation has been met in order to recognise a provision. For staff
costs, this included determining whether the plans had been
communicated with employees.
For premises and equipment, this included determining whether the
unavoidable costs to execute the planned exit exceed the benefit.
There is a legal or constructive obligation as a result
of a past event;
It is probable that an economic outflow such as a
payment will occur; and
The amount of the payment (or other economic
outflow) can be estimated reliably.
The most significant areas of judgement when recognising
these costs are:
Determining whether a constructive obligation has
been met. For example, has the Group indicated to
other parties that it will accept certain responsibilities;
and
Judgement involved in the measurement of the
provision based on estimated costs.
We assessed the measurement of the provision by testing the
underlying data and assumptions used in estimating the amount
recorded. We also assessed any impact to goodwill and intangibles.
Key observations communicated to the Group Audit Committee
We are satisfied that the restructuring costs are appropriately recorded and in compliance with IFRS. We highlighted the following:
Timing of the recognition of certain restructuring provisions and the control in place to estimate the amount of the provision and
consider the relevant accounting judgements.
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Independent auditor’s report to the members of The Royal Bank of Scotland Group plc
Our assessment of IAS 37 criteria that resulted in differences that were not material being recorded by management.
Relevant references in the Annual Report and Accounts
Report of the Group Audit Committee (page 65)
Accounting policies (page 251)
Note 20 (page 299) of the financial statements.
Risk
Pension valuation and retirement benefit obligations
The Group operates a number of defined benefit schemes
which in total are significant in the context of the overall
balance sheet. At year end the Group reported a net
pension asset of £263 million (2016: £87 million net pension
liability).
The valuations of the retirement benefit liabilities are
calculated with reference to a number of actuarial
assumptions and inputs including discount rate, rate of
inflation and mortality rates. The net pension asset is
sensitive to changes in the assumptions.
Our response to the risk
We tested the design and operating effectiveness of key controls
over the completeness and accuracy of data extracted and supplied
to the Group’s actuaries, which is used to calculate the pension
schemes’ surplus or deficit.
We also tested the controls associated with the actuarial
assumptions setting process and the measurement of the fair value
of the schemes’ assets. We concluded that the key controls were
designed, implemented and operated effectively.
With the support of our actuarial specialists, we understood the
judgements made in determining the assumptions used by
management to value the retirement benefit liabilities and we
challenged and verified whether these assumptions met the
requirements of the applicable accounting standards, the specific
circumstances of the schemes and their participants, and were in line
with market practice.. Our audit procedures included an assessment
of the methodology adopted by the actuaries in determining the
assumptions, a comparison of life expectancy assumptions with
relevant mortality tables, benchmarking inflation and discount rates
against external market data, considering changes in historical
assumptions and evaluating the independence, qualifications and
results of work performed by management’s actuaries involved in the
valuation process.
We tested the fair value measurement of scheme assets by
independently calculating a fair value for a sample of the assets held.
Our sample included cash, equity instruments, derivative financial
instruments and other assets. We also tested the existence of the
sampled pension assets by obtaining written confirmation from the
relevant pension asset custodian and by examining the relevant legal
documentation.
We also tested the actuaries’ calculation of the pension liabilities by
independently rolling forward the prior year figures allowing for the
ageing of members, accrual of benefits over the year and changes in
financial and demographic assumptions over the period.
We read and tested the disclosures made in the financial statements,
including the sensitivities to the key assumptions.
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Independent auditor’s report to the members of The Royal Bank of Scotland Group plc
Key observations communicated to the Group Audit Committee
We are satisfied that the valuation and disclosure of the retirement benefit obligations recorded at 31 December 2017 is reasonable
and in accordance with requirements of the relevant accounting standards.
We described and discussed results of our internal benchmarking of key actuarial assumptions including the discount rate, inflation,
mortality and pension payments. We concluded that assumptions tested are within a reasonable range. We also presented the
results of our independent valuation of a sample of pension assets.
In determining the accounting for the pension schemes, we understood management’s assessment of the impact of IFRIC 14 on the
amount of the surplus recognised in the financial statements and verified its compliance with the applicable accounting standards.
Relevant references in the Annual Report and Accounts
Report of the Group Audit Committee (page 65)
Accounting policies (page 251)
Note 4 of the financial statements (page 269)
Risk
IT systems and controls
Our audit procedures have a focus on IT systems and
controls due to the pervasive nature and complexity of
the IT environment, the large volume of transactions
processed in numerous locations daily and the
reliance on automated and IT dependent manual
controls. Our areas of audit focus included user
access management, developer access to the
production environment and changes to the IT
environment. These are key to ensuring IT dependent
and application based controls are operating
effectively.
Our response to the risk
We tested the design and operating effectiveness of the Group’s IT
access controls over the information systems that are critical to financial
reporting. We tested IT general controls (logical access, changes
management and aspects of IT operational controls). This included testing
that requests for access to systems were appropriately reviewed and
authorised. We tested the Group’s periodic review of access rights. We
inspected requests of changes to systems for appropriate approval and
authorisation. We considered the control environment relating to various
interfaces, configuration and other application layer controls identified as
key to our audit.
Where deficiencies were identified, we tested compensating controls or
performed alternate procedures. In addition, we understood where
relevant, changes were made to the IT landscape during the audit period
and tested those changes that had a significant impact on financial
reporting.
Key observations communicated to the Group Audit Committee
We are satisfied that IT controls relevant to financial reporting operated effectively at year-end.
We noticed that a number of user access related deficiencies were identified. Compensating controls were tested or alternate
procedures were performed.
Relevant references in the Annual Report and Accounts
Report of the Group Audit Committee (page 65)
Accounting policies (page 251)
An overview of the scope of our audit
Tailoring the scope
Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our audit scope for
each component of the Group. Taken together, this enables us to form an opinion on the financial statements. We take into account the
size and risk profile of the component and its activities, the organisation of the Group and effectiveness of group-wide controls, changes
in the business environment and other factors such as recent internal audit results when assessing the level of work to be performed at
each component.
Our audit of the significant components covers the reportable segments identified in the financial statements, together with the central
functions of the Group based in the UK and overseas, and includes Finance, the Services function and Treasury. In assessing the risk of
material misstatement to the Group financial statements, and to ensure that we had adequate quantitative coverage of significant
accounts in the financial statements, we selected seven components covering entities within the UK and 10 other countries, which
represent the principal business units within the Group.
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Independent auditor’s report to the members of The Royal Bank of Scotland Group plc
Of the seven components selected, we performed an audit of the complete financial information of four components (‘full scope
components’) which were selected based on their size or risk characteristics. For the remaining three components (‘specific scope
components’), we performed audit procedures on specific accounts within that component that we considered had the potential for the
greatest impact on the accounts and disclosures in the financial statements either because of the size of these accounts or their risk
profile.
Component
Scope
Key locations
UK Personal & Business Banking
Ulster Bank ROI
Commercial Banking
Private Banking
RBS International
NatWest Markets
Central items and other (including Global Financial Services, Services
and Treasury)
United Kingdom
Full
Specific Republic of Ireland
Full
United Kingdom
Specific United Kingdom
Specific Channel Islands
Full
Full
United Kingdom, United States and Singapore
United Kingdom, India and Poland
The table below illustrates the coverage obtained from the work performed by our audit teams. As the Group has historically made
losses, we considered total assets, total equity and the absolute value of the amounts in the income statement (meaning the magnitude
of the amounts without regard to their positive or negative value) to verify we had appropriate overall coverage on the income statement.
Total assets
Total equity
Absolute value of the income statement
93%
57%
90%
6%
40%
3%
1%
3%
7%
Full scope(1)
Specific scope(2)
Other procedures(3)
Total
100%
100%
100%
The audit scope of Specific scope components may not have included testing of all significant accounts within the component; however
the testing will have contributed to the total coverage of significant accounts tested for the overall Group.
Changes from the prior year
In Q4 2017, RBS completed a segmental reorganisation, which included:
Williams & Glyn, previously a specific scope component, was integrated into UK Personal and Business Banking (UK PBB).
Capital Resolution, previously a full scope component, with the exception of the Retail Mortgaged Backed Securities (RMBS)
litigation costs, was integrated into NatWest Markets (NWM).
Capital Resolution RMBS litigation related costs was included, at a reportable operating segment level, within Central items &
other.
Involvement with component teams
In establishing our overall approach to the Group audit, we determined the type of work that needed to be undertaken in each of the
components by us, as the primary audit engagement team, or by component auditors in the United Kingdom or from other EY global
network firms operating under our instruction. Of the four full scope components, audit procedures were performed on one of these
directly by the primary audit engagement team. Of the three specific scope components, where work was performed by component
auditors, we determined the appropriate level of involvement to enable us to determine that sufficient audit evidence had been obtained
as a basis for our opinion on the Group as a whole.
The primary audit engagement team interacted regularly with the component audit teams where appropriate throughout the course of
the audit, which included holding planning meetings, maintaining regular communications on the status of the audits, reviewing key
working papers and taking responsibility for the scope and direction of the audit process. The primary audit engagement team also
participated in meetings with key management personnel in the components and, for certain overseas locations, implemented a
programme of planned visits. These visits involved discussing the audit approach with the component team and any issues arising from
their work, as well as meeting with local management. This, together with the additional procedures performed at Group level, gave us
appropriate evidence for our opinion on the Group financial statements.
Our application of materiality
We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified misstatements on the audit
and in forming our audit opinion.
Notes:
(1)
(2)
(3)
Full scope: audit procedures on all significant accounts.
Specific scope: audit procedures on selected accounts.
Other procedures: considered in analytical procedures.
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Independent auditor’s report to the members of The Royal Bank of Scotland Group plc
Materiality
The magnitude of omission or misstatement that, individually or in the aggregate, could reasonably be expected to influence the
economic decisions of the users of the financial statements. Materiality provides a basis for determining the nature and extent of our
audit procedures.
We determined materiality for the Group and parent company to be £300 million (2016 materiality: £270 million), which is 0.6% of the
total equity of the Group and 0.6% of the parent company. We considered that equity represented a relevant measure used by investors,
regulators and other stakeholders when assessing the performance of the Group and parent company. Our materiality was based on the
equity of the Group given the significant losses and volatility of results in recent years. During the course of our audit, we reassessed
initial materiality and increased it from our initial level of £270 million in light of the fact that many legacy items are now reflected in
equity.
Performance materiality
The application of materiality at the individual account or balance level is set at an amount to reduce to an appropriately low level the
probability that the aggregate of uncorrected and corrected misstatements exceed materiality.
On the basis of our risk assessments, together with our assessment of the Group’s overall control environment, our judgement was that
performance materiality was 50% of our planning materiality, namely £150 million (2016: £135 million). We have set performance
materiality at this percentage (which is at the lowest end of the range of our audit methodology) based on various considerations
including the past history of misstatements, our ability to assess the likelihood of misstatements, the effectiveness of the control
environment and other factors affecting the entity and its financial reporting.
Audit work of component teams for the purpose of obtaining audit coverage over significant financial statement accounts is undertaken
based on a percentage of total performance materiality. The performance materiality set for each component team is based on the
relative scale and risk of the component to the Group as a whole and our assessment of the risk of misstatement at that component. In
the current year, the range of performance materiality allocated by the primary audit engagement team to components was between £60
million and £115 million.
Reporting threshold
An amount below which identified misstatements are considered to be clearly trivial.
We agreed with the Group Audit Committee that we would report to them all corrected and uncorrected audit misstatements in excess of
£15 million, which is set at 5% of planning materiality, as well as misstatements below that threshold that, in our view, warranted
reporting on qualitative grounds.
We evaluate any uncorrected misstatements against both the quantitative and qualitative measures of materiality discussed above and
in light of other relevant qualitative considerations in forming our opinion.
Accounting developments effective 1 January 2018 – IFRS 9 Financial Instruments
IFRS 9 replaces the current financial instruments standard IAS 39 effective 1 January 2018. It represents a fundamental change to the
way financial instruments are classified, measured and assessed for credit impairment. The Group has established a Group-wide
programme to implement the necessary changes as a result of this standard and disclosed the impact of transition on equity. Our audit
work on this accounting change has been performed throughout 2017, for the purpose of the transition disclosure included in the 2017
financial statements, and continues through 2018. Our procedures on the impact disclosed included:
Assessing the key interpretations made by management for compliance with IFRS 9
Classification and measurement:
o
Testing the intent of holding the instruments and their contractual characteristics in order to assess their
classification
Credit impairment:
o
o
o
Testing the assumptions and judgements used in the impairment models to calculate expected credit losses,
including the incorporation of economic forecasts
Testing the data used to run the models
Testing the IT applications used in the credit impairment process
We also tested the design and operating effectiveness of key controls over the completeness and accuracy of the transition disclosure
included in the financial statements.
Other information
The other information comprises the information included in the Annual Report and Accounts, including the Strategic Report (set out
on pages 1 to 49, Governance (set out on pages 50 to 116), Business review (set out on pages 117 to 148), Capital and risk
management (set out on pages 149 to 228), Additional information (set out on pages 357 to 371, Risk Factors (set out on pages 372 to
403, Shareholder information (set out on pages 404 to 407), Abbreviations and acronyms (set out on page 408), Glossary of terms (set
out on pages 409 to 415), Index (set out on pages 416 to 418), and Important addresses (set out on page 419) other than the financial
statements and our auditor’s report thereon. The directors are responsible for the other information.
Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in this
report, we do not express any form of assurance conclusion thereon.
241
Independent auditor’s report to the members of The Royal Bank of Scotland Group plc
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider
whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise
appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to
determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If,
based on the work we have performed, we conclude that there is a material misstatement of the other information, we are required to
report that fact.
We have nothing to report in this regard.
In this context, we also have nothing to report in regard to our responsibility to specifically address the following items in the other
information and to report as uncorrected material misstatements of the other information where we conclude that those items meet the
following conditions:
Fair, balanced and understandable (set out on page 116) – the statement given by the directors that they consider the annual
report and financial statements taken as a whole are fair, balanced and understandable and provides the information necessary for
shareholders to assess the Group’s performance, business model and strategy, is materially inconsistent with our knowledge
obtained in the audit; or
Group Audit Committee reporting (set out on page 65) – the section describing the work of the Group Audit Committee does
not appropriately address matters communicated by us to the audit; or
Directors’ statement of compliance with the UK Corporate Governance Code (set out on page 106) – the parts of the
directors’ statement required under the Listing Rules relating to the company’s compliance with the UK Corporate Governance
Code containing provisions specified for review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a
departure from a relevant provision of the UK Corporate Governance Code.
Opinions on other matters prescribed by the Companies Act 2006
In our opinion, based on the work undertaken in the course of the audit:
the part of the directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act
2006.
the information given in the strategic report and the directors’ report for the financial year for which the financial statements are
prepared is consistent with the financial statements; and
the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements.
Matters on which we are required to report by exception
In the light of the knowledge and understanding of the Group and the parent company and its environment obtained in the course of the
audit, we have not identified material misstatements in the strategic report or the directors’ report.
We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if,
in our opinion:
adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received
from branches not visited by us; or
the parent company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement
with the accounting records and returns; or
certain disclosures of directors’ remuneration specified by law are not made; or
we have not received all the information and explanations we require for our audit
Responsibilities of directors
As explained more fully in the directors’ responsibilities statement (set out on page 116), the directors are responsible for the
preparation of the financial statements and for being satisfied that they give a true and fair view, and for the implementation of such
internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error.
In preparing the financial statements, the directors are responsible for assessing the Group and parent company’s ability to continue as
a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the
directors either intend to liquidate the Group or the parent company or to cease operations, or have no realistic alternative but to do so.
Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high
level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate,
they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.
242
Independent auditor’s report to the members of The Royal Bank of Scotland Group plc
Explanation as to what extent the audit was considered capable of detecting irregularities, including fraud
The objectives of our audit, in respect to fraud, are; to identify and assess the risks of material misstatement of the financial statements
due to fraud; to obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement due to fraud, through
designing and implementing appropriate responses; and to respond appropriately to fraud or suspected fraud identified during the audit.
However, the primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity
and management.
Our approach was as follows:
We obtained an understanding of the legal and regulatory frameworks that are applicable to the Group and have a direct impact on
the preparation of the financial statements. We determined that the most significant are:
o
o
o
o
o
o
Companies Act 2006
Financial Reporting Council (FRC) and the UK Corporate Governance Code
Sarbanes Oxley Act (SOX)
Tax Legislation (governed by HM Revenue and Customs)
Financial Conduct Authority (FCA) rules
CRDIV (Basel III) and Prudential Regulatory Authority (PRA) rules
We understood how the Group is complying with those frameworks by reviewing the RBS Policy Framework, holding discussions
with the Group’s general counsel, external counsel compliance group, regulatory group, internal audit, amongst others. We
inquired as to any known instances of non-compliance or suspected non-compliance with laws and regulations. We also reviewed
the Group’s Complaints Management Policy and Whistleblowing Policy.
We assessed the susceptibility of the group’s financial statements to material misstatement, including how fraud might occur by
holding discussions with senior management, including the Chief Executive Officer, Chief Financial Officer, Chief Risk Officer,
Head of Internal Audit and Group Audit Committee Chairman. We also reviewed the Group’s fraud-related policies and mandates
of different governance forums assessing fraud.
As part of our audit procedures, we were aware of the risk of fraud, especially in the areas of estimation and those we assessed as
having the risk of management override.
Based on this understanding we designed our audit procedures to identify non-compliance with such laws and regulations. Our
procedures involved inquiring of key management, reviewing the key policies and reports on the aforementioned regulatory
frameworks as well as reviewing the correspondence exchanged with the Regulators.
We communicated with the component teams to assess if there were any specific considerations for these areas which were then
incorporated in the Group-wide approach.
We tested the design and operating effectiveness of the Group’s key controls by walking through key processes and testing
controls.
A further description of our responsibilities for the audit of the financial statements is located on the
Financial Reporting Council’s website at https://www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s
report.
Other matters we are required to address
Following the recommendation of the Group Audit Committee we were appointed by the Group at its annual general meeting on 4
May 2016 to audit the financial statements of the Group for the period ending 31 December 2016 and subsequent financial periods.
The period of total uninterrupted engagement including previous renewals and reappointments is 2 years, covering periods from
our appointment through 31 December 2017.
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
The audit opinion is consistent with the additional report to the Group Audit Committee
Jonathan Bourne (Senior Statutory Auditor)
for and on behalf of Ernst & Young LLP, Statutory Auditor
London
22 February 2018
Note:
(1)
The maintenance and integrity of the RBS web site is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these
matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on
the web site. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions
243
Consolidated income statement for the year ended 31 December 2017
Interest receivable
Interest payable
Net interest income
Fees and commissions receivable
Fees and commissions payable
Income from trading activities
Loss on redemption of own debt
Other operating income
Non-interest income
Total income
Staff costs
Premises and equipment
Other administrative expenses
Depreciation and amortisation
Write down of goodwill and other intangible assets
Operating expenses
Profit/(loss) before impairment (losses)/releases
Impairment (losses)/releases
Operating profit/(loss) before tax
Tax charge
Profit/(loss) from continuing operations
Profit from discontinued operations, net of tax
Profit/(loss) for the year
Attributable to:
Non-controlling interests
Preference shareholders
Paid-in equity holders
Dividend access share
Ordinary shareholders
Per ordinary share
Basic and diluted earnings/(loss) from continuing and discontinued operations
Basic and diluted earnings/(loss) from continuing operations
Note
1
2
3
11
6
18
7
7
7
2017
£m
11,034
(2,047)
8,987
3,338
(883)
634
(7)
1,064
4,146
13,133
(4,676)
(1,565)
(3,323)
(808)
(29)
2016
£m
11,258
(2,550)
8,708
3,340
(805)
974
(126)
499
3,882
12,590
(5,124)
(1,388)
(8,745)
(778)
(159)
2015
£m
11,925
(3,158)
8,767
3,742
(809)
1,060
(263)
426
4,156
12,923
(5,726)
(1,827)
(6,288)
(1,180)
(1,332)
(10,401)
(16,194)
(16,353)
2,732
(493)
2,239
(824)
1,415
—
1,415
35
234
394
—
752
1,415
6.3p
6.3p
(3,604)
(478)
(4,082)
(1,166)
(5,248)
—
(5,248)
10
260
244
1,193
(6,955)
(5,248)
(3,430)
727
(2,703)
(23)
(2,726)
1,541
(1,185)
409
297
88
—
(1,979)
(1,185)
(59.5p)
(27.7p)
(59.5p)
(17.2p)
The accompanying notes on pages 264 to 333, the accounting policies on pages 251 to 263 and the audited sections of the Business
review: Capital and risk management on pages 149 to 228 form an integral part of these financial statements.
244
Consolidated statement of comprehensive income for the year ended 31 December 2017
Profit/(loss) for the year
Items that do not qualify for reclassification
Profit/(loss) on remeasurement of retirement benefit schemes
Loss on fair value of credit in financial liabilities designated at fair value
through profit or loss due to own credit risk
Tax
Items that do qualify for reclassification
Available-for-sale financial assets
Cash flow hedges
Currency translation
Tax
Other comprehensive (loss)/income after tax
Total comprehensive income/(loss) for the year
Attributable to:
Non-controlling interests
Preference shareholders
Paid-in equity holders
Dividend access share
Ordinary shareholders
Note
2017
£m
1,415
2016
£m
2015
£m
(5,248)
(1,185)
4
90
(1,049)
(126)
(10)
(46)
26
(1,069)
100
256
(687)
(733)
682
52
234
394
—
2
682
—
288
(761)
(94)
765
1,263
(106)
1,828
1,067
(4,181)
121
260
244
1,193
(5,999)
(4,181)
(73)
—
306
233
44
(700)
(1,181)
108
(1,729)
(1,496)
(2,681)
370
297
88
—
(3,436)
(2,681)
The accompanying notes on pages 264 to 333, the accounting policies on pages 251 to 263 and the audited sections of the Business
review: Capital and risk management on pages 149 to 228 form an integral part of these financial statements.
245
Consolidated balance sheet as at 31 December 2017
Assets
Cash and balances at central banks
Loans and advances to banks
Loans and advances to customers
Debt securities subject to repurchase agreements
Other debt securities
Debt securities
Equity shares
Settlement balances
Derivatives
Intangible assets
Property, plant and equipment
Deferred tax
Prepayments, accrued income and other assets
Assets of disposal groups
Total assets
Liabilities
Deposits by banks
Customer accounts
Debt securities in issue
Settlement balances
Short positions
Derivatives
Provisions for liabilities and charges
Accruals and other liabilities
Retirement benefit liabilities
Deferred tax
Subordinated liabilities
Liabilities of disposal groups
Total liabilities
Non-controlling interests
Owners’ equity
Total equity
Total liabilities and equity
Note
2017
£m
2016
£m
8
8
8
29
13
14
12
15
16
22
17
18
8
8
8
19
12
20
21
4
22
23
18
24
25, 26
98,337
30,251
349,919
23,781
55,152
78,933
450
2,517
160,843
6,543
4,602
1,740
3,726
195
738,056
46,898
398,036
30,559
2,844
28,527
154,506
7,757
6,392
129
583
12,722
10
688,963
763
48,330
49,093
74,250
30,138
351,950
18,107
54,415
72,522
703
5,526
246,981
6,480
4,590
1,803
3,700
13
798,656
38,556
380,968
27,245
3,645
22,077
236,475
12,836
6,991
363
662
19,419
15
749,252
795
48,609
49,404
738,056
798,656
The accompanying notes on pages 264 to 333, the accounting policies on pages 251 to 263 and the audited sections of the Business
review: Capital and risk management on pages 149 to 228 form an integral part of these financial statements.
The accounts were approved by the Board of directors on 22 February 2018 and signed on its behalf by:
Howard Davies
Chairman
Ross McEwan
Chief Executive
Ewen Stevenson
Chief Financial Officer
The Royal Bank of Scotland Group plc
Registered No. SC45551
246
Consolidated statement of changes in equity for the year ended 31 December 2017
2017
£m
2016
£m
2015
£m
Called-up share capital
At 1 January
Ordinary shares issued
Conversion of B shares (1)
Preference shares redeemed (2)
At 31 December
Paid-in equity
At 1 January
Redeemed/reclassified (3)
Additional Tier 1 capital notes issued (4)
At 31 December
Share premium account
At 1 January
Ordinary shares issued
Redemption of debt preference shares (2)
Capital reduction (5)
At 31 December
Merger reserve
At 1 January
Transfer to retained earnings
At 31 December
Available-for-sale reserve
At 1 January
Unrealised gains
Realised (gains)/losses
Tax
Recycled to profit or loss on ceding control of Citizens (6)
Transfer to retained earnings
At 31 December
Cash flow hedging reserve
At 1 January
Amount recognised in equity
Amount transferred from equity to earnings
Tax
Recycled to profit or loss on ceding control of Citizens (7)
Transfer to retained earnings
At 31 December
Foreign exchange reserve
At 1 January
Retranslation of net assets
Foreign currency losses on hedges of net assets
Tax
Recycled to profit or loss on disposal of businesses (8)
Recycled to profit or loss on ceding control of Citizens (8)
Transfer to retained earnings
At 31 December
Capital redemption reserve
At 1 January
Conversion of B shares (1)
Capital reduction (5)
Preference shares redeemed (2)
At 31 December
For notes to these tables see page 295.
11,823
142
—
—
11,965
4,582
(524)
—
4,058
25,693
235
748
(25,789)
887
10,881
—
10,881
238
202
(176)
(9)
—
—
255
1,030
(277)
(792)
266
—
—
227
2,888
111
(6)
(1)
(22)
—
—
2,970
4,542
—
(4,542)
—
—
11,625
198
—
—
11,823
2,646
(110)
2,046
4,582
25,425
268
—
—
25,693
10,881
—
10,881
307
282
(376)
25
—
—
238
458
1,867
(1,102)
(193)
—
—
1,030
1,674
1,470
(278)
62
(40)
—
—
2,888
4,542
—
—
—
4,542
6,877
159
4,590
(1)
11,625
784
(150)
2,012
2,646
25,052
373
—
—
25,425
13,222
(2,341)
10,881
299
31
27
(16)
9
(43)
307
1,029
712
(1,354)
98
(36)
9
458
3,483
(22)
(176)
(11)
4
(962)
(642)
1,674
9,131
(4,590)
—
1
4,542
247
Consolidated statement of changes in equity for the year ended 31 December 2017
Retained earnings
At 1 January
Profit/(loss) attributable to ordinary shareholders and other equity owners
- continuing operations
- discontinued operations
Equity preference dividends paid
Paid-in equity dividends paid, net of tax
Capital reduction (5)
Dividend access share dividend
Transfer from available-for-sale reserve
Transfer from cash flow hedging reserve
Transfer from foreign exchange reserve
Transfer from merger reserve
Costs of placing Citizens equity
Redemption of debt preference shares (2)
Redemption of equity preference shares (2)
Redemption/reclassification of paid-in equity
Gain/(loss) on remeasurement of the retirement benefit schemes
- gross
- tax
Changes in fair value of credit in financial liabilities designated at fair value through profit
or loss
- gross
- tax
Shares issued under employee share schemes
Share-based payments
- gross
- tax
2017
£m
2016
£m
2015
£m
(12,936)
(4,020)
(4,001)
1,380
—
(234)
(394)
30,331
—
—
—
—
—
—
(748)
—
(196)
90
(28)
(126)
18
(5)
(22)
—
(5,258)
—
(260)
(244)
—
(1,193)
—
—
—
—
—
—
(1,160)
(21)
(1,049)
288
—
—
(10)
(9)
—
(2,801)
1,207
(297)
(88)
—
—
43
(9)
642
2,341
(29)
—
(1,214)
(27)
(67)
306
—
—
(58)
36
(4)
At 31 December
17,130
(12,936)
(4,020)
Own shares held
At 1 January
Disposal of own shares
Shares issued under employee share schemes
Own shares acquired
At 31 December
Owners’ equity at 31 December
For notes to these tables refer to the following page.
(132)
—
161
(72)
(43)
(107)
—
41
(66)
(132)
(113)
6
—
—
(107)
48,330
48,609
53,431
The accompanying notes on pages 264 to 333, the accounting policies on pages 251 to 263 and the audited sections of the Business
review: Capital and risk management on pages 149 to 228 form an integral part of these financial statements.
248
Consolidated statement of changes in equity for the year ended 31 December 2017
Non-controlling interests (see Note 24)
At 1 January
Currency translation adjustments and other movements
Profit attributable to non-controlling interests
- continuing operations
- discontinued operations
Dividends paid
Movements in available-for-sale securities
- unrealised gains
- realised gains
- tax
Movements in cash flow hedging reserve
- amount recognised in equity
- tax
Loss on remeasurement of the retirement benefit schemes
- gross
Equity raised (9)
Equity withdrawn and disposals
Loss of control of Citizens
At 31 December
Total equity at 31 December
Total equity is attributable to:
Non-controlling interests
Preference shareholders
Paid-in equity holders
Ordinary shareholders
2017
£m
795
17
35
—
(25)
—
—
—
—
—
—
—
(59)
—
763
2016
£m
716
111
10
—
—
—
—
—
—
—
—
—
(42)
—
795
2015
£m
2,946
3
75
334
(31)
22
(6)
(5)
32
(4)
(6)
2,537
(24)
(5,157)
716
49,093
49,404
54,147
763
2,565
4,058
41,707
49,093
795
2,565
4,582
41,462
49,404
716
3,305
2,646
47,480
54,147
Notes:
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
In October 2015, all B shares were converted into ordinary shares of £1 each.
During 2017, non-cumulative US dollar preference shares were redeemed at their original issue price of US$1.1 billion. The nominal value of £0.3 million has been credited
to the capital redemption reserve; share premium increased by £0.7 billion in respect of the premium received on issue, with a corresponding decrease in retained
earnings. During 2016, non-cumulative US dollar preference shares were redeemed at their original issue price of US$1.5 billion (2015 - $1.9 billion). The nominal value of
£0.3 million (2015 – £1.0 million) was transferred from share capital to capital redemption reserve and ordinary owners equity was reduced by £0.4 billion (2015 - £0.2
billion) in respect of the movement in exchange rates since issue.
Paid-in equity reclassified to liabilities as a result of the call of US$564 million and CAD321 million EMTN notes in August 2017 (redeemed in October 2017), the call of
RBS Capital Trust D in March 2017 (redeemed in June 2017), the call of RBS Capital Trust C in May 2016 (redeemed in July 2016), the call of RBS Capital Trust IV in
January 2015 (redeemed in March 2015).
AT1 capital notes totalling £2.0 billion issued in August 2016 (2015 - £2.0 billion).
On 15 June 2017, the Court of Session approved a reduction of RBSG plc capital so that the amounts which stood to the credit of share premium, account and capital
redemption reserve were transferred to retained earnings.
2015 Net of tax - £6 million charge.
2015 Net of tax - £16 million credit.
No tax impact.
Includes £2,491 million relating to the secondary offering of Citizens in March 2015.
The accompanying notes on pages 264 to 333, the accounting policies on pages 251 to 263 and the audited sections of the Business
review: Capital and risk management on pages 149 to 228 form an integral part of these financial statements.
249
Consolidated cash flow statement for the year ended 31 December 2017
Note
2017
£m
2016
£m
2015
£m
Cash flows from operating activities
Operating profit/(loss) before tax from continuing operations
Profit before tax from discontinued operations
Adjustments for non-cash items and other adjustments included within income statement
Contributions to defined benefit schemes
Changes in operating assets and liabilities
Income taxes paid
Net cash flows from operating activities
Cash flows from investing activities
Sale and maturity of securities
Purchase of securities
Sale of property, plant and equipment
Purchase of property, plant and equipment
Net divestment of/(investment in) business interests and intangible assets
Net cash flows from investing activities
32
33
2,239
—
(4,498)
(627)
42,147
(520)
38,741
11,656
(17,212)
405
(1,132)
(199)
(6,482)
306
—
(720)
—
(748)
(59)
89
(5,747)
(612)
—
(717)
(8,208)
(16)
24,035
98,570
(4,082)
—
(3,024)
(4,786)
8,413
(171)
(3,650)
8,599
(11,607)
447
(912)
(886)
(4,359)
300
2,046
—
(110)
(1,160)
—
(42)
(25)
(3,606)
(504)
(1,193)
(813)
(5,107)
8,094
(2,703)
1,766
(5,601)
(1,060)
8,589
(73)
918
8,229
(14,135)
1,432
(783)
391
(4,866)
307
2,012
2,537
(150)
(1,214)
—
—
6
(3,047)
(416)
—
(975)
(940)
576
(5,022)
103,592
98,570
(4,312)
107,904
103,592
36
122,605
Cash flows from financing activities
Issue of ordinary shares
Issue of Additional Tier 1 capital notes
Redemption of non-controlling interests
Redemption of paid-in equity
Redemption of equity preference shares
Redemption of debt preference shares
Non-controlling interests equity withdrawn and disposals
Own shares (acquired)/disposed
Redemption of subordinated liabilities
Dividends paid
Dividend access share
Interest on subordinated liabilities
Net cash flows from financing activities
Effects of exchange rate changes on cash and cash equivalents
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at 1 January
Cash and cash equivalents at 31 December
The accompanying notes on pages 264 to 333, the accounting policies on pages 251 to 263 and the audited sections of the Business
review: Capital and risk management on pages 149 to 228 form an integral part of these financial statements.
250
Accounting policies
1. Presentation of accounts
The accounts, set out on pages 244 to 356 including these
accounting policies on pages 251 to 263 and the audited sections
of the Financial review: Capital and risk management on pages
149 to 228, are prepared on a going concern basis (see the
Report of the directors, page 109) and in accordance with
International Financial Reporting Standards issued by the
International Accounting Standards Board (IASB) and
interpretations issued by the IFRS Interpretations Committee of
the IASB as adopted by the European Union (EU) (together
IFRS). The EU has not adopted the complete text of IAS 39
‘Financial Instruments: Recognition and Measurement’; it has
relaxed some of the standard's hedging requirements. The Group
has not taken advantage of this relaxation: its financial
statements are prepared in accordance with IFRS as issued by
the IASB.
The company is incorporated in the UK and registered in
Scotland. Its accounts are presented in accordance with the
Companies Act 2006. With the exception of investment property
and certain financial instruments as described in Accounting
policies 9, 14, 16 and 23, the accounts are presented on an
historical cost basis.
The Group adopted two revisions to IFRSs effective 1 January
2017:
In January 2016, the IASB amended IAS 7 ‘Cash Flow
Statements’ to require disclosure of the movements in financing
liabilities. This is shown in Note 35.
In January 2016, the IASB amended IAS 12 ‘Income taxes’ to
clarify the recognition of deferred tax assets in respect of
unrealised losses.
Neither of these amendments has had a material effect on the
Group’s financial statements.
2. Basis of consolidation
The consolidated accounts incorporate the financial statements
of the company and entities (including certain structured entities)
that are controlled by the Group. The Group controls another
entity (a subsidiary) when it is exposed, or has rights, to variable
returns from its involvement with that entity and has the ability to
affect those returns through its power over the other entity; power
generally arises from holding a majority of voting rights. On
acquisition of a subsidiary, its identifiable assets, liabilities and
contingent liabilities are included in the consolidated accounts at
their fair value. A subsidiary is included in the consolidated
financial statements from the date it is controlled by the Group
until the date the Group ceases to control it through a sale or a
significant change in circumstances. Changes in the Group’s
interest in a subsidiary that do not result in the Group ceasing to
control that subsidiary are accounted for as equity transactions.
All intergroup balances, transactions, income and expenses are
eliminated on consolidation. The consolidated accounts are
prepared under uniform accounting policies.
3. Revenue recognition
Interest income on financial assets that are classified as loans
and receivables, available-for-sale or held-to-maturity and
interest expense on financial liabilities other than those measured
at fair value are determined using the effective interest method.
The effective interest method is a method of calculating the
amortised cost of a financial asset or financial liability (or group of
financial assets or liabilities) and of allocating the interest income
or interest expense over the expected life of the asset or liability.
The effective interest rate is the rate that exactly discounts
estimated future cash flows to the instrument's initial carrying
amount. Calculation of the effective interest rate takes into
account fees payable or receivable that are an integral part of the
instrument's yield, premiums or discounts on acquisition or issue,
early redemption fees and transaction costs. All contractual terms
of a financial instrument are considered when estimating future
cash flows. Negative effective interest accruing to financial assets
is presented in interest payable.
Financial assets and financial liabilities held-for-trading or
designated as at fair value through profit or loss are recorded at
fair value. Changes in fair value are recognised in profit or loss.
Fees in respect of services are recognised as the right to
consideration accrues through the provision of the service to the
customer. The arrangements are generally contractual and the
cost of providing the service is incurred as the service is
rendered. The price is usually fixed and always determinable.
The application of this policy to significant fee types is outlined
below.
Payment services - this comprises income received for payment
services including cheques cashed, direct debits, Clearing House
Automated Payments (the UK electronic settlement system) and
BACS payments (the automated clearing house that processes
direct debits and direct credits). These are generally charged on
a per transaction basis. The income is earned when the payment
or transaction occurs. Charges for payment services are usually
debited to the customer's account monthly or quarterly in arrears.
Income is accrued at period end for services provided but not yet
charged.
Credit and debit card fees - fees from card business include:
Interchange received: as issuer, the Group receives a fee
(interchange) each time a cardholder purchases goods and
services. The Group also receives interchange fees from
other card issuers for providing cash advances through its
branch and automated teller machine networks. These fees
are accrued once the transaction has taken place.
Periodic fees payable by a credit card or debit card holder
are deferred and taken to profit or loss over the period of the
service.
Lending (credit facilities) - commitment and utilisation fees are
determined as a percentage of the outstanding facility. If it is
unlikely that a specific lending arrangement will be entered into,
such fees are taken to profit or loss over the life of the facility
otherwise they are deferred and included in the effective interest
rate on the loan.
251
Accounting policies
Brokerage fees - in respect of securities, foreign exchange,
futures or options transactions entered into on behalf of a
customer are recognised as income on execution of a significant
act.
Trade finance - income from the provision of trade finance is
recognised over the term of the finance unless specifically related
to a significant act, in which case income is recognised when the
act is executed.
Investment management - fees charged for managing
investments are recognised as revenue as the services are
provided. Incremental costs that are directly attributable to
securing an investment management contract are deferred and
charged as expense as the related revenue is recognised.
4. Assets held for sale and discontinued operations
A non-current asset (or disposal group) is classified as held for
sale if the Group will recover its carrying amount principally
through a sale transaction rather than through continuing use. A
non-current asset (or disposal group) classified as held for sale is
measured at the lower of its carrying amount and fair value less
costs to sell. If the asset (or disposal group) is acquired as part of
a business combination it is initially measured at fair value less
costs to sell. Assets and liabilities of disposal groups classified as
held for sale and non-current assets classified as held for sale
are shown separately on the face of the balance sheet.
The results of discontinued operations, comprising the post-tax
profit or loss of discontinued operations and the post-tax gain or
loss recognised either on measurement to fair value less costs to
sell or on disposal of the discontinued operation, are shown as a
single amount on the face of the income statement; an analysis
of this amount is presented in Note 18 on the accounts.
A discontinued operation is a cash generating unit or a group of
cash generating units that either has been disposed of, or is
classified as held for sale, and (a) represents a separate major
line of business or geographical area of operations, (b) is part of
a single co-ordinated plan to dispose of a separate major line of
business or geographical area of operations or (c) is a subsidiary
acquired exclusively with a view to resale.
5. Employee benefits
Short-term employee benefits, such as salaries, paid absences,
and other benefits are accounted for on an accruals basis over
the period in which the employees provide the related services.
Employees may receive variable compensation satisfied by cash,
by debt instruments issued by the Group or by RBSG shares.
The treatment of share-based compensation is set out in
Accounting policy 25. Variable compensation that is settled in
cash or debt instruments is charged to profit or loss over the
period from the start of the year to which the variable
compensation relates to the expected settlement date taking
account of forfeiture and clawback criteria.
Contributions to defined contribution pension schemes are
recognised in profit or loss when payable.
For defined benefit schemes, the defined benefit obligation is
measured on an actuarial basis using the projected unit credit
method and discounted at a rate determined by reference to
market yields at the end of the reporting period on high quality
corporate bonds of equivalent term and currency to the scheme
liabilities. Scheme assets are measured at their fair value. The
difference between scheme assets and scheme liabilities, the net
defined benefit asset or liability, is recognised in the balance
sheet. A defined benefit asset is limited to the present value of
any economic benefits available to the Group in the form of
refunds from the plan or reduced contributions to it.
The charge to profit or loss for pension costs (recorded in
operating expenses) comprises:
the current service cost
interest, computed at the rate used to discount scheme
liabilities, on the net defined benefit liability or asset
past service cost resulting from a scheme amendment or
curtailment
gains or losses on settlement.
A curtailment occurs when the Group significantly reduces the
number of employees covered by a plan. A plan amendment
occurs when the Group introduces, or withdraws, a defined
benefit plan or changes the benefits payable under an existing
defined benefit plan. Past service cost may be either positive
(when benefits are introduced or changed so that the present
value of the defined benefit obligation increases) or negative
(when benefits are withdrawn or changed so that the present
value of the defined benefit obligation decreases). A settlement is
a transaction that eliminates all further obligation for part or all of
the benefits.
Actuarial gains and losses (i.e. gains or and losses on re-
measuring the net defined benefit asset or liability) are
recognised in other comprehensive income in full in the period in
which they arise.
6. Intangible assets and goodwill
Intangible assets acquired by the Group are stated at cost less
accumulated amortisation and impairment losses. Amortisation is
charged to profit or loss over the assets' estimated economic
lives using methods that best reflect the pattern of economic
benefits and is included in Depreciation and amortisation. These
estimated useful economic lives are:
Computer software
Other acquired intangibles
3 to 12 years
5 to 10 years
Expenditure on internally generated goodwill and brands is
written-off as incurred. Direct costs relating to the development of
internal-use computer software are capitalised once technical
feasibility and economic viability have been established. These
costs include payroll, the costs of materials and services, and
directly attributable overheads. Capitalisation of costs ceases
when the software is capable of operating as intended.
252
Accounting policies
During and after development, accumulated costs are reviewed
for impairment against the benefits that the software is expected
to generate. Costs incurred prior to the establishment of technical
feasibility and economic viability are expensed as incurred as are
all training costs and general overheads. The costs of licences to
use computer software that are expected to generate economic
benefits beyond one year are also capitalised.
Intangible assets include goodwill arising on the acquisition of
subsidiaries and joint ventures. Goodwill on the acquisition of a
subsidiary is the excess of the fair value of the consideration
transferred, the fair value of any existing interest in the subsidiary
and the amount of any non-controlling interest measured either at
fair value or at its share of the subsidiary’s net assets over net
fair value of the subsidiary’s identifiable assets, liabilities and
contingent liabilities.
Goodwill arises on the acquisition of a joint venture when the cost
of investment exceeds the Group’s share of the net fair value of
the joint venture’s identifiable assets and liabilities. Goodwill is
measured at initial cost less any subsequent impairment losses.
Goodwill arising on the acquisition of associates is included
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.
7. Property, plant and equipment
Items of property, plant and equipment (except investment
property - see Accounting policy 9) are stated at cost less
accumulated depreciation and impairment losses. Where an item
of property, plant and equipment comprises major components
having different useful lives, these are accounted for separately.
Depreciation is charged to profit or loss on a straight-line basis so
as to write-off the depreciable amount of property, plant and
equipment (including assets owned and let on operating leases)
over their estimated useful lives. The depreciable amount is the
cost of an asset less its residual value. Freehold land is not
depreciated. The estimated useful lives of the Group’s property,
plant and equipment are:
Freehold buildings
Long leasehold property (leases
with more than 50 years to run)
Short leaseholds
Property adaptation costs
Computer equipment
Other equipment
50 years
50 years
unexpired period of the
lease
10 to 15 years
up to 5 years
4 to 15 years
8. Impairment of intangible assets and property, plant and
equipment
At each balance sheet date, the Group assesses whether there is
any indication that its intangible assets, or property, plant and
equipment are impaired. If any such indication exists, the Group
estimates the recoverable amount of the asset and the
impairment loss if any. Goodwill is tested for impairment annually
or more frequently if events or changes in circumstances indicate
that it might be impaired.
If an asset does not generate cash flows that are independent
from those of other assets or groups of assets, the recoverable
amount is determined for the cash-generating 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 the 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 and 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. If the recoverable amount of an intangible or tangible
asset is less than its carrying value, an impairment loss is
recognised immediately in profit or loss and the carrying value of
the asset reduced by the amount of the loss.
A reversal of an impairment loss on intangible assets (excluding
goodwill) or property, plant and equipment can be recognised
when an increase in service potential arises provided the
increased carrying value is not greater than it would have been
had no impairment loss been recognised. Impairment losses on
goodwill are not reversed.
9. Investment property
Investment property comprises freehold and leasehold properties
that are held to earn rentals or for capital appreciation or both.
Investment property is not depreciated but is stated at fair value.
Fair value is based on current prices for similar properties in the
same location and condition. Any gain or loss arising from a
change in fair value is recognised in profit or loss. Rental income
from investment property is recognised on a straight-line basis
over the term of the lease in Other operating income. Lease
incentives granted are recognised as an integral part of the total
rental income.
The residual value and useful life of property, plant and
equipment are reviewed at each balance sheet date and updated
for any changes to previous estimates.
10. Foreign currencies
The Group's consolidated financial statements are presented in
sterling which is the functional currency of the company.
Group entities record transactions in foreign currencies in their
functional currency, the currency of the primary economic
environment in which they operate, at the foreign exchange rate
ruling at the date of the transaction.
253
Accounting policies
Monetary assets and liabilities denominated in foreign currencies
are translated into the relevant functional currency at the foreign
exchange rates ruling at the balance sheet date. Foreign
exchange differences arising on the settlement of foreign
currency transactions and from the translation of monetary assets
and liabilities are reported in income from trading activities except
for differences arising on cash flow hedges and hedges of net
investments in foreign operations (see Accounting policy 23).
Non-monetary items denominated in foreign currencies that are
stated at fair value are translated into the relevant functional
currency at the foreign exchange rates ruling at the dates the
values are determined. Translation differences arising on non-
monetary items measured at fair value are recognised in profit or
loss except for differences arising on available-for-sale non-
monetary financial assets, for example equity shares, which are
recognised in other comprehensive income unless the asset is
the hedged item in a fair value hedge.
Assets and liabilities of foreign operations, including goodwill and
fair value adjustments arising on acquisition, are translated into
sterling at foreign exchange rates ruling at the balance sheet
date. Income and expenses of foreign operations are translated
into sterling at average exchange rates unless these do not
approximate to the foreign exchange rates ruling at the dates of
the transactions. Foreign exchange differences arising on the
translation of a foreign operation are recognised in other
comprehensive income. The amount accumulated in equity is
reclassified from equity to profit or loss on disposal of a foreign
operation.
11. Leases
As lessor
Contracts with customers to lease assets are classified as
finance leases if they transfer substantially all the risks and
rewards of ownership of the asset to the customer; all other
contracts with customers to lease assets are classified as
operating leases.
Finance lease receivables are included in the balance sheet,
within Loans and advances to customers, at the amount of the
net investment in the lease being the minimum lease payments
and any unguaranteed residual value discounted at the interest
rate implicit in the lease. Finance lease income is allocated to
accounting periods so as to give a constant periodic rate of return
before tax on the net investment and included in Interest
receivable. Unguaranteed residual values are subject to regular
review; if there is a reduction in their value, income allocation is
revised and any reduction in respect of amounts accrued is
recognised immediately.
Rental income from operating leases is recognised in income on
a straight-line basis over the lease term unless another
systematic basis better represents the time pattern of the asset’s
use. Operating lease assets are included within Property, plant
and equipment and depreciated over their useful lives (see
Accounting policy 7). Operating lease rentals receivable are
included in Other operating income.
As lessee
The Group’s contracts to lease assets are principally operating
leases. Operating lease rental expense is included in Premises
and equipment costs and recognised as an expense on a
straight-line basis over the lease term unless another systematic
basis better represents the benefit to the Group.
12. Provisions
The Group recognises a provision for a present obligation
resulting from a past event when it is more likely than not that it
will be required to transfer economic benefits to settle the
obligation and the amount of the obligation can be estimated
reliably.
Provision is made for restructuring costs, including the costs of
redundancy, when the Group has a constructive obligation to
restructure. An obligation exists when the Group has a detailed
formal plan for the restructuring and has raised a valid
expectation in those affected by starting to implement the plan or
by announcing its main features.
If the Group has a contract that is onerous, it recognises the
present obligation under the contract as a provision. An onerous
contract is one where the unavoidable costs of meeting the
Group’s contractual obligations exceed the expected economic
benefits. When the Group vacates a leasehold property, a
provision is recognised for the costs under the lease less any
expected economic benefits (such as rental income).
Contingent liabilities are possible obligations arising from past
events, whose existence will be confirmed only by uncertain
future events, or present obligations arising from past events that
are not recognised because either an outflow of economic
benefits is not probable or the amount of the obligation cannot be
reliably measured. Contingent liabilities are not recognised but
information about them is disclosed unless the possibility of any
outflow of economic benefits in settlement is remote.
13. Tax
Income tax expense or income, comprising current tax and
deferred tax, is recorded in the income statement except income
tax on items recognised outside profit or loss which is credited or
charged to other comprehensive income or to equity as
appropriate.
Current tax is income tax payable or recoverable in respect of the
taxable profit or loss for the year arising in profit or loss, other
comprehensive income or equity. Provision is made for current
tax at rates enacted or substantively enacted at the balance
sheet date.
Deferred tax is the tax expected to be payable or recoverable in
respect of temporary differences between the carrying amount of
an asset or liability for accounting purposes and its carrying
amount for tax purposes. Deferred tax liabilities are generally
recognised for all taxable temporary differences and deferred tax
assets are recognised.
254
Accounting policies
Deferred tax is not recognised on temporary differences that
arise from initial recognition of an asset or a liability in a
transaction (other than a business combination) that at the time
of the transaction affects neither accounting nor taxable profit or
loss. Deferred tax is calculated using tax rates expected to apply
in the periods when the assets will be realised or the liabilities
settled, based on tax rates and laws enacted, or substantively
enacted, at the balance sheet date.
Deferred tax assets and liabilities are offset where the Group has
a legally enforceable right to offset and where they relate to
income taxes levied by the same taxation authority either on an
individual Group company or on Group companies in the same
tax group that intend, in future periods, to settle current tax
liabilities and assets on a net basis or on a gross basis
simultaneously.
14. Financial assets
On initial recognition, financial assets are classified into held-to-
maturity investments; held-for-trading; designated as at fair value
through profit or loss; loans and receivables; or available-for-sale
financial assets. Normal purchases of financial assets classified
as loans and receivables are recognised on the settlement date;
all other normal transactions in financial assets are recognised on
the trade date.
Held-to-maturity investments - a financial asset may be classified
as a held-to-maturity investment only if it has fixed or
determinable payments, a fixed maturity and the Group has the
positive intention and ability to hold to maturity. Held-to-maturity
investments are initially recognised at fair value plus directly
related transaction costs. They are subsequently measured at
amortised cost using the effective interest method (see
Accounting policy 3) less any impairment losses.
Held-for-trading - a financial asset is classified as held-for-trading
if it is acquired principally for sale in the near term, or forms part
of a portfolio of financial instruments that are managed together
and for which there is evidence of short-term profit taking, or it is
a derivative (not in a qualifying hedge relationship). Held-for-
trading financial assets are recognised at fair value with
transaction costs being recognised in profit or loss. Subsequently
they are measured at fair value. Income from trading activities
includes gains and losses on held-for-trading financial assets as
they arise.
Designated as at fair value through profit or loss - financial assets
may be designated as at fair value through profit or loss only if
such designation (a) eliminates or significantly reduces a
measurement or recognition inconsistency; or (b) applies to a
group of financial assets, financial liabilities or both, that the
Group manages and evaluates on a fair value basis; or (c) relates
to an instrument that contains an embedded derivative which is
not evidently closely related to the host contract. Financial assets
that the Group designates on initial recognition as being at fair
value through profit or loss are recognised at fair value, with
transaction costs being recognised in profit or loss, and are
subsequently measured at fair value. Gains and losses are
recognised in profit or loss as they arise.
Loans and receivables - non-derivative financial assets with fixed
or determinable repayments that are not quoted in an active
market are classified as loans and receivables, except those that
are classified as available-for-sale or as held-for-trading, or
designated as at fair value through profit or loss. Loans and
receivables are initially recognised at fair value plus directly
related transaction costs. They are subsequently measured at
amortised cost using the effective interest method (see
Accounting policy 3) less any impairment losses.
Available-for-sale financial assets - financial assets that are not
classified as held-to-maturity; held-for-trading; designated as at
fair value through profit or loss; or loans and receivables are
classified as available-for-sale. Financial assets can be
designated as available-for-sale on initial recognition. Available-
for-sale financial assets are initially recognised at fair value plus
directly related transaction costs. They are subsequently
measured at fair value. Unquoted equity investments whose fair
value cannot be measured reliably are carried at cost and
classified as available-for-sale financial assets. Impairment
losses and exchange differences resulting from retranslating the
amortised cost of foreign currency monetary available-for-sale
financial assets are recognised in profit or loss together with
interest calculated using the effective interest method (see
Accounting policy 3) as are gains and losses attributable to the
hedged risk on available-for-sale financial assets that are hedged
items in fair value hedges (see Accounting policy 23). Other
changes in the fair value of available-for-sale financial assets and
any related tax are reported in other comprehensive income until
disposal, when the cumulative gain or loss is reclassified from
equity to profit or loss.
Reclassifications - held-for-trading and available-for-sale financial
assets that meet the definition of loans and receivables (non-
derivative financial assets with fixed or determinable payments
that are not quoted in an active market) may be reclassified to
loans and receivables if the Group has the intention and ability to
hold the financial asset for the foreseeable future or until maturity.
The Group typically regards the foreseeable future for this
purpose as twelve months from the date of reclassification.
Additionally, held-for-trading financial assets that do not meet the
definition of loans and receivables may, in rare circumstances, be
transferred to available-for-sale financial assets or to held-to-
maturity investments. Reclassifications are made at fair value.
This fair value becomes the asset's new cost or amortised cost
as appropriate. Gains and losses recognised up to the date of
reclassification are not reversed.
Fair value - the Group’s approach to determining the fair value of
financial instruments measured at fair value is set out in the
section of Critical accounting policies and key sources of
estimation uncertainty entitled Fair value - financial instruments.
Further details are given in Note 9 on the accounts.
15. Impairment of financial assets
The Group assesses at each balance sheet date whether there is
any objective evidence that a financial asset or group of financial
assets classified as held-to-maturity, as available-for-sale or as
loans and receivables is impaired.
255
Accounting policies
A financial asset or group of financial assets is impaired and an
impairment loss incurred if there is objective evidence that an
event or events since initial recognition of the asset have
adversely affected the amount or timing of future cash flows from
the asset.
The typical time frames from initial impairment to write off for the
Group’s collectively-assessed portfolios are:
Retail mortgages: write off usually occurs within five years,
or when an account is closed if earlier.
Credit cards: the irrecoverable amount is written off after 12
Financial assets carried at amortised cost - if there is objective
evidence that an impairment loss on a financial asset or group of
financial assets classified as loans and receivables or as held-to-
maturity investments has been incurred, the Group measures the
amount of the loss as the difference between the carrying amount
of the asset or group of assets and the present value of
estimated future cash flows from the asset or group of assets
discounted at the effective interest rate of the instrument at initial
recognition. For collateralised loans and receivables, estimated
future cash flows include cash flows that may result from
foreclosure less the costs of obtaining and selling the collateral,
whether or not foreclosure is probable.
Where, in the course of the orderly realisation of a loan, it is
exchanged for equity shares or property, the exchange is
accounted for as the sale of the loan and the acquisition of equity
securities or investment property. Where the Group’s interest in
equity shares following the exchange is such that the Group
controls an entity, that entity is consolidated.
Impairment losses are assessed individually for financial assets
that are individually significant and individually or collectively for
assets that are not individually significant. In making collective
impairment assessments, financial assets are grouped into
portfolios on the basis of similar risk characteristics. Future cash
flows from these portfolios are estimated on the basis of the
contractual cash flows and historical loss experience for assets
with similar credit risk characteristics. Historical loss experience
is adjusted, on the basis of observable data, to reflect current
conditions not affecting the period of historical experience.
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.
months; three years later any remaining amounts
outstanding are written off.
Overdrafts and other unsecured loans: write off occurs
within six years.
Business and commercial loans: write offs of commercial
loans are determined in the light of individual circumstances;
the period does not exceed five years. Business loans are
generally written off within five years.
Amounts recovered after a loan has been written off are credited
to the loan impairment charge for the period in which they are
received.
Financial assets carried at fair value - when a decline in the fair
value of a financial asset classified as available-for-sale has been
recognised directly in other comprehensive income and there is
objective evidence that it is impaired, the cumulative loss is
reclassified from equity to profit or loss. The loss is measured as
the difference between the amortised cost (including any hedge
accounting adjustments) of the financial asset and its current fair
value. Impairment losses on available-for-sale equity instruments
are not reversed through profit or loss, but those on available-for-
sale debt instruments are reversed, if there is an increase in fair
value that is objectively related to a subsequent event.
16. Financial liabilities
Financial liabilities are recognised initially at fair value and
classified into held-for-trading; designated as at fair value through
profit or loss; or amortised cost. Issues of financial liabilities
measured at amortised cost are recognised on settlement date;
all other normal transactions in financial liabilities are recognised
on trade date.
Held-for-trading - a financial liability is classified as held-for-
trading if it is incurred principally for repurchase in the near term,
or forms part of a portfolio of financial instruments that are
managed together and for which there is evidence of short-term
profit taking, or it is a derivative (not in a qualifying hedge
relationship). Held-for-trading financial liabilities are recognised at
fair value with transaction costs being recognised in profit or loss.
Subsequently they are measured at fair value. Gains and losses
are recognised in profit or loss as they arise.
Impaired loans and receivables are written off, i.e. the impairment
provision is applied in writing down the loan's carrying value
partially or in full, when the Group concludes that there is no
longer any realistic prospect of recovery of part or all of the loan.
For loans that are individually assessed for impairment, the
timing of write off is determined on a case-by-case basis. Such
loans are reviewed regularly and write off will be prompted by
bankruptcy, insolvency, renegotiation and similar events.
Designated as at fair value through profit or loss - financial
liabilities may be designated as at fair value through profit or loss
only if such designation (a) eliminates or significantly reduces a
measurement or recognition inconsistency; or (b) applies to a
group of financial assets, financial liabilities or both that the
Group manages and evaluates on a fair value basis; or (c) relates
to an instrument that contains an embedded derivative which is
not evidently closely related to the host contract.
256
Accounting policies
Financial liabilities that the Group designates on initial recognition
as being at fair value through profit or loss are recognised at fair
value, with transaction costs being recognised in profit or loss,
and are subsequently measured at fair value. Income from
trading activities includes gains and losses on held-for-trading
financial liabilities as they arise.
If substantially all the risks and rewards have been neither
retained nor transferred, the Group assesses whether or not it
has retained control of the asset. If the Group has retained
control of the asset, it continues to recognise the asset to the
extent of its continuing involvement; if the Group has not retained
control of the asset, it is derecognised.
Financial liabilities designated as at fair value through profit or
loss principally comprise structured liabilities issued by the
Group: designation significantly reduces the measurement
inconsistency between these liabilities and the related derivatives
carried at fair value.
Amortised cost - all other financial liabilities are measured at
amortised cost using the effective interest method (see
Accounting policy 3).
Fair value - the Group’s approach to determining the fair value of
financial instruments measured at fair value is set out in the
section of Critical accounting policies and key sources of
estimation uncertainty entitled Fair value - financial instruments;
further details are given in Note 9 on the accounts.
17. Financial guarantee contracts
Under a financial guarantee contract, the Group, in return for a
fee, undertakes to meet a customer’s obligations under the terms
of a debt instrument if the customer fails to do so. A financial
guarantee is recognised as a liability; initially at fair value and, if
not designated as at fair value through profit or loss,
subsequently at the higher of its initial value less cumulative
amortisation and any provision under the contract measured in
accordance with Accounting policy 12. Amortisation is calculated
so as to recognise fees receivable in profit or loss over the period
of the guarantee.
18. Loan commitments
Provision is made for loan commitments, other than those
classified as held-for-trading, if it is probable that the facility will
be drawn and the resulting loan will be recognised at an amount
less than the cash advanced. Syndicated loan commitments in
excess of the level of lending under the commitment approved for
retention by the Group are classified as held-for-trading and
measured at fair value.
19. Derecognition
A financial asset is derecognised when the contractual right to
receive cash flows from the asset has expired or when it has
been transferred and the transfer qualifies for derecognition. A
transfer requires that the Group either (a) transfers the
contractual rights to receive the asset's cash flows; or (b) retains
the right to the asset's cash flows but assumes a contractual
obligation to pay those cash flows to a third party. After a
transfer, the Group assesses the extent to which it has retained
the risks and rewards of ownership of the transferred asset. The
asset remains on the balance sheet if substantially all the risks
and rewards have been retained. It is derecognised if
substantially all the risks and rewards have been transferred.
A financial liability is removed from the balance sheet when the
obligation is discharged, or is cancelled, or expires. On the
redemption or settlement of debt securities (including
subordinated liabilities) issued by the Group, the Group
derecognises the debt instrument and records a gain or loss
being the difference between the debt's carrying amount and the
cost of redemption or settlement. The same treatment applies
where the debt is exchanged for a new debt issue that has terms
substantially different from those of the existing debt. The
assessment of whether the terms of the new debt instrument are
substantially different takes into account qualitative and
quantitative characteristics including a comparison of the present
value of the cash flows under the new terms with the present
value of the remaining cash flows of the original debt issue
discounted at the effective interest rate of the original debt issue.
20. Sale and repurchase transactions
Securities subject to a sale and repurchase agreement under
which substantially all the risks and rewards of ownership are
retained by the Group continue to be shown on the balance sheet
and the sale proceeds recorded as a financial liability. Securities
acquired in a reverse sale and repurchase transaction under
which the Group is not exposed to substantially all the risks and
rewards of ownership are not recognised on the balance sheet
and the consideration paid is recorded as a financial asset.
Securities borrowing and lending transactions are usually
secured by cash or securities advanced by the borrower.
Borrowed securities are not recognised on the balance sheet or
lent securities derecognised.
Cash collateral given or received is treated as a loan or deposit;
collateral in the form of securities is not recognised. However,
where securities borrowed are transferred to third parties, a
liability for the obligation to return the securities to the stock
lending counterparty is recorded.
21. Netting
Financial assets and financial liabilities are offset and the net
amount presented in the balance sheet when, and only when, the
Group currently has a legally enforceable right to set off the
recognised amounts and it intends either to settle on a net basis
or to realise the asset and settle the liability simultaneously. The
Group is party to a number of arrangements, including master
netting agreements, that give it the right to offset financial assets
and financial liabilities, but where it does not intend to settle the
amounts net or simultaneously, the assets and liabilities
concerned are presented gross.
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Accounting policies
22. Capital instruments
The Group classifies a financial instrument that it issues as a
liability if it is a contractual obligation to deliver cash or another
financial asset, or to exchange financial assets or financial
liabilities on potentially unfavourable terms and as equity if it
evidences a residual interest in the assets of the Group after the
deduction of liabilities. The components of a compound financial
instrument issued by the Group are classified and accounted for
separately as financial assets, financial liabilities or equity as
appropriate.
Incremental costs and related tax that are directly attributable to
an equity transaction are deducted from equity.
The consideration for any ordinary shares of the company
purchased by the Group (treasury shares) is deducted from
equity. On the cancellation of treasury shares their nominal value
is removed from equity and any excess of consideration over
nominal value is treated in accordance with the capital
maintenance provisions of the Companies Act. On the sale or
reissue of treasury shares the consideration received and related
tax are credited to equity, net of any directly attributable
incremental costs.
23. Derivatives and hedging
Derivative financial instruments are initially recognised, and
subsequently measured, at fair value. The Group’s approach to
determining the fair value of financial instruments is set out in the
section of Critical accounting policies and key sources of
estimation uncertainty entitled Fair value - financial instruments;
further details are given in Note 9 on the accounts.
A derivative embedded in a contract is accounted for as a stand-
alone derivative if its economic characteristics are not closely
related to the economic characteristics of the host contract;
unless the entire contract is measured at fair value with changes
in fair value recognised in profit or loss.
Gains and losses arising from changes in the fair value of
derivatives that are not the hedging instrument in a qualifying
hedge are recognised as they arise in profit or loss. Gains and
losses are recorded in Income from trading activities except for
gains and losses on those derivatives that are managed together
with financial instruments designated at fair value; these gains
and losses are included in Other operating income. The Group
enters into three types of hedge relationship: hedges of changes
in the fair value of a recognised asset or liability or unrecognised
firm commitment (fair value hedges); hedges of the variability in
cash flows from a recognised asset or liability or a highly
probable forecast transaction (cash flow hedges); and hedges of
the net investment in a foreign operation.
Hedge relationships are formally designated and documented at
inception. The documentation identifies the hedged item and the
hedging instrument and details the risk that is being hedged and
the way in which effectiveness will be assessed at inception and
during the period of the hedge. If the hedge is not highly effective
in offsetting changes in fair values or cash flows attributable to
the hedged risk, consistent with the documented risk
management strategy, hedge accounting is discontinued.
Hedge accounting is also discontinued if the Group revokes the
designation of a hedge relationship.
Fair value hedge - in a fair value hedge, the gain or loss on the
hedging instrument is recognised in profit or loss. The gain or
loss on the hedged item attributable to the hedged risk is
recognised in profit or loss and, where the hedged item is
measured at amortised cost, adjusts the carrying amount of the
hedged item. Hedge accounting is discontinued if the hedge no
longer meets the criteria for hedge accounting; or if the hedging
instrument expires or is sold, terminated or exercised; or if hedge
designation is revoked. If the hedged item is one for which the
effective interest rate method is used, any cumulative adjustment
is amortised to profit or loss over the life of the hedged item using
a recalculated effective interest rate.
Cash flow hedge - in a cash flow hedge, the effective portion of
the gain or loss on the hedging instrument is recognised in other
comprehensive income and the ineffective portion in profit or
loss. When the forecast transaction results in the recognition of a
financial asset or financial liability, the cumulative gain or loss is
reclassified from equity to profit or loss in the same periods in
which the hedged forecast cash flows affect profit or loss.
Otherwise the cumulative gain or loss is removed from equity and
recognised in profit or loss at the same time as the hedged
transaction. Hedge accounting is discontinued if the hedge no
longer meets the criteria for hedge accounting; if the hedging
instrument expires or is sold, terminated or exercised; if the
forecast transaction is no longer expected to occur; or if hedge
designation is revoked. On the discontinuance of hedge
accounting (except where a forecast transaction is no longer
expected to occur), the cumulative unrealised gain or loss is
reclassified from equity to profit or loss when the hedged cash
flows occur or, if the forecast transaction results in the recognition
of a financial asset or financial liability, when the hedged forecast
cash flows affect profit or loss. Where a forecast transaction is no
longer expected to occur, the cumulative unrealised gain or loss
is reclassified from equity to profit or loss immediately.
Hedge of net investment in a foreign operation - in the hedge of a
net investment in a foreign operation, the portion of foreign
exchange differences arising on the hedging instrument
determined to be an effective hedge is recognised in other
comprehensive income. Any ineffective portion is recognised in
profit or loss. Non-derivative financial liabilities as well as
derivatives may be the hedging instrument in a net investment
hedge. On disposal or partial disposal of a foreign operation, the
amount accumulated in equity is reclassified from equity to profit
or loss.
24. Associates and joint ventures
An associate is an entity over which the Group has significant
influence. A joint venture is one which it controls jointly with other
parties. Investments in associates and interests in joint ventures
are recognised using the equity method. They are stated initially
at cost, including attributable goodwill, and subsequently adjusted
for post-acquisition changes in the Group’s share of net assets.
258
Accounting policies
25. Share-based compensation
The Group operates a number of share-based compensation
schemes under which it awards RBSG shares and share options
to its employees. Such awards are generally subject to vesting
conditions: conditions that vary the amount of cash or shares to
which an employee is entitled. Vesting conditions include service
conditions (requiring the employee to complete a specified period
of service) and performance conditions (requiring the employee
to complete a specified period of service and specified
performance targets to be met). Other conditions to which an
award is subject are non-vesting conditions (such as a
requirement to save throughout the vesting period). The cost of
employee services received in exchange for an award of shares
or share options granted is measured by reference to the fair
value of the shares or share options on the date the award is
granted and takes into account non-vesting conditions and
market performance conditions (conditions related to the market
price of RBSG shares): an award is treated as vesting
irrespective of whether any market performance condition or non-
vesting condition is met. The fair value of options granted is
estimated using valuation techniques which incorporate exercise
price, term, risk-free interest rates, the current share price and its
expected volatility. The cost is expensed on a straight-line basis
over the vesting period (the period during which all the specified
vesting conditions must be satisfied) with a corresponding
increase in equity in an equity-settled award, or a corresponding
liability in a cash-settled award. The cost is adjusted for vesting
conditions (other than market performance conditions) so as to
reflect the number of shares or share options that actually vest.
If an award is modified, the original cost continues to be
recognised as if there had been no modification. Where
modification increases the fair value of the award, this increase is
recognised as an expense over the modified vesting period. A
new award of shares or share options is treated as the
modification of a cancelled award if, on the date the new award is
granted, the Group identifies them as replacing the cancelled
award. The cancellation of an award through failure to meet non-
vesting conditions triggers an immediate expense for any
unrecognised element of the cost of an award.
26. Cash and cash equivalents
In the cash flow statement, cash and cash equivalents comprises
cash and deposits with banks with an original maturity of less
than three months together with short-term highly liquid
investments that are readily convertible to known amounts of
cash and subject to insignificant risk of change in value.
Critical accounting policies and key sources of estimation
uncertainty
The reported results of the Group are sensitive to the accounting
policies, assumptions and estimates that underlie the preparation
of its financial statements. UK company law and IFRS require the
directors, in preparing the Group's financial statements, to select
suitable accounting policies, apply them consistently and make
judgements and estimates that are reasonable and prudent. In
the absence of an applicable standard or interpretation, IAS 8
‘Accounting Policies, Changes in Accounting Estimates and
Errors’, requires management to develop and apply an
accounting policy that results in relevant and reliable information
in the light of the requirements and guidance in IFRS dealing with
similar and related issues and the IASB's ’Conceptual Framework
for Financial Reporting’. The judgements and assumptions
involved in the Group's accounting policies that are considered by
the Board to be the most important to the portrayal of its financial
condition are discussed below. The use of estimates,
assumptions or models that differ from those adopted by the
Group would affect its reported results.
(i) Goodwill
The Group capitalises goodwill arising on the acquisition of
businesses, as discussed in Accounting policy 6. The carrying
value of goodwill as at 31 December 2017 was £5,558 million
(2016 - £5,558 million).
Goodwill is the excess of the cost of an acquired business over
the fair value of its net assets. Goodwill is not amortised but is
tested for impairment annually or more frequently if events or
changes in circumstances indicate that it might be impaired.
Impairment testing in accordance with Accounting policy 8
inherently involves a number of judgmental areas: the
preparation of cash flow forecasts for periods that are beyond the
normal requirements of management reporting; the assessment
of the discount rate appropriate to the business; estimation of the
fair value of cash-generating units; and the valuation of their
separable assets. The sensitivity of the assessment to changes
in assumptions is discussed in Note 15 on the accounts.
(ii) Provisions for liabilities
As set out in Note 20 on the accounts, at 31 December 2017 the
Group recognised provisions for liabilities in respect of Payment
Protection Insurance, £1,053 million (2016 - £1,253 million), other
customer redress, £870 million (2016 - £1,105 million), residential
mortgage backed securities, £3,243 million (2016 - £6,752
million), litigation and other regulatory proceedings, £641 million
(2016 - £1,918 million) and property and other £1,950 million
(2016 - £1,808 million).
259
Accounting policies
Provisions are liabilities of uncertain timing or amount, and are
recognised when there is a present obligation as a result of a
past event, the outflow of economic benefit is probable and the
outflow can be estimated reliably. Judgement is involved in
determining whether an obligation exists, and in estimating the
probability, timing and amount of any outflows. Where the Group
can look to another party such as an insurer to pay some or all of
the expenditure required to settle a provision, any reimbursement
is recognised when, and only when, it is virtually certain that it will
be received.
Payment Protection Insurance - the Group has established a
provision for redress payable in respect of the mis-selling of
Payment Protection Insurance policies. The provision is
management’s best estimate of the anticipated costs of redress
and related administration expenses. The determination of
appropriate assumptions to underpin the provision requires
significant judgement by management. The principal assumptions
underlying the provision together with sensitivities to changes in
those assumptions are given in Note 20 on the accounts.
Provisions for litigation - the Group and members of the Group
are party to legal proceedings in the United Kingdom, the United
States and other jurisdictions, arising out of their normal business
operations. The measurement and recognition of liabilities in
respect of litigation involves a high degree of management
judgement. Before the existence of a present obligation as the
result of a past event can be confirmed, numerous facts may
need to be established, involving extensive and time-consuming
discovery, and novel or unsettled legal questions addressed.
Once it is determined there is an obligation, assessing the
probability of economic outflows and estimating the amount of
any liability can be very difficult. In many proceedings, it is not
possible to determine whether any loss is probable or to estimate
the amount of any loss. Furthermore, for an individual matter,
there can be a wide range of possible outcomes and often it is
not practicable to quantify a range of such outcomes. The
Group’s outstanding litigation is periodically assessed in
consultation with external professional advisers, where
appropriate, to determine the likelihood of the Group incurring a
liability. A detailed description of the Group’s material legal
proceedings and a discussion of the nature of the associated
uncertainties are given in Note 31 on the accounts.
Tax contingencies - determining the Group’s income tax charge
and its provisions for income taxes necessarily involves a
significant degree of estimation and judgement. The tax
treatment of some transactions is uncertain and tax computations
are yet to be agreed with the tax authorities in a number of
jurisdictions. The Group recognises anticipated tax liabilities
based on all available evidence and, where appropriate, in the
light of external advice. Any difference between the final outcome
and the amounts provided will affect current and deferred income
tax assets and liabilities in the period when the matter is
resolved.
(iii) Deferred tax
The Group makes provision for deferred tax on temporary
differences where tax recognition occurs at a different time from
accounting recognition. Deferred tax assets of £1,740 million
were recognised as at 31 December 2017 (2016 - £1,803
million).
The Group has recognised deferred tax assets in respect of
losses, principally in the UK, and temporary differences. Deferred
tax assets are recognised in respect of unused tax losses and
other temporary differences to the extent that it is probable that
there will be future taxable profits against which the losses and
other temporary differences can be utilised. The Group has
considered their carrying value as at 31 December 2017 and
concluded that, based on management’s estimates, sufficient
taxable profits will be generated in future years to recover
recognised deferred tax assets. These estimates are based on
forecast performance and take into account Brexit, the Group’s
plans to implement the UK ring-fencing regime and the resultant
transfers between members of the Group.
Deferred tax assets of £6,356 million (2016 - £7,940 million) have
not been recognised in respect of tax losses and other temporary
differences where the availability of future taxable profits is
uncertain. Further details about the Group’s deferred tax assets
are given in Note 22 on the accounts.
(iv) Loan impairment provisions
The Group's loan impairment provisions are established to
recognise incurred impairment losses in its portfolio of loans
classified as loans and receivables and carried at amortised cost
in accordance with Accounting policy 16. At 31 December 2017,
customer loan impairment provisions amounted to £3,814 million
(2016 - £4,455 million).
A loan is impaired when there is objective evidence that events
since the loan was granted have affected expected cash flows
from the loan. Such objective evidence, indicative that a
borrower’s financial condition has deteriorated, can include for
loans that are individually assessed: the non-payment of interest
or principal; debt renegotiation; probable bankruptcy or
liquidation; significant reduction in the value of any security;
breach of limits or covenants; and deteriorating trading
performance and, for collectively assessed portfolios: the
borrowers’ payment status and observable data about relevant
macroeconomic measures.
The impairment loss is the difference between the carrying value
of the loan and the present value of estimated future cash flows
at the loan's original effective interest rate.
There are two components to the Group's loan impairment
provisions: individual and collective.
260
Accounting policies
Individual component - all impaired loans that exceed specific
thresholds are individually assessed for impairment. Individually
assessed loans principally comprise the Group's portfolio of
commercial loans to medium and large businesses. Impairment
losses are recognised as the difference between the carrying
value of the loan and the discounted value of management's best
estimate of future cash repayments and proceeds from any
security held. These estimates take into account the customer's
debt capacity and financial flexibility; the level and quality of its
earnings; the amount and sources of cash flows; the industry in
which the counterparty operates; and the realisable value of any
security held. Estimating the quantum and timing of future
recoveries involves significant judgement. The size of receipts
will depend on the future performance of the borrower and the
value of security, both of which will be affected by future
economic conditions; additionally, collateral may not be readily
marketable. The actual amount of future cash flows and the date
they are received may differ from these estimates and
consequently actual losses incurred may differ from those
recognised in these financial statements.
Collective component - this is made up of two elements: loan
impairment provisions for impaired loans that are below individual
assessment thresholds (collectively assessed provisions) and for
loan losses that have been incurred but have not been separately
identified at the balance sheet date (latent loss provisions).
Collectively assessed provisions are established on a portfolio
basis using a present value methodology taking into account the
level of arrears, security, past loss experience, credit scores and
defaults based on portfolio trends. The most significant factors in
establishing these provisions are the expected loss rates and the
related average life. These portfolios include mortgages, credit
card receivables and other personal lending. The future credit
quality of these portfolios is subject to uncertainties that could
cause actual credit losses to differ materially from reported loan
impairment provisions. These uncertainties include the economic
environment, notably interest rates and their effect on customer
spending, the unemployment level, payment behaviour and
bankruptcy trends. Latent loss provisions are held against
estimated impairment losses in the performing portfolio that have
yet to be identified as at the balance sheet date. To assess the
latent loss within its portfolios, the Group has developed
methodologies to estimate the time that an asset can remain
impaired within a performing portfolio before it is identified and
reported as such.
(v) Fair value - financial instruments
In accordance with Accounting policies 14, 16 and 23, financial
instruments classified as held-for-trading or designated as at fair
value through profit or loss and financial assets classified as
available-for-sale are recognised in the financial statements at
fair value. All derivatives are measured at fair value.
Fair value is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between
market participants at the measurement date. A fair value
measurement takes into account the characteristics of the asset
or liability if market participants would take those characteristics
into account when pricing the asset or liability at the
measurement date.
It also uses the assumptions that market participants would use
when pricing the asset or liability. In determining fair value the
Group maximises the use of relevant observable inputs and
minimises the use of unobservable inputs.
Where the Group manages a group of financial assets and
financial liabilities on the basis of its net exposure to either
market risks or credit risk, it measures the fair value of a group of
financial assets and financial liabilities on the basis of the price
that it would receive to sell a net long position (i.e. an asset) for a
particular risk exposure or to transfer a net short position (i.e. a
liability) for a particular risk exposure in an orderly transaction at
the measurement date under current market conditions.
Credit valuation adjustments are made when valuing derivative
financial assets to incorporate counterparty credit risk.
Adjustments are also made when valuing financial liabilities
measured at fair value to reflect the Group’s own credit standing.
Where the market for a financial instrument is not active, fair
value is established using a valuation technique. These valuation
techniques involve a degree of estimation, the extent of which
depends on the instrument’s complexity and the availability of
market-based data. Further details about the Group’s valuation
methodologies and the sensitivity to reasonably possible
alternative assumptions of the fair value of financial instruments
valued using techniques where at least one significant input is
unobservable are given in Note 9 on the accounts.
Accounting developments
International Financial Reporting Standards
A number of IFRSs and amendments to IFRS were in issue at
31 December 2017 that would affect the Group from 1 January
2018 or later.
Effective 1 January 2018 - IFRS 9
In July 2014, the IASB published IFRS 9 ‘Financial Instruments’
with an effective date of 1 January 2018. IFRS 9 replaces the
current financial instruments standard IAS 39, setting out new
accounting requirements in a number of areas.
The principle features of IFRS 9 are as follows:
Recognition and derecognition
The sections in IAS 39 setting out the criteria for the recognition
and derecognition of financial instruments have been included
unamended in IFRS 9.
Classification and measurement
Financial assets - There are three classifications for financial
assets in IFRS 9.
Amortised cost - Financial assets with terms that give rise to
interest and principal cash flows only and which are held in
a business model whose objective is to hold financial assets
to collect their cash flow are measured at amortised cost.
261
Accounting policies
Fair value through other comprehensive income - Financial
assets with terms that give rise to interest and principal cash
flows only and which are held in a business model whose
objective is achieved by holding financial assets to collect
their cash flow and selling them are measured at fair value
through other comprehensive income.
Fair value through profit and loss - Other financial assets are
measured at fair value through profit and loss.
At initial recognition, any financial asset may be irrevocably
designated as measured at fair value through profit or loss if such
designation eliminates a measurement or recognition
inconsistency.
The measurement basis of the majority of the Group’s financial
assets is unchanged on application of IFRS 9.
Financial liabilities – Since early adopting in 2017 the IFRS 9
accounting for fair value attributable to own credit risk there are
no further material changes on accounting for financial liabilities
on adoption of IFRS 9.
Hedge accounting
IFRS 9’s hedge accounting requirements are designed to align
the accounting more closely to the risk management framework;
permit a greater variety of hedging instruments; and remove or
simplify some of the rule-based requirements in IAS 39. The
elements of hedge accounting: fair value, cash flow and net
investment hedges are retained. The Group accounting policy
choice is continue with the IAS 39 hedge accounting framework.
Credit impairment
IFRS 9’s credit impairment requirements apply to financial assets
measured at amortised cost, to those measured at fair value
through other comprehensive income, to lease receivables and to
certain loan commitments and financial guarantee contracts. On
initial recognition a loss allowance is established at an amount
equal to 12-month expected credit losses (ECL) that is the
portion of life-time expected losses resulting from default events
that are possible within the next 12 months. Where a significant
increase in credit risk since initial recognition is identified, the loss
allowance increases so as to recognise all expected default
events over the expected life of the asset. The Group expects
that financial assets where there is objective evidence of
impairment under IAS 39 will be credit impaired under IFRS 9,
and carry loss allowances based on all expected default events.
The assessment of credit risk and the estimation of ECL are
required to be unbiased and probability-weighted: determined by
evaluating at the balance sheet date for each customer or loan
portfolio a range of possible outcomes using reasonable and
supportable information about past events, current conditions and
forecasts of future events and economic conditions. The
estimation of ECL also takes into account the time value of
money. Recognition and measurement of credit impairments
under IFRS 9 are more forward-looking than under IAS 39.
A Group-wide programme implemented the necessary changes
in the modelling of credit loss parameters, and the underlying
credit management and financial processes.
The result is an increase in overall credit impairment provisions
when compared with the current basis of measurement under
IAS 39.
Transition
The classification and measurement and impairment
requirements will be applied retrospectively by adjusting the
opening balance sheet at the date of initial application, with no
requirement to restate comparative periods. Hedge accounting
will be applied prospectively from that date.
In summary, on 1 January 2018, the impact on shareholders’
equity was a £71 million post tax reduction in equity, comprising:
Reclassification of financial instruments – £561 million
pre tax increase in equity
Change in impairment methodology – £616 million pre
tax reduction.
Net tax impact – £16 million decrease.
There will be no restatement of accounts prior to 2018.
The Group has opted to early adopt the IFRS 9 amendment on
negative compensation with effect from 1 January 2018; this is
expected to be endorsed for use in the EU in early 2018.
Effective 1 January 2018 – other standards
IFRS 15 ‘Revenue from Contracts with Customers’ was issued in
May 2014. It will replace IAS 11 ‘Construction Contracts’, IAS 18
‘Revenue’ and several Interpretations. Contracts are bundled or
unbundled into distinct performance obligations with revenue
recognised as the obligations are met. A restatement is not
expected on initial application of this standard.
IFRS 2 ‘Share-based payment’ was amended in June 2016 to
clarify the accounting for net settlement of tax in respect of share-
based payments and the calculation of the cost of modified
awards and those with vesting conditions that are not market
conditions. IFRIC Interpretation 22 ‘Foreign Currency
Transaction and Advance Consideration’ was issued in
December 2016 clarifying the date of a foreign exchange
transaction to be used on initial recognition of a related asset or
other item.
IAS 40 ‘Investment Property’ was amended in December 2016 to
clarify that transfers into or out of the investment property
classification may only occur on a change of use or the property
ceasing to meet the definition of an investment property.
On adoption, none of these standards are expected to have a
material effect on the Group’s results.
262
Accounting policies
Effective after 2018
IFRS 16 ‘Leases’ was issued in January 2016 to replace IAS 17
‘Leases’. There are no substantial changes to the accounting for
leases by lessors nor for finance leases; operating leases will be
brought on balance sheet through the recognition of assets
representing the contractual rights of use, and liabilities will be
recognised for the contractual payments that exist. The effective
date is 1 January 2019.
IFRS 17 ‘Insurance contracts’ was issued in May 2017 to replace
IFRS 4 and to establish a comprehensive standard for inceptors
of insurance policies. The effective date is 1 January 2021.
IFRIC Interpretation 23 ‘Uncertainty over income tax treatments’
was issued in June 2017 to clarify how to apply judgement in
assessing the tax position of the reporting entity. The effective
date is 1 January 2019.
The Group is currently working on the implementation of the new
requirements and currently anticipates that the property lease
portfolio will have the most significant implementation impact as
property represents 87% of the operating lease commitments per
Note 31. A preliminary estimate (excluding the impacts of tax) of
the opening balance sheet adjustment as a result of the property
portfolio using a modified retrospective approach to transition
would be to create a Right of Use asset of c£1.4bn, also
impacting RWAs and an estimated decrease (excluding the
impacts of tax) in retaining earnings of some c£0.3bn. As
permitted by the standard, the Group intends to apply IFRS 16 on
a retrospective basis but to take advantage of the option not to
restate. The Group will continue to work on the implementation
throughout 2018 and therefore this estimate of the impact is
subject to change. Changes could arise from the addition of non
property leases, further development of calibration of models and
processes, methodology and approach refinement, and
sensitivity analysis performed on key assumptions such as
discount factors and lease term.
In October 2017, the IASB amended IAS 28 ’Investments in
associates and joint ventures’ to require long term, non-equity
interests in these investments to be tested for impairment first in
accordance with IFRS 9 and then in accordance with IAS 28. The
effective date of the amendment is 1 January 2019.
In February 2018 the IASB amended IAS ‘Employee Benefits’ to
clarify the need to update assumptions whenever there is a plan
amendment, curtailment or settlement during the reporting
period. The effective date is 1 January 2019.
The Group is assessing the effect of adopting these standards on
its financial statements.
263
Notes on the consolidated accounts
1 Net interest income
Loans and advances to customers
Loans and advances to banks
Debt securities
Interest receivable (1)
Customer accounts: demand deposits
Customer accounts: savings deposits
Customer accounts: other time deposits
Balances with banks
Debt securities in issue
Subordinated liabilities
Internal funding of trading businesses
Interest payable (1)
Net interest income
2 Non-interest income
Fees and commissions receivable
Payment services
Credit and debit card fees
Lending (credit facilities)
Brokerage
Investment management
Trade finance
Other
Fees and commissions payable
Banking
Income from trading activities
Foreign exchange
Interest rate
Credit
Changes in fair value of own debt and derivative liabilities attributable to own credit
- debt securities in issue
- derivative liabilities
Equities and other
Loss on redemption of own debt
Other operating income
Operating lease and other rental income
Changes in the fair value of own debt designated as at fair value through profit or loss
attributable to own credit risk (2)
- debt securities in issue
- subordinated liabilities
Other changes in the fair value of financial assets and liabilities designated as at fair
value through profit or loss and related derivatives
Changes in the fair value of investment properties
Profit/(loss) on sale of securities
Profit on sale of property, plant and equipment
Profit/(loss) on sale of subsidiaries and associates
Loss on disposal or settlement of loans and receivables
Share of profits of associated entities
Other income (3)
Non-interest income
2017
£m
10,409
277
348
11,034
99
445
179
175
554
572
23
2,047
8,987
2017
£m
829
665
1,060
148
249
173
214
3,338
2016
£m
10,706
246
306
11,258
433
432
190
97
557
845
(4)
2,550
8,708
2016
£m
856
645
1,044
154
250
196
195
3,340
2015
£m
11,268
340
317
11,925
619
446
315
45
759
869
105
3,158
8,767
2015
£m
923
738
1,076
262
305
242
196
3,742
(883)
(805)
(809)
525
(50)
197
(81)
12
31
634
(7)
989
(480)
336
87
67
(25)
974
(126)
809
35
(80)
252
2
42
1,060
(263)
276
287
276
—
—
99
(14)
226
75
245
(35)
104
88
1,064
41
(15)
(13)
(11)
71
18
273
(277)
59
66
499
84
(29)
375
2
(4)
91
(102)
(558)
140
151
426
Notes:
(1) Negative interest on loans and advances is classed as interest payable and on customer deposits is classed as interest receivable.
(2) Measured as the change in fair value from movements in the year in the credit risk premium payable by RBS. Ahead of adopting IFRS9 Financial Instruments from 1 January
2018, RBS has adopted the provisions in respect of the presentation of gains and losses on financial liabilities designated as at fair value through profit or loss from 1 January
2017.
Includes income from activities other than banking.
(3)
264
Notes on the consolidated accounts
3 Operating expenses
Salaries
Variable compensation
Temporary and contract costs
Social security costs
Share-based compensation
Pension costs
- defined benefit schemes (see Note 4)
- loss/(gain) on curtailments or settlements (see Note 4)
- defined contribution schemes
Severance
Other
Staff costs
Premises and equipment
UK bank levy
Other administrative expenses (1)
Property, plant and equipment depreciation and write down (see Note 16)
Intangible assets amortisation (see Note 15)
Depreciation and amortisation
Write down of goodwill and other intangible assets (see Note 15)
Operating expenses
Restructuring and divestment costs
Included in operating expenses are the following restructuring and divestment costs:
Staff costs
Premises, equipment, depreciation and amortisation
Other administrative expenses (2)
Total
Notes:
(1) Includes litigation and conduct costs, net of amounts recovered. Further details are provided in Note 20.
(2) Includes other administrative expenses, write down of goodwill and other intangible assets.
2017
£m
2,765
298
415
318
17
309
66
92
255
141
4,676
1,565
215
3,108
586
222
808
29
2016
£m
3,097
281
674
388
32
267
1
89
229
66
5,124
1,388
190
8,555
574
204
778
159
10,401
16,194
2017
£m
753
471
341
1,565
2016
£m
642
164
1,300
2,106
2015
£m
3,177
314
638
344
36
523
(65)
74
511
174
5,726
1,827
230
6,058
950
230
1,180
1,332
16,353
2015
£m
830
746
1,355
2,931
265
Notes on the consolidated accounts
3 Operating expenses continued
The average number of persons employed, rounded to the nearest hundred, in continuing operations during the year, excluding
temporary staff, was 73,400 (2016 - 82,400; 2015 - 88,800); on the same basis there were no people employed in discontinued
operations (2016 - nil; 2015 - 10,100). The average number of temporary employees during 2017 was 5,000 (2016 - 6,700; 2015 -
7,800). The number of persons employed in continuing operations at 31 December, excluding temporary staff, by reportable segment,
was as follows:
UK Personal & Business Banking
Ulster Bank RoI
Personal & Business Banking
Commercial Banking
Private Banking
Commercial & Private Banking
RBS International
NatWest Markets
Central items & other
Total
UK
USA
Europe
Rest of the World
Total
2017
21,900
2,600
24,500
4,500
1,500
6,000
1,600
5,300
32,300
69,700
51,200
500
4,200
13,800
69,700
2016*
25,100
3,000
28,100
5,600
1,700
7,300
800
1,500
39,300
77,000
57,300
700
5,200
13,800
77,000
2015*
29,900
2,500
32,400
5,700
1,900
7,600
700
2,500
44,600
87,800
64,100
1,100
6,200
16,400
87,800
There were no people employed in discontinued operations at 31 December 2017 (2016 - nil; 2015 - nil).
* Re-presented to reflect segment reorganisation.
Share-based payments
As described in the Remuneration report on page 103, the Group grants share-based awards to employees principally on the following
bases:
Award plan
Sharesave
Eligible employees
UK, Republic of Ireland,
Channel Islands, Gibraltar
and Isle of Man
All
Deferred performance
awards
Long-term incentives (2) Senior employees
Nature of award
Option to buy shares under
employee savings plan
Vesting conditions (1)
Continuing employment or
leavers in certain circumstances
Settlement
2018 to 2022
Awards of ordinary shares Continuing employment or
2018 to 2024
Awards of conditional
shares or share options
leavers in certain circumstances
Continuing employment or
leavers in certain circumstances
and/or achievement of
performance conditions
2018 to 2024
Notes:
(1) All awards have vesting conditions and therefore some may not vest.
(2) Long-term incentives include the Executive Share Option Plan, the Long-Term Incentive Plan and the Employee Share Plan.
266
Notes on the consolidated accounts
3 Operating expenses continued
The fair value of options granted in 2017 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; no
dividends on equity shares; and risk-free interest rates determined from UK gilts with terms matching the expected lives of the options.
The strike price of options and the fair value on granting awards of fully paid shares is the average market price over the five trading
days (three trading days for Sharesave) preceding grant date.
Sharesave
2017
2016
2015
At 1 January
Granted
Exercised
Cancelled
At 31 December
Average
exercise price
£
2.46
2.27
2.46
2.49
2.38
Shares
under option
(million)
56
21
(3)
(14)
60
Average
exercise price
£
2.87
1.68
2.37
3.02
2.46
Shares
under option
(million)
56
17
—
(17)
56
Average
exercise price
£
2.85
2.91
2.38
2.98
2.87
Shares
under option
(million)
51
12
(2)
(5)
56
Options are exercisable within six months of vesting; 3.7 million options were exercisable at 31 December 2017 (2016 – 8.1 million;
2015 - 1.0 million). The weighted average share price at the date of exercise of options was £2.77 (2016 - £1.78; 2015 - £3.54). At 31
December 2017, exercise prices ranged from £1.68 to £4.34 (2016 - £1.68 to £4.34; 2015 - £2.33 to £18.93) and the remaining average
contractual life was 2.9 years (2016 - 2.9 years; 2015 – 2.9 years). The fair value of options granted in 2017 was £21 million (2016 - £18
million; 2015 - £12 million).
Deferred performance awards
2017
2016
2015
At 1 January
Granted
Forfeited
Vested
At 31 December
Value at
grant
£m
296
152
(11)
(173)
264
Shares
awarded
(million)
102
63
(4)
(60)
101
Value at
grant
£m
276
170
(19)
(131)
296
Shares
awarded
(million)
80
75
(7)
(46)
102
Value at
grant
£m
272
186
(34)
(148)
276
Shares
awarded
(million)
85
50
(11)
(44)
80
The awards granted in 2017 vest in three equal tranches on their anniversaries.
Long-term incentives
At 1 January
Granted
Vested/exercised
Lapsed
At 31 December
Value
at grant
£m
119
35
(22)
(30)
102
2017
2016
2015
Shares
awarded
(million)
Options
over shares
(million)
Value at
grant
£m
Shares
awarded
(million)
Options
over shares
(million)
Value at
grant
£m
Shares
awarded
(million)
Options
over shares
(million)
38
15
(7)
(9)
37
4
—
—
(2)
2
153
37
(39)
(32)
119
44
16
(12)
(10)
38
5
—
—
(1)
4
214
39
(51)
(49)
153
69
11
(18)
(18)
44
7
—
(2)
—
5
The market value of awards vested/exercised in 2017 was £22 million (2016 - £40 million; 2015 - £55 million). There are vested options
of 2 million shares exercisable up to 2020 (2016 - 4 million; 2015 - 5 million).
267
Notes on the consolidated accounts
3 Operating expenses continued
Variable compensation awards
The following tables analyse the Group variable compensation awards for 2017.
Non-deferred cash awards (2)
Total non-deferred variable compensation
Deferred bond awards
Deferred share awards
Total deferred variable compensation
Total variable compensation (3)
Variable compensation as a % of adjusted operating profit (4)
Proportion of variable compensation that is deferred
of which
- deferred bond awards
- deferred share awards
Reconciliation of variable compensation awards to income statement charge
Variable compensation awarded
Less: deferral of charge for amounts awarded for current year
Income statement charge for amounts awarded in current year
Add: current year charge for amounts deferred from prior years
Less: forfeiture of amounts deferred from prior years
Income statement charge for amounts deferred from prior years
Income statement charge for variable compensation (3)
2017
£m
51
51
134
157
291
342
7%
85%
46%
54%
2017
£m
342
(133)
209
96
(7)
89
298
Group
2016
£m
56
56
138
149
287
343
9%
84%
48%
52%
2016
£m
343
(103)
240
147
(106)
41
281
Change
%
(9)
(9)
(3)
5
1
—
2015
£m
373
(97)
276
140
(102)
38
314
Year in which income statement charge is expected to be taken
for deferred variable compensation
Variable compensation deferred from 2015 and earlier
Variable compensation deferred from 2016
Less: forfeiture of amounts deferred from prior years
Variable compensation for 2017 deferred
Notes:
(1) The tables above relate to continuing businesses only.
(2) Cash awards are limited to £2,000 for all employees.
(3) Excludes other performance related compensation.
(4) Adjusted operating profit before variable compensation expense.
Actual
Expected
2015
£m
140
—
(102)
—
38
2016
£m
147
—
(106)
—
41
2017
£m
16
80
(7)
—
89
2018
£m
6
20
—
89
115
2019
and beyond
£m
1
13
—
44
58
268
Notes on the consolidated accounts
4 Pensions
Defined contribution schemes
The Group sponsors a number of defined contribution pension
schemes in different territories, which new employees are offered
the opportunity to join.
Defined benefit schemes
The Group sponsors a number of pension schemes in the UK
and overseas, including the Main section of The Royal Bank of
Scotland Group Pension Fund (the “Main scheme”) which
operates under UK trust law and is managed and administered
on behalf of its members in accordance with the terms of the trust
deed, the scheme rules and UK legislation.
Pension fund trustees are appointed to operate each fund and
ensure benefits are paid in accordance with the scheme rules
and national law. The trustees are the legal owner of a scheme’s
assets, and have a duty to act in the best interests of all scheme
members.
The schemes generally provide a pension of one-sixtieth of final
pensionable salary for each year of service prior to retirement up
to a maximum of 40 years and are contributory for current
members. These have been closed to new entrants some ten
years ago, although current members continue to build up
additional pension benefits, currently subject to 2% maximum
annual salary inflation, while they remain employed by the Group.
Major classes of plan assets as a percentage of total plan assets
Quoted assets
Quoted equities
- Consumer industry
- Manufacturing industry
- Energy and utilities
- Financial institutions
- Technology and telecommunications
- Other
Private equity
Index-linked bonds
Government fixed interest bonds
Corporate fixed interest bonds
Unquoted assets
Corporate and other bonds
Hedge funds
Real estate
Derivatives
Cash and other assets
Equity exposure of equity futures
Cash exposure of equity futures
The Main scheme corporate trustee is RBS Pension Trustee
Limited (the Trustee), a wholly owned subsidiary of National
Westminster Bank Plc, Principal Employer of the Main scheme.
The Board of the Trustee comprises four member trustee
directors selected from eligible active staff, deferred and
pensioner members who apply and six appointed by the Group.
Under UK legislation a defined benefit pension scheme is
required to meet the statutory funding objective of having
sufficient and appropriate assets to cover its liabilities (the
pensions that have been promised to members).
Similar governance principles apply to the Group’s other pension
schemes.
Investment strategy
The assets of the Main scheme, which represent 90% of plan
assets at 31 December 2017 (2016 - 89%), are invested in a
diversified portfolio of quoted and private equity, government and
corporate fixed-interest and index-linked bonds, and other assets
including real estate and infrastructure.
The Main scheme employs derivative instruments to achieve a
desired asset class exposure and to reduce the scheme’s interest
rate, inflation and currency risk. This means that the net funding
position is considerably less sensitive to changes in market
conditions than the value of the assets or liabilities in isolation.
Main scheme
2017
%
6.7
1.8
3.6
7.8
1.9
0.1
4.0
30.6
9.2
15.8
1.0
—
5.2
8.1
4.2
(3.6)
3.6
100.0
2016
%
4.6
1.8
2.7
8.3
2.3
0.8
3.4
31.4
5.9
17.9
1.8
0.2
5.2
10.2
3.4
(1.8)
1.9
100.0
269
Notes on the consolidated accounts
4 Pensions continued
The Main scheme’s holdings of derivative instruments are summarised in the table below:
Inflation rate swaps
Interest rate swaps
Currency forwards
Equity and bond call options
Equity and bond put options
Other
Notional
amounts
£bn
11
44
12
2
3
4
2017
Fair value
Assets
£m
310
8,161
160
428
3
327
Liabilities
£m
555
4,779
34
—
1
444
Notional
amounts
£bn
12
41
15
2
2
4
2016
Fair value
Assets
£m
299
9,440
191
799
—
1,719
Liabilities
£m
549
5,442
136
1
2
1,816
The investment strategy of other schemes is similar to that of the
Main scheme, adjusted to take account of the nature of liabilities,
risk appetite of the trustees, size of the scheme and any local
regulatory constraints.
Swaps are used to manage interest rate and inflation risk of the
liabilities, as well as being used to manage other risks within the
Main scheme. They have been executed at prevailing market
rates and within standard market bid/offer spreads with a number
of counterparty banks, including The Royal Bank of Scotland plc.
At 31 December 2017, the gross notional value of the swaps was
£57 billion (2016 - £56 billion) and had a net positive fair value of
£3,045 million (2016 - £3,629 million).
Collateral is required on all swap transactions. The counterparty
banks had delivered a net amount of £3,436 million of collateral
at 31 December 2017 (2016 - £3,991 million).
The schemes do not invest directly in the Group but can have
exposure to the Group within their investment programmes
through indirect exposure to ordinary shares of the Group
through index tracking investments, swaps contracts (before
allowing for collateral posted against the mark value of the
swaps) and cash deposits placed with National Westminster
Bank Plc. The trustees of the respective schemes are
responsible for ensuring that indirect investments in the Group do
not exceed the 5% regulatory limit.
Amounts in the Financial statements
The Group recognises the net pension scheme surplus or deficit as a net asset or liability. In doing so, the funded status is adjusted to
reflect any schemes with a surplus that the Group may not be able to access, as well as any minimum funding requirement to pay in
additional contributions. This is most relevant to the Main scheme, where the current surplus is not recognised.
Amounts recognised on the balance sheet
Fund assets at fair value
Present value of fund liabilities
Funded status
Asset ceiling/minimum funding
Net pension asset/(liability) comprises
Net assets of schemes in surplus (included in Prepayments, accrued income and other assets, Note 17)
Net liabilities of schemes in deficit
All schemes
2017
£m
49,746
42,378
7,368
7,105
263
2016
£m
49,229
43,990
5,239
5,326
(87)
2017
£m
392
(129)
263
2016
£m
276
(363)
(87)
270
Notes on the consolidated accounts
4 Pensions continued
Main scheme
All schemes
Changes in value of net pension liability/(asset)
At 1 January 2016
Currency translation and other adjustments
Income statement
Net interest expense
Current service cost
Past service cost
Loss on curtailments or settlements
Statement of comprehensive income
Return on plan assets above recognised interest income
Experience gains and losses
Effect of changes in actuarial financial assumptions
Effect of changes in actuarial demographic assumptions
Asset ceiling/minimum funding adjustments
Contributions by employer
Contributions by plan participants and other scheme
members
Liabilities extinguished upon settlement
Benefits paid
At 1 January 2017
Currency translation and other adjustments
Income statement
Net interest expense
Current service cost
Past service cost
Loss on curtailments or settlement
Statement of comprehensive income
Return on plan assets above recognised interest income
Experience gains and losses
Effect of changes in actuarial financial assumptions
Effect of changes in actuarial demographic assumptions
Asset ceiling/minimum funding adjustments
Contributions by employer
Contributions by plan participants and other scheme
members
Liabilities extinguished upon settlement
Benefits paid
At 31 December 2017
Notes:
Fair
value of
plan assets
£m
30,703
—
1,310
—
—
—
1,310
8,562
—
—
—
—
8,562
4,518
Present value
of defined
Asset
ceiling/
benefit minimum
obligation funding (1)
£m
£m
£m
30,966 2,981 3,244
—
—
—
Net
Fair
pension
liability/
value of
(asset) plan assets
£m
34,708
533
Present value
of defined
Asset
ceiling/
benefit minimum
obligation funding (1)
£m
Net
pension
liability/
(asset)
£m
3,130 3,574
69
—
£m
35,152
602
1,184
199
28
—
1,411
116
—
—
—
116
(10)
199
28
—
217
—
(658)
8,803
(402)
— (8,562)
(658)
—
— 8,803
(402)
—
— 1,876 1,876
7,743 1,876 1,057
1,454
—
—
—
1,454
9,254
—
—
—
—
9,254
1,327
264
8
1
1,600
—
(794)
9,565
(542)
—
8,229
122
—
—
—
122
(5)
264
8
1
268
— (9,254)
(794)
—
— 9,565
(542)
—
2,074 2,074
2,074 1,049
—
— (4,518)
4,786
—
— (4,786)
—
—
(1,269)
43,824
—
—
—
—
—
—
(1,269)
38,851 4,973
—
—
12
(43)
(1,475)
49,229
46
12
(130)
(1,475)
43,990
46
—
—
—
5,326
3
1,021
226
19
—
1,266
134
—
—
—
134
—
107
678
(794)
— (1,580)
107
—
678
—
(794)
—
— 1,608 1,608
19
(9) 1,608
1,285
—
—
—
1,285
1,728
—
—
—
—
1,728
1,140
292
20
66
1,518
—
93
737
(826)
—
4
1,155
—
—
—
1,155
1,580
—
—
—
—
1,580
264
—
—
(264)
627
—
—
(627)
4
—
(2,175)
4
—
(2,175)
—
—
—
44,652
37,937 6,715
—
—
—
—
10
(744)
(2,435)
10
(755)
(2,435)
—
—
—
—
(11)
—
49,746
42,378
7,105
(263)
—
(87)
—
87
3
(3)
292
20
66
375
142
—
—
—
142
— (1,728)
93
—
737
—
(826)
—
1,634 1,634
(90)
1,634
—
—
—
—
—
—
226
19
—
245
(1)
(2)
In recognising the net surplus or deficit of a pension scheme, the funded status of each scheme is adjusted to reflect any minimum funding requirement imposed on the
sponsor and any ceiling on the amount that the sponsor has an unconditional right to recover from a scheme.
The Group expects to make contributions to the Main scheme of £190 million in 2018.
271
Notes on the consolidated accounts
4 Pensions continued
Funding and contributions by the Group
In the UK, the Trustees of defined benefit pension schemes are
required to perform funding valuations every three years. The
Trustees and the Company, with the support of the Scheme
Actuary, agree the assumptions used to value the liabilities and a
Schedule of Contributions required to eliminate any funding
deficit. The funding assumptions incorporate a margin for
prudence over and above the expected cost of providing the
benefits promised to members, taking into account the sponsor’s
covenant and the investment strategy of the scheme. Similar
arrangements apply in the other territories where the Group
sponsors defined benefit pension schemes. The last funding
valuation of the Main scheme was at 31 December 2015 and
next funding valuation is due at 31 December 2018, to be agreed
by 31 March 2020.
The triennial funding valuation of the Main scheme as at 31
December 2015 determined the funding level to be 84%, pension
liabilities to be £37 billion and the deficit to be £5.8 billion,
subsequently reduced by a £4.2 billion cash payment in March
2016. Investment returns over the next 10 year period were
forecast to absorb the £1.6 billion balance of the deficit. The
average cost of the future service of current members is 35% of
basic salary before contributions from those members; it includes
the expenses of running the scheme.
Assumptions
Placing a value on the Group’s defined benefit pension schemes’
liabilities requires the Group’s management to make a number of
assumptions, with the support of independent actuaries who
provide advice and guidance to the Group. The ultimate cost of
the defined benefit obligations to the Group will depend upon
actual future events and the assumptions made are unlikely to be
exactly borne out in practice, meaning the final cost may be
higher or lower than expected.
The most significant assumptions used for the Main scheme are shown below:
Discount rate
Inflation assumption (RPI)
Rate of increase in salaries
Rate of increase in deferred pensions
Rate of increase in pensions in payment
Proportion of pension converted to a cash lump
sum at retirement
Longevity at age 60 for current pensioners
(years)
Males
Females
Longevity at age 60 for future pensioners
currently aged 40 (years)
Males
Females
Principal IAS 19
actuarial assumptions
2017
2016
%
2.6
3.1
1.8
3.0
2.9
%
2.7
3.2
1.8
3.2
3.0
21
21
27.2
28.7
27.4
29.1
28.6
30.4
29.0
31.2
Principal assumptions of 2015 triennial valuation
2015
Fixed interest swap yield curve plus 1.5% per annum at
all durations
Retail price index RPI swap yield curve
(RPI floor 0%, cap 5%): Limited price indexation (LPI)
(0,5) swap yield curve
21%
28.4
30.2
29.9
32.4
Discount rate
The Group discounts its defined benefit pension obligations at
discount rates determined by reference to the yield on ‘high
quality’ corporate bonds.
The sterling yield curve (applied to 96% of the Group’s defined
benefit obligations) is constructed by reference to yields on ‘AA’
corporate bonds from which a single discount rate is derived
based on a cash flow profile similar in structure and duration to
the pension obligations. The weighted average duration of the
Main scheme’s defined benefit obligation at 31 December 2017 is
21 years (2016 – 20.9 years).
Significant judgement is required when setting the criteria for
bonds to be included in the population from which the yield curve
is derived.
The criteria include issue size, quality of pricing and the exclusion
of outliers. Judgement is also required in determining the shape
of the yield curve at long durations: a constant credit spread
relative to gilts is assumed.
272
Notes on the consolidated accounts
4 Pensions continued
The table below shows how the present value of the defined benefit obligation would change if the key assumptions used were
changed. The sensitivity analysis presented below may not be representative of the actual change in the defined benefit obligation as it
is unlikely that the changes in assumptions would occur in isolation of one another as some of the assumptions may be correlated.
0.25% increase in the discount rate
0.25% increase in inflation
0.25% additional rate of increase in pensions in payment
Longevity increase of one year
Main scheme (decrease)/increase
in obligation at 31 December
2017
£m
(1,964)
1,329
1,328
1,478
2016
£m
(1,978)
1,552
1,339
1,522
The defined benefit obligation is attributable to the different classes of scheme members in the following proportions (Main scheme):
Membership category
Active members
Deferred members
Pensioners and dependants
2017
%
16.2
47.3
36.5
2016
%
18.1
45.9
36.0
100.0
100.0
The experience history of Group schemes is shown below:
History of defined benefit schemes
Fair value of plan assets
Present value of plan obligations
Net surplus/(deficit)
Main Scheme
2017
£m
2016
£m
2015
£m
2014
£m
2013
£m
2017
£m
All schemes
2015
£m
2016
£m
2014
£m
2013
£m
44,652 43,824 30,703 30,077 24,272
37,937 38,851 30,966 31,776 26,958
49,746 49,229 34,708 34,359 28,488
42,378 43,990 35,152 36,643 31,484
6,715 4,973
(263) (1,699) (2,686)
7,368 5,239
(444) (2,284) (2,996)
Experience (losses)/gains on plan liabilities
Experience gains/(losses) on plan assets
Actual return on plan assets
Actual return on plan assets - %
658
(107)
1,580 8,562
2,735 9,872
102
3
233
(415) 4,629
986
703 5,766 1,997
6.2% 32.2% 2.3% 23.8% 8.9%
(93)
794
1,728 9,254
3,013 10,708
176
18
258
(458) 5,171 1,097
749 6,485 2,270
6.1% 30.9% 2.2% 22.8% 8.6%
273
Notes on the consolidated accounts
5 Auditor’s remuneration
Amounts paid to the Group's auditors for statutory audit and other services are set out below. All audit-related and other services are
approved by the Group Audit Committee and are subject to strict controls to ensure the external auditor’s independence is unaffected by
the provision of other services. The Group Audit Committee recognises that for certain assignments the auditors are best placed to
perform the work economically; for other work the Group selects the supplier best placed to meet its requirements. The Group’s auditors
are permitted to tender for such work in competition with other firms where the work is permissible under audit independence rules.
On 24 March 2016 Deloitte LLP (Deloitte) resigned as the Group’s auditors and at the Annual General Meeting on 4 May 2016 the
shareholders approved the appointment of Ernst & Young LLP (EY) as the Group’s auditor for the audit of the 2016 annual accounts.
EY remain the Group’s auditors for the audit of the 2017 annual accounts.
Amounts paid to the Group's auditors for statutory audit and other services are set out below:
EY
Fees payable for the audit of the Group’s annual accounts
- the audit of the company’s subsidiaries
- audit-related assurance services (2)
Total audit and audit-related assurance services fees
Other assurance services
Corporate finance services (3)
Total other services
Deloitte
Fees payable to the auditor and its associates for other services to the Group
- the audit of the company’s subsidiaries
- audit-related assurance services (5)
Total audit and audit-related assurance services fees
Other assurance services
Corporate finance services (6)
Total other services
Fees payable to the auditor and its associates in respect of audits of associated pension schemes
Total
2017
£m
4.0
22.9
4.3
31.2
1.7
0.2
1.9
2017
£m
—
—
—
—
—
—
—
—
—
2016 (1)
£m
4.0
20.7
4.0
28.7
3.4
0.2
3.6
2016 (4)
£m
—
0.2
0.5
0.7
0.1
1.3
1.4
0.1
2.2
Notes:
(1)
(2) Comprises fees of £1.1 million (2016 - £1.1 million) in relation to reviews of interim financial information, £2.5 million (2016 - £2.2 million) in respect of reports to the Group’s
Includes fees for the period EY were principal Group auditor (2016 - 1 January 2016 – 31 December 2016; Deloitte 2016 to effective resignation on 24 March 2016.)
regulators in the UK and overseas, £0.7 million (2016 - £0.7 million) in relation to non-statutory audit opinions.
(3) Comprises fees of £0.2 million (2016 - £0.2 million) in respect of work performed by the auditors as reporting accountants on debt and equity issuances undertaken by the
Group.
Includes fees for the period Deloitte were principal Group auditor (2016 1 January 2016 to effective resignation on 24 March 2016)
(4)
(5) Comprises no fees (2016 - nil) in relation to revenues of interim financial information, no fees (2016 - £10 million) in respect of reports to the Group’s regulators in the UK and
overseas, no fees (2016 - £0.2 million) in respect of internal controls assurance, and no fees in relation to non-statutory audit opinions.
(6) Comprises no fees (2016 £1.4 million) in respect of work performed by the auditors as reporting accountants as debt and equity issuances undertake by the Group, including
securitisations, no fees (2016 - £0.1 million), and no fees (2016 – nil) in relation to working capital report in correction with a circular to shareholders.
274
Notes on the consolidated accounts
6 Tax
Current tax:
Charge for the year
Over provision in respect of prior years
Deferred tax:
Credit for the year
Reduction in the carrying value of deferred tax assets
(Under)/over provision in respect of prior years
Tax charge for the year
2017
£m
2016
£m
(1,018)
227
(791)
108
(30)
(111)
(824)
(1,126)
186
(940)
246
(317)
(155)
(1,166)
2015
£m
(249)
220
(29)
—
—
6
(23)
The actual tax charge differs from the expected tax charge computed by applying the standard rate of UK corporation tax of 19.25%
(2016 – 20.00%; 2015 – 20.25%) as follows:
Expected tax (charge)/credit
Losses and temporary differences in year where no deferred tax asset recognised
Foreign profits taxed at other rates
UK tax rate change impact (1)
Non-deductible goodwill impairment
Items not allowed for tax:
- losses on disposals and write-downs
- UK bank levy
- regulatory and legal actions
- other disallowable items
Non-taxable items
Taxable foreign exchange movements
Losses brought forward and utilised
Reduction in carrying value of deferred tax asset in respect of:
- UK losses
Banking surcharge
Adjustments in respect of prior years (2)
Actual tax charge
2017
£m
(431)
(303)
104
(7)
—
(69)
(45)
(56)
(110)
134
27
11
(30)
(165)
116
(824)
2016
£m
816
(742)
340
6
—
(45)
(41)
(952)
(141)
136
(57)
10
(317)
(210)
31
(1,166)
2015
£m
547
(1,086)
510
94
(124)
(23)
(50)
(232)
(199)
173
19
122
—
—
226
(23)
Notes:
(1)
(2)
In recent years, the UK government has steadily reduced the rate of UK corporation tax, with the latest enacted rates standing at 20% with effect from 1 April 2015, 19% from
1 April 2017 and 17% from 1 April 2020. The Finance (No 2) Act 2015 restricts the rate at which tax losses are given credit in future periods to the main rate of UK corporation
tax, excluding the Banking Surcharge 8% rate introduced by this Act. Deferred tax assets and liabilities at 31 December 2017 take into account the reduced rates in respect of
tax losses and non-banking temporary differences and where appropriate, the banking surcharge inclusive rate in respect of other banking temporary differences.
Prior year tax adjustments incorporate refinements to tax computations made on submission and agreement with the tax authorities. Current taxation balances include
provisions in respect of uncertain tax positions, in particular in relation to restructuring and other costs where the taxation treatment remains subject to agreement with the
relevant tax authorities.
275
Notes on the consolidated accounts
7 Earnings per ordinary share
Earnings per ordinary share have been calculated based on the following:
Earnings
Profit/(loss) attributable to ordinary shareholders
Loss from discontinued operations attributable to ordinary shareholders
Profit/(loss) from continuing operations attributable to ordinary shareholders
Weighted average number of shares (millions) (1)
Weighted average number of ordinary shares outstanding during the year
Effect of dilutive share options and convertible securities
Diluted weighted average number of ordinary shares outstanding during the year
2017
£m
752
—
752
2016
£m
2015
£m
(6,955)
—
(6,955)
(1,979)
(1,207)
(3,186)
11,867
69
11,936
11,692
51
11,743
11,516
60
11,576
Note:
(1) All periods include the effect of 51 billion B shares that were converted to 5.1 billion ordinary shares in October 2015 (see Note 25).
There were no basic earnings/(loss) per ordinary share from
discontinued operations (2016 - nil; 2015 – 10.5p). There were no
diluted earnings per ordinary share from discontinued operations
(2016 – nil; 2015 – 10.4p).
An agreement on 25 June 2014 between RBS and Her Majesty’s
Treasury (HMT) set out the terms for the retirement of the
Dividend Access Share (DAS).
On 22 March 2016 the DAS was retired on payment the final
dividend of £1,193 million to HMT; the DAS was re-designated as
a single B share which was then cancelled.
Earnings per share for periods ended after 25 June 2014 and
prior to the retirement of the DAS reflect DAS dividends
recognised before the end of a reporting period; this amounted to
nil (2016 – £1,193; 2015- nil).
8 Financial instruments - classification
The following tables analyse financial assets and liabilities in accordance with the categories of financial instruments in IAS 39. Assets
and liabilities outside the scope of IAS 39 are shown within other assets and other liabilities.
Assets
Cash and balances at central banks
Loans and advances to banks
- reverse repos
- other (1)
Loans and advances to customers
- reverse repos
- other
Debt securities
Equity shares
Settlement balances
Derivatives
Other assets
31 December 2017
Cash and balances at central banks
Loans and advances to banks
- reverse repos
- other (1)
Loans and advances to customers
- reverse repos
- other
Debt securities
Equity shares
Settlement balances
Derivatives
Other assets
31 December 2016
Held-for-
trading
£m
—
11,845
6,889
24,427
15,320
27,481
29
—
157,876
—
243,867
—
11,120
6,780
26,586
17,504
24,504
166
—
242,192
—
328,852
Designated
as at fair value
through profit
or loss
£m
—
Hedging
derivatives
£m
Available-
for-sale
£m
—
Loans and
receivables
£m
98,337
Held-to-
maturity
£m
—
—
—
—
—
4,128
—
—
—
2,152
9,365
—
—
43,681
287
—
2,308
307,808
3,643
—
2,517
2,967
2,967
—
43,968
—
426,130
—
4,128
—
74,250
—
—
1,740
10,498
—
—
39,254
365
—
2,341
305,437
3,968
—
5,526
—
—
—
—
—
4,769
—
4,789
4,789
—
39,619
—
403,760
—
4,769
—
—
—
56
—
134
—
190
—
—
—
—
82
27
172
—
281
Note:
(1)
Includes items in the course of collection from other banks of £1,017 million (2016 - £781 million).
Other
assets
£m
Total
£m
98,337
13,997
16,254
26,735
323,184
78,933
450
2,517
160,843
16,806
16,806
16,806 738,056
74,250
12,860
17,278
28,927
323,023
72,522
703
5,526
246,981
16,586
16,586
16,586 798,656
276
Notes on the consolidated accounts
8 Financial instruments - classification continued
Liabilities
Deposits by banks
- repos
- other (1)
Customer accounts
- repos
- other (2)
Debt securities in issue (3)
Settlement balances
Short positions
Derivatives
Subordinated liabilities
Other liabilities
31 December 2017
Deposits by banks
- repos
- other (1)
Customer accounts
- repos
- other (2)
Debt securities in issue (3)
Settlement balances
Short positions
Derivatives
Subordinated liabilities
Other liabilities
31 December 2016
Designated
as at fair value
through profit
or loss
£m
Hedging
derivatives
£m
Amortised cost
£m
Other
liabilities
£m
—
—
—
874
3,403
—
—
939
—
5,216
—
—
—
1,506
4,621
—
—
955
—
7,082
3,389
27,007
6,669
354,647
26,049
2,844
11,783
2,181
3,571
3,571
434,569
1,114
12,561
3,910
339,588
21,010
3,645
18,464
2,010
4,057
4,057
402,302
12,690
12,690
18,857
18,857
Held-for-
trading
£m
4,030
12,472
24,333
11,513
1,107
—
28,527
150,935
—
—
232,917
4,125
20,756
23,186
12,778
1,614
—
22,077
232,418
—
—
316,954
Total
£m
7,419
39,479
31,002
367,034
30,559
2,844
28,527
154,506
12,722
14,871
688,963
5,239
33,317
27,096
353,872
27,245
3,645
22,077
236,475
19,419
20,867
749,252
Notes:
(1) Includes items in the course of transmission to other banks of £214 million (2016 - £295 million).
(2) The carrying amount of other customer accounts designated as at fair value through profit or loss is £114 million (2016 - £155 million) higher than the principal amount. No
amounts have been recognised in profit or loss for changes in credit risk associated with these liabilities as the changes are immaterial both during the period and cumulatively.
Measured as the change in fair value from movements in the period in the credit risk premium payable.
(3) Comprises bonds and medium term notes of £25,922 million (2016 - £24,037 million) and certificates of deposit and other commercial paper of £4,637 million
(2016 - £3,208 million).
Amounts included in operating profit/(loss) before tax:
Gains on financial assets/liabilities designated as at fair value through profit or loss
Losses on disposal or settlement of loans and receivables
2017
£m
60
(35)
2016
£m
13
(277)
2015
£m
388
(558)
277
Notes on the consolidated accounts
8 Financial instruments - classification continued
The tables below present information on financial assets and financial liabilities that are offset on the balance sheet under IFRS or
subject to enforceable master netting agreement together with financial collateral received or given.
2017
Assets
Derivatives
Reverse repos
Loans to customers
Settlement balances
Liabilities
Derivatives
Repos
Customer accounts
Settlement balances
2016
Assets
Derivatives
Reverse repos
Loans to customers
Settlement balances
Liabilities
Derivatives
Repos
Customer accounts
Settlement balances
Offsetable instruments
Offsetable potential not recognised by IFRS
Gross
£m
IFRS
offset
£m
Balance
sheet
£m
Effect of
master netting
and similar
agreements
£m
Cash
collateral
£m
Net amount after
Instruments
Other the effect of netting
arrangements and
related collateral
£m
financial
collateral
£m
outside
netting
arrangements
£m
Balance
sheet total
£m
175,670
78,991
1,110
685
(17,088) 158,582
35,017
(43,974)
—
(1,110)
17
(668)
(128,287)
(329)
—
—
(20,311)
—
—
—
(5,850)
(34,646)
—
—
256,456
(62,840) 193,616
(128,616)
(20,311)
(40,496)
170,405
80,088
641
1,620
(17,557) 152,848
36,114
(43,974)
—
(641)
952
(668)
(128,287)
(329)
—
—
(18,035)
—
—
—
(3,952)
(35,785)
—
—
252,754
(62,840) 189,914
(128,616)
(18,035)
(39,737)
293,728
69,805
600
1,711
(51,080) 242,648
38,077
(31,728)
—
(600)
182
(1,529)
(197,288)
(1,052)
—
—
(28,742)
—
—
—
(8,435)
(36,938)
—
—
365,844
(84,937) 280,907
(198,340)
(28,742)
(45,373)
284,255
61,742
1,106
1,677
(50,574) 233,681
30,014
(31,728)
—
(1,106)
148
(1,529)
(197,288)
(1,052)
—
—
(20,417)
—
—
—
(11,048)
(28,960)
—
—
348,780
(84,937) 263,843
(198,340)
(20,417)
(40,008)
4,134
42
—
17
4,193
2,574
—
—
952
3,526
8,183
87
—
182
8,452
4,928
2
—
148
5,078
2,261 160,843
40,732
5,715
323,184 323,184
2,517
2,500
333,660 527,276
1,658 154,506
38,421
2,307
367,034 367,034
2,844
1,892
372,891 562,805
4,333 246,981
41,787
3,710
323,023 323,023
5,526
5,344
336,410 617,317
2,794 236,475
32,335
2,321
353,872 353,872
3,645
3,497
362,484 626,327
Loans and deposits on the balance sheet include cash collateral given or taken against the derivative portfolio. Where offset is available
but not recognised under IFRS, this is reflected in the cash collateral column.
278
Notes on the consolidated accounts
9 Financial instruments - valuation
Valuation of financial instruments carried at fair value
Control environment
RBS's control environment for the determination of the fair value
of financial instruments includes formalised protocols for the
review and validation of fair values independent of the
businesses entering into the transactions. There are specific
controls to ensure consistent pricing policies and procedures,
incorporating disciplined price verification. RBS ensures that
appropriate attention is given to bespoke transactions, structured
products, illiquid products and other instruments which are
difficult to price.
Independent price verification (IPV)
IPV is a key element of the control environment. Valuations are
first performed by the business which entered into the
transaction. Such valuations may be directly from available
prices, or may be derived using a model and variable model
inputs. These valuations are reviewed, and if necessary
amended, by a team independent of those trading the financial
instruments, in the light of available pricing evidence.
IPV differences are classified according to the quality of
independent market observables into IPV quality bands linked to
the fair value hierarchy principles, as laid out in IFRS 13 ‘Fair
Value Measurement’. These differences are classified into fair
value levels 1, 2 and 3 (with the valuation uncertainty risk
increasing as the levels rise from 1 to 3) and then further
classified into high, medium, low and indicative depending on the
quality of the independent data available to validate the prices.
Valuations are revised if they are outside agreed thresholds.
Governance framework
IPV takes place at least each month end date, for all fair value
positions. The IPV control includes formalised reporting and
escalation of any valuation differences in breach of established
thresholds. The Pricing Unit determines IPV policy, monitors
adherence to that policy and performs additional independent
reviews of highly subjective valuation issues.
The Modelled Product Review Committee sets the policy for
model documentation, testing and review, and prioritises models
with significant exposure being reviewed by the RBS Pricing
Model Risk team. The NatWest Markets Valuation Committee is
made up of valuation specialists and senior business
representatives from various functions and oversee pricing,
reserving and valuations issues. This committee meets monthly
to review and ratify any methodology changes. The Executive
Valuation Committee meets quarterly to address key material and
subjective valuation issues, to review items escalated by the
NatWest Markets Valuation Committee and to discuss other
relevant matters including prudential valuation.
Valuation hierarchy
Initial classification of a financial instrument is carried out by the
Product Control team following the principles in IFRS 13. They
base their judgment on information gathered during the IPV
process for instruments which include the sourcing of
independent prices and model inputs. The quality and
completeness of the information gathered in the IPV process
gives an indication as to the liquidity and valuation uncertainty of
an instrument.
These initial classifications are reviewed and challenged by the
Pricing Unit and are also subject to senior management review.
Particular attention is paid to instruments crossing from one level
to another, new instrument classes or products, instruments that
are generating significant profit and loss and instruments where
valuation uncertainty is high.
Valuation techniques
RBS derives fair value of its instruments differently depending on
whether the instrument is a non-modelled or a modelled product.
Non-modelled products
Non-modelled products are valued directly from a price input
typically on a position by position basis and include cash, equities
and most debt securities.
Modelled products
Modelled products valued using a pricing model range in
complexity from comparatively vanilla products such as interest
rate swaps and options (e.g. interest rate caps and floors)
through to more complex derivatives. The valuation of modelled
products requires an appropriate model and inputs into this
model. Sometimes models are also used to derive inputs (e.g. to
construct volatility surfaces). RBS uses a number of modelling
methodologies.
Inputs to valuation models
Values between and beyond available data points are obtained
by interpolation and extrapolation. When utilising valuation
techniques, the fair value can be significantly affected by the
choice of valuation model and by underlying assumptions
concerning factors such as the amounts and timing of cash flows,
discount rates and credit risk. The principal inputs to these
valuation techniques are as follows:
Bond prices - quoted prices are generally available for
government bonds, certain corporate securities and some
mortgage-related products.
Credit spreads - where available, these are derived from
prices of credit default swaps or other credit based
instruments, such as debt securities. For others, credit
spreads are obtained from pricing services. For counterparty
credit spreads, adjustments are made to market prices (or
parameters) when the creditworthiness of the counterparty
differs from that of the assumed counterparty in the market
price (or parameters).
279
Notes on the consolidated accounts
9 Financial instruments - valuation continued
Interest rates - these are principally benchmark interest
rates such as the London Interbank Offered Rate (LIBOR),
Overnight Index Swaps (OIS) rate and other quoted interest
rates in the swap, bond and futures markets.
Foreign currency exchange rates - there are observable
prices both for spot and forward contracts and futures in the
world's major currencies.
Equity and equity index prices - quoted prices are generally
readily available for equity shares listed on the world's major
stock exchanges and for major indices on such shares.
Commodity prices - many commodities are actively traded in
spot and forward contracts and futures on exchanges in
London, New York and other commercial centres.
Price volatilities and correlations - volatility is a measure of
the tendency of a price to change with time. Correlation
measures the degree which two or more prices or other
variables are observed to move together.
Prepayment rates - the fair value of a financial instrument
that can be prepaid by the issuer or borrower differs from
that of an instrument that cannot be prepaid. In valuing
prepayable instruments that are not quoted in active
markets, RBS considers the value of the prepayment option.
Recovery rates/loss given default - these are used as an
input to valuation models and reserves for asset-backed
securities 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.
Consensus pricing
RBS uses consensus prices for the IPV of some instruments. The
consensus service encompasses the equity, interest rate,
currency, commodity, credit, property, fund and bond markets,
providing comprehensive matrices of vanilla prices and a wide
selection of exotic products. NatWest Markets contributes to
consensus pricing services where there is a significant interest
either from a positional point of view or to test models for future
business use. Data sourced from consensus pricing services are
used for a combination of control processes including direct price
testing, evidence of observability and model testing. In practice
this means that RBS submits prices for all material positions for
which a service is available. Data from consensus services are
subject to the same level of quality review as other inputs used
for IPV process.
In order to determine a reliable fair value, where appropriate,
management applies valuation adjustments to the pricing
information gathered from the above sources. The sources of
independent data are reviewed for quality and are applied in the
IPV processes using a formalised input quality hierarchy. These
adjustments reflect RBS's assessment of factors that market
participants would consider in setting a price.
Furthermore, on an ongoing basis, RBS assesses the
appropriateness of any model used. To the extent that the price
determined by internal models does not represent the fair value
of the instrument, for instance in highly stressed market
conditions, RBS makes adjustments to the model valuation to
calibrate to other available pricing sources.
Where unobservable inputs are used, RBS may determine a
range of possible valuations derived from differing stress
scenarios to determine the sensitivity associated with the
valuation. When establishing the fair value of a financial
instrument using a valuation technique, RBS considers
adjustments to the modelled price which market participants
would make when pricing that instrument. Such adjustments
include the credit quality of the counterparty and adjustments to
compensate for model limitations.
Valuation reserves
When valuing financial instruments in the trading book,
adjustments are made to mid-market valuations to cover bid-offer
spread, liquidity and credit risk. A breakdown of valuation
adjustments is provided in Capital and risk management: Balance
sheet analysis - derivatives on page 204.
Credit valuation adjustments (CVA)
CVA represent an estimate of the adjustment to fair value that a
market participant would make to incorporate the counterparty
credit risk inherent in derivative exposures. CVA is actively
managed by a credit and market risk hedging process, and
therefore movements in CVA are partially offset by trading
revenue on the hedges.
The CVA is calculated on a portfolio basis reflecting an estimate
of the amount a third party would charge to assume the credit
risk.
Where a positive exposure exists to a counterparty that is
considered to be close to default, the CVA is calculated by
applying expected losses to the current level of exposure.
Otherwise, expected losses are applied to estimated potential
future positive exposures which are modelled to reflect the
volatility of the market factors which drive the exposures and the
correlation between those factors.
Expected losses are determined from market implied probabilities
of default and internally assessed recovery levels. The probability
of default is calculated with reference to observable credit
spreads and observable recovery levels. For counterparties
where observable data do not exist, the probability of default is
determined from the credit spreads and recovery levels of
similarly rated entities.
Collateral held under a credit support agreement is factored into
the CVA calculation. In such cases where RBS holds collateral
against counterparty exposures, CVA is held to the extent that
residual risk remains.
Bid-offer, liquidity and other reserves
Fair value positions are adjusted to bid (long positions) or offer
(short positions) levels, by marking individual cash positions
directly to bid or offer or by taking bid-offer reserves calculated on
a portfolio basis for derivatives exposures. The bid-offer
approach is based on current market spreads and standard
market bucketing of risk.
280
Notes on the consolidated accounts
9 Financial instruments - valuation continued
Bid-offer adjustments for each risk factor (including delta (the
degree to which the price of an instrument changes in response
to a change in the price of the underlying), vega (the degree to
which the price of an instrument changes in response to the
volatility in the price of the underlying), correlation (the degree to
which prices of different instruments move together) are
determined by aggregating similar risk exposures arising on
different products. Additional basis bid-offer reserves are taken
where these are charged in the market.
Funding valuation adjustment (FVA)
FVA represents an estimate of the adjustment to fair value that a
market participant would make to incorporate funding costs and
benefits that arise in relation to uncollateralised derivative
exposures.
Funding levels are applied to estimated potential future
exposures, the modelling of which is consistent with the approach
used in the calculation of CVA. The counterparty contingent
nature of the exposures is reflected in the calculation.
Bid-offer spreads vary by maturity and risk type to reflect different
spreads in the market. For positions where there is no observable
quote, the bid-offer spreads are widened in comparison to
proxies to reflect reduced liquidity or observability. Bid-offer
methodologies may also incorporate liquidity triggers whereby
wider spreads are applied to risks above pre-defined thresholds.
As permitted by IFRS 13, netting is applied on a portfolio basis to
reflect the value at which RBS believes it could exit the portfolio,
rather than the sum of exit costs for each of the portfolio’s
individual trades. This is applied where the asset and liability
positions are managed as a portfolio for risk and reporting
purposes.
Vanilla risk on exotic products is typically reserved as part of the
overall portfolio based calculation e.g. delta and vega risk on
exotic products are included within the delta and vega bid-offer
calculations.
Product related risks such as correlation risk, attract specific bid-
offer reserves. Additional reserves are provided for exotic
products to ensure overall reserves match market close-out
costs. These market close-out costs inherently incorporate risk
decay and cross-effects (taking into account how changes in one
risk factor may affect other inputs rather than treating all risk
factors independently) that are unlikely to be adequately reflected
in a static hedge based on vanilla instruments. Where there is
limited bid-offer information for a product, the pricing approach
and risk management strategy are taken into account when
assessing the reserve.
Reserves are also held in relation to fair value funding costs that
are not within the scope of FVA, potential losses arising from
receivables where there is a counterparty dispute and certain
uncollateralised derivatives after the pricing impact of a
significant novation in 2017 was incorporated into transactions of
a similar nature.
The discount rates applied to derivative cash flows in determining
fair value reflect any underlying collateral agreements.
Collateralised derivatives are generally discounted at the relevant
OIS-related rates at an individual trade level. Reserves are held
to the extent that the discount rates applied do not reflect all of
the terms of the collateral agreements.
Amounts deferred on initial recognition
On initial recognition of financial assets and liabilities valued
using valuation techniques incorporating information other than
observable market data, any difference between the transaction
price and that derived from the valuation technique is deferred.
Such amounts are recognised in profit or loss over the life of the
transaction; when market data becomes observable; or when the
transaction matures or is closed out as appropriate. At 31
December 2017, net gains of £56 million (2016 - £72 million)
were carried forward. During the year, net gains of £64 million
(2016 - £27 million) were deferred and £80 million
(2016 - £48 million) were recognised in the income statement.
Own credit
RBS takes into account the effect of its own credit standing when
valuing financial liabilities recorded at fair value in accordance
with IFRS. Own credit spread adjustments are made when
valuing issued debt held at fair value, including issued structured
notes, and derivatives. An own credit adjustment is applied to
positions where it is believed that counterparties would consider
RBS's creditworthiness when pricing trades.
For issued debt this adjustment is based on debt issuance
spreads above average inter-bank rates (at a range of tenors).
Secondary senior debt issuance spreads are used in the
calculation of the own credit adjustment applied to senior debt.
The fair value of RBS's derivative financial liabilities is also
adjusted to reflect RBS's own credit risk through debit valuation
adjustments (DVA). Expected gains are applied to estimated
potential future negative exposures, the modelling of which is
consistent with the approach used in the calculation of CVA.
Expected gains are determined from market implied probabilities
of default and recovery levels. FVA is considered the primary
adjustment applied to derivative liabilities. The extent to which
DVA and FVA overlap is eliminated from DVA.
The own credit adjustment does not alter cash flows, is not used
for performance management, is disregarded for regulatory
capital reporting processes and will reverse over time provided
the liability is not repaid at a premium or a discount.
281
Notes on the consolidated accounts
9 Financial instruments - valuation continued
The own credit adjustments (OCA) recorded on held-for-trading (HFT) and designated as at fair value through profit or loss (DFV) debt
securities in issue, subordinated liabilities and derivative liabilities are set out below. The cumulative adjustments below represent
reductions/(increases) to the balance sheet liability amounts.
Cumulative own credit adjustment (2)
2017
2016
Carrying values of underlying liabilities
2017
2016
Debt Securities in issue (3)
HFT
£m
(47)
(34)
£bn
1.1
1.6
DFV
£m
(37)
(6)
£bn
3.4
4.6
Subordinated
liabilities DFV
£m
116
196
£bn
0.9
1.0
Derivatives
£m
—
81
Total
£m
32
237
Includes wholesale and retail note issuances.
Notes:
(1) The OCA does not alter cash flows and is not used for performance management.
(2)
(3) The reserve movement between periods will not equate to the reported profit or loss or other comprehensive income related to own credit. RBS has early adopted the provisions
within IFRS 9 Financial Instruments in respect of the presentation of gains and losses on financial liabilities designated at fair value through profit and loss from 1 January 2017.
The balance sheet reserve is stated by converting underlying currency balances at spot rates for each period, whereas the income statement includes intra-period foreign
exchange sell-offs.
(4) The cumulative adjustment for debt securities in issue is opposite to that for subordinated liabilities: debt securities in issue were issued relatively recently at wider than current
spreads, whilst many of the subordinated liabilities were issued before the financial crisis at significantly tighter spreads.
Key points
The cumulative OCA decrease during the year was mainly
due to the tightening of RBS issuance spreads. The OCA on
senior debt is determined by reference to secondary debt
issuance spreads, which tightened by 52 basis points at the
five year level to 10 basis points at 31 December 2017 (31
December 2016 – 62 basis points).
RBS subordinated debt spreads at the five year level
tightened to 169 basis points at 31 December 2017 (31
December 2016 – 281 basis points).
RBS five year CDS credit spreads tightened to 75 basis
points at 31 December 2017 (31 December 2016 – 125
basis points).
DVA in respect of derivative liabilities has reduced to nil
following the tightening in spreads in 2017, such that
adjustments overlap with FVA and are thus eliminated from
DVA.
Financial instruments: carried at fair value - valuation hierarchy
The following tables show financial instruments carried at fair value on the Group’s balance sheet by valuation hierarchy – level 1, level
2 and level 3 and related level 3 sensitivities.
Level 1
£bn
Level 2
£bn
Level 3
£bn
Total
£bn
Level 3 sensitivity (5)
Favourable (£m) Unfavourable (£m)
2017
Assets
Loans and advances
Debt securities
- of which AFS
Equity shares
- of which AFS
Derivatives
Proportion
Liabilities
Customer accounts
Debt securities in issue
Short positions
Derivatives
Subordinated liabilities
—
56.8
37.2
—
—
—
56.8
58.3
13.2
6.2
0.3
0.1
159.1
230.9
0.2
1.2
0.3
0.2
0.2
1.7
3.3
58.5
71.2
43.7
0.5
0.3
160.8
291.0
19.6%
79.3%
1.1%
100%
—
—
23.7
—
—
23.7
53.0
4.2
4.8
152.9
0.9
215.8
0.2
0.3
—
1.7
—
2.2
53.2
4.5
28.5
154.6
0.9
241.7
—
30
—
20
20
160
210
20
10
—
140
—
170
Proportion
9.8%
89.3%
0.9%
100%
For the notes to this table refer to the following page.
—
(10)
—
(30)
(20)
(170)
(210)
(20)
(10)
—
(140)
—
(170)
282
Notes on the consolidated accounts
9 Financial instruments: carried at fair value - valuation hierarchy continued
2016
Assets
Loans and advances
Debt securities (3)
- of which AFS
Equity shares
- of which AFS
Derivatives
Proportion
Liabilities
Customer accounts
Debt securities in issue
Short positions
Derivatives
Subordinated liabilities
Level 1
£bn
Level 2
£bn
Level 3
£bn
Total
£bn
Level 3 sensitivity (5)
Favourable (£m) Unfavourable (£m)
—
53.8
35.1
0.1
—
—
53.9
61.5
9.2
4.0
0.2
0.1
244.2
315.1
0.6
0.8
0.1
0.4
0.3
2.7
4.5
62.1
63.8
39.2
0.7
0.4
246.9
373.5
14.4%
84.4%
1.2%
100%
—
—
19.7
—
—
19.7
62.0
5.6
2.4
234.4
1.0
305.4
0.4
0.6
—
2.0
—
3.0
62.4
6.2
22.1
236.4
1.0
328.1
50
70
20
40
30
200
360
10
40
—
120
—
170
(50)
(20)
(10)
(50)
(40)
(200)
(320)
(20)
(40)
—
(120)
—
(180)
Proportion
6.0%
93.1%
0.9%
100%
Notes:
(1) Level 1: valued using unadjusted quoted prices in active markets, for identical financial instruments. Examples include G10 government securities, listed equity shares, certain
exchange-traded derivatives and certain US agency securities.
Level 2: valued using techniques based significantly on observable market data. Instruments in this category are valued using:
(a) quoted prices for similar instruments or identical instruments in markets which are not considered to be active; or
(b) valuation techniques where all the inputs that have a significant effect on the valuations are directly or indirectly based on observable market data.
Level 2 instruments include non-G10 government securities, most government agency securities, investment-grade corporate bonds, certain mortgage products, including
CLOs, most bank loans, repos and reverse repos, less liquid listed equities, state and municipal obligations, most notes issued, and certain money market securities and loan
commitments and most OTC derivatives.
Level 3: instruments valued using a valuation technique where at least one input which could have a significant effect on the instrument’s valuation, is not based on observable
market data. Level 3 instruments primarily include cash instruments which trade infrequently, certain syndicated and commercial mortgage loans, certain emerging markets
instruments, unlisted equity shares, certain residual interests in securitisations, asset-backed products and less liquid debt securities, certain structured debt securities in issue,
and OTC derivatives where valuation depends upon unobservable inputs such as certain credit and exotic derivatives. No gain or loss is recognised on the initial recognition of a
financial instrument valued using a technique incorporating significant unobservable data.
(2) Transfers between levels are deemed to have occurred at the beginning of the quarter in which the instruments were transferred. There were no significant transfers between
level 1 and level 2.
(3) For an analysis of debt securities (by issuer, measurement classification and analysis of asset backed securities) and derivatives (by type of contract) refer to Capital and risk
management - Credit risk.
(4) The determination of an instrument’s level cannot be made at a global product level as a single product type can be in more than one level. For example, a single name
corporate credit default swap could be in level 2 or level 3 depending on whether the reference counterparty’s obligations are liquid or illiquid.
(5) Sensitivity represents the favourable and unfavourable effect on the income statement or the statement of comprehensive income due to reasonably possible changes to
valuations using reasonably possible alternative inputs in RBS’s valuation techniques or models. Level 3 sensitivities are calculated on a trade or low level portfolio basis and
hence these aggregated figures do not reflect the correlation between some of the sensitivities. In particular, for some portfolios, the sensitivities may be negatively correlated
where a downward movement in one asset would produce an upward movement in another, but due to the additive presentation above, this correlation cannot be shown.
283
Notes on the consolidated accounts
9 Financial instruments: valuation techniques
The table below shows a breakdown of valuation techniques and the ranges for those unobservable inputs used in valuation models
and techniques that have a material impact on the valuation of level 3 financial instruments.
Financial instruments
Loans and advances
Debt securities
Equity shares
Assets
0.2
1.2
0.2
Level 3 (£bn)
Liabilities Valuation technique
Unobservable inputs
Range
Low
High
0%
100.53%
0
99.94%
369.81 GBP
101.84%
Price
Price
Price
Price-based
Price-based
Price-based
Price-based
Valuation
Valuation
Price
Discount factor
Fund NAV
0.164 585,066 GBP
13%
120%
9%
80%
Customer accounts
0.2
Debt securities in issue
DCF based on recoveries Correlation
Interest rate delta
(29%)
(0.38%)
86.05%
2.61%
0.3
Price-based
Valuation
Price
Fund NAV
56.77 JPY 148.68 EUR
0.202 977.24 GBP
Derivatives
Credit
1.7
0.2
1.7
0.1 DCF based on recoveries Credit spreads
Option pricing model
Interest and foreign exchange contracts
Equity
1.4
0.1
1.5 Option pricing model
0.1 Option pricing model
Correlation
Volatility
Upfront points
Recovery rate
Correlation
Volatility
Correlation
Forward
Volatility
0.1 bps
(50%)
38%
0%
10%
(75%)
0%
(57%)
146%
7%
500 bps
80%
80%
99%
40%
100%
292%
95%
189%
11%
Notes:
(1) The table above excludes unobservable inputs where the impact on valuation is not significant. Movements in the underlying input may have a favourable or unfavourable
impact on the valuation depending on the particular terms of the contract and the exposure. For example, an increase in the credit spread of a bond would be favourable for the
issuer but unfavourable for the note holder. Whilst RBS indicates where it considers that there are significant relationships between the inputs, there inter-relationships will be
affected by macro economic factors including interest rates, foreign exchange rates or equity index levels.
(2) Credit spreads and discount margins: credit spreads and margins express the return required over a benchmark rate or index to compensate for the credit risk associated with a
cash instrument. A higher credit spread would indicate that the underlying instrument has more credit risk associated with it. Consequently, investors require a higher yield to
compensate for the higher risk. The discount rate comprises credit spread or margin plus the benchmark rate; it is used to value future cash flows.
(3) Price and yield: There may be a range of prices used to value an instrument that may be a direct comparison of one instrument or portfolio with another or, movements in a more
liquid instrument may be used to indicate the movement in the value of a less liquid instrument. The comparison may also be indirect in that adjustments are made to the price to
reflect differences between the pricing source and the instrument being valued, for example different maturity, credit quality, seniority or expected pay-outs. Similarly to price, an
instrument’s yield may be compared with other instruments’ yields either directly or indirectly.
(4) Recovery rate: reflects market expectations about the return of principal for a debt instrument or other obligations after a credit event or on liquidation. Recovery rates tend to
move conversely to credit spreads.
(5) Valuation: for private equity investments, risk may be measured by beta, estimated by looking at past prices of similar stocks and from valuation statements where valuations are
usually derived from earnings measures such as EBITDA or net asset value.
(6) Correlation: measures the degree by which two 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. Correlations typically include relationships between: default probabilities of assets in a basket (a group of separate
assets), exchange rates, interest rates and other financial variables.
(7) Volatility: a measure of the tendency of a price to change with time.
(8)
(9) Upfront points: where CDS contracts are standardised, the inherent spread of the trade may exceed the standard premium paid or received under the contract. Upfront points
Interest rate delta: these ranges represent the low/high marks on the relevant discounting curve.
will compensate for the difference between the standard premium and the actual premium at the start of the contract.
(10) RBS does not have any material liabilities measured at fair value that are issued with an inseparable third party credit enhancement.
284
Notes on the consolidated accounts
9 Financial instruments - valuation continued
The Level 3 sensitivities on the previous page are calculated at a
trade or low level portfolio basis. They are not calculated on an
overall portfolio basis and therefore do not reflect the likely
potential uncertainty on the portfolio as a whole. The figures are
aggregated and do not reflect the correlated nature of some of
the sensitivities. In particular, for some of the portfolios the
sensitivities may be negatively correlated where a downwards
movement in one asset would produce an upwards movement in
another, but due to the additive presentation of the above figures
this correlation cannot be displayed. The actual potential
downside sensitivity of the total portfolio may be less than the
non-correlated sum of the additive figures as shown in the above
table.
Areas of judgment
Whilst the business has simplified, the diverse range of products
historically traded by RBS results in a wide range of instruments
that are classified into Level 3 of the hierarchy. Whilst the
majority of these instruments naturally fall into a particular level,
for some products an element of judgment is required. The
majority of RBS financial instruments carried at fair value are
classified as Level 2: inputs are observable either directly (i.e. as
a price) or indirectly (i.e. derived from prices).
Active and inactive markets
A key input in the decision making process for the allocation of
assets to a particular level is market activity. In general, the
degree of valuation uncertainty depends on the degree of liquidity
of an input.
Where markets are liquid, little judgment is required. However,
when the information regarding the liquidity in a particular market
is not clear, a judgment may need to be made. This can be more
difficult as assessing the liquidity of a market is not always
straightforward. For an equity traded on an exchange, daily
volumes of trading can be seen, but for an over-the-counter
(OTC) derivative assessing the liquidity of the market with no
central exchange is more difficult.
A key related matter is where a market moves from liquid to
illiquid or vice versa. Where this change is considered to be
temporary, the classification is not changed. For example, if there
is little market trading in a product on a reporting date but at the
previous reporting date and during the intervening period the
market has been considered to be liquid, the instrument will
continue to be classified in the same level in the hierarchy. This is
to provide consistency so that transfers between levels are driven
by genuine changes in market liquidity and do not reflect short
term or seasonal effects. Material movements between levels are
reviewed quarterly.
The breadth and depth of the IPV data allows for a rules based
quality assessment to be made of market activity, liquidity and
pricing uncertainty, which assists with the process of allocation to
an appropriate level. Where suitable independent pricing
information is not readily available, the quality assessment will
result in the instrument being assessed as Level 3.
Modelled products
For modelled products the market convention is to quote these
trades through the model inputs or parameters as opposed to a
cash price equivalent. A mark-to-market is derived from the use
of the independent market inputs calculated using RBS’s model.
The decision to classify a modelled instrument as Level 2 or 3 will
be dependent upon the product/model combination, the currency,
the maturity, the observability and quality of input parameters and
other factors. All these must be assessed to classify the asset.
If an input fails the observability or quality tests then the
instrument is considered to be in Level 3 unless the input can be
shown to have an insignificant effect on the overall valuation of
the product.
The majority of derivative instruments for example vanilla interest
rate swaps, foreign exchange swaps and liquid single name
credit derivatives are classified as Level 2 as they are vanilla
products valued using observable inputs. The valuation
uncertainty on these is considered to be low and both input and
output testing may be available.
Non-modelled products
Non-modelled products are generally quoted on a price basis and
can therefore be considered for each of the three levels. This is
determined by the market activity, liquidity and valuation
uncertainty of the instruments which is in turn measured from the
availability of independent data used by the IPV process to
allocate positions to IPV quality levels.
The availability and quality of independent pricing information are
considered during the classification process. An assessment is
made regarding the quality of the independent information. For
example, where consensus prices are used for non-modelled
products, a key assessment of the quality of a price is the depth
of the number of prices used to provide the consensus price. If
the depth of contributors falls below a set hurdle rate, the
instrument is considered to be Level 3. This hurdle rate is that
used in the IPV process to determine the IPV quality rating.
However, where an instrument is generally considered to be
illiquid, but regular quotes from market participants exist, these
instruments may be classified as Level 2 depending on frequency
of quotes, other available pricing and whether the quotes are
used as part of the IPV process or not.
For some instruments with a wide number of available price
sources, there may be differing quality of available information
and there may be a wide range of prices from different sources.
In these situations the highest quality source is used to determine
the classification of the asset. For example, a tradable quote
would be considered a better source than a consensus price.
285
Notes on the consolidated accounts
9
Financial instruments: level 3 portfolios and sensitively
methodologies
Reasonably plausible alternative assumptions of unobservable
inputs are determined based on a specified target level of
certainty of 90%. The assessments recognise different favourable
and unfavourable valuation movements where appropriate. Each
unobservable input within a product is considered separately and
sensitivity is reported on an additive basis.
Alternative assumptions are determined with reference to all
available evidence including consideration of the following:
quality of independent pricing information taking into account
consistency between different sources, variation over time,
perceived tradability or otherwise of available quotes; consensus
service dispersion ranges; volume of trading activity and market
bias (e.g. one-way inventory); day 1 profit or loss arising on new
trades; number and nature of market participants; market
conditions; modelling consistency in the market; size and nature
of risk; length of holding of position; and market intelligence.
Other considerations
Whilst certain inputs used to calculate CVA, FVA and own credit
adjustments are not based on observable market data, the
uncertainty of the inputs is not considered to have a significant
effect on the net valuation of the related derivative portfolios and
issued debt. The classification of the derivative portfolios and
issued debt is not determined by the observability of these inputs
and any related sensitivity does not form part of the Level 3
sensitivities presented.
Level 3
The following table shows the movement in level 3 assets and liabilities in the year.
At 1 January
Amount recorded in the income statement (1)
Amount recorded in the statement of comprehensive
income
Level 3 transfers in
Level 3 transfers out
Issuances
Purchases
Settlements
Sales
Foreign exchange and other adjustments
At 31 December
Amounts recorded in the income statement in respect
of balances held at year end
- unrealised
- realised
FVTPL
assets (2)
£m
4,111
(654)
—
719
(1,015)
371
1,789
(161)
(2,354)
(16)
2,790
2017
2016
AFS
assets
£m
426
82
2
275
(3)
—
19
—
(301)
(2)
Total
assets
£m
4,537
(572)
2
994
(1,018)
371
1,808
(161)
(2,655)
(18)
Total
liabilities
£m
2,997
(341)
—
530
(672)
—
412
(423)
(323)
5
498
3,288
2,185
FVTPL
assets (2)
£m
3,152
(124)
—
2,135
(1,020)
3
1,298
(758)
(624)
49
4,111
AFS
assets
£m
765
5
71
29
(113)
—
42
—
(382)
9
Total
assets
£m
3,917
(119)
71
2,164
(1,133)
3
1,340
(758)
(1,006)
58
Total
liabilities
£m
2,716
(70)
—
1,408
(1,052)
35
600
(610)
(87)
57
426
4,537
2,997
(84)
276
4
—
(80)
276
595
(100)
29
282
11
(4)
40
278
13
(34)
Notes:
(1) There were £240 million net losses on HFT instruments (2016 - £45 million) recorded in income from trading activities in continuing operations. Net gains on other instruments of
£9 million (2016 - £4 million losses) were recorded in other operating income and interest income as appropriate in continuing operations. There were no losses in discontinued
operations.
(2) Fair value through profit or loss comprises held-for-trading predominantly and designated at fair value through profit and loss.
286
Notes on the consolidated accounts
9 Financial instruments: fair value of financial instruments not carried at fair value
The following table shows the carrying value and fair value of financial instruments carried at amortised cost on the balance sheet.
Items where fair value
approximates
carrying value
£bn
Carrying
value
£bn
Fair value of hierarchy level
Fair value
£bn
Level 1
£bn
Level 2
£bn
Level 3
£bn
98.3
1.0
10.5
10.5
—
9.1
1.4
Total loans and advances to customers
310.1
306.8
2017
Financial assets
Cash and balances at central banks
Loans and advances to banks
Loans and advances to customers
UK PBB
- mortgages
- other
Ulster Bank RoI
- mortgages
- other
Commercial Banking
- commercial real estate
- other
Private Banking
RBS International
NatWest Markets
Central items & other
Of which:
Performing
Non-performing
Debt securities
Settlement balances
Financial liabilities
Deposits by banks
Customer accounts
Debt securities in issue
Settlement balances
Notes in circulation (1)
Subordinated liabilities
Note:
(1) Included in Accruals and other liabilities.
136.6
25.1
136.6
24.7
14.5
5.0
15.9
81.1
13.5
8.7
9.6
0.1
12.8
5.0
15.7
80.2
13.4
8.6
9.7
0.1
303.9
6.2
300.8
6.0
7.8
7.9
25.9
39.8
26.0
26.0
39.9
27.3
2.5
4.5
321.5
2.8
2.2
—
—
—
—
—
—
—
—
—
—
—
—
—
4.3
—
—
—
—
—
—
—
—
0.1
—
—
1.2
—
1.3
1.3
—
1.5
136.6
24.7
12.8
5.0
15.7
80.1
13.4
8.6
8.5
0.1
305.5
299.5
6.0
2.1
22.4
12.9
22.2
3.6
27.0
5.1
11.8
12.6
—
12.5
0.1
287
Notes on the consolidated accounts
9 Financial instruments - fair value of financial instruments not carried at fair value continued
Items where fair value
approximates
carrying value
£bn
Carrying
value
£bn
Fair value of hierarchy level
Fair value
£bn
Level 1
£bn
Level 2
£bn
Level 3
£bn
74.3
0.8
11.4
11.5
—
3.3
8.2
Total loans and advances to customers
307.8
306.0
2016*
Financial assets
Cash and balances at central banks
Loans and advances to banks
Loans and advances to customers
UK PBB
- mortgages
- other
Ulster Bank RoI
- mortgages
- other
Commercial Banking
- commercial real estate
- other
Private Banking
RBS International
NatWest Markets
Central items & other
Of which:
Performing
Non-performing
Debt securities
Settlement balances
Financial liabilities
Deposits by banks
Customer accounts
Debt securities in issue
Settlement balances
Notes in circulation (1)
Subordinated liabilities
* Re-presented to reflect segment reorganisation.
Note:
(1)
Included in Accruals and other liabilities.
137.5
15.2
138.4
14.7
14.4
4.5
16.6
83.7
12.2
8.5
13.1
2.1
12.3
4.5
16.4
84.4
12.2
8.3
12.7
2.1
300.4
7.4
298.8
7.2
8.7
8.8
9.4
35.1
21.0
9.5
35.2
21.6
5.5
4.3
308.4
3.6
2.0
—
—
—
—
—
—
—
—
—
—
—
—
—
5.0
—
—
—
—
—
—
—
—
0.1
—
—
0.8
—
0.9
0.9
—
0.3
138.4
14.7
12.3
4.5
16.4
84.3
12.2
8.3
11.9
2.1
305.1
297.9
7.2
3.5
6.2
10.9
17.1
3.3
24.3
4.5
18.5
18.5
—
18.4
0.1
288
Notes on the consolidated accounts
9
Financial instruments: fair value of financial instruments not
carried at fair value continued
The fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. Quoted market
values are used where available; otherwise, fair values have
been estimated based on discounted expected future cash flows
and other valuation techniques. These techniques involve
uncertainties and require assumptions and judgments covering
prepayments, credit risk and discount rates. Furthermore there is
a wide range of potential valuation techniques. Changes in these
assumptions would significantly affect estimated fair values. The
fair values reported would not necessarily be realised in an
immediate sale or settlement.
The assumptions and methodologies underlying the calculation of
fair values of financial instruments at the balance sheet date are
as follows:
Short-term financial instruments
For certain short-term financial instruments: cash and balances at
central banks, items in the course of collection from other banks,
settlement balances, items in the course of transmission to other
banks, customer demand deposits and notes in circulation,
carrying value is a reasonable approximation of fair value.
Loans and advances to banks and customers
In estimating the fair value of loans and advances to banks and
customers measured at amortised cost, RBS’s loans are
segregated into appropriate portfolios reflecting the
characteristics of the constituent loans. Two principal methods
are used to estimate fair value:
(a) Contractual cash flows are discounted using a market
discount rate that incorporates the current spread for the
borrower or where this is not observable, the spread for
borrowers of a similar credit standing. This method is used
for portfolios where counterparties have external ratings:
institutional and corporate lending in NatWest Markets.
(b) Expected cash flows (unadjusted for credit losses) are
discounted at the current offer rate for the same or similar
products. This approach is adopted for lending portfolios in
UK PBB, Ulster Bank RoI, Commercial Banking (SME loans)
and Private Banking in order to reflect the homogeneous
nature of these portfolios.
For certain portfolios where there are very few or no recent
transactions, such as Ulster Bank RoI’s portfolio of lifetime
tracker mortgages, a bespoke approach is used.
Debt securities
The majority of debt securities are valued using quoted prices in
active markets, or using quoted prices for similar assets in active
markets. Fair values of the rest are determined using discounted
cash flow valuation techniques.
Deposits by banks and customer accounts
Fair values of deposits are estimated using discounted cash flow
valuation techniques.
Debt securities in issue and subordinated liabilities
Fair values are determined using quoted prices for similar
liabilities where available or by reference to valuation techniques,
adjusting for own credit spreads where appropriate.
10 Financial instruments - maturity analysis
Remaining maturity
The following table shows the residual maturity of financial instruments, based on contractual date of maturity.
Assets
Cash and balances at central banks
Loans and advances to banks
Loans and advances to customers
Debt securities
Equity shares
Settlement balances
Derivatives
Liabilities
Deposits by banks
Customer accounts
Debt securities in issue
Settlement balances and short positions
Derivatives
Subordinated liabilities
Less than
12 months
£m
98,337
30,153
108,990
17,204
—
2,517
32,372
27,303
394,587
7,940
4,938
32,212
2,383
2017
More than
12 months
£m
—
98
240,929
61,729
450
—
128,471
19,595
3,449
22,619
26,433
122,294
10,339
Total
£m
98,337
30,251
349,919
78,933
450
2,517
160,843
46,898
398,036
30,559
31,371
154,506
12,722
Less than
12 months
£m
74,250
30,078
115,925
19,530
—
5,526
61,719
32,043
377,328
6,689
5,010
60,878
1,062
2016
More than
12 months
£m
—
60
236,025
52,992
703
—
185,262
6,513
3,640
20,556
20,712
175,597
18,357
Total
£m
74,250
30,138
351,950
72,522
703
5,526
246,981
38,556
380,968
27,245
25,722
236,475
19,419
289
Notes on the consolidated accounts
10 Financial instruments – maturity analysis continued
Assets and liabilities by contractual cash flow maturity
The tables below show the contractual undiscounted cash flows
receivable and payable, up to a period of 20 years, including
future receipts and payments of interest of financial assets and
liabilities by contractual maturity. The balances in the following
tables do not agree directly with the consolidated balance sheet,
as the tables include all cash flows relating to principal and future
coupon payments, presented on an undiscounted basis. The
tables have been prepared on the following basis:
Financial assets have been reflected in the time band of the
latest date on which they could be repaid, unless earlier
repayment can be demanded by RBS. Financial liabilities are
included at the earliest date on which the counterparty can
require repayment, regardless of whether or not such early
repayment results in a penalty. If the repayment of a financial
instrument is triggered by, or is subject to, specific criteria such
as market price hurdles being reached, the asset is included in
the time band that contains the latest date on which it can be
repaid, regardless of early repayment.
The liability is included in the time band that contains the earliest
possible date on which the conditions could be fulfilled, without
considering the probability of the conditions being met.
For example, if a structured note is automatically prepaid when
an equity index exceeds a certain level, the cash outflow will be
included in the less than three months period, whatever the level
of the index at the year end. The settlement date of debt
securities in issue, issued by certain securitisation vehicles
consolidated by RBS, depends on when cash flows are received
from the securitised assets. Where these assets are prepayable,
the timing of the cash outflow relating to securities assumes that
each asset will be prepaid at the earliest possible date. As the
repayments of assets and liabilities are linked, the repayment of
assets in securitisations is shown on the earliest date that the
asset can be prepaid, as this is the basis used for liabilities.
The principal amounts of financial assets and liabilities that are
repayable after 20 years or where the counterparty has no right
to repayment of the principal are excluded from the table, as are
interest payments after 20 years.
Held-for-trading assets of £243.9 billion (2016 - £328.9 billion)
and liabilities of £232.9 billion (2016 - £317.0 billion) have been
excluded from the following tables.
2017
Assets by contractual maturity
Cash and balances at central banks
Loans and advances to banks
Debt securities
Settlement balances
Total maturing assets
Loans and advances to customers
Derivatives held for hedging
Liabilities by contractual maturity
Deposits by banks
Debt securities in issue
Subordinated liabilities
Settlement balances and other liabilities
Total maturing liabilities
Customer accounts
Derivatives held for hedging
Maturity gap
Cumulative maturity gap
Guarantees and commitments notional amount
Guarantees (1)
Commitments (2)
For the notes to this table refer to following page.
0-3 months
£m
3-12 months
£m
1-3 years
£m
3-5 years
£m
5-10 years
£m
10-20 years
£m
98,337
10,792
3,675
2,517
115,321
45,898
281
161,500
9,180
4,106
87
5,030
18,403
356,594
212
375,209
96,918
96,918
7,718
121,229
128,947
—
633
5,889
—
6,522
32,031
832
39,385
1,740
4,322
2,645
—
8,707
4,298
289
13,294
(2,185)
94,733
—
—
—
—
94
11,960
—
12,054
65,077
1,336
78,467
3,614
10,474
1,515
—
15,603
1,218
1,188
18,009
(3,549)
91,184
—
—
—
—
—
11,312
—
11,312
52,016
334
63,662
16,023
3,731
1,620
—
21,374
77
526
21,977
(10,062)
81,122
—
—
—
—
—
12,813
—
12,813
68,500
166
81,479
61
9,762
7,746
—
17,569
20
813
18,402
(4,756)
76,366
—
—
—
—
—
3,638
—
3,638
81,995
111
85,744
71
49
2,582
—
2,702
28
738
3,468
936
77,302
—
—
—
290
Notes on the consolidated accounts
10 Financial instruments – maturity analysis continued
2016
Assets by contractual maturity
Cash and balances at central banks
Loans and advances to banks
Debt securities
Settlement balances
Total maturing assets
Loans and advances to customers
Derivatives held for hedging
Liabilities by contractual maturity
Deposits by banks
Debt securities in issue
Subordinated liabilities
Settlement balances and other liabilities
Total maturing liabilities
Customer accounts
Derivatives held for hedging
Maturity gap
Cumulative maturity gap
Guarantees and commitments notional amount
Guarantees (1)
Commitments (2)
0-3 months
£m
3-12 months
£m
1-3 years
£m
3-5 years
£m
5-10 years
£m
10-20 years
£m
73,822
11,753
4,999
5,526
96,100
47,915
455
144,470
7,205
2,269
996
5,673
16,143
338,436
205
354,784
79,957
79,957
7,867
134,324
142,191
428
438
5,424
—
6,290
33,443
1,178
40,911
33
4,537
966
—
5,536
4,943
405
10,884
754
80,711
—
—
—
—
47
11,262
—
11,309
65,027
2,319
78,655
1,285
7,239
4,835
—
13,359
1,484
1,329
16,172
(2,050)
78,661
—
—
—
—
—
8,567
—
8,567
52,675
531
61,773
5,050
5,381
2,638
—
13,069
149
584
13,802
(4,502)
74,159
—
—
—
—
—
13,541
—
13,541
65,427
337
79,305
78
7,604
12,421
—
20,103
51
854
21,008
(6,562)
67,597
—
—
—
—
—
3,291
—
3,291
77,710
125
81,126
79
798
2,532
—
3,409
35
857
4,301
(118)
67,479
—
—
—
Notes:
(1) RBS is only called upon to satisfy a guarantee when the guaranteed party fails to meet its obligations. RBS expects most guarantees it provides to expire unused.
(2) RBS has given commitments to provide funds to customers under undrawn formal facilities, credit lines and other commitments to lend subject to certain conditions being met by
the counterparty. RBS does not expect all facilities to be drawn, and some may lapse before drawdown.
11 Financial assets - impairments
The following table shows the movement in the provision for impairment losses on loans and advances.
At 1 January
Currency translation and other adjustments
Disposals
Amounts written-off
Recoveries of amounts previously written-off
Losses/(releases) to income statement
Unwind of discount (recognised in interest income)
At 31 December (1)
Notes:
(1)
(2) The table above excludes impairments relating to securities.
Includes nil relating to loans and advances to banks (2016 - nil).
Impairment losses/(releases) charged to the income statement
Loans and advances to customers
Loans and advances to banks
Securities
Individually
assessed
£m
1,395
(39)
(5)
(453)
29
229
(24)
Collectively
assessed
£m
2,660
9
—
(757)
127
315
(62)
1,132
2,292
Latent
£m
400
4
—
—
—
(14)
—
390
2017
£m
530
—
530
(37)
493
2017
£m
4,455
(26)
(5)
(1,210)
156
530
(86)
3,814
2016
£m
537
—
537
(59)
478
2016
£m
7,119
500
(2)
(3,695)
109
537
(113)
4,455
2015
£m
(849)
(4)
(853)
126
(727)
291
Notes on the consolidated accounts
11 Financial assets - impairments continued
The following tables analyse impaired financial assets.
Loans and receivables
Loans and advances to customers (1)
2017
2016
Cost
£m
Provision
£m
Carrying
value
£m
Cost
£m
Provision
£m
Carrying
value
£m
7,423
3,424
3,999
8,865
4,055
4,810
Note:
(1)
Impairment provisions individually assessed on balances of £3,418 million (2016 - £4,186 million).
Available-for-sale securities
Debt securities
Equity shares
Loans and receivables
Debt securities
Carrying value
2017
£m
2
20
1
23
2016
£m
33
23
2
58
Financial and non-financial assets recognised on the balance sheet, obtained during the year by taking possession of collateral or
calling on other credit enhancements, were £30 million (2016 - £30 million).
In general, RBS seeks to dispose of property and other assets not readily convertible into cash, obtained by taking possession of
collateral, as rapidly as the market for the individual asset permits.
12 Derivatives
Companies within RBS transact derivatives as principal either as
a trading activity or to manage balance sheet foreign exchange,
interest rate and credit risk.
RBS enters into fair value hedges, cash flow hedges and hedges
of net investments in foreign operations. The majority of RBS’s
interest rate hedges relate to the management of RBS’s non-
trading interest rate risk. RBS manages this risk within approved
limits. Residual risk positions are hedged with derivatives
principally interest rate swaps. Suitable larger financial
instruments are fair value hedged; the remaining exposure,
where possible, is hedged by derivatives documented as cash
flow hedges and qualifying for hedge accounting. The majority of
RBS’s fair value hedges involve interest rate swaps hedging the
interest rate risk in recognised financial assets and financial
liabilities. Cash flow hedges relate to exposures to the variability
in future interest payments and receipts on forecast transactions
and on recognised financial assets and financial liabilities. RBS
hedges its net investments in foreign operations with currency
borrowings and forward foreign exchange contracts.
For cash flow hedge relationships of interest rate risk, the hedged
items are actual and forecast variable interest rate cash flows
arising from financial assets and financial liabilities with interest
rates linked to LIBOR, EURIBOR or the Bank of England Official
Bank Rate. The financial assets are customer loans and the
financial liabilities are customer deposits and LIBOR linked
medium-term notes and other issued securities. At 31 December
2017 variable rate financial assets of £91 billion (2016 - £81
billion) and variable rate financial liabilities of £69 billion (2016 -
£55 billion) were hedged in such cash flow hedge relationships.
For cash flow hedging relationships, the initial and ongoing
effectiveness is assessed by comparing movements in the fair
value of the expected highly probable forecast interest cash flows
with movements in the fair value of the expected changes in cash
flows from the hedging interest rate swap. Hedge effectiveness is
measured on a cumulative basis over a time period management
feels appropriate. The method of calculating hedge
ineffectiveness is the hypothetical derivative method.
For fair value hedge relationships of interest rate risk, the hedged
items are typically large corporate fixed-rate loans, government
securities, fixed rate finance leases, fixed rate medium-term
notes or preference shares classified as debt. At 31 December
2017, fixed rate financial assets of £36 billion (2016 - £29 billion)
and fixed rate financial liabilities of £22 billion (2016 - £23 billion)
were hedged by interest rate swaps in fair value hedge
relationships.
The initial and ongoing effectiveness of fair value hedge
relationships is assessed on a cumulative basis by comparing
movements in the fair value of the hedged item attributable to the
hedged risk with changes in the fair value of the hedging interest
rate swap over a time period management feels is appropriate.
292
Notes on the consolidated accounts
12 Derivatives continued
Exchange rate contracts
Spot, forwards and futures
Currency swaps
Options purchased
Options written
Interest rate contracts
Interest rate swaps
Options purchased
Options written
Futures and forwards
Credit derivatives
Equity and commodity contracts
2017
2016
Notional
amount
£bn
1,900
666
419
440
8,058
1,162
1,032
1,764
38
3
Assets
£m
Liabilities
£m
19,283
11,163
8,765
—
99,065
21,733
—
147
531
156
19,172
13,534
—
8,975
91,025
—
21,021
114
558
107
Notional
amount
£bn
2,271
821
670
683
Assets
£m
Liabilities
£m
35,817
22,139
17,486
—
33,986
25,053
—
18,109
11,523
1,518
1,181
2,403
139,004
31,457
—
63
127,151
—
31,298
36
42
21
682
333
557
285
160,843
154,506
246,981
236,475
Included in the table above are derivatives held for hedging purposes as follows:
Fair value hedging
Interest rate contracts
Cash flow hedging
Interest rate contracts
Exchange rate contacts
Net investment hedging
Exchange rate contracts
1,989
63
11
2,967
1,295
37
28
3,571
2017
Assets
£m
Liabilities
£m
2016
Assets
£m
Liabilities
£m
904
2,211
1,365
2,612
Hedge ineffectiveness recognised in other operating income in continuing operations comprised:
Fair value hedging
(Losses)/gains on the hedged items attributable to the hedged risk
Gains/(losses) on the hedging instruments
Fair value hedging ineffectiveness
Cash flow hedging ineffectiveness
2017
£m
(48)
78
30
9
39
Substantially all forecast receivable hedged cash flows occur within 5 years (2016 - 5 years) and substantially all forecast payable cash
flows occur within 10 years (2016 – 10 years); the income statement is impacted over the same periods.
293
3,079
259
86
4,789
2016
£m
1,146
(1,117)
29
(29)
—
1,419
—
26
4,057
2015
£m
110
(39)
71
(23)
48
Notes on the consolidated accounts
13 Debt securities
2017
Held-for-trading
Designated as at fair value through profit or loss
Available-for-sale
Loans and receivables
Held-to-maturity
Available-for-sale
Gross unrealised gains
Gross unrealised losses
2016
Held-for-trading
Designated as at fair value through profit or loss
Available-for-sale
Loans and receivables
Held-to-maturity
Available-for-sale
Gross unrealised gains
Gross unrealised losses
Note:
(1)
Includes covered bonds.
Central and local government
UK
£m
3,514
—
17,656
—
4,128
US
£m
3,667
—
8,461
—
—
Other
£m
14,736
—
11,454
—
—
25,298
12,128
26,190
Banks
£m
1,844
—
2,218
—
—
4,062
Other
financial
institutions
£m
2,746
—
3,784
3,501
—
Corporate
£m
974
—
108
142
—
Total
£m
27,481
—
43,681
3,643
4,128
10,031
1,224
78,933
Of which
ABS (1)
£m
870
—
1,826
3,500
—
6,196
703
(19)
67
(70)
324
(16)
8
(4)
24
(7)
1
(1)
1,127
(117)
12
—
2,615
—
10,581
—
4,769
4,133
—
6,953
—
—
14,087
25
15,678
—
—
17,965
11,086
29,790
821
—
1,852
—
—
2,673
2,299
2
4,072
3,774
—
10,147
549
—
118
194
—
861
24,504
27
39,254
3,968
4,769
72,522
886
—
2,263
3,814
—
6,963
768
(16)
56
(123)
504
(13)
8
(1)
93
(43)
2
(2)
1,431
(198)
75
(32)
Gross gains of £58 million (2016 - £115 million) and gross losses of £12 million (2016 - £107 million) were realised on the sale of
available-for-sale securities in continuing operations.
There were no gross gains or losses in discontinued operations in 2017 or 2016.
The following table analyses available-for-sale debt securities and the related yield (based on weighted averages) by remaining maturity
and issuer.
2017
Central and local governments
- UK
- US
- other
Banks
Other financial institutions
Corporate
0-1 years
1-5 years
5-10 years
Amount
£m
1,152
455
4,716
619
987
26
7,955
Yield
%
1.7
0.8
0.7
0.6
1.2
1.9
0.9
Amount
£m
Yield
%
Amount
£m
7,000
4,243
3,405
1,287
1,983
63
17,981
2.5
1.9
1.5
0.9
1.1
1.9
1.9
5,814
2,221
2,230
312
491
19
11,087
Yield
%
2.0
2.1
1.1
0.6
1.0
1.0
1.7
Over 10 years
Amount
£m
Yield
%
Total
Amount
£m
3,690
1,542
1,103
—
323
—
6,658
3.2
2.8
2.6
—
0.4
—
2.9
17,656
8,461
11,454
2,218
3,784
108
43,681
Yield
%
2.4
2.1
1.2
0.8
1.1
1.8
1.8
Of which ABS (1)
263
0.4
1,009
0.5
231
-
323
0.1
1,826
0.4
2016
Central and local governments
- UK
- US
- other
Banks
Other financial institutions
Corporate
1,722
41
5,104
798
451
27
8,143
0.9
1.9
1.1
0.5
1.1
0.7
1.0
2,900
2,797
5,942
965
2,282
56
14,942
5.2
1.9
1.0
0.4
1.1
0.7
2.0
3,318
2,799
3,444
89
848
35
10,533
3.5
2.1
1.2
0.3
0.9
0.7
2.1
2,641
1,316
1,188
—
491
—
5,636
3.0
3.0
2.4
—
0.3
—
2.6
10,581
6,953
15,678
1,852
4,072
118
39,254
3.4
2.2
1.2
0.5
1.0
0.7
1.9
Of which ABS (1)
377
0.8
974
0.5
415
—
497
—
2,263
0.3
Note:
(1)
Includes covered bonds.
294
Notes on the consolidated accounts
14 Equity shares
Held-for-trading
Designated as at fair value through profit or loss
Available-for-sale
Available-for-sale
Gross unrealised gains
Gross unrealised losses
Listed
£m
7
6
35
48
20
—
20
2017
Unlisted
£m
22
128
252
402
47
(8)
39
Total
£m
29
134
287
450
67
(8)
59
Listed
£m
106
3
30
139
13
—
13
2016
Unlisted
£m
60
169
335
564
48
(8)
40
Total
£m
166
172
365
703
61
(8)
53
Gross gains of £89 million (2016 - £73 million) and gross losses of £1 million (2016 - £10 million) were realised on the sale of available-
for-sale equity shares in continuing operations. There were no gains or losses in discontinued operations.
Dividend income from available-for-sale equity shares was £13 million (2016 - £13 million) in continuing operations and nil (2016 - nil) in
discontinued operations.
Unquoted equity investments whose fair value cannot be reliably measured are carried at cost and classified as available-for-sale
financial assets. Unquoted equity shares generated no material gains or losses in 2017 or 2016.
15 Intangible assets
Cost
At 1 January
Currency translation and other adjustments
Additions
Disposals and write-off of fully amortised assets
At 31 December
Accumulated amortisation and impairment
At 1 January
Currency translation and other adjustments
Disposals and write-off of fully amortised assets
Charge for the year
Write down of goodwill and other intangible assets
At 31 December
Goodwill
£m
17,756
283
—
—
18,039
12,198
283
—
—
—
12,481
2017
Other (1)
£m
2,095
(3)
384
(217)
2,259
1,173
(5)
(145)
222
29
1,274
Total
£m
19,851
280
384
(217)
20,298
13,371
278
(145)
222
29
13,755
Goodwill
£m
16,483
1,273
—
—
17,756
10,925
1,273
—
—
—
12,198
2016
Other (1)
£m
2,190
76
480
(651)
2,095
1,211
70
(471)
204
159
1,173
Total
£m
18,673
1,349
480
(651)
19,851
12,136
1,343
(471)
204
159
13,371
Net book value at 31 December
5,558
985
6,543
5,558
922
6,480
Note:
(1) Principally internally generated software.
295
Notes on the consolidated accounts
15 Intangible assets continued
The Group's goodwill acquired in business combinations is
reviewed annually at 31 December for impairment.
Impairment testing involves the comparison of the carrying value
of each cash-generating unit (CGU) with its recoverable amount.
The carrying values of the segments reflect the equity allocations
made by management which are consistent with the Group’s
capital targets. Recoverable amount is the higher of fair value
and value in use. Value in use is the present value of expected
future cash flows from the CGU. Fair value is the price that would
be received to sell an asset in an orderly transaction between
market participants.
Impairment testing inherently involves a number of judgmental
areas: the preparation of cash flow forecasts for periods that are
beyond the normal requirements of management reporting; the
assessment of the discount rate appropriate to the business;
estimation of the fair value of CGUs; and the valuation of the
separable assets of each business whose goodwill is being
reviewed.
The impact of sensitivity to the more significant variables in each
assessment is presented in the tables on the following page.
The recoverable amounts for all CGUs at 31 December 2017
were based on value in use, using management's latest five-year
revenue and cost forecasts. The long-term growth rates have
been based on expected nominal growth of the CGUs. The pre-
tax risk discount rates are based on those observed to be applied
to businesses regarded as peers of the CGUs.
The annual review at 31 December 2017 indicated no impairment
to goodwill.
The analysis of goodwill by reportable segment is shown in Note
37.
The carrying value of goodwill and the amount by which it is exceeded by the recoverable amount are set out below by reportable
segment, along with the key assumptions applied in calculating the recoverable amount and sensitivities to changes in those
assumptions. The recoverable amount of UK Personal & Business Banking, Commercial Banking and RBS International were £21.6
billion (2016 - £23.9 billion), £13.7 billion (2016 - £14.1 billion) and £3.3 billion (2016 - £2.7 billion) respectively.
31 December 2017
UK Personal & Business Banking
Commercial Banking
RBS International
31 December 2016
UK Personal & Business Banking
Commercial Banking
RBS International
Assumptions
Terminal
Goodwill growth rate discount rate
%
£bn
%
Recoverable
Pre-tax amount exceeded
carrying value
£bn
adverse movement in
Discount
rate
£bn
Terminal
growth rate
£bn
adverse movement
Forecast
Income
£bn
Break
even
Forecast discount
rate
%
cost
£bn
Consequential impact of 1% Consequential impact of 5%
3.4
1.9
0.3
3.4
1.9
0.3
2.0
2.0
2.0
2.5
2.5
2.5
13.1
12.9
11.0
12.8
12.9
10.9
9.7
1.3
0.6
14.6
2.1
0.2
(1.8)
(1.2)
(0.4)
(2.3)
(1.2)
(0.3)
(1.2)
(0.8)
(0.3)
(1.5)
(0.8)
(0.2)
(1.3)
(0.7)
(0.1)
(1.2)
(0.7)
(0.1)
(0.6)
(0.4)
—
21.6
13.9
12.8
(0.6)
(0.4)
—
27.0
14.7
11.7
Other intangible assets are reviewed for indicators of impairment. In 2017 £29 million (2016 - £159 million) of previously capitalised
software was impaired primarily as a result of software which is no longer expected to derive future economic benefit.
16 Property, plant and equipment
2017
Cost or valuation
At 1 January
Transfers to disposal groups
Currency translation and other adjustments
Reclassifications
Additions
Change in fair value of investment properties
Disposals and write-off of fully depreciated assets
At 31 December
Accumulated impairment, depreciation and amortisation
At 1 January
Transfers to disposal groups
Currency translation and other adjustments
Reclassifications
Write down of property, plant and equipment
Disposals and write-off of fully depreciated assets
Charge for the year
At 31 December
Investment
properties
£m
Freehold
premises
£m
Long
leasehold
premises
£m
Short
leasehold
premises
£m
Computers
and other
equipment
£m
Operating
lease
assets
£m
1,095
—
18
—
8
(14)
(14)
1,093
—
—
—
—
—
—
—
—
2,736
(405)
(36)
109
691
—
(80)
3,015
1,177
(223)
(35)
57
122
(34)
88
1,152
152
(10)
—
—
5
—
(14)
133
72
(5)
—
—
—
(14)
5
58
75
1,247
(1)
—
(109)
66
—
(218)
985
799
(1)
—
(57)
—
(176)
64
629
356
2,467
(21)
(17)
—
148
—
(208)
2,369
1,784
(18)
(18)
—
3
(159)
161
1,753
1,313
—
(1)
—
199
—
(447)
1,064
588
—
—
—
—
(266)
143
465
Total
£m
9,010
(437)
(36)
—
1,117
(14)
(981)
8,659
4,420
(247)
(53)
—
125
(649)
461
4,057
616
599
4,602
296
Net book value at 31 December
1,093
1,863
Notes on the consolidated accounts
16 Property, plant and equipment continued
2016
Cost or valuation
At 1 January
Currency translation and other adjustments
Reclassifications
Additions
Change in fair value of investment properties
Disposals and write-off of fully depreciated
assets
At 31 December
Accumulated impairment, depreciation and
amortisation
At 1 January
Currency translation and other adjustments
Reclassifications
Write down of property, plant and equipment
Disposals and write-off of fully depreciated
assets
Charge for the year
At 31 December
Long
Short
Computers
Operating
Investment
Freehold
leasehold
leasehold
and other
properties
£m
premises
£m
premises
£m
premises
£m
equipment
£m
915
140
—
103
(11)
(52)
1,095
—
—
—
—
—
—
—
2,559
91
46
215
—
(175)
2,736
1,090
70
9
71
(137)
74
1,177
177
5
—
5
—
(35)
152
87
3
—
—
(22)
4
72
80
1,259
73
(46)
79
—
(118)
1,247
759
53
(9)
—
(86)
82
799
448
2,305
108
—
282
—
(228)
2,467
1,677
97
—
7
(180)
183
1,784
lease
assets
£m
1,556
25
—
228
—
(496)
1,313
676
9
—
—
(250)
153
588
Total
£m
8,771
442
—
912
(11)
(1,104)
9,010
4,289
232
—
78
(675)
496
4,420
Net book value at 31 December
1,095
1,559
683
725
4,590
Investment property valuations principally employ present value
techniques that discount expected cash flows. Expected cash
flows reflect rental income, occupancy and residual market
values; valuations are sensitive to changes in these factors. The
fair value measurement of non-specialised properties in locations
where the market for such properties is active and transparent
are categorised as level 2 - 2% (2016 - 2%); otherwise
investment property fair value measurements are categorised as
level 3 - 98% (2016 - 98%). A 5% change in the most sensitive
assumption, residual values, is £40 million.
Valuations were carried out by qualified surveyors who are
members of the Royal Institution of Chartered Surveyors, or an
equivalent overseas body; property with a fair value of £201
million (2016 - £222 million) was valued by independent valuers.
Rental income from investment properties was £84 million (2016
- £79 million). Direct operating expenses of investment properties
in continuing operations were £9 million (2016 - £16 million).
17 Prepayments, accrued income and other assets
Prepayments
Accrued income
Interests in associates (1)
Pension schemes in net surplus (refer to Note 4)
Tax recoverable
Other assets
2017
£m
392
378
1,410
392
27
1,127
3,726
2016
£m
350
412
1,509
276
71
1,082
3,700
Note:
(1)
Interests in associates includes interest in Alawwal Bank £1,052 million (2016 - £1,083 million) and Business Growth Fund £316 million (2016 - £256 million).
297
Notes on the consolidated accounts
18 Discontinued operations and assets and liabilities of disposal groups
(a) Profit/(loss) from discontinued operations, net of tax
Citizens
Interest receivable
Interest payable
Net interest income
Non-interest income
Total income
Operating expenses
Profit before impairment losses
Impairment losses
Operating profit before tax
Tax charge
Profit after tax
Provision for gain on disposal of subsidiary
Gain on disposal of subsidiary
Provision for loss on disposal of interest in associate
Gain on disposal of interest in associate
Profit from Citizens discontinued operation, net of tax
Other
Profit from other discontinued operations, net of tax
Total profit from discontinued operations, net of tax
2017
£m
2016
£m
2015
£m
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,433
(144)
1,289
615
1,904
(1,181)
723
(103)
620
(212)
408
10
1,147
(130)
90
1,525
16
1,541
RBS sold the final tranche of its interest in Citizens Financial Group, Inc (Citizens) during October 2015. Consequently, Citizens was
classified as a disposal group at 31 December 2014 and presented as a discontinued operation until October 2015. From 3 August 2015
until the final tranche was sold in October 2015, Citizens was an associated undertaking.
The gain on disposal in 2015 in relation to Citizens comprised £248 million on the derecognition of assets and liabilities, and £989
million in respect of reserves reclassified in accordance with IFRS.
There was no profit from discontinued operations attributable to non-controlling interests (2016 - nil; 2015 - £334 million).
(b) Operating cash flows attributable to discontinued operations
Included within the Group’s cash flows are the following amounts attributable to discontinued operations:
Net cash flows from operating activities
Net cash flows from investing activities
Net cash flows from financing activities
Net decrease in cash and cash equivalents
2017
£m
—
—
—
—
2016
£m
—
—
—
—
2015
£m
(57)
(6)
10
(58)
298
Notes on the consolidated accounts
18 Discontinued operations and assets and liabilities of disposal groups continued
(c) Assets and liabilities of disposal groups
Assets of disposal groups
Loans and advances to banks
Property, plant and equipment
Liabilities of disposal groups
Other liabilities
19 Short positions
Debt securities
- Government
- Other issuers
Equity shares
Note:
(1) All short positions are classified as held-for-trading.
20 Provisions for liabilities and charges
Provisions for liabilities and charges
At 1 January 2017
Currency translation and other movements
Charge to income statement
Releases to income statement
Provisions utilised
At 31 December 2017
Payment
protection
insurance (1)
£m
1,253
—
175
—
(375)
1,053
2017
£m
10
185
195
10
10
2017
£m
2016
£m
13
—
13
15
15
2016
£m
26,381
2,145
1
28,527
20,979
1,095
3
22,077
Other
Residential
customer mortgage backed
securities (2)
£m
redress
£m
Litigation
and other
Property
regulatory (3) and other (4) (5)
£m
£m
1,105
4
228
(54)
(413)
870
6,752
(541)
714
(50)
(3,632)
3,243
1,918
(31)
280
(156)
(1,370)
641
1,808
35
1,003
(209)
(687)
1,950
Total
£m
12,836
(533)
2,400
(469)
(6,477)
7,757
Notes:
(1) To reflect the increased volume of complaints following the FCA’s introduction of an August 2019 PPI timebar as outlined in FCA
announcement CP17/3 and the introduction of new Plevin (unfair commission) complaint handling rules, RBS increased its provision
for PPI by £175m in 2017 (2016 - £601 million, 2015 - £600 million, 2014 - £650 million) bringing the cumulative charge to £5.1
billion, of which £3.7 billion (74%) in redress and £0.4 billion in administrative expenses had been paid by 31 December 2017. Of the
£5.1 billion cumulative charge, £4.6 billion relates to redress and £0.5 billion to administrative expenses.
The principal assumptions underlying RBS’s provision in respect of PPI sales are: assessment of the total number of complaints that
RBS will receive before 29 August 2019; the proportion of these that will result in redress; and the average cost of such redress. The
number of complaints has been estimated from an analysis of RBS’s portfolio of PPI policies sold by vintage and by product.
Estimates of the percentage of policyholders that will lodge complaints (the take up rate) and of the number of these that will be
upheld (the uphold rate) have been established based on recent experience, guidance in FCA policy statements and the expected
rate of responses from proactive customer contact. The average redress assumption is based on recent experience and FCA
calculation rules. The table below shows the sensitivity of the provision to changes in the principal assumptions (all other
assumptions remaining the same).
Assumptions
Customer initiated complaints (1)
Uphold rate (2)
Average redress (3)
Processing costs per claim (4)
Actual to
date
2,386k
90%
£1,681
£160
Future
expected
429k
94%
£1,476
£142
Sensitivity
Change in
assumption
%
+/- 5
+/- 1
+/- 5
+/- £20
Consequential change in
provision
£m
+/- 30
+/- 6
+/- 30
+/- 3
Notes:
(1)
(2)
(3)
(4)
Claims received directly by RBS to date, including those received via CMCs and Plevin (commission) only. Excluding those for proactive mailings and where no PPI
policy exists.
Average uphold rate per customer initiated claims received directly by RBS to end of timebar for both PPI (mis-sale) and Plevin (commission), excluding those for which
no PPI policy exists.
Average redress for PPI (mis-sale) and Plevin (commission) pay-outs.
Processing costs per claim on a valid complaints basis, includes direct staff costs and associated overhead - excluding FOS fees.
299
Notes on the consolidated accounts
20 Provisions for liabilities and charges continued
Interest that will be payable on successful complaints has been included in the provision as has the estimated cost to RBS of
administering the redress process. There are uncertainties as to the eventual cost of redress which will depend on actual complaint
volumes, take up and uphold rates and average redress costs. Assumptions related to these are inherently uncertain and the
ultimate financial impact may be different from the amount provided. We continue to monitor the position closely and refresh the
underlying assumptions.
Background information in relation to PPI claims is given in Note 31.
(2) In the US, RBS is subject to civil litigation and various investigations relating to its issuance and underwriting of US mortgage-backed
securities (RMBS). An additional charge of US$650 million (£492 million) was taken in Q4 2017 in connection with these matters,
resulting in a year to date charge of US$971 million (£714 million). Detailed descriptions of RBS’s legal proceedings and discussion
of the associated uncertainties are given in Note 31.
In July 2017, RBS reached a settlement with the Federal Housing Finance Agency (FHFA) as conservator of Fannie Mae and
Freddie Mac, to resolve claims by FHFA in relation to RBS's issuance and underwriting of approximately US$32 billion (£25 billion)
of RMBS in the US. As part of the settlement, FHFA's outstanding litigation against RBS relating to those securities was withdrawn.
Under the settlement, RBS paid FHFA US$5.5 billion (£4.2 billion), of which US$754 million (£581 million) was reimbursed to RBS
under indemnification agreements with third parties. The cost to RBS (net of the indemnity mentioned above) of US$4.75 billion
(£3.65 billion) was largely covered by then-existing provisions but an incremental charge of US$196 million (£151 million) was
recorded in Q2 2017 in relation to the settlement.
(3) RBS is party to certain legal proceedings and regulatory investigations and continues to co-operate with a number of regulators. All
such matters are periodically reassessed with the assistance of external professional advisers, where appropriate, to determine the
likelihood of RBS incurring a liability and to evaluate the extent to which a reliable estimate of any liability can be made. Details of
these investigations and a discussion of the nature of the associated uncertainties are given in Note 31.
(4) RBS recognised a £750 million provision in 2016 as a consequence of the announcement that HM Treasury is seeking a revised
package of remedies that would conclude its remaining State Aid commitments. An additional charge of £50 million was taken in Q2
2017 following further revisions to the package, taking the total provision to £800 million.
(5) The majority of property provisions relate to vacant leasehold property and comprise the present value of the shortfall between
rentals payable and rentals receivable from sub-letting. In addition to the £800 million provision taken as an estimate of the cost of
completing RBS's State Aid divestment commitments as referred to in (4), other provisions include restructuring provisions of £482
million principally in relation to termination benefits.
21 Accruals and other liabilities
Notes in circulation
Current tax
Accruals
Deferred income
Other liabilities
2017
£m
2,186
227
1,074
469
2,436
6,392
2016
£m
2,028
336
1,311
483
2,833
6,991
300
Notes on the consolidated accounts
22 Deferred tax
Deferred tax asset
Deferred tax liability
Net deferred tax asset
Net deferred tax asset comprised:
Accelerated
capital
Pension allowances Provisions
£m
£m
£m
Fair
value of
financial
instruments
£m
Deferred
gains
£m
AFS
financial
assets Intangibles
£m
£m
2017
£m
(1,740)
583
(1,157)
Tax
losses
carried
forward
£m
2016
£m
(1,803)
662
(1,141)
Other
£m
Total
£m
Cash
flow
Share
hedging schemes
£m
£m
At 1 January 2016
Acquisitions and disposals
of subsidiaries
(Credit)/charge to income
statement
Charge/(credit) to other
comprehensive income
Currency translation and
other adjustments
At 1 January 2017
Acquisitions and disposals
of subsidiaries
Charge/(credit) to income
statement
Charge/(credit) to other
comprehensive income
Currency translation and
other adjustments
At 31 December 2017
(857)
238
(344)
132
21
100
4
253
(23)
(1,332)
59
(1,749)
(1)
(59)
—
3
—
4
—
—
—
—
1
(52)
(39)
149
25
(22)
1
(24)
—
(143)
13
317
(51)
226
240
—
(5)
(662)
33
361
—
(3)
—
1
(322)
114
—
(29)
—
—
3
(126)
55
(45)
(52)
—
(9)
—
193
—
—
—
424
—
22
—
2
73
—
(4)
1
5
(3)
—
(35)
300
(10)
(1,050)
19
28
10
(1,141)
—
—
—
—
—
(29)
—
102
1
121
(22)
33
266
—
—
(19)
—
23
—
(266)
—
—
—
4
—
(393)
(14)
192
1
(266)
3
53
—
(30)
—
92
—
5
—
136
—
(9)
(10)
(939)
(4)
(24)
2
(1,157)
Deferred tax assets in respect of unused tax losses are recognised if the losses can be used to offset probable future taxable profits
after taking into account the expected reversal of other temporary differences. Recognised deferred tax assets in respect of tax losses
are analysed further below.
UK tax losses carried forward
- The Royal Bank of Scotland plc
- National Westminster Bank Plc
- Ulster Bank Limited
Total
Overseas tax losses carried forward
- Ulster Bank Ireland DAC
2017
£m
125
541
14
680
259
939
2016
£m
182
605
14
801
249
1,050
301
Notes on the consolidated accounts
22 Deferred tax continued
UK tax losses
Under UK tax rules, tax losses can be carried forward indefinitely.
In periods from 1 April 2015, the Finance Act 2015 limits the
offset of losses carried forward by UK banks to 50% of profits. In
periods from 1 April 2016, the Finance Act 2016 further limits the
offset of losses carried forward by UK banks to 25% of profits.
The main rate of UK Corporation Tax reduced from 20% to 19%
from 1 April 2017 and will reduce to 17% from 1 April 2020.
Under the Finance (No 2) Act 2015, tax losses arising prior to 1
January 2016 are given credit in future periods at the main rate of
UK corporation tax, excluding the Banking Surcharge rate (8%)
introduced by the Act. Deferred tax assets and liabilities at 31
December 2017 take into account the reduced rates in respect of
tax losses and non-banking temporary differences and where
appropriate, the banking surcharge inclusive rate in respect of
other banking temporary differences.
The Royal Bank of Scotland plc – The Royal Bank of Scotland plc
expects that the balance of recognised deferred tax asset at 31
December 2017 of £125 million in respect of tax losses
amounting to c. £700 million will be substantially recovered by the
end of 2022. Since 2012 RBS has reported mixed levels of
taxable profits and losses because core banking profitability was
offset by a series of restructuring plans as the group reshaped to
meet commercial and regulatory demands. In total, £10,247
million of losses have not been recognised in the deferred tax
balance at 31 December 2017; such losses will be available to
offset 25% of future taxable profits in excess of those forecast in
the closing deferred tax asset.
National Westminster Bank plc – A deferred tax asset of £541
million has been recognised in respect of total losses of £3,092
million. The losses arose principally as a result of significant
impairment and conduct charges between 2009 and 2012 during
challenging economic conditions in the UK banking sector.
National Westminster Bank plc returned to tax profitability during
2015 and expects the deferred tax asset to be substantially
consumed by future taxable profits by the end of 2024. A
reduction in annual profits by £120 million would extend the
recovery of the deferred tax asset by one year.
Overseas tax losses
Ulster Bank Ireland DAC – A deferred tax asset of £259 million
has been recognised in respect of losses of £2,071 million of total
tax losses of £8,596 million carried forward at 31 December
2017. The losses arose principally as a result of significant
impairment charges between 2008 and 2013 during challenging
economic conditions in the Republic of Ireland; subsequent
movements reflect £: € exchange differences. Ulster Bank Ireland
DAC returned to profitability during 2014 and expects the
deferred tax asset to be substantially consumed by future taxable
profits by the end of 2024.
Unrecognised deferred tax
Deferred tax assets of £6,356 million (2016 - £7,940 million; 2015
- £6,349 million) have not been recognised in respect of tax
losses and other temporary differences carried forward of
£30,049 million (2016 - £33,376 million; 2015 - £27,483 million) in
jurisdictions where doubt exists over the availability of future
taxable profits. Of these losses and other temporary differences,
£4,335 million expire within five years and £7,208 million
thereafter. The balance of tax losses and other temporary
differences carried forward has no expiry date.
Deferred tax liabilities of £255 million (2016 - £258 million; 2015 -
£256 million) have not been recognised in respect of retained
earnings of overseas subsidiaries and held-over gains on the
incorporation of overseas branches. Retained earnings of
overseas subsidiaries are expected to be reinvested indefinitely
or remitted to the UK free from further taxation. No taxation is
expected to arise in the foreseeable future in respect of held-over
gains. Dividends received from overseas are largely exempt from
UK tax.
302
Notes on the consolidated accounts
23 Subordinated liabilities
Dated loan capital
Undated loan capital
Preference shares
2017
£m
10,394
2,169
159
12,722
2016
£m
15,288
2,775
1,356
19,419
Certain preference shares issued by the company are classified as liabilities; these securities remain subject to the capital maintenance
rules of the Companies Act 2006.
The following tables analyse the remaining contractual maturity of subordinated liabilities by the final redemption date and by the
next call date.
2017 - final redemption
Sterling
US dollar
Euro
Other
2017 - call date
Sterling
US dollar
Euro
Other
2016 - final redemption
Sterling
US dollar
Euro
Other
2016 - call date
Sterling
US dollar
Euro
Other
2018
£m
16
441
1,926
—
2,383
2018
£m
123
1,043
2,084
—
3,250
2017
£m
17
98
913
34
1,062
2017
£m
68
1,817
1,395
906
4,186
2019
£m
—
63
145
—
208
2020-2022
2023-2027
Thereafter
Perpetual
£m
354
1,704
271
—
2,329
£m
—
4,037
1,037
—
5,074
£m
—
517
301
—
818
£m
504
1,183
215
8
1,910
2019
2020-2022
2023-2027
Thereafter
Perpetual
£m
37
63
1,044
8
1,152
£m
466
1,705
271
—
2,442
£m
23
4,041
147
—
4,211
£m
21
1,078
300
—
1,399
£m
204
—
49
—
253
2018
2019-2021
2022-2026
Thereafter
Perpetual
£m
—
700
1,817
—
2,517
£m
369
168
243
—
780
£m
—
7,955
1,725
872
£m
—
967
263
—
10,552
1,230
£m
576
2,479
215
8
3,278
2018
2019-2021
2022-2026
Thereafter
Perpetual
£m
113
700
1,817
—
2,630
£m
407
168
1,108
—
1,683
£m
140
6,242
378
—
6,760
£m
22
1,186
263
—
1,471
£m
197
394
53
—
644
Currently
£m
—
15
—
—
15
Currently
£m
15
1,860
162
8
2,045
Total
£m
874
7,945
3,895
8
12,722
Total
£m
874
7,945
3,895
8
12,722
Total
£m
962
12,367
5,176
914
19,419
Total
£m
962
12,367
5,176
914
19,419
303
Notes on the consolidated accounts
23 Subordinated liabilities continued
Redemptions
The Royal Bank of Scotland Group plc
£200 million series 1 non cumulative convertible £0.01 preference shares 7.387%
(partial redemption)
US$ 1,000 million series 1 non cumulative convertible preference shares of US$ 0.01 9.118%
(partial redemption)
$156 million 7.65% Series F non-cumulative preference shares (callable)
$242 million 7.25% Series H non-cumulative preference shares (callable)
$751 million 5.75% Series L non-cumulative preference shares (callable)
US$ 750 million 6.8% (partial redemption)
US$ 1,285 million 5.90% Trust Preferred
US$ 200 million 6.25% Trust Preferred
US$ 1,800 million 6.08% Trust Preferred
€26 million 7.42% dated notes
€7 million 7.38% dated notes
US$ 25 million floating rate notes (partial redemption)
Ineligible
Ineligible
Ineligible
Ineligible
Ineligible
Tier 1
Tier 1
Tier 1
Tier 2
Tier 2
Tier 2
The Royal Bank of Scotland plc
€750 million 4.35% subordinated notes 2017
CHF124 million 9.375% subordinates notes March 2022
CAD420 million 10.50% subordinated notes March 2022
£564 million 10.50% subordinated notes March 2022
AU$880 million 13.125% subordinated notes March 2022
US$ 2,132 million 9.50% subordinated notes March 2022
€100 million floating rate subordinated notes 2017
£51 million 2.35% + 5 year UK Gilts yield undated subordinated notes (callable December 2012) Ineligible
Ineligible
£54 million 5.13% undated notes
Ineligible
CAD474 million 5.37% undated notes
Ineligible
€1 billion 4.625% dated notes
Tier 2
Tier 2
Tier 2
Tier 2
Tier 2
Tier 2
Tier 2
NatWest Plc
US$ 300 million 8.6250% non-cumulative preference shares (callable)
Tier 1
RBS NV and subsidiaries
€15 million floating rate notes 2022 (partial redemption)
€250 million 4.70% notes 2019 (partial redemption)
US$ 500 million 4.65% notes 2018 (partial redemption)
NatWest Holdings Limited
£20 million 11.75% perpetual tier two capital (partial redemption)
€38 million 11.375% perpetual tier two capital (partial redemption)
Note:
(1)
There were no issuances in 2017 or 2016.
Tier 2
Tier 2
Tier 2
Tier 2
Tier 2
Capital
treatment
£m
2017
£m
2016
£m
Ineligible
15
—
48
120
186
577
360
—
—
—
—
—
—
1,306
645
101
255
489
548
1,724
90
51
—
—
—
3,903
178
178
2
80
244
326
9
6
15
—
—
—
—
—
902
140
1,263
21
6
6
2,338
—
—
—
—
—
—
—
—
55
283
866
1,204
—
—
—
—
—
—
—
—
—
304
Total
£m
716
111
10
(42)
795
17
35
(25)
(59)
763
2016
000s
Notes on the consolidated accounts
24 Non-controlling interests
At 1 January 2016
Currency translation and other adjustments
Profit attributable to non-controlling interests
Equity withdrawn and disposals
At 1 January 2017
Currency translation and other adjustments
Profit attributable to non-controlling interests
Dividends paid
Equity withdrawn and disposals
At 31 December 2017
25 Share capital
RBS N.V.
£m
Other
interests
£m
662
108
6
(43)
733
22
30
(20)
(59)
706
54
3
4
1
62
(5)
5
(5)
—
57
Number of shares
Allotted, called up and fully paid
Ordinary shares of £1
Non-cumulative preference shares of US$0.01(1)
Non-cumulative convertible preference shares of US$0.01
Non-cumulative preference shares of €0.01
Non-cumulative convertible preference shares of £0.01
Non-cumulative preference shares of £1
Cumulative preference shares of £1
2017
£m
11,965
—
—
—
—
—
1
2016
£m
11,823
—
—
—
—
—
1
2017
000s
11,964,565
26,459
—
2,044
—
54
900
11,823,163
72,430
65
2,044
15
54
900
Note:
(1)
46 million shares with a total nominal value of £0.3 million were redeemed in September and December 2017. (2016 – 61.4 million shares with a total nominal value of £0.3
million were redeemed).
Movement in allotted, called up and fully paid ordinary shares
At 1 January 2016
Shares issued
At 1 January 2017
Shares issued
At 31 December 2017
Ordinary shares
There is no authorised share capital under the company’s
constitution. At 31 December 2017, the directors had authority
granted at the 2017 Annual General Meeting to issue up to
£1,184 million nominal of ordinary shares other than by pre-
emption to existing shareholders.
During 2017, the company allotted and issued the following new
ordinary shares of £1 each:
Month
April
June
September
Number
of shares
33.4m
29.0m
56.6m
Subscription
Gross
price per share
239.688p
259.046p
256.027p
proceeds
£80 million
£75 million
£145 million
In addition, the company issued 22 million ordinary shares of £1
each in connection with employee share plans. In October 2015,
the company allotted and issued 5.1 billion new ordinary shares
of £1 each to HM Treasury on conversion of 51 billion B shares.
The company did not pay an ordinary dividend in 2017 or 2016.
£m
11,625
198
11,823
142
Number of
shares - 000s
11,624,564
198,599
11,823,163
141,402
11,965
11,964,565
B shares and dividend access share
From December 2009, HM Treasury owned 51 billion B shares
with a nominal value of £0.01 each and a dividend access share
(DAS) with a nominal value of £0.01.
The B shares carried no voting rights at general meetings of
ordinary shareholders and were convertible at any time at HM
Treasury’s option into ordinary shares at the rate of ten B shares
for each ordinary share. In October 2015, all of the B shares were
converted into ordinary shares of £1 each.
In March 2016, a final payment of £1,193 million was made to
HM Treasury to retire the DAS. The terms for the removal of the
DAS were provided by the ‘DAS Retirement Agreement’ between
RBS and HM Treasury. In line with the terms of the DAS
Retirement Agreement, upon the final payment, the DAS lost its
preferential rights and become a single B share, which was
subsequently cancelled.
Preference shares
Under IFRS certain of RBS's preference shares are classified as
debt and are included in subordinated liabilities on the balance
sheet.
Other securities
Certain of RBS's subordinated securities in the legal form of debt
are classified as equity under IFRS.
305
Notes on the consolidated accounts
25 Share capital continued
These securities entitle the holders to interest which may be
deferred at the sole discretion of the company. Repayment of the
securities is at the sole discretion of the company on giving
between 30 and 60 days notice.
In December 2017, the company redeemed in whole the Series
F, H, L and 1 non-cumulative preference shares of US$0.01 and
Series 1 non-cumulative convertible preference shares of £0.01.
In September 2016, the company redeemed in whole the Series
R and T, non-cumulative preference shares of US$0.01.
Non-cumulative preference shares
Non-cumulative preference shares entitle the holders thereof
(subject to the terms of issue) to receive periodic non-cumulative
cash dividends at specified fixed rates for each Series payable
out of distributable profits of the company.
The non-cumulative preference shares are redeemable at the
option of the company, in whole or in part from time to time at the
rates detailed in the table below plus dividends otherwise payable
for the then current dividend period accrued to the date of
redemption.
In the context of macro-prudential policy discussions, the Board
decided to partially neutralise any impact on CET1 capital of
coupon and dividend payments from 2013 onwards. £300 million
of new equity was issued during the course of 2017 and the
Board has decided a further £300 million of new equity will be
issued during the course of 2018 to again partially neutralise the
CET1 impact of coupon and dividend payments.
Class of preference share
Non-cumulative preference shares of US$0.01
Series S
Series U
Non-cumulative preference shares of €0.01
Series 1
Series 2
Series 3
Non-cumulative preference shares of £1
Series 1
Number of shares
Redemption
Redemption
in issue
Interest rate
date on or after price per share Debt/equity (1)
26.4 million
10,130
US$25
30 June 2012
6.60%
floating 29 September 2017 US$100,000
Equity
Equity
1.25 million
784,989
5.50% 31 December 2009
30 June 2010
5.25%
3 month
€ 1,000
€ 1,000
Equity
Equity
9,429
LIBOR + 2.33% 29 September 2017
€ 50,000
Equity
54,442
3 month
LIBOR + 2.33%
5 October 2012
£1,000
Equity
Note:
(1) Those preference shares where RBS has an obligation to pay dividends are classified as debt; those where distributions are discretionary are classified as equity. The
conversion rights attaching to the convertible preference shares may result in RBS delivering a variable number of equity shares to preference shareholders; these convertible
preference shares are treated as debt.
In the event that the non-cumulative convertible preference
shares are not redeemed on or before the redemption date, the
holder may convert them into ordinary shares in the company at
the prevailing market price.
Under existing arrangements, no redemption or purchase of any
non-cumulative preference shares may be made by the company
without the prior consent of the Prudential Regulation Authority.
On a winding-up or liquidation of the company, the holders of the
non-cumulative preference shares are entitled to receive, out of
any surplus assets available for distribution to the company's
shareholders (after payment of arrears of dividends on the
cumulative preference shares up to the date of repayment) pari
passu with the cumulative preference shares and all other shares
of the company ranking pari passu with the non-cumulative
preference shares as regards participation in the surplus assets
of the company, a liquidation distribution per share equal to the
applicable redemption price detailed in the table above, together
with an amount equal to dividends for the then current dividend
period accrued to the date of payment, before any distribution or
payment may be made to holders of the ordinary shares as
regards participation in the surplus assets of the company.
Except as described above, the holders of the non-cumulative
preference shares have no right to participate in the surplus
assets of the company.
Holders of the non-cumulative preference shares are not entitled
to receive notice of or attend general meetings of the company
except if any resolution is proposed for adoption by the
shareholders of the company to vary or abrogate any of the rights
attaching to the non-cumulative preference shares or proposing
the winding-up or liquidation of the company. In any such case,
they are entitled to receive notice of and to attend the general
meeting of shareholders at which such resolution is to be
proposed and are entitled to speak and vote on such resolution
(but not on any other resolution). In addition, in the event that,
prior to any general meeting of shareholders, the company has
failed to pay in full the three most recent quarterly dividend
payments due on the non-cumulative dollar preference shares
(other than Series U), the two most recent semi-annual dividend
payments due on the non-cumulative convertible dollar
preference shares and the most recent dividend payments due
on the non-cumulative euro preference shares, the non-
cumulative sterling preference shares, the Series U non-
cumulative dollar preference shares and the non-cumulative
convertible sterling preference shares, the holders shall be
entitled to receive notice of, attend, speak and vote at such
meeting on all matters together with the holders of the ordinary
shares. In these circumstances only, the rights of the holders of
the non-cumulative preference shares so to vote shall continue
until the company shall have resumed the payment in full of the
dividends in arrears.
306
Notes on the consolidated accounts
26 Other equity
Paid-in equity - comprises equity instruments issued by the
company other than those legally constituted as shares.
2017
£m
2016
£m
Additional Tier 1 notes (1)
US$2.0 billion 7.5% notes callable August 2020 (2) 1,278 1,278
734
US$1.15 billion 8% notes callable August 2025 (2)
US$2.65 billion 8.625% notes callable August
2,046 2,046
2021 (3)
EMTN notes
US$564 million 6.99% capital securities
(redeemed October 2017)
CAD321 million 6.666% notes
(redeemed October 2017)
734
275
156
-
-
Trust preferred issues: subordinated notes (4)
£93 million 5.6457% 2047
(redeemed June 2017) (5)
-
93
4,058 4,582
Notes:
(1) The coupons on these notes are non-cumulative and payable at the company’s
discretion. In the event the Group’s CET1 ratio falls below 7% any outstanding
notes will be converted into ordinary shares at a fixed price. While taking the legal
form of debt these notes are classified as equity under IFRS.
(2) Issued in August 2015. In the event of conversion, converted into ordinary shares
at a price of $3.606 nominal per £1 share.
(3) Issued in August 2016. In the event of conversion, converted into ordinary shares
at a price of $2.284 nominal per £1 share.
(4) Subordinated notes issued to limited partnerships that have in turn issued
partnership preferred securities to RBS Capital Trust D that issued trust preferred
securities to investors.
(5) Preferred securities in issue - £93 million RBS Capital Trust D, fixed/floating rate
non-cumulative trust preferred securities.
Merger reserve - the merger reserve comprises the premium on
shares issued to acquire NatWest, less goodwill amortisation
charged under previous GAAP, and the premium arising on
shares issued to acquire Aonach Mor Limited, less amounts
realised through subsequent share redemptions by Aonach Mor
Limited. No share premium was recorded in the company
financial statements through the operation of the merger relief
provisions of the Companies Act.
Capital redemption reserve - under UK companies legislation,
when shares are redeemed or purchased wholly or partly out of
the company's profits, the amount by which the company's issued
share capital is diminished must be transferred to the capital
redemption reserve. The capital maintenance provisions of UK
companies legislation apply to the capital redemption reserve as
if it were part of the company’s paid up share capital. On 15 June
2017, the Court of Session approved a reduction of RBSG plc
capital so that the amounts which stood to the credit of the capital
redemption reserve were transferred to retained earnings.
Own shares held - at 31 December 2017, 16 million ordinary
shares of £1 each of the company (2016 - 39 million) were held
by employee share trusts in respect of share awards and options
granted to employees. During the year, the employee share
trusts purchased 30 million ordinary shares and delivered 53
million ordinary shares in satisfaction of the exercise of options
and the vesting of share awards under the employee share plans.
RBS optimises capital efficiency by maintaining reserves in
subsidiaries, including regulated entities. Certain preference
shares and subordinated debt are also included within regulatory
capital. The remittance of reserves to the company or the
redemption of shares or subordinated capital by regulated entities
may be subject to maintaining the capital resources required by
the relevant regulator.
UK law prescribes that only the reserves of the company are
taken into account for the purpose of making distributions and in
determining permissible applications of the share premium
account.
307
Notes on the consolidated accounts
27 Leases
Year in which receipt will occur
2017
Within 1 year
After 1 year but within 5 years
After 5 years
Total
2016
Within 1 year
After 1 year but within 5 years
After 5 years
Total
Nature of operating lease assets on the balance sheet
Transportation
Cars and light commercial vehicles
Other
Amounts recognised as income and expense in continuing operations
Finance leases - contingent rental rebate
Operating leases - minimum rentals payable
Finance lease contracts and hire purchase agreements
Future
drawdowns
£m
Present value
adjustments
£m
Other
movements
£m
Gross
amounts
£m
3,164
4,686
2,062
9,912
3,174
5,002
2,715
(212)
(444)
(742)
(1,398)
(230)
(518)
(951)
10,891
(1,699)
(125)
(94)
(27)
(246)
(54)
(113)
(26)
(193)
(70)
—
—
(70)
(27)
(68)
-
(95)
2017
£m
(34)
221
Operating lease
assets:
future minimum
lease rentals
£m
129
257
21
407
139
296
25
460
2016
£m
391
56
278
725
2015
£m
(81)
239
Present
value
£m
2,757
4,148
1,293
8,198
2,863
4,303
1,738
8,904
2017
£m
283
45
271
599
2016
£m
(76)
239
Finance lease contracts and hire purchase agreements
Accumulated allowance for uncollectable minimum receivables
63
54
65
There were no amounts recognised as income and expense in discontinued operations (2016 - nil; 2015 - £75 million) in relation to
operating leases - minimum rentals payable.
Residual value exposures
The table below gives details of the unguaranteed residual values included in the carrying value of finance lease receivables and
operating lease assets (refer to pages 296 and 297).
Operating leases
- transportation
- cars and light commercial vehicles
- other
Finance lease contracts
Hire purchase agreements
2017
Year in which residual value will be recovered
2016
Year in which residual value will be recovered
Within 1
year
£m
After 1 year
but within
2 years
£m
After 2
years
but within
5 years
£m
29
5
21
88
38
181
22
7
24
20
2
75
69
7
30
72
1
179
After 5
years
£m
17
—
9
27
—
53
Total
£m
137
19
84
207
41
488
Within 1
year
£m
After 1 year
but within
2 years
£m
After 2
years
but within
5 years
£m
24
5
30
43
24
60
5
19
27
25
126
136
128
12
32
46
2
220
After 5
years
£m
21
—
6
26
—
53
Total
£m
233
22
87
142
51
535
Acting as a lessor, RBS provides asset finance to its customers. It purchases plant, equipment and intellectual property, renting them to
customers under lease arrangements that, depending on their terms, qualify as either operating or finance leases.
308
Notes on the consolidated accounts
28 Structured entities
A structured entity (SE) is an entity that has been designed such
that voting or similar rights are not the dominant factor in deciding
who controls the entity, for example, when any voting rights relate
to administrative tasks only and the relevant activities are
directed by means of contractual arrangements. SEs are usually
established for a specific, limited purpose. They do not carry out
a business or trade and typically have no employees. They take a
variety of legal forms - trusts, partnerships and companies - and
fulfil many different functions. As well as being a key element of
securitisations, SEs are also used in fund management activities
in order to segregate custodial duties from the provision of fund
management advice.
Consolidated structured entities
Securitisations
In a securitisation, assets, or interests in a pool of assets, are
transferred generally to an SE which then issues liabilities to third
party investors. The majority of securitisations are supported
through liquidity facilities or other credit enhancements.
RBS arranges securitisations to facilitate client transactions and
undertakes own asset securitisations to sell or to fund portfolios
of financial assets. RBS also acts as an underwriter and
depositor in securitisation transactions in both client and
proprietary transactions.
RBS involvement in client securitisations takes a number of
forms. It may: sponsor or administer a securitisation programme;
provide liquidity facilities or programme-wide credit enhancement;
and purchase securities issued by the vehicle.
Own asset securitisations
In own-asset securitisations, the pool of assets held by the SE is
either originated by RBS, or (in the case of whole loan
programmes) purchased from third parties.
The table below analyses the asset categories for those own-
asset securitisations where the transferred assets continue to be
recorded on RBS balance sheet.
Asset type
Mortgages
- UK
- Irish
- US
Cash deposits
2017
Debt securities in issue
2016
Debt securities in issue
Held by third
parties
£m
—
—
—
—
Held by
RBS (1)
£m
—
4,688
—
4,688
Total
£m
—
4,688
—
4,688
Assets
£m
—
4,073
—
4,073
518
4,591
Assets
£m
1,475
7,054
301
8,830
965
9,795
Held by third
parties
£m
—
1,180
301
1,481
Held by
RBS (1)
£m
1,774
6,621
—
8,395
Total
£m
1,774
7,801
301
9,876
Note:
(1) Debt securities retained by RBS may be pledged with central banks.
Commercial paper conduits
RBS consolidates a number of asset-backed commercial paper (ABCP) conduits. A conduit is an SE that issues commercial paper and
uses the proceeds to purchase or fund a pool of assets. The commercial paper is secured on the assets and is redeemed by further
commercial paper issuance, repayment of assets or funding from liquidity facilities. Commercial paper is typically short-dated, usually up
to three months. At 31 December 2017 assets held by the conduits were nil (2016 - £0.1 billion). At 31 December 2016 the conduits
were funded entirely by RBS.
Covered bond programme
Certain loans and advances to customers have been assigned to bankruptcy remote limited liability partnerships to provide security for
issues of debt securities by RBS. RBS retains all of the risks and rewards of these loans. The partnerships are consolidated, the loans
retained on RBS’s balance sheet and the related covered bonds included within debt securities in issue. At 31 December 2017, £8,915
million of mortgages provided security for debt securities in issue of £6,307 million (2016: mortgages - £8,621 million, bonds - £3,935
million).
309
Notes on the consolidated accounts
28 Structured entities continued
Unconsolidated structured entities
RBS’s interests in unconsolidated structured entities are analysed below.
Asset backed
securitisation
vehicles
£m
2017
Investment
funds
and other
£m
Held-for-trading
Loans and advances to customers
Debt securities
Equity shares
Derivative assets
Derivative liabilities
Total
Other than held-for-trading
Loans and advances to customers
Debt securities
Total
Liquidity facilities/loan commitments
Guarantees
Maximum exposure
380
504
—
660
(561)
983
1,243
3,888
5,131
2,117
229
8,460
2016
Asset backed
securitisation
vehicles
£m
Investment
funds
and other
£m
Total
£m
475
536
4
777
(692)
588
618
—
318
(509)
1,100
1,015
1,363
4,029
5,392
2,572
234
1,339
4,702
6,041
1,397
55
Total
£m
628
646
94
395
(611)
1,152
2,210
4,848
7,058
2,154
61
40
28
94
77
(102)
137
871
146
1,017
757
6
95
32
4
117
(131)
117
120
141
261
455
5
838
9,298
8,508
1,921 10,425
Notes:
(1)
(2) A sponsored entity is a structured entity established by RBS where RBS provides liquidity and/or credit enhancements or provides ongoing services to the entity. RBS can act as
Income from interests in unconsolidated structured entities includes interest receivable, changes in fair value and other income less impairments.
(3)
sponsor for its own or for customers’ transactions.
In 2017, no assets were transferred into sponsored structured entities (2016 - nil) which are not consolidated by RBS and for which RBS held no interest at 31 December 2017.
Income arising from sponsored entities where we hold no interest at year end was £11 million (2016 - £18 million).
29 Asset transfers
Transfers that do not qualify for derecognition
Securities repurchase agreements and lending transactions
RBS enters into securities repurchase agreements and securities
lending transactions under which it transfers securities in
accordance with normal market practice.
Generally, the agreements require additional collateral to be
provided if the value of the securities falls below a predetermined
level.
Under standard terms for repurchase transactions in the UK and
US markets, the recipient of collateral has an unrestricted right to
sell or repledge it, subject to returning equivalent securities on
settlement of the transaction.
Securities sold under repurchase transactions are not
derecognised if RBS retains substantially all the risks and
rewards of ownership. The fair value (and carrying value) of
securities transferred under such repurchase transactions
included on the balance sheet, are set out below. All of these
securities could be sold or repledged by the holder.
Assets subject to securities repurchase agreements or security lending transactions
Debt securities
Note:
(1) Associated liabilities were £23,692 million (2016 - £17,975 million).
2017(1)
£m
23,781
2016
£m
18,107
Assets pledged as collateral
The Group pledges collateral with its counterparties in respect of derivative liabilities and bank and other borrowings.
2017
2016
Assets pledged against liabilities
Liabilities secured by assets
Loans and
advances
to banks
£m
7,622
7,360
Loans and
advances
to customers
£m
45,986
29,654
Securities
£m
18,470
20,152
Total
£m
72,078
57,166
Deposits
by banks
£m
20,226
5,514
Derivatives
£m
22,956
26,443
Total
£m
43,182
31,957
310
Notes on the consolidated accounts
30 Capital resources
RBS's regulatory capital resources in accordance with PRA definitions were as follows:
Shareholders’ equity (excluding non-controlling interests)
Shareholders’ equity
Preference shares - equity
Other equity instruments
Regulatory adjustments and deductions
Own credit
Defined benefit pension fund adjustment
Cash flow hedging reserve
Deferred tax assets
Prudential valuation adjustments
Goodwill and other intangible assets
Expected losses less impairments
Other regulatory adjustments
CET1 capital
Additional Tier 1 (AT1) capital
Eligible AT1
Qualifying instruments and related share premium subject to phase out
Qualifying instruments issued by subsidiaries and held by third parties
AT1 capital
Tier 1 capital
Qualifying Tier 2 capital
Qualifying instruments and related share premium
Qualifying instruments issued by subsidiaries and held by third parties
Tier 2 capital
Total regulatory capital
PRA transitional basis
2017
£m
2016
£m
48,330
(2,565)
(4,058)
41,707
(90)
(287)
(227)
(849)
(496)
(6,543)
(1,286)
28
(9,750)
48,609
(2,565)
(4,582)
41,462
(304)
(208)
(1,030)
(906)
(532)
(6,480)
(1,371)
(8)
(10,839)
31,957
30,623
4,041
3,416
140
7,597
4,041
5,416
339
9,796
39,554
40,419
6,501
1,876
8,377
47,931
7,066
4,818
11,884
52,303
It is RBS policy to maintain a strong capital base, to expand it as
appropriate and to utilise it efficiently throughout its activities to
optimise the return to shareholders while maintaining a prudent
relationship between the capital base and the underlying risks of
the business. In carrying out this policy, RBS has regard to the
supervisory requirements of the PRA. The PRA uses capital
ratios as a measure of capital adequacy in the UK banking
sector, comparing a bank's capital resources with its risk-
weighted assets (the assets and off-balance sheet exposures are
‘weighted’ to reflect the inherent credit and other risks); by
international agreement, the Pillar 1 capital ratios should be not
less than 8% with a Common Equity Tier 1 component of not less
than 4.5%. RBS has complied with the PRA’s capital
requirements throughout the year.
A number of subsidiaries and sub-groups within RBS, principally
banking entities, are subject to various individual regulatory
capital requirements in the UK and overseas. Furthermore, the
payment of dividends by subsidiaries and the ability of members
of RBS to lend money to other members of RBS may be subject
to restrictions such as local regulatory or legal requirements, the
availability of reserves and financial and operating performance.
311
Notes on the consolidated accounts
31 Memorandum items
Contingent liabilities and commitments
The amounts shown in the table below are intended only to provide an indication of the volume of business outstanding at 31 December
2017. Although RBS is exposed to credit risk in the event of a customer’s failure to meet its obligations, the amounts shown do not, and
are not intended to, provide any indication of RBS's expectation of future losses.
More than More than
1 year but 3 years but
less than
3 years
£m
less than
5 years
£m
Less than
1 year
£m
Over
5 years
£m
2017
£m
2016
£m
1,354
609
60,079
493
1,115
22,884
481
180
36,511
5,390
1,487
5,467
7,718
3,391
124,941
7,867
4,179
138,645
62,042
24,492
37,172
12,344
136,050
150,691
Standby facilities and credit lines - under a loan commitment,
RBS agrees to make funds available to a customer in the future.
Loan commitments, which are usually for a specified term, may
be unconditionally cancellable or may persist, provided all
conditions in the loan facility are satisfied or waived.
Commitments to lend include commercial standby facilities and
credit lines, liquidity facilities to commercial paper conduits and
unutilised overdraft facilities.
Other commitments - these include documentary credits, which
are commercial letters of credit providing for payment by RBS to
a named beneficiary against presentation of specified
documents, forward asset purchases, forward deposits placed
and undrawn note issuance and revolving underwriting facilities,
and other short-term trade related transactions.
Guarantees and assets pledged as collateral security
Other contingent liabilities
Standby facilities, credit lines and other commitments
Contingent liabilities and commitments
Note:
(1)
Includes liquidity facilities provided to RBS sponsored conduits.
Banking commitments and contingent obligations, which have
been entered into on behalf of customers and for which there are
corresponding obligations from customers, are not included in
assets and liabilities. RBS's maximum exposure to credit loss, in
the event of its obligation crystallising and all counterclaims,
collateral or security proving valueless, is represented by the
contractual nominal amount of these instruments included in the
table above. These commitments and contingent obligations are
subject to RBS's normal credit approval processes.
Guarantees - RBS gives guarantees on behalf of customers. A
financial guarantee represents an irrevocable undertaking that
RBS will meet a customer's specified obligations to third party if
the customer fails to do so. The maximum amount that RBS
could be required to pay under a guarantee is its principal
amount as in the table above. RBS expects most guarantees to
expire unused.
Other contingent liabilities - these include standby letters of
credit, supporting customer debt issues and contingent liabilities
relating to customer trading activities such as those arising from
performance and customs bonds, warranties and indemnities.
Contractual obligations for future expenditure not provided for in the accounts
The following table shows contractual obligations for future expenditure not provided for in the accounts at the year end.
Operating leases
Minimum rentals payable under non-cancellable leases (1)
- within 1 year
- after 1 year but within 5 years
- after 5 years
Capital expenditure on property, plant and equipment
Contracts to purchase goods or services (2)
Notes:
(1) Predominantly property leases.
(2) Of which due within 1 year: £276 million (2016 - £231 million).
2017
£m
2016
£m
206
651
1,422
2,279
18
682
2,979
246
786
1,775
2,807
21
598
3,426
312
Notes on the consolidated accounts
31 Memorandum items continued
Trustee and other fiduciary activities
In its capacity as trustee or other fiduciary role, the Group may
hold or place assets on behalf of individuals, trusts, companies,
pension schemes and others. The assets and their income are
not included in the Group's financial statements. The Group
earned fee income of £244 million (2016 - £251 million; 2015 -
£321 million) from these activities.
The Financial Services Compensation Scheme
The Financial Services Compensation Scheme (FSCS), the UK's
statutory fund of last resort for customers of authorised financial
services firms, pays compensation if a firm is unable to meet its
obligations. The FSCS funds compensation for customers by
raising management expenses levies and compensation levies
on the industry. In relation to protected deposits, each deposit-
taking institution contributes towards these levies in proportion to
their share of total protected deposits on 31 December of the
year preceding the scheme year (which runs from 1 April to 31
March), subject to annual maxima set by the Prudential
Regulation Authority. In addition, the FSCS has the power to
raise levies on a firm that has ceased to participate in the scheme
and is in the process of ceasing to be authorised for the costs
that it would have been liable to pay had the FSCS made a levy
in the financial year it ceased to be a participant in the scheme.
The FSCS has borrowed from HM Treasury to fund
compensation costs associated with the failure of Bradford &
Bingley, Heritable Bank, Kaupthing Singer & Friedlander,
Landsbanki ‘Icesave’ and London Scottish Bank plc. The industry
repaid the remaining balance on the non-Bradford and Bingley
loans during the period. The Bradford and Bingley loan is interest
bearing with the reference rate being the higher of 12 month
LIBOR plus 111 basis points or the relevant gilt rate for the
equivalent cost of borrowing from HMT. The FSCS and HM
Treasury have agreed that the period of these loans will reflect
the expected timetable for recoveries from the estate of Bradford
& Bingley. The total interest element levied on the industry in the
2017/18 scheme year was £202 million (£337 million in the
2016/17 scheme year).
RBS Group has accrued £11.6 million for its share of estimated
FSCS levies.
Litigation, investigations and reviews
The Royal Bank of Scotland Group plc (the ‘company’ or RBSG)
and certain members of the Group are party to legal proceedings
and the subject of investigation and other regulatory and
governmental action (‘Matters’) in the United Kingdom (UK), the
United States (US), the European Union (EU) and other
jurisdictions.
RBS recognises a provision for a liability in relation to these
Matters when it is probable that an outflow of economic benefits
will be required to settle an obligation resulting from past events,
and a reliable estimate can be made of the amount of the
obligation.
While the outcome of these Matters is inherently uncertain, the
directors believe that, based on the information available to them,
appropriate provisions have been made in respect of the Matters
as at 31 December 2017 (refer to Note 20).
In many proceedings and investigations, it is not possible to
determine whether any loss is probable or to estimate reliably the
amount of any loss, either as a direct consequence of the
relevant proceedings and investigations or as a result of adverse
impacts or restrictions on RBS’s reputation, businesses and
operations. Numerous legal and factual issues may need to be
resolved, including through potentially lengthy discovery and
document production exercises and determination of important
factual matters, and by addressing novel or unsettled legal
questions relevant to the proceedings in question, before a
liability can reasonably be estimated for any claim. RBS cannot
predict if, how, or when such claims will be resolved or what the
eventual settlement, damages, fine, penalty or other relief, if any,
may be, particularly for claims that are at an early stage in their
development or where claimants seek substantial or
indeterminate damages.
In respect of certain matters described below, we have
established a provision and in certain of those matters, we have
indicated that we have established a provision. RBS generally
does not disclose information about the establishment or
existence of a provision for a particular matter where disclosure
of the information can be expected to prejudice seriously RBS’s
position in the matter.
There are situations where RBS may pursue an approach that in
some instances leads to a settlement agreement. This may occur
in order to avoid the expense, management distraction or
reputational implications of continuing to contest liability, or in
order to take account of the risks inherent in defending claims or
investigations even for those matters for which RBS believes it
has credible defences and should prevail on the merits. The
uncertainties inherent in all such matters affect the amount and
timing of any potential outflows for both matters with respect to
which provisions have been established and other contingent
liabilities.
The future outflow of resources in respect of any matter may
ultimately prove to be substantially greater than or less than the
aggregate provision that RBS has recognised. Where (and as far
as) liability cannot be reasonably estimated, no provision has
been recognised.
Other than those discussed below, no member of the Group is or
has been involved in governmental, legal or regulatory
proceedings (including those which are pending or threatened)
that are expected to be material, individually or in aggregate.
RBS expects that in future periods additional provisions,
settlement amounts, and customer redress payments will be
necessary, in amounts that are expected to be substantial in
some instances.
313
Notes on the consolidated accounts
Litigation, investigations and reviews continued
For a discussion of certain risks associated with the Group’s
litigation, investigations and reviews, see the Risk Factor relating
to legal, regulatory and governmental actions and investigations
set out on page 372.
Litigation
UK 2008 rights issue shareholder litigation
Between March and July 2013, claims were issued in the High
Court of Justice of England and Wales by sets of current and
former shareholders, against RBSG (and in one of those claims,
also against certain former individual officers and directors)
alleging that untrue and misleading statements and/or improper
omissions, in breach of the Financial Services and Markets Act
2000, were made in connection with the rights issue announced
by RBS on 22 April 2008. These and other similar threatened
claims were consolidated by the Court via a Group Litigation
Order. Since then, further High Court claims have been issued
against RBS under the Group Litigation Order. Prior to the
settlement described below, the aggregate value of the shares
subscribed for at 200 pence per share by all of the then claimant
shareholders was approximately £4 billion.
In December 2016 RBS concluded full and final settlements with
four of the five shareholder groups representing 78 per cent of
the claims by value. Further full and final settlements, without any
admission of liability, were reached and RBS has now concluded
the action with over 98 per cent of the claimants.
The aggregate settlement figure available to claimants is £900
million, for which a previously established provision is in place,
and is subject to validation of claims.
The Court directed that any claimant choosing not to enter the
settlement should, by 28 July 2017, issue an application to
restore the proceedings. No such application was made.
Residential mortgage-backed securities (RMBS) litigation in the
US
RBS companies have been named as defendants in their various
roles as issuer, depositor and/or underwriter in a number of
claims in the US that relate to the securitisation and securities
underwriting businesses. These cases include actions by
individual purchasers of securities and a purported class action
suit.
In general, plaintiffs in these actions claim that certain disclosures
made in connection with the relevant offerings of RMBS
contained materially false or misleading statements and/or
omissions regarding the underwriting standards pursuant to
which the mortgage loans underlying the securities were issued.
RBS Securities Inc. remains a defendant in a lawsuit relating to
RMBS issued by Nomura Holding America Inc. (Nomura) and
subsidiaries, filed by the US Federal Housing Finance Agency
(FHFA) as conservator for the Federal National Mortgage
Association (Fannie Mae) and the Federal Home Loan Mortgage
Corporation (Freddie Mac).
In May 2015, following a trial, the United States District Court for
the Southern District of New York issued a written decision in
favour of FHFA, finding, as relevant to RBS, that the offering
documents for four Nomura-issued RMBS for which RBS
Securities Inc. served as an underwriter contained materially
misleading statements about the mortgage loans that backed the
securitisations. Nomura and RBS appealed. On 28 September
2017, the court’s judgment against Nomura and RBS Securities
Inc. was affirmed by the United States Court of Appeals for the
Second Circuit.
RBS Securities Inc. estimates that its net exposure under the
court’s judgment is approximately US$318 million, which consists
of the difference between the amount of the judgment against
RBS Securities Inc. (US$636 million) and the estimated market
value of the four RMBS that FHFA would return to RBS
Securities Inc. pursuant to the judgment, plus the costs and
attorney’s fees that will be due to FHFA if the judgment is upheld.
The estimated net exposure in this matter is covered by an
existing provision. The judgment is stayed pending defendants’
request for review by the United States Supreme Court, though
post-judgment interest on the judgment amount will accrue while
that request and any further review is pending. RBS Securities
Inc. intends to pursue a contractual claim for indemnification
against Nomura with respect to any losses it suffers as a result of
this matter.
RBS companies are also defendants in a purported RMBS class
action entitled New Jersey Carpenters Health Fund v. Novastar
Mortgage Inc. et al., which remains pending in the United States
District Court for the Southern District of New York. RBS has
settled this matter for US$55.3 million, which has been paid into
escrow pending court approval of the settlement.
In addition to the above, the remaining RMBS lawsuits against
RBS companies consist of cases filed by the Federal Home Loan
Banks of Boston and Seattle and the Federal Deposit Insurance
Corporation that together involve the issuance of less than US$1
billion of RMBS issued primarily from 2005 to 2007.
As at 31 December 2017, the total aggregate of provisions in
relation to certain of the RMBS litigation matters (described
immediately above) and RMBS and other securitised products
investigations (set out under ‘Investigations and reviews’ on page
319) was £3.2 billion (US$4.4 billion). The duration and outcome
of these investigations and litigation matters remain uncertain,
including in respect of whether settlements for all or any of such
matters may be reached.
RBS continues to caution that, in connection with RMBS litigation
matters and RMBS investigations taken as a whole, further
substantial provisions and costs may be recognised and,
depending on the final outcomes, other adverse consequences
may occur.
314
Notes on the consolidated accounts
Litigation, investigations and reviews continued
London Interbank Offered Rate (LIBOR) and other rates litigation
Certain members of the Group have been named as defendants
in a number of class actions and individual claims filed in the US
with respect to the setting of LIBOR and certain other benchmark
interest rates. The complaints are substantially similar and allege
that certain members of the Group and other panel banks
individually and collectively violated various federal laws,
including the US commodities and antitrust laws, and state
statutory and common law, as well as contracts, by manipulating
LIBOR and prices of LIBOR-based derivatives in various markets
through various means.
Most of the USD LIBOR-related actions in which RBS companies
are defendants, including all purported class actions relating to
USD LIBOR, were transferred to a coordinated proceeding in the
United States District Court for the Southern District of New York.
In the coordinated proceeding, consolidated class action
complaints were filed on behalf of (1) exchange-based purchaser
plaintiffs, (2) over-the-counter purchaser plaintiffs, and (3)
corporate debt purchaser plaintiffs. Over 35 other USD LIBOR-
related actions naming RBS as a defendant, including purported
class actions on behalf of lenders and mortgage borrowers, were
also made part of the coordinated proceeding.
In a series of orders issued in 2013 and 2014, the district court
overseeing the coordinated USD proceeding dismissed class
plaintiffs' antitrust claims and claims under RICO (Racketeer
Influenced and Corrupt Organizations Act), but declined to
dismiss (a) certain Commodity Exchange Act claims on behalf of
persons who transacted in Eurodollar futures contracts and
options on futures contracts on the Chicago Mercantile Exchange
(on the theory that defendants' alleged persistent suppression of
USD LIBOR caused loss to plaintiffs), and (b) certain contract
and unjust enrichment claims on behalf of over-the-counter
purchaser plaintiffs who transacted directly with a defendant. On
23 May 2016, the district court’s dismissal of plaintiffs’ antitrust
claims was vacated by the United States Court of Appeals for the
Second Circuit, which held that plaintiffs have adequately pled
antitrust injury and an antitrust conspiracy, but remanded to the
lower court for further consideration on the question of whether
plaintiffs possess the requisite antitrust standing to proceed with
antitrust claims.
In a decision issued in December 2016, the district court held that
it lacks personal jurisdiction over RBS with respect to certain
claims asserted in the coordinated proceeding. Following that
decision, RBS has been dismissed from each of the USD LIBOR-
related class actions in the coordinated proceeding, subject to
appeal, although certain non-class cases on behalf of particular
plaintiffs remain pending.
On 10 July 2017, the US Federal Deposit Insurance Corporation
(FDIC), on behalf of 39 failed US banks, served a claim in the
High Court of Justice of England and Wales against RBS, other
LIBOR panel banks and the British Bankers’ Association, alleging
collusion with respect to the setting of USD LIBOR.
The action alleges that the defendants breached English and
European competition law as well as asserting common law
claims of fraud under US law. The FDIC previously asserted
many of the same US law USD LIBOR-related claims against
RBS and others in a lawsuit pending in the United States District
Court for the Southern District of New York, though most of the
claims in that case have been dismissed as a result of a series of
rulings by that court. RBS’s defence to the High Court claim was
filed on 24 November 2017.
Certain members of the Group have also been named as
defendants in two class actions relating to JPY LIBOR and
Euroyen TIBOR, both pending before the same judge in the
United States District Court for the Southern District of New York.
In the first case, relating to Euroyen TIBOR futures contracts, the
court dismissed plaintiffs’ antitrust claims in March 2014, but
declined to dismiss their claims under the Commodity Exchange
Act for price manipulation, which are proceeding in the discovery
phase. In the second case, relating to other derivatives allegedly
tied to JPY LIBOR and Euroyen TIBOR, the court dismissed the
case on 10 March 2017 on the ground that the plaintiffs lack
standing. Plaintiffs have commenced an appeal of that decision.
Certain members of the Group have also been named as
defendants in class actions relating to (i) Euribor, (ii) Swiss Franc
LIBOR (iii) Pound sterling LIBOR, (iv) the Singapore Interbank
Offered Rate and Singapore Swap Offer Rate, and (v) the
Australian Bank Bill Swap Reference Rate, all of which are
pending before other judges in the United States District Court for
the Southern District of New York. On 21 February 2017, the
court in the action relating to Euribor dismissed all claims alleged
against RBS for lack of personal jurisdiction. On 18 August 2017,
the court in the action relating to the Singapore Interbank Offered
Rate and Singapore Swap Offer Rate dismissed all claims
against RBS for lack of personal jurisdiction; however, the court
allowed the plaintiffs to replead their complaint, and defendants’
renewed motion to dismiss the amended complaint is pending.
On 25 September 2017, the court in the action relating to Swiss
Franc LIBOR dismissed all claims against all defendants on
various grounds; however, the court held that it has personal
jurisdiction over RBS and allowed the plaintiffs to replead their
complaint, and defendants’ renewed motion to dismiss the
amended complaint is pending. The other matters described in
this paragraph (relating to Pound Sterling LIBOR and the
Australian Bank Bill Swap Reference Rate) are subject to
motions to dismiss that are currently pending.
Details of UK litigation claims in relation to the sale of interest
rate hedging products (IRHPs) involving LIBOR-related
allegations are set out under ‘Interest rate hedging products
litigation’ on page 317. Details of LIBOR investigations involving
RBS are set out under ‘‘Investigations and reviews’’ on page 320.
315
Notes on the consolidated accounts
Litigation, investigations and reviews continued
ISDAFIX antitrust litigation
Beginning in September 2014, The Royal Bank of Scotland plc
(RBS plc) and a number of other financial institutions were
named as defendants in several purported class action
complaints (subsequently consolidated into one complaint) in the
United States District Court for the Southern District of New York
alleging manipulation of USD ISDAFIX rates. In 2015, RBS plc
reached an agreement to settle this matter for US$50 million, and
that settlement received preliminary approval from the Court in
May 2016. The settlement amount has been paid into escrow
pending the final court approval of the settlement.
FX antitrust litigation
In 2015, Group companies settled a consolidated antitrust class
action (the ‘consolidated action’), pending in the United States
District Court for the Southern District of New York, asserting
claims on behalf of persons who entered into (a) over-the-counter
foreign exchange (FX) spot transactions, forwards, swaps,
futures, options or other FX transactions the trading or settlement
of which is related in any way to FX rates, or (b) exchange-traded
FX instruments. Following the Court’s preliminary approval of the
settlement in December 2015, RBS paid the total settlement
amount (US$255 million) into escrow pending final court approval
of the settlement.
On 24 March 2017, the court dismissed a second FX-related
antitrust class action, holding that the alleged class of ‘consumers
and end-user businesses’ lacked standing to pursue antitrust
claims. The plaintiffs in that case have since filed an amended
complaint. The defendants made a renewed motion to dismiss
the complaint but the court denied that motion on 3 August 2017.
As a result, the discovery phase has commenced. RBS and the
other defendants are seeking reconsideration of the court’s
decision regarding standing or, in the alternative, permission to
take an immediate appeal to the United States Court of Appeals
for the Second Circuit.
A third FX-related class action, asserting Employee Retirement
Income Security Act claims on behalf of employee benefit plans
that engaged in FX transactions, including claims based on
alleged non-collusive FX-related conduct, was dismissed in
September 2016 on the ground that the plaintiffs failed to plead
that the defendants had ERISA-based fiduciary duties to the
plaintiffs. The plaintiffs’ appeal of this dismissal remains pending.
Beginning in September 2016, several additional class action
complaints were filed in the United States District Court for the
Southern District of New York asserting claims on behalf of
‘indirect purchasers’ of FX instruments.
The plaintiffs define ‘indirect purchasers’ as persons who were
indirectly affected by FX instruments that others entered into
directly with defendant banks or on exchanges. The consolidated
amended complaint for these matters alleges that certain RBS
companies and other defendant banks caused damages to the
‘indirect purchasers’ by conspiring to restrain trade in the FX spot
market. The plaintiffs have asserted claims under federal and
state antitrust laws. RBS and the other defendants have filed a
motion to dismiss, which remains pending.
On 12 July 2017, Alpari (US) LLC (Alpari) filed a class action
complaint against RBS companies in the United States District
Court for the Southern District of New York. The complaint
alleges that RBS breached contracts with Alpari and other
counterparties by rejecting FX orders placed over electronic
trading platforms through the application of a function referred to
as ‘Last Look’, and that the rejected orders were later filled at
prices less favourable to putative class members. The complaint
contains claims for breach of contract and unjust enrichment.
RBS has filed a motion to compel arbitration of Alpari’s claims or,
in the alternative, to dismiss those claims for improper venue.
In September 2015, certain members of the Group, as well as a
number of other financial institutions, were named as defendants
in two class actions filed in Ontario and Quebec on behalf of
persons in Canada who entered into foreign exchange
transactions or who invested in funds that entered into foreign
exchange transactions, alleging that the defendants violated the
Canadian Competition Act by conspiring to manipulate the prices
of currency trades. RBS settled the matters for approximately
CAD 13 million. The settlement amount has been paid and the
settlement has received final court approval.
Certain other foreign exchange transaction related claims have
been or may be threatened against RBS in other jurisdictions.
RBS cannot predict whether any of these claims will be pursued,
but expects that several may.
US Treasury securities antitrust litigation
Beginning in July 2015, numerous class action antitrust
complaints were filed in US federal courts against a number of
primary dealers of US Treasury securities, including RBS
Securities Inc.. The consolidated amended complaint for these
matters, pending in the United States District Court for the
Southern District of New York, alleges that RBS Securities Inc.
and the other defendants rigged the US Treasury securities
auction bidding process to deflate prices at which they bought
such securities and colluded to increase the prices at which they
sold such securities to plaintiffs.
The complaint asserts claims under the US antitrust laws on
behalf of persons who transacted in US Treasury securities or
derivatives based on such instruments, including futures and
options. The defendants anticipate filing a motion to dismiss the
operative complaint in this matter.
Swaps antitrust litigation
Beginning in November 2015, RBS plc and other members of the
Group, as well as a number of other interest rate swap dealers,
were named as defendants in a number of class action antitrust
complaints filed in the United States District Court for the
Southern District of New York and the United States District
Court for the Northern District of Illinois. The complaints, filed on
behalf of persons who entered into interest rate swaps with the
defendants, allege that the defendants violated the US antitrust
laws by restraining competition in the market for interest rate
swaps through various means and thereby caused inflated bid-
ask spreads for interest rate swaps, to the alleged detriment of
the plaintiff class.
316
Notes on the consolidated accounts
Litigation, investigations and reviews continued
In addition, two complaints containing similar allegations of
collusion were filed in United States District Court for the
Southern District of New York on behalf of TeraExchange and
Javelin, who allege that they would have successfully established
exchange-like trading of interest rate swaps if the defendant
dealers had not unlawfully conspired to prevent that from
happening through boycotts and other means, in violation of the
U.S. antitrust laws. In June 2016, all of these matters were
transferred to the United States District Court for the Southern
District of New York for coordinated or consolidated pretrial
proceedings.
In July 2017, the Court overseeing the above matters dismissed
all claims against RBS companies relating to the 2008 - 2012
time period, but declined to dismiss certain antitrust and unjust
enrichment claims covering the 2013 - 2016 time period.
Discovery is ongoing.
On 8 June 2017, TeraExchange filed another complaint against
RBS and others in the United States District Court for the
Southern District of New York, this time relating to credit default
swaps instead of interest rate swaps. TeraExchange alleges it
would have established exchange-like trading of credit default
swap if the defendant dealers had not engaged in an unlawful
antitrust conspiracy. RBS has filed a motion to dismiss the
complaint in this matter.
Madoff
In December 2010, Irving Picard, as trustee for the bankruptcy
estates of Bernard L. Madoff and Bernard L. Madoff Investment
Securities LLC., filed a clawback claim against The Royal Bank of
Scotland N.V. (RBS N.V.) in the New York bankruptcy court.
In the operative complaint, filed in August 2012, the trustee seeks
to recover US$75.8 million in redemptions that RBS N.V.
allegedly received from certain Madoff feeder funds and
US$162.1 million that RBS N.V. allegedly received from its swap
counterparties at a time when RBS N.V. allegedly ‘knew or
should have known of Madoff’s possible fraud’. The trustee
alleges that those transfers were preferences or fraudulent
conveyances under the US bankruptcy code and New York law
and he asserts the purported right to claw them back for the
benefit of Madoff’s estate.
RBS N.V. made a motion to dismiss in this case on the ground
that many of the transfers at issue were extraterritorial to the
United States and therefore not subject to the fraudulent
conveyance statute upon which the trustee’s claim is based, but
the bankruptcy court denied that motion in November 2016. RBS
N.V. sought leave to appeal, but this was denied on 3 October
2017. A further claim by the trustee against RBS N.V., for
clawback of an additional US$21.8 million, was filed in October
2011. With respect to that claim, the bankruptcy court granted
RBS N.V.’s motion to dismiss on extraterritorial grounds, and the
trustee has commenced an appeal of that decision.
Thornburg adversary proceeding
RBS Securities Inc. and certain other RBS companies, as well as
several other financial institutions, are defendants in an
adversary proceeding filed in the US bankruptcy court in
Maryland by the trustee for TMST, Inc. (formerly known as
Thornburg Mortgage, Inc.). The trustee seeks recovery of
transfers made under certain restructuring agreements as,
among other things, avoidable fraudulent and preferential
conveyances and transfers. In September 2014, the Court largely
denied the defendants' motion to dismiss this matter and, as a
result, discovery is ongoing.
Interest rate hedging products litigation
RBS is dealing with a large number of active litigation claims in
relation to the sale of interest rate hedging products (IRHPs). In
general claimants allege that the relevant interest rate hedging
products were mis-sold to them, with some also alleging RBS
made misrepresentations in relation to LIBOR. Claims have been
brought by customers who were considered under the UK
Financial Conduct Authority (FCA) redress programme, as well
as customers who were outside of the scope of that programme,
which was closed to new entrants on 31 March 2015. RBS
encouraged those customers that were eligible to seek redress
under the FCA redress programme to participate in that
programme. RBS remains exposed to potential claims from
customers who were either ineligible to be considered for redress
or who are dissatisfied with their redress offers.
Property Alliance Group (PAG) v The Royal Bank of Scotland plc
was the leading case before the English High Court involving
both IRHP mis-selling and LIBOR misconduct allegations. The
amount claimed was £34.8 million and the trial ended in October
2016. In December 2016 the Court dismissed all of PAG’s claims.
PAG appealed that decision, and the appeal hearing closed on 8
February 2018. The judgment is awaited. The decision (subject to
the appeal by PAG) may have significance to other similar
LIBOR-related cases currently pending in the English courts,
some of which involve substantial amounts.
The case of London Bridge Holdings Ltd and others v RBS plc
remains stayed pending the outcome of the PAG appeal. The
sum claimed in that case is £446.7 million.
In addition to claims alleging that IRHPs were mis-sold, RBS has
received a number of claims involving allegations that it breached
a legal duty of care in its conduct of the FCA redress programme.
These claims have been brought by customers who are
dissatisfied with redress offers made to them through the FCA
redress programme. The claims followed a preliminary decision
against another UK bank. RBS has since been successful in
opposing an application by a customer to amend its pleadings to
include similar claims against RBS, on the basis that the bank
does not owe a legal duty of care to customers in carrying out the
FCA review. An appeal of that decision was dismissed in July
2017 and permission to further appeal was refused by the UK
Supreme Court in December 2017.
317
Notes on the consolidated accounts
Litigation, investigations and reviews continued
Tax dispute
HMRC issued a tax assessment in 2012 against RBS for
approximately £86 million regarding a value-added-tax (‘VAT’)
matter in relation to the trading of European Union Allowances
(‘EUAs’) by an RBS joint venture subsidiary in 2009. RBS has
commenced legal proceedings before the First-tier Tribunal
(Tax), a specialist tax tribunal, challenging the assessment (the
‘Tax Dispute’). In the event that the assessment is upheld,
interest and costs would be payable, and a penalty of up to 100
per cent of the VAT held to have been legitimately denied by
HMRC could also be levied. Separately, RBS is a named
defendant in proceedings before the High Court brought in 2015
by ten companies (all in liquidation) (the ‘Liquidated Companies’)
and their respective liquidators (together, ‘the Claimants’). The
Liquidated Companies previously traded in EUAs in 2009 and are
alleged to be defaulting traders within (or otherwise connected to)
the EUA supply chains forming the subject of the Tax Dispute.
The Claimants are claiming approximately £80 million plus
interest and costs by alleging that RBS dishonestly assisted the
directors of the Liquidated Companies in the breach of their
statutory duties and/or knowingly participated in the carrying on
of the business of the Liquidated Companies with intent to
defraud creditors. The trial in that matter is currently scheduled to
start in June 2018.
Weiss v. National Westminster Bank Plc (NatWest)
NatWest is defending a lawsuit filed by a number of US nationals
(or their estates, survivors, or heirs) who were victims of terrorist
attacks in Israel. The plaintiffs allege that NatWest is liable for
damages arising from those attacks pursuant to the US Anti-
Terrorism Act because NatWest previously maintained bank
accounts and transferred funds for the Palestine Relief &
Development Fund, an organisation which plaintiffs allege
solicited funds for Hamas, the alleged perpetrator of the attacks.
In March 2013, the trial court (the United States District Court for
the Eastern District of New York) granted summary judgment in
favour of NatWest on the issue of scienter, but in September
2014, that summary judgment ruling was vacated by the United
States Court of Appeals for the Second Circuit. The appeals court
returned the case to the trial court for consideration of NatWest's
other asserted grounds for summary judgment and, if necessary,
for trial. In March 2016, the trial court denied a motion by
NatWest to dismiss the case in which NatWest had argued that
the court lacked personal jurisdiction over NatWest. NatWest has
since asserted other grounds for summary judgment that the trial
court has not previously ruled upon. On 5 October 2017, the
United States District Court for the Eastern District of New York
dismissed claims against NatWest with respect to two terrorist
attacks, but denied NatWest’s summary judgment motion with
respect to claims arising from 16 other attacks. No trial date has
been set.
Anti-Terrorism Act litigation against RBS N.V.
RBS N.V. and certain other financial institutions (HSBC,
Barclays, Standard Chartered, Credit Suisse, Bank Saderat, and
Commerzbank) are defendants in an action first commenced in
the United States District Court for the Eastern District of New
York in November 2014 by a number of US nationals (or their
estates, survivors, or heirs), most of whom are or were US
military personnel, who were killed or injured in more than 90
attacks in Iraq between 2004 and 2011.
The attacks were allegedly perpetrated by Hezbollah and certain
Iraqi terror cells allegedly funded by the Islamic Republic of Iran.
According to the plaintiffs’ allegations, RBS N.V. and the other
defendants are liable for damages arising from the attacks
because they allegedly conspired with Iran and certain Iranian
banks to assist Iran in transferring money to Hezbollah and the
Iraqi terror cells, in violation of the US Anti-Terrorism Act, by
agreeing to engage in ‘stripping’ of transactions initiated by the
Iranian banks so that the Iranian nexus to the transactions would
not be detected. Since commencing this matter, the plaintiffs
have amended the complaint twice. The second amended
complaint is subject to a motion to dismiss that defendants filed in
September 2016.
In November 2016, additional plaintiffs commenced a second
action in the United States District Court for the Southern District
of Illinois against the same defendants (including RBS N.V.), as
well as Deutsche Bank. The allegations were substantially similar
to the allegations contained in the complaint described above.
The plaintiffs were a number of US military personnel (or their
estates, survivors, or heirs) who were killed or injured in 21
attacks in Iraq between 2006 and 2011. In April 2017, this case
was transferred to the United States District Court for the Eastern
District of New York. On 3 October 2017, the plaintiffs in this
second case, instead of responding to defendants’ motion to
dismiss, voluntarily dismissed their claims without prejudice to re-
filing at a later date.
On 9 November 2017, a third action was commenced by an
additional group of plaintiffs in the United States District Court for
the Southern District of New York, against the same defendants
as the November 2016 action (including RBS N.V.), as well as
RBS plc. The allegations are substantially similar to the
allegations contained in the complaints described above and
concern 55 attacks in Iraq between 2003 and 2011. The
defendants anticipate filing a motion to dismiss the claims in this
case.
318
Notes on the consolidated accounts
Litigation, investigations and reviews continued
Investigations and reviews
RBS’s businesses and financial condition can be affected by the
actions of various governmental and regulatory authorities in the
UK, the US, the EU and elsewhere. RBS has engaged, and will
continue to engage, in discussions with relevant governmental
and regulatory authorities, including in the UK, the US, the EU
and elsewhere, on an ongoing and regular basis, and in response
to informal and formal inquiries or investigations, regarding
operational, systems and control evaluations and issues including
those related to compliance with applicable laws and regulations,
including consumer protection, business conduct,
competition/anti-trust, anti-bribery, anti-money laundering and
sanctions regimes.
The NatWest Markets segment in particular has been providing
information regarding a variety of matters, including, for example,
the setting of benchmark rates and related derivatives trading,
conduct in the foreign exchange market, and various issues
relating to the issuance, underwriting, and sales and trading of
fixed-income securities, including structured products and
government securities.
Any matters discussed or identified during such discussions and
inquiries may result in, among other things, further inquiry or
investigation, other action being taken by governmental and
regulatory authorities, increased costs being incurred by RBS,
remediation of systems and controls, public or private censure,
restriction of RBS’s business activities and/or fines. Any of the
events or circumstances mentioned in this paragraph or below
could have a material adverse effect on RBS, its business,
authorisations and licences, reputation, results of operations or
the price of securities issued by it.
RBS is co-operating fully with the investigations and reviews
described below.
RMBS and other securitised products investigations
In the US, RBS is involved in reviews, investigations and
proceedings (both formal and informal) by federal and state
governmental law enforcement and other agencies and self-
regulatory organisations, including the US Department of Justice
(DOJ) and several state attorneys general, including those
mentioned below, relating to, among other things, issuance,
underwriting and trading in RMBS and other mortgage-backed
securities and collateralised debt obligations (CDOs). These
ongoing matters include, among others, active investigations by
the DOJ, relating primarily to due diligence on and disclosure
related to loans purchased for, or otherwise included in,
securitisations and related disclosures.
As at 31 December 2017, the total aggregate of provisions in
relation to certain of the RMBS investigations and RMBS litigation
matters (set out under ‘Litigation’ on page 314) was £3.2 billion
(US$4.4 billion).
RBS continues to cooperate with the DOJ and with certain state
attorneys general in their investigations of RMBS matters.
The duration, timing for resolution and outcome of these
investigations and RMBS litigation matters remain uncertain,
including in respect of whether settlements for all or any of such
matters may be reached. Further substantial provisions and costs
may be recognised and, depending on the final outcome, other
adverse consequences may occur as described above and in the
Risk Factor relating to legal, regulatory and governmental actions
and investigations set out on page 372.
In December 2017, RBS Financial Products Inc. agreed to pay
US$125 million to settle the RMBS investigation of the California
Attorney General. Payment has been made from a previously
established provision. Ongoing investigations into the same or
similar issues by certain other state attorneys general are at
various stages. RBS is in advanced discussions with the New
York Attorney General to resolve its investigation, although there
is no certainty that any settlement will be reached.
On 26 October 2017, the United States Attorney for the District of
Connecticut (USAO) announced that it had entered into a Non-
Prosecution Agreement (NPA) with RBS Securities Inc. in
connection with alleged misrepresentations to counterparties
relating to secondary trading in various forms of asset-backed
securities. The NPA, which recognises RBS Securities Inc.’s
timely self-reporting and cooperation, required RBS Securities
Inc. to pay a penalty of US$35 million, reimburse customers at
least US$9.1 million, and continue to cooperate with the
investigation.
These amounts were covered by provisions existing at the time of
settlement. As part of the NPA, the USAO has agreed not to file
criminal charges against RBS Securities Inc. relating to certain
conduct and information described in the NPA if RBS Securities
Inc. complies with the NPA during its one-year term. In March
and December 2015, two former RBS Securities Inc. traders
entered guilty pleas in the United States District Court for the
District of Connecticut, each to one count of conspiracy to commit
securities fraud while employed at RBS Securities Inc.
US mortgages - loan repurchase matters
RBS’s NatWest Markets business in North America was a
purchaser of non-agency residential mortgages in the secondary
market, and an issuer and underwriter of non-agency RMBS.
In issuing RMBS, NatWest Markets in some circumstances made
representations and warranties regarding the characteristics of
the underlying loans. As a result, NatWest Markets may be, or
may have been, contractually required to repurchase such loans
or indemnify certain parties against losses for certain breaches of
such representations and warranties. Depending on the extent to
which such loan repurchase related claims are pursued against
and not rebutted by NatWest Markets on timeliness or other
grounds, the aggregate potential impact on RBS, if any, may be
material.
319
Notes on the consolidated accounts
Litigation, investigations and reviews continued
LIBOR and other trading rates
From February 2013 to December 2016, RBS entered into
settlements with various governmental authorities in relation to
investigations into submissions, communications and procedures
around the setting of LIBOR and other interest rates and interest
rate trading, which, among other things, required RBS to pay
significant penalties. As part of these resolutions, RBS made
certain undertakings regarding benchmark interest rates,
including the undertakings contained in its February 2013
resolution with the Commodity Futures Trading Commission
(CFTC).
RBS continues to co-operate with investigations and requests for
information by various other governmental and regulatory
authorities, including in the UK, US and APAC.
On 3 February 2017, it was announced that RBS and the CFTC
entered into a civil settlement resolving the CFTC’s investigation
of ISDAFIX and related trading activities. As part of the
settlement, RBS has paid a penalty of US$85 million and agreed
to certain undertakings.
Foreign exchange related investigations
In November 2014, RBS plc reached a settlement with the FCA
and the CFTC in relation to investigations into failings in RBSG’s
FX businesses within its NatWest Markets segment. RBS plc
agreed to pay penalties of £217 million to the FCA and US$290
million to the CFTC to resolve the investigations. The fines were
paid in November 2014.
In May 2015, RBS plc announced that it had reached settlements
with the DOJ and the Board of Governors of the Federal Reserve
System (Federal Reserve) in relation to investigations into its FX
business within its NatWest Markets segment. RBS plc paid a
penalty of US$274 million to the Federal Reserve and agreed to
pay a penalty of US$395 million to the DOJ to resolve the
investigations.
As part of its plea agreement with the DOJ, RBS plc pled guilty in
the United States District Court for the District of Connecticut to a
one-count information charging an antitrust conspiracy. RBS plc
admitted that it knowingly, through one of its euro/US dollar
currency traders, joined and participated in a conspiracy to
eliminate competition in the purchase and sale of the euro/US
dollar currency pair exchanged in the FX spot market.
The charged conspiracy occurred between as early as December
2007 to at least April 2010. On 5 January 2017, the United States
District Court for the District of Connecticut imposed a sentence
on RBS plc consisting of the US$395 million criminal fine
previously agreed with the DOJ and a term of probation, which
among other things, prohibits RBS plc from committing another
crime in violation of US law or engaging in the FX trading
practices that form the basis for the charged crime and requires
RBS plc to implement a compliance program designed to prevent
and detect the unlawful conduct at issue and to strengthen its
compliance and internal controls as required by other regulators
(including the FCA and the CFTC). A violation of the terms of
probation could lead to the imposition of additional penalties.
Subsequent to the sentencing, RBS plc paid the criminal fine,
which had been covered by an existing provision.
RBS plc and RBS Securities Inc. have also entered into a cease
and desist order with the Federal Reserve relating to FX and
other designated market activities (the FX Order). In the FX
Order, which is publicly available and will remain in effect until
terminated by the Federal Reserve, RBS plc and RBS Securities
Inc. agreed to take certain remedial actions with respect to FX
activities and certain other designated market activities, including
the creation of an enhanced written internal controls and
compliance program, an improved compliance risk management
program, and an enhanced internal audit program. RBS plc and
RBS Securities Inc. are obligated to implement and comply with
these programs as approved by the Federal Reserve, and are
also required to conduct, on an annual basis, a review of
applicable compliance policies and procedures and a risk-
focused sampling of key controls.
RBS is co-operating with investigations and responding to
inquiries from other governmental and regulatory (including
competition) authorities on similar issues relating to failings in its
FX business within its NatWest Markets segment. The timing and
amount of financial penalties with respect to any further
settlements and related litigation risks and collateral
consequences remain uncertain and may well be material.
FCA review of RBS’s treatment of SMEs
In November 2013, a report by Lawrence Tomlinson,
entrepreneur in residence at the UK Government’s Department
for Business Innovation and Skills, was published (‘Tomlinson
Report’). The Tomlinson Report was critical of RBS’s treatment of
SMEs.
The Tomlinson Report was passed to the PRA and FCA. Shortly
thereafter, the FCA appointed an independent Skilled Person
under section 166 of the Financial Services and Markets Act to
review the allegations in the Tomlinson Report. The Skilled
Person’s review was focused on RBS’s UK small and medium
sized business customers with credit exposures of up to £20
million whose relationship was managed within RBS’s Global
Restructuring Group or within similar units within RBS’s
Corporate Banking Division that were focused on customers in
financial difficulties. In the period 2008 to 2013 RBS was one of
the leading providers of credit to the UK SME sector.
Separately, in November 2013, RBS instructed the law firm
Clifford Chance to conduct an independent review of the principal
allegation made in the Tomlinson Report: RBS was alleged to be
culpable of systematic and institutional behaviour in artificially
distressing otherwise viable businesses and, through that, putting
businesses into insolvency. Clifford Chance published its report
on 17 April 2014 and, while it made certain recommendations to
enhance customer experience and transparency of pricing, it
concluded that there was no evidence to support the principal
allegation.
320
Notes on the consolidated accounts
Litigation, investigations and reviews continued
A separate independent review of the principal allegation, led by
Mason Hayes & Curran, Solicitors, was conducted in the
Republic of Ireland. The report was published in December 2014
and found no evidence to support the principal allegation.
The Skilled Person review focused on the allegations made in the
Tomlinson Report and certain observations made by Sir Andrew
Large in his 2013 Independent Lending Review, and was broader
in scope than the reviews undertaken by Clifford Chance and
Mason, Hayes & Curran which are referred to above. The Skilled
Person delivered the draft findings from its review to the FCA in
March 2016. RBS was then given the opportunity to consider and
respond to those draft findings before the Skilled Person
delivered its final report to the FCA during September 2016.
In November 2016, the FCA published an update on its review. In
response, RBS announced redress steps for SME customers in
the UK and the Republic of Ireland that were in GRG between
2008 and 2013. These steps were (i) an automatic refund of
certain complex fees; and (ii) a new complaints process,
overseen by an Independent Third Party. They were developed
with the involvement of the FCA, which agreed that they were
appropriate steps for RBS to take.
RBS estimates the costs associated with the complaints review
process and the automatic refund of complex fees to be
approximately £400 million, which was recognised as a provision
in 2016. This includes operational costs together with the cost of
refunded complex fees and the additional estimated redress
costs arising from the complaints process. Of the £400 million
provision, £150 million had been utilised by 31 December 2017.
On 23 October 2017, the FCA published an interim report
incorporating a summary of the Skilled Person’s report which
stated that, further to the general investigation announced in
November 2016, the FCA had decided to carry out a more
focused investigation. The FCA published its final summary of the
Skilled Person’s report on 28 November 2017. The UK House of
Commons Treasury Select Committee, seeking to rely on
Parliamentary powers, published the full version of the Skilled
Person’s report on 20 February 2018.
Interest rate hedging products (IRHP) redress programme
From 2013, RBS and other banks undertook a redress exercise
and past business review in relation to the sale of interest rate
hedging products to some small and medium sized businesses
classified as retail clients or private customers under FSA rules.
This exercise was scrutinised by an independent reviewer,
KPMG (appointed as a Skilled Person under section 166 of the
Financial Services and Markets Act), and overseen by the FCA.
RBS provisions in relation to the above redress exercises total
£1.47 billion for these matters, virtually all of which had been
utilised at 31 December 2017.
Judicial Review of Skilled Person’s role in IRHP review
RBS has been named as an interested party in a number of
claims for judicial review of KPMG’s decisions as Skilled Person
in RBS’s previously disclosed IRHP redress programme. This
follows a similar claim from a customer of another UK bank, also
against KPMG.
All of these claims were stayed pending the outcome of the other
bank’s case. The trial in that case was heard in January 2016.
The court decided in favour of KPMG, finding that (1) KPMG is
not a body amenable to judicial review in respect of its role as
Skilled Person in this matter; and (2) that there was no unfairness
by the other bank in the procedure adopted.
The claimant has been granted permission to appeal that
decision, and the appeal hearing is expected to take place on 23
and 24 May 2018.
The majority of the claims that name RBS as an interested party
have been discontinued but there are still several cases which
remain stayed pending the outcome of the appeal in the other
bank’s case. If the appeal court finds that a section 166-
appointed Skilled Person is susceptible to judicial review, these
remaining claims against RBS may then proceed to full hearing to
assess the fairness of KPMG’s role in the redress programme in
those particular cases. If deemed unfair, this could have a
consequential impact on the reasonableness of the methodology
applied to reviewed and settled IRHP files generally. As there
remains some uncertainty, it is not practicable reliably to estimate
the impact of this matter, if any, on RBS which may be material.
Investment advice review
In February 2013, the FSA announced the results of a mystery
shopping review it undertook into the investment advice offered
by banks and building societies to retail clients. As a result of that
review the FSA announced that firms involved were cooperative
and agreed to take immediate action. RBS was one of the firms
involved.
The action required included a review of the training provided to
advisers, considering whether changes were necessary to both
advice processes and controls for new business, and undertaking
a past business review to identify any historic poor advice (and
where breaches of regulatory requirements are identified, to put
this right for customers).
Subsequent to the FSA announcing the results of its mystery
shopping review, the FCA required RBS to carry out a past
business review and customer contact exercise on a sample of
historic customers that received investment advice on certain
lump sum products through the UK Financial Planning channel of
the UK Personal & Business Banking (UK PBB) segment of RBS,
which includes RBS plc and NatWest, during the period from
March 2012 until December 2012.
This review was conducted under section 166 of the Financial
Services and Markets Act, under which a Skilled Person was
appointed to carry out the exercise. Redress has been paid to
certain customers in this sample group.
321
Notes on the consolidated accounts
Litigation, investigations and reviews continued
Following discussions with the FCA after issue of the draft
section 166 report, RBS agreed with the FCA that it would carry
out a wider review/remediation exercise relating to certain
investment, insurance and pension sales from 1 January 2011 to
1 April 2015. The project regarding review/remediation of sales
between 1 January 2011 and 1 April 2015 was due to finish at the
end of 2017 but this deadline is being extended with completion
anticipated by the end of Q1 2018. This is to allow completion of
outstanding remediation activity that was impacted by customer
responses, and to receive information from third party providers,
in addition to concluding small cohorts of work that were
postponed until the additional scope was agreed.
In addition, discussions are ongoing with FCA with regard to
extending the scope of the review/remediation exercise to include
the period from 1 January 2010 to 31 December 2010, with a
formal decision expected during Q1 2018. It is not currently
anticipated that any extension of scope will require an additional
provision to be taken.
In addition, RBS agreed with the FCA that it would carry out a
remediation exercise, for a specific customer segment who were
sold a particular structured product, in response to concerns
raised by the FCA with regard to (a) the target market for the
product and (b) how the product may have been described to
customers by certain advisers. Redress has been paid to certain
customers who took out the structured product.
RBS provisions in relation to investment advice total £201 million
to date for these matters, of which £102 million had been utilised
as at 31 December 2017.
Packaged accounts
As a result of an uplift in packaged current account complaints,
RBS proactively put in place dedicated resources in 2013 to
investigate and resolve complaints on an individual basis. RBS
has made gross provisions totalling £409 million to date for this
matter.
The FCA conducted a thematic review of packaged bank
accounts across the UK from October 2014 to April 2016, the
results of which were published in October 2016. RBS continues
to take into consideration and, where relevant, address the
findings from this review.
FCA investigation into RBS plc’s compliance with the Money
Laundering Regulations 2007
On 21 July 2017, the FCA notified RBS that it was undertaking an
investigation into RBS plc’s compliance with the Money
Laundering Regulations 2007 in relation to certain customers.
Following amendment to the scope of the investigation, there are
currently three areas under review: (1) compliance with Money
Laundering Regulations in respect of Money Service Business
customers; (2) compliance with the Terrorism Act 2000 in relation
to sanctions screening; and (3) the Suspicious Transactions
regime in relation to the events surrounding a particular
customer. The investigations in all three areas are assessing
both criminal and civil culpability. RBS is cooperating with the
investigations.
Multilateral interchange fees
In September 2014, the Court of Justice upheld earlier decisions
by the EU Commission and the General Court that MasterCard’s
multilateral interchange fee (MIF) arrangements for cross border
payment card transactions with MasterCard and Maestro
branded consumer credit and debit cards in the EEA are in
breach of competition law.
Separately, in April 2013, the EC announced it was opening a
new investigation into interchange fees payable in respect of
payments made in the EEA by MasterCard cardholders from non-
EEA countries. On 3 August 2017, the EC announced it had also
sent Visa a Supplementary Statement of Objections. The EC
investigations are ongoing.
In June 2015, a regulation on interchange fees for card payments
entered into force. The regulation requires the capping of both
cross-border and domestic MIF rates for debit and credit
consumer cards.
The regulation also sets out other reforms including to the
Honour All Cards Rule which require merchants to accept all
cards with the same level of MIF but not cards with different MIF
levels.
In May 2015, the Competition & Markets Authority (CMA)
announced that it had closed the investigations into domestic
interchange fees on the grounds of administrative priorities.
Whilst there are no recent developments on the above to report,
there remains uncertainty around the outcomes of the ongoing
EC investigation, and the impact of the regulation, and they may
have a material adverse effect on the structure and operation of
four party card payment schemes in general and, therefore, on
RBS’s business in this sector.
Payment Protection Insurance (PPI)
Since 2011, RBS has been implementing the FCA’s policy
statement for the handling of complaints about the mis-selling of
PPI (Policy Statement 10/12).
In August 2017, the FCA’s new rules and guidance on PPI
complaints handling (Policy Statement 17/3) came into force. The
Policy Statement introduced new so called ‘Plevin’ rules, under
which customers may be eligible for redress if the bank earned a
high level of commission from the sale of PPI, but did not
disclose this detail at the point of sale. The Policy Statement also
introduced a two year PPI deadline, due to expire in August
2019, before which new PPI complaints must be made. RBS is
implementing the Policy Statement.
RBS has made provisions totalling £5.1 billion to date for PPI
claims, including an additional provision of £175 million in 2017.
Of the £5.1 billion cumulative provision, £4.1 billion had been
utilised by 31 December 2017.
322
Notes on the consolidated accounts
Litigation, investigations and reviews continued
UK retail banking
In November 2014, the CMA announced its decision to proceed
with a market investigation reference (MIR) into retail banking,
which would cover personal current account (PCA) and SME
banking. On 9 August 2016, the CMA published its final report.
The CMA concluded that there are a number of competition
concerns in the provision of PCAs, business current accounts
and SME lending, particularly around low levels of customers
searching and switching, resulting in banks not being put under
enough competitive pressure, and new products and new banks
not attracting customers quickly enough. The final report set out
remedies to address these concerns. These included remedies
making it easier for customers to compare products, ensure
customers benefit from technological advantages around open
banking, improve the current account switching service and
provide PCA overdraft customers with greater control over their
charges along with additional measures targeted at SME
customers.
On 2 February 2017 the CMA published the Retail Banking
Market Investigation Order 2017 (the ‘Order’), which is the
primary legal framework setting out the obligations for the
implementation of the majority of remedies, including an
implementation deadline for each.
Other remedies are to be delivered via undertakings signed by
Bacs and recommendations to be taken forward by other
regulators (including the FCA).
On 19 December 2017 the CMA published directions for RBS
and four other banks, which set out revised implementation dates
for the delivery of certain obligations relating to open banking
under the Order. On 29 January 2018 the CMA published
separate directions for RBS, which set out revised
implementation dates for the delivery of certain obligations
requiring PCA overdraft alerts to be sent to customers under the
Order.
At this stage there remains uncertainty around the financial
impact of the remedies once implemented, and so it is not
practicable to estimate the potential impact on RBS, which may
be material.
FCA Investment and Corporate Banking Market Study
In February 2015, the FCA launched a market study into
investment and corporate banking. In October 2016 the FCA
published its final report. It found that whilst many clients feel well
served by primary capital market services there were some areas
where improvements could be made to encourage competition,
particularly for smaller clients. It set out a package of remedies,
including prohibiting the use of restrictive contractual clauses and
ending league table misrepresentation by asking league table
providers to review their recognition criteria. The prohibition on
restrictive contractual clauses took effect from 3 January 2018.
Some uncertainty remains around the financial impact of the
remedies once implemented and so it is not practicable reliably to
estimate the potential impact on RBS. However, at this stage, this
impact is not expected to be material.
FCA Asset Management Market Study
In November 2015, the FCA announced that a market study
would be undertaken into asset management. In November 2016,
the FCA published the interim report which indicated that price
competition is weak and expressed concerns around the lack of
transparency on the objectives, and appropriate benchmarks, for
reporting fund performance. On 28 June 2017, the FCA
published the final report which was broadly in line with the
interim report and sets out an extensive package of remedies
which include providing further protection to investors and driving
competitive pressure on asset managers.
Some uncertainty remains around the financial impact of the
remedies once implemented and so it is not practicable reliably to
estimate the potential impact on RBS. However, at this stage, this
impact is not expected to be material.
FCA Mortgages Market Study
In December 2016, the FCA launched a market study into the
provision of mortgages. The FCA is expected to publish an
interim report in Spring 2018 with the final report expected in Q4
2018.
At this stage, as there is considerable uncertainty around the
outcome of this market study, it is not practicable reliably to
estimate the aggregate impact, if any, on RBS which may be
material.
FCA Strategic Review of Retail Banking Models
On 11 May 2017 the FCA announced a two phase strategic
review of retail banking models. The FCA will use the review to
understand how these models operate, including how ‘free if in
credit’ banking is paid for and the impact of changes such as
increased use of digital channels and reduced branch usage.
Phase 1 will allow the FCA to enhance its understanding of
existing models and how these impact competition and conduct.
Phase 2 will evaluate the impacts of economic, technological,
social and regulatory factors on these models. A project update is
expected in Q2 2018 outlining the FCA’s preliminary conclusions
from Phase 1.
At this early stage, as there is considerable uncertainty around
the outcome of this review, it is not practicable reliably to
estimate the aggregate impact, if any, on RBS, which in due
course may be material.
323
Notes on the consolidated accounts
Litigation, investigations and reviews continued
Governance and risk management consent order
In July 2011, RBS agreed with the Board of Governors of the
Federal Reserve System, the New York State Banking
Department, the Connecticut Department of Banking, and the
Illinois Department of Financial and Professional Regulation to
enter into a consent Cease and Desist Order (Governance Order)
(which is publicly available) to address deficiencies related to
governance, risk management and compliance systems and
controls in the US branches of RBS plc and RBS N.V. branches
(the US Branches).
In the Governance Order, RBS agreed to create the following
written plans or programmes:
Key points
● a plan to strengthen board and senior management oversight of
the corporate governance, management, risk management, and
operations of RBS’s US operations on an enterprise-wide and
business line basis;
● an enterprise-wide risk management programme for RBS’s US
operations;
● a plan to oversee compliance by RBS’s US operations with all
applicable US laws, rules, regulations, and supervisory guidance;
● a Bank Secrecy Act/anti-money laundering compliance
programme for the US Branches on a consolidated basis;
● a plan to improve the US Branches’ compliance with all
applicable provisions of the Bank Secrecy Act and its rules and
regulations as well as the requirements of Regulation K of the
Federal Reserve;
● a customer due diligence programme designed to ensure
reasonably the identification and timely, accurate, and complete
reporting by the US Branches of all known or suspected
violations of law or suspicious transactions to law enforcement
and supervisory authorities, as required by applicable suspicious
activity reporting laws and regulations; and
● a plan designed to enhance the US Branches’ compliance with
Office of Foreign Assets Control (OFAC) requirements.
The Governance Order identified specific items to be addressed,
considered, and included in each proposed plan or programme.
RBS also agreed in the Governance Order to adopt and
implement the plans and programmes after approval by the
regulators, to comply fully with the plans and programmes
thereafter, and to submit to the regulators periodic written
progress reports regarding compliance with the Governance
Order.
RBS has created, submitted, and adopted plans and/or
programmes to address each of the areas identified above. In
connection with RBS’s efforts to implement these plans and
programmes, it has, among other things, made investments in
technology, hired and trained additional personnel, and revised
compliance, risk management, and other policies and procedures
for RBS’s US operations. RBS continues to test the effectiveness
of the remediation efforts it has undertaken to ensure they are
sustainable and meet regulators' expectations.
Furthermore, RBS continues to work closely with the regulators in
its efforts to fulfil its obligations under the Governance Order,
which will remain in effect until terminated by the regulators.
RBS may be subject to formal and informal supervisory actions
and may be required by its US banking supervisors to take
further actions and implement additional remedial measures with
respect to these and additional matters. RBS’s activities in the
US may be subject to significant limitations and/or conditions.
US dollar processing consent order
In December 2013 RBS and RBS plc agreed a settlement with
the Federal Reserve, the New York State Department of
Financial Services (DFS), and the Office of Foreign Assets
Control (OFAC) with respect to RBS plc’s historical compliance
with US economic sanction regulations outside the US. As part of
the settlement, RBS and RBS plc entered into a consent Cease
and Desist Order with the Federal Reserve (US Dollar
Processing Order), which remains in effect until terminated by the
Federal Reserve. The US Dollar Processing Order (which is
publicly available) indicated, among other things, that RBS and
RBS plc lacked adequate risk management and legal review
policies and procedures to ensure that activities conducted
outside the US comply with applicable OFAC regulations.
RBS agreed to create an OFAC compliance programme to
ensure compliance with OFAC regulations by RBS’s global
business lines outside the US, and to adopt, implement, and
comply with the programme. Prior to and in connection with the
US Dollar Processing Order, RBS has made investments in
technology, hired and trained personnel, and revised compliance,
risk management, and other policies and procedures.
Under the US Dollar Processing Order (as part of the OFAC
compliance programme) RBS was required to appoint an
independent consultant to conduct an annual review of OFAC
compliance policies and procedures and their implementation
and an appropriate risk-focused sampling of US dollar payments.
RBS appointed the independent consultant and their reports were
submitted to the authorities in June 2015. The independent
consultant review examined a significant number of sanctions
alerts and no reportable issues were identified.
Pursuant to the US Dollar Processing Order, the authorities
requested a second annual review to be conducted by an
independent consultant. The second review was conducted by
the independent consultant and reports were submitted to the
authorities in September 2016. In line with the first review, and
following examination of a significant number of sanctions alerts,
the independent consultant did not identify any reportable issues.
The authorities have requested a third annual review to be
conducted and independent consultant reports are expected to
be issued during Q1 2018. In addition, pursuant to requirements
of the US Dollar Processing Order, RBS has provided the
required written submissions, including quarterly updates, in a
timely manner, and RBS continues to participate in a constructive
dialogue with the authorities.
324
Notes on the consolidated accounts
Litigation, investigations and reviews continued
US/Swiss tax programme
In August 2013, the DOJ announced a programme for Swiss
banks (the Programme) which provides Swiss banks with an
opportunity to obtain resolution, through non-prosecution
agreements or non-target letters, of the DOJ’s investigations of
the role that Swiss banks played in concealing the assets of US
tax payers in offshore accounts (US related accounts). In
December 2013, Coutts & Co Ltd., a member of the Group
incorporated in Switzerland, notified the DOJ that it intended to
participate in the Programme.
As required by the Programme, Coutts & Co Ltd. subsequently
conducted a review of its US related accounts and presented the
results of the review to the DOJ. In December 2015, Coutts & Co
Ltd. entered into a non-prosecution agreement (the NPA) in
which Coutts & Co Ltd. paid a US$78.5 million penalty and
acknowledged responsibility for certain conduct set forth in a
statement of facts accompanying the agreement. Under the NPA,
which has a term of four years, Coutts & Co Ltd. is required,
among other things, to provide certain information, cooperate
with DOJ’s investigations, and commit no U.S. federal offences. If
Coutts & Co Ltd. abides by the NPA, the DOJ will not prosecute it
for certain tax-related and monetary transaction offences in
connection with US related accounts.
Enforcement proceedings and investigations in relation to Coutts
& Co Ltd
The Swiss Financial Market Supervisory Authority (FINMA) has
been taking enforcement proceedings against Coutts & Co Ltd, a
member of RBS incorporated in Switzerland, with regard to
certain client accounts held with Coutts & Co Ltd relating to
allegations in connection with the Malaysian sovereign wealth
fund 1MDB. On 2 February 2017, FINMA announced that Coutts
& Co Ltd had breached money laundering regulations by failing to
carry out adequate background checks into business
relationships and transactions associated with 1MDB. FINMA
accordingly required Coutts & Co Ltd to disgorge profits of CHF
6.5 million. FINMA is currently investigating three individuals in
connection with 1MDB.
In addition, Coutts & Co Ltd is cooperating with investigations
and enquiries from authorities in other jurisdictions in relation to
the same subject matter. In this context, the Monetary Authority
of Singapore (MAS)’s supervisory examination of Coutts & Co
Ltd’s Singapore branch revealed breaches of anti-money
laundering requirements. MAS imposed on Coutts & Co Ltd
financial penalties amounting to SGD 2.4 million in December
2016.
The outcomes of other proceedings, investigations and enquiries
are uncertain but may include financial consequences and/or
regulatory sanctions.
Regulator requests concerning certain historic Russian
transactions
Media coverage in 2017 highlighted an alleged money laundering
scheme involving Russian entities between 2010 and 2014.
Allegedly certain European banks, including RBS and 16 other
UK based financial institutions, and certain US banks, were
involved in processing certain transactions associated with this
scheme. RBS has responded to requests for information from the
FCA, PRA and regulators in other jurisdictions.
Review and investigation of treatment of tracker mortgage
customers in Ulster Bank Ireland DAC (formerly Ulster Bank
Ireland Limited)
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 have 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 has required Ulster Bank Ireland DAC (UBI DAC), a
member of RBS, incorporated in the Republic of Ireland, to
participate in this review and UBI DAC is co-operating with the
CBI in this regard. UBI DAC submitted its phase 2 report to the
CBI on 31 March 2017, identifying impacted customers. The
redress and compensation phase (phase 3) commenced in Q4
2017.
RBS has made provisions totalling €298 million (£248 million) to
date for this matter, including an additional provision of €87
million (£76 million) in 2017. Of the €298 million (£248 million)
cumulative provision, €75 million (£64 million) had been utilised
by 31 December 2017.
Separately, in April 2016, the CBI notified UBI DAC that it was
also commencing an investigation under its Administrative
Sanctions Procedure into suspected breaches of the Consumer
Protection Code 2006 during the period 4 August 2006 to 30
June 2008 in relation to certain customers who switched from
tracker mortgages to fixed rate mortgages. This investigation is
ongoing and UBI DAC continues to co-operate with the CBI.
As part of an internal review of the wider retail and commercial
loan portfolios extending from the tracker mortgage examination
programme, UBI DAC identified further legacy business issues. A
programme is ongoing to identify and remediate impacted
customers and a charge of €101 million (£89 million) has been
recognised in 2017 based on expected remediation and project
costs in relation to these items.
325
Notes on the consolidated accounts
32 Net cash flow from operating activities
Operating profit/(loss) before tax - continuing operations
Profit before tax - discontinued operations
Decrease/(increase) in prepayments and accrued income
Interest on subordinated liabilities
Decrease in income accruals
Impairment losses/(releases)
Loans and advances written-off net of recoveries
Unwind of discount on impairment losses
Profit on sale of property, plant and equipment
Profit on sale of subsidiaries and associates
(Profit)/loss on sale of securities
Charge for defined benefit pension schemes
Pension schemes curtailments or settlements (gain)/loss
Cash contribution to defined benefit pension schemes
Other provisions charged net of releases
Other provisions utilised
Depreciation and amortisation
Loss on redemption of own debt
Loss on reclassification to disposal groups
Write down of goodwill and other intangible assets
Elimination of foreign exchange differences
Other non-cash items
Net cash outflow from trading activities
Decrease/(increase) in loans and advances to banks and customers
(Increase)/decrease in securities
(Increase)/decrease in other assets
Decrease in derivative assets
Changes in operating assets
Increase/(decrease) in deposits by banks and customers
Increase/(decrease) in debt securities in issue
(Decrease)/increase in other liabilities
Decrease in derivative liabilities
Increase/(decrease) in settlement balances and short positions
Changes in operating liabilities
Income taxes paid
Net cash inflow/(outflow) from operating activities
33 Analysis of the net investment in business interests and intangible assets
Acquisitions and disposals
Fair value given for businesses acquired
Net outflow of cash in respect of acquisitions
Net assets/(liabilities) sold
Non-cash consideration
Profit on disposal
Net cash and cash equivalents disposed
Net inflow/(outflow) of cash in respect of disposals
Dividends received from associates
Cash expenditure on intangible assets
Net (outflow)/inflow
Note:
(1)
Includes cash proceeds of £1,628 million in 2015 relating to the disposal of the controlling interest in Citizens.
2017
£m
2,239
—
1
572
(236)
493
(1,054)
(86)
(75)
(155)
(226)
309
66
(627)
1,931
(6,477)
808
7
—
29
(426)
21
(2,886)
2,466
(1,319)
(221)
86,138
87,064
25,449
3,326
(381)
(81,969)
8,658
(44,917)
(520)
38,741
2017
£m
(131)
(131)
177
(15)
155
—
317
(1)
(384)
(199)
2016
£m
(4,082)
—
(42)
845
(444)
478
(3,586)
(113)
(18)
(22)
(71)
267
1
(4,786)
7,216
(2,699)
778
126
—
159
(6,518)
619
(11,892)
(12,960)
16,741
1,195
15,562
20,538
10,418
(3,967)
(422)
(18,258)
104
(12,125)
(171)
(3,650)
2016
£m
(87)
(87)
(400)
(5)
22
55
(328)
9
(480)
(886)
2015
£m
(2,703)
1,766
410
875
(1,075)
(624)
(8,789)
(144)
(91)
(1,135)
4
523
(65)
(1,060)
4,566
(2,202)
1,180
263
273
1,332
(1,501)
599
(7,598)
58,766
13,149
2,808
91,311
166,034
(43,597)
(20,580)
4,465
(94,951)
(2,782)
(157,445)
(73)
918
2015
£m
(59)
(59)
(2,041)
—
1,135
1,959
1,053
11
(614)
391
326
Notes on the consolidated accounts
34 Interest received and paid
Interest received
Interest paid
35 Analysis of changes in financing during the year
At 1 January
Issue of ordinary shares
Issue of Additional Tier 1 capital notes
Redemption of paid-in equity
Redemption of subordinated liabilities
Net cash (outflow)/inflow from financing
2017
£m
10,946
(2,300)
8,646
2016
£m
11,321
(2,638)
8,683
2015
£m
11,788
(3,598)
8,190
Share capital, share premium,
paid-in equity and merger reserve
2017
£m
2016
£m
2015
£m
Subordinated liabilities
2017
£m
2016
£m
2015
£m
52,979
50,577
45,935
19,419
19,847
22,905
306
—
(720)
300
2,046
(110)
(414)
2,236
307
2,012
(150)
2,169
—
4,590
225
—
(1)
(2,341)
—
(5,747)
(5,747)
(3,606)
(3,606)
(3,047)
(3,047)
(950)
3,178
(11)
Transfer to retained earnings
Conversion of B shares
Ordinary shares issued in respect of employee share schemes
Redemption of debt preference shares
Redemption of equity preference shares
Transfer of merger reserve to retained earnings
Other adjustments including foreign exchange
(25,789)
—
71
748
—
—
196
—
—
166
—
—
—
—
At 31 December
27,791
52,979
50,577
12,722
19,419
19,847
36 Analysis of cash and cash equivalents
At 1 January
- cash
- cash equivalents
Net cash outflow
At 31 December
Comprising:
Cash and balances at central banks
Treasury bills and debt securities
Loans and advances to banks
Cash and cash equivalents
2017
£m
2016
£m
2015
£m
88,414
10,156
98,570
24,035
122,605
98,337
427
23,841
122,605
94,832
8,760
103,592
(5,022)
98,570
74,250
387
23,933
98,570
92,060
15,844
107,904
(4,312)
103,592
79,404
1,578
22,610
103,592
Note:
(1)
Includes cash collateral posted with bank counterparties in respect of derivative liabilities of £6,883 million (2016 - £6,661 million; 2015 - £11,031 million).
Certain members of RBS are required by law or regulation to maintain balances with the central banks in the jurisdictions in which they
operate. These balances are set out below.
Bank of England
De Nederlandsche Bank
2017
£0.6bn
€0.1bn
2016
£0.5bn
€0.4bn
2015
£0.5bn
€0.3bn
327
Notes on the consolidated accounts
37 Segmental analysis
(a) 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).
Segmental reorganisation and business transfers
RBS continues to deliver on its plan to build a strong, simple and
fair bank for both customers and shareholders. To support this,
and in preparation for the UK ring-fencing regime, the previously
reported operating segments were realigned in Q4 2017 and a
number of business transfers completed.
Segmental reorganisation
The previously reported operating segments are now realigned
and comparatives have been re-presented as follows:
The former Williams & Glyn reportable operating segment
has been integrated into the UK PBB reportable segment;
The former Capital Resolution reportable operating segment
has been integrated into the NatWest Markets reportable
segment, with the exception of the costs in relation to the
RMBS claims, which have been transferred to the Central &
other items reportable segment;
The RBSI reportable operating segment is no longer
presented within the CPB franchise.
Business transfers
On 1 October 2017 the following changes were made to RBS’s
businesses, which impacts its financial reporting but where
comparatives have not been re-presented:
Shipping and other activities, which were formerly in Capital
Resolution, were transferred from the NatWest Markets
reportable segment to the Commercial Banking reportable
segment.
UK PBB Collective Investment Funds (CIFL) business was
transferred to the Private Banking reportable segment in
order to better serve customers.
The RBS International (RBSI) reportable operating segment
was aligned to the legal entity The Royal Bank of Scotland
International (Holdings) Limited. This predominantly involved
transfers from Private Banking, and Services and Functions
within Central items & other in preparation for the
implementation of the UK ring-fencing regime.
Commercial Banking whole business securitisations and
relevant financial institutions (RFI) were transferred to
NatWest Markets during December 2017. RFIs are
prohibited from being within the ring-fence due to their
nature and exposure to global financial markets. The move
is in preparation for the implementation of the UK ring-
fencing regime.
Reportable operating segments
Following the changes detailed the reportable operating
segments are as follows:
Personal & Business Banking (PBB) comprises two reportable
segments: UK Personal & Business Banking (UK PBB) and
Ulster Bank RoI. UK PBB serves individuals and mass affluent
customers in the UK together with small businesses (generally up
to £2 million turnover). UK PBB includes Ulster Bank customers
in Northern Ireland. Ulster Bank RoI serves individuals and
businesses in the Republic of Ireland (RoI).
Commercial & Private Banking (CPB) comprises two reportable
segments: Commercial Banking and Private Banking.
Commercial Banking serves commercial and corporate
customers in the UK and Western Europe. Private Banking
serves UK connected high net worth individuals.
RBS International (RBSI) serves retail, commercial, corporate
and financial institution customers in Jersey, Guernsey, Isle of
Man and Gibraltar and financial institution customers in
Luxembourg and London.
NatWest Markets offers corporate and institutional customers
global market access, providing them with trading, risk
management and financing solutions through its trading and
sales operations in London, Singapore and Stamford and sales
offices in Dublin, Hong Kong and Tokyo.
Central items & other includes corporate functions, such as RBS
treasury, finance, risk management, compliance, legal,
communications and human resources. Central functions
manages RBS capital resources and RBS-wide regulatory
projects and provides services to the reportable segments.
Balances in relation to legacy litigation issues and the
international private banking business are included in Central
items in the relevant periods.
Allocation of central balance sheet items
RBS allocates all central costs relating to Services and Functions
to the business using appropriate drivers, these are reported as
indirect costs in the segmental income statements. Assets (and
risk-weighted assets) held centrally, mainly relating to RBS
Treasury, are allocated to the business using appropriate drivers.
328
Notes on the consolidated accounts
37 Segmental analysis continued
2017
UK Personal & Business Banking
Ulster Bank RoI
Personal & Business Banking
Commercial Banking
Private Banking
Commercial & Private Banking
RBS International
NatWest Markets
Central items & other
Total
2016*
UK Personal & Business Banking
Ulster Bank RoI
Personal & Business Banking
Commercial Banking
Private Banking
Commercial & Private Banking
RBS International
NatWest Markets
Central items & other
Total
2015*
UK Personal & Business Banking
Ulster Bank RoI
Personal & Business Banking
Commercial Banking
Private Banking
Commercial & Private Banking
RBS International
NatWest Markets
Central items & other
Total
* Re-presented to reflect the segmental reorganisation.
Net
interest
income
£m
5,130
421
5,551
2,286
464
2,750
325
203
158
Non-interest
income
£m
1,347
183
1,530
1,198
214
1,412
64
847
293
Total
income
£m
6,477
604
7,081
3,484
678
4,162
389
1,050
451
8,987
4,146
13,133
4,945
409
5,354
2,143
449
2,592
303
343
116
1,182
167
1,349
1,272
208
1,480
71
869
113
6,127
576
6,703
3,415
657
4,072
374
1,212
229
Operating
expenses
£m
(3,829)
(676)
(4,505)
(1,870)
(529)
(2,399)
(217)
(2,250)
(222)
(9,593)
(4,278)
(669)
(4,947)
(2,324)
(549)
(2,873)
(174)
(2,810)
(4,612)
8,708
3,882
12,590
(15,416)
4,810
365
5,175
1,997
436
2,433
303
452
404
8,767
1,223
185
1,408
1,257
208
1,465
64
1,614
(395)
4,156
6,033
550
6,583
3,254
644
3,898
367
(4,564)
(429)
(4,993)
(1,780)
(1,101)
(2,881)
(160)
2,066
9
12,923
(5,226)
(1,913)
(15,173)
(15)
(1,024)
(1,180)
Depreciation
and
amortisation
£m
—
—
Impairment
(losses)/
releases
£m
(235)
(60)
Operating
profit/(loss)
£m
2,413
(132)
—
(144)
—
(144)
(2)
49
(711)
(808)
2
—
2
(143)
—
(143)
—
(14)
(623)
(778)
—
—
—
(141)
—
(141)
—
(295)
(362)
(6)
(368)
(3)
174
(1)
(493)
(125)
113
(12)
(206)
3
(203)
(10)
(253)
—
(478)
(8)
141
133
(69)
(13)
(82)
—
730
(54)
727
2,281
1,108
143
1,251
167
(977)
(483)
2,239
1,726
20
1,746
742
111
853
190
(1,865)
(5,006)
(4,082)
1,461
262
1,723
1,264
(470)
794
207
(2,445)
(2,982)
(2,703)
329
Notes on the consolidated accounts
37 Segmental analysis continued
Total income
UK Personal & Business Banking
Ulster Bank RoI
Personal & Business Banking
Commercial Banking
Private Banking
2017
Inter
segment
£m
12
(5)
Total
£m
6,477
604
7
7,081
(367)
84
3,484
678
External
£m
6,465
609
7,074
3,851
594
2016*
Inter
segment
£m
12
(8)
Total
£m
6,127
576
4
6,703
(372)
103
3,415
657
External
£m
6,115
584
6,699
3,787
554
2015*
Inter
segment
£m
44
(19)
Total
£m
6,033
550
25
6,583
(365)
110
3,254
644
External
£m
5,989
569
6,558
3,619
534
Commercial & Private Banking
4,445
(283)
4,162
4,341
(269)
4,072
4,153
(255)
3,898
RBS International
NatWest Markets
Central items & other
281
1,077
256
108
(27)
195
389
1,050
451
239
1,296
15
135
(84)
214
374
1,212
229
200
2,190
(178)
167
(124)
187
367
2,066
9
Total
13,133
—
13,133
12,590
—
12,590
12,923
—
12,923
Total revenue
UK Personal & Business Banking
Ulster Bank RoI
Personal & Business Banking
Commercial Banking
Private Banking
Commercial & Private Banking
RBS International
NatWest Markets
Central items & other
Total
2017
Inter
segment
£m
44
(4)
Total
£m
7,392
672
40
8,064
74
143
217
119
809
(1,185)
—
3,664
728
4,392
428
2,217
962
16,063
External
£m
7,348
676
8,024
3,590
585
4,175
309
1,408
2,147
16,063
2016*
Inter
segment
£m
52
1
Total
£m
7,249
661
53
7,910
68
172
240
156
1,539
(1,988)
—
3,706
739
4,445
469
3,247
(126)
15,945
External
£m
7,197
660
7,857
3,638
567
4,205
313
1,708
1,862
15,945
2015*
Inter
segment
£m
51
15
Total
£m
7,215
655
66
7,870
42
191
233
177
2,913
(3,389)
—
3,524
768
4,292
452
6,010
(1,734)
16,890
External
£m
7,164
640
7,804
3,482
577
4,059
275
3,097
1,655
16,890
* Re-presented to reflect the segmental reorganisation.
2017
2016*
2015*
Cost to
acquire fixed
assets and
intangible
assets
£m
—
—
Cost to
acquire fixed
assets and
intangible
assets
£m
—
—
Assets
£m
Liabilities
£m
181,357 173,040
19,299
24,111
Assets
£m
Liabilities
£m
190,636 183,410
19,853
24,564
UK Personal & Business Banking
Ulster Bank RoI
Assets
£m
Liabilities
£m
167,959 164,830
15,837
21,264
Personal & Business Banking
215,200 203,263
—
205,468 192,339
—
189,223 180,667
Commercial Banking
Private Banking
149,545 105,144
27,049
20,290
Commercial & Private Banking
169,835 132,193
RBS International
NatWest Markets
Central items & other
Total
25,867
29,077
277,886 248,553
75,877
738,056 688,963
49,268
208
2
210
12
4
1,275
1,501
150,453 104,441
26,673
18,578
169,031 131,114
23,420
25,280
372,496 340,471
60,048
798,656 749,252
28,241
288
—
288
—
6
1,098
1,392
133,546
17,022
94,619
23,257
150,568 117,876
23,130
21,398
416,748 380,059
61,261
815,408 761,261
35,739
*Re-presented to reflect the segmental reorganisation
Segmental analysis of goodwill is as follows, there was no movements in goodwill in 2016 or 2017:
At 1 January 2016 and 31 December 2016
At 1 January 2017 and 31 December 2017
UK Personal
& Business
Banking
£m
3,351
3,351
Commercial
Banking
£m
1,907
1,907
RBS
International
£m
300
300
Cost to
acquire fixed
assets and
intangible
assets
£m
—
—
—
214
—
214
—
29
1,227
1,470
Total
£m
5,558
5,558
330
Notes on the consolidated accounts
37 Segmental analysis continued
(b) Geographical segments
The geographical analysis in the tables below has been compiled on the basis of location of office where the transactions are recorded.
2017
Total revenue
Net interest income
Net fees and commissions
Income from trading activities
Other operating income
Total income
Operating profit/(loss) before tax
Total assets
Of which total assets held for sale
Total liabilities
Of which total liabilities held for sale
Net assets attributable to equity owners and non-controlling interests
Contingent liabilities and commitments
Cost to acquire property, plant and equipment and intangible assets
2016
Total revenue
Net interest income
Net fees and commissions
Income from trading activities
Other operating income
Total income
Operating (loss)/profit before tax
Total assets
Of which total assets held for sale
Total liabilities
Of which total liabilities held for sale
Net assets attributable to equity owners and non-controlling interests
Contingent liabilities and commitments
Cost to acquire property, plant and equipment and intangible assets
2015
Total revenue
Net interest income
Net fees and commissions
Income from trading activities
Other operating income
Total income
Operating (loss)/profit before tax
Total assets
Of which total assets held for sale
Total liabilities
Of which total liabilities held for sale
Net assets attributable to equity owners and non-controlling interests
Contingent liabilities and commitments
Cost to acquire property, plant and equipment and intangible assets
UK
£m
15,011
8,611
2,192
570
806
USA
£m
192
(4)
97
83
22
12,179
198
3,230
662,314
182
626,103
—
36,211
128,127
1,479
14,606
8,243
2,287
790
261
11,581
(2,214)
715,685
—
675,089
—
40,596
141,963
1,323
14,724
7,947
2,377
942
102
11,368
(87)
673,409
—
630,818
—
42,591
127,781
1,331
(580)
38,485
10
36,564
10
1,921
78
1
264
82
9
159
(40)
210
(1,652)
44,447
13
44,513
15
(66)
639
3
315
162
139
44
(118)
227
(2,723)
77,514
15
75,971
16
1,543
9,729
70
Europe
£m
655
346
113
(24)
121
556
(485)
34,280
3
25,171
—
9,109
7,823
11
738
302
175
18
9
504
(266)
32,142
—
26,311
—
5,831
8,038
54
1,247
407
334
85
34
860
261
42,133
1,251
34,942
418
7,191
14,961
36
RoW
£m
205
34
53
5
108
200
74
2,977
—
1,125
—
1,852
22
10
337
81
64
7
143
295
50
6,382
—
3,339
—
3,043
51
12
604
251
83
(11)
145
468
(154)
22,352
2,220
19,530
2,546
2,822
1,281
33
Total
£m
16,063
8,987
2,455
634
1,057
13,133
2,239
738,056
195
688,963
10
49,093
136,050
1,501
15,945
8,708
2,535
974
373
12,590
(4,082)
798,656
13
749,252
15
49,404
150,691
1,392
16,890
8,767
2,933
1,060
163
12,923
(2,703)
815,408
3,486
761,261
2,980
54,147
153,752
1,470
331
Notes on the consolidated accounts
38 Directors' and key management remuneration
Directors' remuneration
Non-executive directors emoluments
Chairman and executive directors emoluments
Amounts receivable under long-term incentive plans and share option plans
2017
£000
1,747
5,299
7,046
1,225
8,271
2016
£000
1,466
5,801
7,267
993
8,260
No directors accrued benefits under defined benefit schemes or money purchase schemes during 2017 and 2016.
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 is also given in the Directors' remuneration report.
Compensation of key management
The aggregate remuneration of directors and other members of key management during the year was as follows:
Short-term benefits
Post-employment benefits
Share-based payments
2017
£000
19,019
434
3,558
23,011
2016
£000
20,350
471
2,606
23,427
Key management comprises members of the Executive Committee.
39 Transactions with directors and key management
(a) At 31 December 2017, amounts outstanding in relation to transaction, arrangements and agreements entered into by authorised
institutions in the Group, as defined in UK legislation, were £24,376 in respect of loans to six persons who were directors of the
company at any time during the financial period.
(b) For the purposes of IAS 24 ‘Related Party Disclosures’, key management comprise directors of the company and members of the
Executive Committee. The captions in the Group's primary financial statements include the following amounts attributable, in aggregate,
to key management:
Loans and advances to customers
Customer accounts
2017
£000
3,942
23,619
2016
£000
4,127
17,045
Key management have banking relationships with Group entities which are entered into in the normal course of business and on
substantially the same terms, including interest rates and security, as for comparable transactions with other persons of a similar
standing or, where applicable, with other employees. These transactions did not involve more than the normal risk of repayment or
present other unfavourable features.
332
Notes on the consolidated accounts
40 Related parties
UK Government
On 1 December 2008, the UK Government through HM Treasury
became the ultimate controlling party of The Royal Bank of
Scotland Group plc. The UK Government's shareholding is
managed by UK Financial Investments Limited, a company
wholly owned by the UK Government. As a result, the UK
Government and UK Government controlled bodies became
related parties of the Group. During 2015, all of the B shares held
by the UK Government were converted into ordinary shares of £1
each (see Note 25).
The Group enters into transactions with many of these bodies on
an arm’s length basis. Transactions include the payment of: taxes
principally UK corporation tax (see Note 6) and value added tax;
national insurance contributions; local authority rates; and
regulatory fees and levies (including the bank levy (see Note 3)
and FSCS levies (see Note 31) together with banking
transactions such as loans and deposits undertaken in the
normal course of banker-customer relationships.
Bank of England facilities
The Group may participate in a number of schemes operated by
the Bank of England in the normal course of business.
Members of the Group that are UK authorised institutions are
required to maintain non-interest bearing (cash ratio) deposits
with the Bank of England amounting to 0.18% of their average
eligible liabilities in excess of £600 million. They also have
access to Bank of England reserve accounts: sterling current
accounts that earn interest at the Bank of England Rate.
41 Post balance sheet events
There have been no other significant events between 31
December 2017 and the date of approval of these accounts
which would require a change to or additional disclosure in the
accounts.
Associates
Transactions with associates have given rise to the following:
Loans and advances
Customer deposits
Total income
Operating expenses
2017
£m
130
111
28
23
2016
£m
150
64
30
8
Other related parties
(a) In their roles as providers of finance, RBS companies provide
development and other types of capital support to
businesses. These investments are made in the normal
course of business and on arm's length terms. In some
instances, the investment may extend to ownership or control
over 20% or more of the voting rights of the investee
company. However, these investments are not considered to
give rise to transactions of a materiality requiring disclosure
under IAS 24.
(b) RBS recharges The Royal Bank of Scotland Group Pension
Fund with the cost of administration services incurred by it.
The amounts involved are not material to the Group.
(c) In accordance with IAS 24, transactions or balances between
RBS entities that have been eliminated on consolidation are
not reported.
(d) The captions in the primary financial statements of the parent
company include amounts attributable to subsidiaries. These
amounts have been disclosed in aggregate in the relevant
notes to the financial statements.
333
Parent company financial statements and notes
Balance sheet as at 31 December 2017
Assets
Investments in Group undertakings
Loans due from subsidiaries
Debt securities
Derivatives with subsidiaries
Prepayments, accrued income and other assets
Total assets
Liabilities
Deposits due to subsidiaries
Debt securities in issue
Derivatives with subsidiaries
Provisions, accruals and other liabilities
Subordinated liabilities
Total liabilities
Owners’ equity
Total liabilities and equity
Note
2017
£m
2016
£m
7
6
3
8
3
47,559
24,983
104
163
53
72,862
—
9,202
284
438
7,977
17,901
54,961
72,862
44,608
28,964
398
373
70
74,413
944
6,832
260
992
10,668
19,696
54,717
74,413
Owners’ equity includes a total comprehensive profit for the year, dealt with in the accounts of the parent company, of £1,118 million
(2016 - £5,255 million loss; 2015 - £1,950 million loss). Refer to Note 2 on the parent company accounts.
The accompanying notes on pages 337 to 356 form an integral part of these financial statements.
The accounts were approved by the Board of directors on 22 February 2018 and signed on its behalf by:
Howard Davies
Chairman
Ross McEwan
Chief Executive
Ewen Stevenson
Chief Financial Officer
The Royal Bank of Scotland Group plc
Registered No. SC45551
334
Parent company financial statements and notes
Statement of changes in equity for the year ended 31 December 2017
Called-up share capital
At 1 January
Ordinary shares issued
Conversion of B shares (1)
Preference shares redeemed (2)
At 31 December
Paid-in equity
At 1 January
Additional Tier 1 capital notes (3)
Redeemed/reclassified (4)
At 31 December
Share premium account
At 1 January
Ordinary shares issued
Capital reduction (5)
Redemption of debt preference shares (2)
At 31 December
Merger reserve
At 1 January
Transfer on impairment of investment in RBS plc
At 31 December
Cash flow hedging reserve
At 1 January
Amount recognised in equity
Amount transferred from equity to earnings
Tax
At 31 December
Capital redemption reserve
At 1 January
Conversion of B shares (1)
Capital reduction (5)
Preference shares redeemed (2)
At 31 December
Retained earnings
At 1 January
Profit/(loss) attributable to ordinary shareholders and other equity owners
Equity preference dividends paid
Dividend access share dividend
Paid-in equity dividends paid, net of tax
Capital reduction (5)
Redemption of debt preference shares (2)
Redemption of equity preference shares (2)
Transfer on impairment of investment in RBS plc
Reclassification of paid-in equity
At 31 December
Owners’ equity at 31 December
2017
£m
2016
£m
2015
£m
11,823
142
—
—
11,965
4,478
—
(431)
4,047
25,693
235
(25,789)
748
887
—
—
—
186
(157)
(47)
38
20
4,542
—
(4,542)
—
—
7,995
1,284
(234)
—
(390)
30,331
(748)
—
—
(196)
38,042
54,961
11,625
198
—
—
11,823
2,438
2,040
—
4,478
25,425
268
—
—
25,693
—
—
—
32
243
(54)
(35)
186
4,542
—
—
—
4,542
16,252
(5,409)
(260)
(1,193)
(235)
—
—
(1,160)
—
—
7,995
54,717
6,877
159
4,590
(1)
11,625
431
2,007
—
2,438
25,052
373
—
—
25,425
2,341
(2,341)
—
—
44
(4)
(8)
32
9,131
(4,590)
—
1
4,542
17,483
(1,982)
(297)
—
(79)
—
—
(1,214)
2,341
—
16,252
60,314
Notes:
(1)
(2)
(3)
(4)
(5)
In October 2015, all B shares were converted into ordinary shares of £1 each.
During 2017, non-cumulative US dollar preference shares recorded as debt were redeemed at their original issue price of US$1.1 billion. The nominal value of £0.3 million
has been credited to the capital redemption reserve; share premium increased by £0.7 billion in respect of the premium received on issue, with a corresponding decrease
in retained earnings. During 2016, non-cumulative US dollar preference shares were redeemed at their original issue price of US$1.5 billion (2015 - $1.9 billion).The
nominal value of £0.3 million (2015 - £1.0 million) was transferred from share capital to capital redemption reserve and ordinary owners equity was reduced by £0.4 billion
(2015 - £0.2 billion) in respect of the movement in exchange rates since issue.
AT1 capital notes totalling £2.0 billion issued in August 2016 (2015 - £2.0 billion).
Paid-in equity reclassified to liabilities as a result of the call of US$564 million and CAD321 million EMTN notes in August 2017 (redeemed in October 2017).
On 15 June 2017, the Court of Session approved a reduction of RBSG plc capital so that the amounts which stood to the credit of share premium account and capital
redemption reserve were transferred to retained earnings.
The accompanying notes on pages 337 to 356 form an integral part of these financial statements.
335
Parent company financial statements and notes
Cash flow statement for the year ended 31 December 2017
Operating profit/(loss) before tax
Write-back/(write-down) of investment in subsidiaries
Gain on redemption of investment in Group undertakings
Interest on subordinated liabilities
Elimination of foreign exchange differences
Other non-cash items
Changes in operating assets and liabilities
Income taxes (paid)/received
Net cash flows from operating activities
Sale and maturity of securities
Purchase of securities
Investment in subsidiaries
Disposal of subsidiaries and associates
Net cash flows from investing activities
Issue of ordinary shares
Issue of Additional Tier 1 capital notes
Redemption of equity preference shares
Redemption of subordinated liabilities
Dividends paid
Dividends access share
Interest on subordinated liabilities
Redemption of paid-in equity
Redemption of debt preference shares
Net cash flows from financing activities
Effects of exchange rate changes on cash and cash equivalents
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at 1 January
Cash and cash equivalents at 31 December
Note
10
13
2017
£m
1,471
(562)
—
497
(713)
(472)
4,688
64
4,973
264
—
(2,461)
119
(2,078)
306
—
—
(1,665)
(583)
—
(514)
(627)
(748)
(3,831)
(14)
(950)
1,195
245
2016
£m
(5,416)
6,106
(298)
509
1,506
1,247
(6,540)
(140)
(3,026)
794
—
—
1,744
2,538
300
2,040
(1,160)
(425)
(495)
(1,193)
(512)
—
—
(1,445)
122
(1,811)
3,006
1,195
2015
£m
(1,805)
2,827
—
486
265
142
1,503
175
3,593
934
(1,067)
(50)
—
(183)
307
2,007
(1,214)
(1,745)
(376)
—
(497)
—
—
(1,518)
9
1,901
1,105
3,006
The accompanying notes on pages 337 to 356 form an integral part of these financial statements.
336
Parent company financial statements and notes
1 Presentation of accounts
The accounts are prepared on a going concern basis (refer to the Report of the directors, page 112) and in accordance with
International Financial Reporting Standards issued by the International Accounting Standards Board (IASB) and interpretations issued
by the IFRS Interpretations Committee of the IASB as adopted by the European Union (together IFRS). The company's financial
statements are prepared in accordance with IFRS as issued by the IASB and are presented in accordance with the Companies Act
2006.
The company is incorporated in the UK and registered in Scotland. The accounts are prepared on the historical cost basis except that
derivative financial instruments and certain issued securities are stated at fair value. Recognised financial assets and financial liabilities
in fair value hedges are adjusted for changes in fair value in respect of the risk that is hedged.
The accounting policies that are applicable to the company are included in RBS accounting polices which are set out on pages 251 to
263 of the consolidated financial statements, except that it has no policy regarding ‘Basis of consolidation’ and that the company’s
investments in its subsidiaries are stated at cost less any impairment.
Critical accounting policies and sources of estimation uncertainty
The reported results of the company are sensitive to the accounting policies, assumptions and estimates that underlie the preparation of
its financial statements. The judgements and assumptions involved in the company’s accounting policies that are considered by the
Board to be the most important to the portrayal of its financial condition are those involved in assessing the impairment, if any, in its
investments in subsidiaries. At each reporting date, the company assesses whether there is any indication that its investment in a
subsidiary is impaired. If any such indication exists, the company undertakes an impairment test by comparing the carrying value of the
investment in the subsidiary with its estimated recoverable amount. The recoverable amount of an investment in a subsidiary is the
higher of its fair value less cost to sell and its value in use. Impairment testing inherently involves a number of judgments: the choice of
appropriate discount and growth rates; and the estimation of fair value.
Accounting developments
International Financial Reporting Standards
A number of IFRSs and amendments to IFRS were in issue at 31 December 2017 that would affect the Company from 1 January 2018
or later.
Effective 1 January 2018 - IFRS 9
In July 2014, the IASB published IFRS 9 ‘Financial Instruments’ with an effective date of 1 January 2018. IFRS 9 replaces the current
financial instruments standard IAS 39, setting out new accounting requirements in a number of areas.
The principle features of IFRS 9 are disclosed in the RBS accounting policies. The impact on the company is as follows:
Transition
The classification and measurement and impairment requirements will be applied retrospectively by adjusting the opening balance sheet
at the date of initial application, with no requirement to restate comparative periods.
In summary, on 1 January 2018, the estimated post tax increase in equity is not more than £0.2 billion. There will be no restatement of
accounts prior to 2018.
The Group has opted to early adopt the IFRS 9 amendment on negative compensation with effect from 1 January 2018; this is expected
to be endorsed for use in the EU in early 2018.
337
Parent company financial statements and notes
2 Profit dealt with in the accounts of the company
As permitted by section 408(3) of the Companies Act 2006, the primary financial statements of the company do not include an income
statement or a statement of comprehensive income. Condensed information is set out below.
Income statement
Dividends received from subsidiaries
Net interest income from subsidiaries
Other net interest income, non-interest income and operating expenses
Write-back/(write-down) of investments in subsidiaries (see Note 7)
Operating profit/(loss) before tax
Tax (charge)/credit
Profit/(loss) for the year
Statement of comprehensive income
Profit/(loss) for the year
Cash flow hedges
Tax
Total comprehensive income/(loss) for the year
Attributable to:
Preference shareholders
Paid-in equity holders
Dividend access share
Ordinary shareholders
2017
£m
—
918
(9)
562
1,471
(187)
1,284
2017
£m
1,284
(204)
38
1,118
234
390
—
494
1,118
2016
£m
663
942
(915)
(6,106)
(5,416)
7
(5,409)
2016
£m
(5,409)
189
(35)
(5,255)
260
235
1,193
(6,943)
(5,255)
2015
£m
44
964
14
(2,827)
(1,805)
(177)
(1,982)
2015
£m
(1,982)
40
(8)
(1,950)
297
79
—
(2,326)
(1,950)
The company did not pay an ordinary dividend in 2017, 2016 or 2015.
3 Financial instruments - classification
The following table shows the company's financial assets and liabilities in accordance with the categories of financial instruments in IAS
39.
Assets
Investment in Group undertakings
Loans and advances to banks (1) - loans and receivables
Loans and advances to customers (1) - loans and receivables
Debt securities - loans and receivables
Derivatives (1)
- held-for-trading
- hedging
Prepayments, accrued income and other assets - non-financial assets
Liabilities
Deposits by banks (2) - amortised cost
Debt securities in issue
- amortised cost
- designated as at fair value through profit or loss
Derivatives (2)
- held-for-trading
- hedging
Provisions, accruals and other liabilities - non-financial liabilities
Subordinated liabilities - amortised cost
Owners’ equity
Notes:
(1) Due from subsidiaries.
(2) Due to subsidiaries.
2017
£m
47,559
14,503
10,480
104
27
136
163
53
72,862
2016
£m
44,608
28,867
97
398
12
361
373
70
74,413
—
944
9,122
80
9,202
71
213
284
438
7,977
17,901
54,961
72,862
6,745
87
6,832
67
193
260
992
10,668
19,696
54,717
74,413
338
Parent company financial statements and notes
4 Financial instruments - fair value
The following table shows the carrying value and fair value of financial instruments carried at amortised cost on the balance sheet.
Financial assets
Loans and advances due from subsidiaries (1)
Debt securities (2)
Financial liabilities
Deposits due to subsidiaries (3)
Debt securities in issue (2)
Subordinated liabilities (2)
2017
Carrying
value
£bn
Fair value
£bn
2016
Carrying
value
£bn
Fair value
£bn
25.0
0.1
—
9.1
8.0
25.4
0.2
—
9.8
8.8
28.9
0.4
0.9
6.7
10.7
29.7
0.7
1.0
6.9
10.9
Notes:
(1) Fair value hierarchy: level 2 - £11.3 billion (2016 - £26.9 billion) and level 3 - £14.1 billion (2016 - £2.8 billion).
(2) Fair value hierarchy level 2.
(3) Fair value hierarchy level 3.
5 Financial instruments - maturity analysis
Remaining maturity
The following table shows the residual maturity of financial instruments, based on contractual date of maturity.
Assets
Loans and advances due from subsidiaries
Debt securities
Derivatives with subsidiaries
Liabilities
Deposits due to subsidiaries
Debt securities in issue
Derivatives with subsidiaries
Subordinated liabilities
Less than
12 months
£m
19,340
—
25
—
88
70
320
2017
More than
12 months
£m
5,643
104
138
—
9,114
214
7,657
Total
£m
Less than
12 months
£m
24,983
104
163
17,386
10
23
—
9,202
284
7,977
944
821
66
77
2016
More than
12 months
£m
11,578
388
350
—
6,011
194
10,591
Total
£m
28,964
398
373
944
6,832
260
10,668
Financial liabilities: contractual maturity
The following table shows undiscounted cash flows payable up to 20 years from the balance sheet date, including future interest
payments.
2017
Amounts due to subsidiaries
Debt securities in issue
Subordinated liabilities
2016
Amounts due to subsidiaries
Debt securities in issue
Subordinated liabilities
0-3 months
£m
—
116
60
176
—
497
115
612
3-12 months
£m
—
286
649
935
969
643
550
2,162
1-3 years
£m
—
1,828
876
2,704
—
1,882
1,505
3,387
3-5 years
£m
—
2,715
876
3,591
—
339
1,211
1,550
5-10 years
£m
—
6,052
7,193
13,245
—
5,141
8,757
13,898
10-20 years
£m
—
—
2,080
2,080
—
—
2,221
2,221
For further information on the timing of cash flows to settle financial liabilities, refer to Note 10 on the consolidated accounts.
339
Parent company financial statements and notes
6 Debt securities
Debt securities comprise the partial repurchase of preferred securities issued by the trusts referred to in Note 26 on the consolidated
accounts.
7 Investments in Group undertakings
Investments in Group undertakings are carried at cost less impairment. Movements during the year were as follows:
At 1 January
Currency translation and other adjustments
Additions
Disposals
Write back/(impairment) of investments
At 31 December
2017
£m
44,608
—
2,461
(72)
562
47,559
2016
£m
52,129
31
—
(1,446)
(6,106)
44,608
In 2017 additions principally relate to the acquisition of the Royal Bank of Scotland International (Holdings) Limited from The Royal Bank
of Scotland plc (RBS plc). The write-back in 2017 relates to the partial reversal of the company’s investment in RFS Holdings B.V..
The majority of the impairment charge for 2016 relates to the company’s investment in RBS plc. At 31 December 2017, the amount by
which it exceeded its carrying value (based on its value in use) was £0.8 billion.
The key assumptions applied in assessing the carrying value of the company’s investment in RBS plc are terminal growth rate of
underlying business, the pre-tax discount rate, income and costs of future periods. The underlying sensitivities in connection to the
Group’s reportable segments are disclosed in Note 15 on the consolidated accounts. The following sensitivities reduce the available
headroom of £0.8 billion (2016: £2.9 billion) and result in a deficit indicating potential impairment.
1% adverse movement Discount Rate
1% adverse movement Terminal Growth Rate
5% adverse movement in Costs
5% adverse movement in Income
Remaining headroom/
(potential impairment)
2017
£bn
(4.8)
(1.4)
(0.8)
(1.8)
2016
£bn
(3.4)
—
1.2
0.4
The principal subsidiary undertakings of the company are shown below. Their capital consists of ordinary and preference shares which
are unlisted with the exception of certain preference shares issued by NatWest.
The Royal Bank of Scotland plc and RFS Holdings B.V. are directly owned by the company, and all other subsidiary undertakings are
owned either by the company, or directly, or indirectly through intermediate holding companies. All of these subsidiaries are included in
RBS's consolidated financial statements and have an accounting reference date of 31 December.
The Royal Bank of Scotland plc
National Westminster Bank Plc (1)
Coutts & Company (2)
RBS Securities Inc.
Ulster Bank Limited
Ulster Bank Ireland Designated Activity Company
The Royal Bank of Scotland International Limited
Nature of business
Banking
Banking
Private banking
Broker dealer
Banking
Banking
Financial Institution
Country of incorporation and
principal area of operation
Great Britain
Great Britain
Great Britain
US
Northern Ireland
Republic of Ireland
Jersey
Group interest
100%
100%
100%
100%
100%
100%
100%
Notes:
(1) The company does not hold any of the preference shares in issue.
(2) Coutts & Company is incorporated with unlimited liability. Its registered office is 440 Strand, London WC2R 0QS.
For full information on all related undertakings, refer to Note 15 to the parent company financial statements.
340
Parent company financial statements and notes
8 Subordinated liabilities
Dated loan capital
Undated loan capital
Preference shares
2017
£m
7,213
763
1
7,977
2016
£m
8,830
836
1,002
10,668
Certain preference shares issued by the company are classified as liabilities; these securities remain subject to the capital maintenance
rules of the Companies Act 2006.
Dated loan capital
US$350 million 4.70% dated notes 2018 (1)
US$2250 million 6.13% dated notes 2022 (1)
US$750 million 6.80% dated notes 2042 (callable quarterly) (1,2)
US$650 million 6.425% dated notes 2043 (callable January 2034) (1,2)
£400 million 5.65% dated notes 2047 (callable June 2017) (2)
US$2000 million 6.00% dated notes 2023
US$1000 million 6.10% dated notes 2023
€1,000 million 3.63% dated notes 2024 (callable March 2019)
US$2250 million 5.13% dated notes 2024
Notes:
(1) On-lent to The Royal Bank of Scotland plc on a subordinated basis.
(2) The call is on the underlying security in the partnership, rather than the internal issued debt.
Undated loan capital
US$106 million floating rate notes (callable semi-annually)
US$762 million 7.648% notes (callable September 2031) (1)
US$150 million 8.00% notes (callable October 2093)
Capital
treatment
Ineligible
Tier 2
Ineligible
Ineligible
Ineligible
Tier 2
Tier 2
Tier 2
Tier 2
2017
£m
265
1,665
—
479
—
1,470
737
907
1,690
7,213
2016
£m
290
1,826
609
525
413
1,612
811
875
1,869
8,830
Capital
treatment
Ineligible
Ineligible
Tier 2
2017
£m
79
571
113
763
2016
£m
87
625
124
836
Note:
(1)
The company can satisfy interest payment obligations by issuing sufficient ordinary shares to appointed Trustees to enable them, on selling these shares, to settle the
interest payment.
Preference shares (1)
US$156 million 7.65% series F non-cumulative preference shares of US$ 0.01 (callable)
US$242 million 7.25% series H non-cumulative preference shares of US$ 0.01 (callable)
US$751 million 5.75% series L non-cumulative preference shares of US$ 0.01 (callable)
£200 million 7.387% series 1 non-cumulative convertible £0.01 preference
shares (callable, partial redemption)
US$ 1,000 million 9.118% series 1 non-cumulative convertible preference
shares of US$ 0.01 (callable, partial redemption)
£0.5 million 11% and £0.4 million 5.5% cumulative preference shares of £1 (not callable)
Note:
(1) Further details of the contractual terms of the preference shares are given in Note 25 on the consolidated accounts.
9 Share capital
Details of the company’s share capital are set out in Note 25 on the consolidated accounts.
Capital
treatment
2017
£m
Ineligible
Ineligible
Ineligible
Ineligible
Ineligible
Ineligible
—
—
—
—
—
1
1
2016
£m
127
197
609
14
54
1
1,002
341
Parent company financial statements and notes
10 Net cash flow from operating activities
Operating profit/(loss) before tax
Interest on subordinated liabilities
Increase/(decrease) in income accruals
Profit on disposal of investments in subsidiaries
(Write-back)/write-down of investment in subsidiaries
Gain on redemption of investment in Group undertakings
Other provisions charged net of releases
Elimination of foreign exchange differences
Other provisions utilised
(Gain)/loss on redemption of own debt
Other non-cash items
Net cash inflow from trading activities
Decrease/(increase) in loans and advances to banks and customers (1)
Increase in securities
(Increase)/decrease in other assets
Increase in derivative assets (1)
Changes in operating assets
(Decrease)/increase in deposits by banks and customers (2)
Increase/(decrease) in debt securities in issue
Increase/(decrease) in other liabilities
Increase/(decrease) in derivative liabilities (2)
Changes in operating liabilities
Income taxes received/(paid)
Net cash inflow/(outflow) from operating activities
Notes:
(1) Due from subsidiaries.
(2) Due to subsidiaries
11 Interest received and paid
Interest received
Interest paid
2017
£m
1,471
497
—
(47)
(562)
—
25
(713)
(773)
(239)
562
221
3,031
—
(64)
210
3,177
(944)
2,370
61
24
1,511
64
4,973
2016
£m
(5,416)
509
10
—
6,106
(298)
—
1,506
—
—
1,237
3,654
(8,359)
—
(65)
(156)
(8,580)
37
1,772
36
195
2,040
(140)
(3,026)
2015
£m
(1,805)
486
(140)
—
2,827
—
—
265
—
—
282
1,915
4,274
(2)
192
(38)
4,426
(295)
(2,461)
(202)
35
(2,923)
175
3,593
2017
£m
999
(777)
222
2016
£m
1,066
(743)
323
2015
£m
1,103
(744)
359
342
Parent company financial statements and notes
12 Analysis of changes in financing during the year
At 1 January
Issue of ordinary shares
Issue of Additional Tier 1 capital notes
Redemption of paid-in equity
Redemption of subordinated liabilities
Net cash (outflow)/inflow from financing
Transfer to retained earnings
Conversion of B shares
Ordinary shares issued in respect of employee share schemes
Redemption of equity preference shares
Transfer on impairment of investment in RBS plc
Redemption of debt preference shares
Other adjustments including foreign exchange
Share capital,
share premium, paid-in
equity and merger reserve
2017
£m
2016
£m
2015
£m
Subordinated liabilities
2017
£m
2016
£m
2015
£m
41,994
39,488
34,701
10,668
9,366
10,708
306
—
(627)
—
(321)
(25,789)
—
71
—
—
748
196
300
2,040
—
—
2,340
—
—
166
—
—
—
—
307
2,007
—
—
2,314
—
4,590
225
(1)
(2,341)
—
—
—
—
—
(1,665)
(1,665)
—
—
—
—
—
—
(1,026)
—
—
—
(425)
(425)
—
—
—
—
—
—
1,727
—
—
—
(1,745)
(1,745)
—
—
—
—
—
—
403
At 31 December
16,899
41,994
39,488
7,977
10,668
9,366
13 Analysis of cash and cash equivalents
At 1 January - cash equivalents
Net cash (outflow)/inflow
At 31 December*
*Comprises loans and advances to banks
2017
£m
1,195
(950)
2016
£m
3,006
(1,811)
245
1,195
2015
£m
1,105
1,901
3,006
14 Directors’ and key management remuneration
Directors’ remuneration is disclosed in Note 38 on the consolidated accounts. The directors had no other reportable related party
transactions or balances with the company.
343
Parent company financial statements and notes
15 Related undertakings
RBS legal entities and activities at 31 December 2017
In accordance with the Companies Act 2006, the company’s related undertakings and the accounting treatment for each are listed
below. All undertakings are wholly-owned by the company or subsidiaries of the company and are consolidated by reason of contractual
control (Section 1162(2) CA 2006), unless otherwise indicated. Group interest refers to ordinary shares of equal values and voting rights
unless further analysis is provided in the notes. Activities are classified in accordance with Annex I to the Capital Requirements Directive
(“CRD IV”) and the definitions in Article 4 of the Capital Requirements Regulation. All other requirements of the Capital Requirements
(country-by-country) Reporting Regulations 2013 will be published on the RBS Group’s website.
The following table details active related undertakings incorporated in the UK which are 100% owned by the Group and fully
consolidated for accounting purposes.
Activity
Reg
Entity name
280 Bishopsgate Finance Ltd
Adam & Company Group PLC
(2)
INV
BF
Adam & Company Investment Management Ltd BF
Adam & Company PLC
Caledonian Sleepers Rail Leasing Ltd
Care Homes 1 Ltd
Care Homes 2 Ltd
Care Homes 3 Ltd
Care Homes Holdings Ltd
Churchill Management Ltd
Coutts & Company
Coutts Finance Company
Desertlands Entertainment Ltd
Digi Ventures Ltd
Distant Planet Productions Ltd
Esme Loans Ltd
Euro Sales Finance Plc
G L Trains Ltd
Gatehouse Way Developments Ltd
Heartlands (Central) Ltd
Helena Productions Ltd
KUC (Public Houses) Ltd
KUC Properties Ltd
Land Options (West) Ltd
Leckhampton Finance Ltd
Lombard & Ulster Ltd
Lombard Business Finance Ltd
Lombard Business Leasing Ltd
Lombard Charterhire Ltd
Lombard Corporate Finance (10) Ltd
Lombard Corporate Finance (11) Ltd
Lombard Corporate Finance (13) Ltd
Lombard Corporate Finance (14) Ltd
Lombard Corporate Finance (15) Ltd
Lombard Corporate Finance (6) Ltd
Lombard Corporate Finance (7) Ltd
CI
BF
BF
BF
BF
BF
BF
BF
BF
BF
OTH
BF
BF
BF
BF
INV
BF
BF
BF
BF
INV
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
Lombard Corporate Finance (December 1) Ltd BF
Lombard Corporate Finance (December 3) Ltd BF
Lombard Corporate Finance (June 2) Ltd
Lombard Discount Ltd
Lombard Finance Ltd
Lombard Industrial Leasing Ltd
Lombard Initial Leasing Ltd
Lombard Lease Finance Ltd
Lombard Leasing Company Ltd
Lombard Leasing Contracts Ltd
For notes for this table refer to page 356
BF
BF
BF
BF
BF
BF
BF
BF
Acc (3) Address
Notes
FC
250 Bishopsgate, London, EC2M 4RB, England
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
PC
DE
FC
DE
FC
DE
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
1 Princes Street, London, EC2R 8PB, England
250 Bishopsgate, London, EC2M 4AA, England
250 Bishopsgate, London, EC2M 4AA, England
250 Bishopsgate, London, EC2M 4AA, England
250 Bishopsgate, London, EC2M 4AA, England
1 Princes Street, London, EC2R 8PB, England
440 Strand, London, WC2R 0QS, England
440 Strand, London, WC2R 0QS, England
The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
250 Bishopsgate, London, EC2M 4AA, England
The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
250 Bishopsgate, London, EC2M 4AA, England
250 Bishopsgate, London, EC2M 4AA, England
1 Princes Street, London, EC2R 8PB, England
1 Princes Street, London, EC2R 8PB, England
24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
1 Princes Street, London, EC2R 8PB, England
24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
11-16 Donegall Square East, Belfast, BT1 5HD, Northern Ireland
280 Bishopsgate, London, EC2M 4RB, England
280 Bishopsgate, London, EC2M 4RB, England
280 Bishopsgate, London, EC2M 4RB, England
The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
FC
The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
280 Bishopsgate, London, EC2M 4RB, England
280 Bishopsgate, London, EC2M 4RB, England
The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
280 Bishopsgate, London, EC2M 4RB, England
The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
1 Princes Street, London, EC2R 8PB, England
344
Parent company financial statements and notes
15 Related undertakings continued
Activity
Reg
Entity name
Lombard Lessors Ltd
Lombard Maritime Ltd
Lombard North Central Leasing Ltd
Lombard North Central PLC
Lombard Property Facilities Ltd
Lombard Technology Services Ltd
Nanny McPhee Productions Ltd
National Westminster Bank Plc
National Westminster Home Loans Ltd
National Westminster Properties No. 1 Ltd
NatWest Capital Finance Ltd
NatWest Corporate Investments
NatWest Holdings Ltd
NatWest Machinery Leasing Ltd
NatWest Property Investments Ltd
NatWest Ventures Investments Ltd
Nevis Derivatives No. 3 LLP
Northern Isles Ferries Ltd
P of A Productions Ltd
Patalex II Productions Ltd
Patalex III Productions Ltd
Patalex IV Productions Ltd
Patalex Productions Ltd
Patalex V Productions Ltd
Pittville Leasing Ltd
Premier Audit Company Ltd
Premier Place Finance Ltd
Price Productions Ltd
Priority Sites Investments Ltd
Priority Sites Ltd
Property Venture Partners Ltd
R.B. Capital Leasing Ltd
R.B. Equipment Leasing Ltd
R.B. Leasing (April) Ltd
R.B. Leasing (December) Ltd
R.B. Leasing (March) Ltd
R.B. Leasing (September) Ltd
R.B. Leasing Company Ltd
R.B. Quadrangle Leasing Ltd
R.B.S. Special Investments Ltd
RB Investments 2 Ltd
RB Investments 3 Ltd
RBDC Administrator Ltd
RBOS (UK) Ltd
RBS AA Holdings (UK) Ltd
RBS Asset Finance Europe Ltd
RBS Asset Management (ACD) Ltd
RBS Asset Management Holdings
RBS Asset Management Ltd
RBS Collective Investment Funds Ltd
RBS Equities Holdings (UK) Ltd
RBS HG (UK) Ltd
RBS Investment Ltd
RBS Investments Holdings (UK) Ltd
RBS Invoice Finance (Holdings) Ltd
For notes for this table refer to page 356
(2)
BF
BF
BF
BF
BF
BF
BF
CI
BF
SC
BF
BF
INV
BF
INV
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
INV
BF
BF
INV
INV
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
OTH
SC
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
Acc (3) Address
Notes
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
280 Bishopsgate, London, EC2M 4RB, England
280 Bishopsgate, London, EC2M 4RB, England
280 Bishopsgate, London, EC2M 4RB, England
280 Bishopsgate, London, EC2M 4RB, England
1 Princes Street, London, EC2R 8PB, England
280 Bishopsgate, London, EC2M 4RB, England
The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
135 Bishopsgate, London, EC2M 4AA, England
250 Bishopsgate, London, EC2M 4AA, England
250 Bishopsgate, London, EC2M 4AA, England
1 Princes Street, London, EC2R 8PB, England
DE
250 Bishopsgate, London, EC2M 4AA, England
FC
FC
FC
280 Bishopsgate, London, EC2M 4RB, England
250 Bishopsgate, London, EC2M 4AA, England
250 Bishopsgate, London, EC2M 4AA, England
DE
250 Bishopsgate, London, EC2M 4AA, England
FC
FC
FC
FC
FC
FC
FC
FC
FC
DE
FC
FC
DE
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
35 Great St Helen's, London, EC3A 6AP, England
The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
250 Bishopsgate, London, EC2M 4AA, England
250 Bishopsgate, London, EC2M 4RB, England
The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
250 Bishopsgate, London, EC2M 4AA, England
250 Bishopsgate, London, EC2M 4AA, England
24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
250 Bishopsgate, London, EC2M 4AA, England
250 Bishopsgate, London, EC2M 4AA, England
250 Bishopsgate, London, EC2M 4AA, England
24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
250 Bishopsgate, London, EC2M 4AA, England
250 Bishopsgate, London, EC2M 4AA, England
The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
440 Strand, London, WC2R 0QS, England
440 Strand, London, WC2R 0QS, England
250 Bishopsgate, London, EC2M 4AA, England
24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
250 Bishopsgate, London, EC2M 4AA, England
250 Bishopsgate, London, EC2M 4AA, England
24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
250 Bishopsgate, London, EC2M 4AA, England
250 Bishopsgate, London, EC2M 4AA, England
345
Parent company financial statements and notes
Activity
Reg
15 Related undertakings continued
Entity name
RBS Invoice Finance Ltd
RBS Management Services (UK) Ltd
RBS Mezzanine Ltd
RBS Property Developments Ltd
RBS Property Ventures Investments Ltd
RBS Secured Funding LLP
RBS SME Investments Ltd
RBSG Collective Investments Holdings Ltd
RBSG International Holdings Ltd
RBSM Capital Ltd
RBSSAF (11) Ltd
RBSSAF (12) Ltd
RBSSAF (2) Ltd
RBSSAF (25) Ltd
RBSSAF (4) Ltd
RBSSAF (6) Ltd
RBSSAF (7) Ltd
RBSSAF (8) Ltd
Riossi Ltd
RoboScot Equity Ltd
RoboScot Ventures Ltd
Royal Bank Investments Ltd
Royal Bank Invoice Finance Ltd
Royal Bank Leasing Ltd
(2)
BF
SC
BF
INV
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
Royal Bank of Scotland (Industrial Leasing) Ltd BF
Royal Bank Ventures Investments Ltd
Royal Scot Leasing Ltd
RoyScot Financial Services Ltd
RoyScot Trust plc
Safetosign Ltd
Sandford Leasing Ltd
SIG 1 Holdings Ltd
SIG Number 2 Ltd
BF
BF
BF
BF
SC
BF
BF
BF
Springwell Street Developments (No 1) Ltd
INV
Style Financial Services Ltd
The One Account Ltd
The Royal Bank of Scotland Group Independent
Financial Services Ltd
The Royal Bank of Scotland Invoice Discounting
Ltd
The Royal Bank of Scotland plc
Theobald Film Productions LLP
Total Capital Finance Ltd
Ulster Bank Commercial Services (NI) Ltd
Ulster Bank Ltd
Ulster Bank Pension Trustees Ltd
Voyager Leasing Ltd
Walton Lake Developments Ltd
West Register (Hotels Number 1) Ltd
West Register (Hotels Number 3) Ltd
West Register (Land) Ltd
West Register (Project Developments) Ltd
West Register (Property Investments) Ltd
West Register (Realisations) Ltd
West Register Hotels (Holdings) Ltd
Winchcombe Finance Ltd
For notes for this table refer to page 356
BF
BF
BF
BF
CI
BF
BF
BF
CI
TR
BF
INV
INV
INV
INV
INV
BF
INV
BF
BF
Acc (3) Address
Notes
FC
250 Bishopsgate, London, EC2M 4AA, England
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
DE
FC
FC
FC
FC
DE
DE
DE
FC
FC
DE
DE
FC
FC
250 Bishopsgate, London, EC2M 4AA, England
24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
36 St Andrew Square, Edinburgh, EH2 2YB, Scotland
24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
35 Great St Helen's, London, EC3A 6AP, England
1 Princes Street, London, EC2R 8PB, England
24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
280 Bishopsgate, London, EC2M 4RB, England
24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
250 Bishopsgate, London, EC2M 4AA, England
24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
250 Bishopsgate, London, EC2M 4AA, England
280 Bishopsgate, London, EC2M 4RB, England
250 Bishopsgate, London, EC2M 4RB, England
The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
280 Bishopsgate, London, EC2M 4RB, England
24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
250 Bishopsgate, London, EC2M 4AA, England
24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
250 Bishopsgate, London, EC2M 4AA, England
36 St Andrew Square, Edinburgh, EH2 2YB, Scotland
The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
1 Princes Street, London, EC2R 8PB, England
11-16 Donegall Square East, Belfast, BT1 5UB, Northern Ireland
11-16 Donegall Square East, Belfast, BT1 5UB, Northern Ireland
11-16 Donegall Square East, Belfast, BT1 5UB, Northern Ireland
The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
1 Princes Street, London, EC2R 8PB, England
24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
346
Parent company financial statements and notes
15 Related undertakings continued
The following table details active related undertakings incorporated outside the UK which are 100% owned by the Group and fully
consolidated for accounting purposes.
Activity (2)
Reg
Acc (3)
Address
BF
BF
BF
BF
BF
BF
BF
SC
BF
Country (1) Entity name
Australia
Australia
Australia
Australia
RBS Alternative Investments
(Australia) Pty Ltd
RBS Group (Australia) Pty Ltd
RBS Holdings III (Australia) Pty
Ltd
RBS Nominees (Australia) Pty
Ltd
Bahamas
CTB Ltd
Bermuda
R.B. Leasing BDA One Ltd
Bermuda
KEB Investors, L.P.
Brazil
British Virgin
Islands
British Virgin
Islands
Cayman
Islands
Cayman
Islands
Cayman
Islands
Cayman
Islands
Cayman
Islands
Denmark
Denmark
RBS Assessoria Ltda
Action Corporate Services Ltd
Minster Corporate Services Ltd
BF
Coutts & Co (Cayman) Ltd
Coutts General Partner
(Cayman) V Ltd
BF
BF
Redlion Investments Ltd
OTH
Redshield Holdings Ltd
Royhaven Secretaries Ltd
BF
BF
Airside Properties ASP Denmark
AS
Airside Properties Denmark AS BF
BF
Denmark
Kastrup Commuter K/S
Denmark
Kastrup Hangar 5 K/S
Denmark
Kastrup V & L Building K/S
Finland
Artul Kiinteistöt Oy
BF
BF
BF
BF
Finland
Fab Ekenäs Formanshagen 4
BF
Finland
Forssa Liikekiinteistöt Oy
BF
Finland
Kiinteistö Oy Pennalan Johtotie 2 BF
Finland
Koy Espoon Entresse II
Finland
Koy Espoon Niittysillantie 5
BF
BF
Finland
Koy Helsingin Mechelininkatu 1 BF
Finland
Koy Helsingin Osmontie 34
Finland
Koy Helsingin Panuntie 11
Finland
Koy Helsingin Panuntie 6
Finland
Koy Iisalmen Kihlavirta
Finland
Koy Jämsän Keskushovi
BF
BF
BF
BF
BF
Finland
Koy Kokkolan Kaarlenportti Fab BF
Finland
Koy Kouvolan Oikeus ja
Poliisitalo
Finland
Koy Lohjan Huonekalutalo
Finland
Koy Millennium
Finland
Koy Nummelan Portti
Finland
Koy Nuolialan päiväkoti
For notes for this table refer to page 356
BF
BF
BF
BF
BF
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
Level 22, 88 Phillip Street, Sydney, NSW, 2000
Level 22, 88 Phillip Street, Sydney, NSW, 2000
Level 22, 88 Phillip Street, Sydney, NSW, 2000
Level 22, 88 Phillip Street, Sydney, NSW, 2000
Trident Corporate Services (Bahamas) Ltd, Suite 200B, 2nd Floor,
Centre of Commerce, One Bay Street, PO Box N-3944, Nassau,
JE4 8ND
22 Victoria Street, Hamilton, HM12
Clarendon House, Two Church Street, Suite 104, Reid Street,
Hamilton, HM 11
Rua Boa Vista, Sao Paulo, SP 01014-907
Hudson Trust Company Limited, Third Floor, Geneva Place, Road
Town, Tortola, VG1110
Hudson Trust Company Limited, Third Floor, Geneva Place, Road
Town, Tortola, VG1110
Estera Trust (Cayman) Limited, PO Box 1350, Clifton House, 75
Fort Street, George Town, Grand Cayman, KY1-1108
Maples Corporate Services Limited, P.O. Box 309, 121 South
Church Street, George Town, Grand Cayman, KY1-1104
Estera Trust (Cayman) Limited, PO Box 1350, Clifton House, 75
Fort Street, George Town, Grand Cayman, KY1-1108
Estera Trust (Cayman) Limited, PO Box 1350, Clifton House, 75
Fort Street, George Town, Grand Cayman, KY1-1108
Estera Trust (Cayman) Limited, PO Box 1350, Clifton House, 75
Fort Street, George Town, Grand Cayman, KY1-1108
c/o Visma Services, Lyskaer 3 CD, Herlev, 104 40
c/o Visma Services, Lyskaer 3 CD, Herlev, 104 40
c/o Visma Services, Lyskaer 3 CD, Herlev, 104 40
c/o Visma Services, Lyskaer 3 CD, Herlev, 104 40
c/o Visma Services, Lyskaer 3 CD, Herlev, 104 40
c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130,
Helsinki
c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130,
Helsinki
c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130,
Helsinki
c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130,
Helsinki
c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130,
Helsinki
c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130,
Helsinki
c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130,
Helsinki
c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130,
Helsinki
c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130,
Helsinki
c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130,
Helsinki
c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130,
Helsinki
Södra esplanaden, 12 c/o Nordisk Renting Oy, FI-00130, Helsinki
c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130,
Helsinki
c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130,
Helsinki
c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130,
Helsinki
c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130,
Helsinki
c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130,
Helsinki
c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130,
Helsinki
Notes
(5)
347
Parent company financial statements and notes
15 Related undertakings continued
Country (1) Entity name
Activity (2)
Reg
Acc (3)
Finland
Koy Päiväläisentie 1-6
Finland
Koy Peltolantie 27
Finland
Koy Raision Kihlakulma
BF
BF
BF
Finland
Koy Ravattulan Kauppakeskus BF
Finland
Koy Tapiolan Louhi
BF
Finland
Koy Vapaalan Service-Center BF
Finland
Nordisk Renting OY
Germany
Gibraltar
Guernsey
Guernsey
Guernsey
Guernsey
Guernsey
Hong Kong
RBS Deutschland Holdings
GmbH
RBS (Gibraltar) Ltd
Alsecure Life Insurance PCC
Ltd
Alsecure US PCC Ltd
Lothbury Insurance Company
Ltd
Morar ICC Insurance Ltd
RBS Employment (Guernsey)
Ltd
RBS Asia Financial Services
Ltd
Hong Kong RBS Asia Futures Ltd
Hong Kong
RBS Nominees (Hong Kong)
Ltd
Hong Kong RBS Securities Japan Ltd
India
India
Isle of Man
RBS Prime Services (India)
Private Ltd
RBS Services India Private
Ltd
Isle of Man Bank Ltd
Isle of Man
Lombard Manx Leasing Ltd
Isle of Man
Lombard Manx Ltd
Italy
Jersey
Jersey
Jersey
Jersey
Jersey
Luxembourg
Mauritius
Fondo Sallustio
C.J. Fiduciaries Ltd
Keep SPV Ltd
Lombard Finance (CI) Ltd
The Royal Bank of Scotland
International (Holdings) Ltd
The Royal Bank of Scotland
International Ltd
RBS European Investments
SARL
RBS Asia (Mauritius) Ltd
Netherlands AA Merchant Banking B.V.
Netherlands
Alternative Investment Fund
B.V.
Netherlands FI Equity Partners B.V.
Netherlands
Netherlands
National Westminster
International Holdings B.V.
RBS AA Holdings
(Netherlands) B.V.
Netherlands RBS Asia Holdings B.V.
Netherlands RBS Holdings N.V.
Netherlands RBS Hollandsche N.V.
Netherlands
Netherlands
Netherlands
Netherlands
RBS Netherlands Holdings
B.V.
RBS Nominees (Netherlands)
B.V.
RBS Participations
(Netherlands) B.V.
The Royal Bank of Scotland
N.V.
Norway
BD Lagerhus AS
BF
BF
CI
BF
BF
BF
BF
SC
BF
BF
BF
BF
BF
SC
BF
BF
BF
BF
BF
BF
BF
BF
CI
BF
BF
BF
BF
BF
BF
BF
BF
BF
CI
BF
BF
BF
CI
BF
For notes for this table refer to page 356
Notes
Address
c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130,
Helsinki
c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130,
Helsinki
c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130,
Helsinki
c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130,
Helsinki
c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130,
Helsinki
c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130,
Helsinki
c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130,
Helsinki
Junghofstrasse 22, Frankfurt am Main, D-60311
1 Corral Road, JE4 8ND
3rd Floor, Dixcart House, Sir William Place, St Peter Port, GY1 1GX
(5)
3rd Floor, Dixcart House, Sir William Place, St Peter Port, GY1 1GX
PO Box 230, Heritage Hall, Le Marchant Street, St Peter Port, GY1
4JH
PO Box 384, The Albany, South Esplanade, St Peter Port, GY1 4NF
(5)
1 Le Marchant Street, St. Peter Port, GY1 1LF
7/F, Lincoln House, Taikoo Place, 979 King's Road, Quarry Bay
7/F, Lincoln House, Taikoo Place, 979 King's Road, Quarry Bay
7/F, Lincoln House, Taikoo Place, 979 King's Road, Quarry Bay
Level 54, Hopewell Centre, 183 Queen's Road East
414, Empire Complex (South Wing), Senapati Bapat Marg, Lower
Parel, Mumbai, 400 013
DLF Cyber City, Tower C, DLF Phase III, Haryana, 122 002
2 Athol Street, Douglas, IM99 1AN
Royal Bank House, 2 Victoria Street, Douglas, IM1 2LN
Royal Bank House, 2 Victoria Street, Douglas, IM1 2LN
FC
FC
FC
FC
FC
DE
FC
FC
FC
FC
DE
FC
DE
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
DE
Via Vittorio Alfieri 1, Conegliano, 31015
FC
DE
FC
FC
FC
FC
FC
PC
DE
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
Royal Bank House, 71 Bath Street, St Helier, JE4 8PJ
La Motte Chambers, St. Helier, JE1 1BJ
Royal Bank House, 71 Bath Street, St Helier, JE4 8PJ
Royal Bank House, 71 Bath Street, St Helier, JE4 8PJ
Royal Bank House, 71 Bath Street, St Helier, JE4 8PJ
46 Avenue J.F. Kennedy, Luxembourg-Kirchberg, L-1855
10th Floor, Raffles Tower, 19 Cybercity, Ebene, M20
Gustav Mahlerlaan 350, Amsterdam, 1082 ME
Gustav Mahlerlaan 350, Amsterdam, 1082 ME
Gustav Mahlerlaan 350, Amsterdam, 1082 ME
24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland, UK
Gustav Mahlerlaan 350, Amsterdam, 1082 ME
Gustav Mahlerlaan 350, Amsterdam, 1082 ME
Gustav Mahlerlaan 350, Amsterdam, 1082 ME
Gustav Mahlerlaan 350, Amsterdam, 1082 ME
Gustav Mahlerlaan 350, Amsterdam, 1082 ME
Gustav Mahlerlaan 350, Amsterdam, 1082 ME
Gustav Mahlerlaan 350, Amsterdam, 1082 ME
Gustav Mahlerlaan 350, Amsterdam, 1082 ME
c/o Nordisk Renting AS, 9 Estaje, Klingenberggata 7, NO-0161,
Oslo
(5)
(5)
(5)
(5)
(5)
(5)
(5)
(5)
(5)
(5)
(5)
348
Parent company financial statements and notes
15 Related undertakings continued
Country (1) Entity name
Activity (2)
Norway
Eiendomsselskapet Apteno Lar
AS
Norway
Hatros 1 AS
Norway
Nordisk Renting AS
Norway
Ringdalveien 20 AS
BF
BF
BF
BF
CI
BF
BF
BF
BF
BF
BF
BF
BF
BF
TR
INV
BF
TR
BF
CI
TR
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
Poland
Poland
RoI
RoI
RoI
RoI
RoI
RoI
RoI
RoI
RoI
RoI
RoI
RoI
RoI
RoI
RoI
RoI
RoI
RoI
RoI
Singapore
Sweden
RBS Bank (Polska) S.A.
RBS Polish Financial Advisory
Services sp. z o.o.
Easycash (Ireland) Ltd
First Active Insurances
Services Ltd
First Active Investments No. 4
Ltd
First Active Ltd
Hume Street Nominees Ltd
Lombard Ireland Group
Holdings Unlimited Company
Lombard Ireland Ltd
Norgay Property Ltd
RBS Asset Management
(Dublin) Ltd
RBS Investments (Ireland) Ltd BF
BF
BF
RBS Nominees (Ireland) Ltd
The RBS Group Ireland
Retirement Savings Trustee
Ltd
Ulster Bank (Ireland) Holdings
Unlimited Company
Ulster Bank Commercial
Services Ltd
Ulster Bank Dublin Trust
Company Unlimited Company
Ulster Bank Holdings (ROI)
Ltd
Ulster Bank Ireland
Designated Activity Company
Ulster Bank Pension Trustees
(RI) Ltd
Walter Property Ltd
The Royal Bank of Scotland
Asia Merchant Bank
(Singapore) Ltd
Airside Properties AB
Sweden
Arkivborgen KB
Sweden
Backsmedjan KB
Sweden
Bil Fastigheter i Sverige AB
Sweden
Bilfastighet i Täby AB
Sweden
Braheberget KB
Sweden
Brödmagasinet KB
Sweden
Sweden
Sweden
Sweden
Sweden
Eurohill 4 KB
Fastighet Kallebäck 2:4 i
Göteborg AB
Fastighets AB Flöjten i
Norrköping
Fastighets AB
Hammarbyvagnen
Fastighets AB Kabisten 1
Sweden
Fastighets AB Stockmakaren BF
Sweden
Sweden
Sweden
Sweden
Sweden
Fastighets AB Xalam
Fastighets Aktiebolaget
Sambiblioteket
Fastighetsbolaget Holma i
Höör AB
Forskningshöjden KB
Förvaltningsbolaget Dalkyrkan
KB
BF
BF
BF
BF
BF
For notes for this table refer to page 356
Reg
Acc (3)
FC
FC
FC
FC
FC
FC
FC
Address
c/o Nordisk Renting AS, 9 Estaje, Klingenberggata 7, NO-0161,
Oslo
c/o Nordisk Renting AS, 9 Estaje, Klingenberggata 7, NO-0161,
Oslo
c/o Nordisk Renting AS, 9 Estaje, Klingenberggata 7, NO-0161,
Oslo
c/o Nordisk Renting AS, 9 Estaje, Klingenberggata 7, NO-0161,
Oslo
Wisniowy Business Park, ul 1-go Sierpnia 8a, Warsaw 02-134
Wisniowy Business Park, ul 1-go Sierpnia 8a, Warsaw 02-134
Ulster Bank Group Centre, George's Quay, Dublin 2
DE
Ulster Bank Group Centre, George's Quay, Dublin 2
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
DE
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
Ulster Bank Group Centre, George's Quay, Dublin 2
Ulster Bank Group Centre, George's Quay, Dublin 2
Ulster Bank Group Centre, George's Quay, Dublin 2
Ulster Bank Group Centre, George's Quay, Dublin 2
Ulster Bank Group Centre, George's Quay, Dublin 2
Ulster Bank Group Centre, George's Quay, Dublin 2
Guild House, Guild Street, IFSC, D01 K2C5, Dublin 1
Ulster Bank Group Centre, George's Quay, Dublin 2
Ulster Bank Group Centre, George's Quay, Dublin 2
Ulster Bank Group Centre, George's Quay, Dublin 2
Ulster Bank Group Centre, George's Quay, Dublin 2
Ulster Bank Group Centre, George's Quay, Dublin 2
Ulster Bank Group Centre, George's Quay, Dublin 2
Ulster Bank Group Centre, George's Quay, Dublin 2
Ulster Bank Group Centre, George's Quay, Dublin 2
Ulster Bank Group Centre, George's Quay, Dublin 2
Ulster Bank Group Centre, George's Quay, Dublin 2
One Raffles Quay, #23-10 South Tower, Singapore, 48583
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
Notes
(5)
(5)
349
Parent company financial statements and notes
15 Related undertakings continued
Country (1) Entity name
Activity (2)
Reg
Acc (3)
Address
Notes
Sweden
Sweden
Förvaltningsbolaget Predio 3
KB
Gredelinen KB
Sweden
Grinnhagen KB
Sweden
Horrsta 4:38 KB
Sweden
IR Fastighets AB
Sweden
Sweden
Sweden
IR IndustriRenting AB
Kallebäck Institutfastigheter
AB
KB Eurohill
Sweden
KB IR Gamlestaden
Sweden
KB Lagermannen
Sweden
KB Likriktaren
Sweden
Läkten 1 KB
Sweden
LerumsKrysset KB
Sweden
Limstagården KB
Sweden
Mjälgen KB
Sweden
Mons AB
Sweden
Mons Investment AB
Sweden
Nordisk Renting AB
Sweden
Nordisk Renting Kapital AB
Sweden
Sweden
Sweden
Nordisk Specialinvest AB
Nordiska Strategifastigheter
Holding AB
Pyrrhula 6,7 AB
Sweden
SFK Kommunfastigheter AB
Sweden
Sjöklockan KB
Sweden
Skinnarängen KB
Sweden
Solbänken KB
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
Sweden
Strand European Holdings AB BF
Sweden
Svenskt Fastighetskapital AB BF
BF
BF
BF
BF
BF
BF
BF
SC
BF
BF
BF
BF
INV
INV
CI
Sweden
Sweden
Sweden
Svenskt Energikapital AB
Svenskt Fastighetskapital
Holding AB
Tingsbrogården KB
Sweden
Tygverkstaden 1 KB
Switzerland Alcover A.G.
Switzerland Coutts & Co Ltd
Switzerland
Switzerland
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
USA
Coutts & Co Trustees (Suisse)
S.A.
RBS Services (Switzerland)
Ltd
Candlelight Acquisition LLC
Financial Asset Securities
Corp.
Greenwich Capital
Derivatives, Inc.
NatWest Group Holdings
Corporation
Random Properties
Acquisition Corp. III
Random Properties
Acquisition Corp. IV
RBS Acceptance Inc.
RBS Americas Property Corp. SC
RBS Commercial Funding Inc. BF
RBS Equity Corporation
RBS Financial Products Inc.
RBS Holdings USA Inc.
RBS Securities Inc.
BF
BF
BF
BF
RBS WCS Holding Company BF
FC
FC
PC
FC
FC
FC
FC
FC
FC
FC
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
DE
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
DE
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
FC
FC
FC
FC
FC
PC
PC
FC
PC
Baarerstrasse 98, 6302 Zug, CH-6300
Lerchenstrasse 18, Zurich, CH 8022
c/o Regus Rue du Rhône Sàrl, Geneva, CH-1204
Lerchenstrasse 18, Zurich, CH 8022
(5)
2711 Centerville Road, Suite 400, Wilmington, Delaware, DE 19808
2711 Centerville Road, Suite 400, Wilmington, Delaware, DE 19808
2711 Centerville Road, Suite 400, Wilmington, Delaware, DE 19808
2711 Centerville Road, Suite 400, Wilmington, Delaware, DE 19808
2711 Centerville Road, Suite 400, Wilmington, Delaware, DE 19808
DE
2711 Centerville Road, Suite 400, Wilmington, Delaware, DE 19808
FC
FC
FC
FC
FC
FC
FC
FC
2711 Centerville Road, Suite 400, Wilmington, Delaware, DE 19808
2711 Centerville Road, Suite 400, Wilmington, Delaware, DE 19808
2711 Centerville Road, Suite 400, Wilmington, Delaware, DE 19808
340 Madison Avenue, New York, 10173
2711 Centerville Road, Suite 400, Wilmington, Delaware, DE 19808
2711 Centerville Road, Suite 400, Wilmington, Delaware, DE 19808
2711 Centerville Road, Suite 400, Wilmington, Delaware, DE 19808
Corporation Trust Centre, 1209 Orange St, Wilmington, Delaware,
DE 19808
(5)
For notes for this table refer to page 356
350
Parent company financial statements and notes
15 Related undertakings continued
The following table details active related undertakings incorporated in the UK where the Group ownership is less than 100%.
Activity (2)
Accounting
Treatment (4)
Reg
Acc (3)
Group
Int % Address
Entity name
Aspire Oil Services Ltd
Ballymore (London Arena) Ltd
BGF Group Ltd
CFN Packaging Group Ltd
BF
BF
BF
BF
Cloud Electronics Holdings Ltd
BF
Coneworx Ltd
BF
EAA
IA
EAA
IA
IA
IA
GWNW City Developments Ltd
BF
EAJV
Hamsard 3120 Ltd
Higher Broughton (GP) Ltd
BF
BF
Higher Broughton Partnership LP BF
Isobel AssetCo Ltd
Isobel EquityCo Ltd
BF
BF
Isobel Finance HoldCo No2 Ltd BF
Isobel HoldCo Ltd
Isobel Intermediate HoldCo Ltd
Isobel Loan Capital Ltd
Isobel Mezzanine Borrower Ltd
Jaguar Cars Finance Ltd
JCB Finance (Leasing) Ltd
JCB Finance Ltd
Land Options (East) Ltd
Landpower Leasing Ltd
London Rail Leasing Ltd
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
Lyalvale Property Ltd
INV
Pollokshields Developments Ltd
INV
Prestige Walker Ltd
RBS Covered Bonds (LM) Ltd
RBS Covered Bonds LLP
OTH
BF
BF
RBS Secured Funding (LM) Ltd BF
RBS Sempra Commodities LLP BF
Uniconn Ltd
Wealdland Ltd
OTH
OTH
IA
EAA
EAA
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
EAJV
FC
EAJV
IA
IA
IA
IA
FC
FC
FC
IA
EAA
Notes
(6)
(7)
FC
DE
PC
DE
PC
DE
FC
FC
PC
FC
FC
FC
FC
FC
27
45
Union Plaza 6th Floor, 1 Union Wynd, Aberdeen,
AB10 1DQ, Scotland
St John's House, 5 South Parade, Summertown, Oxford,
Oxfordshire, OX2 7JL, England
24 13-15 York Buildings, London, WC2N 6JU, England
25
20
40
50
40
27-29 Lumley Avenue, Skegness, Lincolnshire, PE25 2AT,
England
140 Staniforth Road, Darnall, Sheffield, South Yorkshire,
S9 3HF, England
4 Biggar Road Industrial Estate, Cleland, Motherwell,
ML1 5PB, Scotland
Gate House, Turnpike Road, High Wycombe,
Buckinghamshire, HP12 3NR, England
Sycamore Road, Eastwood Trading Estate, Rotherham,
South Yorkshire, S65 1EN, England
51 Floor 3, 1 St Ann Street, Manchester, M2 7LR, England
Cornwall Buildings, 45-51 Newhall Street, Birmingham,
West Midlands, B3 3QR, England
51
75 40 Berkeley Square, London, W1J 5AL, England
75 40 Berkeley Square, London, W1J 5AL, England
0 35 Great St Helen's, London, EC3A 6AP, England
75 40 Berkeley Square, London, W1J 5AL, England
DE
75 40 Berkeley Square, London, W1J 5AL, England
FC
FC
FC
FC
FC
FC
FC
PC
FC
DE
FC
FC
DE
FC
FC
FC
FC
75 40 Berkeley Square, London, W1J 5AL, England
75 40 Berkeley Square, London, W1J 5AL, England
50 280 Bishopsgate, London, EC2M 4RB, England
75 The Mill, High Street, Rocester, ST14 5JW, England
75 The Mill, High Street, Rocester, ST14 5JW, England
50 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
75 The Mill, High Street, Rocester, ST14 5JW, England
50 99 Queen Victoria Street, London, EC4V 4EH, England
31
49
30
Lyalvale Express Ltd, Express Estate, Fisherwick, Nr
Whittington, Lichfield, WS13 8XA, England
Abercorn House, 79 Renfrew Road, Paisley, Renfrewshire,
PA3 4DA, Scotland
Terminal House, Station Approach, Shepperton, Middlesex,
TW17 8AS, England
20 35 Great St Helen's, London, EC3A 6AP, England
73 1 Princes Street, London, EC2R 8BP, England
20
c/o SFM Corporate Services Ltd, 35 Great St Helens,
London, EC3A 6AP, England
(8)
51 24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
Howe Moss Drive, Kirkhill Industrial Estate, Dyce,
Aberdeen, AB21 0GL, Scotland
30
29 10 Norwich Street, London, EC4A 1BD, England
The following table details active related undertakings incorporated outside the UK where the Group ownership is less than 100%.
Activity
Accounting
Reg
treatment (4)
Acc (3)
Country (1) Entity name
Cayman
Islands
CITIC Capital China
Mezzanine Fund Ltd
(2)
BF
IA
Cayman
Islands
Lunar Funding VIII Ltd
BF
FC
China
Galaxy Futures Company Ltd BF
EAA
Cyprus
Pharos Estates Ltd
OTH
EAA
Guernsey
MSE Holdings Ltd
Italy
Italy
Eris Finance S.R.L.
Maja Finance S.R.L.
Jersey
Spring Allies Jersey Ltd
For notes for this table refer to page 356
INV
BF
BF
BF
IA
IA
FC
IA
FC
FC
FC
DE
FC
FC
DE
FC
Group
Int %
33
0
17
49
37
45
0
49
Address
Boundary Hall, Cricket Square, 171 Elgin
Avenue, George Town, Grand Cayman, KY1-
1104
Boundary Hall, Cricket Square, 171 Elgin
Avenue, George Town, Grand Cayman, KY1-
1104
Floor 9th, SOHO Century Plaza, 1501 Century
Avenue, Pudong New Area, Shanghai
24 Demostheni Severi, 1st Floor, Nicosia, 1080
c/o Gentoo Fund Services Ltd, Mill Court, La
Charrotiere, St Peter Port, GY1 3GG
Via Vittorio Alfieri 1, Conegliano, 31015
Via Vittorio Alfieri 1, Conegliano, 31015
Whiteley Chambers, Don Street, St Helier, JE4
9WG
Notes
(7)
351
Parent company financial statements and notes
Activity
Accounting
Reg
Group
treatment (4)
Acc (3)
Int %
Address
Notes
(2)
BF
BF
BF
BF
BF
BF
15 Related undertakings continued
Country (1) Entity name
Jersey
Luxembourg
Netherlands
Nightingale Securities 2017-1
Ltd
Solar Energy Capital Europe
SARL
German Public Sector
Finance B.V.
Netherlands Herge Holding B.V.
Netherlands RFS Holdings B.V.
Netherlands
Poland
RoI
RoI
RoI
RoI
Tulip Asset Purchase
Company B.V.
Wiśniowy Management sp. z
o.o.
Celtic Residential Irish
Mortgage Securitisation No
14 DAC
Celtic Residential Irish
Mortgage Securitisation No
15 DAC
Cesium Structured Funding
Ltd
The Drive4Growth Company
Ltd
FC
EAJV
EAJV
IA
FC
FC
SC
EAA
BF
FC
BF
BF
FC
FC
OTH
IA
Saudi Arabia Alawwal Bank
Sweden
Förvaltningsbolaget
Klöverbacken Skola KB
Sweden
Optimus KB
Sweden
Stora Kvarnen KB
CI
BF
BF
BF
USA
USA
Sempra Energy Trading LLC BF
Thames Asset Global
Securitization No.1 Inc.
BF
EAA
FC
FC
FC
FC
FC
DE
FC
FC
FC
FC
FC
FC
DE
FC
FC
FC
FC
FC
PC
FC
DE
DE
0
44 Esplanade, St Helier, JE4 9WG
33
50
63
98
46 Avenue J.F. Kennedy, Luxembourg-
Kirchberg, L-1855
De entree 99 -197, 1101HE, Amsterdam
Zuidoost
Verlengde Poolseweg 16, 4818 CL, Breda
Herikerbergweg 238, Luna Arena, 1101 CM,
Amsterdam Zuidoost
0
Claude Debussylaan 24, Amsterdam, 1082 MD
(9)
25
Ilzecka 26 Street, Warsaw, 02-135
0
5 Harbourmaster Place, Dublin 1
0
0
20
40
51
51
51
51
5 Harbourmaster Place, Dublin 1
5 Harbourmaster Place, Dublin 1
c/o Denis Crowley & Co, Chartered Accountants,
Unit 6 Riverside Grove, Riverstick, Cork
Al-Dhabab Street, Riyadh, 11431
c/o Nordisk Renting AB, Box 14044, SE-104 40,
Stockholm
c/o Nordisk Renting AB, Box 14044, SE-104 40,
Stockholm
c/o Nordisk Renting AB, Box 14044, SE-104 40,
Stockholm
251 Little Falls Drive, Wilmington, Delaware, DE
19808
0
114 West 47th Street, New York, 10036
The following table details active related undertakings which are 100% owned by the Group but are not consolidated for accounting
purposes (8).
Country (1) Entity name
Activity (2)
treatment (4)
Accounting
Reg
Acc (3) Address
Jersey
Jersey
USA
USA
USA
USA
USA
USA
RBS International Employees'
Pension Trustees Ltd
RBS Retirement And Death
Provision Company Ltd
RBS Capital LP B
RBS Capital LP II
RBS Capital Trust B
RBS Capital Trust II
RBSG Capital Corporation
BF
BF
BF
BF
BF
BF
BF
West Granite Homes Inc.
INV
NC
NC
NC
NC
NC
NC
NC
NC
FC
FC
DE
DE
DE
DE
FC
FC
PO Box 6, 23-25 Broad Street, St Helier, JE4 8ND
PO Box 236, First Island House, Peter Street, St Helier,
JE4 8SG
1209 Orange Street, Wilmington, Delaware, DE 19801
1209 Orange Street, Wilmington, Delaware, DE 19801
100, Suite 102, White Clay Center, Newark, New Castle
County, Delaware, DE 19711
100, Suite 102, White Clay Center, Newark, New Castle
County, Delaware, DE 19711
2711 Centerville, Road Suite 400, Wilmington, Delaware,
DE 19808
Bellevue Parkway, Suite 210, Wilmington, Delaware, DE
19809
Notes
(11)
(12)
(12)
(12)
(12)
(12)
(11)
The following tables detail related undertakings that are not active.
Actively being dissolved
Accounting
treatment (4)
Reg
Acc (3)
Group
Int %
Country (1) Entity name
Cayman
Islands
Equator Investments (Cayman)
Ltd
China
Germany
Jersey
Jersey
Jersey
The Royal Bank of Scotland
(China) Co., Ltd
West Register Prime Holding
GmbH i. L.
Arran Cards Loan Note Issuer
No.1 Ltd
Arran Cards Loan Note Issuer
No.2 Ltd
Foundation Commercial Property
Ltd
For notes for this table refer to page 356
FC
FC
FC
FC
FC
EAJV
FC
FC
FC
DE
FC
FC
Address
Maples Corporate Services Limited, P.O. Box 309,
121 South Church Street, George Town, Grand
Cayman, KY1-1104
Level 25F, Azia Center, 1233 Lu Jia Zui Ring Road,
Shanghai, 200120
Notes
(5)
100
98
100
Emil-Riedl-Weg 6, Pullach i.Isartal, D-82049
0
0
50
44 Esplanade, St Helier, JE49WG
47 Esplanade, St Helier, JE1 0BD
Royal Bank House, 71 Bath Street, St Helier, JE4
8PJ
352
Parent company financial statements and notes
15 Related undertakings continued
Country (1) Entity name
Accounting
treatment (4)
Reg
Acc (3)
Group
Int %
Jersey
Mulcaster Street Nominees Ltd
FC
Malaysia
The Royal Bank of Scotland
BERHAD
Netherlands Exfin Capital B.V.
Netherlands
Antilles
RBSG Holdings N.V.
FC
FC
FC
FC
FC
FC
FC
FC
FC
Celtic Residential Irish Mortgage
Securitisation No 09 plc
Celtic Residential Irish Mortgage
Securitisation No 10 plc
Celtic Residential Irish Mortgage
Securitisation No 11 plc
Celtic Residential Irish Mortgage
Securitisation No 12 DAC
Celtic Residential Irish Mortgage
Securitisation No 16 DAC
First Active Holdings Ltd
First Active Investments No. 3 Ltd FC
First Active Treasury Ltd
Marnin Ltd
Qulpic Ltd
RBS Holdings (Ireland) Unlimited
Company
RBS Trustees (Ireland) Ltd
The Royal Bank of Scotland
Finance (Ireland)
UB SIG (ROI) Ltd
FC
NC
FC
FC
FC
FC
FC
Ulster Bank Group Treasury Ltd FC
Ulster Bank Wealth Unlimited
Company
Utras Unlimited Company
FC
FC
West Register (RoI) Property Ltd FC
Zrko Ltd
Arran Cards Funding plc
Arran Residential Mortgages
Funding 2010-1 plc
Arran Residential Mortgages
Funding 2011-1 plc
Arran Residential Mortgages
Funding 2011-2 plc
Attlee Personal Loans Plc
Bevan Loan Interest Purchaser
plc
Cala Campus Ltd
CNW Group Ltd
FC
FC
FC
FC
FC
FC
FC
EAJV
FC
Dixon Motors Developments Ltd FC
Emperor Holdings Ltd
Farming and Agricultural Finance
Ltd
Funding For Equity Release
Securitisation Transaction (No.4)
Ltd
Funding For Equity Release
Securitisation Transaction (No.5)
Ltd
Greenock Funding No 5 Plc
Greenwich NatWest Ltd
KUC Holdings Ltd
Latam Directors Ltd
Lombard Corporate Finance (3)
Ltd
Lombard Venture Finance Ltd
Mons (UK) Ltd
NatWest Finance Ltd
FC
FC
FC
FC
FC
FC
FC
NC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
DE
FC
FC
FC
FC
DE
FC
FC
FC
FC
DE
FC
FC
FC
DE
DE
FC
FC
DE
DE
FC
FC
DE
FC
FC
FC
FC
FC
DE
DE
FC
FC
FC
FC
FC
FC
FC
DE
RoI
RoI
RoI
RoI
RoI
RoI
RoI
RoI
RoI
RoI
RoI
RoI
RoI
RoI
RoI
RoI
RoI
RoI
RoI
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
NatWest Nominees Ltd
For notes for this table refer to page 356
Address
Royal Bank House, 71 Bath Street, St Helier, JE4
8PJ
Level 9, Menara Maxis, Kuala Lumpur City Centre,
Kuala Lumpur, 50088
Amsteldijk 166, Amsterdam, 1082 MD
Notes
100
100
0
100
Kaya Flambayan 9, Curacao, Netherlands Antilles
0
0
0
0
0
100
100
100
98
67
98
98
100
100
100
100
98
100
67
0
0
0
0
0
0
50
100
100
100
100
0
0
0
100
100
100
100
100
100
100
100
Riverside One, Sir John Rogersons Quay, Dublin 2
5 Harbourmaster Place, Dublin 1
5 Harbourmaster Place, Dublin 1
5 Harbourmaster Place, Dublin 1
5 Harbourmaster Place, Dublin 1
Ulster Bank Group Centre, George's Quay, Dublin 2
Ulster Bank Group Centre, George's Quay, Dublin 2
Ulster Bank Group Centre, George's Quay, Dublin 2
Ulster Bank Group Centre, George's Quay, Dublin 2
70 Sir John Rogerson's Quay, Dublin 2
Ulster Bank Group Centre, George's Quay, Dublin 2
(5)
First Floor, 10/11 Exchange Place, International
Financial Services Centre, Dublin 1
24/26 City Quay, Dublin 2
Ulster Bank Group Centre, George's Quay, Dublin 2
Ulster Bank Group Centre, George's Quay, Dublin 2
Ulster Bank Group Centre, George's Quay, Dublin 2
Ulster Bank Group Centre, George's Quay, Dublin 2
(5)
Ulster Bank Group Centre, George's Quay, Dublin 2
70 Sir John Rogerson's Quay, Dublin 2
35 Great St Helen's, London, EC3A 6AP, England
35 Great St Helen's, London, EC3A 6AP, England
35 Great St Helen's, London, EC3A 6AP, England
35 Great St Helen's, London, EC3A 6AP, England
35 Great St Helen's, London, EC3A 6AP, England
35 Great St Helen's, London, EC3A 6AP, England
Ledingham Chalmers, Johnstone House, 52-54 Rose
Street, Aberdeen, AB10 1HA, Scotland
250 Bishopsgate, London, EC2M 4AA, England
1 Princes Street, London, EC2R 8PB, England
1 Princes Street, London, EC2R 8PB, England
280 Bishopsgate, London, EC2M 4RB, England
Wilmington Trust SP Services (London) Ltd, Third
Floor, 1 Kings Arms Yard, London, EC2R 7AF,
England
Wilmington Trust SP Services (London) Ltd, Third
Floor, 1 Kings Arms Yard, London, EC2R 7AF,
England
35 Great St Helen's, London, EC3A 6AP, England
250 Bishopsgate, London, EC2M 4AA, England
24/25 St Andrew Square, Edinburgh, EH2 1AF,
Scotland
Quartermile Two, 2 Lister Square, Edinburgh,
Midlothian, EH3 9GL, Scotland
1 Princes Street, London, EC2R 8PB, England
280 Bishopsgate, London, EC2M 4RB, England
250 Bishopsgate, London, EC2M 4AA, England
250 Bishopsgate, London, EC2M 4AA, England
1 Princes Street, London, EC2R 8PB, England
353
Parent company financial statements and notes
15 Related undertakings continued
Country (1) Entity name
UK
NatWest (HMHP) Ltd
Accounting
treatment (4)
FC
Reg
Acc (3)
FC
Group
Int %
100
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
Nevis Derivatives No. 2 LLP
Nevis Derivatives No.1 LLP
Northants Developments Ltd
Property Ventures (B&M) Ltd
Pulley's Nominees Ltd
Raingrove Ltd
RBDC Investments Ltd
RBEF Ltd
RBS Argonaut Ltd
RBS Corporate Finance Ltd
RBS Corporate Investments (UK)
Ltd
RBS Development (UK) Ltd
RBS Equities (UK) Ltd
RBS Equity Products (UK) Ltd
RBS Finance (UK) Ltd
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
RBS Group Investments (UK) Ltd FC
RBS GTS Services Ltd
RBS Health Trustee (UK) Ltd
RBS International Corporate
Holdings (UK) Ltd
RBS International Investment
Holdings (UK) Ltd
RBS Investments (UK) Ltd
RBS Lease Finance (UK) Ltd
RBS Life Holdings Ltd
RBS Overseas (UK) Ltd
RBS Sempra Products Ltd
RBS Special Opportunities
General Partner (England) Ltd
RBS Special Opportunities
General Partner (Scotland) II Ltd
RBS Special Opportunities
General Partner (Scotland) Ltd
RBS Specialised Property
Investments Ltd
RoboScot DevCap Ltd
RoboScot (64) Ltd
Royal Bank Development Capital
Ltd
Royal Bank Project Investments
Ltd
Royal Bank Ventures Ltd
RoyScot Ltd
STAR 1 Special Partner Ltd
The National Bank Ltd
Thrapston Triangle Ltd
West Register (Hotels Number 2)
Ltd
West Register (Northern Ireland)
Property Ltd
West Register (Residential
Property Investments) Ltd
Williams & Glyn's Trust Company
Ltd
WR (NI) Property Investments
Ltd
WR (NI) Property Realisations
Ltd
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
Isle of Man Coutts & Co (Manx) Ltd
For notes for this table refer to page 356
FC
FC
FC
FC
FC
FC
FC
FC
PC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
DE
FC
FC
FC
FC
DE
DE
DE
FC
DE
DE
FC
Address
250 Bishopsgate, London, EC2M 4AA, England
Notes
35 Great St Helen's, London, EC3A 6AP, England
35 Great St Helen's, London, EC3A 6AP, England
1 Princes Street, London, EC2R 8PB, England
1 Princes Street, London, EC2R 8PB, England
250 Bishopsgate, London, EC2M 4AA, England
250 Bishopsgate, London, EC2M 4AA, England
24/25 St Andrew Square, Edinburgh, EH2 1AF,
Scotland
24/25 St Andrew Square, Edinburgh, EH2 1AF,
Scotland
24/25 St Andrew Square, Edinburgh, EH2 1AF,
Scotland
250 Bishopsgate, London, EC2M 4AA, England
250 Bishopsgate, London, EC2M 4AA, England
250 Bishopsgate, London, EC2M 4AA, England
250 Bishopsgate, London, EC2M 4AA, England
250 Bishopsgate, London, EC2M 4AA, England
250 Bishopsgate, London, EC2M 4AA, England
250 Bishopsgate, London, EC2M 4AA, England
250 Bishopsgate, London, EC2M 4AA, England
(5)
250 Bishopsgate, London, EC2M 4AA, England
250 Bishopsgate, London, EC2M 4AA, England
250 Bishopsgate, London, EC2M 4AA, England
250 Bishopsgate, London, EC2M 4AA, England
250 Bishopsgate, London, EC2M 4AA, England
24/25 St Andrew Square, Edinburgh, EH2 1AF,
Scotland
250 Bishopsgate, London, EC2M 4AA, England
Suite 1, 3rd Floor 11-12 St James's Square, London,
SW1Y 4LB, England
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
98
100
100
100
100
100
100
100
51
100
250 Bishopsgate, London, EC2M 4AA, England
100
100
24/25 St Andrew Square, Edinburgh, EH2 1AF,
Scotland
24/25 St Andrew Square, Edinburgh, EH2 1AF,
Scotland
100
250 Bishopsgate, London, EC2M 4AA, England
100
100
100
24/25 St Andrew Square, Edinburgh, EH2 1AF,
Scotland
24/25 St Andrew Square, Edinburgh, EH2 1AF,
Scotland
1 Princes Street, London, EC2R 8PB, England
100
250 Bishopsgate, London, EC2M 4AA, England
100
100
100
100
100
100
100
24/25 St Andrew Square, Edinburgh, EH2 1AF,
Scotland
280 Bishopsgate, London, EC2M 4RB, England
250 Bishopsgate, London, EC2M 4AA, England
1 Princes Street, London, EC2R 8PB, England
1 Princes Street, London, EC2R 8PB, England
24/25 St Andrew Square, Edinburgh, EH2 1AF,
Scotland
11-16 Donegall Square East, Belfast, BT1 5UB,
Northern Ireland
100
250 Bishopsgate, London, EC2M 4AA, England
100
1 Princes Street, London, EC2R 8PB, England
100
100
100
11-16 Donegall Square East, Belfast, BT1 5UB,
Northern Ireland
11-16 Donegall Square East, Belfast, BT1 5UB,
Northern Ireland
23/25 Broad Street, St Helier, JE4 8ND, Jersey
354
Parent company financial statements and notes
Accounting
treatment (4)
Reg
Acc (3)
15 Related undertakings continued
Dormant
Country (1)
Entity name
Denmark
Nordisk Renting A/S
Hong Kong
Atlas Nominees Ltd
Jersey
Jersey
Sweden
National Westminster Bank Nominees
(Jersey) Ltd
RBS Cards Securitisation Funding Ltd
Nordisk Renting Facilities Management
AB
Sweden
Nordisk Renting HB
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
NC
NC
FC
FC
FC
FC
FC
FC
FC
FC
AD Aggregator Platform Ltd
Adam & Company (Nominees) Ltd
Blydenstein Nominees Ltd
British Overseas Bank Nominees Ltd
Buchanan Holdings Ltd
Coutts Group
Dixon Vehicle Sales Ltd
Dunfly Trustee Ltd
FIT Nominee 2 Ltd
FIT Nominee Ltd
Freehold Managers (Nominees) Ltd
Glyns Nominees Ltd
HPUT A Ltd
HPUT B Ltd
JCB Finance Pension Ltd
Lombard Bank
Marigold Nominees Ltd
N.C. Head Office Nominees Ltd
National Westminster Ltd
NatWest Aerospace Trust Company Ltd FC
NatWest FIS Nominees Ltd
NatWest Invoice Finance Ltd
NatWest PEP Nominees Ltd
FC
FC
FC
NatWest Security Trustee Company Ltd FC
Nextlinks Ltd
Project & Export Finance (Nominees)
Ltd
R.B.S. Property (Greenock) Ltd
RB Investments 5 Ltd
RBOS Nominees Ltd
RBOS Trustees Ltd
RBS CIF Trustee Ltd
RBS Investment Executive Ltd
RBS Pension Trustee Ltd
RBS Retirement Savings Trustee Ltd
RBS Secretarial Services Ltd
RBS Trustees Ltd
RBSG Collective Investments Nominees
Ltd
RoyScot Leasing Ltd
Sixty Seven Nominees Ltd
Strand Nominees Ltd
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
For notes for this table refer to page 356
Syndicate Nominees Ltd
Group
int %
100
100
Address
c/o Adv Jan-Erik Svensson, HC Andersens Boulevard
12, Kopenhaum V, 1553
7/F, Lincoln House, Taikoo Place, 979 King's Road,
Quarry Bay
100
16 Library Place, St. Helier, JE4 8ND
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
88
100
100
100
100
100
100
100
100
100
100
Royal Bank House, 71 Bath Street, St Helier, JE4 8PJ
c/o Nordisk Renting AB, Box 14044, SE-104 40,
Stockholm
c/o Nordisk Renting AB, Box 14044, SE-104 40,
Stockholm
The Shards, 32 London Bridge Street, London, SE1
9SG, England
25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
250 Bishopsgate, London, EC2M 4AA, England
250 Bishopsgate, London, EC2M 4AA, England
1 Princes Street, London, EC2R 8PB, England
1 Princes Street, London, EC2R 8PB, England
1 Princes Street, London, EC2R 8PB, England
1 Princes Street, London, EC2R 8PB, England
250 Bishopsgate, London, EC2M 4AA, England
250 Bishopsgate, London, EC2M 4AA, England
250 Bishopsgate, London, EC2M 4AA, England
250 Bishopsgate, London, EC2M 4AA, England
250 Bishopsgate, London, EC2M 4RB, England
250 Bishopsgate, London, EC2M 4RB, England
11-16 Donegall Square East, Belfast, BT1 5UB,
Northern Ireland
Lee House, Baird Road, Enfield, Middlesex, EN1 1SJ,
England
1 Princes Street, London, EC2R 8PB, England
24/25 St Andrew Square, Edinburgh, EH2 1AF,
Scotland
1 Princes Street, London, EC2R 8PB, England
250 Bishopsgate, London, EC2M 4AA, England
1 Princes Street, London, EC2R 8PB, England
250 Bishopsgate, London, EC2M 4AA, England
1 Princes Street, London, EC2R 8PB, England
250 Bishopsgate, London, EC2M 4AA, England
250 Bishopsgate, London, EC2M 4RB, England
FC
DE
FC
DE
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
PC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
DE
100
1 Princes Street, London, EC2R 8PB, England
FC
FC
FC
FC
FC
DE
FC
FC
FC
FC
FC
FC
FC
FC
FC
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
24/25 St Andrew Square, Edinburgh, EH2 1AF,
Scotland
250 Bishopsgate, London, EC2M 4AA, England
250 Bishopsgate, London, EC2M 4AA, England
250 Bishopsgate, London, EC2M 4AA, England
1 Princes Street, London, EC2R 8PB, England
24/25 St Andrew Square, Edinburgh, EH2 1AF,
Scotland
1 Princes Street, London, EC2R 8PB, England
1 Princes Street, London, EC2R 8PB, England
24/25 St Andrew Square, Edinburgh, EH2 1AF,
Scotland
24/25 St Andrew Square, Edinburgh, EH2 1AF,
Scotland
24/25 St Andrew Square, Edinburgh, EH2 1AF,
Scotland
280 Bishopsgate, London, EC2M 4RB, England
1 Princes Street, London, EC2R 8PB, England
440 Strand, London, WC2R 0QS, England
1 Princes Street, London, EC2R 8PB, England
355
Parent company financial statements and notes
15 Related undertakings continued
Country (1)
Entity name
Accounting
treatment (4)
Reg
Acc (3)
Group
int %
UK
UK
UK
UK
UK
TDS Nominee Company Ltd
FC
The Royal Bank of Scotland (1727) Ltd FC
W.G.T.C.Nominees Ltd
Williams & Glyn Ltd
Williams & Glyn's Bank Ltd
FC
FC
FC
FC
FC
FC
FC
FC
100
100
100
100
100
Address
24/25 St Andrew Square, Edinburgh, EH2 1AF,
Scotland
24/25 St Andrew Square, Edinburgh, EH2 1AF,
Scotland
250 Bishopsgate, London, EC2M 4AA, England
250 Bishopsgate, London, EC2M 4AA, England
1 Princes Street, London, EC2R 8PB, England
In Administration
Country (1) Entity name
Adam & Company Second
General Partner Ltd
Activity (2)
Accounting
treatment (4)
Reg
Acc (3)
Group
int %
BF
IA
PC
50
Address
FRP Advisory LLP, Apex 3, 95 Haymarket Terrace,
Edinburgh, EH12 5HD, Scotland
UK
Notes:
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
Country:
UK – United Kingdom
USA – United States of America
RoI – Republic of Ireland
Activity:
BF - Banking and Financial institution
CI - Credit institution
INV - Investment (shares or property) holding company
SC - Service company
TR - Trustee
OTH – Other
Regulatory Accounting treatment:
DE - Deconsolidated (for non financial or insurance undertakings)
FC - Full consolidation
PC - Pro-rata consolidation (based on percentage equity held by RBSG)
Accounting treatment:
EAA - Equity accounting - Associate
EAJV - Equity accounting - Joint Venture
FC - Fully consolidated
IA - Investment accounting
NC - Not consolidated
Wholly-owned subsidiary of RFS Holdings B.V. which is 98% owned by the Group.
The Group is interested in 25% of the voting rights
The Group is interested in none of the voting rights
Related undertaking consolidated because the Group controls the company by virtue of contractual agreements
By contractual agreement the Group holds 50% of the voting rights.
Related undertaking not consolidated as it is not controlled by the Group.
Related undertaking owned for the benefit of Group pension schemes.
Related undertaking for the benefit of trust preferred security holders.
Group overseas branches
The company’s related undertakings have branches in the following countries.
Subsidiary
Coutts & Co Ltd
National Westminster Bank Plc
RBS Securities Japan Ltd
The Royal Bank of Scotland International Ltd Gibraltar, Guernsey, Isle of Man, Luxembourg, UK
The Royal Bank of Scotland N.V.
The Royal Bank of Scotland plc
Geographic location of branches
Hong Kong
Finland, France, Germany, Italy, Jersey, Netherlands, Norway, Spain, Sweden
Japan
Hong Kong, UK
Canada, Germany, Hong Kong, RoI, Jersey, Poland, Singapore, Turkey, United Arab
Emirates
Ulster Bank Ireland DAC
UK
356
Additional information
Financial summary
Material contracts
Risk factors
Climate related financial disclosure
Page
358
370
372
403
357
Additional information
Financial summary
The geographic analysis, including the average balance sheet and interest rates, changes in net interest income and average interest
rates, yields, spreads and margins in this report have generally been compiled on the basis of location of office - UK and overseas -
unless indicated otherwise. ‘UK’ in this context includes transactions conducted through the offices in the UK which service international
banking transactions.
Analysis of loans and advances to customers
The following table analyses gross loans and advances to customers by remaining maturity, geographical area (location of office) and
type of customer.
UK
Central and local government
Finance
Residential mortgages
Personal lending
Property
Construction
Manufacturing
Service industries and business activities
Agriculture, forestry and fishing
Finance leases and instalment credit
Accrued interest
Within
1 year
£m
After 1 year
but within
5 years
£m
After
5 years
£m
2017
Total
£m
2016
£m
2015
£m
2014
£m
2013
£m
2,602
22,149
10,605
6,201
8,290
1,996
4,588
19,965
1,237
5,045
255
85
5,697
30,692
4,805
15,840
1,345
3,011
20,047
1,212
4,805
32
1,922
2,345
106,102
3,139
8,197
317
734
9,120
979
1,820
4
4,609
30,191
147,399
14,145
32,327
3,658
8,333
49,132
3,428
11,670
291
6,004
32,026
137,427
14,198
33,881
4,061
9,101
53,018
3,445
11,967
272
6,166
29,748
123,653
14,348
34,100
3,906
8,071
51,257
3,471
11,134
346
7,665
31,762
113,521
15,923
37,547
4,098
9,332
50,621
3,211
10,933
258
6,951
28,937
110,515
17,098
44,252
4,691
8,739
52,253
2,887
10,524
136
Total UK
82,933
87,571
134,679
305,183
305,400
286,200
284,871
286,983
Overseas
US
Rest of the World
Total overseas
Reverse repos
UK
US
Rest of the World
Total reverse repos
458
2,683
3,141
—
6,525
6,525
39
12,110
12,149
497
21,318
21,815
1,171
20,907
22,078
2,331
24,921
27,252
9,308
57,532
60,440
68,555
66,840
128,995
20,901
5,797
32
26,730
5
—
—
5
—
—
—
—
20,906
5,797
32
26,735
21,407
7,476
44
28,927
18,000
9,532
26
27,558
29,228
8,216
6,543
43,987
19,777
18,603
11,517
49,897
Loans and advances to customers - gross
112,804
94,101
146,828
353,733
356,405
341,010
395,698
465,875
Loan impairment provisions
Loans and advances to customers - net
(3,814)
(4,455)
(7,118)
(17,460)
(25,153)
349,919
351,950
333,892
378,238
440,722
Fixed rate
Variable rate
Reverse repos
13,265
72,809
26,730
30,832
63,264
5
88,077
58,751
—
132,174
194,824
26,735
118,316
209,162
28,927
118,300
195,152
27,558
114,664
237,047
43,987
117,452
298,526
49,897
Loans and advances to customers - gross
112,804
94,101
146,828
353,733
356,405
341,010
395,698
465,875
RBS provides credit facilities at variable rates to its corporate and retail customers. Variable rate credit extended to RBS’s corporate and
commercial customers includes bullet and instalment loans, finance lease agreements and overdrafts; interest is generally charged at a
margin over a benchmark rate such as LIBOR or base rate. Interest on variable rate retail loans may also be based on LIBOR or base
rate; other variable rate retail lending is charged at variable interest rates set by RBS such as its mortgage standard variable rate in the
UK.
358
Additional information
Yields, spreads and margins of the banking business
Gross yield on interest-earning assets of the banking business (1)
Cost of interest-bearing liabilities of the banking business
Interest spread of the banking business (2)
Benefit from interest-free funds
Net interest margin of the banking business (2,5,6)
Gross yield (1,5,6)
- Group
- UK
- Overseas
Interest spread (2,5,6)
- Group
- UK
- Overseas
Net interest margin (3,4,5,6)
- Group
- UK
- Overseas
The Royal Bank of Scotland plc base rate (average)
London inter-bank three month offered rates (average)
- Sterling
- Eurodollar
- Euro
2017
%
2.57
(0.69)
1.88
0.25
2.13
2.57
2.79
0.92
1.88
2.08
0.44
2.13
2.32
0.74
2016
%
2.80
(0.94)
1.86
0.32
2.18
2.80
3.12
1.07
1.86
2.19
0.09
2.18
2.45
0.73
2015
%
2.88
(1.11)
1.77
0.35
2.12
2.88
3.35
1.31
1.77
2.26
0.05
2.12
2.48
0.87
0.29
0.40
0.50
0.36
1.26
(0.33)
0.50
0.69
(0.26)
0.57
0.32
(0.02)
Notes:
(1) Gross yield is the interest earned on average interest-earning assets of the banking book.
(2)
(3) For the purpose of net interest margin calculations, there was no increase in interest receivable (2016 - nil; 2015 – nil) and no increase in interest payable
Interest spread is the difference between the gross yield and the interest rate paid on average interest-bearing liabilities of the banking business.
(2016 - nil; 2015 - £15 million) in respect of interest on financial assets and liabilities designated as at fair value through profit or loss. Related interest-earning assets and
interest-bearing liabilities have been adjusted where applicable.
(4) Net interest margin is net interest income of the banking business as a percentage of interest-earning assets (IEA) of the banking business.
(5) For the purpose of calculating gross yields and interest spread, interest receivable and interest payable have both been decreased by £182 million (2016 - £76 million) in respect
of negative interest relating to financial assets and financial liabilities that attracted negative interest.
(6) The analysis into UK and overseas has been compiled on the basis of location of office.
359
Additional information
Average balance sheet and related interest
Assets
Loans and advances to banks
Loans and advances to customers
Debt securities
Interest-earning assets
- UK
- Overseas
- UK
- Overseas
- UK
- Overseas
- UK
- Overseas
Total interest-earning assets
- banking business (1,2,3,5)
- trading business (4)
Interest-earning assets
Non-interest-earning assets
Total assets
Percentage of assets applicable to overseas operations
Liabilities
Deposits by banks
Customer accounts: demand deposits
Customer accounts: savings deposits
- UK
- Overseas
- UK
- Overseas
- UK
- Overseas
Customer accounts: other time deposits - UK
Debt securities in issue
Subordinated liabilities
Internal funding of trading business
Interest-bearing liabilities
- Overseas
- UK
- Overseas
- UK
- Overseas
- UK
- Overseas
- UK
- Overseas
Total interest-bearing liabilities
- banking business (1,2)
- trading business (4)
Interest-bearing liabilities
Non-interest-bearing liabilities:
Demand deposits
Other liabilities
Total equity
Total liabilities and equity
- UK
- Overseas
Percentage of liabilities applicable to overseas operations
For the notes to this table refer to the following page.
2017
2016
Interest
£m
Rate
%
257
(76)
9,807
516
322
26
10,386
466
10,852
0.50
(0.31)
3.55
2.38
0.72
0.66
2.79
0.92
2.57
66
13
96
3
358
1
159
20
545
9
543
29
8
15
1,775
90
1,865
0.40
0.75
0.07
0.05
0.55
0.07
1.83
0.48
2.17
2.08
3.94
3.03
(0.04)
0.35
0.71
0.48
0.69
Average
balance
£m
51,150
24,894
275,895
21,697
44,768
3,933
371,813
50,524
422,337
109,094
531,431
164,934
696,365
8.2%
16,647
1,737
140,514
5,718
65,506
1,429
8,703
4,196
25,079
433
13,765
957
(18,739)
4,324
251,475
18,794
270,269
118,618
388,887
101,527
6,490
150,368
49,093
696,365
11.8%
Interest
£m
Rate
%
159
11
10,098
608
243
63
10,500
682
11,182
0.57
0.03
3.78
2.29
0.59
1.17
3.12
1.07
2.80
13
8
390
43
425
7
149
41
551
6
733
112
(4)
-
2,257
217
2,474
0.47
0.59
0.27
0.33
0.68
0.47
1.66
0.95
2.75
0.38
4.24
5.25
0.03
-
0.93
0.98
0.94
Average
balance
£m
27,986
31,555
267,141
26,583
40,935
5,398
336,062
63,536
399,598
132,027
531,625
338,654
870,279
12.0%
2,772
1,348
146,340
13,101
62,097
1,477
8,984
4,330
20,065
1,563
17,268
2,134
(15,302)
(1,706)
242,224
22,247
264,471
142,796
407,267
78,480
10,278
320,240
54,014
870,279
14.4%
360
Additional information
Assets
Loans and advances to banks
Loans and advances to customers
Debt securities
Interest-earning assets
- UK
- Overseas
- UK
- Overseas
- UK
- Overseas
- UK
- Overseas
Total interest-earning assets
- banking business (1,2,3,5)
- trading business (4)
Interest-earning assets
Non-interest-earning assets
Total assets
Percentage of assets applicable to overseas operations
Liabilities
Deposits by banks
Customer accounts: demand deposits
Customer accounts: savings deposits
- UK
- Overseas
- UK
- Overseas
- UK
- Overseas
Customer accounts: other time deposits - UK
Debt securities in issue
Subordinated liabilities
Internal funding of trading business
Interest-bearing liabilities
- Overseas
- UK
- Overseas
- UK
- Overseas
- UK
- Overseas
- UK
- Overseas
Total interest-bearing liabilities
- banking business (1,2)
- trading business (4)
Interest-bearing liabilities
Non-interest-bearing liabilities:
Demand deposits
Other liabilities
Total equity
Total liabilities and equity
- UK
- Overseas
Percentage of liabilities applicable to overseas operations
Rate
£m
0.65
0.22
4.12
2.19
0.70
1.36
3.35
1.31
2.88
0.69
0.81
0.41
0.45
0.61
0.77
1.58
1.48
2.58
0.76
4.09
5.46
(0.75)
(0.15)
1.09
1.26
1.11
Average
balance
£m
2015
Interest
£m
253
87
10,205
1,063
234
83
10,692
1,233
11,925
25
20
537
82
435
11
221
94
762
12
676
193
104
1
2,760
413
3,173
38,626
39,211
247,678
48,511
33,199
6,120
319,503
93,842
413,345
139,642
552,987
417,401
970,388
26.4%
3,601
2,462
131,617
18,178
70,803
1,436
14,018
6,342
29,502
1,585
16,546
3,533
(13,909)
(669)
252,178
32,867
285,045
147,117
432,162
69,873
10,619
399,664
58,070
970,388
25.5%
Notes:
(1)
Interest receivable and interest payable have both been decreased by £182 million (2016 – £76 million) in respect of negative interest relating to financial assets and financial
liabilities that attracted negative interest.
(2) There was no increase in interest receivable (2016 - nil; 2015 - nil) and no increase in interest payable (2016 - nil; 2015 - £15 million) in respect of interest on financial assets
(3)
(4)
(5)
and liabilities designated as at fair value through profit or loss. Related interest-earning assets and interest-bearing liabilities have been adjusted where applicable.
Interest receivable includes £256 million (2016 - £290 million; 2015 - £400 million) in respect of loan fees forming part of the effective interest rate of loans and receivables.
Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities.
Interest receivable includes amounts (unwind of discount) recognised on impaired loans and receivables. The average balances of such loans are included in average loans and
advances to banks and loans and advances to customers.
(6) The analysis into UK and overseas has been compiled on the basis of location of office.
361
Additional information
Analysis of change in net interest income - volume and rate analysis
Volume and rate variances have been calculated based on movements in average balances over the period and changes in interest
rates on average interest-earning assets and average interest-bearing liabilities. Changes due to a combination of volume and rate are
allocated pro rata to volume and rate movements.
2017 over 2016
Increase/(decrease) due to changes in:
Average
volume
£m
Average
rate
£m
Net
change
£m
2016 over 2015
Increase/(decrease) due to changes in:
Average
volume
£m
Average
rate
£m
Net
change
£m
Interest-earning assets
Loans and advances to banks
UK
Overseas
Loans and advances to customers
UK
Overseas
Debt securities
UK
Overseas
Total interest receivable of the banking business
UK
Overseas
Interest-bearing liabilities
Deposits by banks
UK
Overseas
Customer accounts: demand deposits
UK
Overseas
Customer accounts: savings deposits
UK
Overseas
Customer accounts: other time deposits
UK
Overseas
Debt securities in issue
UK
Overseas
Subordinated liabilities
UK
Overseas
Internal funding of trading business
UK
Overseas
Total interest payable of the banking business
UK
Overseas
Movement in net interest income
UK
Overseas
119
(2)
328
(115)
24
(14)
471
(131)
340
(55)
(3)
15
16
(21)
—
5
1
(123)
7
141
47
1
—
(37)
68
31
434
(63)
371
(21)
(85)
(619)
23
55
(23)
(585)
(85)
(670)
2
(2)
279
24
88
6
(15)
20
129
(10)
49
36
(13)
(15)
519
59
578
(66)
(26)
(92)
98
(87)
(291)
(92)
79
(37)
(114)
(216)
(330)
(53)
(5)
294
40
67
6
(10)
21
6
(3)
190
83
(12)
(15)
482
127
609
368
(89)
279
(65)
(14)
769
(501)
49
(9)
753
(524)
229
5
7
(55)
20
56
—
83
25
258
—
(31)
74
(10)
(1)
306
125
431
(29)
(62)
(876)
46
(40)
(11)
(945)
(27)
(972)
7
5
202
19
(46)
4
(11)
28
(47)
6
(26)
7
118
2
197
71
268
(94)
(76)
(107)
(455)
9
(20)
(192)
(551)
(743)
12
12
147
39
10
4
72
53
211
6
(57)
81
108
1
503
196
699
1,059
(399)
660
(748)
44
(704)
311
(355)
(44)
362
Additional information
Loan impairment provisions
For details of the factors considered in determining the amount of provisions, refer to the accounting policy on page 254 and ‘Critical
accounting policies and key sources of estimation uncertainty’ on page 260. The following table shows the movements in loan
impairment provisions.
2017
£m
2016
£m
2015
£m
2014
£m
2013
£m
Provisions at the beginning of the year
UK
Overseas
Transfer to disposal groups
Overseas
Currency translation and other adjustments
UK
Overseas
Disposals
Overseas
Amounts written-off
UK
Overseas
Recoveries of amounts previously written-off
UK
Overseas
Losses/(releases) to income statement - continuing operations (1)
UK
Overseas
Losses to income statement - discontinued operations
Overseas
Unwind of discount (recognised in interest income)
UK
Overseas
Provisions at the end of the year
UK
Overseas
Provisions at the end of the year comprise
Customers
Banks
Gross loans and advances to customers (2)
UK
Overseas
For the notes to this table refer to the following page.
3,150
1,305
4,455
4,037
3,082
7,119
8,185
9,315
17,500
—
—
94
406
500
(20)
(20)
(27)
(548)
(575)
—
—
(28)
2
(26)
(5)
11,005
14,211
25,216
(553)
(553)
929
(1,596)
(667)
9,754
11,496
21,250
(9)
(9)
323
(202)
121
(2)
—
(6)
(77)
(1,070)
(140)
(1,210)
(1,670)
(2,025)
(3,695)
(4,142)
(4,822)
(8,964)
142
14
156
473
57
530
80
29
109
684
(147)
537
130
45
175
(11)
(842)
(853)
(3,570)
(1,708)
(5,278)
77
128
205
(110)
(1,254)
(1,364)
(2,547)
(1,799)
(4,346)
78
178
256
3,593
4,512
8,105
—
—
—
194
307
(61)
(25)
(86)
2,606
1,208
3,814
3,814
—
3,814
(75)
(38)
(113)
3,150
1,305
4,455
4,455
—
4,455
(98)
(46)
(144)
4,037
3,082
7,119
7,118
1
7,119
(146)
(101)
(247)
8,185
9,315
17,500
17,460
40
17,500
(196)
(195)
(391)
11,005
14,211
25,216
25,153
63
25,216
305,183
21,815
305,400
22,078
286,200
27,252
326,998
327,478
313,452
284,871
66,840
351,711
286,983
128,995
415,978
363
Additional information
2017
2016
2015
2014
2013
Closing customer provisions as a % of gross loans and advances to customers (2)
UK
Overseas
Total
0.9%
5.5%
1.2%
1.0%
5.9%
1.4%
1.4%
11.3%
2.3%
2.9%
3.8%
13.9% 11.0%
6.0%
5.0%
Customer losses/(releases) to income statement as a % of gross loans and
advances to customers (2)
UK
Overseas
Total
0.2%
0.2%
0.3% (0.7%)
0.2%
0.2%
—
(3.1%)
(0.3%)
—
(1.9%)
(0.4%)
1.3%
3.5%
2.0%
Average loans and advances to customers - gross
366,959 373,644 387,956 472,545 509,937
As a % of average loans and advances to customers during the year
Total customer provisions charged/(released) to income statement
Amounts written-off (net of recoveries) - customers
0.1%
0.3%
0.1%
1.0%
(0.2%)
2.3%
(0.3%)
1.1%
1.6%
0.8%
Notes:
(1)
(2) Excludes reverse repos.
Includes nil relating to loans and advances to banks (2016 - nil; 2015 - £4 million release; 2014 - £10 million release; 2013 - £15 million release).
Analysis of closing customer loan impairment provisions
The following table analyses customer loan impairment provisions by geographical area and type of UK customer.
2017
2016
2015
Closing
provision
£m
—
37
317
8
Total
loans
%
1.4
2.5
1.1
9.2
Closing
provision
£m
1
69
172
12
Total
loans
%
1.8
2.8
1.2
9.8
Closing
provision
£m
1
78
234
17
Total
loans
%
2.0
2.6
1.2
9.5
2014
Closing
provision
£m
1
142
365
65
Total
loans
%
2.2
2.7
1.2
9.0
2013
Closing
provision
£m
2
140
515
73
Total
loans
%
1.7
2.1
1.1
7.0
769
15.0
1,131
16.2
993
16.4
1,510
14.4
2,192
12.6
1.0
9.9
45.1
4.3
3.6
0.1
93.2
6.8
100
15
211
137
721
80
—
2,295
1,129
3,424
390
3,814
1.1
10.3
42.0
4.3
3.7
0.1
93.3
6.7
100
17
365
143
853
69
—
2,832
1,223
4,055
400
4,455
1.1
10.9
39.4
4.6
3.6
0.1
91.4
8.6
100
24
1,048
158
1,086
69
—
3,708
2,826
6,534
584
7,118
0.9
10.7
32.3
4.5
3.1
—
81.0
19.0
100
33
3,671
191
1,453
82
—
7,513
8,931
16,444
1,016
17,460
45
5,190
319
1,718
136
—
10,330
12,820
23,150
2,003
25,153
0.7
10.6
26.6
4.1
2.5
—
69.0
31.0
100
UK
Central and local government
Manufacturing
Construction
Finance
Service industries and
business activities
Agriculture, forestry and
fishing
Property
Residential mortgages
Personal lending
Finance leases and
instalment credit
Accrued interest
Total UK
Overseas
Impaired book provisions
Latent book provisions
Total provisions
364
Additional information
Analysis of write-offs
The following table analyses amounts written-off by geographical area and type of UK customer.
UK
Manufacturing
Construction
Finance
Service industries and business activities
Agriculture, forestry and fishing
Property
Residential mortgages
Personal lending
Finance leases and instalment credit
Total UK
Overseas
Total write-offs (1)
2017
£m
16
51
7
460
2
93
20
411
10
1,070
140
1,210
2016
£m
26
279
5
580
6
397
3
362
12
1,670
2,025
3,695
2015
£m
61
269
94
646
11
2,504
36
501
20
4,142
4,822
8,964
Note:
(1)
Includes nil written-off in respect of loans and advances to banks (2016 - nil; 2015 - £33 million; 2014 - £8 million).
Analysis of recoveries
The following table analyses recoveries of amounts written-off by geographical area and type of UK customer.
UK
Manufacturing
Construction
Finance
Service industries and business activities
Property
Residential mortgages
Personal lending
Finance leases and instalment credit
Total UK
Overseas
Total recoveries
2017
£m
1
2
—
16
7
43
72
1
142
14
156
2016
£m
1
4
1
28
17
—
28
1
80
29
109
2015
£m
—
2
3
32
40
—
42
11
130
45
175
2014
£m
48
175
28
719
3
1,917
76
546
58
3,570
1,708
5,278
2014
£m
2
9
—
11
29
—
26
—
77
128
205
2013
£m
41
159
47
422
6
950
180
681
61
2,547
1,799
4,346
2013
£m
1
1
—
21
5
—
48
2
78
178
256
365
Additional information
Risk elements in lending
Risk elements in lending (REIL) comprises of impaired loans and accruing loans past due 90 days or more as to principal or interest.
Impaired loans are all loans (including loans subject to forbearance) for which an impairment provision has been established; for
collectively assessed loans, impairment loss provisions are not allocated to individual loans and the entire portfolio is included in
impaired loans.
Accruing loans past due 90 days or more comprises loans past due 90 days where no impairment loss is expected.
Impaired loans (1)
UK
Overseas
Total
Accruing loans which are contractually overdue 90 days or more as to principal
or interest
UK
Overseas
Total
Total REIL
2017
£m
2016
£m
2015
£m
2014
£m
2013
£m
4,450
2,973
7,423
5,557
3,308
6,095
4,755
11,562
13,681
17,480
19,691
8,865
10,850
25,243
37,171
1,087
394
1,481
1,122
323
1,445
1,262
25
1,287
1,536
105
1,641
1,962
259
2,221
8,904
10,310
12,137
26,884
39,392
Closing provisions for impairment as a % of total REIL
REIL as a % of gross lending to customers excluding reverse repos
43%
2.7%
43%
3.1%
59%
3.9%
65%
7.6%
64%
9.5%
Notes:
(1) The write-off of impaired loans affects closing provisions for impairment as a % of total REIL (the coverage ratio). The coverage ratio reduces if the loan written-off carries a
higher than average provision and increases if the loan written-off carries a lower than average provision.
Impaired loans at 31 December 2017 include £1,324 million (2016 - £2,496 million; 2015 - £2,300 million) of loans subject to forbearance granted during the year.
(2)
Gross income not recognised but which would have been recognised under
the original terms of impaired loans
UK
Overseas
Interest on impaired loans included in net interest income
UK
Overseas
2017
£m
2016
£m
2015
£m
2014
£m
2013
£m
227
80
307
61
25
86
243
122
365
75
38
113
311
125
436
98
46
144
404
165
569
146
101
247
571
601
1,172
196
195
391
Potential problem loans
Potential problem loans (PPL) are loans for which an impairment event has taken place but no impairment loss is expected. This
category is used for advances which are not past due 90 days or revolving credit facilities where identification as 90 days overdue is not
feasible.
Potential problem loans
2017
£m
745
2016
£m
2015
£m
2014
£m
1,196
1,277
1,206
2013
£m
789
Both REIL and PPL are reported gross and take no account of the value of any security held which could reduce the eventual loss
should it occur, nor of any provision marked. Therefore impaired assets which are highly collateralised, such as mortgages, will have a
low coverage ratio of provisions held against the reported impaired balance.
366
Additional information
Forbearance
The table below shows loans granted forbearance during the year. These loans are unimpaired: either the loan was performing before
and after the granting of forbearance or the loan was non-performing before but subsequently transferred to the performing book. Loans
with impairment provisions subject to forbearance continue to be reported as impaired loans.
Loans granted forbearance
2017
£m
1,480
2016
£m
2,257
2015
£m
3,760
2014
£m
6,091
2013
£m
7,901
Notes:
(1) Wholesale loans subject to forbearance include only those arrangements above thresholds set individually by the segments, ranging from nil to £3 million.
(2) For 2017, wholesale loans subject to forbearance were £1,206 million (2016 - £1,807 million; 2015 - £2,258 million) and secured retail loans subject to forbearance were £274
million (2016 - £450 million; 2015 - £1,502 million). Unsecured retail loans subject to forbearance amounting to £31 million (2016 - £37 million; 2015 - £96 million) are not
included.
Cross border exposures
Cross border exposures are loans and advances including finance leases and instalment credit receivables and other monetary assets,
such as debt securities, including non-local currency claims of overseas offices on local residents. RBS monitors the geographical
breakdown of these exposures based on the country of domicile of the borrower or guarantor of ultimate risk. Cross border exposures
exclude exposures to local residents in local currencies.
The table below sets out cross border exposures greater than 0.5% of RBS’s total assets. None of these countries have experienced
repayment difficulties that have required restructuring of outstanding debt.
2017
United States
France
Japan
Netherlands
Germany
2016
United States
France
Japan
Netherlands
Germany
2015
United States
France
Japan
Netherlands
Germany
Government
£m
8,697
4,721
7,533
1,897
7,643
7,677
4,275
8,291
2,809
8,868
10,971
6,221
7,172
3,820
9,574
Banks
£m
4,494
11,739
4,879
798
5,819
6,012
7,045
5,441
563
4,836
3,528
10,794
2,444
1,021
4,211
Other
£m
8,048
2,320
197
5,395
2,165
8,138
2,003
375
6,699
2,138
9,150
2,626
211
7,148
1,565
Total
£m
21,239
18,780
12,609
8,090
15,627
21,827
13,323
14,107
10,071
15,842
23,649
19,641
9,827
11,989
15,350
Short
positions
£m
2,607
3,324
15
986
9,957
5,099
2,392
1
1,061
4,207
3,380
1,778
—
796
3,272
Net of short
positions
£m
18,632
15,456
12,594
7,104
5,670
16,728
10,931
14,106
9,010
11,635
20,269
17,863
9,827
11,193
12,078
367
Additional information
Analysis of deposits - product analysis
The following table analyses deposits excluding repos by geographical area (location of office) and type of deposit.
UK
Deposits
- interest-free
- interest-bearing
Total UK
Overseas
Deposits
- interest-free
- interest-bearing
Total overseas
Total deposits
Overseas
US
Rest of the World
Total overseas
Repos
UK
US
Total repos
2017
£m
2016
£m
2015
£m
118,997
264,028
383,025
108,433
255,588
364,021
97,772
242,120
339,892
6,875
16,613
23,488
6,286
16,882
23,168
7,452
23,872
31,324
406,513
387,189
371,216
165
23,323
23,488
18,235
20,186
38,421
310
22,858
23,168
15,351
16,984
32,335
271
31,053
31,324
21,800
15,578
37,378
Certificates of deposit and other time deposits
The following table shows certificates of deposit and other time deposits over $100,000 or equivalent by remaining maturity.
2017
UK based companies and branches
Certificates of deposit
Other time deposits
Overseas based companies and branches
Other time deposits
0-3 months
£m
3-6 months
£m
6-12 months
£m
Over
12 months
£m
Total
£m
1,919
8,385
554
1,393
337
1,311
—
1,436
2,810
12,525
1,390
11,694
667
2,614
1,848
3,496
1,435
2,871
5,340
20,675
368
Additional information
Short-term borrowings
Short-term borrowings comprise repurchase agreements, borrowings from financial institutions, commercial paper and certificates of
deposit. Derivative collateral received from financial institutions is excluded from the table, as are certain long-term borrowings.
2017
Repos
Financial institutions (1)
Commercial paper
Certificates of deposits
Total
2016
Repos
Financial institutions (1)
Certificates of deposits
Total
2015
Repos
Financial institutions (1)
Commercial paper
Certificates of deposits
Total
At the year end
Weighted
average
interest rate
%
1.5
0.2
(0.2)
0.2
0.6
0.3
0.2
0.2
0.2
0.6
0.3
—
0.9
0.5
Balance
£bn
38
77
2
3
120
32
63
3
98
37
53
—
1
91
During the year
Maximum
balance
£bn
Average
balance
£bn
Weighted
average
interest rate
%
61
89
2
4
156
62
71
3
136
105
71
1
2
179
48
71
1
3
123
46
55
1
102
70
54
—
1
125
0.7
0.2
(0.1)
0.2
0.4
0.3
0.3
0.8
0.3
0.3
0.4
0.4
0.9
0.3
Note:
(1) Excludes derivative cash collateral of £23 billion at 31 December 2017 (2016 - £32 billion; 2015 - £30 billion); and 2017 average of £26 billion (2016 - 34 billion; 2015 - £36 billion).
Balances are generally based on monthly data. Average interest rates during the year are computed by dividing total interest expense
by the average amount borrowed. Weighted average interest rates at year end are for a single day and as such may reflect one-day
market distortions, which may not be indicative of generally prevailing rates.
Other contractual cash obligations
The table below summarises other contractual cash obligations by payment date.
2017
Operating leases
Contractual obligations to purchase goods or services
2016
Operating leases
Contractual obligations to purchase goods or services
2015
Operating leases
Contractual obligations to purchase goods or services
0-3 months
£m
3-12 months
£m
1-3 years
£m
3-5 years
£m
5-10 years
£m
10-20 years
£m
54
74
128
64
64
128
60
81
141
152
202
354
182
168
350
172
221
393
364
332
696
425
266
691
421
570
991
287
67
354
361
93
454
338
570
908
541
7
548
684
7
691
692
—
692
881
—
881
1,091
—
1,091
1,314
—
1,314
Undrawn formal facilities, credit lines and other commitments to lend were £121,229 million (2016 - £134,324 million; 2015 - £132,198
million). While RBS has given commitments to provide these funds, some facilities may be subject to certain conditions being met by the
counterparty. RBS does not expect all facilities to be drawn, and some may lapse before drawdown.
369
Additional information
Material contracts
The company and its subsidiaries are party to various contracts
in the ordinary course of business. Material contracts include the
following:
B Share Acquisition and Contingent Capital Agreement
On 26 November 2009, the company and HM Treasury entered
into the Acquisition and Contingent Capital Agreement pursuant
to which HM Treasury subscribed for the initial B shares and the
Dividend Access Share (the Acquisitions) and agreed the terms
of HM Treasury's contingent subscription (the Contingent
Subscription) for an additional £8 billion in aggregate in the form
of further B shares (the Contingent B shares), to be issued on the
same terms as the initial B shares. The Acquisitions were subject
to the satisfaction of various conditions, including the company
having obtained the approval of its shareholders in relation to the
Acquisitions.
On 16 December 2013, the company announced that, having
received approval from the PRA, it had terminated the £8 billion
Contingent Subscription. RBS was able to cancel the Contingent
Subscription as a result of the actions announced in the second
half of 2013 to further strengthen its capital position.
On 9 October 2015, the company announced that on 8 October
2015, it had received a valid conversion notice from HM Treasury
in respect of all outstanding B shares held by HM Treasury. The
new ordinary shares issued on conversion of the B shares were
admitted to the official list of the UK Listing Authority (UKLA), and
to trading on the London Stock Exchange plc, on 14 October
2015. Following such conversion, HM Treasury no longer holds
any B shares.
The company gave certain representations and warranties to HM
Treasury on the date of the Acquisition and Contingent Capital
Agreement, on the date the circular was posted to shareholders,
on the first date on which all of the conditions precedent were
satisfied, or waived, and on the date of the Acquisitions. The
company also agreed to a number of undertakings.
The company agreed to reimburse HM Treasury for its expenses
incurred in connection with the Acquisitions.
For as long as it is a substantial shareholder of the company
(within the meaning of the UKLA’s Listing Rules), HM Treasury
has undertaken not to vote on related party transaction
resolutions at general meetings and to direct that its affiliates do
not so vote.
Revised State Aid Commitment Deed
As a result of the State Aid granted to the company, it was
required to work with HM Treasury to submit a State Aid
restructuring plan to the European Commission (EC), which was
then approved by the EC under the State Aid rules on 14
December 2009. The company agreed a series of measures
which supplemented the measures in the company's strategic
plan.
RBS entered into a State Aid Commitment Deed with HM
Treasury at the time of the initial EC decision and, following the
EC’S approval of amendments to the restructuring plan in April
2014, RBS entered into a revised State Aid Commitment Deed
with HM Treasury. In September 2017, the revised State Aid
Commitment Deed was amended by a Deed of Variation (as so
amended, the “Revised State Aid Commitment Deed”) following
the EC’s approval of an alternative remedies package (the
“Alternative Remedies Package”). The Alternative Remedies
Package will form the basis of a new agreement with HM
Treasury to replace RBS’s final outstanding divestment
commitment under its State Aid obligations (to divest the
business previously known as Williams & Glyn).
The Alternative Remedies Package is focused on the following
two remedies to promote competition in the market for banking
services to small and medium-sized enterprises (“SMEs”): (i) a
£425 million fund that will grant funding for eligible bodies in the
UK banking and financial technology sectors to develop and
improve their capability to compete with RBS in the provision of
banking services to SMEs and develop and improve the financial
products and services available to SMEs (the “Capability and
Innovation Fund”); and (ii) a £275 million scheme which will
provide funding to eligible bodies to help them incentivise SME
banking customers within the business previously known as
Williams & Glyn to switch their business current accounts and
loans to the eligible bodies (the “Incentivised Switching
Scheme”). RBS has also agreed to set aside up to a further £75
million in funding to cover certain costs customers may incur as a
result of switching under the Incentivised Switching Scheme. In
addition, under the terms of the Alternative Remedies Package,
should the uptake within the Incentivised Switching Scheme not
be sufficient, RBS may be required to make a further contribution,
capped at £50 million. An independent body (the “Independent
Body”) is being established to facilitate and oversee the delivery
of the Alternative Remedies Package, including the distribution of
the funds from the Capability and Innovation Fund and the
implementation of the Incentivised Switching Scheme.
The Revised State Aid Commitment Deed provides that RBS will
comply or procure compliance with certain measures and
behavioural commitments. RBS agreed to do all acts and take all
measures to ensure HM Treasury's compliance with its
obligations under any EC decision approving State Aid to RBS,
including under the Alternative Remedies Package.
The Revised State Aid Commitment Deed also provides that if
the EC adopts a decision that the UK Government must recover
any State Aid (a "Repayment Decision") and the recovery order
of the Repayment Decision has not been annulled or suspended
by the General Court or the European Court of Justice, then RBS
must repay HM Treasury any aid ordered to be recovered under
the Repayment Decision.
370
Additional information
The Revised State Aid Commitment Deed also provides for
RBS's undertakings in respect of State Aid to be modified in
certain limited circumstances. However, HM Treasury has
undertaken that it will not, without the consent of RBS, agree
modifications to RBS's undertakings with respect to State Aid
which are significantly more onerous to RBS than those granted
in order to obtain the State Aid approval. Further details are
provided in the Risk Factors.
In the context of the Alternative Remedies Package, RBS has
also agreed to enter into separate indemnification arrangements
with each of the Independent Body and HM Treasury, up to an
amount of £320 million collectively to cover liabilities that may be
incurred in implementing the Alternative Remedies Package.
State Aid Costs Reimbursement Deed
Under the 2009 State Aid Costs Reimbursement Deed, RBS has
agreed to reimburse HM Treasury for fees, costs and expenses
associated with the State Aid and State Aid approval.
HMT and UKFI Relationship Deed
On 7 November 2014, in order to comply with an amendment to
the UK Listing Rules, the company entered into a Relationship
Deed with HM Treasury and UK Financial Investments Limited in
relation to the company’s obligations under the UK Listing Rules
to put in place an agreement with any controlling shareholder (as
defined for these purposes in the Listing Rules). The Relationship
Deed covers the three independence provisions mandated by the
Listing Rules: (i) that contracts between the company and HM
Treasury (or any of its subsidiaries) will be arm's length and
normal commercial arrangements, (ii) that neither HM Treasury
nor any of its associates will take any action that would have the
effect of preventing the company from complying with its
obligations under the Listing Rules; and (iii) neither HM Treasury
nor any of its associates will propose or procure the proposal of a
shareholder resolution which is intended or appears to be
intended to circumvent the proper application of the Listing Rules.
371
Additional information
Risk factors
Set out below are certain risk factors that could adversely affect
the Group’s future results, its financial condition and prospects
and cause them to be materially different from what is expected.
The factors discussed below and elsewhere in this report should
not be regarded as a complete and comprehensive statement of
all potential risks and uncertainties facing the Group.
The Group is subject to a number of legal, regulatory and
governmental actions and investigations. Unfavourable
outcomes in such actions and investigations could have a
material adverse effect on the Group’s operations, operating
results, reputation, financial position and future prospects
The Group’s operations remain diverse and complex and it
operates in legal and regulatory environments that expose it to
potentially significant legal and regulatory actions, including
litigation claims and proceedings and civil and criminal regulatory
and governmental investigations, and other regulatory risk. The
Group has settled a number of legal and regulatory actions over
the past several years but continues to be, and may in the future
be, involved in a number of legal and regulatory actions in the
US, the UK, Europe and other jurisdictions.
The legal and regulatory actions specifically referred to below
are, in the Group’s view, the most significant legal and regulatory
actions to which the Group is currently exposed. However, the
Group is also subject to a number of additional claims,
proceedings and investigations, the adverse resolution of which
may also have a material adverse impact on the Group and
which include ongoing reviews, investigations and proceedings
(both formal and informal) by governmental law enforcement and
other agencies and litigation proceedings (including class action
litigation), relating to, among other matters, the offering of
securities, including residential mortgage-backed securities
(RMBS), conduct in the foreign exchange market, the setting of
benchmark rates such as LIBOR and related derivatives trading,
the issuance, underwriting, and sales and trading of fixed-income
securities (including government securities), product mis-selling,
customer mistreatment, anti-money laundering, sanctions,
antitrust and various other compliance issues. See ‘Litigation,
investigations and reviews’ of Note 31 on the consolidated
accounts on pages 313 to 325 for details for these matters. The
Group continues to cooperate with governmental and regulatory
authorities in relation to ongoing informal and formal inquiries or
investigations regarding these and other matters. Legal and
regulatory actions are subject to many uncertainties, and their
outcomes, including the timing, amount of fines or settlements or
the form of any settlements, which may be material, are often
difficult to predict, particularly in the early stages of a case or
investigation. It is expected that the Group will continue to have a
material exposure to legal and regulatory actions relating to
legacy issues in the medium term.
RMBS
In the US, ongoing matters include certain matters relating to
legacy RMBS activities including investigations by the US
Department of Justice (DOJ) and several state attorneys general
and various civil claims. A further provision of $650 million (£492
million) was recorded by the Group in Q4 2017 in relation to
RBS’s various RMBS investigations and litigation matters, taking
the total charge for the year to $971 million (£714 million). The
total aggregate provision at 31 December 2017 was $4.4 billion
(£3.2 billion).
The duration and outcome of the DOJ’s investigations and other
RMBS matters remain uncertain, including in respect of whether
settlements for all or any such matters may be reached and any
timing thereof. Further substantial provisions and costs may be
recognised.
Global Restructuring Group
As announced on 8 November 2016, the Group has taken steps,
including automatic refunds of certain complex fees and a
complaints process, overseen by an independent third party for
small and medium entity (SME) customers in the UK and the
Republic of Ireland that were in its Global Restructuring Group
(GRG) between 2008 and 2013. This complaints review process
and the automatic refund of complex fees was developed with the
involvement of the Financial Conduct Authority (FCA). The Group
booked a provision of £400 million in Q4 2016, based on its
estimates of the costs associated with the complaints review
process and the automatic refund of complex fees for SME
customers in GRG. On 23 October 2017, the FCA published an
interim report incorporating a summary of the Skilled Person’s
report which stated that, further to the general investigation
announced in November 2016, the FCA had decided to carry out
a more focused investigation. The FCA published its final
summary of the Skilled Person’s report on 28 November 2017.
The UK House of Commons Treasury Select Committee, seeking
to rely on Parliamentary powers, published the full version of the
Skilled Person’s report on 20 February 2018. The FCA
investigation is ongoing and fines or additional redress
commitments may be accepted by or imposed upon the Group as
a result of this or any subsequent investigation or enquiry,
notwithstanding the steps the Group has already taken.
Payment protection insurance
To date, the Group has booked provisions totaling £5.1 billion
with respect to payment protection insurance (PPI), including an
additional provision of £175 million in 2017. Of the £5.1 billion
cumulative provision, £4.0 billion had been utilised by 31
December 2017. In August 2017, the FCA’s new rules and
guidance on PPI complaints handling (Policy Statement (17/3))
came into force. The Policy Statement introduced new so called
‘Plevin’ rules, under which customers may be eligible for redress
if the bank earned a high level of commission from the sale of
PPI, but did not disclose this detail at the point of sale. The Policy
Statement also introduced a two year PPI deadline, due to expire
in August 2019, before which new PPI complaints must be made.
RBS is implementing the Policy Statement. The number of claims
received and the cost of the redress of such claims may
materially exceed the Group’s estimates and may entail
additional material provisions and reputational harm.
Settlements, resolutions and outcomes in relation to ongoing
legal or regulatory actions may result in material financial fines or
penalties, non-monetary penalties, restrictions upon or revocation
of regulatory permissions and licences and other collateral
consequences and may prejudice both contractual and legal
rights otherwise available to the Group. The costs of resolving
these legal and regulatory actions could individually or in
aggregate prove to be substantial and monetary penalties and
other outcomes could be materially in excess of provisions, if
any, made by the Group. New provisions or increases in existing
provisions relating to existing or future legal or regulatory actions
may be substantial and may have a material adverse effect on
the Group’s financial condition and results of operations as well
as its reputation. The outcome of on-going claims against the
Group may give rise to additional legal claims being asserted
against the Group.
372
Additional information
Risk factors continued
Adverse outcomes or resolution of current or future legal or
regulatory actions could result in restrictions or limitations on the
Group’s operations, adversely impact the implementation of
Group’s current transformation programme as well as its capital
position and its ability to meet regulatory capital adequacy
requirements. The remediation programmes or commitments
which the Group has agreed to in connection with past
settlements or investigations, could require significant financial
costs and personnel investment for the Group and may result in
changes in its operations or product offerings, and failure to
comply with undertakings made by the Group to its regulators
may result in additional measures or penalties being taken
against the Group.
See ‘Implementation of the ring-fencing regime in the UK which
began in 2015 and must be completed before 1 January 2019 will
result in material structural changes to the Group’s business. The
steps required to implement the UK ring-fencing regime are
complex and entail significant costs and operational, legal and
execution risks, which risks may be exacerbated by the Group’s
other ongoing restructuring efforts.’ The Group is concurrently
seeking to implement the Alternative Remedies Package. See
‘The cost of implementing the Alternative Remedies Package
regarding the business previously described as Williams & Glyn
could be more onerous than anticipated and any failure to comply
with the terms of the Alternative Remedies Package could result
in the imposition of additional measures or limitations on the
Group’s operations.’
The Group has been, and will remain, in a period of major
business transformation and structural change through to at
least 2019 as it implements its own transformation
programme and seeks to comply with UK ring-fencing and
recovery and resolution requirements as well as the
Alternative Remedies Package. Additional structural
changes to the Group’s operations will also be required as a
result of Brexit. These various transformation and
restructuring activities are required to occur concurrently,
which carries significant execution and operational risks,
and the Group may not be a viable, competitive and
profitable bank as a result.
Since early 2015, the Group has been implementing a major
restructuring and transformation programme, articulated around a
strategy focused on the growth of its strategic operations in
Personal & Business Banking (PBB) and Commercial & Private
Banking (CPB) and the further restructuring of the NatWest
Markets franchise, to focus mainly on UK and Western European
corporate and financial institutions.
Part of the focus of this transformation programme is to downsize
and simplify the Group, reduce underlying costs and strengthen
its overall capital position. The transformation programme also
aims to improve customer experience and employee
engagement, update the Group’s operational and technological
capabilities, strengthen governance and control frameworks and
better position the Group to operate in compliance with the UK
ring-fencing regime by 1 January 2019. Together, these initiatives
are referred to as the Group’s ‘transformation programme’.
This transformation programme including the restructuring of its
NatWest Markets franchise, is being completed at the same time
as the Group is going through a period of very significant
structural reform to implement the requirements of the UK ring-
fencing regime and the requirements of the bank recovery and
resolution framework. Alongside changes to help make the Group
resolvable (specifically, regulatory requirements to ensure
operational continuity in resolution), ring-fencing also requires
significant changes in how services are delivered between legal
entities within the Group. It is complex and entails significant
costs and operational, legal and execution risks.
Due to changes in the macro-economic and political and
regulatory environment in which it operates, in particular as a
result of the UK’s exit from the EU (Brexit), the Group has been
required to reconsider certain aspects of its current restructuring
and transformation programme. In anticipation of Brexit the
Group has announced that it will be re-purposing its Dutch
subsidiary, The Royal Bank of Scotland N.V. (‘RBS N.V.’) for the
NatWest Market franchise’s European business and further
structural changes to Group’s Western European operations may
also be required, including in response to proposed changes to
the European prudential regulatory framework for banks and
investment banks. These proposals may result in additional
prudential or structural requirements being imposed on financial
institutions based outside the EU wishing to provide financial
services within the EU and may apply to the Group once the UK
has formally exited the EU. The ability of the RBS Group to
successfully re-purpose and utilise RBS N.V. as the platform for
the NatWest Market franchise’s European business following
Brexit is subject to numerous uncertainties, including those
relating to Brexit negotiations. See ‘The Group is subject to
political risks, including economic, regulatory and political
uncertainty arising from the referendum on the UK’s membership
of the European Union which could adversely impact the Group’s
business, results of operations, financial condition and
prospects.’
One proposal made by the European Commission would impose
a requirement for any bank established outside the EU which has
an asset base within the EU exceeding a certain size and has
two or more institutions within the EU, to establish a single
intermediate parent undertaking (‘IPU’) in the European Union,
under which all EU entities within that group will operate. The
Group is currently taking steps to plan for how these proposals, if
adopted as currently proposed, may impact the Group and its
current plans to implement the UK ring-fencing regime (which will
come into force on 1 January 2019 ahead of any IPU being
required). The impact of these proposals could be material given
the expectation that banking entities both inside the ring-fence
and outside of it would continue to carry out operations in the EU.
This could result in organisational complexity, could require
material additional capital requirements and could have adverse
tax implications.
The scale and scope of the changes currently being implemented
present material operational, people and financial risks to the
Group.
373
Additional information
Risk factors continued
The Group’s transformation programme and structural reform
agenda comprise a large number of concurrent actions and
initiatives, any of which could fail to be implemented due to
operational or execution issues. Implementation of such actions
and initiatives is expected to result in significant costs, which
could be materially higher than currently contemplated, including
due to material uncertainties and factors outside of the Group’s
control. Furthermore it requires the implementation and
application of robust governance and controls frameworks and
there is no guarantee that the Group will be successful in doing
so. The planning and execution of the various restructuring and
transformation activities is disruptive and will continue to divert
management resources from the conduct of the Group’s
operations and development of its business. Any additional
restructuring or transformation of the Group’s activities would
increase these risks and could result in further material
restructuring or transformation costs, jeopardise the delivery and
implementation of a number of other significant change projects,
impact the Group’s product offering or business model or
adversely impact the Group’s ability to deliver its strategy and
meet its targets and guidance, each of which could have a
material adverse impact on the Group’s results of operations,
financial condition and prospects.
There can be no certainty that the Group will be able to
successfully complete its transformation programme and
programmes for mandatory structural reform nor that the
restructured Group will be a viable, competitive or profitable
banking business.
The Group’s ability to meet the targets and expectations
which accompany the Group’s transformation programme,
including with respect to its cost reduction programme and
its return to profitability and the timing thereof, are subject
to various internal and external risks and are based on a
number of key assumptions and judgments any of which
may prove to be inaccurate.
As part of its transformation programme, a number of financial,
capital, operational and diversity targets and expectations have
been set by management for the Group, both for the short term
and throughout the transformation and restructuring period.
These include (but are not limited to) expectations relating to the
Group’s return to profitability and the timing thereof, one-off costs
incurred in connection with material litigation and conduct matters
and the timing thereof, expected growth rates in income,
customer loans and advances and volumes and underlying
drivers and trends, cost:income ratio targets, expectations with
respect to reductions in operating costs, including remediation
costs, expectations relating to restructuring or transformation
costs and charges as well as impairment charges, disposal
losses, CET1 ratio targets and expectations regarding funding
plans and requirements, expectations with respect to reductions
in risk-weighted assets and the timing thereof, expectations with
respect to employee engagement and diversity and
environmental targets.
The successful implementation of the Group’s transformation
programme and the Group’s ability to meet associated targets
and expectations, are subject to various internal and external
factors and risks, including those described in this risk factor, the
other risk factors included in this section and the disclosure
included in the rest of this document.
These include, but are not limited to, market, regulatory,
economic and political uncertainties, developments relating to
litigation, governmental actions and investigations and regulatory
matters, operational risks, risks relating to the Group’s business
model and strategy and delays or difficulties in implementing its
transformation programme, including the restructuring and
funding of its NatWest Markets franchise, the implementation of
the UK ring-fencing regime, and compliance with the Group’s
Alternative Remedies Package obligations. A number of factors
may impact the Group’s ability to maintain its current CET1 ratio
target at 13% throughout the restructuring period, including
conduct related costs, pension or legacy charges, accounting
impairments, including as a result of the implementation of IFRS
9, or limited organic capital generation through profits. In addition,
the run-down of risk-weighted assets may be accompanied by
the recognition of disposal losses which may be higher than
anticipated, including due to a degraded economic environment.
The Group’s ability to meet its cost:income ratio target and the
planned reductions in its annual underlying costs (excluding
restructuring and conduct-related charges) may also be
impacted. In 2017, the Group’s costs on an unadjusted basis take
into account restructuring costs of £1,565 million, including costs
relating Williams & Glyn and property exit costs of £221 million
and £293 million, respectively, as well as litigation and conduct
costs of £1,285 million. Such costs may vary considerably from
year to year and may impact the Group’s ability to maintain its
2020 cost reduction targets, and the focus on meeting cost
reduction targets may result in limited investment in other areas
which could affect the Group’s long-term product offering or
competitive position.
More generally, the targets and expectations which accompany
the Group’s transformation programme are based on
management plans, projections and models and are subject to a
number of key assumptions and judgments any of which may
prove to be inaccurate. Among others, the targets and
expectations set as part of the Group’s transformation
programme assume that the Group will be successful in
implementing its business model and strategy, in executing its
transformation programme and reducing the complexity of its
business and infrastructure at the same time that it will be
implementing significant structural changes to comply with the
regulatory environment and that it will implement and maintain a
robust control environment and effective culture, including with
respect to risk management.
In addition, the plans to deliver a UK ring-fencing compliant
structure across franchises and functions may impact the Group’s
concurrent transformation programme, which could result in
delays to the transformation programme portfolio deliveries which
in turn could result in delayed benefits therefrom. See ‘The Group
has been, and will remain, in a period of major business
transformation and structural change through to at least 2019 as
it implements its own transformation programme and seeks to
comply with UK ring-fencing and recovery and resolution
requirements as well as the Alternative Remedies Package.
Additional structural changes to the Group’s operations will also
be required as a result of Brexit. These various transformation
and restructuring activities are required to occur concurrently,
which carries significant execution and operational risks, and the
Group may not be a viable, competitive and profitable bank as a
result.’
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Additional information
Risk factors continued
As a result, there can be no certainty that the implementation of
the Group’s transformation programme will prove to be a
successful strategy, that the Group will meet its targets and
expectations during the restructuring period or that the
restructured Group will be a viable, competitive or profitable
banking business.
Implementation of the ring-fencing regime in the UK which
began in 2015 and must be completed before 1 January 2019
will result in material structural changes to the Group’s
business. The steps required to implement the UK ring-
fencing regime are complex and entail significant costs and
operational, legal and execution risks, which risks may be
exacerbated by the Group’s other ongoing restructuring
efforts.
The requirement for large UK banks taking deposits to ‘ring-
fence’ retail banking operations was introduced under the UK
Financial Services (Banking Reform) Act 2013 (the ‘Banking
Reform Act 2013’) and adopted through secondary legislation
(the ‘UK ring-fencing regime’). These reforms form part of a
broader range of structural reforms of the banking industry
seeking to improve the resilience and resolvability of banks and
which range from structural reforms (including ring-fencing) to the
implementation of a new recovery and resolution framework
(which in the UK will incorporate elements of the ring-fencing
regime). See ‘The Group and its subsidiaries are subject to an
evolving framework on recovery and resolution, the impact of
which remains uncertain, and which may result in additional
compliance challenges and costs.’
By the end of 2018, the Group intends to have placed the
majority of its UK banking business in ring-fenced banking
entities organised as a sub-group (‘RFB’) under an intermediate
holding company named NatWest Holdings Limited, which will
ultimately be a direct subsidiary of RBSG and will own National
Westminster Bank Plc, Adam & Company PLC (to be renamed
The Royal Bank of Scotland plc) and Ulster Bank Ireland DAC
(Ulster Bank). As a result, National Westminster Bank Plc will no
longer be a subsidiary of the current The Royal Bank of Scotland
plc (‘RBS plc’). The current RBS plc and the RBS International
businesses will sit outside the RFB.
As part of this restructuring, the majority of existing personal,
private, business and commercial customers of RBS plc is
expected to be transferred to the RFB during the second quarter
of 2018, specifically to Adam & Company PLC (to be renamed
The Royal Bank of Scotland plc). Certain assets and liabilities
(including the covered bond programme, certain hedging
positions and parts of the liquid asset portfolio) will also be
transferred to National Westminster Bank Plc. At the same time,
RBS plc (which will sit outside the RFB) will be renamed NatWest
Markets Plc to bring its legal name in line with the rebranding of
the NatWest Markets franchise which was initiated in December
2016, and will continue to operate the NatWest Markets franchise
as a direct subsidiary of RBSG. The transfer, as described
above, will be effected principally by utilising a legal scheme
entitled a ‘Ring-Fencing Transfer Scheme’ under Part VII of the
Financial Services and Markets Act 2000. The implementation of
such a scheme is subject to, amongst other considerations,
regulatory approval and the sanction of the Court of Session in
Scotland, Edinburgh (the ‘Court’). A hearing to seek the Court’s
approval of the scheme is expected to be held on 22 March 2018.
The approval of the scheme by the Prudential Regulation
Authority (‘PRA’) is expected to be confirmed shortly before that
hearing date. If the scheme is duly approved by the Court at the
hearing expected to be held on 22 March 2018, it is expected that
the scheme will be implemented with effect from 30 April 2018 or
any later date which the Group may agree with the PRA and the
Financial Conduct Authority (‘FCA’). It remains possible that the
court process described above may result in amendments being
required to be made to the Group’s current plan and that this may
result in delays in the implementation of the UK ring-fencing
compliant structure, additional costs and/or changes to the
Group’s business.
In addition, during the second half of 2018, it is proposed that
NatWest Holdings Limited, being the parent of the future ring-
fenced sub-group (which together with other entities is intended
to include National Westminster Bank Plc, Adam & Company
PLC (to be renamed The Royal Bank of Scotland plc) and Ulster
Bank Ireland DAC), will become a direct subsidiary of RBSG.
This is expected to occur through a capital reduction of The
Royal Bank of Scotland plc (to be renamed NatWest Markets
Plc), which will be satisfied by the transfer of the shares in
NatWest Holdings Limited currently held by of The Royal Bank of
Scotland plc to RBSG, which will occur via a further and separate
court process, which is subject to the relevant Court and
regulatory approvals. It is possible that the court process
described above may result in amendments being required to be
made to the Group’s current plan and that this may result in
delays in the implementation of the UK ring-fencing compliant
structure, additional costs and/or changes to the Group’s
business.
During the course of 2018, it is proposed that the Group will seek
to implement a second, smaller ring-fencing transfer scheme as
part of its strategy to implement its future ring-fencing compliant
structure, which is proposed to transfer certain assets from
National Westminster Bank Plc to The Royal Bank of Scotland
plc (by then renamed to NatWest Markets Plc). Such a scheme
would be subject to the same reviews and approvals as
described above in connection with the first scheme.
As a result of the implementation of the changes described
above, there will be a material impact on how the Group conducts
its business and will require a significant legal and organisational
restructuring of the Group and the transfer of large numbers of
assets, liabilities, obligations, customers and employees between
legal entities and the realignment of employees within the Group.
The Group’s final ring-fenced legal structure and the actions
being taken to achieve it, remain subject to, amongst other
factors, additional regulatory, board and other approvals. In
particular, transfers of assets and liabilities by way of a Ring-
Fencing Transfer Scheme, as described above, must be
reviewed and reported on by an Independent Skilled Person
appointed by the Group with the prior approval of the PRA
(having consulted with the FCA). The reports of the Skilled
Person are made public and form part of the court process
described above.
The implementation of these changes involves a number of risks
related to both the revised Group structure and also the process
of transition to such new structure.
375
Additional information
Risk factors continued
Those risks include the following:
As a result of ring-fencing, certain customers will be moved
to the RFB and certain customers will be required to deal
with both the RFB and other Group entities outside the RFB
to obtain the full range of products and services or to take
any affirmative steps in connection with the reorganisation.
The Group is unable to predict how some customers may
react to these and other required changes.
As part of the establishment of the RFB, the RFB will need
to operate independently from the other Group entities
outside the RFB and as a result, amendments will need to
be made to the Group’s existing corporate governance
structure to ensure the RFB is independent from the other
Group entities outside the RFB. This new structure, which
will also require the approval of the PRA, may result in
divergences between the various governance bodies within
the Group and create operational challenges.
In order to comply with the requirements of the UK ring-
fencing regime, the Group will need to revise its operations
infrastructure so as to comply with the shared services,
independence and resolvability requirements set out in the
UK ring-fencing legislation and rules, including in areas such
as information technology (IT) infrastructure, human
resources and critical service providers which may involve
associated execution risk and may result in increased costs.
Arrangements between the RFB and other Group entities
outside the RFB will also need to be reviewed in light of
these requirements and the requirement that all such
transactions take place on an arm’s-length basis. Any
duplication of certain infrastructure or functions between the
RFB and other Group entities outside the RFB that are
required to comply with the UK ring-fencing legislation and
rules and dis-synergies resulting therefrom may in turn
result in additional costs and/or changes to the Group’s
business and operations
The implementation of the UK ring-fencing regime will
significantly impact the management of the Group’s treasury
operations, including internal and external funding
arrangements. The changes required may adversely impact
the assessment made by credit rating agencies, creditors
and other stakeholders of the credit strength of the different
entities on a standalone basis and may heighten the cost of
capital and funding for the Group and its subsidiaries. The
ability of bank entities outside the RFB to meet funding and
capital prudential requirements may be dependent on
obtaining an adequate credit rating. Once the UK ring-
fencing regime is implemented, reliance on intragroup
exemptions in relation to large exposures and liquidity will
not be possible between the RFB and other Group entities
and may result in risk-weighted assets inflation.
From 2026 it will not be possible for the Group entities
outside the RFB to participate in the same defined benefit
pension scheme as RFB entities or their wholly-owned
subsidiaries. As a result, it will be necessary to restructure
the Group’s defined benefit pension scheme (including The
Royal Bank of Scotland Group Pension Fund (‘Main
scheme’)). This restructuring will be such that either the RFB
or other Group outside the RFB leave the current scheme.
The costs of separation may be material and may trigger
certain legal and regulatory obligations including possibly
increased contributions. Such restructuring may
also result in additional or increased cash contributions in
the event the pension trustees determine that the employer
covenant has been weakened as a result of such
separation. See ‘The Group is subject to pension risks and
will be required to make additional contributions as a result
of the restructuring of its pension schemes in relation to the
implementation of the UK ring-fencing regime. In addition,
the Group expects to make additional contributions to cover
pension funding deficits if there are degraded economic
conditions or if there is any devaluation in the asset portfolio
held by the pension trustee.’
The restructuring and planned transfers may also result in
accounting consequences for the Group. Although a number
of transfers will be made at book value between fully owned
Group entities, certain transfers will be made at fair value
which may result in a profit or loss being recognised by
Group entities. In addition, transfers of assets that have
related hedging arrangements may result in adverse
operational, financial or accounting consequences if the
transfer is not consistent with the unaffected continuation of
such hedging arrangements.
In addition, the proposed transfers may have tax costs, or
may impact the tax attributes of the RFB or other Group
entities outside the RFB and the ability to transfer tax
losses.
The steps required to implement the UK ring-fencing regime
within the Group to comply with the relevant rules and regulations
are complex and require an extended period of time to plan,
execute and implement and entail significant costs and
operational, legal and execution risks, which risks may be
exacerbated by the Group’s other ongoing restructuring efforts.
External or internal factors including new and developing legal
requirements relating to the regulatory framework for the banking
industry and the evolving regulatory and economic landscape
resulting from Brexit, as well as further political developments or
changes to the Group’s current strategy, may require the Group
to further restructure its operations (including certain operations
in the UK and Western Europe) and may in turn require further
changes to be made to the Group’s ring-fencing plans (including
the planned structure of the Group post implementation).
376
Additional information
Risk factors continued
The completion of ring-fencing will substantially reconfigure the
way RBSG holds its businesses and the legal entities within the
Group. There is no certainty that the Group will be able to
complete the legal restructuring and migration of customers’
assets and liabilities by the 1 January 2019 deadline or in
accordance with future rules and the consequences of non-
compliance are currently uncertain.
Conducting the Group’s operations in accordance with the new
rules may result in additional costs (transitional and recurring)
following implementation and impact the Group’s profitability. As
a result, the implementation of the UK ring-fencing regime could
have a material adverse effect on the Group’s reputation, results
of operations, financial condition and prospects.
The Group’s operations are highly dependent on its IT
systems. A failure of the Group’s IT systems, including as a
result of the lack of or untimely investments, could
adversely affect its operations, competitive position and
investor and customer confidence and expose the Group to
regulatory sanctions.
The Group’s operations are dependent on the ability to process a
very large number of transactions efficiently and accurately while
complying with applicable laws and regulations where it does
business. The proper functioning of the Group’s payment
systems, financial and sanctions controls, risk management,
credit analysis and reporting, accounting, customer service and
other IT systems, as well as the communication networks
between its branches and main data processing centres, are
critical to the Group’s operations.
The vulnerabilities of the Group’s IT systems are in part due to
their complexity, which is attributable to overlapping multiple
dated systems that result from the Group’s historical acquisitions
and insufficient investment prior to 2013 to keep the IT
applications and infrastructure up-to-date. Within a complex IT
estate, the risk of disruption due to end-of-life hardware and
software may create challenges in recovering from system
breakdowns. In 2017, the Group made progress to remediate or
replace out of date systems, reducing the overall risk of
disruption. However, some risk remains, and will require
continued focus and investment on an on-going basis to limit any
IT failures which may adversely affect the Group’s relationship
with its customers and its reputation, and which may also lead to
regulatory investigations and redress.
The Group’s regulators in the UK, continue to actively monitor
progress being made by banks in the UK to modernise, manage
and secure their IT infrastructure and environment, in order to
prevent future failures affecting customers. Any critical system
failure, any prolonged loss of service availability or any material
breach of data security could cause serious damage to the
Group’s ability to provide service to its customers, which could
result in significant compensation costs or fines resulting from
regulatory investigations and could breach regulations under
which the Group operates.
In particular, failures or breaches resulting in the loss or
publication of confidential customer data could cause long-term
damage to the Group’s reputation, business and brands, which
could undermine its ability to attract and keep customers.
The Group is currently implementing a number of complex
change initiatives, including its transformation programme, the
UK ring-fencing regime and the restructuring of the NatWest
Markets franchise. A failure to safely and timely implement one
or several of these initiatives could lead to disruptions of the
Group’s IT infrastructure or loss or publication of confidential
customer data and in turn could cause long-term damage to the
Group’s reputation, brands, results of operations and financial
position.
In addition, recent or future regulatory changes, such as the EU
General Data Protection Regulation and the CMA’s Open
Banking standard, increase the risks relating to the Group’s
ability to comply with rules that impact its IT infrastructure. Any
non-compliance with such regulations could result in regulatory
proceedings or the imposition of fines or penalties and
consequently could have a material adverse effect on the
Group’s business, reputation, financial condition and future
prospects.
The Group has made, and will continue to make, considerable
investments in its IT systems and technology to further simplify,
upgrade and improve its capabilities to make them more cost-
effective and improve controls, procedures, strengthen cyber
security defences, enhance the digital services provided to its
bank customers and improve its competitive position, which is
also designed to reduce the potential for system failures which
adversely affect its relationship with its customers and reputation,
which may lead to regulatory investigations and redress.
However, the Group’s current focus on cost-saving measures, as
part of its transformation programme, may impact the resources
available to implement further improvements to the Group IT
infrastructure and technology or limit the resources available for
investments in technological developments and/or innovation.
Should such investment and rationalisation initiatives fail to
achieve the expected results, or prove to be insufficient, it could
have a material adverse impact on the Group’s operations, its
ability to retain or grow its customer business or its competitive
position and could negatively impact the Group’s financial
position.
The Group is exposed to cyberattacks and a failure to
prevent or defend against such attacks and provide, as
appropriate, notification of them, could have a material
adverse effect on the Group’s operations, results of
operations or reputation.
The Group is subject to regular cybersecurity attacks and related
threats, which have targeted financial institutions, corporates,
governments and other institutions across all industries. The
Group is increasingly reliant on technology which is vulnerable to
attacks, and these attacks continue to increase in frequency,
sophistication and severity and could have a material adverse
effect on the Group’s operations, customers and reputation. The
Group relies on the effectiveness of its internal policies, controls,
procedures and capabilities to protect the confidentiality, integrity
and availability of information held on its computer systems,
networks and devices, and also on the computer systems,
networks and devices of third parties with whom the Group
interacts.
377
Additional information
Risk factors continued
The Group takes appropriate measures to prevent, detect and
minimise attacks that could disrupt the delivery of critical
business processes to its customers. Because financial
institutions such as the Group operate with complex legacy
infrastructure, they may be even more susceptible to attack due
to the increased number of potential entry points and
weaknesses. In addition, the increasing sophistication of cyber
criminals may increase the risk of a security breach of the
Group’s systems and as security threats continue to evolve the
Group’s may be required to invest additional resources to modify
the security of its systems, which could have a material adverse
effect on the Group’s results of operations.
Failure to protect the Group’s operations from cyberattacks or to
continuously review and update current processes and controls in
response to new or existing threats could result in the loss of
customer data or other sensitive information as well as instances
of denial of service for the Group’s customers and staff. The
Group’s systems, and those of third parties suppliers, are often
subject to cyberattacks which have to date been immaterial to the
Group’s operations. In 2017, the Group experienced 11
distributed denial of service (DDOS) attacks against customer-
facing websites, one of which caused minimal customer impacts
for a short period of time. This represents a decrease from 26
attacks against the Group in 2016, but a recent surge of activity
in the fourth quarter of 2017 points towards an increasing trend of
such attacks into 2018. The Group’s DDOS mitigation controls
have recently been strengthened and will continue to be
strengthened further in 2018. However, there can be no
assurance that those and the Group’s other strategies to defend
against cyberattacks, including future DDOS attacks, will be
successful and avoid the potential adverse effects of
cyberattacks on the Group.
The Bank of England, the FCA and HM Treasury in the UK and
regulators in the US and in Europe continue to recognise
cybersecurity as a systemic risk to the financial sector and have
highlighted the need for financial institutions to improve resilience
to cyberattacks and provide timely notification of them, as
appropriate. The Group expects greater regulatory engagement,
supervision and enforcement on cybersecurity in the future. The
Group continues to participate in initiatives led by the Bank of
England and other regulators designed to share best practice and
to test how major firms respond to significant cyberattacks. The
outputs of this collaboration along with other regulatory and
industry-led initiatives are continually incorporated into the
Group’s on-going IT priorities and improvement measures.
However, the Group continues to expect to be targeted regularly
in the future but there can be no certainty that the Group will not
be materially impacted by a future attack.
Any failure in the Group’s cybersecurity policies, procedures or
controls, could lead to the Group suffering financial losses,
reputational damage, a loss of customers, additional costs
(including costs of notification of consumers, credit monitoring or
card reissuance), regulatory investigations or sanctions being
imposed and could have a material adverse effect on the Group’s
results of operations, financial condition or future prospects.
The Group is subject to political risks, including economic,
regulatory and political uncertainty arising from the
referendum on the UK’s membership of the European Union
which could adversely impact the Group’s business, results
of operations, financial condition and prospects.
In a referendum held in the UK on 23 June 2016 (the ‘EU
Referendum’), a majority voted for the UK to leave the European
Union (‘EU’). On 29 March 2017 the UK Government triggered
the exit process contemplated under Article 50 of the Treaty on
European Union. This provides for a maximum two year period of
negotiation to determine the terms of Brexit and set the
framework for the UK’s new relationship with the EU. After this
period its EU membership and all associated treaties will cease
to apply, unless some form of transitional agreement
encompassing those associated treaties is agreed or there is
unanimous agreement by the European Council with the UK to
extend the negotiation period defined under Article 50. There is
no certainty that negotiations relating to the terms of the UK’s
relationship with the EU will be completed within the two-year
period designated by Article 50. Such negotiations may well
extend beyond 29 March 2019, into any transitional period, the
terms and duration of which are currently uncertain. Furthermore,
the government has introduced the European Union (Withdrawal)
Bill (the ‘Withdrawal Bill’) to the UK Parliament, which aims to
repeal the European Communities Act of 1972 and to transpose
EU law relevant to the UK into national law upon the UK’s exit
from the EU. However, the precise terms of the Withdrawal Bill, if
enacted by the UK Parliament, are uncertain and it remains
unclear how the Withdrawal Bill will impact the legal and
regulatory landscape in the UK after it becomes effective. In
addition, it is possible (although of low likelihood) that a disorderly
termination of the Article 50 process could occur, resulting in the
UK leaving the EU before 29 March 2019. The consequences of
such an early termination of the Article 50 process are uncertain
and adverse impacts could crystallise rapidly should this occur.
This prevailing uncertainty relates to the timing of Brexit, as well
as to the negotiation and form of the UK’s relationships with the
EU, with other multilateral organisations and with individual
countries at the time of exit and beyond. The timing of, and
process for, such negotiations and the resulting terms of the UK’s
future economic, trading and legal relationships with both the EU
and other counterparties could impact the Group’s financial
condition, results of operations and prospects. The direct and
indirect effects of Brexit are expected to affect many aspects of
the Group’s business and operating environment, including as
described elsewhere in these risk factors, and may be material.
The longer term effects of Brexit on the Group’s operating
environment are difficult to predict, and subject to wider global
macro-economic trends and events, but may significantly impact
the Group and its customers and counterparties who are
themselves dependent on trading with the EU or personnel from
the EU and may result in periodic financial volatility and slower
economic growth, in the UK in particular, but also in Republic of
Ireland, Europe and potentially the global economy. Until the
bilateral and multilateral trading and economic relationships
between the UK, the EU, members of the World Trade
Organisation and other key trading partners are agreed,
implemented and settled, the longer-term effects of this
uncertainty are likely to endure and their severity increase in the
absence of such agreements.
378
Additional information
Risk factors continued
There is related uncertainty as to the respective legal and
regulatory arrangements under which the Group and its
subsidiaries will operate when the UK is no longer a member of
the EU. The Group and its counterparties may no longer be able
to rely on the EU passporting framework for financial services
and could be required to apply for authorisation in multiple
jurisdictions in the EU. The cost and timing of that authorisation
process is uncertain. The Group has already announced plans to
re-purpose its Dutch banking subsidiary, RBS N.V., to conduct
the NatWest Market franchise’s European business and further
changes to the Group’s business operations may be required.
The Group is also monitoring proposed amendments to the
prudential framework for non-EU banks operating within in the
EU.
These and any other restructuring or commercial actions as well
as new or amended rules, could have a significant impact on the
Group’s operations and/or legal entity structure, including
attendant restructuring costs, capital requirements and tax
implications and as a result adversely impact the Group’s
profitability, business model and product offering. These impacts
would potentially be greater in the event of a disorderly
termination of the Article 50 process and early Brexit. See ‘The
Group has been, and will remain, in a period of major business
transformation and structural change through to at least 2019 as
it implements its own transformation programme and seeks to
comply with UK ring-fencing and recovery and resolution
requirements as well as the Alternative Remedies Package.
Additional structural changes to the Group’s operations will also
be required as a result of Brexit. These various transformation
and restructuring activities are required to occur concurrently
which carries significant execution and operational risks, and the
Group may not be a viable, competitive and profitable bank as a
result.’
The Group faces additional political uncertainty as to how the
Scottish parliamentary process may impact the negotiations
relating to Brexit. RBSG, RBS plc and one of the future post ring-
fencing principal operating companies, Adam & Company PLC,
are all headquartered and incorporated in Scotland. Any
changes to Scotland’s relationship with the UK or the EU (as an
indirect result of Brexit or other developments) would impact the
environment in which the Group and its subsidiaries operate, and
may require further changes to be made to the Group’s structure,
independently or in conjunction with other mandatory or strategic
structural and organisational changes and as a result could
adversely impact the Group.
The Group is currently subject to increased political risks as a
result of the UK Government’s majority ownership stake in the
Group. The UK Government in its November 2017 Autumn
Budget indicated its intention to recommence the process for the
privatisation of RBSG before the end of 2018-2019, although
there can be no certainty as to the commencement of any sell-
downs or the timing or extent thereof. (See ‘HM Treasury (or
UKFI on its behalf) may be able to exercise a significant degree
of influence over the Group and any further offer or sale of its
interests may affect the price of securities issued by the Group.’)
Were there to be a change of UK government as a result of a
general election, the Group may face new risks as a result of a
change in government policy. In its 2017 manifesto, for example,
the Labour Party announced its intention to launch a consultation
on breaking up the Group to create new local public banks.
In addition to the political risks described above, the Group
remains exposed to risks arising out of geopolitical events, such
as the imposition of trade barriers, the implementation of
exchange controls and other measures taken by sovereign
governments that can hinder economic or financial activity levels.
Furthermore, unfavourable domestic or international political,
military or diplomatic events, armed conflict, pandemics and
terrorist acts and threats, and the response to them by the UK
and other governments could also adversely affect levels of
economic activity and have an adverse effect upon the Group’s
business, financial condition and results of operations.
The Group is subject to pension risks and will be required to
make additional contributions as a result of the restructuring
of its pension schemes in relation to the implementation of
the UK ring-fencing regime. In addition, the Group expects
to make additional contributions to cover pension funding
deficits if there are degraded economic conditions or if there
is any devaluation in the asset portfolio held by the pension
trustee.
The Group maintains a number of defined benefit pension
schemes for certain former and current employees. The UK ring-
fencing regime will require significant changes to the structure of
the Group’s existing defined benefit pension schemes because,
from 2026 it will not be possible for Group entities outside the
RFB to participate in the same defined benefit pension scheme
as RFB entities or their wholly-owned subsidiaries. As a result,
RFB cannot be liable for debts to pension schemes that might
arise as a result of the failure of an entity that is not a RFB entity
or wholly owned subsidiary thereof after 1 January 2026. The
restructuring of the Group and its defined benefit pension scheme
to implement the UK ring-fencing regime could also affect
assessments of the Group’s pension scheme deficits or result in
the pension scheme trustees considering that the employer
covenant has been weakened and result in further additional
material contributions being required.
The Group is developing a strategy to meet these requirements.
This will require the agreement of the pension scheme trustee.
The Group’s intention is for the Main scheme to be supported by
the RFB. Discussions with the pension scheme trustee are
ongoing and will be influenced by the Group’s overall ring-fence
strategy and its pension funding and investment strategies.
If agreement is not reached with the pension trustee, alternative
options less favourable to the Group may need to be developed
to meet the requirements of the pension regulations. The costs
associated with the restructuring of the Group’s existing defined
benefit pension schemes could be material and could result in
higher levels of additional contributions than those described
above and currently agreed with the pension trustee which could
have a material adverse effect on the Group’s results of
operations, financial position and prospects.
Pension risk also includes the risk that the assets of the Group’s
various defined benefit pension schemes do not fully match the
timing and amount of the schemes’ liabilities, as a result of which
the Group is required or chooses to make additional contributions
to address deficits that may emerge.
379
Additional information
Risk factors continued
Risk arises from the schemes because the value of the asset
portfolios may be less than expected, or may have reduced in
value relative to the pension liabilities it supports, and because
there may be greater than expected increases in the estimated
value of the schemes’ liabilities and additional future contributions
to the schemes may be required. Pension regulations may also
change in a manner adverse to the Group.
The value of pension scheme liabilities varies with changes to
long-term interest rates (including prolonged periods of low
interest rates as is currently the case), inflation, monetary policy,
pensionable salaries and the longevity of scheme members, as
well as changes in applicable legislation.
In addition, as the Group expects to continue to materially reduce
the scope of its operations as part of the implementation of its
transformation programme and of the UK ring-fencing regime,
pension liabilities will therefore increase relative to the size of the
Group, which may impact the Group’s results of operations and
capital position.
Given economic and financial market difficulties and volatility, the
low interest rate environment and the risk that such conditions
may occur again over the near and medium term, some of the
Group’s pension schemes have experienced increased pension
deficits.
The last triennial valuation of the Main scheme, had an effective
date of 31 December 2015. This valuation was concluded with
the acceleration of the nominal value of all committed
contributions in respect of past service (£4.2 billion), which was
paid in the first quarter of 2016.
The next triennial period valuation will take place in the fourth
quarter of 2018 and the Main scheme pension trustee agreed
that it would not seek a new valuation prior to that date, except
where a material change arises. The 2018 triennial valuation is
expected to result in a significant increase in the regular annual
contributions in respect of the ongoing accrual of benefits.
Notwithstanding the 2016 accelerated payment and any
additional contributions that may be required beforehand as a
result of a material change, the Group expects to have to agree
to additional contributions, over and above the existing committed
past service contributions, as a result of the next triennial
valuation. Under current legislation, such agreement would need
to be reached no later than the first quarter of 2020. The cost of
such additional contributions could be material and any additional
contributions that are committed to the Main scheme following
new actuarial valuations would trigger the recognition of a
significant additional liability on the Group’s balance sheet and/or
an increase in any pension surplus derecognised, which in turn
could have a material adverse effect on the Group’s results of
operations, financial position and prospects.
Pension risk and changes to the Group’s funding of its
pension schemes may have a significant impact on the
Group’s regulatory capital position or its capital plan.
The Group’s capital position is influenced by pension risk in
several respects: Pillar 1 capital is impacted by the requirement
that net pension assets are deducted from capital and that
actuarial gains/losses impact reserves and, by extension, CET1
capital; Pillar 2A requirements result in the Group being required
to carry a capital add-on to absorb stress on the pension fund;
and finally, the risk of additional contributions to the Group’s
pension fund and investment risk associated with the pension
fund is taken into account in the Group’s capital plan and include
additions to its capital management buffer to cater for certain
pension related stress scenarios.
The Group believes that the accelerated payment to the Group’s
Main scheme pension fund made in the first quarter of 2016
improved the Group’s capital planning and resilience through the
period to 2019 and provided the Main scheme pension trustee
with more flexibility over its investment strategy.This payment has
resulted in a reduction in prevailing Pillar 2A add-on. However,
subsequent contributions required in connection with the 2018
triennial valuation, or otherwise, may adversely impact the
Group’s capital position.
As the Group is unable to recognise any accounting surplus due
to constraints under IFRIC14, any contributions made which
increase the accounting surplus, or contributions committed to
which would increase the accounting surplus when paid, would
have a corresponding negative impact on the Group’s capital
position.
As a result, if any of these assumptions prove inaccurate, or if the
Group does not hold adequate capital in its management buffer
to cover market risk in the pension fund in a stressed scenario,
the Group’s capital position may significantly deteriorate and fall
below the minimum capital requirements applicable to the Group
or Group entities, and in turn result in increased regulatory
supervision or sanctions, restrictions on discretionary
distributions or loss of investor confidence, which could
individually or in aggregate have a material adverse effect on the
Group’s results of operations, financial prospects or reputation.
The impact of the Group’s pension obligations on its results and
operations are also dependent on the regulatory environment in
which it operates. There is a risk that changes in prudential
regulation, pension regulation and accounting standards, or a
lack of coordination between such sets of rules, may make it
more challenging for the Group to manage its pension obligations
resulting in an adverse impact on the Group’s CET1 capital.
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Risk factors continued
The Group’s business and results of operations may be
adversely affected by increasing competitive pressures and
technology disruption in the markets in which it operates.
The markets for UK financial services, and the other markets
within which the Group operates, are very competitive, and
management expects such competition to continue or intensify in
response to customer behaviour, technological changes
(including the growth of digital banking), competitor behaviour,
new entrants to the market (including non-traditional financial
services providers such as large retail or technology
conglomerates), new lending models (such as peer-to-peer
lending), industry trends resulting in increased disaggregation or
unbundling of financial services or conversely the re-
intermediation of traditional banking services, and the impact of
regulatory actions and other factors. In particular, developments
in the financial sector resulting from new banking, lending and
payment solutions offered by rapidly evolving incumbents,
challengers and new entrants, in particular with respect to
payment services and products, and the introduction of disruptive
technology may impede the Group’s ability to grow or retain its
market share and impact its revenues and profitability,
particularly in its key UK retail banking segment.
These trends may be catalysed by various regulatory and
competition policy interventions, particularly as a result of the
Open Banking initiative and other remedies imposed by the
Competition and Markets Authority (CMA) which are designed to
further promote competition within retail banking.
Increasingly many of the products and services offered by the
Group are, and will become, technology intensive and the
Group’s ability to develop such services has become increasingly
important to retaining and growing the Group’s customer
business in the UK.
There can be no certainty that the Group’s investment in its IT
capability intended to address the material increase in customer
use of online and mobile technology for banking will be
successful or that it will allow the Group to continue to grow such
services in the future. Certain of the Group’s current or future
competitors may have more efficient operations, including better
IT systems allowing them to implement innovative technologies
for delivering services to their customers. Furthermore, the
Group’s competitors may be better able to attract and retain
customers and key employees and may have access to lower
cost funding and/or be able to attract deposits on more
favourable terms than the Group. Although the Group invests in
new technologies and participates in industry and research led
initiatives aimed at developing new technologies, such
investments may be insufficient, especially given the Group’s
focus on its cost savings targets, which may limit additional
investment in areas such as financial innovation and therefore
could affect the Group’s offering of innovative products and its
competitive position. The Group may also fail to identify future
opportunities or derive benefits from disruptive technologies in
the context of rapid technological innovation, changing customer
behaviour and growing regulatory demands, including the UK
initiative on Open Banking (PSD2), resulting in increased
competition from both traditional banking businesses as well as
new providers of financial services, including technology
companies with strong brand recognition, that may be able to
develop financial services at a lower cost base.
If the Group is unable to offer competitive, attractive and
innovative products that are also profitable, it will lose market
share, incur losses on some or all of its activities and lose
opportunities for growth.
For example, companies in the financial services industry are
increasingly using artificial intelligence and/or automated
processes to enhance their output and performance. As part of
this broader trend, the Group is in the early stages of automating
certain of its solutions and interactions within its customer-facing
businesses. Such developments may result in unintended
consequences or conduct risk for the Group if such new
processes, including the algorithms used, are not carefully tested
and integrated into the Group’s current solutions. In addition to
such reputational risks, the development of automated solutions
will require investment in technology and will likely result in
increased costs for the Group.
In addition, recent and future disposals and restructurings by the
Group relating to the implementation of non-customer facing
elements of its transformation programme and the UK ring-
fencing regime, or required by the Group’s regulators, as well as
constraints imposed on the Group’s ability to compensate its
employees at the same level as its competitors, may also have
an impact on its ability to compete effectively.
Intensified competition from incumbents, challengers and new
entrants in the Group’s core markets could lead to greater
pressure on the Group to maintain returns and may lead to
unsustainable growth decisions. These and other changes in the
Group’s competitive environment could have a material adverse
effect on the Group’s business, margins, profitability, financial
condition and prospects.
Operational risks are inherent in the Group’s businesses and
these risks are heightened as the Group implements its
transformation programme, including significant cost
reductions, the UK ring-fencing regime and implementation
of the Alternative Remedies Package against the backdrop
of legal and regulatory changes.
Operational risk is the risk of loss resulting from inadequate or
failed internal processes, people or systems, or from external
events, including legal risks. The Group has complex and diverse
operations and operational risks or losses can result from a
number of internal or external factors, including:
internal and external fraud and theft from the Group,
including cybercrime;
compromise of the confidentiality, integrity, or availability of
the Group’s data, systems and services;
failure to identify or maintain the Group’s key data within the
limits of the Group’s agreed risk appetite;
failure to provide adequate data, or the inability to correctly
interpret poor quality data;
failure of the Group’s technology services due to loss of
data, systems or data centre failure as a result of the
Group’s actions or those actions outside the Group’s control,
or failure by third parties to restore services;
failure to appropriately or accurately manage the Group’s
operations, transactions or security;
incorrect specification of models used by the Group or
implementing or using such models incorrectly;
failure to effectively design, execute or deliver the Group’s
transformation programme;
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Risk factors continued
failure to attract, retain or engage staff;
insufficient resources to deliver change and business-as-
usual activity;
decreasing employee engagement or failure by the Group to
embed new ways of working and values; or
incomplete, inaccurate or untimely statutory, regulatory or
management reporting.
Operational risks are and will continue to be heightened as a
result of the number of initiatives being concurrently implemented
by the Group, in particular the implementation of its
transformation programme, including its cost-reduction
programme, the implementation of the UK ring-fencing regime
and implementation of the Alternative Remedies Package.
Individually, these initiatives carry significant execution and
delivery risk and such risks are heightened as their
implementation is often highly correlated and dependent on the
successful implementation of interdependent initiatives. These
initiatives are being delivered against the backdrop of ongoing
cost challenges and increasing legal and regulatory uncertainty
and will put significant pressure on the Group’s ability to maintain
effective internal controls and governance frameworks. Although
the Group has implemented risk controls and loss mitigation
actions and significant resources and planning have been
devoted to mitigate operational risk, it is not possible to be certain
that such actions have been or will be effective in controlling each
of the operational risks faced by the Group. Ineffective
management of such risks could have a material adverse effect
on the Group’s business, financial condition and results of
operations.
The Group’s business performance and financial position
could be adversely affected if its capital is not managed
effectively or if it is unable to meet its prudential regulatory
requirements, or if it is deemed prudent to increase the
amount of any management buffer that it requires. Effective
management of the Group’s capital is critical to its ability to
operate its businesses, comply with its regulatory
obligations, pursue its transformation programme and
current strategies, resume dividend payments on its
ordinary shares, maintain discretionary payments and
pursue its strategic opportunities.
The Group is required by regulators in the UK, the EU and other
jurisdictions in which it undertakes regulated activities to maintain
adequate capital resources. Adequate capital also gives the
Group financial flexibility in the face of continuing turbulence and
uncertainty in the global economy and specifically in its core UK
and European markets.
The Group currently targets a CET1 ratio at or above 13%
throughout the period until completion of its restructuring. On a
fully loaded basis, the Group’s CET1 ratio was 15.9% at 31
December 2017, compared with 13.4% at 31 December 2016.
The Group’s target capital ratio is based on its expected
regulatory requirements and internal modelling, including stress
scenarios. However, the Group’s ability to achieve such targets
depends on a number of factors, including the implementation of
its transformation programme and any of the factors described
below.
A shortage of capital, which could in turn affect the Group’s
capital ratio and ability to resume dividend payments, could arise
from:
a depletion of the Group’s capital resources through
increased costs or liabilities (including pension, conduct and
litigation costs), reduced profits or increased losses (which
would in turn impact retained earnings), sustained periods of
low or lower interest rates, reduced asset values resulting in
write-downs, impairments or accounting charges;
reduced upstreaming of dividends from the Group’s
subsidiaries as a result of the Bank of England’s approach
to setting the minimum requirements for own funds and
eligible liabilities (‘MREL’) within groups, requiring sub-
groups to hold internal MREL resources sufficient to match
both their own individual MREL as well as the internal MREL
of the subsidiaries constituting the sub-group;
an increase in the amount of capital that is required to meet
the Group’s regulatory requirements, including as a result of
changes to the actual level of risk faced by the Group,
factors influencing the Group’s regulator’s determination of
the firm-specific Pillar 2B buffer applicable to the Group
(PRA buffer), changes in the minimum levels of capital or
liquidity required by legislation or by the regulatory
authorities or the calibration of capital or leverage buffers
applicable to the Group, including countercyclical buffers,
increases in risk-weighted assets or in the risk weighting of
existing asset classes, or an increase in the Group’s view of
any management buffer it needs, taking account of, for
example, the capital levels or capital targets of the Group’s
peer banks and criteria set by the credit rating agencies;
the implementation of the Group’s transformation
programme, including in response to implementation of the
UK ring-fencing regime, certain intragroup funding
arrangements will be limited and may no longer be permitted
and the Group may need to increasingly manage funding
and liquidity at an individual Group entity level, which could
result in the Group being required to maintain higher levels
of capital in order to meet the Group’s regulatory
requirements than would otherwise be the case, as may be
the case if the Bank of England were to identify impediments
to the Group’s resolvability resulting from new funding and
liquidity management strategies.
The Group’s current capital strategy is based on the expected
accumulation of additional capital through the accrual of profits
over time and/or through the planned reduction of its risk-
weighted assets through disposals, natural attrition and other
capital management initiatives.
Further losses or a failure to meet profitability targets or reduce
risk-weighted assets in accordance with or within the timeline
contemplated by the Group’s capital plan, a depletion of its
capital resources, earnings and capital volatility resulting from the
implementation of IFRS 9 as of 1 January 2018, or an increase in
the amount of capital it needs to hold (including as a result of the
reasons described above), would adversely impact the Group’s
ability to meet its capital targets or requirements and achieve its
capital strategy during the restructuring period.
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Additional information
Risk factors continued
If the Group is determined to have a shortage of capital, including
as a result of any of the circumstances described above, the
Group may suffer a loss of confidence in the market with the
result that access to liquidity and funding may become
constrained or more expensive or may result in the Group being
subject to regulatory interventions and sanctions. The Group’s
regulators may also request that the Group carry out certain
capital management actions or, in an extreme scenario, this may
also trigger the implementation of its recovery plans. Such
actions may, in turn, affect, among other things, the Group’s
product offering, ability to operate its businesses, comply with its
regulatory obligations, pursue its transformation programme and
current strategies, resume dividend payments on its ordinary
shares, maintain discretionary payments on capital instruments
and pursue strategic opportunities, affecting the underlying
profitability of the Group and future growth potential.
If, in response to such shortage, certain regulatory capital
instruments are converted into equity or the Group raises
additional capital through the issuance of share capital or
regulatory capital instruments, existing shareholders may
experience a dilution of their holdings. The success of such
issuances will also be dependent on favourable market
conditions and the Group may not be able to raise the amount of
capital required or on satisfactory terms. Separately, the Group
may address a shortage of capital by taking action to reduce
leverage and/or risk-weighted assets, by modifying the Group’s
legal entity structure or by asset or business disposals. Such
actions may affect the underlying profitability of the Group.
RBSG and the Group entities’ ability to meet their
obligations, including funding commitments, depends on
their ability to access sources of liquidity and funding. If the
Group or any Group entity is unable to raise funds through
deposits and/or in the capital markets, its liquidity position
could be adversely affected which may require
unencumbered assets to be liquidated or it may result in
higher funding costs which may impact the Group’s margins
and profitability.
Liquidity risk is the risk that a bank will be unable to meet its
obligations, including funding commitments, as they fall due. This
risk is inherent in banking operations and can be heightened by a
number of factors, including an over-reliance on a particular
source of wholesale funding (including, for example, short-term
and overnight funding), changes in credit ratings or market-wide
phenomena such as market dislocation and major disasters.
The Group’s funding may also be impacted at the Group entity
level as a result of ongoing restructuring efforts and strategy
planning, including in response to implementation of the UK ring-
fencing regime, planning around Brexit and the implementation of
the Alternative Remedies Package, amongst others. For
example, where the Group’s funding strategy depends on
intragroup funding arrangements between Group entities, as a
result of the implementation of the UK ring-fencing regime, such
arrangements will be limited and may no longer be permitted if
they are provided between RFB and entities outside the RFB
and, as a result, the cost of funding may increase for certain
Group entities, which will be required to manage their own
funding and liquidity strategy.
As a result of these and other restructuring changes that could
result in the Group’s need to manage funding and liquidity at an
individual entity level, the Group may be required to maintain
higher levels of funding and liquidity than would otherwise be the
case.
The Group relies on retail and wholesale deposits to meet a
considerable portion of its funding. The level of deposits may
fluctuate due to factors outside the Group’s control, such as a
loss of confidence (including in individual Group entities),
increasing competitive pressures for retail customer deposits or
the repatriation of deposits by foreign wholesale depositors,
which could result in a significant outflow of deposits within a
short period of time.
An inability to grow, or any material decrease in, the Group’s
deposits could, particularly if accompanied by one of the other
factors described above, have a material adverse impact on the
Group’s ability to satisfy its liquidity needs. Increases in the cost
of retail deposit funding may impact the Group’s margins and
profitability.
The market view of bank credit risk has changed radically as a
result of the financial crisis and banks perceived by the market to
be riskier have had to issue debt at significantly higher costs.
Although conditions have improved, there have been recent
periods where corporate and financial institution counterparties
have reduced their credit exposures to banks and other financial
institutions, limiting the availability of these sources of funding.
Rules currently proposed by the Financial Stability Board (‘FSB’)
and in the EU in relation to the implementation of total loss-
absorbing capacity (‘TLAC’) and MREL may also limit the ability
of certain large financial institutions to hold debt instruments
issued by other large financial institutions. The ability of the Bank
of England to resolve the Group in an orderly manner may also
increase investors’ perception of risk and hence affect the
availability and cost of funding for the Group. Any uncertainty
relating to the credit risk of financial institutions may lead to
reductions in levels of interbank lending or may restrict the
Group’s access to traditional sources of funding or increase the
costs or collateral requirements for accessing such funding.
The implementation of the UK ring-fencing regime may impact
the Group’s funding strategy and the cost of funding may
increase for certain Group entities which will be required to
manage their own funding and liquidity strategy, in particular
those entities outside the ring-fence which will no longer be able
to rely on retail deposit funding.
In addition, the Group is subject to certain regulatory
requirements with respect to liquidity coverage, including a
liquidity coverage ratio set by the PRA in the UK. This
requirement was phased in at 90% from 1 January 2017 and
increased to 100% in January 2018 (as required by the Capital
Requirements Regulation). The PRA may also impose additional
liquidity requirements to reflect risks not captured in the leverage
coverage ratio by way of Pillar 2 add-ons, which may increase
and/or decrease from time to time and require the Group to
obtain additional funding or diversify its sources of funding.
Current proposals by the FSB and the European Commission
also seek to introduce certain liquidity requirements for financial
institutions, including the introduction of a net stable funding ratio
(‘NSFR’).
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Additional information
Risk factors continued
Under the European Commission November 2016 proposals, the
NSFR would be calculated as the ratio of an institution’s available
stable funding relative to the required stable funding it needs over
a one-year horizon.
The NSFR would be expressed as a percentage and set at a
minimum level of 100%, which indicates that an institution holds
sufficient stable funding to meet its funding needs during a one-
year period under both normal and stressed conditions. If an
institution’s NSFR were to fall below the 100% level, the
institution would be required to take the measures laid down in
the CRD IV Regulation for a timely restoration to the minimum
level. Competent authorities would assess the reasons for non-
compliance with the NSFR requirement before deciding on any
potential supervisory measures. These proposals are currently
being considered and negotiated among the European
Commission, the European Parliament and the European Council
and, in light of Brexit, there is considerable uncertainty as to the
extent to which such rules will apply to the Group.
If the Group is unable to raise funds through deposits or in the
capital markets on acceptable terms or at all, its liquidity position
could be adversely affected and it might be unable to meet
deposit withdrawals on demand or at their contractual maturity, to
repay borrowings as they mature, to meet its obligations under
committed financing facilities, to comply with regulatory funding
requirements, to undertake certain capital and/or debt
management activities, or to fund new loans, investments and
businesses. The Group may need to liquidate unencumbered
assets to meet its liabilities, including disposals of assets not
previously identified for disposal to reduce its funding
commitments. In a time of reduced liquidity, the Group may be
unable to sell some of its assets, or may need to sell assets at
depressed prices, which in either case could have a material
adverse effect on the Group’s financial condition and results of
operations.
Failure by the Group to comply with regulatory capital,
funding, liquidity and leverage requirements may result in
intervention by its regulators and loss of investor
confidence, and may have a material adverse effect on its
results of operations, financial condition and reputation and
may result in distribution restrictions and adversely impact
existing shareholders.
The Group is subject to extensive regulatory supervision in
relation to the levels and quality of capital it is required to hold in
connection with its business, including as a result of the
transposition of the Basel Committee on Banking Supervision’s
regulatory capital framework (Basel III) in Europe by a Directive
and Regulation (collectively known as CRD IV).
In addition, the Group is currently identified as a global
systemically important bank (G-SIB) by FSB and is therefore
subject to more intensive oversight and supervision by its
regulators as well as additional capital requirements, although the
Group belongs to the last ‘bucket’ of the FSB G-SIB list and is
therefore subject to the lowest level of additional loss-absorbing
capacity requirements.
Under CRD IV, the Group is required to hold at all times a
minimum amount of regulatory capital calculated as a percentage
of risk-weighted assets (Pillar 1 requirement).
CRD IV also introduced a number of new capital buffers that are
in addition to the Pillar 1 and Pillar 2A requirements (as described
below) that must be met with CET1 capital. The combination of
the capital conservation buffer (which, subject to transitional
provisions, will be set at 2.5% from 2019), the countercyclical
capital buffer (of up to 2.5% which is currently set at 1.0%, with
binding effect from 28 November 2018 by the FPC for UK banks)
and the higher of (depending on the institution) the systemic risk
buffer, the global systemically important institutions buffer (G-SIB
Buffer) and the other systemically important institutions buffer, is
referred to as the ‘combined buffer requirement’. These rules
entered into force on 1 May 2014 for the countercyclical capital
buffer and on 1 January 2016 for the capital conservation buffer
and the G-SIB Buffer.
The G-SIB Buffer is currently set at 1.0% for the Group (from 1
January 2017), and is being phased in over the period to 1
January 2019. The systemic risk buffer will be applicable from 1
January 2019. The Bank of England’s Financial Policy Committee
(the FPC) was responsible for setting the framework for the
systemic risk buffer and the PRA adopted in December 2016 a
final statement of policy implementing the FPC’s framework. In
early 2019, the PRA is expected to determine which institutions
the systemic risk buffer should apply to, and if so, how large the
buffer should be up to a maximum of 3% of a firm’s risk-weighted
assets. The systemic risk buffer will apply to ring-fenced entities
only and not all entities within a banking group. The systemic risk
buffer is part of the UK framework for identifying and setting
higher capital buffers for domestic systemically important banks
(D-SIBs), which are groups that, upon distress or failure, could
have an important impact on their domestic financial systems.
In addition, national supervisory authorities may add extra capital
requirements (the Pillar 2A requirements) to cover risks that they
believe are not covered or insufficiently covered by Pillar 1
requirements. The Group’s current Pillar 2A requirement has
been set by the PRA at an equivalent of 4.0% of risk-weighted
assets.
The PRA has also introduced a firm-specific the PRA buffer,
which is a forward-looking requirement set annually and based
on various factors including firm-specific stress test results and is
to be met with CET1 capital (in addition to any CET1 capital used
to meet any Pillar 1 or Pillar 2A requirements). Where
appropriate, the PRA may require an increase in an institution’s
PRA buffer to reflect additional capital required to be held to
mitigate the risk of additional losses that could be incurred as a
result of risk management and governance weaknesses,
including with respect to the effectiveness of the internal stress
testing framework and control environment. UK banks are
required to meet the higher of the combined buffer requirement or
PRA buffer requirement. The FPC and PRA have expressed
concerns around potential systemic risk associated with recent
increases in UK consumer lending and the impact of consumer
credit losses on banks’ resilience in a stress scenario, which the
PRA has indicated that it will consider when setting capital
buffers for individual banks.
In addition to capital requirements and buffers, the regulatory
framework adopted under CRD IV, as transposed in the UK, sets
out minimum leverage ratio requirements for financial institutions.
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Risk factors continued
These include a minimum leverage requirement of 3.25% which
applies to major UK banks, as recalibrated in October 2017 in
accordance with the FPC’s recommendation to the PRA. In
addition, the UK leverage ratio framework provides for: (i) an
additional leverage ratio to be met by G-SIBs and ring-fenced
institutions to be calibrated at 35% of the relevant firm’s capital
G-SIB Buffer or systemic risk buffer and which is being phased in
from 2016 (currently set at 0.75% from 1 January 2018) and (ii) a
countercyclical leverage ratio buffer for all firms subject to the
minimum leverage ratio requirements which is calibrated at 35%
of a firm’s countercyclical capital buffer. Further changes may be
made to the current leverage ratio framework as a result of future
regulatory reforms, including FSB proposals and proposed
amendments to the CRD IV proposed by the European
Commission in November 2016.
Most of the capital requirements which apply or will apply to the
Group will need to be met in whole or in part with CET1 capital.
CET1 capital broadly comprises retained earnings and equity
instruments, including ordinary shares. As a result, the Group’s
ability meet applicable CET1 capital requirements is dependent
on organic generation of CET1 through sustained profitability
and/or the Group’s ability to issue ordinary shares, and there is
no guarantee that the Group may be able to generate CET1
capital through either of these alternatives.
The amount of regulatory capital required to meet the Group’s
regulatory capital requirements (and any additional management
buffer), is determined by reference to the amount of risk-weighted
assets held by the Group. The models and methodologies used
to calculate applicable risk-weightings are a combination of
individual models, subject to regulatory permissions, and more
standardised approaches. The rules are applicable to the
calculation of the Group’s risk-weighted assets are subject to
regulatory changes which may impact the levels of regulatory
capital required to be met by the Group.
On 7 December 2017, the Basel Committee on Banking
Supervision published revised standards intended to finalise the
Basel III post-crisis regulatory reforms. The revised standards
include the following elements: (i) a revised standardised
approach for credit risk, which will improve the robustness and
risk sensitivity of the existing approach; (ii) revisions to the
internal ratings-based approach for credit risk, where the use of
the most advanced internally modelled approaches for low-
default portfolios will be limited; (iii) revisions to the credit
valuation adjustment (CVA) framework, including the removal of
the internally modelled approach and the introduction of a revised
standardised approach; (iv) a revised standardised approach for
operational risk, which will replace the existing standardised
approaches and the advanced measurement approaches; (v)
revisions to the measurement of the leverage ratio and a
leverage ratio buffer for global systemically important banks (G-
SIBs), which will take the form of a Tier 1 capital buffer set at
50% of a G-SIB’s risk-weighted capital buffer; and (vi) an
aggregate output floor, which will ensure that banks' risk-
weighted assets (RWAs) generated by internal models are no
lower than 72.5% of RWAs as calculated by the Basel III
framework’s standardised approaches.
The revised Basel III standards will take effect from 1 January
2022 and will be phased in over five years. Although the revised
Basel III standards must be implemented through legislation in
the EU and UK, and precise estimates of their impact would be
premature at this time, the revised standards may result in higher
levels of risk-weighted assets and therefore higher levels of
capital, and in particular CET1 capital, required to be held by the
Group, under Pillar 1 requirements. Such requirements would be
separate from any further capital overlays required to be held as
part of the PRA’s determination of the Group’s Pillar 2A or PRA
buffer requirements with respect to such exposures.
In the UK, the PRA also set revised expectations to the
calculation of risk-weighted capital requirements in relation to
residential mortgage portfolios which firms are expected to meet
by the end of 2020. To this effect, firms should also submit
amended models for regulatory approval.
Although the above provides an overview of the capital and
leverage requirements currently applicable to the Group, such
requirements are subject to ongoing amendments and revisions,
including as a result of final rules and recommendations adopted
by the FSB or by European or UK regulators. In particular, on 23
November 2016, the European Commission published a
comprehensive package of reforms including proposed
amendments to CRD IV and the EU Bank Recovery and
Resolution Directive ‘BRRD’. Although such proposals are
currently being considered and discussed among the European
Commission, the European Parliament and the European Council
and their final form and the timetable for their implementation are
not known, such amendments may result in increased or more
stringent requirements applying to the Group or its subsidiaries.
This uncertainty is compounded by Brexit which may result in
further changes to the prudential and regulatory framework
applicable to the Group.
If the Group is unable to raise the requisite amount of regulatory
capital (including loss absorbing capital in the form of MREL), or
to otherwise meet regulatory capital and leverage requirements, it
may be exposed to increased regulatory supervision or
sanctions, loss of investor confidence, restrictions on distributions
and it may be required to reduce further the amount of its risk-
weighted assets or total assets and engage in the disposal of
core and other non-core businesses, which may not occur on a
timely basis or achieve prices which would otherwise be
attractive to the Group.
This may also result in write-down or the conversion into equity of
certain regulatory capital instruments issued by the Group or the
issue of additional equity by the Group, each of which could
result in the dilution of the Group’s existing shareholders. A
breach of the Group’s applicable capital or leverage requirements
may also trigger the application of the Group’s recovery plan to
remediate a deficient capital position.
Failure by the Group to comply with its capital requirements
or to maintain sufficient distributable reserves may result in
the application of restrictions on its ability to make
discretionary distributions, including the payment of
dividends to its ordinary shareholders and coupons on
certain capital instruments.
In accordance with the provisions of CRD IV, a minimum level of
capital adequacy is required to be met by the Group in order for it
to be entitled to make certain discretionary payments.
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Additional information
Risk factors continued
Pursuant to Article 141 (Restrictions on distribution) of the CRD
IV Directive, as transposed in the UK, institutions that fail to meet
the ‘combined buffer requirement’ will be subject to restricted
‘discretionary payments’ (which are defined broadly by CRD IV
as payments relating to CET1 instruments (dividends), variable
remuneration and coupon payments on additional Tier 1
instruments). The resulting restrictions are scaled according to
the extent of the breach of the ‘combined buffer requirement’ and
calculated as a percentage of the profits of the institution since
the last distribution of profits or ‘discretionary payment’ which
gives rise to a maximum distributable amount (MDA) (if any) that
the financial institution can distribute through discretionary
payments.
The EBA has clarified that the CET1 capital to be taken into
account for the MDA calculation should be limited to the amount
not used to meet the Pillar 1 and Pillar 2 own funds requirements
of the institution. In the event of a breach of the combined buffer
requirement, the Group will be required to calculate its MDA, and
as a consequence it may be necessary for the Group to reduce
or cease discretionary payments to the extent of the breach.
The ability of the Group to meet the combined buffer requirement
will be subject to the Group holding sufficient CET1 capital in
excess of its minimum Pillar 1 and Pillar 2 capital requirements.
In addition, the interaction of such restrictions on distributions
with the capital requirements and buffers applicable to the Group
remains uncertain in many respects while the relevant authorities
in the EU and the UK consult on and develop their proposals and
guidance on the application of the rules. In particular, the
proposals published by the European Commission in November
2016 contain certain proposed amendments to Article 141,
including to introduce a ‘stacking order’ in the calculation of the
maximum distributable amount and establish certain priorities in
the payments which could be made in the event the restrictions
apply (with payments relating to additional Tier 1 instruments
being required to be made before payments on CET1
instruments (dividends) or other discretionary payments). The
treatment of MDA breaches under the European Commission
proposals differ from the proposed consequences set out in the
final PRA rules and may result in uncertainty in the application of
these rules.
In addition to these rules and the requirement for PRA approval,
in order to make distributions (including dividend payments) in
the first place, RBSG is required to have sufficient distributable
reserves available. Furthermore, coupon payments due on the
additional Tier 1 instruments issued by RBSG must be cancelled
in the event that RBSG has insufficient ‘distributable items’ as
defined under CRD IV. Both distributable reserves and
distributable items are largely impacted by the Group’s ability to
generate and accumulate profits or conversely by material losses
(including losses resulting from conduct related-costs,
restructuring costs or impairments).
RBSG’s distributable reserves and distributable items are
sensitive to the accounting impact of factors including the
redemption of preference shares, restructuring costs and
impairment charges and the carrying value of its investments in
subsidiaries which are carried at the lower of cost and their
prevailing recoverable amount. Recoverable amounts depend on
discounted future cash flows which can be affected by
restructurings, including the restructuring required to implement
the UK ring-fencing regime, or unforeseen events.
The distributable reserves of RBSG also depend on the receipt of
income from subsidiaries, principally as dividends. The ability of
subsidiaries to pay dividends is subject to their performance and
applicable local laws and other restrictions, including their
respective regulatory requirements and distributable reserves.
Any of these factors, including restructuring costs, impairment
charges and a reduction in the carrying value of RBSG
subsidiaries or a shortage of dividends from them could limit
RBSG’s ability to maintain sufficient distributable reserves to be
able to pay coupons on certain capital instruments and dividends
to its ordinary shareholders.
The Group may be required to recognise further impairments in
the future if the outlook for its subsidiaries were to worsen. Whilst
this level of distributable profits does not impact upon RBSG’s
ability to pay coupons on existing securities, the Group
implemented a capital reorganisation in 2017 in order to increase
RBSG’s distributable reserves by approximately £30 billion,
providing greater flexibility for potential future distributions and
preference share redemptions (if any).
Failure by the Group to meet the combined buffer requirement or
retain sufficient distributable reserves or distributable items as a
result of reduced profitability or losses, or changes in regulation
or taxes adversely impacting distributable reserves or
distributable items, may therefore result in limitations on the
Group’s ability to make discretionary distributions which may
negatively impact the Group’s shareholders, holders of additional
Tier 1 instruments, staff receiving variable compensation (such
as bonuses) and other stakeholders and impact its market
valuation and investors’ and analysts’ perception of its financial
soundness.
The cost of implementing the Alternative Remedies Package
regarding the business previously described as Williams &
Glyn could be more onerous than anticipated and any failure
to comply with the terms of the Alternative Remedies
Package could result in the imposition of additional
measures or limitations on the Group’s operations.
On 18 September 2017, the Group received confirmation that an
alternative remedies package announced on 26 July 2017
(‘Alternative Remedies Package’), regarding the business
previously described as Williams & Glyn, had been formally
approved by the European Commission (‘EC’) in the form
proposed.
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Additional information
Risk factors continued
The Alternative Remedies Package replaced the existing
requirement to divest the business previously described as
Williams & Glyn by 31 December 2017. The Alternative
Remedies Package focuses on the following two remedies to
promote competition in the market for banking services to small
and medium-sized enterprises (‘SMEs’) in the UK: (i) a £425
million capability and innovation fund that will grant funding to a
range of eligible competitors in the UK banking and financial
technology sectors; and (ii) a £275 million incentivised switching
scheme which will provide funding for eligible bodies to help them
incentivise SME customers of the business previously described
as Williams & Glyn to switch their primary accounts and loans
from the Group paid in the form of ‘dowries’ to business current
accounts at the receiving bank. The Group has also agreed to set
aside up to a further £75 million in funding to cover certain costs
customers may incur as a result of switching under the
incentivised switching scheme. In addition, under the terms of the
Alternative Remedies Package, should the uptake within the
incentivised switching scheme not be sufficient, RBSG may be
required to make a further contribution, capped at £50 million.
An independent body (‘Independent Body’) is in the process of
being established to administer the Alternative Remedies
Package. However, the implementation of the Alternative
Remedies Package also entails additional costs for the Group,
including but not limited to the funding commitments and financial
incentives envisaged to be provided under the plan.
Implementation of the Alternative Remedies Package could also
divert resources from the Group’s operations and jeopardise the
delivery and implementation of other significant plans and
initiatives. In addition, under the terms of the Alternative
Remedies Package, the Independent Body can require the Group
to modify certain aspects of the Group’s execution of the
incentivised switching scheme, which could increase the cost of
implementation. Furthermore, should the uptake within the
incentivised switching scheme not be sufficient, the Independent
Body can extend the duration of the scheme by up to twelve
months and can compel the Group to extend the customer base
to which the scheme applies which may result in prolonged
periods of disruption to a wider portion of the Group’s business.
As a direct consequence of the incentivised switching scheme,
the Group will lose existing customers and deposits, which in turn
will have adverse impacts on the Group’s business and
associated revenues and margins. Furthermore, the capability
and innovation fund is intended to benefit eligible competitors and
negatively impact the Group’s competitive position. To support
the incentivised switching initiative, upon request by an eligible
bank, the Group has also agreed to grant those customers which
have switched to eligible banks under the incentivised switching
scheme access to its branch network for cash and cheque
handling services, which may result in reputational and financial
exposure for the Group and impact customer service quality for
RBS’s own customers with consequent competitive, financial and
reputational implications. The implementation of the incentivised
switching scheme is also dependent on the engagement of the
eligible banks with the incentivised switching scheme and the
application of the eligible banks to and approval by the
Independent Body. The incentivised transfer of SME customers
to third party banks places reliance on those third parties to
achieve satisfactory customer outcomes which could give rise to
reputational damage if these are not forthcoming.
A failure to comply with the terms of the Alternative Remedies
Package could result in the imposition of additional measures or
limitations on the Group’s operations, additional supervision by
the Group’s regulators, and loss of investor or customer
confidence, any of which could have a material adverse impact
on the Group. Delays in execution may also impact the Group’s
ability to carry out its transformation programme, including the
implementation of cost saving initiatives and mandatory
regulatory requirements. Such risks will increase in line with any
delays.
As a result of extensive reforms being implemented relating
to the resolution of financial institutions within the UK, the
EU and globally, material additional requirements will arise
to ensure that financial institutions maintain sufficient loss-
absorbing capacity. Such changes to the funding and
regulatory capital framework may require the Group to meet
higher capital levels than the Group anticipated within its
strategic plans and affect the Group’s funding costs.
In addition to the prudential requirements applicable under CRD
IV, the BRRD introduces, among other things, a requirement for
banks to maintain at all times a sufficient aggregate amount of
own funds and ‘eligible liabilities’ (that is, liabilities that can
absorb loss and assist in recapitalising a firm in accordance with
a predetermined resolution strategy), known as the minimum
requirements for MREL, designed to ensure that the resolution of
a financial institution may be carried out, without public funds
being exposed to the risk of loss and in a way which ensures the
continuity of critical economic functions, maintains financial
stability and protects depositors.
In November 2015, the FSB published a final term sheet setting
out its TLAC standards for G-SIBs. The EBA was mandated to
assess the implementation of MREL in the EU and the
consistency of MREL with the final TLAC standards and
published an interim report setting out the conclusions of its
review in July 2016 and its final report in December 2016. On the
basis of the EBA’s work and its own assessment of CRD IV and
the BRRD, the European Commission published in November
2016 a comprehensive set of proposals, seeking to make certain
amendments to the existing MREL framework. In particular, the
proposals make a number of amendments to the MREL
requirements under the BRRD, in part in order to transpose the
FSB’s final TLAC term sheet.
The UK government is required to transpose the BRRD’s
provisions relating to MREL into law through further secondary
legislation. In November 2016, the Bank of England published its
final rules setting out its approach to setting MREL for UK banks.
These final rules (which were adopted on the basis of the current
MREL framework in force in the EU) do not take into account the
European Commission’s most recent proposals with respect to
MREL and differ in a number of respects. In addition, rules
relating to a number of specific issues under the framework
remain to be implemented. These include internal MREL
requirements, in respect of which the FSB published guiding
principles in July 2017. The Bank of England published a
consultation paper in October 2017 but has not yet published a
final statement of policy on its approach to setting internal MREL.
The Bank of England has also stated that it expects to set out
policy proposals for MREL cross-holdings and disclosure
requirements once there is greater clarity as to the timing and
final content of related EU proposals.
387
Additional information
Risk factors continued
The Bank of England is responsible for setting the MREL
requirements for each UK bank, building society and certain
investment firms in consultation with the PRA and the FCA, and
such requirement will be set depending on the resolution strategy
of the financial institution. In its final rules, the Bank of England
has set out a staggered compliance timeline for UK banks,
including with respect to those requirements applicable to G-SIBs
(including the Group).
Under the revised timeline, G-SIBs will be expected to (i) meet
the minimum requirements set out in the FSB’s TLAC term sheet
from 1 January 2019 (i.e. the higher of 16% of risk-weighted
assets or 6% of leverage exposures), and (ii) meet the full MREL
requirements to be phased in from 1 January 2020, with the full
requirements applicable from 2 January 2022 (i.e. for G-SIBs two
times Pillar 1 plus Pillar 2A or the higher of two times the
applicable leverage ratio requirement or 6.75% of leverage
exposures). MREL requirements are expected to be set on
consolidated, sub-consolidated and individual bases, and are in
addition to regulatory capital requirements (so that there can be
no double counting of instruments qualifying for capital
requirements).
For institutions, including the Group, for which bail-in is the
required resolution strategy and which are structured to permit
single point of entry resolution due to their size and systemic
importance, the Bank of England has indicated that in order to
qualify as MREL, eligible liabilities must be issued by the
resolution entity (i.e. the holding company for the Group) and be
structurally subordinated to operating and excluded liabilities
(which include insured deposits, short-term debt, derivatives,
structured notes and tax liabilities). Under the single point of
entry (SPE) resolution model that applies to the Group, losses
that crystallise in the operating companies are passed up the
chain to RBSG through the write down of the holding company’s
investments in the equity and debt of its operating companies.
The probability of the external MREL investors being bailed-in will
depend on the Group’s overall going-concern capital resources,
the extent of any losses in the operating companies, and the
extent to which those losses are passed up to the investing entity
(recognising that some operating company liabilities, including
obligations to pension schemes, are protected from bail-in).
The final rules set out a number of liabilities which cannot qualify
as MREL and are therefore ‘excluded liabilities’. As a result,
senior unsecured issuances by RBSG will need to be
subordinated to the excluded liabilities described above. The
proceeds from such issuances will be transferred to material
operating subsidiaries (as identified using criteria set in the Bank
of England’s final rules on internal MREL) in the form of capital or
another form of subordinated claim.
In this way, MREL resources will be ‘structurally subordinated’ to
senior liabilities of operating companies, allowing losses from
operating companies to be transferred to the holding company
and - if necessary - for resolution to occur at the holding company
level, without placing the operating companies into a resolution
process.
The TLAC standard requires that the total amount of excluded
liabilities on RBSG’s balance sheet does not exceed 5% of its
external TLAC (i.e. the eligible liabilities RBSG has issued to
investors which meet the TLAC requirements) and the Bank of
England has adopted this criterion in its final rules.
If the Group were to fail to comply with this ‘clean balance sheet’
requirement, it could disqualify otherwise eligible liabilities from
counting towards MREL and result in the Group breaching its
MREL requirements. The purpose of internal MREL requirements
is to provide for loss-absorbing capacity to be appropriately
distributed within a banking group and to provide the mechanism
by which losses can be transferred from operating companies to
the resolution entity.
The Bank of England proposes to set internal MREL
requirements above capital requirements for each ‘material
subsidiary’ of a banking group. The Bank of England will formally
determine which entities within the group represent material
subsidiaries, with reference to indicative criteria including such
subsidiary’s contribution to the Group’s risk-weighted assets and
operating income. It will also set the internal MREL requirement,
calibrated to be between 75% and 90% of the external MREL
requirement that would otherwise apply to a material subsidiary
were it a resolution entity in its own right. Such requirements
must be met with internal MREL resources which are
subordinated to the operating liabilities of the material subsidiary
issuing them and must be capable of being written down or
converted to equity via a contractual trigger. These liabilities,
issued to other group entities (typically the issuing entity’s
immediate parent), must be priced on an arm’s-length basis. The
impact of these requirements on the Group, the cost of servicing
these liabilities and the implications for the Group’s funding plans
cannot be assessed with certainty until the Bank of England’s
proposed internal MREL policy is finalised and final rules are
published.
Compliance with these and other future changes to capital
adequacy and loss-absorbency requirements in the EU and the
UK by the relevant deadline will require the Group to restructure
its balance sheet and issue additional capital and other
instruments compliant with the rules which may be costly whilst
certain existing Tier 1 and Tier 2 securities and other senior,
unsecured instruments issued by the Group will cease to count
towards the Group’s loss-absorbing capacity for the purposes of
meeting MREL/TLAC requirements. The Group’s resolution
authority can impose an MREL requirement over and above the
regulatory minima and potentially higher than the Group’s peers,
if it has concerns regarding the resolvability of the Group. As a
result, RBSG may be required to issue additional loss-absorbing
instruments in the form of CET1 capital or subordinated or senior
unsecured debt instruments or may result in an increased risk of
a breach of the Group’s combined buffer requirement, triggering
the restrictions relating to the MDA described above. There
remain some areas of uncertainty regarding the implementation
of outstanding regulatory requirements within the UK, the EU and
globally, and the final requirements to which the Group will be
subject, and the Group may therefore need to revise its capital
plan accordingly.
388
Additional information
Risk factors continued
The Group’s businesses and performance can be negatively
affected by actual or perceived economic conditions in the
UK and globally and other global risks, including risks
arising out of geopolitical events, and political developments
and the Group will be increasingly impacted by
developments in the UK as its operations become
increasingly concentrated in the UK.
Actual or perceived difficult global economic conditions can
create challenging economic and market conditions and a difficult
operating environment for the Group’s businesses and its
customers and counterparties.
As part of its revised strategy, the Group has been refocusing its
business in the UK, the ROI and Western Europe and,
accordingly is more exposed to the economic conditions of the
British economy as well as the Eurozone. In particular, the longer
term effects of Brexit are difficult to predict and are subject to
wider global macro-economic trends, but may include periods of
financial market volatility and slower economic growth, in the UK
in particular, but also in the ROI, Europe and the global economy,
at least in the short to medium term. See ‘The Group is subject to
political risks, including economic, regulatory and political
uncertainty arising from the referendum on the UK’s membership
of the European Union which could adversely impact the Group’s
business, results of operations, financial condition and
prospects.’ and ‘The Group has been, and will remain, in a period
of major business transformation and structural change through
to at least 2019 as it implements its own transformation
programme and seeks to comply with UK ring-fencing and
recovery and resolution requirements as well as the Alternative
Remedies Package. Additional structural changes to the Group’s
operations will also be required as a result of Brexit. These
various transformation and restructuring activities are required to
occur concurrently, which carries significant execution and
operational risks, and the Group may not be a viable, competitive
and profitable bank as a result.’
The outlook for the global economy over the medium-term
remains uncertain due to a number of factors including: political
instability, an extended period of low inflation and low interest
rates, although monetary policy has begun the process of
normalisation in some countries. The normalisation of monetary
policy in the USA may affect some emerging market economies
which may raise their domestic interest rates in order to avoid
capital outflows, with negative effects on growth and trade. Such
conditions could be worsened by a number of factors including
political uncertainty or macro-economic deterioration in the
Eurozone or the US, increased instability in the global financial
system and concerns relating to further financial shocks or
contagion, volatility in the value of the pound sterling, new or
extended economic sanctions, volatility in commodity prices or
concerns regarding sovereign debt. In particular, concerns
relating to emerging markets, including lower economic growth or
recession, concerns relating to the Chinese economy and
financial markets, reduced global trade in emerging market
economies to which the Group is exposed or increased financing
needs as existing debt matures, may give rise to further instability
and financial market volatility.
Any of the above developments could impact the Group directly
by resulting in credit losses and indirectly by further impacting
global economic growth and financial markets.
Developments relating to current economic conditions, including
those discussed above, could have a material adverse effect on
the Group’s business, financial condition, results of operations
and prospects. Any such developments may also adversely
impact the financial position of the Group’s pension schemes,
which may result in the Group being required to make additional
contributions. See ‘The Group is subject to pension risks and will
be required to make additional contributions as a result of the
restructuring of its pension schemes in relation to the
implementation of the UK ring-fencing regime. In addition, the
Group expects to make additional contributions to cover pension
funding deficits if there are degraded economic conditions of if
there is any devaluation in the asset portfolio held by the pension
trustee.’
In addition, the Group is exposed to risks arising out of
geopolitical events or political developments, such as trade
barriers, exchange controls, sanctions and other measures taken
by sovereign governments that can hinder economic or financial
activity levels. Furthermore, unfavourable political, military or
diplomatic events, including secession movements or the exit of
other Member States from the EU, armed conflict, pandemics,
state and privately sponsored cyber and terrorist acts or threats,
and the responses to them by governments, could also adversely
affect economic activity and have an adverse effect upon the
Group’s business, financial condition and results of operations.
The financial performance of the Group has been, and may
continue to be, materially affected by customer and
counterparty credit quality and deterioration in credit quality
could arise due to prevailing economic and market
conditions and legal and regulatory developments.
The Group has exposure to many different industries, customers
and counterparties, and risks arising from actual or perceived
changes in credit quality and the recoverability of monies due
from borrowers and other counterparties are inherent in a wide
range of the Group’s businesses.
In particular, the Group has significant exposure to certain
individual customers and other counterparties in weaker business
sectors and geographic markets and also has concentrated
country exposure in the UK, the US and across the rest of
Europe principally Germany, the Netherlands, Ireland and
France.
At 31 December 2017, current exposure in the UK was £363.0
billion, in the US was £18.4 billion and in Western Europe
(excluding the UK) was £60.0 billion); and within certain
business sectors, namely personal and financial institutions (at
31 December 2016, personal lending amounted to £176.6 billion,
and lending to banks and other financial institutions was £37.8
billion.
Provisions held on loans in default have decreased in recent
years due to asset sales and the portfolio run-down in Ulster
Bank Ireland DAC and the NatWest Markets franchise’s legacy
portfolios. If the risk profile of these loans were to increase,
including as a result of a degradation of economic or market
conditions, this could result in an increase in the cost of risk and
the Group may be required to make additional provisions, which
in turn would reduce earnings and impact the Group’s
profitability.
389
Additional information
Risk factors continued
The Group’s lending strategy or processes may also fail to
identify or anticipate weaknesses or risks in a particular sector,
market or borrower category, which may result in an increase in
default rates, which may, in turn, impact the Group’s profitability.
Any adverse impact on the credit quality of the Group’s
customers and other counterparties, coupled with a decline in
collateral values, could lead to a reduction in recoverability and
value of the Group’s assets and higher levels of impairment
allowances, which could have an adverse effect on the Group’s
operations, financial position or prospects.
The credit quality of the Group’s borrowers and its other
counterparties is impacted by prevailing economic and market
conditions and by the legal and regulatory landscape in their
respective markets.
Credit quality has improved in certain of the Group’s core
markets, in particular the UK and Ireland, as these economies
have improved. However, a further deterioration in economic and
market conditions or changes to legal or regulatory landscapes
could worsen borrower and counterparty credit quality and also
impact the Group’s ability to enforce contractual security rights. In
particular, developments relating to Brexit may adversely impact
credit quality in the UK.
In addition, as the Group continues to implement its strategy and
further reduces its scale and global footprint, the Group’s relative
exposure to the UK and certain sectors and asset classes in the
UK will continue to increase as its business becomes more
concentrated in the UK as a result of the reduction in the number
of jurisdictions outside of the UK in which it operates. The level of
UK household indebtedness remains high and the ability of some
households to service their debts could be challenged by a period
of higher unemployment. Highly indebted households are
particularly vulnerable to shocks, such as falls in incomes or
increases in interest rates, which threaten their ability to service
their debts.
In particular, in the UK, the Group is at risk from downturns in the
UK economy and volatility in property prices in both the
residential and commercial sectors. With UK home loans
representing the most significant portion of the Group’s total
loans and advances to the retail sector, the Group has a large
exposure to adverse developments in the UK residential property
sector. In the UK commercial real estate market, activity has
improved against 2016 but may be short-lived given continued
political uncertainty and progress of negotiations relating to the
form and timing of Brexit. There is a risk of further adjustment
given the reliance of the UK commercial real estate market in
recent years on inflows of foreign capital and, in some segments,
stretched property valuations. As a result, the continued house
price weakness, particularly in London and the South East of the
UK, would be likely to lead to higher impairment and negative
capital impact as loss given default rate increases. In addition,
reduced affordability of residential and commercial property in the
UK, for example, as a result of higher interest rates, inflation or
increased unemployment, could also lead to higher impairments
on loans held by the Group being recognised.
The Group also remains exposed to certain counterparties
operating in certain industries which have been under pressure in
recent years and any further deterioration in the outlook the credit
quality of these counterparties may require the Group to make
additional provisions, which in turn would reduce earnings and
impact the Group’s profitability.
In addition, the Group’s credit risk is exacerbated when the
collateral it holds cannot be realised as a result of market
conditions or regulatory intervention or is liquidated at prices not
sufficient to recover the full amount of the loan or derivative
exposure that is due to the Group, which is most likely to occur
during periods of illiquidity and depressed asset valuations, such
as those experienced in recent years.
This has particularly been the case with respect to large parts of
the Group’s commercial real estate portfolio. Any such
deteriorations in the Group’s recoveries on defaulting loans could
have an adverse effect on the Group’s results of operations and
financial condition.
Concerns about, or a default by, one financial institution could
lead to significant liquidity problems and losses or defaults by
other financial institutions, as the commercial and financial
soundness of many financial institutions may be closely related
as a result of credit, trading, clearing and other relationships.
Even the perceived lack of creditworthiness of, or questions
about, a counterparty may lead to market-wide liquidity problems
and losses for, or defaults by, the Group. This systemic risk may
also adversely affect financial intermediaries, such as clearing
agencies, clearing houses, banks, securities firms and
exchanges with which the Group interacts on a daily basis.
The effectiveness of recent prudential reforms designed to
contain systemic risk in the EU and the UK is yet to be tested.
Counterparty risk within the financial system or failures of the
Group’s financial counterparties could have a material adverse
effect on the Group’s access to liquidity or could result in losses
which could have a material adverse effect on the Group’s
financial condition, results of operations and prospects.
The trends and risks affecting borrower and counterparty credit
quality have caused, and in the future may cause, the Group to
experience further and accelerated impairment charges,
increased repurchase demands, higher costs, additional write-
downs and losses for the Group and an inability to engage in
routine funding transactions.
The Group’s borrowing costs, its access to the debt capital
markets and its liquidity depend significantly on its credit
ratings and, to a lesser extent, on the UK sovereign ratings.
The credit ratings of RBSG, RBS plc and other Group members
directly affect the cost of funding and capital instruments issued
by the Group, as well as secondary market liquidity in those
instruments. The implementation of ring-fencing is expected to
change the funding strategy of the Group as a result of the RFB
and the entities outside of the RFB raising debt capital directly. A
number of UK and other European financial institutions, including
RBSG, RBS plc and other Group entities, have been downgraded
multiple times in recent years in connection with rating
methodology changes and credit rating agencies’ revised outlook
relating to regulatory developments, macroeconomic trends and
a financial institution’s capital position and financial prospects.
390
Additional information
Risk factors continued
The senior unsecured long-term and short-term credit ratings of
RBSG and RBS plc are investment grade by Moody’s, S&P and
Fitch. The outlook for RBSG is currently stable for S&P, Fitch and
Moody’s and the outlook for RBS plc is currently stable for S&P
and Fitch and under review for downgrade for Moody’s. This
outlook is consistent with previous statements made by Moody’s
that the implementation of the ring-fencing regime is likely to lead
to downgrades in the ratings of RBS plc.
Rating agencies regularly review the RBSG and Group entity
credit ratings and their ratings of long-term debt are based on a
number of factors, including the Group’s financial strength as well
as factors not within the Group’s control, such as political
developments and conditions affecting the financial services
industry generally.
In particular, the rating agencies may further review the RBSG
and Group entity ratings as a result of the implementation of the
UK ring-fencing regime, pension and litigation/regulatory
investigation risk, including potential fines relating to
investigations relating to legacy conduct issues, and other
macroeconomic and political developments, including in light of
the outcome of the negotiations relating to the form and timing of
the UK’s exit from the EU.
A challenging macroeconomic environment, a delayed return to
satisfactory profitability and greater market uncertainty could
negatively impact the Group’s credit ratings and potentially lead
to ratings downgrades which could adversely impact the Group’s
ability and cost of funding. The Group’s ability to access capital
markets on acceptable terms and hence its ability to raise the
amount of capital and funding required to meet its regulatory
requirements and targets, including those relating to loss-
absorbing instruments to be issued by the Group, could be
affected. See ‘Implementation of the ring-fencing regime in the
UK which began in 2015 and must be completed before 1
January 2019 will result in material structural changes to the
Group’s business. The steps required to implement the UK ring-
fencing regime are complex and entail significant costs and
operational, legal and execution risks, which risks may be
exacerbated by the Group’s other ongoing restructuring efforts.’
Any reductions in the long-term or short-term credit ratings of
RBSG or of certain of its subsidiaries (particularly RBS plc),
including downgrades below investment grade, could adversely
affect the Group’s issuance capacity in the financial markets,
increase its funding and borrowing costs, require the Group to
replace funding lost due to the downgrade, which may include the
loss of customer deposits and may limit the Group’s access to
capital and money markets and trigger additional collateral or
other requirements in derivatives contracts and other secured
funding arrangements or the need to amend such arrangements,
limit the range of counterparties willing to enter into transactions
with the Group and its subsidiaries and adversely affect its
competitive position, all of which could have a material adverse
impact on the Group’s earnings, cash flow and financial
condition.
As discussed above, the success of the implementation of the UK
ring-fencing regime and the restructuring of the Group’s NatWest
Markets franchise, is in part dependent upon the relevant banking
entities obtaining a sustainable credit rating and being able to
satisfy their funding needs.
A failure to obtain such a rating, or any subsequent downgrades
may threaten the ability of the NatWest Markets franchise or
other entities outside of the RFB to satisfy their funding needs
and to meet prudential capital requirements. At 31 December
2017, a simultaneous one-notch long-term and associated short-
term downgrade in the credit ratings of RBSG and RBS plc by the
three main ratings agencies would have required the Group to
post estimated additional collateral of £1.4 billion, without taking
account of mitigating action by management. Individual credit
ratings of RBSG, RBS plc, RBS N.V., RBS International, RBS
Securities Inc., National Westminster Bank Plc, Ulster Bank Ltd,
Ulster Bank Ireland DAC and Adam & Company PLC are also
important to the Group when competing in certain markets such
as corporate deposits and over-the-counter derivatives.
The major credit rating agencies downgraded and changed their
outlook to negative on the UK’s sovereign credit rating in June
2016 and September 2017 following the UK’s decision to leave
the EU. Any further downgrade in the UK Government’s credit
ratings could adversely affect the credit ratings of Group entities
and may result in the effects noted above. Further political
developments, including in relation to Brexit or the outcome of
any further Scottish referendum could negatively impact the
credit ratings of the UK Government and result in a downgrade of
the credit ratings of RBSG and Group entities.
The Group’s businesses are exposed to the effect of
movements in currency rates, which could have a material
adverse effect on the results of operations, financial
condition or prospects of the Group.
As part of its strategy, the Group has revised its focus to become
a UK-focused domestic bank. However, 6.5% of its revenues are
derived in foreign currencies. The Group’s foreign exchange
exposure arises from structural foreign exchange risk, including
capital deployed in the Group’s foreign subsidiaries, branches
and joint arrangements, and non-trading foreign exchange risk,
including customer transactions and profits and losses that are in
a currency other than the functional currency of the transacting
entity. The Group also relies on MREL issuances in foreign
currency. The Group maintains policies and procedures to ensure
the impact of exposures to fluctuations in currency rates are
minimised. Nevertheless, changes in currency rates, particularly
in the sterling-US dollar and euro-sterling exchange rates, affect
the value of assets, liabilities, (including the total amount of
MREL eligible instruments), income and expenses denominated
in foreign currencies and the reported earnings of the Group’s
non-UK subsidiaries and may affect the Group’s reported
consolidated financial condition or its income from foreign
exchange dealing and may also require incremental MREL to be
issued.
Changes in foreign exchange rates may result from the decisions
of the Bank of England, ECB, the US Federal Reserve and from
political or global market events outside the Group’s control and
lead to sharp and sudden variations in foreign exchange rates,
such as those seen in the sterling/US dollar exchange rates since
the occurrence of the EU Referendum. Throughout 2017,
ongoing UK negotiations to exit the EU, amongst other factors,
resulted in continued volatility in the sterling exchange rate
relative to other major currencies. Continued or increasing
volatility in currency rates can materially affect the Group’s
results of operations, financial condition or prospects.
391
Additional information
Risk factors continued
Continued low interest rates have significantly affected and
will continue to affect the Group’s business and results of
operations. A continued period of low interest rates, and
yield curves and spreads may affect net interest income, the
effect of which may be heightened during periods of liquidity
stress.
Interest rate and foreign exchange risks, discussed below, are
significant for the Group. Monetary policy has been highly
accommodative in recent years, including as a result of certain
policies implemented by the Bank of England and HM Treasury
such as the Term Funding Scheme, which have helped to
support demand at a time of very pronounced fiscal tightening
and balance sheet repair. In the UK, the Bank of England
lowered interest rates to 0.25% in August 2016 and raised them
to 0.5% in November 2017.
However, there remains considerable uncertainty as to whether
or when the Bank of England and other central banks will further
increase interest rates. While the ECB has been conducting a
quantitative easing programme since January 2015 designed to
improve confidence in the Eurozone and encourage more private
bank lending, there remains considerable uncertainty as to
whether such measures have been or will be sufficient or
successful and the extension of this programme until the end of
September 2018 (or beyond) may put additional pressure on
margins. Continued sustained low or negative interest rates or
any divergences in monetary policy approach between the Bank
of England and other major central banks could put further
pressure on the Group’s interest margins and adversely affect the
Group’s profitability and prospects.
A continued period of low interest rates and yield curves and
spreads may affect the interest rate margin realised between
lending and borrowing costs, the effect of which may be
heightened during periods of liquidity stress.
Conversely while increases in interest rates may support Group
income, sharp increases in interest rates could lead to generally
weaker than expected growth, or even contracting GDP, reduced
business confidence, higher levels of unemployment or
underemployment, adverse changes to levels of inflation,
potentially higher interest rates and falling property prices in the
markets in which the Group operates. In turn, this could cause
stress in the loan portfolio of the Group, particularly in relation to
non-investment grade lending or real estate loans and
consequently to an increase in delinquency rates and default
rates among customers, leading to the possibility of the Group
incurring higher impairment charges. Similar risks result from the
exceptionally low levels of inflation in developed economies,
which in Europe particularly could deteriorate into sustained
deflation if policy measures prove ineffective. Reduced monetary
stimulus and the actions and commercial soundness of other
financial institutions have the potential to impact market liquidity.
The Group’s earnings and financial condition have been, and
its future earnings and financial condition may continue to
be, materially affected by depressed asset valuations
resulting from poor market conditions.
The Group’s businesses and performance are affected by
financial market conditions. The performance and volatility of
financial markets affect bond and equity prices and have caused,
and may in the future cause, changes in the value of the Group’s
investment and trading portfolios.
Financial markets have recently experienced and may in the near
term experience significant volatility, including as a result of
concerns about Brexit, political and financial developments in the
US and in Europe, including as a result of general elections,
geopolitical developments and developments relating to trade
agreements volatility and instability in the Chinese and global
stock markets, expectations relating to or actions taken by central
banks with respect to monetary policy, and weakening
fundamentals of the Chinese economy, resulting in further short-
term changes in the valuation of certain of the Group’s assets.
Uncertainty about potential fines for past misconduct and
concerns about the longer-term viability of business models have
also weighed heavily on the valuations of some financial
institutions in Europe and in the UK, including the Group.
Any further deterioration in economic and financial market
conditions or weak economic growth could require the Group to
recognise further significant write-downs and realise increased
impairment charges or goodwill impairments, all of which may
have a material adverse effect on its financial condition, results of
operations and capital ratios. As part of its transformation
programme, the Group is executing the run-down or disposal of a
number of businesses, assets and portfolios.
Moreover, market volatility and illiquidity (and the assumptions,
judgements and estimates in relation to such matters that may
change over time and may ultimately not turn out to be accurate)
make it difficult to value certain of the Group’s exposures.
Valuations in future periods reflecting, among other things, the
then-prevailing market conditions and changes in the credit
ratings of certain of the Group’s assets may result in significant
changes in the fair values of the Group’s exposures, such as
credit market exposures, and the value ultimately realised by the
Group may be materially different from the current or estimated
fair value. As part of its ongoing derivatives operations, the Group
also faces significant basis, volatility and correlation risks, the
occurrence of which are also impacted by the factors noted
above.
In addition, for accounting purposes, the Group carries some of
its issued debt, such as debt securities, at the current market
price on its balance sheet. Factors affecting the current market
price for such debt, such as the credit spreads of the Group, may
result in a change to the fair value of such debt, which is
recognised in the income statement as a profit or loss.
The Group’s businesses are subject to substantial
regulation and oversight. Significant regulatory
developments and increased scrutiny by the Group’s key
regulators has had and is likely to continue to increase
compliance and conduct risks and could have a material
adverse effect on how the Group conducts its business and
on its results of operations and financial condition.
The Group is subject to extensive laws, regulations, corporate
governance requirements, administrative actions and policies in
each jurisdiction in which it operates. Many of these have been
introduced or amended recently and are subject to further
material changes.
392
Additional information
Risk factors continued
Among others, the implementation and strengthening of the
prudential and recovery and resolution framework applicable to
financial institutions in the UK, the EU and the US, and future
amendments to such rules, are considerably affecting the
regulatory landscape in which the Group operates and will
operate in the future, including as a result of the adoption of rules
relating to the UK ring-fencing regime, severe restrictions on
proprietary trading, CRD IV and the BRRD and certain other
measures. Increased regulatory focus in certain areas, including
conduct, consumer protection regimes, anti-money laundering,
anti-tax evasion, payment systems, and antiterrorism laws and
regulations, have resulted in the Group facing greater regulation
and scrutiny in the UK, the US and other countries in which it
operates.
Recent regulatory changes, proposed or future developments
and heightened levels of public and regulatory scrutiny in the UK,
Europe and the US have resulted in increased capital, funding
and liquidity requirements, changes in the competitive landscape,
changes in other regulatory requirements and increased
operating costs, and have impacted, and will continue to impact,
product offerings and business models.
Such changes may also result in an increased number of
regulatory investigations and proceedings and have increased
the risks relating to the Group’s ability to comply with the
applicable body of rules and regulations in the manner and within
the time frames required.
Such risks are currently exacerbated by Brexit and the
unprecedented degree of uncertainty as to the respective legal
and regulatory frameworks in which the Group and its
subsidiaries will operate when the UK is no longer a member of
the EU. For example, current proposed changes to the European
prudential regulatory framework for banks and investment banks
may result in additional prudential or structural requirements
being imposed on financial institutions based outside the EU
wishing to provide financial services within the EU (which may
apply to the Group once the UK has formally exited the EU). See
‘The Group has been, and will remain, in a period of major
business transformation and structural change through to at least
2019 as it implements its own transformation programme and
seeks to comply with UK ring-fencing and recovery and resolution
requirements as well as the Alternative Remedies Package.
Additional structural changes to the Group’s operations will also
be required as a result of Brexit. These various transformation
and restructuring activities are required to occur concurrently,
which carries significant execution and operational risks, and the
Group may not be a viable, competitive and profitable bank as a
result.’. In addition, the Group and its counterparties may no
longer be able to rely on the European passporting framework for
financial services and could be required to apply for authorisation
in multiple European jurisdictions, the costs, timing and viability of
which is uncertain.
Any of these developments (including failures to comply with new
rules and regulations) could have a significant impact on how the
Group conducts its business, its authorisations and licenses, the
products and services it offers, its reputation and the value of its
assets, the Group’s operations or legal entity structure, including
attendant restructuring costs and consequently have a material
adverse effect on its business, funding costs, results of
operations, financial condition and future prospects.
Areas in which, and examples of where, governmental policies,
regulatory and accounting changes and increased public and
regulatory scrutiny could have an adverse impact (some of which
could be material) on the Group include, but are not limited to,
those set out above as well as the following:
amendments to the framework or requirements relating to
the quality and quantity of regulatory capital to be held by
the Group as well as liquidity and leverage requirements,
either on a solo, consolidated or subgroup level (and taking
into account the Group’s new legal structure following the
implementation of the UK ring-fencing regime), including
amendments to the rules relating to the calculation of risk-
weighted assets and reliance on internal models and credit
ratings as well as rules affecting the eligibility of deferred tax
assets;
the design and implementation of national or supranational
mandated recovery, resolution or insolvency regimes or the
implementation of additional or conflicting loss-absorption
requirements, including those mandated under UK rules,
BRRD, MREL or by the FSB’s recommendations on TLAC;
new or amended regulations or taxes that reduce profits
attributable to shareholders which may diminish, or restrict,
the accumulation of the distributable reserves or
distributable items necessary to make distributions or
coupon payments or limit the circumstances in which such
distributions may be made or the extent thereof;
the monetary, fiscal, interest rate and other policies of
central banks and other governmental or regulatory bodies;
further investigations, proceedings or fines either against the
Group in isolation or together with other large financial
institutions with respect to market conduct wrongdoing;
the imposition of government-imposed requirements and/or
related fines and sanctions with respect to lending to the UK
SME market and larger commercial and corporate entities;
increased regulatory scrutiny with respect to mortgage
lending, including through the implementation of the FCA’s
UK mortgages market study and other initiatives led by the
Bank of England or European regulators;
concerns expressed by the FPC and PRA around potential
systemic risk associated with recent increases in UK
consumer lending and the impact of consumer credit losses
on banks’ resilience in a stress scenario, which the PRA has
indicated that it will consider when setting capital buffers for
individual banks;
additional rules and regulatory initiatives and review relating
to customer protection, including the FCA’s Treating
Customers Fairly regime and increased focus by regulators
on how institutions conduct business, particularly with
regard to the delivery of fair outcomes for customers and
orderly/transparent markets;
the imposition of additional restrictions on the Group’s ability
to compensate its senior management and other employees
and increased responsibility and liability rules applicable to
senior and key employees;
rules and regulations relating to, and enforcement of, anti-
corruption, anti-bribery, anti-money laundering, anti-
terrorism, sanctions, anti-tax evasion or other similar
regimes;
investigations into facilitation of tax evasion or avoidance or
the creation of new civil or criminal offences relating thereto;
rules relating to foreign ownership, expropriation,
nationalisation and confiscation of assets;
393
Additional information
Risk factors continued
changes to financial reporting standards (including
accounting standards or guidance) and guidance or the
timing of their implementation;
changes to risk aggregation and reporting standards;
changes to corporate governance requirements, senior
manager responsibility, corporate structures and conduct of
business rules;
competition reviews and investigations relating to the retail
banking sector in the UK, including with respect to SME
banking and PCAs;
financial market infrastructure reforms establishing new
rules applying to investment services, short selling, market
abuse, derivatives markets and investment funds, including
the European Market Infrastructure Regulation and the
Markets in Financial Instruments Directive and Regulation in
the EU and the Dodd Frank Wall Street Reform Consumer
Protection Act of 2010 in the US;
increased regulatory scrutiny with respect to UK payment
systems by the Payments Systems Regulator and the FCA,
including in relation to banks’ policies and procedures for
handling push payment scams;
increased attention to competition and innovation in UK
payment systems and developments relating to the UK
initiative on Open Banking and the European directive on
payment services;
new or increased regulations relating to customer data and
privacy protection, including the EU General Data Protection
Regulation (‘GDPR’);
restrictions on proprietary trading and similar activities within
a commercial bank and/or a group;
the introduction of, and changes to, taxes, levies or fees
applicable to the Group’s operations, such as the imposition
of a financial transaction tax, changes in tax rates, increases
in the bank corporation tax surcharge in the UK, restrictions
on the tax deductibility of interest payments or further
restrictions imposed on the treatment of carry-forward tax
losses that reduce the value of deferred tax assets and
require increased payments of tax;
the regulation or endorsement of credit ratings used in the
EU (whether issued by agencies in European member
states or in other countries, such as the US);
the Markets in Financial Instruments Directive (‘MiFID’)
regulating the provision of ‘investment services and
activities’ in relation to a range of customer-related areas
and the revised directive (‘MiFID II’) and new regulation
(Markets in Financial Instruments Regulation or ‘MiFIR’)
replacing and changing MiFID to include expanded
supervisory powers that include the ability to ban specific
products, services and practices;
the European Commission’s proposal to impose a
requirement for any bank established outside the EU, which
has an asset base of a certain size and has two or more
institutions within the EU, to establish a single intermediate
parent undertaking (‘IPU’) in the European Union, under
which all EU entities within that group would operate; and
other requirements or policies affecting the Group and its
profitability or product offering, including through the
imposition of increased compliance obligations or
obligations which may lead to restrictions on business
growth, product offerings, or pricing.
Changes in laws, rules or regulations, or in their interpretation or
enforcement, or the implementation of new laws, rules or
regulations, including contradictory laws, rules or regulations by
key regulators in different jurisdictions, or failure by the Group to
comply with such laws, rules and regulations, may have a
material adverse effect on the Group’s business, financial
condition and results of operations. In addition, uncertainty and
lack of international regulatory coordination as enhanced
supervisory standards are developed and implemented may
adversely affect the Group’s ability to engage in effective
business, capital and risk management planning.
The Group relies on valuation, capital and stress test models
to conduct its business, assess its risk exposure and
anticipate capital and funding requirements. Failure of these
models to provide accurate results or accurately reflect
changes in the micro-and macroeconomic environment in
which the Group operates or findings of deficiencies by the
Group’s regulators resulting in increased regulatory capital
requirements could have a material adverse effect on the
Group’s business, capital and results.
Given the complexity of the Group’s business, strategy and
capital requirements, the Group relies on analytical models to
manage its business, assess the value of its assets and its risk
exposure and anticipate capital and funding requirements,
including with stress testing. The Group’s valuation, capital and
stress test models and the parameters and assumptions on
which they are based, need to be periodically reviewed and
updated to maximise their accuracy.
Failure of these models to accurately reflect changes in the
environment in which the Group operates or to be updated in line
with the Group’s business model or operations, or the failure to
properly input any such changes could have an adverse impact
on the modelled results or could fail to accurately capture the
Group’s risk exposure or the risk profile of the Group’s financial
instruments or result in the Group being required to hold
additional capital as a function of the PRA buffer. For example,
as the Group implements its transformation programme, including
the restructuring and funding of its NatWest Markets franchise
and the implementation of the UK ring-fencing regime, any
impacted models would need to be correctly identified and
adapted in line with the implementation process. The Group also
uses valuation models that rely on market data inputs. If incorrect
market data is input into a valuation model, it may result in
incorrect valuations or valuations different to those which were
predicted and used by the Group in its forecasts or decision
making. Internal stress test models may also rely on different,
less severe, assumptions or take into account different data
points than those defined by the Group’s regulators.
Some of the analytical models used by the Group are predictive
in nature. In addition, a number of internal models used by Group
subsidiaries are designed, managed and analysed by the Group
and may not appropriately capture the risks and exposures at
subsidiary level. Some of the Group’s internal models are subject
to periodic review by its regulators and, if found deficient, the
Group may be required to make changes to such models or may
be precluded from using any such models, which could result in
an additional capital requirement which could have a material
impact on the Group’s capital position.
394
Additional information
Risk factors continued
The Group could face adverse consequences as a result of
decisions which may lead to actions by management based on
models that are poorly developed, implemented or used, or as a
result of the modelled outcome being misunderstood or such
information being used for purposes for which it was not
designed. Risks arising from the use of models could have a
material adverse effect on the Group’s business, financial
condition and results of operations, minimum capital
requirements and reputation.
The Group is subject to stress tests mandated by its
regulators in the UK and in Europe which may result in
additional capital requirements or management actions
which, in turn, may impact the Group’s financial condition,
results of operations and investor confidence or result in
restrictions on distributions.
The Group is subject to annual stress tests by its regulator in the
UK and also subject to stress tests by the European regulators
with respect to RBSG, RBS N.V. and Ulster Bank Ireland DAC.
Stress tests provide an estimate of the amount of capital banks
might deplete in a hypothetical stress scenario. In addition, if the
stress tests reveal that a bank’s existing regulatory capital buffers
are not sufficient to absorb the impact of the stress, it is possible
that it will need to take action to strengthen its capital position.
There is a strong expectation that the PRA would require a bank
to take action if, at any point during the stress, a bank were
projected to breach any of its minimum CET1 capital or leverage
ratio requirements.
However, if a bank is projected to fail to meet its systemic buffers,
it will still be expected to strengthen its capital position over time
but the supervisory response is expected to be less intensive
than if it were projected to breach its minimum capital
requirements. The PRA will also use the annual stress test
results to inform its determination of whether individual banks’
current capital positions are adequate or need strengthening. For
some banks, their individual stress-test results might imply that
the capital conservation buffer and countercyclical rates set for all
banks is not consistent with the impact of the stress on them. In
that case, the PRA can increase regulatory capital buffers for
individual banks by adjusting their PRA buffers.
Under the 2017 Bank of England stress tests, which were based
on the balance sheet of the Group for the year ended 31
December 2016, the Group’s capital position before the impact of
strategic management actions that the PRA judged could
realistically be taken in the stress scenario remained below its
CET1 capital hurdle rate and above its Tier 1 leverage hurdle
rate. After the impact of strategic management actions the
Group’s capital position would have remained above its CET1
capital hurdle rate, but the PRA judged that RBS did not meet its
systemic reference point in this scenario. Given the steps RBS
had already taken to strengthen its capital position during 2017,
the PRA did not require the Group to submit a revised capital
plan.
Failure by the Group to meet the thresholds set as part of the
stress tests carried out by its regulators in the UK and elsewhere
may result in the Group’s regulators requiring the Group to
generate additional capital, increased supervision and/or
regulatory sanctions, restrictions on capital distributions and loss
of investor confidence, which may impact the Group’s financial
condition, results of operations and prospects.
The Group’s operations entail inherent reputational risk, i.e.,
the risk of brand damage and/or financial loss due to a
failure to meet stakeholders’ expectations of the Group’s
conduct, performance and business profile.
Brand damage can be detrimental to the business of the Group in
a number of ways, including its ability to build or sustain business
relationships with customers, low staff morale, regulatory censure
or reduced access to, or an increase in the cost of, funding. In
particular, negative public opinion resulting from the actual or
perceived manner in which the Group conducts or modifies its
business activities and operations, including as a result of the
transformation programme or other restructuring efforts,
speculative or inaccurate media coverage, the Group’s financial
performance, ongoing investigations and proceedings and the
settlement of any such investigations and proceedings, IT failures
or cyber-attacks resulting in the loss or publication of confidential
customer data or other sensitive information, the level of direct
and indirect government support, or the actual or perceived
strength or practices in the banking and financial industry may
adversely affect the Group’s ability to keep and attract customers
and, in particular, corporate and retail depositors.
Modern technologies, in particular online social networks and
other broadcast tools which facilitate communication with large
audiences in short time frames and with minimal costs, may also
significantly enhance and accelerate the impact of damaging
information and allegations.
Although the Group has implemented a Reputational Risk Policy
across customer-facing businesses to improve the identification,
assessment and management of customers, transactions,
products and issues which represent a reputational risk, the
Group cannot ensure that it will be successful in avoiding
damage to its business from reputational risk, which could result
in a material adverse effect on the Group’s business, financial
condition, results of operations and prospects.
The reported results of the Group are sensitive to the
accounting policies, assumptions and estimates that
underlie the preparation of its financial statements. Its
results in future periods may be affected by changes to
applicable accounting rules and standards.
The preparation of financial statements requires management to
make judgements, estimates and assumptions that affect the
reported amounts of assets, liabilities, income and expenses.
Due to the inherent uncertainty in making estimates, results
reported in future periods may reflect amounts which differ from
those estimates. Estimates, judgements and assumptions take
into account historical experience and other factors, including
market practice and expectations of future events that are
believed to be reasonable under the circumstances.
The accounting policies deemed critical to the Group’s results
and financial position, based upon materiality and significant
judgements and estimates, include goodwill, provisions for
liabilities, deferred tax, loan impairment provisions, fair value of
financial instruments, which are discussed in detail in ‘Critical
accounting policies and key sources of estimation uncertainty’ on
pages 259 to 261. IFRS Standards and Interpretations that have
been issued by the International Accounting Standards Board
(the IASB) but which have not yet been adopted by the Group are
discussed in ‘Accounting developments’ on pages 261 to 263.
395
Additional information
Risk factors continued
Changes in accounting standards or guidance by accounting
bodies or in the timing of their implementation, whether
mandatory or as a result of recommended disclosure relating to
the future implementation of such standards could result in the
Group having to recognise additional liabilities on its balance
sheet, or in further write-downs or impairments and could also
significantly impact the financial results, condition and prospects
of the Group.
In July 2014, the IASB published a new accounting standard for
financial instruments (IFRS 9) effective for annual periods
beginning on or after 1 January 2018. It introduced a new
framework for the recognition and measurement of credit
impairment, based on expected credit losses, rather than the
incurred loss model currently applied under IAS 39. The inclusion
of loss allowances with respect to all financial assets that are not
recorded at fair value tend to result in an increase in overall
impairment balances when compared with the previous basis of
measurement under IAS 39. The Group expects IFRS 9 to
increase earnings and capital volatility in 2018 and beyond.
The valuation of financial instruments, including derivatives,
measured at fair value can be subjective, in particular where
models are used which include unobservable inputs. Generally,
to establish the fair value of these instruments, the Group relies
on quoted market prices or, where the market for a financial
instrument is not sufficiently active, internal valuation models that
utilise observable market data. In certain circumstances, the data
for individual financial instruments or classes of financial
instruments utilised by such valuation models may not be
available or may become unavailable due to prevailing market
conditions. In such circumstances, the Group’s internal valuation
models require the Group to make assumptions, judgements and
estimates to establish fair value, which are complex and often
relate to matters that are inherently uncertain. Resulting changes
in the fair values of the financial instruments has had and could
continue to have a material adverse effect on the Group’s
earnings, financial condition and capital position.
The Group is exposed to conduct risk which may adversely
impact the Group or its employees and may result in
conduct having a detrimental impact on the Group’s
customers or counterparties.
In recent years, the Group has sought to refocus its culture on
serving the needs of its customers and continues to redesign
many of its systems and processes to promote this focus and
strategy. However, the Group is exposed to various forms of
conduct risk in its operations. These include business and
strategic planning that does not adequately reflect the Group’s
customers’ needs, ineffective management and monitoring of
products and their distribution, actions taken that may not
conform to the Group’s customer-centric focus, outsourcing of
customer service and product delivery via third parties that do not
have appropriate levels of control, oversight and culture, the
possibility of alleged mis-selling of financial products or the
mishandling of complaints related to the sale of such product, or
poor governance of incentives and rewards. Some of these risks
have materialised in the past and ineffective management and
oversight of conduct issues may result in customers being poorly
or unfairly treated and may in the future lead to further
remediation and regulatory intervention/enforcement.
The Group’s businesses are also exposed to risks from employee
misconduct including non-compliance with policies and regulatory
rules, negligence or fraud (including financial crimes), any of
which could result in regulatory fines or sanctions and serious
reputational or financial harm to the Group. In recent years, a
number of multinational financial institutions, including the Group,
have suffered material losses due to the actions of employees,
including, for example, in connection with the foreign exchange
and LIBOR investigations and the Group may not succeed in
protecting itself from such conduct in the future. It is not always
possible to timely detect or deter employee misconduct and the
precautions the Group takes to detect and prevent this activity
may not always be effective.
The Group has implemented a number of policies and allocated
new resources in order to help mitigate against these risks. The
Group has also prioritised initiatives to reinforce good conduct in
its engagement with the markets in which it operates, together
with the development of preventative and detective controls in
order to positively influence behaviour.
The Group’s transformation programme is also intended to
improve the Group’s control environment. Nonetheless, no
assurance can be given that the Group’s strategy and control
framework will be effective and that conduct and financial crime
issues will not have an adverse effect on the Group’s results of
operations, financial condition or prospects.
The Group may be adversely impacted if its risk
management is not effective and there may be significant
challenges in maintaining the effectiveness of the Group’s
risk management framework as a result of the number of
strategic and restructuring initiatives being carried out by
the Group simultaneously.
The management of risk is an integral part of all of the Group’s
activities. Risk management includes the definition and
monitoring of the Group’s risk appetite and reporting of the
Group’s exposure to uncertainty and the consequent adverse
effect on profitability or financial condition arising from different
sources of uncertainty and risks as described throughout these
risk factors.
Ineffective risk management may arise from a wide variety of
events and behaviours, 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
Group’s reputation or its relationship with its customers,
shareholders or other stakeholders, which in turn could have a
significant effect on the Group’s business prospects, financial
condition and/or results of operations.
Risk management is also strongly related to the use and
effectiveness of internal stress tests and models. See ‘The Group
relies on valuation, capital and stress test models to conduct its
business, assess its risk exposure and anticipate capital and
funding requirements. Failure of these models to provide
accurate results or accurately reflect changes in the micro-and
macroeconomic environment in which the Group operates or
findings of deficiencies by the Group’s regulators resulting in
increased regulatory capital requirements could have a material
adverse effect on the Group’s business, capital and results.’
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Additional information
Risk factors continued
A failure by the Group to embed a strong risk culture across
the organisation could adversely affect the Group’s ability to
achieve its strategic objective.
In response to weaknesses identified in previous years, the
Group is currently seeking to embed a strong risk culture within
the Group based on a robust risk appetite and governance
framework. A key component of this approach is the three lines of
defence model designed to identify, manage and mitigate risk
across all levels of the organisation. This framework has been
implemented and improvements continue and will continue to be
made to clarify and improve the three lines of defence and
internal risk responsibilities and resources, including in response
to feedback from regulators. Notwithstanding the Group’s efforts,
changing an organisation’s risk culture requires significant time,
investment and leadership, and such efforts may not insulate the
Group from future instances of misconduct. A failure by any of
these three lines to carry out their responsibilities or to effectively
embed this culture could have a material adverse effect on the
Group through an inability to achieve its strategic objectives for
its customers, employees and wider stakeholders.
As a result of the commercial and regulatory environment in
which it operates, the Group may be unable to attract or
retain senior management (including members of the board)
and other skilled personnel of the appropriate qualification
and competence. The Group may also suffer if it does not
maintain good employee relations.
The Group’s current and future success depend on its ability to
attract, retain and remunerate highly skilled and qualified
personnel, including senior management (which includes
directors and other key employees), in a highly competitive
labour market. This cannot be guaranteed, particularly in light of
heightened regulatory oversight of banks and the increasing
scrutiny of, and (in some cases) restrictions placed upon,
employee compensation arrangements, in particular those of
banks in receipt of Government support (such as the Group),
which may place the Group at a competitive disadvantage.
In addition, the market for skilled personnel is increasingly
competitive, thereby raising the cost of hiring, training and
retaining skilled personnel.
Certain of the Group’s directors as well as members of its
executive committee and certain other senior managers and
employees are also subject to the new responsibility regime
introduced under the Banking Reform Act 2013 which introduces
clearer accountability rules for those within the new regime. The
senior managers’ regime and certification regime took effect on 7
March 2016, whilst the conduct rules apply to the wider employee
population from 7 March 2017, with the exception of some
transitional provisions. The new regulatory regime may contribute
to reduce the pool of candidates for key management and non-
executive roles, including non-executive directors with the right
skills, knowledge and experience, or increase the number of
departures of existing employees, given concerns over the
allocation of responsibilities and personal liability introduced by
the new rules.
In addition, in order to ensure the independence of the RFB as
part of the Group’s implementation of the UK ring-fencing regime,
the Group will be required to recruit new independent directors
and senior members of management to sit on the boards of
directors and board committees of the RFB and other Group
entities, and there may be a limited pool of competent candidates
from which such appointments can be made.
The Group’s evolving strategy has led to the departure of a large
number of experienced and capable employees. The
restructuring relating to the ongoing implementation of the
Group’s transformation programme and related cost-reduction
targets may cause experienced staff members to leave and
prospective staff members not to join the Group. The lack of
continuity of senior management and the loss of important
personnel coordinating certain or several aspects of the Group’s
restructuring could have an adverse impact on its
implementation.
The failure to attract or retain a sufficient number of appropriately
skilled personnel to manage the complex restructuring required to
implement the Group’s strategy could prevent the Group from
successfully maintaining its current standards of operation,
implementing its strategy and meeting regulatory commitments.
This could have a material adverse effect on the Group’s
business, financial condition and results of operations.
In addition, many of the Group’s employees in the UK, Republic
of Ireland and continental Europe are represented by employee
representative bodies, including trade unions. Engagement with
its employees and such bodies is important to the Group and a
breakdown of these relationships could adversely affect the
Group’s business, reputation and results.
HM Treasury (or UKFI on its behalf) may be able to exercise
a significant degree of influence over the Group and any
further offer or sale of its interests may affect the price of
securities issued by the Group.
On 6 August 2015, the UK Government made its first sale of
RBSG ordinary shares since its original investment in 2009 and
sold approximately 5.4% of its stake in RBSG. Following this
initial sale, the UK Government exercised its conversion rights
under the B Shares on 14 October 2015 which resulted in HM
Treasury holding 72.88% of the ordinary share capital of RBSG.
The UK Government, through HM Treasury, held 70.5% of the
issued ordinary share capital of the Group as of 31 December
2017. The UK Government in its November 2017 Autumn Budget
indicated its intention to recommence the process for the
privatisation of RBSG before the end of 2018-2019 and to carry
out over the forecast period a programme of sales of RBSG
ordinary shares expected to sell down approximately two thirds of
HM Treasury’s current shareholding in the Group, although there
can be no certainty as to the commencement of any sell-downs
or the timing or extent thereof.
Any offers or sale, or expectations relating to the timing thereof,
of a substantial number of ordinary shares by HM Treasury, could
negatively affect prevailing market prices for the outstanding
ordinary shares of RBSG and other securities issued by the
Group and lead to a period of increased price volatility for the
Group’s securities.
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Additional information
Risk factors continued
In addition, UKFI manages HM Treasury’s shareholder
relationship with the Group and, although HM Treasury has
indicated that it intends to respect the commercial decisions of
the Group and that the Group will continue to have its own
independent board of directors and management team
determining its own strategy, its position as a majority
shareholder (and UKFI’s position as manager of this
shareholding) means that HM Treasury or UKFI might be able to
exercise a significant degree of influence over, among other
things, the election of directors and appointment of senior
management, the Group’s capital strategy, dividend policy,
remuneration policy or the conduct of the Group’s operations.
The manner in which HM Treasury or UKFI exercises HM
Treasury’s rights as majority shareholder could give rise to
conflicts between the interests of HM Treasury and the interests
of other shareholders. The Board has a duty to promote the
success of the Group for the benefit of its members as a whole.
The Group operates in markets that are subject to intense
scrutiny by the competition authorities and its business and
results of operations could be materially affected by
competition decisions and other regulatory interventions.
The competitive landscape for banks and other financial
institutions in the UK, the rest of Europe and the US is changing
rapidly. Recent regulatory and legal changes have and may
continue to result in new market participants and changed
competitive dynamics in certain key areas, such as in retail and
SME banking in the UK where the introduction of new entrants is
being actively encouraged by the UK Government. The
competitive landscape in the UK is also likely to be affected by
the UK Government’s implementation of the UK ring-fencing
regime and other customer protection measures introduced by
the Banking Reform Act 2013. The implementation of these
reforms may result in the consolidation of newly separated
businesses or assets of certain financial institutions with those of
other parties to realise new synergies or protect their competitive
position and is likely to increase competitive pressures on the
Group.
The UK retail banking sector has been subjected to intense
scrutiny by the UK competition authorities and by other bodies,
including the FCA, in recent years, including with a number of
reviews/inquiries being carried out, including market reviews
conducted by the CMA and its predecessor the Office of Fair
Trading regarding SME banking and personal banking products
and services, the Independent Commission on Banking and the
Parliamentary Commission on Banking Standards.
These reviews raised significant concerns about the
effectiveness of competition in the retail banking sector. The
CMA’s Retail Banking Market Investigation report sets out
measures primarily intended to make it easier for consumers and
businesses to compare PCA and SME bank products, increase
the transparency of price comparison between banks and amend
PCA overdraft charging. The CMA is working with HM Treasury
and other regulators to implement these remedies which are
likely to impose additional compliance requirements on the Group
and could, in aggregate, adversely impact the Group’s
competitive position, product offering and revenues.
Adverse findings resulting from current or future competition
investigations may result in the imposition of reforms or remedies
which may impact the competitive landscape in which the Group
operates or result in restrictions on mergers and consolidations
within the UK financial sector.
The impact of any such developments in the UK will become
more significant as the Group’s business becomes increasingly
concentrated in the UK retail sector. These and other changes to
the competitive framework in which the Group operates could
have a material adverse effect on the Group’s business, margins,
profitability, financial condition and prospects.
The Group and its subsidiaries are subject to an evolving
framework on recovery and resolution, the impact of which
remains uncertain, and which may result in additional
compliance challenges and costs.
In the EU, the UK and the US, regulators have implemented or
are in the process of implementing recovery and resolution
regimes designed to prevent the failure of financial institutions
and resolution tools to ensure the timely and orderly resolution of
financial institutions without use of public funds.
These initiatives have been complemented by a broader set of
initiatives to improve the resilience of financial institutions and
reduce systemic risk, including the UK ring-fencing regime, the
introduction of certain prudential requirements and powers under
CRD IV, and certain other measures introduced under the BRRD,
including the requirements relating to loss absorbing capital.
The BRRD, which was implemented in the UK from January
2015, provides a framework for the recovery and resolution of
credit institutions and investment firms, their subsidiaries and
certain holding companies in the EU, and the tools and powers
introduced under the BRRD include preparatory and preventive
measures, early supervisory intervention powers and resolution
tools.
Implementation of certain provisions of the BRRD remains
subject to secondary rulemaking as well as a review by the
European Parliament and the European Commission of certain
topics mandated by the BRRD. In November 2016, as a result of
this review, the European Commission published a package of
proposals seeking to introduce certain amendments to CRD IV
and the BRRD. These proposals are now subject to further
discussions and negotiations among the European institutions
and it is not possible to anticipate their final content. Further
amendments to the BRRD or the implementing rules in the EU or
the UK may also be necessary to ensure continued consistency
with the FSB recommendations on key attributes of national
resolution regimes and resolution planning for G-SIBs, including
with respect to TLAC and MREL requirements.
In light of these potential developments as well as the impact of
Brexit, there remains uncertainty as to the rules which may apply
to the Group going forward. In addition, banks headquartered in
countries which are members of the Eurozone are now subject to
the European banking union framework.
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Additional information
Risk factors continued
In November 2014, the ECB assumed direct supervisory
responsibility for RBS N.V. and Ulster Bank Ireland DAC under
the Single Supervisory Mechanism (SSM). As a result of the
above, there remains uncertainty as to how the relevant
resolution regimes in force in the UK, the Eurozone and other
jurisdictions, would interact in the event of a resolution of the
Group, although it remains clear that the Bank of England, as UK
resolution authority, would be responsible for resolution of the
Group overall (consistent with the Group’s single point of entry
bail-in resolution strategy, as determined by the Bank of England)
The BRRD requires national resolution funds to raise ‘ex ante’
contributions on banks and investment firms in proportion to their
liabilities and risk profiles and allow them to raise additional ‘ex
post’ funding contributions in the event the ex-ante contributions
do not cover the losses, costs or other expenses incurred by use
of the resolution fund. Although receipts from the UK bank levy
are currently being used to meet the ex-ante and ex post funding
requirements, the Group may be required to make additional
contributions in the future. In addition, Group entities in countries
subject to the European banking union are required to pay
supervisory fees towards the funding of the SSM as well as
contributions to the single resolution fund.
The recovery and resolution regime implementing the BRRD in
the UK places compliance and reporting obligations on the
Group. These compliance and reporting obligations may result in
increased costs, including as a result of the Group’s mandatory
participation in resolution funds, and heightened compliance risks
and the Group may not be in a position to comply with all such
requirements within the prescribed deadlines or at all. In addition
to the costs associated with the issuance of MREL-eligible debt
securities and compliance with internal MREL requirements,
further changes may be required for the Group to enhance its
resolvability, in particular due to regulatory requirements relating
to operational continuity and valuations capabilities in resolution.
In July 2016, the PRA adopted a new framework requiring
financial institutions to ensure the continuity of critical shared
services (provided by entities within the group or external
providers) to facilitate recovery action, orderly resolution and
post-resolution restructuring, which will apply from 1 January
2019.
The application of such rules to the Group requires the Group to
restructure certain of its activities relating to the provision of
services from one legal entity to another within the Group, may
limit the Group’s ability to outsource certain functions and will
result in increased costs resulting from the requirement to ensure
the financial and operational resilience and independent
governance of such critical services.
In August 2017, the Bank of England published a consultation
paper setting out its preliminary views on the valuation
capabilities that firms should have in place prior to resolution. The
Bank of England has not yet published a final statement of policy
in this area.
Achieving compliance with the expectations set out in any such
statement of policy, once finalised, may require changes to the
Group’s existing valuation processes and/or the development of
additional capabilities, infrastructure and processes. The Group
may incur costs in complying with such obligations, which costs
may increase if the Bank of England determined that the Group’s
valuation capabilities constitute an impediment to resolution and
subsequently exercised its statutory power to direct the Group to
take measures to address such impediment.
In addition, compliance by the Group with this recovery and
resolution framework has required and is expected to continue to
require significant work and engagement with the Group’s
regulators, including in order for the Group to continue to submit
to the PRA an annual recovery plan assessed as meeting
regulatory requirements and to be assessed as resolvable by the
Bank of England. The outcome of this regulatory dialogue may
impact the Group’s operations or structure or otherwise result in
increased costs, including as a result of the Bank of England’s
power under section 3A of the Banking Act to direct institutions to
address impediments to resolvability.
The Group may become subject to the application of
stabilisation or resolution powers in certain significant
stress situations, which may result in various actions being
taken in relation to the Group and any securities of the
Group, including the write-off, write-down or conversion of
the Group’s securities.
The Banking Act 2009, as amended to implement the BRRD
(‘Banking Act’) confers substantial powers on relevant UK
authorities designed to enable them to take a range of actions in
relation to UK banks or investment firms and certain of their
affiliates in the event a bank or investment firm in the same group
is considered to be failing or likely to fail. Under the Banking Act,
wide powers are granted to the Bank of England (as the relevant
resolution authority), as appropriate as part of a special resolution
regime (the ‘SRR’). These powers enable the Bank of England to
implement resolution measures with respect to a UK bank or
investment firm and certain of its affiliates (including, for example,
RBSG) (each a ‘relevant entity’) in circumstances in which the
relevant UK resolution authorities are satisfied that the resolution
conditions are met. Under the applicable regulatory framework
and pursuant to guidance issued by the Bank of England,
governmental financial support, if any is provided, would only be
used as a last resort measure where a serious threat to financial
stability cannot be avoided by other measures (such as the
stabilisation options described below, including the UK bail-in
power) and subject to the limitations set out in the Banking Act.
Several stabilisation options and tools are available to the Bank
of England under the SRR, where a resolution has been
triggered. In addition, the Bank of England may commence
special administration or liquidation procedures specifically
applicable to banks. Where stabilisation options are used which
rely on the use of public funds, such funds can only be used once
there has been a contribution to loss absorption and
recapitalisation of at least 8% of the total liabilities of the
institution under resolution. The Bank of England has indicated
that among these options, the UK bail-in tool (as described
further below) would apply in the event that a resolution of the
Group were triggered.
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Additional information
Risk factors continued
Further, the Banking Act grants broad powers to the Bank of
England, the application of which may adversely affect
contractual arrangements and which include the ability to (i)
modify or cancel contractual arrangements to which an entity in
resolution is party, in certain circumstances; (ii) suspend or
override the enforcement provisions or termination rights that
might be invoked by counterparties facing an entity in resolution,
as a result of the exercise of the resolution powers; and (iii)
disapply or modify laws in the UK (with possible retrospective
effect) to enable the powers under the Banking Act to be used
effectively.
The stabilisation options are intended to be applied prior to the
point at which any insolvency proceedings with respect to the
relevant entity would otherwise have been initiated. Accordingly,
the stabilisation options may be exercised if the relevant UK
resolution authority: (i) is satisfied that a UK bank or investment
firm is failing, or is likely to fail; (ii) determines that it is not
reasonably likely that (ignoring the stabilisation powers) action
will be taken by or in respect of a UK bank or investment firm that
will result in condition (i) above ceasing to be met; (iii) considers
the exercise of the stabilisation powers to be necessary, having
regard to certain public interest considerations (such as the
stability of the UK financial system, public confidence in the UK
banking system and the protection of depositors, being some of
the special resolution objectives) and (iv) considers that the
special resolution objectives would not be met to the same extent
by the winding-up of the UK bank or investment firm.
In the event that the Bank of England seeks to exercise its
powers in relation to a UK banking group company (such as
RBSG), the relevant UK resolution authority has to be satisfied
that (A) the conditions set out in (i) to (iv) above are met in
respect of a UK bank or investment firm in the same banking
group (or, in respect of an EEA or third country credit institution
or investment firm in the same banking group, the relevant EEA
or third country resolution authority is satisfied that the conditions
for resolution applicable in its jurisdiction are met) and (B) certain
criteria are met, such as the exercise of the powers in relation to
such UK banking group company being necessary having regard
to public interest considerations. The use of different stabilisation
powers is also subject to further ‘specific conditions’ that vary
according to the relevant stabilisation power being used.
Although the SRR sets out the pre-conditions for determining
whether an institution is failing or likely to fail, it is uncertain how
the relevant UK resolution authority would assess such
conditions in any particular pre-insolvency scenario affecting
RBSG and/or other members of the Group and in deciding
whether to exercise a resolution power. There has been no
application of the SRR powers in the UK to a large financial
institution, such as RBSG, to date, which could provide an
indication of the relevant UK resolution authority’s approach to
the exercise of the resolution powers, and even if such examples
existed, they may not be indicative of how such powers would be
applied to RBSG. Therefore, holders of shares and other
securities issued by the Group may not be able to anticipate a
potential exercise of any such powers.
The UK bail-in tool is one of the powers available to the Bank of
England under the SRR and was introduced under the Banking
Reform Act 2013.
The UK government amended the provisions of the Banking Act
to ensure the consistency of these provisions with the bail-in
provisions under the BRRD, which amendments came into effect
on 1 January 2015. The UK bail-in tool includes both a power to
write-down or convert capital instruments and triggered at the
point of non-viability of a financial institution and a bail-in tool
applicable to eligible liabilities (including senior unsecured debt
securities issued by the Group) and available in resolution.
The capital instruments write-down and conversion power may
be exercised independently of, or in combination with, the
exercise of a resolution tool, and it allows resolution authorities to
cancel all or a portion of the principal amount of capital
instruments and/or convert such capital instruments into common
equity Tier 1 instruments when an institution is no longer viable.
The point of non-viability for such purposes is the point at which
the Bank of England or the PRA determines that the institution
meets certain conditions under the Banking Act, for example if
the institution will no longer be viable unless the relevant capital
instruments are written down or extraordinary public support is
provided, and without such support the appropriate authority
determines that the institution would no longer be viable. The
Bank of England may exercise the power to write down or
convert capital instruments without any further exercise of
resolution tools, as may be the case where the write-down or
conversion of capital instruments is sufficient to restore an
institution to viability.
Where the conditions for resolution exist and it is determined that
a stabilisation power may be exercised, the Bank of England may
use the bail-in tool (in combination with other resolution tools
under the Banking Act) to, among other things, cancel or reduce
all or a portion of the principal amount of, or interest on, certain
unsecured liabilities of a failing financial institution and/or convert
certain debt claims into another security, including ordinary
shares of the surviving entity.
In addition, the Bank of England may use the bail-in tool to,
among other things, replace or substitute the issuer as obligor in
respect of debt instruments, modify the terms of debt instruments
(including altering the maturity (if any) and/or the amount of
interest payable and/or imposing a temporary suspension on
payments) and discontinue the listing and admission to trading of
financial instruments. The exercise of the bail-in tool will be
determined by the Bank of England which will have discretion to
determine whether the institution has reached a point of non-
viability or whether the conditions for resolution are met, by
application of the relevant provisions of the Banking Act, and
involves decisions being taken by the PRA and the Bank of
England, in consultation with the FCA and HM Treasury. As a
result, it will be difficult to predict when, if at all, the exercise of
the bail-in power may occur.
The potential impact of these powers and their prospective use
may include increased volatility in the market price of shares and
other securities issued by the Group, as well as increased
difficulties in issuing securities in the capital markets and
increased costs of raising such funds.
If these powers were to be exercised (or there is an increased
risk of exercise) in respect of the Group or any entity within the
Group, such exercise could result in a material adverse effect on
the rights or interests of shareholders which would likely be
extinguished or very heavily diluted.
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Additional information
Risk factors continued
Holders of debt securities (which may include holders of senior
unsecured debt), may see the conversion of part (or all) of their
claims into equity or written down in part or written off entirely. In
accordance with the rules of the Special Resolution Regime, the
losses imposed on holders of equity and debt instruments
through the exercise of bail-in powers would be subject to the ‘no
creditor worse off’ safeguard, which requires losses (net of any
compensation received) not to exceed those which would be
realised in an insolvency counterfactual.
Although the above represents the risks associated with the UK
bail-in power currently in force in the UK and applicable to the
Group’s securities, changes to the scope of, or conditions for the
exercise of the UK bail-in power may be introduced as a result of
further political or regulatory developments. For example, the
application of these powers to internally-issued MREL
instruments, issued by one group entity and held solely by its
parent entity, is currently being consulted on by the Bank of
England. In addition, further political, legal or strategic
developments may lead to structural changes to the Group,
including at the holding company level. Notwithstanding any such
changes, the Group expects that its securities would remain
subject to the exercise of a form of bail-in power, either pursuant
to the provisions of the Banking Act, the BRRD or otherwise.
The value or effectiveness of any credit protection that the
Group has purchased depends on the value of the
underlying assets and the financial condition of the insurers
and counterparties.
The Group has some remaining credit exposure arising from
over-the-counter derivative contracts, mainly credit default swaps
(CDSs), and other credit derivatives, each of which are carried at
fair value.
The fair value of these CDSs, as well as the Group’s exposure to
the risk of default by the underlying counterparties, depends on
the valuation and the perceived credit risk of the instrument
against which protection has been bought. Many market
counterparties have been adversely affected by their exposure to
residential mortgage-linked and corporate credit products,
whether synthetic or otherwise, and their actual and perceived
creditworthiness may deteriorate rapidly. If the financial condition
of these counterparties or their actual or perceived
creditworthiness deteriorates, the Group may record further credit
valuation adjustments on the credit protection bought from these
counterparties under the CDSs. The Group also recognises any
fluctuations in the fair value of other credit derivatives.
Any such adjustments or fair value changes may have a material
adverse impact on the Group’s financial condition and results of
operations.
In the UK and in other jurisdictions, the Group is responsible
for contributing to compensation schemes in respect of
banks and other authorised financial services firms that are
unable to meet their obligations to customers.
In the UK, the Financial Services Compensation Scheme (FSCS)
was established under the Financial Services and Markets Act
2000 and is the UK’s statutory fund of last resort for customers of
authorised financial services firms. The FSCS pays
compensation if a firm is unable to meet its obligations.
The FSCS funds compensation for customers by raising levies on
the industry, including the Group. In relation to protected
deposits, each deposit-taking institution contributes towards
these levies in proportion to their share of total protected
deposits.
In the event that the FSCS needs to raise additional and
unexpected funding, is required to raise funds more frequently or
significantly increases the levies to be paid by authorised firms,
the associated costs to the Group may have an adverse impact
on its results of operations and financial condition.
To the extent that other jurisdictions where the Group operates
have introduced or plan to introduce similar compensation,
contributory or reimbursement schemes, the Group may make
further provisions and may incur additional costs and liabilities,
which may have an adverse impact on its financial condition and
results of operations.
The Group intends to execute the run-down and/or the sale
of certain portfolios and assets. Failure by the Group to do
so on commercially favourable terms could have a material
adverse effect on the Group’s operations, operating results,
financial position and reputation.
The Group’s ability to execute the run-down and/or sale of certain
portfolios and assets and the price achieved for such disposals
will be dependent on prevailing economic and market conditions.
As a result, there is no assurance that the Group will be able to
sell or run down these portfolios or assets either on favourable
economic terms to the Group or at all or that it may do so within
the intended timetable. Material tax or other contingent liabilities
could arise on the disposal or run-down of assets and there is no
assurance that any conditions precedent agreed will be satisfied,
or consents and approvals required will be obtained in a timely
manner or at all. The Group may be exposed to deteriorations in
the portfolios or assets being sold between the announcement of
the disposal and its completion, which period may span many
months.
In addition, the Group may be exposed to certain risks, including
risks arising out of ongoing liabilities and obligations, breaches of
covenants, representations and warranties, indemnity claims,
transitional services arrangements and redundancy or other
transaction-related costs, and counterparty risk in respect of
buyers of assets being sold.
The occurrence of any of the risks described above could have a
material adverse effect on the Group’s business, results of
operations, financial condition and capital position and
consequently may have the potential to impact the competitive
position of part or all of the Group’s business.
The Group’s results could be adversely affected in the event
of goodwill impairment.
The Group capitalises goodwill, which is calculated as the excess
of the cost of an acquisition over the net fair value of the
identifiable assets, liabilities and contingent liabilities acquired.
Acquired goodwill is recognised initially at cost and subsequently
at cost less any accumulated impairment losses. As required by
IFRS Standards, the Group tests goodwill for impairment
annually, or more frequently when events or circumstances
indicate that it might be impaired.
401
Additional information
Risk factors continued
An impairment test involves comparing the recoverable amount
(the higher of the value in use and fair value less cost to sell) of
an individual cash generating unit with its carrying value.
At 31 December 2017, the Group carried goodwill of £5.6 billion
on its balance sheet. The value in use and fair value of the
Group’s cash-generating units are affected by market conditions
and the performance of the economies in which the Group
operates.
Changes in tax legislation or failure to generate future
taxable profits may impact the recoverability of certain
deferred tax assets recognised by the Group.
In accordance with IFRS Standards, the Group has recognised
deferred tax assets on losses available to relieve future profits
from tax only to the extent it is probable that they will be
recovered. The deferred tax assets are quantified on the basis of
current tax legislation and accounting standards and are subject
to change in respect of the future rates of tax or the rules for
computing taxable profits and offsetting allowable losses.
Where the Group is required to recognise a goodwill impairment,
it is recorded in the Group’s income statement, but it has no
effect on the Group’s regulatory capital position. Further
impairments of the Group’s goodwill could have an adverse effect
on the Group’s results and financial condition.
Failure to generate sufficient future taxable profits or further
changes in tax legislation (including rates of tax) or accounting
standards may reduce the recoverable amount of the recognised
deferred tax assets. Changes to the treatment of deferred tax
assets may impact the Group’s capital, for example by reducing
further the Group’s ability to recognise deferred tax assets. The
implementation of the rules relating to the UK ring-fencing regime
and the resulting restructuring of the Group may further restrict
the Group’s ability to recognise tax deferred tax assets in respect
of brought forward losses.
402
Additional information
Approach to the Financial Stability Board’s Task Force on
Climate-related Financial Disclosure (TCFD)
recommendations
In 2016, the Financial Stability Board (FSB) launched an industry-
led initiative, the Task Force on Climate-related Financial
Disclosure, to review how to best manage the threat climate
change presents to the stability of the global financial system.
The mandate was to develop recommendations for voluntary,
consistent climate-related risk to provide information to
stakeholders. The Task Force considered the physical, liability
and transition risks associated with climate change.
The Task Force published its final recommendations in June
2017. RBS welcomed the release of these recommendations and
is committed to implementing them. RBS has reported on carbon
emissions and climate-related matters, and submitted information
to the CDP sustainability index, since 2003.
Governance
The Board has oversight of climate related risks and
opportunities through the Sustainable Banking Committee (SBC).
SBC’s remit includes considering relevant environmental, social
and ethical issues and during 2017 was engaged on
environmental targets, the sustainable energy strategy and
reputational risk appetite. In addition, in August 2017 SBC invited
a group of external experts to attend a stakeholder engagement
session on climate change risk. For further details on risk
governance, see page 152.
At a franchise level, climate-related opportunities in relation to
supporting customers through the low carbon transition are
managed and assessed through the business and products
approvals processes, with strategy and co-ordination undertaken
by the cross-bank Sustainable Energy Forum (SEF). This forum
brings together senior leaders from across RBS who support
customers from SMEs to multinationals to achieve their
sustainable energy ambitions.
Strategy
The RBS climate change strategy is driven by a range of external
and internal drivers and encompasses all activities covering both
direct and indirect impacts.
Climate Change Strategy Drivers
Climate change
Governance –
Sustainable
Banking
Committee
Customer
products and
services
Sustainable
Energy
Strategy
Risk
Management
Reputation
and
environmental,
social,
ethical risk
Innovation
Gateway
Customers
Bank of
England/PRA –
climate change
risk
TCFD
Investors
Special
interest groups
and NGO
engagement
Sustainable
development
goals
Indices
(including CDP)
Procurement
Environment
Policy
Technology and
innovation
External drivers
Internal contributions
Direct impacts
The strategy for managing direct climate change impacts is
focused on continued efficiency of buildings, processes and
associated activities such as business travel. In 2017 90% of UK
and Republic of Ireland electricity usage was from renewable
sources (66% globally). RBS is also investing in its property
estate to reduce energy usage and waste. This is further
supported by the Innovation Gateway initiative for green
entrepreneurs. The property strategy has and will aim to continue
to result in a material reduction in footprint which in aggregate will
reduce the exposure to direct physical impacts for climate-related
risks.
RBS also continues to refine its business continuity plans to deal
with the impact of severe weather to operations and sees the
shift to digital and mobile banking as helping to improve the
resilience of the business and customers’ activities during severe
weather.
Indirect impacts
The strategy for managing indirect climate change impacts is
focused on supporting customers with the transition to a low
carbon economy through the provision of financial products and
services. RBS is committed to ensuring it does not miss the
substantial opportunities available to finance low carbon
technologies and has been recognised externally as a leader in
supporting renewable energy finance. RBS expects these, and
wider opportunities to continue to grow in the future.
Risk Management
RBS employs a continuous process for identifying and managing
emerging risks, including climate-related risks. While no climate-
related risks have been identified that would have a major impact
on RBS’s strategy over a five-year horizon, the ability to manage
new, emerging and unforeseen threats is a key element of the
risk management framework.
The impact of climate-related issues on the risk profile of RBS’s
customers may also be considered as part of the periodic sector
reviews and deep dives carried out to monitor and assess
different types of risk across the portfolios. Further climate
scenario analysis will be undertaken in 2018.
RBS has significantly reduced its credit exposure to the sectors
most vulnerable to climate-related regulation and market
changes. At 31 December 2017, total exposure to the Power and
Oil & Gas sectors had reduced to 1.2% of total lending
exposures.
Science based
operational
targets
RBS has had a policy in place for ESE risks since 2011. The
policy includes sectors sensitive to climate-related risk, such as
Forestry, Fisheries and Agriculture, and prohibits lending activity
to some industry types proven to have a material adverse
environmental impact.
Metrics and Targets
RBS uses a range of metrics and targets to assess our climate
related risks and opportunities. These include: climate impacts
from our operations (refer to page 30 of the Strategic Report);
exposure to high carbon sectors and lending to support
sustainable energy sectors. For further information refer to the
Sustainable Banking pages on rbs.com.
403
Shareholder information
Financial calendar
Shareholder enquiries
Analyses of ordinary shareholders
Forward-looking statements
Abbreviations and acronyms
Glossary of terms
Index
Important addresses
Principal offices
Page
405
405
406
407
408
409
416
419
419
404
Shareholder information
Financial calendar
Dividends
Payment dates
Cumulative preference shares 31 May and 31 December 2018
Non-cumulative preference
shares
29 March, 29 June,
28 September
and 31 December 2018
Ex-dividend date
Cumulative preference shares 3 May 2018
Record date
Cumulative preference shares 4 May 2018
Interim results
3 August 2018
Shareholder enquiries
Shareholdings in the company may be checked by visiting the
Shareholder centre section of our website, www.rbs.com and
clicking the Managing your shareholding tab. You will need the
shareholder reference number printed on your share certificate or
tax voucher to gain access to this information.
Listed below are the most commonly used features on the
website:
holding enquiry - view balances, values, history, payments
and reinvestments;
address change - change your home address;
E-Comms sign-up - choose to receive email notification
when your shareholder communications become available
instead of paper communications;
outstanding payments - reissue any uncashed payments
using our online replacement service; and
downloadable forms - including stock transfer and change of
address forms.
You may also check your shareholding by contacting our
Registrar:
Computershare Investor Services PLC
The Pavilions
Bridgwater Road
Bristol BS99 6ZZ
Telephone: +44 (0)370 702 0135
Fax: +44 (0)370 703 6009
Website: www-uk.computershare.com/investor/contactus
Braille and audio Strategic report with additional information
Shareholders requiring a Braille or audio version of the Strategic
report with additional information should contact the Registrar on
+44 (0)370 702 0135.
ShareGift
The company is aware that shareholders who hold a small
number of shares may be retaining these shares because dealing
costs make it uneconomical to dispose of them. ShareGift, the
charity share donation scheme, is a free service operated by The
Orr Mackintosh Foundation (registered charity 1052686) to
enable shareholders to donate shares to charity.
Donating your shares in this way will not give rise to either a gain
or a loss for UK capital gains tax purposes and you may be able
to reclaim UK income tax on gifted shares. Further information
can be obtained from HM Revenue & Customs.
Should you wish to donate your shares to charity in this way you
should contact ShareGift for further information:
ShareGift, The Orr Mackintosh Foundation
4th Floor Rear, 67/68 Jermyn Street, London SW1Y 6NY
Telephone: +44 (0)20 7930 3737
Website: www.sharegift.org
405
Shareholder information
Share and bond scams
Share and bond scams are often run from ‘boiler rooms’ where
fraudsters cold-call investors, after obtaining their phone number
from publicly available shareholder lists, offering them worthless,
overpriced or even non-existent shares or bonds.
How to protect yourself
Always be wary if you’re contacted out of the blue, pressured to
invest quickly, or promised returns that sound too good to be
true. FCA authorised firms are unlikely to contact you
unexpectedly with an offer to buy or sell shares or bonds.
They use increasingly sophisticated tactics to approach investors,
offering to buy or sell shares, often pressuring investors to make
a quick decision or miss out on the deal. Contact can also be in
the form of email, post or word of mouth. Scams are sometimes
advertised in newspapers, magazines or online as genuine
investment opportunities and may offer free gifts or discounts on
dealing charges.
Scammers will request money upfront, as a bond or other form of
security, but victims are often left out of pocket, sometimes losing
their savings or even their family home. Even seasoned investors
have been caught out by scams.
Clone firms
A ‘clone firm’ uses the name, firm registration number (FRN) and
address of a firm which 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.
Check the Register to ensure the firm contacting you is
authorised and also check the FCA’s Warning List of firms to
avoid.
Ask for their (FRN) and contact details and then contact them
using the telephone number on the Register. Never use a link in
an email or website from the firm offering you an investment.
It is strongly advised that you seek independent professional
advice before making any investment.
Report a scam
If you suspect that you have been approached by fraudsters, or
have any concerns about a potential scam, report this to the FCA
by contacting their Consumer Helpline on 0800 111 6768 or by
using their reporting form which can be found at
www.fca.org.uk/consumers/report-scam-unauthorised-firm
If you have already invested in a scam, fraudsters are likely to
target you again or sell your details to other criminals. The follow-
up scam may be completely separate, or may be related to the
previous scam in the form of an offer to get your money back or
buy back the investment on payment of a fee.
Find out more at www.fca.org.uk/consumers
Analyses of ordinary shareholders
At 31 December 2017
Individuals
Banks and nominee companies
Investment trusts
Insurance companies
Other companies
Pension trusts
Other corporate bodies
Range of shareholdings:
1 - 1,000
1,001 - 10,000
10,001 - 100,000
100,001 - 1,000,000
1,000,001 - 10,000,000
10,000,001 and over
Shareholdings
183,630
Number
of shares
- millions
102.1
5,491
11,833.8
61
64
515
22
75
0.7
0.5
6.7
0.1
20.7
%
0.8
98.9
—
—
0.1
—
0.2
189,858
11,964.6
100.0
164,339
23,843
1,004
446
176
50
40.2
54.0
30.0
152.2
598.1
11,090.1
189,858
11,964.6
0.3
0.4
0.3
1.3
5.0
92.7
100.0
406
Forward-looking statements
Cautionary statement regarding forward-looking statements
Certain sections in this document contain ‘forward-looking statements’
as that term is defined in the United States Private Securities Litigation
Reform Act of 1995, such as statements that include the words ‘expect’,
‘estimate’, ‘project’, ‘anticipate’, ‘commit’, ‘believe’, ‘should’, ‘intend’,
‘plan’, ‘could’, ‘probability’, ‘risk’, ‘Value-at-Risk (VaR)’, ‘target’, ‘goal’,
‘objective’, ‘may’, ‘endeavour’, ‘outlook’, ‘optimistic’, ‘prospects’ and
similar expressions or variations on these expressions.
In particular, this document includes forward-looking statements
relating, but not limited to: future profitability and performance, including
financial performance targets such as return on tangible equity; cost
savings and targets, including cost:income ratios; litigation and
government and regulatory investigations, including the timing and
financial and other impacts thereof; structural reform and the
implementation of the UK ring-fencing regime; the implementation of
RBS’s transformation programme, including the further restructuring of
the NatWest Markets franchise; the satisfaction of the Group’s residual
EU State Aid obligations; the continuation of RBS’s balance sheet
reduction programme, including the reduction of risk-weighted assets
(RWAs) and the timing thereof; capital and strategic plans and targets;
capital, liquidity and leverage ratios and requirements, including CET1
Ratio, RWA equivalents (RWAe), Pillar 2 and other regulatory buffer
requirements, minimum requirement for own funds and eligible
liabilities, and other funding plans; funding and credit risk profile;
capitalisation; portfolios; net interest margin; customer loan and income
growth; the level and extent of future impairments and write-downs,
including with respect to goodwill; restructuring and remediation costs
and charges; future pension contributions; RBS’s exposure to political
risks, operational risk, conduct risk, cyber and IT risk and credit rating
risk and to various types of market risks, including as interest rate risk,
foreign exchange rate risk and commodity and equity price risk;
customer experience including our Net Promoter Score (NPS);
employee engagement and gender balance in leadership positions.
Limitations inherent to forward-looking statements
These statements are based on current plans, estimates, targets and
projections, and are subject to significant inherent risks, uncertainties
and other factors, both external and relating to the Group’s strategy or
operations, which may result in the Group being unable to achieve the
current targets, predictions, expectations and other anticipated
outcomes expressed or implied by such forward-looking statements. In
addition certain of these disclosures are dependent on choices relying
on key model characteristics and assumptions and are subject to
various limitations, including assumptions and estimates made by
management. By their nature, certain of these disclosures are only
estimates and, as a result, actual future gains and losses could differ
materially from those that have been estimated. Accordingly, undue
reliance should not be placed on these statements. Forward-looking
statements speak only as of the date we make them and we expressly
disclaim any obligation or undertaking to release publicly any updates
or revisions to any forward-looking statements contained herein to
reflect any change in the Group’s expectations with regard thereto or
any change in events, conditions or circumstances on which any such
statement is based.
Important factors that could affect the actual outcome of the
forward-looking statements
We caution you that a large number of important factors could
adversely affect our results or our ability to implement our strategy,
cause us to fail to meet our targets, predictions, expectations and other
anticipated outcomes or affect the accuracy of forward-looking
statements we describe in this document, including in the risk factors
and other uncertainties set out in the Group’s 2017 Annual Report and
other risk factors and uncertainties discussed in this document. These
include the significant risks for RBS presented by the outcomes of the
legal, regulatory and governmental actions and investigations that RBS
is or may be subject to and any resulting material adverse effect on
RBS of unfavourable outcomes and the timing thereof (including where
resolved by settlement); economic, regulatory and political risks,
including as may result from the uncertainty arising from Brexit and from
the outcome of general elections in the UK and changes in government
policies; RBS’s ability to satisfy its residual EU State Aid obligations and
the timing thereof; RBS’s ability to successfully implement the
significant and complex restructuring required to be undertaken in order
to implement the UK ring-fencing regime and related costs; RBS’s
ability to successfully implement the various initiatives that are
comprised in its restructuring and transformation programme,
particularly the proposed further restructuring of the NatWest Markets
franchise, the balance sheet reduction programme and its significant
cost-saving initiatives and whether RBS will be a viable, competitive,
customer focused and profitable bank especially after its restructuring
and the implementation of the UK ring-fencing regime; the dependence
of the Group’s operations on its IT systems; the exposure of RBS to
cyber-attacks and its ability to defend against such attacks; RBS’s
ability to achieve its capital, funding, liquidity and leverage requirements
or targets which will depend in part on RBS’s success in reducing the
size of its business and future profitability as well as developments
which may impact its CET1 capital including additional litigation or
conduct costs, additional pension contributions, further impairments or
accounting changes; ineffective management of capital or changes to
regulatory requirements relating to capital adequacy and liquidity or
failure to pass mandatory stress tests; RBS’s ability to access sufficient
sources of capital, liquidity and funding when required; changes in the
credit ratings of RBS, RBS entities or the UK government; declining
revenues resulting from lower customer retention and revenue
generation in light of RBS’s strategic refocus on the UK; as well as
increasing competition from new incumbents and disruptive
technologies.
In addition, there are other risks and uncertainties that could adversely
affect our results, ability to implement our strategy, cause us to fail to
meet our targets or the accuracy of forward-looking statements in this
document.
These include operational risks that are inherent to RBS’s business and
will increase as a result of RBS’s significant restructuring and
transformation initiatives being concurrently implemented; the potential
negative impact on RBS’s business of global economic and financial
market conditions and other global risks, including risks arising out of
geopolitical events and political developments; the impact of a
prolonged period of low interest rates or unanticipated turbulence in
interest rates, yield curves, foreign currency exchange rates, credit
spreads, bond prices, commodity prices, equity prices; basis, volatility
and correlation risks; the extent of future write-downs and impairment
charges caused by depressed asset valuations; deteriorations in
borrower and counterparty credit quality; heightened regulatory and
governmental scrutiny (including by competition authorities) and the
increasingly regulated environment in which RBS operates as well as
divergences in regulatory requirements in the jurisdictions in which RBS
operates; the risks relating to RBS’s IT systems or a failure to protect
itself and its customers against cyber threats, reputational risks; risks
relating to increased pension liabilities and the impact of pension risk on
RBS’s capital position, including on any requisite management buffer;
risks relating to the failure to embed and maintain a robust conduct and
risk culture across the organisation or if its risk management framework
is ineffective; RBS’s ability to attract and retain qualified personnel;
limitations on, or additional requirements imposed on, RBS’s activities
as a result of HM Treasury’s investment in RBS; the value and
effectiveness of any credit protection purchased by RBS; risks relating
to the reliance on valuation, capital and stress test models and any
inaccuracies resulting therefrom or failure to accurately reflect changes
in the micro and macroeconomic environment in which RBS operates,
risks relating to changes in applicable accounting policies or rules which
may impact the preparation of RBS’s financial statements or adversely
impact its capital position; the impact of the recovery and resolution
framework and other prudential rules to which RBS is subject; the
application of stabilisation or resolution powers in significant stress
situations; contribution to relevant compensation schemes; the
execution of the run-down and/or sale of certain portfolios and assets;
the recoverability of deferred tax assets by the Group; and the success
of RBS in managing the risks involved in the foregoing.
The forward-looking statements contained in this document speak only
as at the date hereof, and RBS does not assume or undertake any
obligation or responsibility to update any forward-looking statement to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
The information, statements and opinions contained in this document
do not constitute a public offer under any applicable legislation or an
offer to sell or solicit of any offer to buy any securities or financial
instruments or any advice or recommendation with respect to such
securities or other financial instruments.
407
Abbreviations and acronyms
ABCP
ABS
AFS
ALCo
AQ
AT1
BBA
BCBS
BoE
BRC
C&RA
CCF
CDO
CDs
CDS
CEC
CET1
CLO
CMBS
COREP
CPB
CRD
CRE
CRR
CVA
DFV
DVA
EAD
EBA
EC
ECB
ECL
EMEA
ERF
ESE
EU
FCA
FI
FINREP
FSA
FSB
FSCS
FTSE
FVA
FVTPL
GDP
GSIB
HFT
HMT
HTM
IAS
IASB
ICAAP
Asset-backed commercial paper
Asset-backed securities
Available-for-sale
Asset and Liability Management Committee
Asset quality
Additional Tier 1
British Bankers’ Association
Basel Committee on Banking Supervision
Bank of England
Board Risk Committee
Conduct & Regulatory Affairs
Credit conversion factor
Collateralised debt obligation
Certificates of deposit
Credit default swap
Control Environment Certification
Common equity tier 1
Collateralised loan obligation
Commercial mortgage-backed securities
CRR Common Reporting
Commercial & Private Banking
Capital Requirements Directive
Commercial real estate
Capital requirements regulation
Credit valuation adjustment
Designated as at fair value through profit or
loss
Debit valuation adjustment
Exposure at default
European Banking Authority
European Commission
European Central Bank
Expected credit losses
Europe, the Middle East and Africa
Executive Risk Forum
Environment, Social and Ethical
European Union
Financial Conduct Authority
Financial institution
Financial Services Authority
Financial Stability Board
Financial Services Compensation Scheme
Financial Times Stock Exchange
Funding Valuation Adjustment
Fair value through profit or loss
Gross domestic product
Global systemically important bank
Held-for-trading
HM Treasury
Held-to-maturity
International Accounting Standards
International Accounting Standards Board
Internal Capital Adequacy Assessment
Process
IFRS
ILAAP
IPV
IRB
IRC
IRHP
L-SREP
LAR
LCR
LGD
LIBOR
LTI
LTV
MDA
MREL
MRM
MTNs
NI
NIM
NSFR
NTIRR
NWM
OCA
OREC
OTC
PBB
PD
PPI
PPL
PRA
RBSG
RCR
REIL
RFB
RMBS
RNIV
ROI
RoW
RWA
SE
SEC
SME
SVaR
TLAC
TSR
SME
UBI DAC
UK
UKFI
US/USA
VaR
International Financial Reporting Standards
Internal Liquidity Adequacy Assessment
Process
Independent price verification
Internal ratings based
Incremental risk charge
Interest rate hedging product
Liquidity Supervisory Review and Evaluation
Process
Loans and receivables
Liquidity coverage ratio
Loss given default
London Interbank Offered Rate
Long term incentive awards
Loan-to-value
Maximum distributable amount
Minimum requirement for own funds and
eligible liabilities
Model risk management
Medium term notes
Northern Ireland
Net Interest Margin
Net stable funding ratio
Non-traded interest rate risk
NatWest Markets
Own credit adjustment
Operational Risk Executive Committee
Over-the-counter
Personal & Business Banking
Probability of default
Payment Protection Insurance
Potential problem loans
Prudential Regulation Authority
The Royal Bank of Scotland Group plc
Risk, Conduct and Restructuring
Risk elements in lending
Ring-fenced banking entities
Residential mortgage-backed securities
Risks not In VaR
Republic of Ireland
Rest of the World
Risk-weighted asset
Structured entity
US Securities and Exchange Commission
Small and medium-sized enterprise
Stressed value-at-risk
Total loss absorbing capacity
Total Shareholder Return
Small and medium-sized enterprise
Ulster Bank Ireland Designated Activity
Company
United Kingdom
UK Financial Investments Limited
United States of America
Value-at-risk
In the Report and Accounts, unless specified otherwise, the terms ‘company’ and ‘RBSG’ mean The Royal Bank of Scotland Group plc;
‘RBS’, ‘RBS Group’ and the ‘Group’ mean the company and its subsidiaries; ‘the Royal Bank’ and ‘RBS plc’ mean The Royal Bank of
Scotland plc; and ‘NatWest’ means National Westminster Bank Plc.
The company publishes its financial statements in pounds sterling (‘£’ or ‘sterling’). The abbreviations ‘£m’ and ‘£bn’ represent millions
and thousands of millions of pounds sterling, respectively, and references to ‘pence’ represent pence in the United Kingdom (‘UK’).
Reference to ‘dollars’ or ‘$’ are to United States of America (‘US’) dollars. The abbreviations ‘$m’ and ‘$bn’ represent millions and
thousands of millions of dollars, respectively, and references to ‘cents’ represent cents in the US. The abbreviation ‘€’ represents the
‘euro’, and the abbreviations ‘€m’ and ‘€bn’ represent millions and thousands of millions of euros, respectively.
408
Glossary of terms
Arrears - the aggregate of contractual payments due on a debt
that have not been met by the borrower. A loan or other financial
asset is said to be 'in arrears' when payments have not been
made.
Collateralised loan obligations (CLOs) - asset-backed securities
for which the underlying asset portfolios are loans, often
leveraged loans.
Asset-backed commercial paper (ABCP) - a form of asset-backed
security generally issued by a commercial paper conduit.
Asset-backed securities (ABS) - securities that represent
interests in specific portfolios of assets. They are issued by a
structured entity following a securitisation. The underlying
portfolios commonly comprise residential or commercial
mortgages but can include any class of asset that yields
predictable cash flows. Payments on the securities depend
primarily on the cash flows generated by the assets in the
underlying pool and other rights designed to assure timely
payment, such as guarantees or other credit enhancements.
Collateralised debt obligations, collateralised loan obligations,
commercial mortgage backed securities and residential mortgage
backed securities are all types of ABS.
Asset quality (AQ) band - probability of default banding for all
counterparties on a scale of 1 to 10.
Assets under management - assets managed by RBS on behalf
of clients.
Back-testing - statistical techniques that assess the performance
of a model, and how that model would have performed had it
been applied in the past.
Basel III - in December 2010, the Basel Committee on Banking
Supervision issued final rules: ‘Basel III: A global regulatory
framework for more resilient banks and banking systems’ and
‘Basel III: International framework for liquidity risk measurement,
standards and monitoring’.
Basis point - one hundredth of a per cent i.e. 0.01 per cent. 100
basis points is 1 per cent. Used when quoting movements in
interest rates or yields on securities.
Buy-to-let mortgages - mortgages to customers for the purchase
of residential property as a rental investment.
Capital requirements regulation (CRR) - refer to CRD IV.
Collectively assessed loan impairment provisions - impairment
loss provisions in respect of impaired loans, such as credit cards
or personal loans, that are below individual assessment
thresholds. Such provisions are established on a portfolio basis,
taking account of the level of arrears, security, past loss
experience, credit scores and defaults based on portfolio trends.
Commercial mortgage backed securities (CMBS) - asset-backed
securities for which the underlying asset portfolios are loans
secured on commercial real estate.
Commercial paper (CP) - unsecured obligations issued by a
corporate or a bank directly or secured obligations (asset-backed
CP), often issued through a commercial paper conduit, to fund
working capital. Maturities typically range from two to 270 days.
However, the depth and reliability of some CP markets means
that issuers can repeatedly roll over CP issuance and effectively
achieve longer term funding. CP is issued in a wide range of
denominations and can be either discounted or interest-bearing.
Commercial paper conduit - a structured entity that issues
commercial paper and uses the proceeds to purchase or fund a
pool of assets. The commercial paper is secured on the assets
and is redeemed either by further commercial paper issuance,
repayment of assets or liquidity drawings.
Commercial real estate (CRE) - freehold and leasehold
properties used for business activities. Commercial real estate
includes office buildings, industrial property, medical centres,
hotels, retail stores, shopping centres, agricultural land and
buildings, warehouses, garages etc.
Common Equity Tier 1 capital (CET1) - the highest quality form of
regulatory capital under Basel III comprising common shares
issued and related share premium, retained earnings and other
reserves excluding reserves which are restricted or not
immediately available, less specified regulatory adjustments.
Contractual maturity - the date in the terms of a financial
instrument on which the last payment or receipt under the
contract is due for settlement.
Certificates of deposit (CDs) - bearer negotiable instruments
acknowledging the receipt of a fixed term deposit at a specified
interest rate.
Cost:income ratio - operating expenses as a percentage of total
income.
Collateralised debt obligations (CDOs) - asset-backed securities
for which the underlying asset portfolios are debt obligations:
either bonds (collateralised bond obligations) or loans
(collateralised loan obligations) or both. The credit exposure
underlying synthetic CDOs derives from credit default swaps. The
CDOs issued by an individual vehicle are usually divided in
different tranches: senior tranches (rated AAA), mezzanine
tranches (AA to BB), and equity tranches (unrated). Losses are
borne first by the equity securities, next by the junior securities,
and finally by the senior securities; junior tranches offer higher
coupons (interest payments) to compensate for their increased
risk.
Counterparty credit risk - the risk that a counterparty defaults
before the maturity of a derivative or sale and repurchase
contract. In contrast to non-counterparty credit risk, the exposure
to counterparty credit risk varies by reference to a market factor
(e.g. interest rate, exchange rate, asset price).
Coverage ratio - impairment provisions as a percentage of
impaired loans.
Covered bonds - debt securities backed by a portfolio of
mortgages that are segregated from the issuer's other assets
solely for the benefit of the holders of the covered bonds.
409
Glossary of terms
CRD IV - the European Union has implemented the Basel III
capital proposals through the CRR and the CRD, collectively
known as CRD IV. CRD IV was implemented on 1 January 2014.
The EBA’s technical standards are still to be finalised through
adoption by the European Commission and implemented within
the UK.
Credit default swap (CDS) - 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.
Credit derivatives - contractual agreements that provide
protection against a credit event on one or more reference
entities or financial assets. The nature of a credit event is
established by the protection buyer and protection seller at the
inception of a transaction, and such events include bankruptcy,
insolvency or failure to meet payment obligations when due. The
buyer of the credit derivative pays a periodic fee in return for a
payment by the protection seller upon the occurrence of a credit
event. Credit derivatives include credit default swaps, total return
swaps and credit swap options.
Credit enhancements - techniques that improve the credit
standing of financial obligations; generally those issued by a
structured entity in a securitisation. External credit enhancements
include financial guarantees and letters of credit from third party
providers. Internal enhancements include excess spread - the
difference between the interest rate received on the underlying
portfolio and the coupon on the issued securities; and over-
collateralisation – at inception, the value of the underlying
portfolio is greater than the securities issued.
Credit grade - a rating that represents an assessment of the
creditworthiness of a customer. It is a point on a scale
representing the probability of default of a customer.
Credit risk - the risk of financial loss due to the failure of a
customer, or counterparty, to meet its obligation to settle
outstanding amounts.
Customer accounts - money deposited with RBS by
counterparties other than banks and classified as liabilities. They
include demand, savings and time deposits; securities sold under
repurchase agreements; and other short term deposits. Deposits
received from banks are classified as deposits by banks.
Debit valuation adjustment (DVA) - an adjustment made in
valuing OTC derivative liabilities to reflect the entity's own credit
risk.
Debt securities - transferable instruments creating or
acknowledging indebtedness. They include debentures, bonds,
certificates of deposit, notes and commercial paper. The holder of
a debt security is typically entitled to the payment of principal and
interest, together with other contractual rights under the terms of
the issue, such as the right to receive certain information. Debt
securities are generally issued for a fixed term and redeemable
by the issuer at the end of that term. Debt securities can be
secured or unsecured.
Debt securities in issue - unsubordinated debt securities issued
by RBS. They include commercial paper, certificates of deposit,
bonds and medium-term notes.
Deferred tax asset - income taxes recoverable in future periods
as a result of deductible temporary differences (temporary
differences between the accounting and tax base of an asset or
liability that will result in tax deductible amounts in future periods)
and the carry-forward of tax losses and unused tax credits.
Deferred tax liability - income taxes payable in future periods as a
result of taxable temporary differences (temporary differences
between the accounting and tax base of an asset or liability that
will result in taxable amounts in future periods).
Defined benefit obligation - the present value of expected future
payments required to settle the obligations of a defined benefit
plan resulting from employee service.
Defined benefit plan/scheme - pension or other post-retirement
benefit plan other than a defined contribution plan.
Credit risk mitigation - reducing the credit risk of an exposure by
application of techniques such as netting, collateral, guarantees
and credit derivatives.
Defined contribution plan/scheme - pension or other post-
retirement benefit plan where the employer's obligation is limited
to its contributions to the fund.
Credit valuation adjustment (CVA) - the CVA is the difference
between the risk-free value of a portfolio of trades and its market
value, taking into account the counterparty’s risk of default. It
represents the market value of counterparty credit risk, or an
estimate of the adjustment to fair value that a market participant
would make to reflect the creditworthiness of its counterparty.
Currency swap - an arrangement in which two parties exchange
specific principal amounts of different currencies at inception and
subsequently interest payments on the principal amounts. Often,
one party will pay a fixed rate of interest, while the other will pay
a floating rate (though there are also fixed-fixed and floating-
floating currency swaps). At the maturity of the swap, the
principal amounts are usually re-exchanged.
Deposits by banks - money deposited with RBS by banks and
recorded as liabilities. They include money-market deposits,
securities sold under repurchase agreements, federal funds
purchased and other short term deposits. Deposits received from
customers are recorded as customer accounts.
Derivative - a contract or agreement whose value changes with
changes in an underlying variable such as interest rates, foreign
exchange rates, share prices or indices and which requires no
initial investment or an initial investment that is smaller than
would be required for other types of contracts with a similar
response to market factors. The principal types of derivatives are:
swaps, forwards, futures and options.
410
Glossary of terms
Discontinued operation - a component of RBS that either has
been disposed of or is classified as held for sale. A discontinued
operation is either: a separate major line of business or
geographical area of operations or part of a single co-ordinated
plan to dispose of a separate major line of business or
geographical area of operations; or a subsidiary acquired
exclusively with a view to resale.
Economic capital - an internal measure of the capital required by
RBS to support the risks to which it is exposed.
Economic profit - the difference between the return on
shareholders funds and the cost of that capital. Economic profit is
usually expressed as a percentage.
Effective interest rate method - the effective interest method is a
method of calculating the amortised cost of a financial asset or
financial liability (or group of financial assets or liabilities) and of
allocating the interest income or interest expense over the
expected life of the asset or liability. The effective interest rate is
the rate that exactly discounts estimated future cash flows to the
instrument's initial carrying amount. Calculation of the effective
interest rate takes into account fees payable or receivable that
are an integral part of the instrument's yield, premiums or
discounts on acquisition or issue, early redemption fees and
transaction costs. All contractual terms of a financial instrument
are considered when estimating future cash flows.
Encumbrance - an interest in an asset held by another party.
Encumbrance usually restricts the asset’s transferability until the
encumbrance is removed.
Equity risk - the risk of changes in the market price of the equities
or equity instruments arising from positions, either long or short,
in equities or equity-based financial instruments.
Eurozone - the 19 European Union countries that have adopted
the euro: Austria, Belgium, Cyprus, Estonia, Finland, France,
Germany, Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg,
Malta, the Netherlands, Portugal, Slovakia, Slovenia and Spain.
Expected credit loss (ECL, an IFRS 9 accounting measure) –
generally is the weighted average of credit losses; for collectively
assessed portfolios it is the product of the exposure, probability of
default at the reporting date and the lifetime loss given default.
At initial recognition of a financial asset, an allowance is made for
the 12 month expected credit loss, using the probability of default
in the first 12 months only. On a significant increase in credit
risk, the expected credit loss is increased to the lifetime
probability of default. ECL is applied to exposures to all financial
assets and contractual facilities whose performance is not
recognised at fair value in the income statement.
Expected loss (EL, a regulatory measure) – is the product of the
regulatory credit exposure, the probability of default over the next
12 months, averaged through an economic cycle, and the
downturn loss given default. It is applied to exposures whether
performance is recognised in income or reserves. Credit
exposures include all financial assets, customer facilities and are
subject to regulatory overlays.
Exposure - a claim, contingent claim or position which carries a
risk of financial loss.
Exposure at default (EAD) - an estimate of the extent to which
the bank will be exposed under a specific facility, in the event of
the default of a counterparty.
FICO score - a credit score calculated using proprietary software
developed by the Fair Isaac Corporation in the US from a
consumer's credit profile. The scores range between 300 and 850
and are used in credit decisions made by banks and other
providers of credit.
Financial Conduct Authority (FCA) - the statutory body
responsible for conduct of business regulation and supervision of
UK authorised firms from 1 April 2013. The FCA also has
responsibility for the prudential regulation of firms that do not fall
within the PRA’s scope.
Financial Services Compensation Scheme (FSCS) - the UK's
statutory fund of last resort for customers of authorised financial
services firms. It pays compensation if a firm is unable to meet its
obligations. The FSCS funds compensation for customers by
raising management expenses levies and compensation levies
on the financial services industry.
First/second lien - a lien is a charge such as a mortgage held by
one party, over property owned by a second party, as security for
payment of some debt, obligation, or duty owed by that second
party. The holder of a first lien takes precedence over all other
encumbrances on that property i.e. second and subsequent liens.
Forbearance - forbearance takes place when a concession is
made on the contractual terms of a loan in response to a
customer’s financial difficulties.
Forward contract - a contract to buy (or sell) a specified amount
of a physical or financial commodity, at an agreed price, at an
agreed future date.
Futures contract - a contract which provides for the future
delivery (or acceptance of delivery) of some type of financial
instrument or commodity under terms established at the outset.
Futures differ from forward contracts in that they are standardised
and traded on recognised exchanges and rarely result in actual
delivery; most contracts are closed out prior to maturity by
acquisition of an offsetting position.
G10 - the Group of Ten comprises the eleven industrial countries
(Belgium, Canada, France, Germany, Italy, Japan, the
Netherlands, Sweden, Switzerland, the United Kingdom and the
United States) that have agreed to participate in the International
Monetary Fund’s (IMF’s) General Arrangements to Borrow.
Government Sponsored Enterprises (GSEs) - a group of financial
services corporations created by the US Congress. Their function
is to improve the efficiency of capital markets and to overcome
statutory and other market imperfections which otherwise prevent
funds from moving easily from suppliers of funds to areas of high
loan demand. They include the Federal Home Loan Mortgage
Corporation and the Federal National Mortgage Association.
Gross yield - the interest rate earned on average interest-earning
assets i.e. interest income divided by average interest-earning
assets.
411
Glossary of terms
Haircut - a downward adjustment to collateral value to reflect its
nature and any currency or maturity mismatches between the
collateral and the exposure it secures.
Hedge funds - pooled investment vehicles that are not widely
available to the public; their assets are managed by professional
asset managers who participate in the performance of the fund.
Impaired loans - all loans for which an impairment provision has
been established; for collectively assessed loans, impairment
loss provisions are not allocated to individual loans and the entire
portfolio is included in impaired loans.
Impairment losses - (a) for impaired financial assets measured at
amortised cost, impairment losses - the difference between
carrying value and the present value of estimated future cash
flows discounted at the asset's original effective interest rate - are
recognised in profit or loss and the carrying amount of the
financial asset reduced by establishing a provision (allowance)
(b) for impaired available-for-sale financial assets, the cumulative
loss that had been recognised directly in equity is removed from
equity and recognised in profit or loss as an impairment loss.
Individually assessed loan impairment provisions - impairment
loss provisions for individually significant impaired loans
assessed on a case-by-case basis, taking into account the
financial condition of the counterparty and any guarantor and the
realisable value of any collateral held.
International Swaps and Derivatives Association (ISDA) master
agreement - a standardised contract developed by ISDA for
bilateral derivatives transactions. The contract grants legal rights
of set-off for derivative transactions with the same counterparty.
Investment grade - generally represents a risk profile similar to a
rating of BBB-/Baa3 or better, as defined by independent rating
agencies.
Key management - members of the RBS Executive Committee.
L-SREP - An annual Liquidity Supervisory Review and Evaluation
Process with the PRA, that involves a comprehensive review of
the RBS ILAAP, liquidity policies and risk management
framework.
Latent loss provisions - loan impairment provisions held against
impairments in the performing loan portfolio that have been
incurred as a result of events occurring before the balance sheet
date but which have not been identified at the balance sheet
date.
Level 1 - level 1 fair value measurements are derived from
quoted prices (unadjusted) in active markets for identical assets
or liabilities that the entity can access at the measurement date.
Level 2 - level 2 fair value measurements use inputs, other than
quoted prices included within level 1, that are observable for the
asset or liability, either directly or indirectly.
Interest rate swap - a contract under which two counterparties
agree to exchange periodic interest payments on a
predetermined monetary principal, the notional amount.
Level 3 - level 3 fair value measurements use one or more
unobservable inputs for the asset or liability.
Interest spread - the difference between the gross yield and the
interest rate paid on average interest-bearing liabilities.
Internal Capital Adequacy Assessment Process (ICAAP) - RBS’s
own assessment, as part of Basel III requirements, of its risks,
how it intends to mitigate those risks and how much current and
future capital is necessary having considered other mitigating
factors.
Internal funding of trading business - the internal funding of the
trading book comprises net banking book financial liabilities that
fund financial assets in RBS’s trading portfolios. Interest payable
on these financial liabilities is charged to the trading book.
Internal Liquidity Adequacy Assessment Process (ILAAP) an
ongoing exercise as part of the PRA’s regulatory framework to
comply with best practice and regulatory standards for liquidity
management.
International Accounting Standards Board (IASB) - the
independent standard-setting body of the IFRS Foundation. Its
members are responsible for the development and publication of
International Financial Reporting Standards (IFRSs) and for
approving Interpretations of IFRS as developed by the IFRS
Interpretations Committee.
Leverage ratio - a measure prescribed under Basel III. It is the
ratio of Tier 1 capital to total exposures. Total exposures include
on-balance sheet items, off-balance sheet items and derivatives,
and generally follow the accounting measure of exposure.
Liquidity and funding risk - the risk that RBS is unable to meet its
financial liabilities when they fall due.
Liquidity coverage ratio (LCR) - the ratio of the stock of high
quality liquid assets to expected net cash outflows over the
following 30 days. High quality liquid assets should be
unencumbered, liquid in markets during a time of stress and,
ideally, central bank eligible.
Loan:deposit ratio - the ratio of loans and advances to customers
net of provision for impairment losses and excluding reverse
repurchase agreements to customer deposits excluding
repurchase agreements.
Loan impairment provisions - 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.
Loan-to-value ratio - the amount of a secured loan as a
percentage of the appraised value of the security e.g. the
outstanding amount of a mortgage loan as a percentage of the
property's value.
412
Glossary of terms
London Interbank Offered Rate (LIBOR) - the benchmark interest
rate at which banks can borrow funds from other banks in the
London interbank market.
Loss given default (LGD) - an estimate of the amount that will not
be recovered by RBS in the event of default, plus the cost of debt
collection activities and the delay in cash recovery.
Market risk - the risk of loss arising from fluctuations in interest
rates, credit spreads, foreign currency rates, equity prices,
commodity prices and other risk-related factors such as market
volatilities that may lead to a reduction in earnings, economic
value or both.
Master netting agreement - an agreement between two
counterparties that have multiple derivative contracts with each
other that provides for the net settlement of all contracts through
a single payment, in a single currency, in the event of default on,
or termination of, any one contract.
Maximum distributable amount (MDA) - a restriction on
distributions which may be made by a bank which does not meet
the combined buffer requirements as set out in the PRA
Supervisory Statement SS6/14 ‘Implementing CRD IV: capital
buffers’.
Medium term notes (MTNs) - debt securities usually with a
maturity of five to ten years, but the term may be less than one
year or as long as 50 years. They can be issued on a fixed or
floating coupon basis or with an exotic coupon; with a fixed
maturity date (non-callable) or with embedded call or put options
or early repayment triggers. MTNs are generally issued as senior
unsecured debt.
Minimum requirement for own funds and eligible liabilities
(MREL) – Tier 1 and Tier 2 capital plus specific loss absorbing
instruments, including senior notes, that may be used to cover
certain gone concern requirements in the EU.
Monoline insurers (monolines) - entities that specialise in
providing credit protection against the notional and interest cash
flows due to the holders of debt instruments in the event of
default. This protection is typically in the form of derivatives such
as credit default swaps.
Model Risk Management - performs independent model
validation for material models where necessary.
Mortgage-backed securities - asset-backed securities for which
the underlying asset portfolios are loans secured on property.
See Residential mortgage backed securities and Commercial
mortgage backed securities.
Net interest income - the difference between interest receivable
on financial assets classified as loans and receivables or
available-for-sale and interest payable on financial liabilities
carried at amortised cost.
Net interest margin - net interest income as a percentage of
average interest-earning assets.
Net stable funding ratio (NSFR) - the ratio of available stable
funding to required stable funding over a one year time horizon,
assuming a stressed scenario. Available stable funding includes
items such as equity capital, preferred stock with a maturity of
over one year and liabilities with an assessed maturity of over
one year.
Non-performing loans - loans classified as Risk elements in
lending and potential problem loans. They have a 100%
probability of default and have been assigned an AQ10 internal
credit grade.
Operational risk - the risk of loss resulting from inadequate or
failed processes, people, systems or from external events.
Option - an option is a contract that gives the holder the right but
not the obligation to buy (or sell) a specified amount of an
underlying physical or financial commodity, at a specific price, at
an agreed date or over an agreed period. Options can be
exchange-traded or traded over-the-counter.
Over-the-counter (OTC) derivatives - derivatives with tailored
terms and conditions negotiated bilaterally, in contrast to
exchange traded derivatives that have standardised terms and
conditions.
Own credit adjustment (OCA) - the effect of the RBS’s own credit
standing on the fair value of financial liabilities.
Past due - a financial asset such as a loan is past due when the
counterparty has failed to make a payment when contractually
due.
Pillar 1 - the part of CRD IV that sets out the process by which
regulatory capital requirements should be calculated for credit,
market and operational risk.
Pillar 2 - Pillar 2 is intended to ensure that firms have adequate
capital to support all the relevant risks in their business and is
divided into capital held against risks not captured or not fully
captured by the Pillar 1 regulations (Pillar 2A) and risks to which
a firm may become exposed over a forward-looking planning
horizon (Pillar 2B). Capital held under Pillar 2A, in addition to the
Pillar 1 requirements, is the minimum level of regulatory capital a
bank should maintain at all times to cover adequately the risks to
which it is or might be exposed, and to comply with the overall
financial adequacy rules. Pillar 2B is a capital buffer which helps
to ensure that a bank can continue to meet minimum
requirements during a stressed period, and is determined by the
PRA evaluating the risks to which the firm may become exposed
(e.g. due to changes to the economic environment) during the
supervisory review and evaluation process. All firms will be
subject to a PRA buffer assessment and the PRA will set a PRA
buffer only if it judges that the CRD IV buffers are inadequate for
a particular firm given its vulnerability in a stress scenario, or
where the PRA has identified risk management and governance
failings, which the CRD IV buffers are not intended to address.
Pillar 3 - the part of CRD IV that sets out the information banks
must disclose about their risks, the amount of capital required to
absorb them, and their approach to risk management. The aim is
to strengthen market discipline.
413
Glossary of terms
Potential future exposure - is a measure of counterparty
risk/credit risk. It is calculated by evaluating existing trades done
against the possible market prices in future during the lifetime of
the transactions.
Potential problem loans (PPL) - loans for which an impairment
event has taken place but no impairment loss is expected. This
category is used for advances which are not past due 90 days or
revolving credit facilities where identification as 90 days overdue
is not feasible.
PRA Rule Book - contains provisions made by the PRA that
apply to PRA authorised firms. Within ‘Banking and Investment
Rules’, the Capital Requirements firms’ section applies to RBS.
Private equity - equity investments in operating companies not
quoted on a public exchange. Capital for private equity
investment is raised from retail or institutional investors and used
to fund investment strategies such as leveraged buyouts, venture
capital, growth capital, distressed investments and mezzanine
capital.
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.
Prudential Regulation Authority (PRA) - the statutory body
responsible for the prudential supervision of banks, building
societies, insurers and a small number of significant investment
firms in the UK. The PRA is a subsidiary of the Bank of England.
Regulatory capital - the amount of capital that RBS holds,
determined in accordance with rules established by the PRA for
the consolidated Group and by local regulators for individual
Group companies.
Repurchase agreement (Repo) - refer to Sale and repurchase
agreements.
Residential mortgage - a loan to purchase a residential property
where the property forms collateral for the loan. The borrower
gives the lender a lien against the property and the lender can
foreclose on the property if the borrower does not repay the loan
per the agreed terms. Also known as a home loan.
Residential mortgage backed securities (RMBS) - asset-backed
securities for which the underlying asset portfolios are residential
mortgages. RBS RMBS classifications, including prime, non-
conforming and sub-prime, reflect the characteristics of the
underlying mortgage portfolios. RMBS are classified as prime
RMBS where the loans have low default risk and are made to
borrowers with good credit records and reliable payment histories
and there is full documentation. Non-conforming RMBS include
US Alt-A RMBS, together with RMBS in jurisdictions other than
the US where the underlying mortgages are not classified as
either prime or sub-prime. Classification of RMBS as subprime or
Alt-A is based on Fair Isaac Corporation (FICO) scores, level of
documentation and loan-to-value ratios of the underlying
mortgage loans. US RMBS are classified as sub-prime if the
mortgage portfolio comprises loans with FICO scores between
500 and 650 with full or limited documentation. Mortgages in Alt-
A RMBS portfolios have FICO scores of 640 to 720, limited
documentation and an original LTV of 70% to 100%. In other
jurisdictions, RMBS are classified as sub-prime if the mortgage
portfolio comprises loans with one or more high risk
characteristics such as: unreliable or poor payment histories; high
loan-to-value ratios; high debt-to-income ratio; the loan is not
secured on the borrower's primary residence; or a history of
delinquencies or late payments on the loan.
Retail loans - loans made to individuals rather than institutions.
The loans may be for car purchases, home purchases, medical
care, home repair, holidays and other consumer uses.
Return on equity - profit attributable to ordinary shareholders
divided by average shareholders’ equity as a percentage.
Reverse repurchase agreement (Reverse repo) - refer to Sale
and repurchase agreements.
Risk appetite - an expression of the maximum level of risk that
RBS is prepared to accept to deliver its business objectives.
Risk asset ratio - total regulatory capital as a percentage of risk-
weighted assets.
Risk elements in lending (REIL) - impaired loans and accruing
loans which are contractually overdue 90 days or more as to
principal or interest.
Risk-weighted assets (RWAs) - assets adjusted for their
associated risks using weightings established in accordance with
the CRD IV as implemented by the PRA. Certain assets are not
weighted but deducted from capital.
Sale and repurchase agreements - in a sale and repurchase
agreement one party, the seller, sells a financial asset to another
party, the buyer, at the same time the seller agrees to reacquire
and the buyer to resell the asset at a later date. From the seller's
perspective such agreements are repurchase agreements
(repos) and from the buyer's reverse repurchase agreements
(reverse repos).
414
Glossary of terms
Securitisation - a process by which assets or cash flows are
transformed into transferable securities. The underlying assets or
cash flows are transferred by the originator or an intermediary,
typically an investment bank, to a structured entity which issues
securities to investors. Asset securitisations involve issuing debt
securities (asset-backed securities) that are backed by the cash
flows of income-generating assets (ranging from credit card
receivables to residential mortgage loans).
Settlement balances - payables and receivables that result from
purchases and sales of financial instruments recognised on trade
date. Asset settlement balances are amounts owed to RBS in
respect of sales and liability settlement balances are amounts
owed by RBS in respect of purchases.
Standardised approach - a method used to calculate credit risk
capital requirements under Pillar 1. In this approach the risk
weights used in the capital calculation are determined by
regulators. For operational risk, capital requirements are
determined by multiplying three years’ historical gross income by
a percentage determined by the regulator. The percentage
ranges from 12 to 18%, depending on the type of underlying
business being considered.
Standstill - is an agreement, usually for a specified period of time,
not to enforce the lender’s rights as a result of a customer
breaching the terms and conditions of their facilities. This is a
concession to the customer. A standstill is most commonly used
in a complex restructuring of a company’s debts, where a group
of creditors agree to delay enforcement action to give the
company time to gather information and formulate a strategy with
a view to establishing a formal restructuring.
Stress testing - a technique used to evaluate the potential effects
on an institution’s financial condition of an exceptional but
plausible event and/or movement in a set of financial variables.
Stressed value-at-risk (SVaR) - a VaR measure using historical
data from a one year period of stressed market conditions. For
the purposes of calculating regulatory SVaR, a time horizon of
ten trading days is assumed at a confidence level of 99%. Refer
also to Value-at-risk below.
Structured entity (SE) - an entity that has been designed such
that voting or similar rights are not the dominant factor in deciding
who controls the entity, for example when any voting rights relate
to administrative tasks only and the relevant activities are
directed by means of contractual arrangements. SEs are usually
established for a specific, limited purpose, they do not carry out a
business or trade and typically have no employees. They take a
variety of legal forms - trusts, partnerships and companies - and
fulfil many different functions.
Structured notes - securities that pay a return linked to the value
or level of a specified asset or index. Structured notes can be
linked to equities, interest rates, funds, commodities and foreign
currency.
Subordinated liabilities - liabilities which, in the event of
insolvency or liquidation of the issuer, are subordinated to the
claims of depositors and other creditors of the issuer.
Tier 1 capital - a component of regulatory capital, comprising
Common Equity Tier 1 and Additional Tier 1. Additional Tier 1
capital includes eligible non-common equity capital securities and
any related share premium. Under Basel III, Tier 1 capital
comprises Core Tier 1 capital plus other Tier 1 securities in issue,
less certain regulatory deductions.
Tier 2 capital - qualifying subordinated debt and other Tier 2
securities in issue, eligible collective impairment provisions less
certain regulatory deductions.
Total loss absorbing capacity (TLAC) - a Financial Stability Board
requirement for global systemically important banks to have a
sufficient amount of specific types of liabilities which can be used
to absorb losses and recapitalise a bank in resolution. The
implementation of the TLAC requirements is being discussed
within local regulators.
Unaudited - financial information that has not been subjected to
the audit procedures undertaken by RBS's auditors to enable
them to express an opinion on RBS's financial statements.
US Federal Agencies - are independent bodies established by
the US Government for specific purposes such as the
management of natural resources, financial oversight or national
security. A number of agencies, including, the Government
National Mortgage Association, issue or guarantee publicly
traded debt securities.
Value-at-risk (VaR) - a technique that produces estimates of the
potential loss in the market value of a portfolio over a specified
time period at a given confidence level.
Wholesale funding - wholesale funding comprises Deposits by
banks, Debt securities in issue and Subordinated liabilities.
Write-down - a reduction in the carrying value of an asset to
record a decline in its fair value or value in use.
415
Index
Accounting
Accounting developments
Accounting policies
Critical accounting policies
Approval of accounts
Asset-backed securities
Audit Committee
Letter from the Chairman of the Group Audit
Committee
Report of the Group Audit Committee
Auditors
Auditor’s remuneration
Independent auditor’s report
Available-for-sale financial assets
Accounting policies
Notes on the consolidated accounts
Average balance sheet
Balance sheet
Business review
Consolidated
Parent company
Board Risk Committee report
Letter from the Chairman of the Board Risk
Committee
Report of the Board Risk Committee
Business divestments
Presentation of information
Report of the directors
Notes on the consolidated accounts
Capital adequacy
Capital ratios
Capital resources
Notes on the consolidated accounts
Capital and risk management
Business risk
Capital, liquidity and funding risk
Conduct risk
Credit risk: management basis
Credit risk: balance sheet analysis
Market risk
Operational risk
Pension risk
Reputational risk
Cash flow statement
Business review
Consolidated
Discontinued operations
Notes on the consolidated accounts
Parent company
Parent company notes
261
251
259
246, 334
203
Central functions/items
Chairman
Chairman’s statement
Corporate governance
Letter from the Chairman
Our Board
Chief Executive’s review
120, 148, 329
6
57
57
51
9
65
67
274
230
255
264
360
125
246
334
73
74
118
109
298
165
166
311
228
161
223
177
192
206
225
220
228
127
250
298
326
336
342
Commercial Banking
15,118,120,138,341
Commercial & Private Banking
15,118,120,329
Consolidated financial statements
Consolidated balance sheet
Consolidated cash flow statement
Consolidated income statement
Consolidated statement of changes in equity
Consolidated statement of comprehensive income
Notes on the consolidated accounts
Contingent liabilities and commitments
Corporate governance
Compliance report
Governance at a glance
Risk governance
The Board and its committees
Debt securities
Capital and risk management
Notes on the consolidated accounts
Parent company notes
Deposits
Customer accounts
Deposits by banks
Derivatives
Capital and risk management
Notes on the consolidated accounts
Directors
Biographies
Interests in shares
Notes on consolidated accounts
Notice and termination provisions
Remuneration
Remuneration policy
Report of the directors
Discontinued operations
Accounting policies
Notes on the consolidated accounts
Disposal groups
Accounting policies
Notes on the consolidated accounts
Earnings per share
Business review
Notes on the consolidated accounts
246
250
244
247
245
264
312
106
48
152
51
201
294
340
276
270
204
292
51
97
331
88
86
85
109
252
298
252
298
129
276
416
Index
Employees
Headcount
Notes on the consolidated accounts
Report of the directors
Variable compensation
Financial instruments
Accounting policies
Critical accounting policies
Notes on the consolidated accounts
Parent company notes
Financial Services Compensation Scheme
Financial summary
Forbearance
Forward-looking statements
Glossary of terms
Going concern
Report of the directors
Goodwill
Critical accounting policies
Notes on the consolidated accounts
Group Performance and Remuneration Committee
Directors’ remuneration report
Letter from the Chair
Impairment
Accounting policies
Business review
Critical accounting policies
Notes on the consolidated accounts
Income statement
Business review
Consolidated
Parent company
Intangible assets
Accounting policies
Segmental analysis of goodwill
Notes on the consolidated accounts
Litigation, investigations and reviews
Loans and advances
Loans and advances to banks
Loans and advances to customers
Material contracts
NatWest Markets
Net interest income
Business review
Notes on the consolidated accounts
118, 120, 145, 328
266
266
111
268
255
261
276
338
313
119, 358
367
407
409
112
259
295
83
84
255
124
260
291
119
244
338
252
330
295
313
276
276
370
Non-interest income
Business review
Notes on the consolidated accounts
Operating expenses
Business review
Notes on the consolidated accounts
Parent company
Balance sheet
Cash flow statement
Income statement
Statement of changes in equity
Statement of comprehensive income
Notes
Payment Protection Insurance
Notes on the consolidated accounts
Critical accounting policies
Pensions
Accounting policies
Notes on the consolidated accounts
Pension risk
122
264
123
265
334
336
338
335
338
337
299
260
252
269
220, 379, 380
Personal & Business Banking
14,21,118,120,130,328
Post balance sheet events
114, 333
Potential problem loans
Presentation of information
Principal risks and uncertainties
Risk factors
Principal subsidiaries
366
118
372
340
Private Banking
15,118,120,141,328
Provisions
Accounting policies
Additional information
Notes on the consolidated accounts
RBS International
Related parties
Risk elements in lending
Additional information
Capital and risk management
Risk-weighted assets
Segmental reporting
Business review
Description of business
Notes on the consolidated accounts
254
363
291, 299
15,118,120,143,328
333
364
366
200
169
130
118
328
Services and Functions
118, 328
121
264
Share-based payments
Accounting policies
Notes on the consolidated accounts
252
267
417
Index
Share capital
Notes on the consolidated accounts
Shareholder information
Analysis of ordinary shareholders
Shareholder enquiries
Short-term borrowings
Statement of changes in equity
Consolidated
Parent company
Statement of comprehensive income
Consolidated
Parent company
Statement of directors’ responsibilities
Strategic report
305
406
405
369
247
335
245
338
116
3
Subordinated liabilities
Notes on the consolidated accounts
Parent company notes
Sustainability
Letter from the Chairman of the Sustainable
Banking Committee
Report of the Sustainable Banking Committee
Building a more sustainable bank
Tax
Accounting policies
Business review
Critical accounting policies
Notes on the consolidated accounts - tax
Notes on the consolidated accounts - deferred tax
303
341
81
82
24
254
124
260
275
301
UK Personal & Business Banking
118, 120, 130, 328
Ulster Bank RoI
Value-at-risk (VaR)
#
Variable compensation
Notes on the consolidated accounts
Viability statement
Strategic report
118, 120, 134, 328
215
268
49
418
Shareholder information
Important addresses
Principal offices
The Royal Bank of Scotland Group plc
PO Box 1000, Gogarburn, Edinburgh EH12 1HQ
Telephone: +44 (0)131 626 0000
The Royal Bank of Scotland plc
PO Box 1000, Gogarburn, Edinburgh EH12 1HQ
280 Bishopsgate, London EC2M 4RB
National Westminster Bank Plc
135 Bishopsgate, London EC2M 3UR
Ulster Bank Limited
11-16 Donegall Square East,
Belfast BT1 5UB, Northern Ireland
Ulster Bank Ireland DAC
Ulster Bank Group Centre,
George's Quay
Dublin 2, D02 VR98
Republic of Ireland
RBS Holdings USA Inc.
600 Washington Blvd
Stamford, CT 06901 USA
Coutts & Company
440 Strand, London WC2R 0QS
The Royal Bank of Scotland International Limited
Royal Bank House, 71 Bath Street
St Helier, Jersey, Channel Islands JE4 8PJ
Shareholder enquiries
Registrar
Computershare Investor Services PLC
The Pavilions
Bridgwater Road
Bristol BS99 6ZZ
Telephone: +44 (0)370 702 0135
Facsimile: +44 (0)370 703 6009
Website: www-
uk.computershare.com/investor/contactus
ADR Depositary Bank
BNY Mellon Shareowner Services
PO Box 505000
Louisville, KY 40233-5000
Direct Mailing for overnight packages:
BNY Mellon Shareowner Services
462 South 4th Street
Suite 1600
Louisville KY 40202
Telephone: 1-888-269-2377 (US callers – toll free)
Telephone: +1 201 680 6825 (International)
Email: shrrelations@cpushareownerservices.com
Website: www.mybnymdr.com
Corporate Governance and Regulatory Affairs
The Royal Bank of Scotland Group plc
PO Box 1000
Gogarburn Edinburgh EH12 1HQ
Telephone: +44 (0)131 556 8555
Investor Relations
280 Bishopsgate
London EC2M 4RB
Telephone: +44 (0)207 672 1758
Facsimile: +44 (0)207 672 1801
Email: investor.relations@rbs.com
Registered office
36 St Andrew Square
Edinburgh EH2 2YB
Telephone: +44 (0)131 556 8555
Registered in Scotland No. SC45551
Website
rbs.com
419