Annual Report and Accounts 2018
Building a simple, safe
and more customer
focused bank
rbs.com
We are a financial services company, providing a wide range of products and services
to personal, commercial, large corporate and institutional customers.
Our purpose is to serve customers well. We are building a safe, simple and customer-focused
bank. To do so we are doing business in a way that aligns with our values and considers
the longer-term impacts of our decisions and actions. Underpinning that ambition is our
blueprint for lasting success.
Our blueprint for
Our blueprint for
lasting success
lasting success
Our Ambition
Our Purpose
Our Values
Our Brands
No.1
for customer
service, trust
and advocacy
Serve customers well
Serving
customers
Working
together
Doing the
right thing
Thinking
long term
Our Priorities
Strength
and
sustainability
Customer
experience
Simplifying
the bank
Supporting
sustainable
growth
Employee
engagement
Our 2020
Goals
Our 2019
Targets
Progressing
towards
c.14%¹ CET1
capital ratio
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
Progressing
towards
c.14%¹ CET1
capital ratio
2 place
improvements
in CMA rank for
both NatWest
and Royal Bank
Brands
Reduce
operating
expenses by
c.£300m²
Grow net
lending in
CPB and PBB
by 2-3%
Improve employee
engagement
Notes: (1) c.14% at the end of 2021, previous target stated as >13%.
(2) Excluding strategic costs and conduct and litigation costs.
Assurance
The scope of work performed by the Group’s independent auditor as part of their review of other information included in
the 2018 Annual Report and Accounts is described in the Independent auditor’s report to the members of The Royal Bank of
Scotland Group plc on pages 166 to 175. In addition, The Royal Bank of Scotland Group plc appointed Ernst & Young LLP to
provide limited independent assurance over selected sustainability content marked with (*) within the Strategic Report, as at
and for the period ended 31 December 2018. 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. An opinion was issued and is available on rbs.com. This opinion includes details of
the scope, respective responsibilities, work performed, limitations and conclusions.
Further information on environmental, social, employee and human rights matters is available on
the Sustainable Banking webpages on rbs.com.
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02
Strategic Report
2-35
An overview of our business performance,
including our external operating environment and
how we are building a more sustainable bank.
2018 highlights
Chairman’s statement
Chief Executive’s review
4
6
8
36-46
47-88
Our operating environment
10
89-164
Business Review
The financial performance of our
business and our operating segments.
Governance
A detailed review of our corporate
governance and remuneration,
including the Report of the directors
and annual report on remuneration.
Capital and risk management
Disclosures on our capital, liquidity
and funding position and a detailed
overview of the management of
key risks relating to our business
operations.
Building a more sustainable bank
14
Our business performance
24
Our investment case and outlook
28
Financial Statements
Our audited financial statements
and related notes, including our
Independent auditor’s report.
165-252
Risk overview
Governance at a glance
30
34
253-263
Risk Factors
A description of certain risk factors
that could adversely affect our future
results, financial condition and
prospects and cause them
to be materially different.
Approval of Strategic Report
The Strategic Report for the year ended 31 December 2018 set out on pages 2 to 35 was approved by the
Board of directors on 14 February 2019.
By order of the Board.
Company Secretary
Aileen Taylor
14 February 2019
Chairman
Howard Davies
Non-executive directors
Frank Dangeard
Alison Davis
Patrick Flynn
Morten Friis
Robert Gillespie
Brendan Nelson
Baroness Noakes
Mike Rogers
Mark Seligman
Dr Lena Wilson
Executive directors
Ross McEwan
Katie Murray
03
w
2018 Highlights
How we have performed on Our Priorities
Strength and sustainability
Operating profit before tax
Profit attributable to
ordinary shareholders
£3,359m
£2,239m
2017
2018
Income
£13,402m
£13,133m
2018
2017
£1,622
million
2018
£752
million
2017
13p Dividend per share in 2018
£1.6
billion
Total proposed
dividend to
shareholders
£1.0
billion
Will be returned
to UK taxpayer
CET 1 ratio (1)
Return on tangible equity
Net interest margin
16.2%
2018
15.9%
2017
4.8%
2018
2.2%
2017
1.98%
2018
2.13%
2017
Customer experience
8.6
million
8.1
million
2018
2017
Digitally active users
(online and mobile)
Our Commercial Bank
is the largest supporter
of UK business
British Bank Awards 2018
Best Banking App:
NatWest
Best Private Bank
in the UK:
Coutts
Note:
(1) Based on end-point Capital Requirements Regulation (CRR) Tier 1 capital and leverage exposure under the CRR Delegated Act.
04
w
Simplifying the bank
Other operating expenses (1)
Cost:income ratio (2)
Risk-weighted assets
2018
2017
2018
2017
2018
2017
£7,359 million
£7,637 million
71.7%
79.0%
£188.7 billion
£200.9 billion
Employee engagement
Employee engagement score
Female representation in
our top c.4,000 roles
Women in Finance
86%
2018
83%
2017
45%
2018
44%
2017
2018 ‘Women in Finance
Awards Employer of
the Year’
Supporting sustainable growth
Lending in our personal and
commercial business (3)
Gross new mortgage lending (4)
Gross lending to SMEs
and mid-corporates in
Commercial Banking
£296.7
billion
£298.5
billion(5)
2018
2017
£32.8 billion
£33.9 billion
2018
2017
£30.0
billion
£30.7
billion
2018
2017
The only UK Bank
to be included in
the DJSI World and
Europe Indices.
Retained our
position in the
FTSE4GOOD Index
Series.
Over one million
Financial Health
Checks in 2018(*).
Awarded ‘highly
commended’ at the
Ethical Corporation
awards for
Climate Action.
Notes:
(1) Operating expenses excluding litigation and conduct costs of £1,282 million (2017 – £1,285 million), strategic costs of £1,004 million (2017 - £1,565 million)
and a VAT release of £86 million in 2017.
(2) Operating lease depreciation included in income of £121 million (2017 - £142 million).
(3) Comprises customer loans in our UK Personal & Business Banking, Ulster Bank RoI, Commercial Banking, Private Banking and RBS International operating segments.
(4) Comprises gross new mortgage lending in our UK Personal & Business Banking, Ulster Bank RoI, Private Banking and RBS International operating segments.
(5) 2017 includes an £1.8 billion reduction in net loans to customers as a result of asset reclassifications in 2018.
05
Chairman’s
statement
Howard Davies
Chairman
In 2018 the bank delivered a good
financial performance, despite an
uncertain economic outlook and a
highly competitive environment.
Paying a dividend for the first time in
a decade showed continued progress
in building a stronger, safer bank that
is capable of delivering improving
returns for shareholders.
A pre-tax operating profit of £3.4 billion
and an attributable profit of £1.6 billion
represent a more consistent financial
performance, following a return to
profitability in 2017. We achieved that
improvement through stable income
generation - despite the low interest
rate environment – as well as by
reducing operating costs and de-risking
the balance sheet further.
With the bank financially stronger and
the largest legacy issues resolved, the
Board and Management Team are
focused on delivering a more consistent
and improved level of customer
service across all areas. Customers’
expectations of all service providers
are high and the range of competitors
in the market using diverse delivery
mechanisms is as wide as it has ever
been.
Shareholder returns and privatisation
Our stronger financial position has
enabled us to provide clarity on how
we intend to return excess capital to
shareholders. We believe that to sustain
a sound bank of this kind we need a
strong capital base. We paid our first
ordinary dividend in a decade of 2
pence per share at our 2018 interim
results. We are pleased to announce
that, subject to shareholder approval
being obtained at the 2019 Annual
General Meeting, we will pay a final
dividend of 3.5 pence per share and a
special dividend of 7.5 pence per share.
Together this will mean over £1.6 billion
in capital returns to shareholders for
the Financial Year 2018. We expect to
maintain ordinary dividends of around
40% of attributable profit.
The bank received approval from
shareholders on 6 February to buyback
shares - equivalent to 4.99% of the
Group’s issued share capital - from HM
Treasury. Any buyback of these shares
will be at the discretion of HM Treasury,
however this approval provides another
mechanism to return excess capital to
shareholders in an efficient way.
The journey towards a return to private
ownership continues and further
progress was made in 2018. In June, the
government undertook a further sell
down of its majority stake in the bank,
selling 925 million shares, raising total
proceeds of £2.5 billion, and reducing
its stake to 62.3%. In addition, the
Chancellor indicated in the Autumn
Budget that the UK government plans
fully to exit its ownership of RBS by
2024.
Brexit and the economy
The Brexit process continues and we
have planned for a range of scenarios
associated with exiting the European
Union. We have put in place plans that
will enable us to continue to serve
our customers in continental Europe.
We have our Dutch Banking entity in
Amsterdam and we are in the final
stages of seeking approval for two
branches in Frankfurt, which we expect
to be operationally ready if required,
to support among other things the
continued clearing of euro payments.
These actions are prudent given the
uncertainty and will allow us to serve
our large corporate customers in
Western Europe while we wait for clarity
on the terms of the deal.
In the UK, we are seeing large corporate
customers delay investment decisions
until they have more detail on the
outcome of the Brexit process. As one of
the largest commercial lenders in the UK
we recognise our responsibility to provide
support at a highly uncertain time.
As a predominantly UK and RoI focused
bank, our performance and lending
growth will broadly reflect those
economies. UK economic growth
remained behind its long term average
in 2018. While the inflationary pressure
induced by sterling’s depreciation post
the EU referendum subsided, consumer
confidence remains muted. It remains to
be seen what fiscal and monetary policy
levers the Bank of England will pull in
the event of an economic downturn,
but lower interest rates for longer
would affect the bank’s ability to deliver
significant income growth.
06
Progress on resolving our
legacy issues
The bank resolved its remaining major
legacy issues in 2018. We settled the
US Department of Justice investigations
into our historic (pre-2007) activities
in the US RMBS market in August
2018. While settling this long-running
issue was welcome, the £3.6 billion
settlement was a stark reminder of how
in the past this bank failed to put the
interests of customers first.
We have seen good progress on the
revised scheme to satisfy our remaining
State Aid obligations. In 2017, Her
Majesty’s Treasury agreed with the
European Commission a two part
scheme comprising of a Capability &
Innovation Fund, and an incentivised
transfer of some of our Small and
Medium sized Enterprise customers
who were due to move to Williams &
Glyn. We welcome the progress that the
independent body Banking Competition
Remedies Ltd has made and are
operationally ready to fully support
the switching scheme and impacted
customers at its launch.
Ring-fence regulation
In 2018, we continued to reshape the
bank in response to UK ring-fencing
legislation. This involved transferring
4.5 million customers between different
legal entities. In July, we reached a
key milestone when the Scottish Court
approved the bank’s request to transfer
the customers who were affected
by a change in legal entity. We also
introduced some significant changes to
the way our Boards operate to comply
with regulatory requirements. We met
the PRA deadline on 1 January 2019
and are fully ring-fence compliant. This
has been a complex project and I am
pleased it has been undertaken with
minimal impact on customers.
Building a more sustainable bank
and community engagement
We are aware of our responsibilities to
the communities we serve, given the
central role we play in the economy. In
2018 we provided £30.4 billion in gross
new lending to UK homeowners and
supported over £100 billion of lending
to UK businesses, as we helped our
customer continue to grow.
Our volunteering and fundraising
partnerships continue to make a
difference for the communities
we serve. In 2018, our employees
supported a wide variety of charities
raising £4.4 million through their giving
and fundraising efforts. Our flagship
financial education programme,
MoneySense, met its annual targets.
Since 2015, we have reached 1.8 million
young people and RBS employees have
supported 59,000 in-school workshops.
Last year, we witnessed a growing
focus on climate change from
regulators and investors. In 2017, the
bank publicly committed its support
of 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 have now committed a
further £10 billion to the Sustainable
Energy sector by 2020. This will include
continued financing of low carbon
generation as well as energy efficiency
projects, such as in the real estate
sector, and alternative fuelled vehicles.
Shareholders
We have continued to engage actively
with our shareholders. A resolution
to establish a formal Shareholder
Committee was requisitioned by a
group of shareholders at our AGM in
2018. It did not receive approval, in part,
we believe, because we have made
efforts to engage with shareholders
large and small. Our investor
relations efforts are highly rated. Our
Sustainable Banking Committee has
met a wide range of stakeholders for
a number of years. Last year we held
retail shareholder events in Glasgow
and Birmingham. The events gave
shareholders the opportunity to meet
with our Board and ask questions on
performance and strategy. Feedback
was positive and we plan to hold more
events in 2019.
Diversity and inclusion
In 2014, we set ourselves a target
to have at least 30% of roles in the
three most senior levels of each of our
businesses filled by women by 2020. In
2018, on aggregate across the bank,
this representation stands at 37%. We
also are aspiring to achieve full gender
balance at all levels of our business by
2030.
We are focused on becoming a more
ethnically diverse organisation, to
reflect the communities in which
we operate. We introduced formal
UK targets in 2017 to improve the
proportion of non-white colleagues in
our top 4 leadership layers, to at least
14% by 2025, and are already making
good progress against this, with 8%
representation.
Board changes
We were pleased to welcome Patrick
Flynn to the Board on 1 June 2018.
Patrick’s appointment further
strengthens our overall board
composition and supports succession
planning. Brendan Nelson will step
down as Chairman of the Group Audit
Committee with effect from 31 March
2019 at which time Patrick will assume
the role of Chairman of the Group Audit
Committee. Brendan has indicated
that he will not stand for re-election at
the 2019 Annual General Meeting. I’d
like to thank Brendan for his significant
contribution since joining the Board as
a Non-Executive Director in 2010. The
Board and the wider organisation have
benefited from his extensive knowledge
and experience and his presence will be
greatly missed.
Penny Hughes resigned as a non-
executive director on 30 May and Ewen
Stevenson resigned as Chief Financial
Officer and Director on 30 September.
I would like to thank Penny and Ewen
for all their hard work and dedication
to RBS.
As a result of Ewen’s resignation we
appointed Katie Murray as Chief
Financial Officer, effective from 1
January 2019. Katie brings nearly
30 years of finance and accounting
experience in capital management,
investor relations and financial planning
to the role. She has already contributed
significantly to RBS over the last three
years.
Conclusion
Overall, the Board is pleased with the
bank’s performance in 2018 during a
period of significant uncertainty in the
macroeconomic environment. We dealt
with our last major outstanding legacy
issue, reduced our cost base, delivered
lending growth in a tough operating
environment and paid our first dividend
in a decade. We still have more work
to do to reach our 2020 ambitions, but
we continue to make good progress on
improving returns for shareholders and
delivering better service for customers.
07
Chief Executive’s
review
Ross McEwan
Chief Executive
2018 was a year of strong progress
on our strategy - we settled our
remaining major legacy issues,
paid our first dividend in ten years
and delivered another full year
bottom line profit. However, while
our financial performance is more
assured, we know that a significant
gap remains to achieving our
ambition to be the best bank for
customers. We are fully focused on
closing this gap.
Today we are reporting a pre-tax
operating profit of £3.4 billion and a
bottom line attributable profit of £1.6
billion for 2018. In addition, we are
pleased to propose a full year ordinary
dividend of 3.5 pence per share, and a
special dividend of 7.5 pence per share.
These are in addition to the ordinary
dividend we paid at our interim results.
Together, we will have returned £1.6
billion to shareholders, and around £1
billion to the UK taxpayer in dividends.
We also have shareholder approval to
participate in a directed buyback should
the government seek to dispose of a
portion of its shares.
The UK economy faces a heightened
level of uncertainty related to the
ongoing Brexit negotiations. We have
continued to support our customers,
providing £30.4 billion in gross new
UK mortgage lending in 2018, and
Commercial Banking made or renewed
commitments of around £30 billion
of term lending facilities to mainly
UK businesses. Our Commercial and
Business Banking businesses supported
total lending of more than £100 billion
in 2018.
We have also committed an additional
£2 billion to our Growth Fund to support
British business, taking the total
fund to £3 billion. This fund is helping
businesses manage their supply chains
in what is a very uncertain time. These
actions help maintain our position as
the largest supporter of UK business.
A good financial performance in
uncertain economic conditions
Our financial performance is good,
given the uncertain economic outlook.
In 2018, we continued to take costs out
of the business and reduced operating
expenses by £278 million. This means
that we have now reduced operating
costs by more than £4 billion in five
years.
Our long-term target remains to reach
a cost to income ratio of below 50%,
however we note that as an industry
we are required to carry additional
costs to deal with Brexit and the
ongoing operational obligations of ring-
fencing. Given the continued low rate
environment and highly competitive
mortgage market, coupled with the
uncertainty in the economy, income
remains under pressure. We continue
to focus on cost reduction to ensure
we are preparing our business for the
future and to meet our customers and
shareholders needs.
In 2019, we are committing to reducing
our operating costs by c.£300 million.
Our consistent delivery on cost targets
in recent years gives me the confidence
we will achieve this.
Our strategic plan has served us well
and we will continue to focus on our five
key priorities, as set out below, as we
strive to become the UK and Republic of
Ireland’s best bank for customers.
Strength and Sustainability
The bank’s financial strength is much
improved. Our Common Equity Tier
1 ratio has increased from 8.6% at
the end of 2013 to 16.2% at the end
of 2018. This progress helped us to
obtain a clear pass in the 2018 Bank of
England stress test - a very important
milestone. Alongside our financial
strength we have continued to build
greater resilience into our systems,
helping to protect our customers who
are at greater risk of fraud and scams
more than ever before. We are the
first and only UK bank to partner with
National Trading Standards on their
Friends Against Scams initiative. More
than 31,000 colleagues completed the
training in 2018 and we have committed
to training a million customers by 2020.
Customer Experience
While our financial performance is more
assured, we know that a significant gap
remains to achieving our ambition to
be the best bank for customers. We are
very aware that we need to deliver
08
better service, more consistently. The
Competition and Markets Authority
(CMA) results, which now provide
the public with a ranking of banks’
performance for customers, bring this
into sharp focus. With the large major
legacy issues behind us, we are putting
all of our focus into improving our
customer experience.
lower our cost base and deliver a 24/7
customer experience . Take Cora for
instance –our AI Chat Bot which we
launched in partnership with IBM
Watson - she now handles an average
of 83,000 queries a week. Given the
success in the personal business,
we have recently rolled out Cora to
Commercial Banking.
We are investing in innovation, with
£1 billion committed to invest in 2019
aimed at improving legacy systems
and delivering better solutions for
customers. We continue to develop our
mobile app which for NatWest now
scores +41 for customer advocacy.
Our Commercial Bank, the UK’s largest
supporter of business, remains ahead
of the rest of the market for customer
advocacy and in Coutts we have a
market leading private banking brand.
Customers want and need to do their
banking quickly and safely. When we
help them to do this, and combine it with
expert advice, we see advocacy scores
increase. That is how we are focusing
the business, and we are confident the
changes we are making will deliver a
consistently higher quality of service.
Simplifying the Bank
We are a simpler bank, but we can’t
yet call ourselves simple to deal with.
While we are now more efficient with a
lower cost base, as we have shrunk in
size, many of our processes are still too
difficult for our customers to deal with,
and are frustrating for our colleagues
as they try to serve our customers.
Whether it is booking travel, watching
a film or shopping online, customers
now expect a fast and reliable service.
Banking is no different from any other
customer focused industry, and we
are responding to those changes in
customer behaviour.
Our first digital lending journey for
Commercial Banking customers is
now live. The new platform allows
existing customers to apply digitally
for secured and unsecured loans up to
£750,000, subject to eligibility criteria.
Customers are able to complete their
loan application in a matter of minutes,
and usually get a decision in principle
within 24 hours. We have simplified and
streamlined the customer experience,
giving our customers a rapid response,
all the while supported by the vast
industry knowledge and insight of our
Relationship Managers.
We are also embracing artificial
intelligence (AI), which is helping us
Supporting sustainable growth
Supporting our customers’ ambitions
is a key part of our role in society. We
have focused on growing lending in our
target markets. Gross mortgage lending
in UK Personal and Business Banking
increased £1.5 billion in 2018, and we
helped around 45,000 customers buy
their first home. Our support doesn’t
only extend to lending, we now have
12 NatWest accelerators. These
hubs make up the UK’s largest fully-
funded business accelerator network,
capable of supporting up to 1,000
entrepreneurs.
NatWest Markets continued to support
large corporate customers with a range
of financing needs in 2018. Our FX team
was voted number one for customer
satisfaction in the 2017 Greenwich
Associates FX Survey and we helped
clients raise £312 billion on the debt
capital markets.
Employee engagement
The turnaround of the bank would
not have been possible without the
hard work and determination of our
colleagues. Over the last four years we
have seen a significant reduction in the
number of roles across the bank, as a
result of divestment and restructuring
aligned to our strategy. Despite this
activity, colleague engagement is
at its highest level since we started
measuring in 2002. The independent
Banking Standards Board report on
culture also showed improvements
in every category. Of course, there is
always more we can do, and we have
set stretching targets as we strive to
become a more diverse and inclusive
organisation.
Innovating and investing to
improve customer service
We have taken a dual approach to
innovation by transforming our core
banking services and delivering
new products and services outside
of traditional banking. In 2018, we
continued to invest in our existing
infrastructure, improving system
resilience and migrating to latest in
cloud technologies. Last year we
experienced 19 Criticality 1 Incidents,
compared to 318 four years ago.
Our customers continued to migrate to
our mobile app during 2018. In UK PBB
we now have 6.4 million regular mobile
customers, 16% higher than 2017.
Today close to three quarters of active
current account customers in UK PBB
are regular digital users. Sales through
our digital channels in UK PBB are up
19% on last year and now represent
almost half of all product sales. Four
years ago this figure would have been
26%.
At the same time we are trying new
things outside our core banking
services. We are piloting Bó and Mettle
as two standalone digital banks. Bó is
our digital personal bank targeted at
helping people to manage their money
better. Mettle is our digital bank for
business customers.
We are learning a lot from these
innovations and applying our findings
back into the core bank.
These innovations complement the
wider eco-systems that we want to build
around key customer experiences – be
it buying a home, or running a business.
Building or acquiring complementary
services to the core banking services
we already offer in these areas will
allow us to deepen our relationships
with customers, and ultimately grow
revenue.
2019, a year of focusing forward
In 2019, we will focus forward, into
a rapidly changing market. We have
set annual goals for 2019 based
around our five priorities in order to
keep up momentum on the delivery
of our strategic plan. There are two
areas in particular that we need to
focus on – customer experience and
simplifying the bank. This year we
aim to spend £1 billion on upgrading
legacy infrastructure, improving
systems, processes and delivering new
innovations which will improve our
customers’ experience. We will simplify
the bank further in 2019, given this we
have set a operating cost reduction
target of c.£300 million for 2019, and
continue to strive for a sub 50% cost to
income ratio.
We have made good progress on
making RBS a much simpler, safer and
more customer focused bank. From
a position of capital strength, we will
aim to improve returns for you, our
shareholders.
09
Our operating environment
Key economic indicators
UK gross domestic
product growth
UK unemployment rate
Number of people in employment
in the UK (million)
1.4%
1.8%
4.0%
4.4%
32.5
32.2
2018
2017
2018
2017
2018
2017
Bank of England
base rate
0.75%
0.50%
Q4 2018
Q4 2017
UK GDP grew by 1.4% in 2018, down from a 1.8% rise in 2017. Weaker business
investment has been a contributing factor. Between Q3 2018 and Q4 2018,
business investment fell by 1.4%, the fourth consecutive quarterly decline, meaning
investment was 3.7% lower in Q4 2018 compared with a year previously. Business
borrowing increased slightly towards the end of 2018, with loans to non-financial
companies up 2.6% in the year to December 2018, compared with 2.1% at the end
of 2017. However, within that, it was larger firms who were primarily responsible
for the growth in lending (up 4% in the year to December 2018). In comparison,
SMEs loan growth was 0.1% year on year. Annual inflation hovered just above the
Monetary Policy Committee’s target in December 2018, at 2.1%.
The labour market remained strong with employment rising further to a new
record 32.5 million in the three months to November 2018 compared to 32.2 million
for the three months to November 2017. This helped push unemployment down to
4.0% in the three months of November 2018, compared to 4.4% at the end of 2017.
Pay growth rose to 3.4% in the three months to November 2018 and vacancies
reached new highs. The Bank of England’s mounting concerns that the pace of
activity is exceeding the potential growth rate of the UK economy prompted a rise
in the Bank Rate to 0.75% in August 2018, the second increase since November
2017. However, the Bank of England signalled it expects UK economic growth to
slow again in 2019 and therefore envisages any further tightening to be gradual
and limited, contingent on the nature of the UK’s withdrawal from the EU.
Any time of day
Our chatbot Cora’s only two, but has already chatted
with more than 4.3 million customers.
Cora can answer most customer queries and is available to chat 24/7, meaning
customers can always get a response in seconds, whatever the time of day.
And the more conversations Cora has, the better Cora gets. Thanks to clever
algorithms, Cora learns from every interaction so the knowledge and service
on offer is always improving.
This 24/7 approach to customer service and Cora’s ability to learn quickly
are resulting in great feedback, with 83 per cent of customers giving a
4 or 5 star rating.
Not bad for a 2-year old.
10
Making sense of money
Through MoneySense, our flagship financial education programme
for 5-18 year olds, we have helped over 6.5 million young people to
be more financially aware. During 2018, our employees helped over
77,000 young people learn about money through our MoneySense
volunteer workshops in schools.
Money management is an essential life skill that, prepares young people for adult life as well
as contributing positively to communities and wider society.
In a fast-changing, digital world it’s important that young people have the skills, knowledge,
and confidence to manage their money well. MoneySense goes beyond the basics of
budgeting and saving, with curriculum-based lessons that also explore fraud and scams,
the connection between unmanageable debt and negative emotions and the dangers
of money muling.
The programme won Gold for Best Educational Programme at the Corporate Engagement
Awards in 2018 and, as MoneySense enters its 25th year, we are proud of the difference
it’s making to young people and our communities.
11
11
Key influences in
our operating
environment
The environment in which
we operate influences our
ability to serve customers
and create value for the
long term.
Every year we assess the importance
and materiality of external influences
both in terms of their relevance to our
stakeholders (including customers,
investors, policy makers, bank
representatives and topic specialists)
and their potential commercial impact
on the bank.
In 2018 the key influences review
involved interviews with internal
and external stakeholders and a
cross-bank workshop.
The results help evaluate our
performance in the context of wider
societal issues, inform the bank’s future
strategy and stakeholder engagement.
For more on our key influences
process refer to the Sustainable
Banking pages on rbs.com
Longer term
considerations
Financial
capability
Social inequality &
financial exclusion
Climate &
sustainable
finance
Housing
h
g
H
i
t
s
e
r
e
t
n
l
i
r
e
d
o
h
e
k
a
t
S
Shorter term
considerations
Reputation
& trust
UK productivity &
economic growth
Inclusion &
diversity
Operational
resilience
Conduct &
litigation
Political
landscape
Banking
regulation
Cyber
security
Culture,
engagement &
wellbeing
Skills, capabilities
and reward
Generating
sustained
returns
Technology &
innovation
Changing
customer
expectations
Competition
Commercial impact
High
The key influences have been mapped to the bank’s five strategic priorities
Strength &
sustainability
Customer
experience
Simplifying
the bank
Supporting
sustainable growth
Employee
engagement
Landing a green deal
NatWest Markets played an active role in the issuance of a
landmark Green bond by Royal Schiphol Group, which issued
its first ever Green bond. This raised EUR 500million, a first
for a European airport.
These proceeds will go towards funding a portfolio of eligible environmental projects
to improve energy efficiency. There will also be investment in new environmentally
friendly forms of transportation at Amsterdam Schiphol Airport.
This sector may not seem the most obvious one for a green bond issuance. But this is
part of an increasing trend of clients wanting to contribute to climate action. NatWest
Markets will continue to help clients transition to a lower carbon economy.
Vianney Heeren, Corporate Treasurer says:
‘The transaction reflects Schiphol’s ambition to be the most sustainable airport.
Proceeds of the bond issue will be used to invest in clean transportation and green
buildings. NatWest Markets did an outstanding job in making this deal a success.’
12
12
Understanding the key influences in our operating environment
Shorter term considerations
UK productivity & economic growth
The UK economy continued to grow in
2018, albeit below its long-term trend.
RBS’s performance is strongly tied to
the economic performance of the UK
economy. With the short and long-term
outlook for the UK and global economy
remaining uncertain, RBS recognises
its role in supporting productivity and
economic growth.
Political landscape
Political risks continue to evolve with
uncertainties related to Brexit.
Generating sustained returns
To generate sustained returns to its
stakeholders, RBS needs to have a
robust business model with a well-
managed cost base that adapts and
responds to changing socio-economic
and environmental factors.
Technology & innovation
Digital maturity is seen as critical to the
future success of RBS as the banking
sector goes through a period of rapid
technological change. Together with
digital innovation and ongoing efforts
to reduce costs, there is potential for
significant disruption to traditional
banking business models.
Changing customer expectations
Customers’ lives are following less
predictable paths. RBS needs to continue
helping customers with new ways to
bank while meeting personalised service
expectations and catering to a broad
range of lifestyles and differing levels
of digital and financial understanding.
Competition
Regulators continue to encourage
competition in the banking sector,
with January 2018 seeing the arrival
of Open Banking and Payment Services
Directive 2 (PSD2).
To respond to growing competitive
pressures, RBS will need to continue to
improve the bank’s products and services
in order to increase market share.
Reputation & trust
A significant level of trust is required to
ensure RBS is sustainable for the long
term. Continued efforts to restore trust
and safeguard reputation remain a key
focus area.
Conduct & litigation
Although RBS has resolved the majority of
legacy conduct issues and litigation costs
are falling, the focus remains on putting
in place and maintaining measures to
prevent future issues related to conduct.
Cyber security
With the increasing possibility of
significant scale attacks resulting in
data breaches and ultimately, damaging
consumer trust, RBS must continue to
build on a multi-layered approach to
cyber security and continue to take part
in industry-wide initiatives to monitor
and anticipate developments.
Operational resilience
2018 has seen heightened media
coverage on the operational competency
of UK banks, including data breaches and
technology failures. To provide continuity
of service for customers with minimal
disruption, RBS must continue to monitor
and assess a diverse array of threats,
both external and internal, as well as
developing, strengthening or adapting
existing control capability to be able to
absorb and adapt to such disruptions.
Banking regulation
RBS continues to operate in an
increasingly complex regulatory
environment. Regulatory and legislative
focus is broadening from banking
regulation to include non-banking
specific regulation, for example relating
to artificial intelligence and climate
change.
Longer term considerations
Inclusion & diversity
Building a more inclusive RBS is essential for
our customers and colleagues. We will only
achieve our ambition to be number one for
customer service, trust and advocacy if we
understand the needs of all of our people and
our customers.
Culture, engagement & wellbeing
A healthy culture and engagement are critical
drivers for overall performance and wellbeing,
underpinning the bank’s long-term success.
Skills, capabilities & reward
RBS faces competition for skilled people.
Recruiting, developing and retaining talent
remains a key priority.
Climate and sustainable finance
As the scientific evidence on climate change
becomes even clearer, RBS needs to further
embed climate risk in its existing risk
management framework and proactively
assist its customers and clients with the
transition to a low carbon economy.
Financial capability
Against a backdrop of increased focus on debt,
fraud and customers in vulnerable situations,
RBS has a key role to play in supporting
customers to use our various banking channels
and manage money well on a day to day basis,
through significant life events and during
periods of financial difficulty.
Social inequality & financial exclusion
Squeezed incomes, the “gig economy” and
rising cost of living means many UK consumers
find themselves in precarious financial
situations. Access to mainstream financial
services coupled with a lack of digital footprint
and skills remains a concern across a number
of stakeholders.
Housing
Housing is a major expense for most people
and in many parts of the UK there are
concerns about the affordability, standard and
availability of housing. RBS is a major mortgage
provider and also lends to the housing and
construction sectors.
Where to find out more
2018
highlights
Chairman/CEO
review
Building a more
sustainable
bank
Sustainable
Banking pages
on rbs.com
Governance at
a glance
Our business
performance
Outlook
Risk
overview
Climate related
disclosures
Key economic
indicators
13
Building a more sustainable bank
Our Stakeholders
Having an understanding of our impact across all stakeholders, and engaging them in ways
that allow their views to be heard, continues to help inform our strategy.
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.
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 Government
Investments, retail and institutional
investors. They are interested
in financial and non-financial
performance in the short, medium
and long term.
Customers
All individual and
business customers,
past, present
and future.
Policy Makers
Includes politicians, government and
regulators. They take issues through
consultations and into policy reform.
They make recommendations,
regulations and the law.
Below are four examples of
engagement that have informed the
bank’s strategic thinking in 2018:
Colleague Advisory Panel
Set up as a pro-active response
to changes in the UK Corporate
Governance Code, the panel is an
additional channel for colleagues to
engage directly with the Board.
Approximately twenty colleagues
from across the Group will meet
twice a year to discuss key issues.
“This is a great opportunity for the
Board to gather opinions on important
topics and for colleagues to share their
views on issues ranging from the bank’s
strategy to social purpose, wellbeing
and inclusion.”
Lena Wilson
Colleague Advisory Panel Chair
Bank Representatives
Includes colleagues, suppliers,
and partners. They are responsible
for product and service delivery
and are the face of our brands.
Climate and sustainable finance
Engaging with investors, regulators,
academics and campaigning NGOs was
key to advancing our climate strategy
in 2018. Their views fed into our policy
changes on mining, power and oil and
gas sectors.
“The strengthened energy financing
policies of RBS implement many of
ShareAction’s recommendations for
more robust management of climate-
related risks. They also make RBS the
bank with the strongest energy sector
policies out of the top five UK banks.”
ShareAction, May 2018.
Artificial Intelligence and Ethics
The Sustainable Banking Committee
and Technology Innovation Committee
hosted a joint engagement session
to debate ethical considerations
surrounding Artificial Intelligence.
14
A table of 2018 stakeholder
engagement issues and outcomes
can be found on the Sustainable
Banking pages at rbs.com
Customer sentiments and opinions were
captured by film and external experts
presented their views and gave insight.
“The strategy should be to collaborate,
map everything out on AI in a
systematic way – and engage.”
Tom Ilube
Technology Advisory Board Member
Customer Listening Event
Consumer advocacy group Which?
hosted a listening event with NatWest
customers. Our CEO and senior
management team heard views on
service, products and ways to bank.
"The evening was a another great
opportunity to engage directly with
our customers outside of our day to day
interaction. Listening to, and acting on
customer feedback is vital in our efforts
to improve customer service."
Ross McEwan
Chief Executive
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 is one of our
core priorities. We have clear cultural
goals to reinforce Our Values and set
ourselves cultural priorities each year,
regularly engaging our management.
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, 80%, of our colleagues
completed our most recent opinion
survey, the highest participation in
the last five years. The results were
the most positive we have seen since
we started measuring engagement in
2002 and showed we are changing the
culture of the bank for the better. Key
measures of engagement, leadership
and our culture have improved
significantly, and we are now above
the global financial services norm in all
of our comparable 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 continue to nurture this
culture, and we encourage colleagues
to tell us what they think via the
bi-annual colleague survey and our
regular comments boards. When
colleagues wish to report concerns
relating to wrong doing or misconduct
one of the ways in which they can do
this is by raising their concerns via
Speak Up, our whistleblowing service.
Our opinion survey has shown the
highest ever score when asking
colleagues if they feel safe to speak up,
as well as understanding the process
of how they do that. In 2018, 480 cases
were raised compared to 290 in 2017.
Performance and Reward
Our approach to performance
management provides clarity for
our employees about how their
contribution links to our ambition
and all our employees 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. We simplified our Value
Account construct, making it easier
for our employees to understand the
value of their fixed pay and to bring
it more in line with industry best
practices. We are confident that we
pay our employees fairly. We keep
our HR policies and processes under
review to ensure we do so. In the UK,
our rates of pay continue to exceed
the Living Wage and we ensure
people performing the same roles
are paid fairly and consistently. More
information on our remuneration
policies can be found in the 2018
Directors Remuneration Report in the
2018 Annual Report and Account's.
Developing Skills and Capabilities
We have launched the NextGen talent
development programme for high
potential colleagues at managerial
level, helping them become the
future leaders we need. The learning
opportunities available through the
programme align to the bank’s Critical
People Capabilities. There are five
people capabilities that we have
identified that will help build the right
knowledge, skills and behaviours
and help the bank to be successful
now and in the future. We have
developed a Capability Checker to
support our colleagues in identifying
the capabilities most relevant to their
current and future roles, aligning
learning to those capabilities.
Our Female Development Programmes
focus on supporting women to reach
their full potential and manage their
careers effectively. They support
our aspiration to be fully gender
balanced by 2030.
Sales Excellence is our complete
bank-wide sales programme.
It teaches the tools and techniques
that enable those in sales roles to
be the best at ethical, needs-based
selling. It covers both core and
advanced techniques that help to
uncover the full financial needs and
goals of customers and present
compelling options on the ways we
can help. Over 60% of the appropriate
colleagues have already completed
a Sales Knowledge Assessment level
1 and training for all front line sales
colleagues, sales specialists and sales
leaders is underway.
15
Health and Wellbeing
As a strong component of making
RBS a great place to work, wellbeing
initiatives have successfully delivered
against three pillars; Physical, Mental
and Social with the final fourth pillar,
Financial Wellbeing well established
and continuing to build momentum.
Our internal wellbeing index has
increased by 3% taking us 1% above
other high performing norm companies.
We continue to embrace the rapid
acceleration of digital wellbeing by
offering our colleagues online and
on-site wellbeing tools and resources.
This year we’ve seen over 20,000 onsite
health checks completed across a
number of our key hubs. We continue to
support the Time to Change pledge and
this year launched our new wellbeing
campaign Live Well, Being You. Our
month long wellbeing campaign in
May 2018 focused on each of our
four pillars with a specific focus on
Mental Health Awareness Week and
World Mental Health Day in October
2018. In 2018 we again supported
our colleagues through change and
have fully utilised the services of our
Employee Assistance Programme.
Inclusion
“ Becoming an inclusive bank is not an optional extra for us. We will only achieve
our ambition to be number one for customer service, trust and advocacy if we
understand the needs of all of our people and our customers. Quite simply, if
we’re a more inclusive place to work, great people will want to work here and
more customers will want to bank with us – so it’s a business imperative.”
We are proud to be building an inclusive
bank which is a great place for all
colleagues to work. Our inclusion
guidelines apply to all our colleagues
globally to make sure everyone feels
included and valued, regardless of their
background. As at 31 December 2018
our permanent headcount was 67,400.
49% were male and 51% female.
Our Inclusion plans apply globally and
are formed around 5 key priorities:
Gender Balanced:
• We continue to work towards our
target of having at least 30% senior
women in our top three leadership
layers in each of our businesses by
2020 (40% on aggregate) and to be
fully gender balanced across the
bank by 2030.
• As at the 31 December 2018 we have,
on aggregate, 37% women in our
top three leadership layers, and our
pipeline (c.4000 of our most senior
roles) has 45% women.
• The reported mean pay gap for the
bank in Great Britain is 36.6% (median
36.8%), and mean gender bonus gap
is 66.7% (median 44.0%).
• Our positive action approach is
helping us to improve the balance
of women in senior roles.
Disability Smart:
• 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
accessibility checks into our key
processes and practices.
• A key focus during 2018 was the
roll out of a Disability Career and
Personal Development Programme
for colleagues with disabilities which
specifically supports development
and career progression by addressing
common barriers colleagues with
disabilities can face.
Ethnically Diverse:
• 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 introduced formal UK targets in
2017 to improve the representation of
non white/BAME colleagues in our top
four leadership layers to at least 14%
(in line with the working age UK BAME
population identified by the Office for
National Statistics) by 2025.
• As at the 31 December 2018 we have
on aggregate 8% non-white colleagues
in our top four leadership layers. We
employ 14% non-white/BAME staff
across the UK.
• Given our focus on becoming more
ethnically diverse and desire to be
transparent, we have used the same
methodology as gender pay gap
reporting to look at our ethnicity
pay gap.
• The bank’s mean ethnicity pay
gap in Great Britain is 10.7% (median
15.8%). The figures also show a mean
ethnicity bonus gap of 24.7% (median
0.00%).
Ross McEwan, CEO
LGBT Innovative:
• Our LGBT agenda continues to deliver
a better experience for our LGBT
colleagues and customers, reflected
within our policies and ways of
working, across our locations globally.
While reflecting local legislation and
jurisdictional requirements, these
are clear that LGBT colleagues and
customers are welcome at RBS
and will be supported.
• We attended 19 Prides globally in 2018,
including in India and Poland where
we want to show our support to our
LGBT colleagues and customers in
countries where LGBT inclusion is not
as progressed as in the UK.
Inclusive Culture:
• We continue to support our c.20,000-
strong colleague led networks.
• We have flexible working practices
in place across the organisation and
externally we are a Top Ten Employer
for Working Families.
• During 2018, we supplemented our
unconscious bias learning (c.80%
of colleagues trained) with wider
inclusion and diversity learning for
all our colleagues to create a solid
platform for behavioural and cultural
change.
• For more information on our Inclusion
work, including our positive action
approaches, refer to rbs.com and
the Sustainable Banking pages at
rbs.com.
16
2018 Gender profile (*)
Grade
#Women
#Men
%Women
CEO – 1
CEO – 2
CEO – 3
CEO – 4
Target
population
(CEO – 3 and above)
7
37
243
1438
287
9
72
412
1760
493
44
34
37
45
37
Note: We report to reflect our organisational (CEO)
levels. This method more accurately describes our
gender balance at leadership/pipeline levels. As well
as being more reflective of our organisational structure,
this enables comparison to be made externally.
Male
Female
Executive Employees
76 (75%)
26 (25%)
Directors of Subsidiaries
220 (80%)
54 (20%)
There were 376 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.
Human rights and Modern
Slavery Act
At RBS we are committed to our
responsibilities to respect and uphold
human rights across our business
and sphere of influence. The Modern
Slavery Act 2015 (MSA) forms part
of our approach to human rights.
Our second statement is available on
our corporate website alongside our
Human Rights Position Statement. Our
approach covers our customers, our
people and our suppliers.
Gold Rated Disability
Standard Employer
Business Disability
Forum
Disability Confident
Leader
Disability Confident
Scheme
Stonewall Global
Diversity Champions
Stonewall
Platinum rated for our
Gender work
Business in the
community
Platinum rated for our
Ethnicity work
Business in the
community
The Times Top 50
Employer for Women
Business in the
community
Top 10 Employer for
Working Families
Working Families
Member of
Bloomberg Global
Gender Equality Index
Bloomberg Global
Gender Equality Index
Employer of the Year
2018 Women in Finance
Exemplary level employer
Carer Positive Scotland
Our Customers
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
and new customers, to consider
whether any of their activities carry
human rights infringements.
Our People
All of our people are legally
recruited subject to local jurisdiction
and in the UK must meet 1998
Immigration Act requirements.
The bank also has policies and
processes such as ‘Our Code’, the ‘Yes
Check’ and ‘Speak Up’ and is an early
adopter of the Living Wage to support
the banks position on Modern Slavery.
Our Suppliers
In 2018 we updated and enhanced
our Sustainable Procurement Code,
now referred to as the Supplier Code
of Conduct (SCoC) (available on rbs
.com). The SCoC continues to be a
contractual requirement - we expect
our suppliers to uphold the same values
and commitments we have made on
social and environmental impacts.
Getting financially fit
Financial Health Checks are fast, free and can be the stepping
stone to a brighter financial future.
Branch colleague Hannah Findlay recently carried out a Financial Health Check with
a customer who wanted to increase her overdraft to cover a credit card payment.
The customer had four credit cards with different banks, and when she discovered
their combined balance was more than £18,500, she was shocked.
Hannah explained that, instead of extending her overdraft, she could consolidate the
debts and pay them off over five years – half the time of the credit card companies,
with roughly a sixth of the interest, and a saving of around £300 a month.
17
17
Managing currency payments
For businesses with customers all over the world,
managing payments in different countries can be costly
and complicated. That’s where FXmicropay – our
automated foreign exchange management service –
can help.
We’ve worked with a large car hire company to develop digital foreign exchange and
payments strategy. Now they can instantly price in more than 60 local currencies,
get real-time customised reporting of the foreign exchange transactions, and hedge
against currency fluctuations.
To improve FXmicropay’s accessibility to a broader range of customers we have
recently made the service available on SAP Commerce Cloud to support their
customers with multi-currency payments via their platform. This reduces the
technology integration of the service to a couple of hours, freeing up more time to
focus on making their business the best it can be.
Our Values
Doing the right thing
Thinking long term
We do the right thing.
We take risk seriously and manage it
prudently.
We prize fairness and diversity and
exercise judgement with thought
and integrity.
We know we succeed only when
our customers and communities
succeed.
We do business in an open, direct
and sustainable way.
A new mortgage without touching
a piece of paper
Moving house is seen as one of the most stressful
things you can do in life but our new paperless
mortgage process is helping to change that.
Whether customers are buying a new home, re-mortgaging or
switching from another provider, they can now get a mortgage
without having to post a single piece of paper.
The paperless process involves customers uploading documents
via a safe temporary portal and providing a digital signature.
Not only is it an average of 8 days quicker, it’s also saving customers
the hassle of printing documents, finding a stamp and popping to
the post box.
Now they can apply at a time and place to suit them, whether that’s
at home, on the move, or even waiting for the kids to finish their
swimming lesson.
18
18
Balancing the books
After three decades spent growing profits for big businesses,
Girish Shah decided to put his skills and experience to work
for himself, launching My Controller Accountants in 2017.
“I looked at the statistics, and saw so many start-ups failing,” he explains. “The main
reason was poor cash flow. While they had good ideas, they didn’t know how to run
the business. My passion was to see the number of businesses that fail, reduce.”
For Girish, one of the benefits of banking with NatWest is the support we provide for
businesses like his, and those of his customers.
He regularly attends bank events which allow business owners to network whilst
also learning how to grow and manage their business. And he’s a big advocate
of FreeAgent – accountancy software that’s available for free for our business
customers.
It’s just one way we’re making financial management as simple as possible – so our
customers can get on with the important business of growing their business.
Our Values
Working together
Serving customers
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.
We exist to serve customers.
We earn their trust by
focusing on their needs and
delivering excellent service.
Cutting the queue
No-one likes waiting – especially now we can do so much with
just a click or a swipe. That’s why our partnership with Qudini
is proving so successful.
When customers arrive in a branch, we explore what they’re hoping to do, and
whether it’s something they can or want to do online, on the spot or at home.
If not, their details are added to Qudini and they’re immediately given an indication
of waiting time – something customers tell us they appreciate.
Qudini means less waiting time and no standing in line. Because customers receive
notifications as they move up the queue, they can even pop into a shop without
missing their turn.
And the data we’re gathering helps us understand customer behaviour so we can
make long-term improvements too. Cutting queues is just the start.
19
19
Our Customers
Our ambition is to build the best bank for
customers and reach No. 1 for customer
service, trust and advocacy.
Measuring
Customer Advocacy
Our
Performance
Latest
Scores
We track customer advocacy for our
key brands using the net-promoter
score (NPS), a commonly used metric
in banking and other industries across
the world. This is measured through
independent customer surveys in which
customers are asked how likely they
would be to recommend their bank to a
friend or colleague, on a scale of 0-10,
with a score of 10 being ‘extremely likely’
and 0 being ‘extremely unlikely’.
We are aware that there is a significant
gap to achieving our ambition to be
No. 1 for customer service, trust and
advocacy. Colleagues across the bank
are fully focused on delivering a more
consistent service which is right first
time. In addition, our digital innovations
continue to attract strong customer
advocacy, proof that when we get the
product and service proposition right,
our NPS improves.
Our brands are our main connection
with customers. Each takes a clear and
differentiated position with the aim of
helping us strengthen our relationship
with them. For this reason we measure
customer advocacy by brand.
Personal Banking
Improvements in customer service have been offset by branch closures which have reduced customer advocacy.
This has been most keenly felt for the Royal Bank of Scotland whose reputation continues to be impacted by legacy issues.
Q4’17
Q1’18
Q2’18
Q3’18
Q4’18
12
-6
-5
-7
12
-14
-6
-5
13
-21
-11
-7
12
-22
-9
-6
11
-17
-10
-6
Northern Ireland
Republic of Ireland
NatWest and Royal Bank of Scotland data sourced from Ipsos MORI FRS using 6 month rolling data. Latest base sizes: 3,111 for NatWest (England & Wales); 421 for
Royal Bank of Scotland (Scotland). Based on the question: "How likely is it that you would recommend (brand) to a relative, friend or colleague in the next 12 months
for current account banking?“ Base: Claimed main banked current account customers. Ulster Bank data sourced from Coyne Research using 12 month rolling data.
Question: “Please indicate to what extent you would be likely to recommend (brand) to your friends or family using a scale of 0 to 10 where 0 is not at all likely and 10 is
extremely likely”. Latest base sizes: 274 Northern Ireland; 297 Republic of Ireland.
20
Business Banking
Business Banking continues to be affected by operating model charges. Our Business Banking customers have also been heavily
impacted by branch closures.
Q4’17
Q1’18
Q2’18
Q3’18
Q4’18
-7
-15
-10
-22
-6
-23
-5
-29
-9
-36
Source: Charterhouse Research Business Banking Survey, YE Q4 2018. Based on interviews with businesses with an annual turnover up to £2 million. Latest base sizes:
1134 for NatWest (England & Wales), 455 for Royal Bank of Scotland (Scotland). 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.
Commercial Banking
Our Commercial Banking NPS has fallen recently, however it remains ahead of the rest of the market. Our NatWest and Royal
Bank of Scotland brands are ahead of the rest of their respective markets.
Q4’17
Q1’18
Q2’18
Q3’18
Q4’18
25
21
23
10
22
17
21
21
21
20
Source: Charterhouse Research Business Banking Survey, YE Q4 2018. Based on interviews with businesses with an annual turnover over £2 million. Latest base sizes:
558 for NatWest (England & Wales), 103 for Royal Bank of Scotland (Scotland). 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.
Trust
We measure Trust by asking customers “how much do you trust the bank to do the right thing?” Scores for NatWest have
fluctuated during 2018 and, over the last five years, have improved in line with the market. Trust in the Royal Bank of Scotland
has also improved over the last five years, but legacy issues are still in customers’ memories and it remains the least trusted
bank in the sector.
Q4’17
Q1’18
Q2’18
Q3’18
Q4’18
57
27
59
15
58
27
64
25
56
27
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: 891 for
NatWest (England & Wales), 215 for Royal Bank of Scotland (Scotland).
21
How we create value
Our long term success is dependent on serving our customers well and generating value for
society through our products, services and facilities.
1. Our key resources
2. Our business activities
Financial
We make use of shareholder
capital and other forms of
financial capital, including £360.9
billion in customer deposits.
Natural
We make use of energy and
resources such as paper and
water to conduct our business
activities. We have committed
to RE100 and pledged 100%
renewable electricity in our
global operations by 2025.
Infrastructure
We rely on online and mobile
banking, our high street and
Post Office branches, mobile
vans, telephony, webchat and
self service options like ATMs and
cash deposit machines. In support
of these channels during 2018 our
technology systems have been
available 99.96% of the time.
Human and Relationships
We rely on an engaged, healthy
and inclusive workforce to
deliver our strategy to 19 million
customers in the UK and
Republic of Ireland.
Our customers
We provide financial services to personal, commercial, large
corporate and institutional customers.
We believe in treating customers fairly, offering flexibility
in how customers choose to bank with us and providing
extra help to vulnerable customers and those in financial
difficulty. This means keeping their funds safe and secure,
improving financial capability and supporting enterprise.
Our business model
We earn income from interest gained on loans to our
personal, business and commercial customers, as
well as fees from customer transactions and
other services.
We pay interest to customers and investors who
have placed deposits with us and bought our debt
securities. We also pay customer benefits, through
loyalty products like our Reward Account.
The attributable profit generated is either re-
invested to improve products and services for
our customers or returned to shareholders.
Our products and services
We provide a comprehensive range of banking
products and related financial services to personal,
business and commercial customers. We serve our
customers 24/7 through the Royal Bank of Scotland,
NatWest and Ulster Bank networks of branches,
dedicated business relationship managers, mobile
banking, digital banking, contact centres, intermediary
channels and ATMs.
We are helping people to build and grow businesses
through innovative enterprise programmes and financing.
We support commercial customers and large finance
projects and also offer financing, risk management and
trading solutions through our NatWest Markets business.
22
Building
financial
capability
Jobs and
the economy
Supporting
enterprise
Improving
digital
capability
Transition to
a low carbon
economy
3. How we create value for our customers and society
Protecting
our customers
Prevented 598,174 cases of attempted fraud amounting
to £251.7 million in the UK(*).
Trained over 150,000 colleagues and customers as part of
Friends Against Scams’ commitment to provide training to
one million people across the UK by end 2020.
Keeping money safe
and accessible for
our customers
Over one million Financial Health Checks with our personal,
private and business customers(*).
MoneySense has been running for over 24 years, during which
it has helped over 6.5 million young people learn about money.
Empowering
customers to make
better financial
decisions and
achieve their goals
One of the largest UK employers with a workforce of
67,400. We recruited 231 graduates and 285 apprentices.
Payment of £1.36 billion in tax to the UK Government,
which supports central government and local authority lending(1)
A responsible
business supporting
employment across
the UK and Ireland
£30.0 billion gross lending to SMEs and mid-corporates
in Commercial Banking.
More than 390 jobs created by businesses participating in NatWest’s
Entrepreneur Accelerator programme since April 2018(*).
Our Skills & Opportunities Fund distributed £1.35 million (from a
total of £2.5 million) to support people to start or develop a business
now or in the future.
72% of our active personal current account customers used
either mobile or online channels(*).
We have a TechXpert in every branch empowering customers
to take advantage of digital and mobile banking.
Target of £10.0 billion of funding to sustainable energy projects
between 2018 and 2020.
We enhanced our energy lending policies to reduce fossil
fuel exposures.
Community
and charitable
giving
Our employees volunteered 100,368 hours.
We supported the Indonesia Tsunami DEC Appeal,
raising over £120,000.
Good causes received £4.4 million through colleague generosity.
An inclusive
culture
Progress continued on our inclusion agenda to value diversity
in all its forms to be gender balanced, ethnically diverse, disability
smart and LGBT innovative.
Helping people
develop, build and
grow businesses
Offering customers
more choice and
ways to bank
Addressing the risks
and opportunities
climate change
presents to us and
our customers
Our colleagues
make a difference
supporting
charities and local
communities
Building a great place
to work that reflects
the society we are
proud to serve
Housing
45,043 first time buyer mortgage customers(*).
We supported the UK Government’s Help to Buy schemes,
helping 7,700 customers on a Help to Buy mortgage scheme,
totalling £1.4 billion.
We are helping
customers to get
onto the property
ladder
We welcome the growing prominence of the Sustainable
Development Goals (SDGs). It has helped us to understand our own
contribution against the framework and global goals. In 2018, we
completed an assessment of our business activities against the
SDGs and we are engaging with a range of stakeholders to help us
further align our strategy to the SDGs in 2019.
Note:
(1) Comprises £348 million
corporate tax, £583 million
irrecoverable VAT, £180
million bank levies and
£250 million employer
payroll taxes.
23
Our Business Performance
UK Personal & Business Banking
UK Personal & Business Banking provides a comprehensive range of banking
products and related financial services to the personal, private and small business
segments in the UK. Offering 24/7 banking facilities, customers are served through
the NatWest and Royal Bank of Scotland network and distribution channels.
Ulster Bank RoI
Ulster Bank RoI provides a comprehensive range of financial services through
Personal and Commercial Banking divisions. Personal Banking provides loan and
deposit products through a network of branches and direct channels, including the
internet, mobile and telephony. Commercial Banking provides services to business
and corporate customers, including small and medium enterprises.
Commercial Banking
Commercial Banking offers comprehensive banking and financing solutions to
commercial and corporate customers in the UK. This includes financing business
assets and invoices, as well as providing specialist finance and transaction services,
through a dedicated network of relationship managers. We continue to digitise the
customer experience, through our growing digital channels and propositions.
Private Banking
Private Banking serves UK connected high net worth individuals and their business
interests. We continue to focus on delivering the best client experience through a
pro-active engagement model which supports clients across both sides of their
balance sheet. Our client-centric strategy is focused on improving returns by
deepening client relationships and improving our digital banking capabilities to
make it easier for clients to deal with us.
RBS International
RBS International serves retail, commercial, corporate and financial institution
customers in Jersey, Guernsey, Isle of Man and Gibraltar and financial institution
customers in Luxembourg and London, supported by our market leading brands
such as NatWest International and Coutts Crown Dependency. 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.
NatWest Markets
In NatWest Markets we help global financial institutions and corporates manage
their financial risks and achieve their short and long-term financial goals while
navigating changing markets and regulation. We do this by providing global
market access, financing, risk management and trading solutions.
24
UK Personal & Business Banking
We are focused on serving customers
brilliantly. This means treating
customers fairly, offering them
flexibility in how they choose to bank
with us and offering extra help to
vulnerable customers and those
in financial difficulty. It also means
keeping their funds safe and secure,
improving financial capability,
and supporting them in the moments
that matter.
Despite a highly uncertain economic
outlook, and a continued low interest
rate environment, we delivered an
operating profit of £2,458 million in
2018 as we delivered an operating
expense reduction of £347 million in
2018, or 9% compared with 2017.
Gross new mortgage lending in 2018
was £30.4 billion, giving a market share
of 11.3% and supporting stock share
of around 10%. In achieving this, the
business has maintained a prudent
approach to risk and pricing, in a
very competitive market.
Ulster Bank RoI
We are focused on our strategic
ambition to become the number one
bank in the Republic of Ireland for
customer service, trust and advocacy.
We have continued to deliver on
growth in new lending, building lasting
relationships with customers and on
digital and technological innovation
that creates benefits for customers
and operational efficiency.
Operating profit was €15 million
compared with a loss of €151 million
in 2017. Total income of €689 million
remained stable with the prior year
and operating expenses decreased
by €115 million, or 14.9%. Net loans
reduced by €1.0 billion principally
reflecting the successful sale of a
portfolio of non-performing loans
of €0.6 billion which contributed to a
reduction in the non-performing loan
ratio from 16.7% in 2017 to 11.3% in 2018.
We have over 850 branches, which
is the second largest branch network
across the UK. 99.7% of the UK
population live within 15 minutes
of a branch, a mobile-van stop or a
Post Office location and our fleet of
41 mobile vans serve more than 600
communities each week. We are also
proud to have the most professional
workforce of any bank in the UK, with
over 13,000 colleagues achieving their
Professional Banker Certificate.
We were the first bank to launch a
paperless mortgage process with
customers continuing to embrace
the simplicity and ease of our market
leading innovation. Approximately
half of all mortgage applications in Q4
2018 were paperless. As a proactive
bank we are using automation and
technology to simplify and streamline
our key customer journeys. We are also
continuing to invest in roles such as
Community Banker and TechXperts
to help customers get the most from
our award-winning digital services
including our mobile banking app which
now has 6.4 million regular users and
was awarded ‘Best Banking App’ at
the British Banking Awards in 2018.
The ‘Help for what matters’ initiative
and ‘First Five’ mortgage campaign
continued to support lending growth in
2018. New mortgage lending increased
by 13% to €1.13 billion, compared to
2017, supported by a positive uptake on
the market leading two, four and seven
year fixed rate products.
We have continued to strengthen our
digital proposition in 2018 through
enhancements to digital and mobile
customer offerings. 69% of our active
personal current account customers
are choosing to bank with us through
digital channels. We introduced a
faster, more convenient and secure
digital application experience for
customers applying for current
accounts and personal loans and made
further enhancements to the mobile
app during the year. Mobile payments
and transfers increased 36% on prior
year, reflecting the continued customer
migration from physical to digital
channels.
25
Commercial Banking
In our position as the largest UK
commercial bank(1), with professional
relationship management at our core
and a strong regional network, we
provide deep sector and business
insight to help UK businesses and
the UK economy succeed. This
commitment and support has
generated market-leading customer
advocacy. In 2018, within total utilised
lending of around £90 billion, we either
made or renewed commitments for
around £30 billion of term lending
facilities, of which £18 billion utilised
as at 31 December 2018, to our mainly
UK-based customers. Additionally
at Q3 2018, we provided a further
£2 billion of growth funding to help
British businesses prepare for the
Brexit transition, bringing the total
commitment to £3 billion.
Private Banking
Through the Coutts and Adam &
Company brands, our business
provides private banking and wealth
management services to UK connected
high net worth clients with domestic
and international needs. Coutts is
recognised as one of the leading
private banks, wealth and investment
managers in the UK with a 325 year
history. A strategy of providing a
personal approach to private banking
and wealth management, combined
with outstanding brand recognition,
drove strong customer volumes in 2018.
Operating profit was £303 million
compared with £152 million in 2017.
Total income(1) was £775 million (2017 –
£702 million) and operating expenses(1)
decreased by £66 million, or 12.1%, as
we continued to focus on front-to-back
simplification and the digitalisation
of key processes. Net lending growth
was £0.9 billion, or 6.7%, compared
with 2017. Assets under management
have decreased by £1.0 billion, or 4.8%,
reflecting negative market movements
partially offset by new business inflows
of £0.6 billion.
This is the largest value offered
by a UK commercial bank, giving
customers rapid, digital access to
funding decisions, with around 50% of
loan applications given a decision in
principle in under 24 hours.
Notes:
(1) Market share includes personal bank accounts
used as business accounts; includes NatWest, RBS &
W&G; Source Charterhouse Business Banking Survey,
Q4 2018. Commercial £2m+ in GB. Sample size 3,075;
sample size excluding don’t knows: NatWest (598);
Royal Bank of Scotland (271). Question: “How likely
would you be to recommend (bank)”. Base: Claimed
main bank. Data weighted by region and turnover to
be representative of businesses in Great Britain.
(2) Comparisons with prior periods are impacted by
transfers in preparation for ring-fencing. The net
impact of these transfers on 2017 operating profit
would have been to reduce income by £246 million,
operating expenses by £10 million and impairments
by £72 million. The variances in the commentary
have been adjusted for the impact of these transfers.
Operating profit(2) was £1,358 million
compared with £944 million in 2017.
Total income(2) was £3,374 million
(2017 – £3,238million) and operating
expenses(2) decreased by £132 million,
or 6.6%, reflecting continued operating
model simplification and efficiencies.
In the year, we made £10.5 billion
RWA reductions through active capital
management activity, leading also
to lower impairment loss rates.
Customer banking preferences
continue to evolve and we are working
hard to anticipate and respond.
Approximately 85% of customers now
interact with us digitally and we have
developed solutions they value. We
successfully launched our Bankline
Mobile in the Apple app store, while
our lending journey now enables
customers to apply digitally for loans of
up to £750,000 through a self-service
application process.
We continue to shift from a physical
to a digital client offering as we
deliver more innovative solutions.
Approximately 60% of clients bank
with us digitally, and 94% of clients
positively rate our Coutts24 telephony
service. We also recently launched
Coutts Connect, a social platform
which allows clients to network and
build working relationships between
one another.
We gained further external recognition
for our investment management
performance having won two Gold
awards at the Portfolio Advisor Wealth
Manager (PAM) awards in 2018.
Note:
(1) Comparisons with prior periods are impacted
by the transfers in preparation for ring-fencing.
The net impact of the transfers on 2017 would have
been to increase income by £24 million and increase
operating expenses by £15 million. The net impact on
the 2017 balance sheet would have been to reduce net
loans to customers by £0.1 billion and assets under
management by £0.7 billion. The variances in the
commentary have been adjusted for the impact
of these transfers.
26
RBS International
We are one of the largest banks
operating in the Channel Islands,
Isle of Man and Gibraltar and in 2017
established new wholesale branches
in Luxembourg and London. In line
with the wider Group we are focused
on serving customers well and
becoming a bank that is simpler
and easier to deal with.
During 2018, we repositioned our
balance sheet so that excess funds
were no longer up streamed to
RBS. Instead some funds have been
deployed into funding customer assets
in our new London branch which
looks after long-standing alternative
investment fund customers who
could not remain inside the UK ring-
fence. We have also established a
liquidity portfolio across central and
correspondent banks and sovereign
bond holdings.
NatWest Markets
We continue to put customers at the
centre of the way we do business and
have focused on the core products and
markets where we have a strong track
record, longstanding relationships and
market leading positions.
An operating loss of £70 million
compared with a loss of £977 million in
2017. Total income(1) increased by £288
million, or 25.0%, primarily reflecting
lower disposal losses in the legacy
business and a £165 million indemnity
insurance recovery, partially offset
by lower income in the core business.
The reduction in the core business was
driven by challenging fixed income,
currencies and commodities (FICC)
market conditions in Q4 2018, together
with turbulence in European bond
markets earlier in the year.
Operating expenses decreased by
£595 million, or 27.1%. This reflects
reductions in other expenses(1) across
both the core and legacy businesses,
down £313 million to £1,213 million,
lower strategic costs, down £198 million
These changes preserve value for the
banking group, provide continuity for
our customers and support compliance
with incoming Basel III Liquidity
Coverage Ratio rules.
71% of wholesale customer payments
are now processed using our newly
introduced international banking
platform, making the payments
process simpler for customers.
Operating profit was £336 million
compared with £304 million in 2017.
Total income(1) was £594 million (2017
– £540 million), the increase largely
driven by deposit margin benefits.
Operating expenses (1) increased by
£27 million, or 11.6%, primarily due to
£39 million higher back-office costs
associated with becoming a non ring-
fenced bank. Net loans to customers
were £13.2 billion and gross new
mortgage lending in 2018 was £0.3
billion compared with £0.5 billion in
2017.
Our mobile app has been further
developed to include new functionality,
allowing customers to manage their
finances more effectively and we have
23% more users compared with 2017
with NPS at +59.
We transformed our retail branches in
each of our jurisdictions to include self
service automation terminals giving
customers more options in how they
bank with us and in 2018 we helped our
customers buy over 1000 new homes.
2018 was a very successful year for
community investment activities
across all of our jurisdictions due
to the commitment and generosity
of our colleagues who supported
our Do Good Feel Good Campaign.
Note:
(1) Comparisons with prior periods are impacted by
the transfers in relation to ring-fencing. The net impact
of the transfers on 2017 would have increased income
by £151 million and increase operating expenses by
£14 million. The net impact on the 2017 balance sheet
would have been to increase net loans to customers
by £4.5 billion. The variances in the commentary have
been adjusted for the impact of these transfers.
to £238 million, and reduced litigation
and conduct costs, down £84 million to
£153 million.
NatWest Markets is increasingly using
technology to enhance the way it
provides innovative financial solutions
to its customers and partners. For
example, FXmicropay makes it simpler
for businesses operating globally to
accept payments in multiple currencies,
reducing costs and increasing revenues
for our customers. Our success in
harnessing technology has been
recognised with the award for Best in
Service Globally among Corporates
for Algorithmic trading in the 2018
Euromoney FX Survey.
Awards and rankings
• Sterling Bond House of the Year 2018
(Source:International Financing
Review (IFR))
• #1 for Overall Service Quality for UK
Corporate (Source: 2017 Greenwich
Associates FX Survey)
• Tied #1 for Rates* Service Quality
– UK FIs (* Government Bonds and
Interest Rate Derivative Investors)
(Source: Greenwich Associates,
European Fixed Income 2018 – Rates).
Note:
(1) Comparisons with 2017 are impacted by the
transfer of business activities in preparation for
ring-fencing. The net impact of the transfers would
have been to increase total income by £104 million
in 2017 and reduce operating expenses by £2 million
in 2017. The commentary has been adjusted for the
impact of these transfers.
27
Our investment case and outlook
The bank we are becoming
We aim to 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.
A leading UK retail and
commercial bank with strong
non-ring-fenced banks in
NatWest Markets and RBS
International
Strong brands and
market positions
Growing in attractive
chosen markets
Track record of cost and
risk reduction
Improving returns and
capital generation:
12%+ RoTE
Resilient balance sheet:
c.14% CET1 Ratio
2
Balanced,
stable and
improving
income
generation
Customer
led, digital
enabled
model
1
Resilient Balance
Sheet with
improving efficiency
c.14%CET1 Ratio
3
Improving
productivity
Sub 50% C:I Ratio
Sustainable
returns above
cost of capital
12%+ RoTE
4
Significant capital
return potential to
shareholders
28
28
Outlook (1)
RBS, like all companies, continues
to deal with a range of significant
risks and uncertainties in the external
economic, political and regulatory
environment. Our central economic
forecast, which supports our corporate
plan, is in line with consensus as at
the end of December 2018 and shows
average UK GDP growth of around
1.0-2.0% from 2019 to 2023 and
continued low interest rates. Given
the current uncertainties we will
continue to actively monitor and
react to market conditions.
2019 Outlook
As part of our continued cost savings
plans, we expect to incur aggregate
strategic costs of around £2.5 billion
across 2018 and 2019, with £1.0 billion
of this having been incurred during
2018. We plan to reduce operating
expenses, excluding strategic costs
and conduct and litigation costs, by
£300 million in 2019 compared with
2018, excluding one-off items.
2018 saw a continuation of the period
of benign economic conditions with low
defaults and strong cash recoveries.
However, the potential impact on the
real economy of ongoing political
uncertainties and geopolitical tensions
could affect our credit loss outcome.
As a result, impairments are expected
to increase in 2019 but remain below
our through-the-cycle loss rate
assumption of 30-40 basis points.
The threat from single name and
sector driven events remains.
We expect to end 2019 with risk
weighted assets (RWAs) of around
£185 – 190 billion as the RWAs
associated with Alawwal Bank are
expected to reduce by around £5
billion, subject to regulatory approvals
relating to the merger and our
shareholding.
RBS Group (RBSG) capital and funding
plans focus on issuing £3-5 billion of
MREL-compliant instruments and
around £1 billion of Tier 2 instruments.
We do not plan to issue AT1 in 2019.
As in prior years, we will continue
to target other funding sources to
diversify our funding structure,
including senior secured issuance
of £2-3 billion from NatWest Bank.
NatWest Markets Plc, as a standalone
bank, plans to issue £3-5 billion of term
senior unsecured instruments.
Medium term outlook
While we remain comfortable with
our 2020 target of a return on tangible
equity of more than 12%, we recognise
our 2020 target of a cost:income
ratio of less than 50% is increasingly
challenging for the business to achieve
with the risk being to the downside.
This reflects the ongoing economic and
political uncertainty and the additional
ongoing costs associated with ring-
fencing and Brexit.
Our previous guidance on RWAs
beyond 2020 was an estimated 10%
increase in 2021 relating to Basel
3 amendments, in addition to RWA
inflation as a result of IFRS 16, which
requires lease obligations to be
brought on balance sheet, of £1.3
billion in 2019 and Bank of England
mortgage floors of £10.5 billion in 2020.
We now expect the overall impact of
Basel 3 amendments to be in the range
of 5-10% and phased across 2021 to
2023, with the details still subject to
significant regulatory uncertainty.
RBS Group capital distributions
We propose a 3.5 pence final ordinary
dividend and a 7.5 pence special
dividend for the 2018 financial year,
while maintaining a CET1 ratio of
16.2% as at 31 December 2018.
Pro-forma for the introduction of
IFRS16 - Leases, the CET1 ratio was
16.0%, with the c.20 basis points
reduction reflecting a £1.3 billion
increase in RWAs and £0.3 billion
charge against reserves.
We expect to maintain ordinary
dividends of around 40% of attributable
profit. We have updated our medium
term guidance of CET1 to be
approximately 14% at the end of 2021.
We have shareholder and regulatory
approval to carry out directed
buybacks of the UK government stake
in RBS, but recognise that any exercise
of this authority would be dependant
upon HMT’s intentions and is limited to
4.99% of issued share capital in any 12
month period. As a reminder, we have
also committed to make further pre tax
contributions to the pension scheme
of up to £1.5 billion in aggregate
from 1 January 2020 linked to future
distributions to RBS shareholders.
NatWest Markets (NWM)
The NWM franchise includes NWM
Plc and NWM N.V., both of which are
currently direct subsidiaries of RBSG.
RBS has previously announced its
intention for NWM N.V. to become
a subsidiary of NWM Plc following
the completion of the sale of the
consortium holding in Alawwal. As
such, NWM Plc’s financial reporting
does not currently include NWM N.V.
NWM Plc is regulated and discloses
capital ratios and RWAs on a
standalone bank basis and is targeting
by 2020 a CET1 ratio of circa 15%,
MREL ratio of at least 30% and a
leverage ratio of at least 4%.
We plan to transfer our Western Europe
corporate business into NWM N.V.
from the ring-fenced bank, in addition
to the NWM business that is expected
to be part of a FSMA Part VII Transfer
Scheme from NWM Plc to NWM N.V.,
subject to court approval and as
announced on 6 December 2018. NWM
Plc legal entity RWAs are expected to
be around £35 billion, NWM N.V. RWAs
are expected to be around £8 billion
with the consolidated NWM franchise
position, excluding RWAs related to
intercompany positions, expected
to be around £39 billion by 2020.
Note:
(1) The targets, expectations and trends discussed
in this section represent RBSG and NWM’s
management’s current expectations and are
subject to change, including as a result of the
factors described in the “Risk Factors” section
on pages 253 to 263 of the RBSG 2018 Annual Report
and Accounts and pages 125 to 134 of the NWM 2018
Annual Report and Accounts. These statements
constitute forward-looking st atements; refer to
Forward-looking statements in this document.
29
Risk overview
Prudent risk management is central to the successful delivery of the RBS strategy.
RBS operates an integrated
framework that facilitates
effective risk management.
The framework – which is centred
around the embedding of a strong risk
culture – ensures that the tools are
in place to identify and manage both
internal and external threats, including
top and emerging risks. Risk appetite,
which defines the level and types of
risk RBS is willing to accept, is set in
line with overall strategy and approved
by the RBS Group board.
An emphasis on prudent risk
management has a key role in
positioning RBS to prepare for, and
respond to, developments in the wider
competitive, economic and regulatory
environment.
All RBS employees share ownership
of the way risk is managed.
Progress in 2018
RBS continued to reduce risk and
strengthen both the balance sheet
and the capital position in 2018. While
continuing progress against the
Group’s strategic objectives, there
was also a significant focus on a
number of key themes. These included
wider economic uncertainty relating
to the UK’s exit from the European
Union, the accelerating evolution
of the technological landscape and
regulatory change.
The final settlement with the US
Department of Justice (DoJ) in
relation to the RBS Group’s issuance
and underwriting of US Residential
Mortgage-Backed Securities (RMBS)
during the period 2005 to 2007
brought to an end a major legacy
issue, leading to further improvement
of the risk profile.
In October 2018, the Federal
Reserve Board terminated a Cease
& Desist Order originally imposed in
December 2013 in relation to historical
compliance with Office of Foreign
Assets Control (OFAC) economic
sanctions regulations.
The termination recognised RBS’s
multi-year programme to establish a
robust, sustainable OFAC Sanctions
compliance framework. In March
2018, the Federal Reserve Board also
terminated a Cease & Desist Order
originally imposed in July 2011 in
relation to RBS’s US operations.
A memorandum of understanding
with the Trustees of the Group Pension
Fund, to align the scheme with the
UK’s ring-fencing rules – and the £2
billion contribution made in October
2018 – significantly reduced the
Group’s exposure to pension risk.
The contribution to the scheme –
which could be followed by up to
a further £1.5 billion of dividend-
linked contributions – facilitated a
reduction in the risk profile of the fund,
principally the sale of approximately
£6 billion of quoted equity exposure
and the purchase of further interest
rate and inflation hedging.
RBS continued to make progress
towards its aim of making risk simply
part of the way colleagues work and
think. In 2018 the risk culture action
plan focused on building clarity,
developing capability and embedding
a standardised risk culture assessment
and reporting approach.
There was a continuing emphasis
on refining risk appetite during the
year. Significant work was done to
enhance the approach at both Group
and subsidiary levels in advance of
compliance with the UK’s ring-fencing
rules. Limits and triggers for material
risks were reviewed and refined as
part of the continuous improvement
of the risk appetite framework. Limits
and triggers were also set for material
subsidiaries.
From an operational risk
perspective, throughout 2018
there was a continued focus on the
control environment, ensuring that
RBS maintains a safe and secure
approach to doing business.
Oversight of the Group’s
transformation – to meet the evolving
needs of customers as well as to
address the changing economic,
regulatory and technology landscapes
30
– was further enhanced in order to
effectively align with the innovation
agenda.
Continuity of service for customers
also remained a key area of focus.
A number of activities aimed at
minimising the impact of disruptive
events – such as system outages – on
overall service were undertaken.
These included preventative
measures, control improvements and
work to calibrate limits or triggers
for the most critical processes. RBS
continues to monitor and assess
a diverse array of threats – both
external and internal – as well as
developing, strengthening or adapting
existing control capability to protect
continuity of service.
Brexit
RBS maintained a consistent focus on
risks arising as a result of uncertainties
related to the UK’s planned exit from
the European Union. Oversight of
planning for regulatory and legislative
impacts – as well as economic impacts
– remained a critical part of forward-
looking risk management throughout
the year. This included stress testing
and scenario modelling as well as
capital planning. In view of continued
uncertainty, RBS is implementing
plans to ensure continuity of service
for its customers in the event of
an immediate loss of access to the
European Single Market. This includes
finalising a third-country licence for
the Frankfurt branch of its National
Westminster Bank subsidiary to
allow for continued clearing of euro-
denominated payments.
While the longer-term effects on the
operating environment of the UK’s exit
are difficult to predict, consideration
has also been given to the potential
second and third order effects
on the Group and its customers,
including planning for the results of
periodic financial volatility and slower
economic growth.
Risk-weighted assets (RWAs)
RWAs reduced by £12.2 billion. This was driven by decreases across
credit and counterparty credit risk of £8.6 billion, market risk of £2.2
billion and a £1.4 billion decrease in operational risk as a result of the
annual recalculation in Q1 2018. The credit risk decrease was primarily
due to reduced asset size resulting from repayments, partially offset by
increases reflecting various loss given default (LGD) model changes.
Common Equity Tier 1 ratio
The CET1 ratio increased by 30 basis points to 16.2% as a result of lower
RWAs, £1,622 million attributable profit and the 30 basis point impact
at 1 January 2018 on the implementation of IFRS9 partially offset by the
impact of the pension contribution in Q2 2018. CET 1 capital reflects the
2p interim dividend, the final dividend of 3.5p and the foreseeable 7.5p
special dividend paid to ordinary shareholders.
Leverage ratios
Both the CRR end-point and UK leverage ratios increased to 5.4%
and 6.2% respectively as a result of reduced assets. The average
CRR leverage ratio and UK leverage ratios increased to 5.4% and
6.2% respectively.
Stress testing
In the Bank of England 2018 stress test, RBS met its CET1 capital
requirements under the hypothetical adverse scenario. The Group’s
CET1 ratio was 9.6% at its lowest point – well above the hurdle rate of
7.3%. The Tier 1 leverage ratio remained above the minimum requirement
throughout the test. In the European Banking Authority (EBA) 2018 stress
test, the low-point CET 1 ratio was 9.9% at 31 December 2019. The low
point leverage ratio was 4.8% at 31 December 2018.
Liquidity and funding
RBS maintained a robust liquidity and funding risk profile in 2018.
The liquidity portfolio increased £12 billion in 2018 to £198 billion and
the liquidity coverage ratio and stressed coverage ratio were 158%
and 154% at 31 December 2018, compared with 152% and 168% at
2017 respectively.
Litigation and conduct
Litigation and conduct costs of £1,282 million included a £1,207 million
provision in relation to various investigations and litigation matters,
including additional provisions in respect of PPI, the FCA's review of
RBS’s treatment of SMEs and settlement of the US Department of Justice
investigation into RBS’s issuance and underwriting of US Residential
Mortgage Backed Securities.
Climate risk
The impact of multiple risks relating
to climate change continues to be
assessed. This includes physical risks
– such as those resulting from extreme
weather events and a more unstable
climate – as well as economic and
regulatory risks.
In addition, RBS continues to focus on
risks arising as a result of government
undertakings to limit carbon emissions,
which will require adjustments in all
sectors of the economy. Though the
nature and timing of these transitional
risks remain uncertain, RBS classifies
climate risk as an emerging threat
and is integrating it into core risk
management.
RBS supports the recommendations
of the Financial Stability Board’s Task
Force on Climate-Related Financial
Disclosures and has established a
climate risk working group.
LIBOR transition
The UK regulators have reiterated the
intention to move from LIBOR to
alternative interest-rate benchmarks
by the end of 2021. A significant
number of transactions across the
industry reference LIBOR and, as a
result, the transition will be a major
undertaking. RBS is conducting risk
assessments of the likely impact
across each of its franchises and the
Risk function will continue to provide
oversight as the programme develops.
Cyber Security
RBS has a multi-layered defence
approach to cyber security and
continues to invest in its defences
as the external threat evolves. In
2018, RBS continued to take part in
industry-wide initiatives to monitor
and anticipate developments, identify
vulnerabilities and share best practice.
Financial crime
The financial crime threat continues
to evolve in line with changes in
technology, the economy and wider
society. As risks relating to money
laundering, terrorist financing, tax
evasion, sanctions, bribery and
corruption develop, understanding
and responding to them appropriately
remains a key area of focus.
In 2018, RBS continued its journey of
improvement in relation to the policies,
processes and systems used to combat
financial crime. RBS also maintained an
emphasis on ensuring proportionate,
risk-focused customer due diligence
standards were in place, particularly
for higher-risk customer segments. In
addition, improvements to the financial
crime control environment remained
a key focus in accordance with the
evolving nature of the risk.
RBS is committed to ensuring it
acts responsibly and ethically, both
when 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 parties it does business with,
understand these obligations and
abide by them, whenever they act
for RBS. Anti-bribery and corruption
(ABC) training is mandatory for all
staff on an annual basis, with targeted
training appropriate for certain roles.
RBS considers ABC risk in its business
processes including, but not limited
to, corporate donations, charitable
sponsorships, political activities and
commercial sponsorships. Where
appropriate, there is a requirement
for ABC contract clauses in written
agreements.
The factors discussed on page 32 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.
31
Top and Emerging Risks
RBS employs a continuous process for identifying and managing its top and emerging risks.
These are risks that could have a significant negative impact on RBS’s ability to operate
or meet its strategic objectives.
Operational and IT resilience
Risk
Mitigation
- RBS’s information technology systems are complex, making recovery from failure
challenging.
- RBS’s information technology systems are critical to the services it provides, with any
outages experienced in the banking sector widely publicised. Cyber attacks continue
to evolve in frequency, sophistication and severity. There is a risk that a cyber attack
damages RBS’s ability to do business and/or compromises data security.
- RBS faces increased operational risk as it makes changes to its structure and
operations to reduce its cost base.
- There is a risk that RBS lacks sufficient capability or capacity at a senior level to
deliver, or adapt to, change.
- Losses may arise from changes in the RBS business model due to ring-fencing or
such as the restructuring of NatWest Markets in light of ring fencing and Brexit.
- A breach in data privacy, either within RBS or in a third-party organisation, may
lead to negative impacts. There is a risk that RBS’s data strategy is not adequate for
the evolving landscape.
- There is a risk that the actions of a third-party supplier could negatively affect
RBS’s reputation or profitability.
- A major investment programme has improved
systems resilience. As RBS continues to simplify
and modernise infrastructure and applications,
system sustainability has improved.
- A major security programme has delivered
control enhancements to mitigate the risk of
cyber attack. RBS continues to invest in its
defences. RBS monitors people risk closely
and has plans in place to support retention of
key roles, with wider programmes supporting
engagement and training.
- RBS continues to implement change in line with its
project plans while assessing the implementation
risks and mitigating where possible.
Economic and political risk
Risk
Mitigation
- RBS remains vulnerable to changes and uncertainty in the economic, political and
legal environment. Scenarios that could have a potentially material negative effect
on RBS include the impact of the UK’s exit from the European Union; changes in UK
government and UK government policy; a second Scottish independence referendum;
a UK recession (including significant falls in house prices); global financial volatility, 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 or major
geopolitical instability.
- Accelerating climate change may lead to faster-than-anticipated climate-related
impacts on RBS and the wider economy.
- RBS has implemented plans to prepare for an
immediate loss of access to the European Single
Market on 29 March 2019 (a “hard Brexit”).
- RBS uses a range of complementary approaches
to inform strategic planning and risk mitigation
relating to a range of economic and political risks.
These include robust risk assessment and dynamic
portfolio management in accordance with the risk
appetite framework, the setting of prudent lending
criteria and, for specific market risks, structural
hedging. Stress testing and scenario planning is
also used extensively.
- RBS is working to embed climate risk into its
risk framework, and adapting its operation and
business strategy to mitigate the risks of both
climate change and the transition to a low carbon
economy.
Financial resilience
Risk
Mitigation
- 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.
Risk
Legal regulatory and conduct risk
- RBS expects government and regulatory intervention in the financial services industry
to remain high for the foreseeable future, and also subject to increasing regulation in
new areas such as financial risks relating to climate change and artificial intelligence.
- RBS has for a number of years been involved in conduct-related reviews and
redress projects, including a review of certain historical customer connections in
its former Global Restructuring Group (GRG). RBS is likely to remain engaged in the
management of GRG-related complaints until at least the end of 2020.
- Implementation of the Alternative Remedies Package (regarding the business
previously described as Williams & Glyn) brings a range of risks for RBS including
significant costs, loss of customers/deposits and associated execution risks.
- The impacts of past business conduct resulting in future litigation and conduct charges
could be substantial. RBS is involved in a number of investigations, including: ongoing
class action litigation, investigations into foreign exchange trading and rate-setting
activities, continuing LIBOR-related litigation 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.
- The transition from LIBOR and other IBOR rates to alternative risk-free rates may lead
to heightened legal, business and conduct risks.
- RBS continues to innovate – including the
development of a number of digital initiatives
designed to meet evolving customer needs – and
monitor the competitive environment as well as
associated regulatory, technological and strategic
developments in order to make adjustments as
appropriate.
Mitigation
- RBS considers and incorporates the implications
of proposed or potential regulatory activities in its
strategic and financial plans.
- RBS has dedicated resources in place to manage
claims and complaints relating to GRG.
- RBS has invested significant resources to meet
the terms of the Alternative Remedies Package and
manage the associated risks.
- Building a healthy culture is a core priority. RBS
continues to focus on creating a solid platform for
behavioural and cultural change.
- In addition, RBS continues to strengthen
its control environment and the journey of
improvement remains an ongoing area of focus.
- A programme to determine the scale and scope of
the impacts relating to the transition to alternative
risk-free rates is underway. Activity to manage
the transition will take place within RBS’s control
framework and in line with expected standards of
conduct.
32
Climate related financial disclosures
Climate change presents both risks and opportunities to our
business across our customers, operations and suppliers.
The Board has governance oversight
on climate via the Sustainable Banking
Committee. From 2019 this will be
shared with the Board Risk Committee.
A Climate Change Working Group
(CCWG) has been established with
the accountable executive being
the Chief Risk Officer. The CCWG is
responsible for addressing climate-
related regulation, risks, opportunities,
metrics and analysis. Membership
includes senior representatives
from Risk, Sustainable Banking,
Corporate Governance, Regulatory
Affairs and Legal. Frontline business
representatives will join in 2019. The
Sustainable Energy Forum (SEF) also
co-ordinates products and services that
help business and corporate customers
to transition to a low carbon economy.
As part of our developing strategy
to address climate change, we are
helping to accelerate the transition to
a low carbon economy by supporting
our customers and integrating climate
change into core business decision
making. To support this, RBS is currently
undertaking climate scenario analysis
across our main lending portfolio.
Two scenarios are being considered:
a ‘Business as Usual’ 3.7°C rise and a
‘Paris Agreement’ 2°C rise. The time
frames used for analysis are aligned to
RBS strategy: short 0-2 years, medium
3-5 years and long 6-30 years. Both
physical and transitional risks are
being incorporated. The results of the
analysis will inform future strategy and
focus areas for more in-depth climate
scenario analysis.
Climate risk management covers
both physical and transitional risks.
RBS employs a continuous process
for identifying and managing top and
emerging risks (refer to page 32),
including climate-related risks. The
nature and timing of the far-reaching
commercial, technological and
regulatory changes the low carbon
transition will bring are currently
uncertain, for our customers and
business. The impact of such changes
may be disruptive, especially if such
changes do not occur in an orderly
or timely manner or are ineffective in
reducing emissions sufficiently. Whilst
these risks are significant and growing,
they are not inconsistent with our
At our AGM in May 2018 we
announced new energy lending
policies, meaning RBS will not provide
project-specific finance to:
• New coal fired power stations
• New thermal coal mines
• Oil sands projects
• Arctic oil projects
• Unsustainable vegetation or
peatland clearance projects
RBS will also not provide finance to:
• Mining companies generating
more than 40% of their revenues
from thermal coal – a reduction
from 65%.
• Power companies generating more
than 40% of their electricity from
coal – a reduction from 65%.
and non-domestic) and agriculture
sectors as having particular exposure
to climate risks and opportunities and
these equated to approximately 44% of
total RBS exposures in 2018(*). These
were calculated using Exposure at
Default (EAD).
We were recognised by InfraDeals as
the leading lender to the UK renewables
sector by number of transactions
over the past ten years (2008- 2018).
Between 2014 and 2018 we reduced our
operational greenhouse gas emissions
(Scopes 1, 2 and 3 – Business Travel)
by 49%, exceeding our Science Based
Target of 45% by 2020.
strategy to be a leading UK-focused
banking service provider to personal
and business customers. To help
manage climate related risks around
individual lending decisions, we use
sector-specific Environmental, Social
and Ethical risk policies (refer to rbs.
com). The Power Generation, Mining
and Metals, Oil & Gas and Forestry,
Fisheries and Agribusiness policies
were updated in 2018 in relation to
climate-related risks. To help us manage
operational risks, we joined RE100,
committing to purchase 100% global
renewable energy by 2020.
RBS uses a range of metrics and
targets to assess our climate-related
financial impacts, including operational
emissions figures, (refer to the table
below (*) and rbs.com), volumes of
sustainable energy sector financing, and
proportion of lending associated with
high carbon or high climate risk sectors.
Our greenhouse gas (GHG) emissions
are independently verified each year by
an external auditor. As at 31 December
2018, our exposure to the Power and
Oil & Gas sectors remains at 1.2% of our
total lending exposures. The PRA report
‘Transition in Thinking’ highlighted the
energy, transport, property (domestic
Greenhouse Gas (GHG) Emissions
2014
(Baseline)
2017
2018
Location-based CO2e emissions
(Scope 1, 2 & business travel) (tonnes)
Scope 1* CO2e emissions (tonnes)
Scope 2** Market-based*** CO2e emissions
(tonnes)
Scope 2 Location-based CO2e
emissions (tonnes)
Scope 3**** CO2e emissions from
business travel (tonnes)
Location-based CO2e emissions per FTE
(Scope 1, 2 & business travel) (tonnes)
496,249
312,731
252,340
30,695
25,578
29,959
377,337
69,391
57,735
360,201
219,979
166,179
105,352
67,174
56,203
5.07
4.08
3.56
Total energy use (GWh)
862
693
619
We have reported on all emission sources required under the Companies Act 2006 (Strategic Report and Directors’
Reports) Regulations 2013. To our knowledge there are no material omissions. Independent limited assurance of
total reported emissions in tonnes of CO2e, (Scope 1*, 2** and 3*** location based emissions) has been provided
by Ernst & Young LLP. Our reporting year runs from October 2017 to September 2018. *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.
These emissions are calculated using The Greenhouse Gas Protocol Corporate Accounting and Reporting Standard
revised edition (2004). The emissions reporting boundary is defined as all entities and facilities either owned or
under operational control. Emissions factors used are from UK Government Emissions Conversion Factors for
Greenhouse Gas Company Reporting (BEIS,2018), CO2 Emissions from Fuel Combustion (IEA,2017) or from relevant
local authorities as required. For more information please see our website (https://www.rbs.com/rbs/sustainability/
responsible-business/).
33
Governance at a glance
Our Board
The Board has thirteen directors comprising the Chairman, two executive directors
and ten independent non-executive directors, one of whom is the Senior Independent
Director. Biographies for each director can be found on pages 47 and 48.
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.
Board of directors
Chairman
Howard Davies
Executive directors
Ross McEwan
Katie Murray
In 2018, the Board and committee evaluation process was conducted externally
by Independent Board Evaluation.
Non-executive directors
Our Board commitees
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
47 to 88 of the 2018 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.
Group 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.
Group 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 the future. Its remit also includes
governance oversight.
Technology and Innovation
Committee
Assists the Board in overseeing
and monitoring the execution of
RBS’s strategic direction in relation
to technology and innovation.
Group Executive Committee
The Board is supported by the Group
Executive Committee, comprising
the executive directors and the
Group Chief Risk Officer. It supports
the Chief Executive in managing
RBS’s businesses. It is responsible for
managing strategic, financial, capital,
risk and operational issues affecting
RBS. It reviews and debates relevant
items before consideration by
the Board.
34
34
Frank Dangeard
Alison Davis
Patrick Flynn
Morten Friis
Robert Gillespie
Brendan Nelson
Baroness Noakes
Mike Rogers
Mark Seligman
(Senior Independent Director)
Dr Lena Wilson
Company Secretary
Aileen Taylor
UK Corporate Governance Code
Throughout the year ended 31
December 2018, 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.
On the basis of this robust assessment
of the principal risks facing the group,
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 group
will be able to continue in operation
and meet its liabilities as they fall due
over the period of the assessment.
Viability Statement
In accordance with provision C.2.2
of the UK Corporate Governance
Code, the Board of Directors (the
“Board” of RBSG (the “group”)) have
assessed the viability of the group
taking into account the current
position of the group, the Board’s
assessment of the group’s prospects,
and the group’s principal risks, as
detailed in the strategic report on
page 32. 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 group’s strategic
plan and regulatory and internal stress
testing periods.
The group’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 group will have sufficient
capital and liquidity resources over
the three year assessment period.
The group’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 & Accounts on
pages 98 to 107.
Assessments of the risks of the
greatest concern are captured
through the group’s processes
for continuously identifying and
effectively managing the principal
top and emerging risks, as detailed on
page 32 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 & Accounts
on pages 30 to 32 and 253 to 263,
respectively, and include political,
legal, macroeconomic, regulatory,
operational and execution risks.
Wind strength increasing
The demand for home-grown renewable energy
continues to grow. Which is why Triton Knoll Offshore
Wind Farm Ltd matters.
With up to 90 wind turbines providing a total installed capacity of circa.
860MW, it will be capable of supplying the equivalent of over 800,000 UK
households with renewable electricity a year.
Situated off the Lincolnshire coast, this consented wind farm is owned
by a group of companies, with Innogy Renewables UK managing the
construction, operation and maintenance works on behalf of the project
partners. Total planned investment amounts to around £2 billion. NatWest
participated in financing as part of a 15-bank lending syndicate, NatWest
Markets provided risk management solutions to Innogy to address interest
rate and foreign exchange risks.
We are market leaders in this growing sector. This project is one of six
offshore wind farms that we have financed in the UK in the past 2 years.
35
Business review
Presentation of information
Financial summary
Segment performance
Page
36
37
41
Presentation of information
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; ‘NWH Ltd’ means NatWest Holdings Limited; ‘NatWest’
means National Westminster Bank Plc and ‘NWM Plc’ means NatWest
Markets 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.
Segmental reporting
RBS continues to deliver on its plan to build a strong, simple and fair
bank for both customers and shareholders.
Reportable operating segments
The reportable operating segments are as follows. For full business
descriptions see Note 4 on page 191.
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 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:
Performance, funding and credit metrics such as ‘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 as fair value through profit or loss (non-statutory NIM),
cost:income ratio, loan:deposit ratio and impairment provision
ratios. These are internal metrics used to measure business
performance.
Personal & Business Banking franchise, combining the reportable
segments of UK Personal & Business Banking (UK PBB) and
Ulster Bank RoI and Commercial & Private Banking (CPB)
franchise, combining the reportable segments of Commercial
Banking and Private Banking.
RBS Group ring-fencing
The UK ring-fencing legislation requires the separation of essential
banking services from investment banking services from 1 January
2019. RBS Group has placed the majority of the UK and Western
European banking business in ring-fenced banking entities under an
intermediate holding company, NatWest Holdings. NatWest Markets
Plc (NWM Plc) and RBS International (RBSI) are separate banks
outside the ring-fence, both subsidiaries of RBSG. Key activities in
2018 included:
NatWest Group Holdings Corporation (NWGH) which owns
NatWest Markets Securities Inc. (NWMSI) was transferred to NWM
Plc (formerly RBS plc). NWGH was previously a direct subsidiary of
NatWest.
The majority of NWM Plc’s (formerly RBS plc) PBB and CPB
business, and certain parts of Central items and the NatWest
Markets segment to be a part of the ring-fenced bank, were
transferred to subsidiaries of NatWest Holdings. The second phase
of ring-fencing which related to the transfer, of certain markets
products from NatWest to NWM Plc, was completed in the third
quarter of 2018.
On 29 June 2018, the Court of Session in Scotland approved the
reduction of capital and the cancellation of the share premium
account and capital redemption reserve (together the “capital
reduction”) of NWM Plc. As part of the capital reduction, NatWest
Holdings transferred to RBSG with effect from 2 July 2018, thereby
creating the legal separation of those RBS Group entities that will
be within the ring-fenced sub-group from those held outside the
ring-fence.
NatWest Markets N.V. (formerly Royal Bank of Scotland N.V.), the
Group’s banking entity in the Netherlands, continues to implement
its plan to be operationally ready to serve European Economic
Area (EEA) customers [when the UK leaves the European Union
on 29 March 2019], in the event that there is a loss of access to the
EU Single Market. In October 2018 approval was received from the
Dutch regulator (DNB) for the repurposing of the existing NatWest
Markets N.V. banking licence. NatWest Markets N.V. is expected to
become a subsidiary of NWM Plc in 2019 subject to regulatory
approval.
36
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
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/(loss) from discontinued operations, net of tax
Profit/(loss) for the year
Attributable to:
Ordinary shareholders
Preference shareholders
Dividend access share
Paid-in equity holders
Non-controlling interests
Notable items within total income
IFRS volatility in Central items & other
Insurance indemnity
Of which:
NatWest Markets
Central items & other
UK PBB debt sale gain
FX losses in Central items & other
Commercial Banking fair value and disposal gain
NatWest Markets legacy business disposal losses
Performance key metrics and ratios
Return on tangible equity (%)
Net interest margin (%) (1)
Average interest earning assets (£m)
Cost:income ratio (%)
Earning per share (pence) - basic
2016
£m
8,708
3,882
12,590
(16,194)
(3,604)
(478)
(4,082)
(1,166)
(5,248)
—
(5,248)
(6,955)
260
1,193
244
10
(5,248)
2015
£m
8,767
4,156
12,923
(16,353)
(3,430)
727
(2,703)
(23)
(2,726)
1,541
(1,185)
(1,979)
297
—
88
409
(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)
(3,470)
330
320
49
60
(2,711)
2018
£m
8,656
4,746
13,402
(9,645)
3,757
(398)
3,359
(1,275)
2,084
—
2,084
1,622
182
—
288
(8)
2,084
2018
£m
(59)
357
165
192
61
(46)
169
(86)
2017
£m
8,987
4,146
13,133
(10,401)
2,732
(493)
2,239
(824)
1,415
—
1,415
752
234
—
394
35
1,415
2017
£m
2
—
—
—
185
(183)
6
(712)
2018
2017
4.8
1.98
436,957
71.7
13.5p
2.2
2.13
422,337
79.0
6.3p
Variance
2.6
(0.15)
14,620
(7.3)
7.2p
Note:
(1) Net interest margin is net interest income of the banking business as a percentage of interest earning assets (IEA) of the banking business
Summary consolidated balance sheet
Cash and balances at central banks
Trading assets
Derivatives
Settlement balances
Loans to banks and customers - amortised cost
Other financial assets
Other assets
Total assets
Deposits
Trading liabilities
Settlement balances, derivatives, and other financial liabilities
Other liabilities
Owners' equity
Non-controlling interests
Total liabilities and equity
2018
£m
88,897
75,119
133,349
2,928
318,036
59,485
16,421
694,235
384,211
72,350
182,230
8,954
45,736
754
694,235
2017
£m
98,337
85,991
160,843
2,517
321,633
51,929
16,806
738,056
391,712
81,982
200,398
14,871
48,330
763
738,056
2016
£m
74,250
86,660
246,981
5,526
320,016
48,637
16,586
798,656
357,173
84,536
267,257
40,286
48,609
795
798,656
2015
£m
79,404
103,972
262,514
4,116
297,020
47,004
21,378
815,408
338,326
92,299
288,023
42,613
53,431
716
815,408
2014
£m
74,872
150,005
353,590
4,667
325,954
38,298
103,633
1,051,019
346,172
130,920
402,829
112,389
55,763
2,946
1,051,019
37
Business review
Financial summary continued
Segmental summary income statements
2018
Net interest income
Non-interest income
Total income
Other expenses
Strategic costs
Litigation and conduct costs
Operating expenses
Impairment (losses)/releases
Operating profit/(loss)
Return on equity (1)
Cost:income ratio (2)
Third party customer asset rate (3)
Third party customer funding rate
Average interest earning assets
2017
Net interest income
Non-interest income
Total income
Other expenses
Strategic costs
Litigation and conduct costs
Operating expenses
Impairment (losses)/releases
Operating profit/(loss)
Return on equity (1)
Cost:income ratio (2)
Third party customer asset rate (3)
Third party customer funding rate
Average interest earning assets
PBB
UK
PBB
£m
Ulster Bank
RoI
£m
5,098
1,184
6,282
(2,991)
(275)
(216)
(3,482)
(342)
2,458
24.3%
55.4%
3.40%
(0.30%)
183,577
5,130
1,347
6,477
(3,158)
(461)
(210)
(3,829)
(235)
2,413
23.7%
59.1%
3.47%
(0.16%)
179,453
444
166
610
(490)
(22)
(71)
(583)
(15)
12
0.5%
95.6%
2.41%
(0.20%)
24,834
421
183
604
(451)
(56)
(169)
(676)
(60)
(132)
(5.0%)
111.9%
2.38%
(0.31%)
25,214
CPB
Commercial
Banking
£m
2,040
1,334
3,374
(1,725)
(106)
(41)
(1,872)
(144)
1,358
10.2%
53.8%
2.87%
(0.36%)
122,382
2,286
1,198
3,484
(1,814)
(167)
(33)
(2,014)
(362)
1,108
6.6%
56.0%
2.73%
(0.15%)
131,177
Private
Banking
£m
RBS
International
£m
NatWest
Markets
£m
Central items
& other
£m
518
257
775
(456)
(21)
(1)
(478)
6
303
15.4%
61.7%
2.89%
(0.25%)
20,547
464
214
678
(445)
(45)
(39)
(529)
(6)
143
6.4%
78.0%
2.71%
(0.09%)
18,799
466
128
594
(260)
(9)
9
(260)
2
336
24.4%
43.8%
2.15%
(0.09%)
27,266
325
64
389
(202)
(9)
(8)
(219)
(3)
167
11.2%
56.3%
2.71%
(0.02%)
23,930
112
1,330
1,442
(1,213)
(238)
(153)
(1,604)
92
(70)
(2.0%)
111.2%
nm
nm
27,851
203
847
1,050
(1,528)
(436)
(237)
(2,201)
174
(977)
(9.0%)
nm
nm
nm
31,231
(22)
347
325
(224)
(333)
(809)
(1,366)
3
(1,038)
nm
nm
nm
nm
30,500
158
293
451
47
(391)
(589)
(933)
(1)
(483)
nm
nm
nm
nm
12,533
Total
RBS
£m
8,656
4,746
13,402
(7,359)
(1,004)
(1,282)
(9,645)
(398)
3,359
4.8%
71.7%
nm
nm
436,957
8,987
4,146
13,133
(7,551)
(1,565)
(1,285)
(10,401)
(493)
2,239
2.2%
79.0%
nm
nm
422,337
Notes:
(1) RBS’s CET 1 target is approximately 14% 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 share dividends is divided by average notional equity allocated at different rates of 14%
(Ulster Bank RoI), 11% (Commercial Banking), 13.5% (Private Banking - 14% prior to Q1 2018), 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) Operating lease depreciation included in income £121 million (2017 - £142 million).
(3) Ulster Bank Ireland DAC manages its funding and liquidity requirements locally. Its liquid asset portfolios and non-customer related funding sources are included
within its net interest margin, but excluded from its third party asset and liability rates.
Variance
£m
15
(346)
(331)
(98)
712
(14)
600
269
0.1%
16.9%
(3.7%)
(4.0%)
101.3%
(1.4%)
14.5%
2.0%
Income
Interest receivable (1,2)
Interest payable (1,2)
Net interest income
2018
£m
11,049
(2,393)
8,656
2017
£m
11,034
(2,047)
8,987
Net fees and commissions
Income from trading activities
Other non-interest income
Non interest income
Total income
Notes:
(1) Negative interest on net loans to customers is classed as interest payable and on customer deposits is classed as interest receivable.
(2) Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities.
2018 compared with 2017
Total income increased by £269 million, or 2.0%. Excluding notable
2,455
703
988
4,146
13,133
2,357
1,415
974
4,746
13,402
points reduction relating to increased liquidity, 3 basis points from
competitive pressures and 2 basis points from mix impacts.
items, income decreased by £650 million, or 4.8%, primarily
reflecting lower NatWest Markets income and reduced net interest
income. Excluding notable items, NatWest Markets and Central
items, income was stable.
Structural hedges of £159 billion generated £0.9 billion of
incremental net interest income for the year, compared with £1.5
billion of incremental net interest income on a balance of £149
billion in 2017.
Net interest income decreased by £331 million, or 3.7%, driven by
Non-interest income increased by £600 million, or 14.5%.
margin pressure, active capital management in Commercial
Banking, a reduction in the NatWest Markets legacy business and
one-off Central items in 2017.
Net interest margin was 15 basis points lower than 2017, or 13
basis points lower excluding one-off items reflecting an 8 basis
Excluding notable items, non-interest income decreased by £381
million principally due to lower core NatWest Markets income
driven by challenging fixed income, currencies and commodities
(FICC) market conditions in Q4 2018, together with turbulence in
European bond markets earlier in the year.
38
Business review
Financial summary continued
Operating expenses
Staff expenses
Premises and equipment
Other administrative expenses
Strategic costs
Litigation and conduct costs
Administrative expenses
Depreciation and amortisation
Write down of other intangible assets
Operating expenses
2018 compared with 2017
Operating expenses decreased by £756 million, or 7.3%, primarily
reflecting £561 million lower strategic costs and a £192 million
reduction in other expenses, with litigation and conduct costs
remaining broadly stable despite the US Department of Justice
charge in the year. Excluding £86 million of one-off VAT releases in
2017, other expenses decreased by £278 million, or 3.6%, and
FTEs reduced by 5.8%.
Strategic costs of £1,004 million included: a £195 million direct
charge in NatWest Markets relating to both the wind-down of the
legacy business and ongoing development of the core business
infrastructure; £177 million in respect of implementing ring-fencing
requirements; £171 million of technology costs; a £133 million
charge relating to the reduction in our property portfolio; a £76
million net
Impairments
Loans - amortised cost (1)
ECL provisions (2)
Impairment losses
ECL charge (3,4)
ECL loss rate - annualised (basis points)
Amounts written off
2018
£m
3,649
1,241
1,787
1,004
1,282
8,963
645
37
9,645
2017
£m
3,923
1,218
1,710
1,565
1,285
9,701
684
16
10,401
Variance
£m
(274)
23
77
(561)
(3)
(738)
(39)
21
(756)
(7.0%)
1.9%
4.5%
(35.8%)
(0.2%)
(7.6%)
(5.7%)
131.3%
(7.3%)
settlement relating to the International Private Bank pension
scheme; with the remaining charge largely relating to
restructuring costs to achieve cost efficiencies across front and
back office operations.
Litigation and conduct costs of £1,282 million largely comprises
the £1,040 million charge relating to the settlement with the
Department of Justice and a £200 million charge relating to
Payment Protection Insurance, partially offset by a £241 million
provision release relating to a RMBS litigation indemnity.
The cost:income ratio of 71.7% is elevated due to the inclusion of
the net RMBS related conduct charge. Excluding this item the
cost:income ratio, including strategic costs, would be 65.7%.
2018
£m
319,800
3,368
398
12.45
1,494
2017
£m
321,633
3,814
493
15.33
1,210
Variance
£m
(1,833)
(446)
(95)
(3)
284
(1%)
(12%)
(19%)
(19%)
23%
Notes:
(1) The table above summarises loans and related credit impairment measures on an IFRS 9 basis at 31 December 2018 and on an IAS 39 basis at 31 December
2017.
(2) 2018 ECL provisions in the above table are provisions on loan assets only. Other ECL provisions not included, relate to cash, debt securities and contingent
liabilities, and amount to £28 million, of which £5 million was FVOCI.
(3) 2018 ECL charge balance in the above table included a £3 million charge relating to other financial assets, of which a £1 million charge related to assets at
FVOCI; and a £31 million release related to contingent liabilities.
(4) 2017 comprises loan impairment losses of £530 million and releases on securities of £37 million.
2018 compared with 2017
A net impairment loss of £398 million, 13 basis points of gross
customer loans, decreased by £95 million, or 19.3%, compared
with 2017 primarily reflecting lower single name charges in
Commercial Banking, partially offset by fewer provision releases in
UK PBB and NatWest Markets.
In addition, we took an additional £101 million charge in Q3 2018
reflecting the more uncertain economic outlook and a net £60
million impairment charge in Ulster Bank RoI principally in relation
to ongoing sales from our loan book to further reduce the level of
non performing loans. Underlying credit conditions remained
benign during 2018.
Tax
Tax charge
UK corporation tax rate
2018
£m
(1,275)
19.00%
2017
£m
(824)
19.25%
2018 compared with 2017
The tax charge for the year ended 31 December 2018 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. These factors have been offset partially by
adjustments in respect of prior years.
39
Business review
Summary consolidated balance sheet as at 31 December 2018
Assets
Cash and balances at central banks
Trading assets
Derivatives
Loans to banks - amortised cost
Loans to customers - amortised cost
Settlement balances
Other financial assets
Other assets
Total assets
Liabilities
Bank deposits
Customer deposits
Trading liabilities
Derivatives
Other financial liabilities
Subordinated liabilities
Other liabilities
Total liabilities
Total equity
Total liabilities and equity
2018
£m
2017
£m
Variance
£m
88,897
75,119
133,349
12,947
305,089
2,928
59,485
16,421
694,235
23,297
360,914
72,350
128,897
42,798
10,535
8,954
647,745
98,337
85,991
160,843
11,517
310,116
2,517
51,929
16,806
738,056
30,396
361,316
81,982
154,506
33,170
12,722
14,871
688,963
(9,440)
(10,872)
(27,494)
1,430
(5,027)
411
7,556
(385)
(43,821)
(7,099)
(402)
(9,632)
(25,609)
9,628
(2,187)
(5,917)
(41,218)
46,490
49,093
(2,603)
694,235
738,056
(43,821)
(9.6%)
(12.6%)
(17.1%)
12.4%
(1.6%)
16.3%
14.6%
(2.3%)
(5.9%)
(23.4%)
(0.1%)
(11.7%)
(16.6%)
29.0%
(17.2%)
(39.8%)
(6.0%)
(5.3%)
(5.9%)
Tangible net asset value per ordinary share (1)
287p
288p
(1p)
Note:
(1)
Tangible net asset value per ordinary share represents tangible equity divided by the number of ordinary shares in issue
From 1 January 2018, the Group adopted IFRS 9 ‘Financial Instruments’. IFRS 9 changed the balance sheet classification categories from IAS
39. Refer to Note 33 for full details of the impact of IFRS 9 on the Group’s balance sheet.
Total assets of £694.2 billion as at 31 December 2018 were down
£43.8 billion, 5.9%, compared with 31 December 2017. This was
primarily driven by reductions in trading assets and derivatives
reflecting the wind-down of the legacy business and management
of the leverage exposure.
Cash and balances at central banks decreased by £9.4 billion,
9.6%, to £88.9 billion representing liquidity management, the
payment of the settlement with the US Department of Justice and
the pension contribution in the year.
Trading assets decreased by £10.9 billion, 12.6%, to £75.1 billion
and trading liabilities decreased by £9.6 billion, 11.7%, to £72.4
billion mainly due to the wind-down of the legacy business in
NatWest Markets.
Movements in the value of derivative assets, down £27.5 billion,
17.1%, to £133.3 billion, and liabilities, down £25.6 billion, 16.6% to
£128.9 billion, due to trading volumes and valuations in NatWest
Markets.
Loans to customers - amortised cost, decreased by £5.0 billion,
1.6%, to £305.1 billion including £2.2 billion in Commercial Banking
due to active capital management, activity and approximately £0.7
billion, in Ulster Bank RoI, primarily in relation to the sale of a
portfolio of non-performing loans.
Other financial assets includes debt securities, equity shares and
other loans and increased by £7.6 billion, 14.6%, to £59.5 billion,
primarily reflecting increases in the liquidity portfolio driven by
increased customer surplus within in the ring-fenced banks,
reduced funding requirement and net term issuance in NatWest
Markets.
Other assets includes property, plant & equipment, deferred tax,
assets of disposal groups, accruals, deferred income and pension
scheme surpluses and decreased by £0.4 billion, 2.3% to £16.4
billion.
Bank deposits decreased by £7.1 billion, 23.4%, to £23.3 billion,
with decreases relating to funding management including a £5
billion payment in relation to the Bank of England Term Funding
Scheme participation.
Customer deposits decreased by £0.4 billion, 0.1% to £360.9 billion
with increases in UK PBB, Ulster Bank RoI and Private Banking
offset by decreases in Commercial Banking and RBS International.
Other financial liabilities included customer deposits at fair value
through profit and loss and debt securities and increased by £9.6
billion, 29.0%, to £42.8 billion primarily including issuances in the
year of covered bonds and MREL in the year.
Subordinated liabilities decreased by £2.2 billion, 17.2% to £10.5
billion, primarily as a result of redemptions of £2.0 billion reflecting
on-going liability management activities.
Other liabilities included deferred awards, deferred income, notes
in circulation and accruals and decreased by £5.9 billion, 39.8% to
£9.0 billion mainly due to the reduction in provisions in the year,
primarily in relation to the settlement with the US Department of
Justice.
Owners’ equity decreased by £2.6 billion, 5.4%, to £45.7 billion,
primarily driven by preference share redemptions and the pension
contribution in the year offset by the £2.1 billion profit for the year.
40
Business review
Segment performance
UK Personal & Business Banking
Income statement
Net interest income
Non-interest income
Total income
Other costs
Strategic costs
Litigation and conduct costs
Operating expenses
Impairment losses
Operating profit
Performance ratios
Return on equity (1)
Net interest margin
Cost:income ratio
2018
£m
5,098
1,184
6,282
(2,991)
(275)
(216)
(3,482)
(342)
2,458
24.3%
2.78%
55.4%
2017
£m
5,130
1,347
6,477
(3,158)
(461)
(210)
(3,829)
(235)
2,413
23.7%
2.86%
59.1%
Variance
£bn
(32)
(163)
(195)
167
186
(6)
347
(107)
45
(0.6%)
(12.1%)
(3.0%)
(5.3%)
(40.3%)
2.9%
(9.1%)
45.5%
1.9%
0.6%
(0.08%)
(3.7%)
Note:
(1) 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.
Capital and balance sheet
Loans to customers (amortised cost)
- personal advances
- mortgages
- cards
- business banking
- commercial
Total loans to customers (amortised cost)
Loan impairment provisions
Net loans to customers
Total assets
Customer deposits
Risk-weighted assets
2018 compared with 2017
UK PBB now has 6.4 million regular mobile app users, 16% higher
than 2017, with 72% of our active current account customers being
regular digital users. Total digital sales increased by 19%
representing 45% of all sales. 61% of mortgage switching is now
done digitally, compared with 51% in 2017. 57% of personal
unsecured loans sales are via the digital channel, with digital
volumes 31% higher. In business banking, 91% of current accounts
and 68% of loans under £50,000 were originated digitally.
Total income was £195 million, or 3.0%, lower reflecting £124
million lower debt sale gains and a £33 million transfer of the
Collective Investment Funds business to Private Banking in Q4
2017. Excluding these items, income was £38 million, or 0.6%,
lower, including a £28 million reduction in overdraft fees following
changes implemented in H2 2017, which included increasing the
number of customer alerts. Net interest income of £5,098 million
decreased by 0.6% as balance growth and deposit margin benefits
were offset by lower mortgage new business margins, with net
interest margin down by 8 basis points to 2.78%.
Operating expenses decreased by £347 million, or 9.1%. Excluding
strategic, litigation and conduct costs, operating expenses were
£167 million, or 5.3%, lower driven by reduced back-office
operations costs and lower headcount reflecting continued
operating efficiencies, partially offset by increased technology
investment spend as we continue to build our digital capability.
2018
£bn
7.6
138.3
4.0
6.8
7.0
163.7
(1.4)
162.3
194.2
184.1
45.1
2017
£bn
7.1
136.8
4.0
6.8
8.3
163.0
(1.3)
161.7
190.6
180.4
43.0
Variance
£bn
0.5
1.5
—
—
(1.3)
0.7
(0.1)
0.6
3.6
3.7
2.1
7.0%
1.1%
0.0%
0.0%
(15.7%)
0.4%
7.7%
0.4%
1.9%
2.1%
4.9%
Impairments were £107 million higher driven by fewer provision
releases and lower recoveries following debt sales in prior years, as
well as increased provisioning requirements under IFRS 9. The
underlying default rate remained broadly stable with asset growth
also accounting for an element of the uplift.
Net loans to customers increased by 0.4% to £162.3 billion. The
business has maintained a prudent approach to risk and pricing in a
very competitive market, with gross new mortgage lending in 2018
at £30.4 billion, 1.9% lower than 2017. Mortgage market share was
maintained at 11.3% supporting a stock share of around 10%.
Momentum continued in personal advances and business banking,
increasing by 7.0% and 0.4% respectively.
Customer deposits increased by £3.7 billion, or 2.1%, as growth
continued across current accounts and savings.
RWAs increased by £2.1 billion, or 4.9%, principally due to
modelling changes on mortgages and unsecured loans.
41
Business review
Segment performance continued
Ulster Bank RoI
Income statement
Net interest income
Non-interest income
Total income
Other costs
Strategic costs
Litigation and conduct costs
Operating expenses
Impairment losses
Operating profit/(loss)
Average exchange rate - €/£
Performance ratios
Return on equity (1)
Net interest margin
Cost:income ratio
2018
€m
502
187
689
(553)
(25)
(79)
(657)
(17)
15
2017
€m
480
209
689
(516)
(64)
(192)
(772)
(68)
(151)
Variance
€m
22
(22)
—
(37)
39
113
115
51
166
4.6%
(10.5%)
—
7.2%
(60.9%)
(58.9%)
(14.9%)
(75.0%)
109.9%
2018
£m
444
166
610
(490)
(22)
(71)
(583)
(15)
12
2017
£m
421
183
604
(451)
(56)
(169)
(676)
(60)
(132)
1.130
1.142
Variance
£m
23
(17)
6
(39)
34
98
93
45
144
5.5%
(9.3%)
1.0%
8.6%
(60.7%)
(58.0%)
(13.8%)
(75.0%)
109.1%
0.5%
1.79%
95.6%
(5.0%)
1.67%
5.5%
0.12%
111.9% (16.3%)
0.5%
1.79%
95.6%
(5.0%)
1.67%
5.5%
0.12%
111.9% (16.3%)
Note:
(1) Return on equity is based on segmental operating profit after tax adjusted for preference share dividends divided by average notional equity (based on
14% of the monthly average of segmental risk-weighted assets incorporating the effect of capital deductions (RWAes)), assuming a nil tax rate.
Capital and balance sheet
Loans to customers (amortised cost)
- mortgages
- other lending
Total loans to customers (amortised cost)
Loan impairment provisions
Net loans to customers
Total assets
Funded assets
Customer deposits
Risk-weighted assets
Spot exchange rate - €/£
2018
€bn
16.0
5.9
21.9
(0.9)
21.0
28.1
28.1
20.1
16.4
2017
€bn
17.3
6.0
23.3
(1.3)
22.0
27.7
27.6
19.1
20.2
Variance
€bn
(1.3)
(0.1)
(1.4)
0.4
(1.0)
0.4
0.5
1.0
(3.8)
(7.5%)
(1.7%)
(6.0%)
(30.8%)
(4.5%)
1.4%
1.8%
5.2%
(18.8%)
2018
£bn
14.4
5.2
19.6
(0.8)
18.8
25.2
25.2
18.0
14.7
2017
£bn
15.4
5.2
20.6
(1.1)
19.5
24.6
24.5
16.9
18.0
1.117
1.127
Variance
£bn
(1.0)
—
(1.0)
0.3
(0.7)
0.6
0.7
1.1
(3.3)
(6.5%)
--
(4.9%)
(27.3%)
(3.6%)
2.4%
2.9%
6.5%
(18.3%)
2018 compared with 2017
Ulster Bank RoI continued to strengthen its digital proposition in
2018 through enhancements to digital and mobile customer
offerings. 69% of our active personal current account customers
are choosing to bank with us through digital channels. A faster,
more convenient and secure digital application experience was
introduced for customers who are applying for current accounts
and personal loans and further enhancements were made to the
mobile app during the year. Mobile payments and transfers
increased 36% compared with 2017, reflecting the continued
customer migration from physical to digital channels.
Total income was in line with 2017. Net interest income increased
by €22 million, or 4.6%, supporting a 12 basis point increase in net
interest margin, primarily driven by an improving asset mix, lower
cost of deposits and a one-off funding benefit in 2018, partially
offset by a reduction in income on free funds. Non-interest income
decreased by €22 million, or 10.5%, principally due to a lower
number of non-recurring benefits and a reduction in fee income.
Operating expenses decreased by €115 million, or 14.9%,
principally due to a €113 million reduction in litigation and conduct
costs and €39 million lower strategic costs. 2018 included a €79
million conduct and litigation provision for customer remediation
and project costs associated with legacy business issues.
Other expenses increased by €37 million primarily reflecting: the
investment made into strengthening the risk, compliance and
control environment; increased bank levies and regulatory fees;
and higher spend on technology and innovation.
A net impairment charge of €17 million reflects a charge associated
with a non-performing loan sale partially offset by observable
improvements in the performance of the loan portfolio.
Net loans to customers reduced by €1.0 billion, or 4.5%, principally
reflecting the sale of a portfolio of non-performing loans of €0.6
billion in 2018 and a continued reduction in the tracker mortgage
book.
Customer deposits increased by €1.0 billion, or 5.2%, supporting a
reduction in the loan:deposit ratio to 105% from 115%.
RWAs reduced by €3.8 billion, or 18.8%, principally reflecting the
impact of the non-performing loan sale and an improvement in
credit metrics.
42
Business review
Segment performance continued
Commercial Banking
Income statement
Net interest income
Non-interest income
Total income
Other costs
Strategic costs
Litigation and conduct costs
Operating expenses
Impairment losses
Operating profit
Performance ratios
Return on equity (1)
Net interest margin
Cost:income ratio
Capital and balance sheet
Loans to customers (amortised cost)
- SME & mid-corporates
- large corporates
- real estate
- specialised business
- other
Total loans to customers (amortised cost)
Loan impairment provisions
Net loans to customers (amortised cost)
Total assets
Customer deposits (excluding repos)
Loan:deposit ratio (excluding repos)
Risk-weighted assets
2018
£m
2,040
1,334
3,374
(1,725)
(106)
(41)
(1,872)
(144)
1,358
10.2%
1.67%
53.8%
2018
£bn
30.0
18.3
20.7
18.0
2.0
89.0
(1.0)
88.0
143.2
95.6
92.0%
67.6
2017
£m
2,286
1,198
3,484
(1,814)
(167)
(33)
(2,014)
(362)
1,108
6.6%
1.74%
56.0%
2017
£bn
30.7
21.5
22.9
19.7
3.3
98.1
(1.2)
96.9
149.5
98.0
99.0%
71.8
Variance
£m
(246)
136
(110)
89
61
(8)
142
218
250
3.6%
(0.07%)
(2.2%)
Variance
£bn
(0.7)
(3.2)
(2.2)
(1.7)
(1.3)
(9.1)
0.2
(8.9)
(6.3)
(2.4)
(7.0%)
(4.2)
(10.8%)
11.4%
(3.2%)
(4.9%)
(36.5%)
24.2%
(7.1%)
(60.2%)
22.6%
(2.3%)
(14.9%)
(9.6%)
(8.6%)
(39.4%)
(9.3%)
(16.7%)
(9.2%)
(4.2%)
(2.4%)
(5.8%)
Notes:
(1)
(2)
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 RWAe, assuming 28% tax rate.
Comparisons with prior periods are impacted by preparations for ring-fencing, including the transfer of shipping and other activities from NatWest Markets,
the transfer of whole business securitisations and Relevant Financial Institutions and other activities to NatWest Markets and the transfer of the funds and
trustee depositary business to RBS International. The net impact of transfers on 2017 would have been to reduce income by £246 million, operating
expenses by £10 million, impairments by £72 million, net loans to customers by £5.3 billion, customer deposits by £1.2 billion and RWAs by £2.2 billion.
There is an additional £1.4 billion reduction in 2017 net loans to customers as a result of 2018 asset reclassifications under IFRS9. The variances in the
commentary below have been adjusted for the impact of these items excluding net interest margin.
2018 compared with 2017 (comparisons adjusted for transfers)
Approximately 85% of customers now interact with Commercial
Banking digitally and we have developed solutions they value. We
successfully launched the Bankline mobile app in the Apple app
store, whilst our lending journey now enables customers to apply
digitally for loans of up to £750,000 through a self-service
application process. This is the largest value offered by a UK
commercial bank, giving customers rapid, digital access to funding
decisions, with approximately 50% of loan applications given a
decision in principle in under 24 hours.
Total income increased by £136 million, or 4.2%, reflecting asset
disposal and fair value gains of £169 million, compared with a £64
million loss in 2017, partially offset by lower lending. Net interest
margin decreased by 7 basis points to 1.67% primarily reflecting
reclassification of net interest income to non-interest income under
IFRS 9, the impact of transfers and asset margin compression,
partially offset by higher funding benefits from deposit balances.
Operating expenses decreased by £132 million, or 6.6%. Excluding
strategic, litigation and conduct costs, operating expenses were
£79 million, or 4.4%, lower reflecting continued operating model
simplification.
Impairments decreased by £146 million, or 50.3%, mainly reflecting
lower single name charges.
Net loans to customers decreased by £2.2 billion, or 2.4%,
principally driven by significant active capital management
reductions, with underlying lending growth of £3.5 billion, or 3.8%.
At Q3 2018, we announced an additional £2 billion of growth
funding to help British businesses prepare for the Brexit transition,
bringing the total commitment to £3 billion.
Customer deposits decreased by £1.2 billion, or 1.2%, supporting a
broadly stable loan:deposit ratio of 92%.
RWAs decreased by £2.0 billion, or 2.9%, driven by £10.5 billion of
gross RWA reductions associated with active capital management,
partially offset by model updates of £2.9 billion, underlying
business growth and partial reinvestment of gross RWA reductions
through refinancing to existing clients under our revised pricing
framework.
43
Business review
Segment performance continued
Private Banking
Income statement
Net interest income
Non-interest income
Total income
Other costs
Strategic costs
Litigation and conduct costs
Operating expenses
Impairment releases/(losses)
Operating profit
Performance ratios
Return on equity (1)
Net interest margin
Cost:income ratio
Capital and balance sheet
Loans to customers (amortised cost)
- personal
- mortgages
- other
Total Net loans to customers (amortised cost)
Total assets
Assets under management (2)
Customer deposits
Loan:deposit ratio
Risk-weighted assets
2018
£m
518
257
775
(456)
(21)
(1)
(478)
6
303
15.4%
2.52%
61.7%
2018
£bn
2.0
8.9
3.4
14.3
22.0
19.8
28.4
50%
9.4
2017
£m
464
214
678
(445)
(45)
(39)
(529)
(6)
143
Variance
£m
54
43
97
(11)
24
38
51
12
160
11.6%
20.1%
14.3%
2.5%
(53.3%)
(97.4%)
(9.6%)
(200.0%)
111.9%
6.4%
2.47%
78.0%
9.0%
0.05%
(16.3%)
2017
£bn
2.3
8.2
3.0
13.5
20.3
21.5
26.9
50%
9.1
Variance
£bn
(0.3)
0.7
0.4
0.8
1.7
(1.7)
1.5
0%
0.3
(13.0%)
8.5%
13.3%
5.9%
8.4%
(7.9%)
5.6%
3.3%
Notes:
(1) Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity based on 13.5% (14%
prior to Q1 2018) of the monthly average of segmental RWAes, assuming 28% tax rate.
(2) Comprises assets under management, assets under custody and investment cash.
(3) Comparisons with prior periods are impacted by the transfer of the Collective Investment Fund business from UK PBB and by the transfers of Coutts Crown
Dependency and the International Client Group Jersey to RBS International. The net impact of the transfers on 2017 would have been to increase income by
£24 million and operating expenses by £15 million and reduce net loans to customers by £0.1 billion, customer deposits by £0.5 billion and assets under
management by £0.7 billion. The variances in the commentary below have been adjusted for the impact of these transfers excluding net interest margin.
2018 compared with 2017 (comparisons adjusted for transfers)
Approximately 60% of clients bank with us digitally and 94% of
clients positively rate our Coutts24 telephony service. Private
Banking also recently launched Coutts Connect, a social platform
which allows clients to network and build working relationships with
one another.
Total income increased by £73 million, or 10.4%, largely due to
increased lending, higher funding benefits from deposit balances
and higher investment income. Net interest margin increased by 5
basis points as higher deposit income was partially offset by asset
margin pressure.
Operating expenses decreased by £66 million, or 12.1%. Excluding
strategic, litigation and conduct costs, operating expenses
decreased by £4 million, or 0.8% driven by operating model
efficiencies.
A net impairment release of £6 million largely reflects a £9m
release in Q4 2018 due to data quality improvements.
Net loans to customers increased by £0.9 billion, or 6.7%, primarily
in mortgages.
Customer deposits increased by £2.0 billion, or 7.6%, mainly due to
higher personal client account balances.
Assets under management decreased by £1.0 billion, or 4.8%,
reflecting market movements partially offset by new business
inflows of £0.6 billion.
Private Banking manages a further £6.7 billion of assets under
management on behalf of RBS Group which sit outside of Private
Banking. Total assets under management overseen by Private
Banking have decreased by 5.7% to £26.5 billion as a result of
market movements partially offset by net new business.
RWAs increased by £0.3 billion, or 3.3%, relative to 6.7% growth in
net loans to customers.
44
Business review
Segment performance continued
RBS International
Income statement
Net interest income
Non-interest income
Total income
Other costs
Strategic costs
Litigation and conduct costs
Operating expenses
Impairment releases/(losses)
Operating profit
Performance ratios
Return on equity (1)
Net interest margin
Cost:income ratio
Capital and balance sheet
Loans to customers (amortised cost)
- corporate
- mortgages
- other
Total Net loans to customers (amortised cost)
Total assets
Customer deposits
Risk-weighted assets
2018
£m
466
128
594
(260)
(9)
9
(260)
2
336
24.4%
1.71%
43.8%
2018
£bn
10.2
2.7
0.4
13.3
28.4
27.5
6.9
2017
£m
325
64
389
(202)
(9)
(8)
(219)
(3)
167
11.2%
1.36%
56.3%
2017
£bn
5.7
2.7
0.3
8.7
25.9
28.9
5.1
Variance
£m
141
64
205
(58)
—
17
(41)
5
169
43.4%
100.0%
52.7%
28.7%
—
nm
18.7%
(166.7%)
101.2%
13.2%
0.35%
(12.5%)
Variance
£bn
4.5
—
0.1
4.6
2.5
(1.4)
1.8
78.9%
—
33.3%
52.9%
9.7%
(4.8%)
35.3%
Notes:
(1) Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity based on 16% (12%
prior to November 2017) of the monthly average of segmental RWAes
(2) Comparisons with prior periods are impacted by the transfer of the funds and trustee depositary business from Commercial Banking and by the transfer of
Coutts Crown Dependency and the International Client Group from Private Banking. The net impact of the transfers on 2017 would have been to increase
income by £151 million and operating expenses by £14 million, net loans to customers by £4.5 billion, customer deposits by £1.7 billion and RWAs by £1.9
billion. The variances in the commentary below have been adjusted for the impact of these transfers excluding net interest margin.
2018 compared with 2017 (comparisons adjusted for transfers)
The RBS International mobile app has been further developed to
include new functionality, allowing customers to manage their
finances more effectively and has 67 thousand users, an increase
of 23% from 2017. 71% of wholesale customer payments are now
processed using our newly introduced international banking
platform, making the payments process simpler for customers.
Total income increased by £54 million, or 10.0%, largely driven by
deposit margin benefits. Institutional Banking contributed 62% to
income in 2018, with Local Banking contributing 32% and
Depositary Services 6%. Net interest margin increased by 35 basis
points primarily driven by the impact of transfers and a change in
product mix.
Operating expenses increased by £27 million, or 11.6%, due to £39
million higher back-office costs associated with becoming a non
ring-fenced bank and £5 million of remediation costs, partially offset
by lower conduct and litigation costs.
Impairments decreased by £5 million reflecting a number of small
releases and improvements in underlying lending quality.
Net loans to customers remained broadly stable at £13.3 billion and
are split: £9.2 billion within Institutional Banking, of which £2.2
billion relates to real estate exposures; and £4.1 billion in Local
Banking, of which £2.7 billion relates to mortgages.
Customer deposits decreased by £3.1 billion reflecting a large
inflow of short term placements in Institutional Banking in 2017.
Customer deposits represent RBS International’s primary funding
source and are split: £18.1 billion Institutional Banking and £9.4
billion Local Banking.
RWAs decreased by £0.1 billion, or 1.4%, with model updates
offset by business movements.
During 2018, we repositioned our balance sheet so that excess
funds previously placed with RBS Group are now deployed into
funding customer assets in our new London branch. We have also
established a liquidity portfolio across central and correspondent
banks and sovereign bond holdings. These changes provide
continuity for our customers and support compliance with incoming
Basel III Liquidity Coverage Ratio rules.
45
Business review
Segment performance continued
NatWest Markets
Income statement
Net interest income
Non-interest income
Total income
Other costs
Strategic costs
Litigation and conduct costs
Operating expenses
Impairment releases
Operating loss
Analysis of income by product
Rates
Currencies
Financing
Revenue share paid to other segments
Core income excluding OCA
Legacy
Own credit adjustments
Total income
Performance ratios
Return on equity (2)
Net interest margin
Capital and balance sheet
Net loans to customers (amortised cost)
Total assets
Funded assets
Customer deposits
Risk-weighted assets
2018
£m
112
1,330
1,442
(1,213)
(238)
(153)
(1,604)
92
(70)
662
432
382
(217)
1,259
91
92
1,442
(2.0%)
0.40%
2018
£bn
8.4
244.5
111.4
2.6
44.9
2017
£m
203
847
1,050
(1,528)
(436)
(237)
(2,201)
174
(977)
959
496
456
(246)
1,665
(549)
(66)
1,050
(9.0%)
0.65%
2017
£bn
9.7
277.9
118.7
3.3
52.9
Variance
£m
(91)
483
392
315
198
84
597
(82)
907
(297)
(64)
(74)
29
(406)
640
158
392
7.0%
(0.25%)
Variance
£bn
(1.3)
(33.4)
(7.3)
(0.7)
(8.0)
(44.8%)
57.0%
37.3%
(20.6%)
(45.4%)
(35.4%)
(27.1%)
(47.1%)
(92.8%)
(31.0%)
(12.9%)
(16.2%)
(11.8%)
(24.4%)
(116.6%)
nm
37.3%
(13.4%)
(12.0%)
(6.1%)
(21.2%)
(15.1%)
Notes:
(1) The NatWest Markets operating segment should not be assumed to be the same as the NatWest Markets Plc legal entity or group.
(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 risk-weighted assets incorporating the effect of capital deductions (RWAes)), assuming 28% tax rate.
(3) Comparisons with prior periods are impacted by the transfer of shipping and other activities to Commercial Banking and the transfer of whole business
securitisations and Relevant Financial Institutions from Commercial Banking in preparation for ring-fencing. The net impact of the transfers on 2017 would have
been to increase income by £104 million, reduce operating expenses by £2 million, reduce the net release of impairments by £72 million and increase funded
assets by £1.3 billion and RWAs by £0.4 billion. The variances in the full year commentary below have been adjusted for the impact of these transfers.
2018 compared with 2017 (comparisons adjusted for transfers)
NatWest Markets continues to focus on customer service and is
increasingly using technology to enhance the way it provides
innovative financial solutions to its customers and partners. For
example, FXmicropay makes it simpler for businesses operating
globally to accept payments in multiple currencies, reducing costs
and increasing revenues for our customers. Our success in
harnessing technology has been recognised with two awards: Best
in Service Globally among Corporates for Algorithmic trading in the
2018 Euromoney FX Survey and Best Order Management award in
the Profit & Loss 2018 Digital FX Awards.
Total income increased by £288 million, or 25.0%, primarily
reflecting lower disposal losses in the legacy business and a £165
million indemnity insurance recovery, partially offset by lower
income in the core business. The reduction in the core business
was driven by challenging fixed income, currencies and
commodities (FICC) market conditions in Q4 2018, together with
turbulence in European bond markets earlier in the year.
Central items & other
Central items not allocated
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.
Operating expenses decreased by £595 million, or 27.1%. This
reflects reductions in other expenses across both the core and
legacy businesses, down £313 million to £1,213 million, lower
strategic costs, down £198 million to £238 million, and reduced
litigation and conduct costs, down £84 million to £153 million.
The net impairment release decreased by £10 million to £92 million
reflecting a lower level of legacy releases.
Funded assets decreased by £8.6 billion, or 7.2%, reflecting the
wind down of the legacy business.
RWAs decreased by £8.4 billion to £44.9 billion, including RWAs
for Alawwal bank of £5.9 billion. The decrease was driven by the
legacy business, down £7.1 billion, in addition to reductions in the
core business.
2018
£m
(1,038)
2017
£m
(483)
Variance
£m
(555)
114.9%
2018 compared with 2017
Central items not allocated represented a charge of £1,038 million
in 2018, largely comprises the £1,040 million charge relating to the
civil settlement with the US Department of Justice and £333m of
strategic costs, partially offset by a £241 million provision release
relating to an RMBS litigation indemnity and indemnity insurance
recoveries of £192 million.
46
Our Board
1
N
8
2
E
9
3
E
10
4
5
Re
T
T
Re
S
11
12
6
A
13
7
Ri
T
Ri
A
14
Re
G
N
Ri
S
A
G
N
Ri
Ri
A
G
N
S
Re
A
G
N
Re
S
T
Key
A
E
G
N
Group audit committee
Group Executive committee
GRG Board Oversight Committee
Group nominations and governance committee
Re
Ri
S
T
Underlined
Group performance and remuneration committee
Group Board risk committee
Group Sustainable banking committee
Technology and innovation committee
Committee Chairman
T
Re
S
5 Alison Davis
Appointed 1 August 2011
Experience: Previously, Alison served as a
director of City National Bank, First Data
Corporation, Xoom, Presidio Bank and
Diamond foods, and as 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.
External appointments: Non-executive
director, and member of the audit committee
of Fiserv Inc; and non-executive director and
chair of the audit committee of Ooma Inc.
A
Ri
T
6 Patrick Flynn
Appointed 1 June 2018
Experience: Patrick Flynn was the Chief
Financial Officer and a member of the
Executive Board of ING Group (Netherlands'
largest financial services group) from April
2009 to May 2017. Prior to that, he was Chief
Financial Officer of HSBC Insurance from
2007 to 2009 and prior to that, from 2002 to
2007, was Chief Financial Officer of HSBC
South America based in Brazil where he was
responsible for HSBC's banking and
insurance operations.
Patrick is a Chartered Accountant; a Fellow of
the Institute of Chartered Accountants Ireland;
and a member of the Association of
Corporate Treasurers in the UK.
External appointments: None.
N
1 Howard Davies
Appointed: 14 July 2015 (Board),
1 September 2015 (Chairman)
Experience: Howard was chair of the UK
Airports Commission between 2012 and 2015;
Director of the London School of Economics
and Political Science from 2003 until May
2011; Chairman of the UK Financial Services
Authority from 1997 to 2003; and Deputy
Governor of the Bank of England from 1995 to
1997.
He is also Professor of Practice at the Paris
Institute of Political Science (Sciences Po)
and 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; and Member of the
International Advisory Council of the China
Banking Regulatory Commission.
E
2 Ross McEwan
Appointed: 1 October 2013
Experience: Ross has more than 25 years
experience in the finance, insurance and
investment industries. He became Chief
Executive of The Royal Bank of Scotland
Group in October 2013 and between August
2012 and September 2013, 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, Ross was
Executive General Manager with responsibility
for the branch network, contact centres and
third party mortgage brokers. 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 appointments: None.
E
3 Katie Murray
Appointed: 1 January 2019
Experience: Katie joined RBS as Director of
Finance in November 2015 and was
appointed as Deputy Chief Financial Officer in
March 2017. Katie has worked in Finance and
Accounting for nearly 30 years with
experience in capital management, investor
relations, financial planning and all areas of
financial services. Katie was previously the
Group Finance Director for Old Mutual
Emerging Markets, based in Johannesburg
from 2011 to 2015, having held various roles
in Old Mutual from 2002. Prior to this Katie
worked at KPMG for 13 years. Katie is a
Chartered Accountant having trained in
Scotland and is a member of The Institute of
Chartered Accountants of Scotland.
External appointments: None.
Independent non-executive directors
Re
T
4 Frank Dangeard
Appointed 16 May 2016
Experience: Frank assumed the role of
Chairman, NatWest Markets Plc on 30 April
2018. 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 Managing Director of SG Warburg.
Frank is a graduate of HEC and IEP in Paris
and of the Harvard Law School in the US.
External appointments: Non-executive director
of the Symantec Corporation and Arqiva.
47
Our Board
A Ri
7 Morten Friis
Appointed 10 April 2014
Experience: Previously, Morten had a 34 year
financial services career. He 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
RBC Dexia Investor Services Trust Company.
External appointments: 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; and non-executive director of
Jackson National Life Insurance Company.
Re
G
N
Ri
S
8 Robert Gillespie
Appointed 2 December 2013
Experience: Robert had a long career in
investment banking, specialising in corporate
advisory work. He was Director General of the
Takeover Panel from 2010 until 2013 and
prior to that held a number of senior
management positions at UBS including being
global head of investment banking from 1999
until 2005, chief executive of UBS for EMEA
from 2004 to 06 and Vice Chairman of UBS
Investment Bank from 2005 to 2008. He
commenced his career at Price Waterhouse
where he qualified as a Chartered Accountant
and in 1981 joined S.G. Warburg which
subsequently became part of UBS.
External appointments: Independent board
director at Ashurst LLP; chairman of the Boat
Race Company Limited; director of Social
Finance Limited; and professor of practice,
Durham University Business School.
G
N Ri
A
9 Brendan Nelson
Appointed 1 April 2010
Experience: Brendan is a non-executive
director of NatWest Markets Plc and chair of
its audit committee. Previously Brendan was
global chairman, financial services for KPMG.
He 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
and President of the Institute of Chartered
Accountants of Scotland 2013/14.
T
S
13 Dr Lena Wilson, CBE
Appointed 1 January 2018
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.
She 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. Lena is Chair of the
Colleague Advisory Panel established by RBS
during 2018.
External appointments: Non-Executive
Director of Intertek Group plc and member of
its audit and nomination committees, and non-
Executive Director of Scottish Power
Renewables Limited. Visiting Professor,
University of Strathclyde Business School.
Advisory Board member of MCR Pathways.
Chief Governance & Regulatory Officer
and Board Counsel; Company Secretary
14 Aileen Taylor
Appointed 1 May 2010
Experience: A qualified solicitor, Aileen joined
RBS in 2000. She was appointed Group
Secretary in 2010 and extended her remit
further in 2015, becoming Chief Governance
Officer and Board Counsel. In 2017 she also
assumed responsibility for Regulatory Affairs.
Prior to that Aileen held various legal,
secretariat and risk roles including Head of
External Risk (Retail), Head of Regulatory
Risk (Retail Direct) and Head of Legal and
Compliance (Direct Line Financial Services).
Aileen is a fellow of the Chartered Institute of
Bankers in Scotland and a member of the
European Corporate Governance Council and
the GC 100. She is also a member of the
FCA’s Listing Authority Advisory Panel.
N
Ri
A G
10 Baroness Noakes, DBE
Appointed 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. Baroness
Noakes previously held non-executive roles
on the Court of the Bank of England, Hanson,
ICI, Severn Trent, Carpetright, John Laing and
SThree.
External appointments: Member of the House
of Lords Select Committee on the European
Union and its sub-committee on the internal
market.
S
Re
11 Mike Rogers
Appointed 28 January 2016
Experience: Mike was previously Chief
Executive of Liverpool Victoria Group for 10
years. Mike has extensive experience in retail
banking and financial services. He joined
Barclays in 1986 where he undertook a
variety of roles in the UK and overseas across
business banking, wealth management and
retail banking and was Managing Director of
Small Business, Premier Banking and UK
Retail Banking.
External appointments: Non-executive
Chairman of Aegon UK; Director of Experian
plc; and Chairman of its Remuneration
Committee.
A G
N Re
12 Mark Seligman
Appointed 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.
External appointments: Non-executive director
and Chairman of the audit committee and
member of the remuneration, nominations &
governance committee and chairman’s
committees of BP plc; and member of the
Financial Reporting Review Panel.
External appointments: Senior Independent
Director of Kingfisher plc and non-Executive
Director and Chairman of the audit committee
of Smiths Group plc.
48
Corporate governance
Our Board
Corporate governance
Report of the Group Nominations
and Governance Committee
Report of the Group Audit
Committee
Report of the Group Board Risk
Committee
Report of the Group Sustainable
Banking Committee
Report of the Technology and
Innovation Committee
Directors’ Remuneration report
Compliance report
Report of the directors
Statement of directors’
responsibilities
Page
47
49
53
54
57
60
61
62
83
85
88
Chairman’s introduction
Dear Shareholder,
I am pleased to present the corporate
governance report. During 2018 the Board
considered a range of key strategic, financial,
regulatory and risk matters, including:
Future strategy, including RBS’s purpose
and long term future, technology and
innovation
Banking structural reform
Dividend policy and declaration of an
interim dividend
US Department of Justice: US RMBS
investigation - final settlement
Group Pension Fund: MoU on structural
changes and additional related funding
contribution
Risks associated with the transition of
LIBOR and other IBOR rates to alternative
risk free rates
Building a healthy culture
Implications of Brexit
The Board also dedicated time to engagement
with employees, shareholders, customers and
other stakeholders, as set out in more detail
on page 51.
Ring-Fencing Governance
We also introduced some significant changes
to the way our board operates. In Q1 the
Board approved a new board and committee
operating model in order to align with UK ring-
fencing requirements effective from 1 January
2019. The transition towards the new model
began in May 2018 and I am pleased to report
that the revised operating rhythm is now
embedded. Under the new arrangements, the
RBSG Board has adopted a revised remit
aligned primarily to the legal and regulatory
obligations of a listed holding company. This
includes: strategy; significant acquisitions and
disposals; budget and financial results; risk
appetite; regulatory submissions; board and
committee appointments; executive pay and
performance; culture; and shareholder
relations.
Under the new model, the NWH Ltd board is
the designated forum for matters relating
specifically to our ring-fenced operations, with
a strong focus on the customer-facing
businesses operating within the NWH Ltd sub-
group. It receives regular business reviews
and updates from franchise and function
CEOs and also considers NWH Ltd strategy;
risk profile; customer, innovation and people
issues; regulatory submissions; financial
results; budget; and board and committee
appointments as they relate to the NWH Ltd
sub-group.
An integral part of our ring-fencing
governance arrangements is the appointment
of Double Independent Non-Executive
Directors or “DINEDs” to the NWH Ltd sub-
group boards and board committees.
The DINEDs are independent in two respects:
(i) independent of management as non-
executives; and (ii) independent of the rest of
the Group by virtue of their NWH Ltd sub-
group only directorships. They play a critical
role in our ring-fencing governance structure,
with an enhanced role in managing any
conflicts which may arise between the
interests of NWH Ltd and RBSG. The DINEDs
attend RBSG Board meetings in an observer
capacity.
On 30 April 2018 Yasmin Jetha stood down
as a director of RBSG allowing her to assume
DINED status. A further 3 DINEDs were
appointed to the NWH Ltd sub-group boards
with effect from 1 May: Francesca Barnes,
Graham Beale and Ian Cormack. On 3
December Alison Rose-Slade was appointed
as Deputy CEO, NatWest Holdings, and as a
director of the NWH Ltd sub-group boards.
RBS’s principal subsidiary entities outside the
ring-fence, including NatWest Markets Plc,
operate separate board and committee
meeting cycles. In April 2018 Frank Dangeard
stood down from the NWH Ltd sub-group
boards and assumed the role of Chairman of
NatWest Markets Plc.
Other Board changes
Penny Hughes resigned as a non-executive
director on 30 May 2018, and Ewen
Stevenson resigned as Chief Financial Officer
and director on 30 September 2018. I would
like to thank Penny and Ewen for all their hard
work and dedication to RBS during their time
with us.
On 1 June 2018, we were pleased to welcome
Patrick Flynn to the Board. Patrick’s
appointment further strengthens our overall
board composition and supports succession
planning.
We were also delighted to announce the
appointment of Katie Murray as Executive
Director and Chief Financial Officer (CFO)
with effect from 1 January 2019. Katie’s
appointment followed a successful period as
interim CFO.
Committee with effect from close of business
on 31 March 2019.
2018 UK Corporate Governance Code and
Statutory Reporting Changes
In July 2018 the Financial Reporting Council
published the 2018 UK Corporate
Governance Code (‘the 2018 Code’), which
applies to accounting periods beginning on or
after 1 January 2019. Having conducted a
comprehensive impact analysis we believe we
are well placed to report on our application of
the new 2018 Code’s principles in our 2019
report. We have also noted the new statutory
reporting requirements (as set out in the
Companies (Miscellaneous Reporting)
Regulations 2018) that apply to the company
for accounting periods beginning on or after 1
January 2019. We will make the relevant
disclosures in our 2019 Annual Report and
Accounts although we have opted for early
disclosure on certain remuneration reporting
requirements which can be found in the
Directors’ Remuneration Report on page 62.
In conclusion, I and my fellow directors are
committed to observing high standards of
corporate governance, integrity and
professionalism. Our statement of compliance
with the UK Corporate Governance Code (the
Code) can be found on page 83.
Howard Davies
Chairman of the Board
14 February 2019
The Board
The Board has thirteen directors comprising
the Chairman, two executive directors and ten
independent non-executive directors, one of
whom is the Senior Independent Director.
Biographies for each director and details of
the Board committees they are members of
can be found on pages 47 and 48. The Board
considers that the Chairman was independent
on appointment and that all non-executive
directors are independent for the purposes of
the Code.
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 on rbs.com. During 2018
an internal review confirmed that the Board
had fulfilled its remit as set out in its terms of
reference.
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 34 of the
Strategic Report for more details. The terms
of reference are available on rbs.com.
NatWest Holdings Limited (NWH Ltd) is now
the holding company for our ring-fenced
operations. NWH Ltd shares a common board
membership with NatWest, the Royal Bank
and Ulster Bank Limited (together, the “NWH
Ltd sub-group”) and the four boards meet
concurrently.
In addition, Brendan Nelson will step down as
Chairman of the Group Audit Committee with
effect from close of business on 31 March
2019, and as a non-executive director with
effect from the end of the 2019 Annual
General Meeting. Patrick Flynn will assume
the role of Chairman of the Group Audit
49
Corporate governance
Executive Management
The Board and the CEO are supported by the
Executive Committee (ExCo), which is
responsible for overseeing all aspects of the
Group’s operations. ExCo’s membership
comprises the executive directors and the
Group Chief Risk Officer; who are also
members of the wider executive management
team. Biographies of the executive
management team can be found on rbs.com.
Chairman and Chief Executive
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 business day to day.
Details of the key responsibilities of the
Chairman and the Chief Executive are
available on rbs.com.
Senior Independent Director
Throughout 2018 Mark Seligman, 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 had, as appropriate.
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.
Company Secretary
The Company Secretary, Aileen Taylor, works
closely with the Chairman to ensure effective
functioning of the Board and appropriate
alignment and information flows between the
Board and its committees.
As Chief Corporate Governance and
Regulatory Officer & Board Counsel, Aileen
advises the Board and individual directors on
a broad range of strategic, governance, legal
and regulatory issues. Aileen also facilitates
Board induction and directors’ professional
development.
Conflicts of interest
The Directors’ Conflicts of Interest policy sets
out procedures to ensure that the Board’s
management of conflicts of interest and its
powers for authorising certain conflicts are
operating effectively.
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 and Committee meetings
The table below shows Board and Committee
meeting attendance during 2018.
In addition to scheduled meetings, additional
meetings of the Board and its Committees
were held on an ad hoc basis to deal with
time-critical matters. There were nine ad hoc
Board meetings, six ad hoc N&G meetings,
four ad hoc RemCo meetings, six ad hoc BRC
meetings and 1 ad hoc GAC meeting. The
Chairman and the non-executive directors
meet at least once per year without executive
directors present.
Board and committee membership and attendance 2018
Group
nominations
and
governance
committee
( N&G)
4/4
—
—
—
—
—
4/4
4/4
3/4
—
3/4
—
Group
performance
and
remuneration
committee
(RemCo)
—
—
3/3
6/7
—
—
7/7
—
—
7/7
7/7
—
Group
sustainable
banking
committee
(SBC)
—
—
—
6/6
—
—
6/6
—
—
5/6
—
6/6
Technology
and Innovation
Committee
(TIC)
—
—
6/6
6/6
4/4
—
—
—
—
—
—
4/4
Group
audit
committee
(GAC)
—
—
—
—
3/3
7/7
—
7/7
7/7
—
—
—
Group
board risk
committee
(BRC)
—
—
4/4
—
5/5
9/9
5/5
9/9
9/9
—
—
—
Board
9/9
9/9
9/9
9/9
5/5
9/9
9/9
9/9
9/9
8/9
9/9
8/9
Howard Davies
Ross McEwan
Frank Dangeard 1
Alison Davis 2
Patrick Flynn 3
Morten Friis
Robert Gillespie 4
Brendan Nelson
Baroness Noakes5
Mike Rogers 6,7
Mark Seligman 8
Lena Wilson 9,10
Former Directors
Yasmin Jetha 11
Penny Hughes 12
Ewen Stevenson13
Notes:
(1)
(2) Alison Davis did not attend the February RemCo meeting due to a scheduling clash with a pre-existing
Frank Dangeard was appointed to RemCo, and stood down from BRC, on 1 June 2018.
2/2
2/2
—
3/3
4/4
7/7
—
1/1
—
—
4/4
—
1/1
—
—
—
—
—
—
—
—
commitment.
(3) Patrick Flynn was appointed to the Board, GAC, BRC and TIC on 1 June 2018.
(4) Robert Gillespie was appointed to BRC on 1 June 2018.
(5) Baroness Noakes did not attend the December N&G meeting due to a scheduling clash with a pre-
existing commitment.
(6) Mike Rogers assumed the role of SBC Chairman on 30 May 2018.
(7) Mike Rogers did not attend the March Board and SBC meetings due to a scheduling clash with a pre-
existing commitment.
(8) Mark Seligman was not able to attend the December N&G meeting due to a private commitment.
(9)
Lena Wilson did not attend the August Board meeting due to a scheduling clash with a pre-existing
commitment.
(10) Lena Wilson was appointed to the TIC on 1 June 2018.
(11) Yasmin Jetha resigned from the Board on 30 April 2018.
(12) Penny Hughes resigned from the Board on 30 May 2018.
(13) Ewen Stevenson resigned from the Board on 30 September 2018.
(14) Sandy Crombie resigned from the Board on 1 January 2018.
50
Board Oversight Committees
GRG Board Oversight Committee
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 2018. 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.
UBI DAC Board Oversight Committee
A Board Oversight Committee was
established in September 2017 in order to
provide oversight of required
enhancements to the governance and risk
management practices within Ulster Bank
Ireland DAC (UBI DAC), reporting to the
Board, as appropriate. The journey of
improvement remains a continued area of
focus within UBI DAC. The Committee
was disbanded in October 2018.
2019 Board Committee Changes
Mark Seligman was appointed to the
Group Audit Committee on 1 January
2019.
Corporate governance
How the Board operated in 2018
At each scheduled Board meeting the
directors receive reports from the Chairman,
Board Committee Chairmen, Chief Executive,
Chief Financial Officer, and other members of
the executive management team, as
appropriate.
Other senior executives attended Board
meetings throughout the year to present
reports to the Board. This provides the Board
with an opportunity to engage directly with
management on key issues and supports
succession planning.
In addition to its scheduled meetings, the
Board also met with the executive
management team in June for the annual
Board strategy offsite, which included
particular focus on RBS’s purpose and long-
term future, technology and innovation. In
October the Board held a focused and
forward-looking discussion on culture, in
support of the Board’s critical role in leading
the development of RBS’s culture, values and
standards.
Board engagement with stakeholders
The board maintained its stakeholder focus
through a range of activities involving
employees, shareholders, customers and
others.
At a “Meet the Board” event for employees in
May we announced the creation of our new
Colleague Advisory Panel. In creating the
Panel we are complying early with one of the
key features of the new UK Corporate
Governance Code 2018. Further information
about the Panel can be found in the Strategic
Report on page 14 and the Report of the
directors on page 85.
We held dedicated events for retail
shareholders in Glasgow and Birmingham,
which provided an opportunity for
shareholders to meet board members and ask
questions. Further details on our relations with
investors can be found on page 52.
In September the Board met in Manchester,
and spent time with local businesses,
customers and staff, including branch visits.
Our annual event for subsidiary non-executive
directors took place in November, enabling
attendees to focus on topics of mutual
interest, including stakeholder engagement,
culture and purpose. A Board reception was
also held in Edinburgh, providing a further
opportunity for some directors to meet and
spend time with customers and other
stakeholders and influencers.
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 60).
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. In addition, our
directors have relevant experience of
government and regulatory matters; mergers
& acquisitions; corporate restructuring;
stakeholder management; technology, digital
and innovation; finance and accountancy; risk;
and change management.
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.
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 and tailored to suit
the requirements of the individual concerned.
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.
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. 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 2018, bespoke training was arranged
for the directors on a range of subjects to
enhance their knowledge, including:
Banking structural reform;
Conflicts of interest;
Competition law;
Cyber security;
The balance sheet; and
EU General Data Protection Regulation.
In addition, all directors have access to an
online resources portal, Diligent, through
which they receive their board and committee
papers. Diligent also contains internal policy
information, corporate governance updates
and external briefing notes on topical
subjects, to support directors’ professional
development and competence.
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.
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 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 AGM. In
accordance with the UK Listing Rules, the
election or re-election of independent
directors also requires approval by a majority
of independent shareholders.
Under the Board Appointment Policy all non-
executive directors appointed since 1 January
2017 are appointed for an initial 3 year term,
subject to annual re-election at the AGM.
Following assessment by the Group
Nominations & Governance Committee they
may then be appointed for a further 3 year
term, and subsequent 12 month terms up to a
maximum of nine years.
51
Individual director and Chairman effectiveness
reviews
The Chairman met each director individually
to discuss their own performance and
continuing professional development and also
shared peer feedback provided to IBE 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,
DINEDs, and key external stakeholders and
discussed it with the Chairman.
Relations with investors
The Chairman is responsible for ensuring
effective communication with shareholders.
Shareholders are given the opportunity to ask
questions at the AGM and any General
Meetings held or can submit written questions
in advance.
Communication with the company's largest
institutional shareholders is undertaken as
part of the Investor Relations programme:
The Chairman, Chief Executive and Chief
Financial Officer undertake an extensive
annual programme of meetings with the
company’s largest institutional
shareholders;
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.
Corporate governance
Performance evaluation
In accordance with the Code, an external
evaluation of the Board, its Committees and
individual directors takes place every 3 years.
An internal evaluation takes place in the
intervening years.
Progress following the 2017 evaluation
A number of actions were progressed during
2018 in response to the findings of the 2017
internal performance evaluation, overseen by
the Group Nominations and Governance
Committee.
These included:
a focus on longer-term issues during
strategy discussions, including RBS’s
purpose;
a dedicated Board discussion on culture,
led by the Chairman;
continued opportunities for the Board to
meet RBS’s customers, for example during
the Manchester board visit;
additional Board focus on executive
succession planning; and
enhancing the quality of information the
Board receives through revised formats for
regular reporting.
Key findings and recommendations
The 2018 Board evaluation findings and
recommendations included the following:
the Board is committed and hard-working,
with a strong Chairman in position and a
good working relationship with the CEO;
Board members are clear on their roles
and accountability to shareholders and
wider stakeholders;
The Board should strive to role model the
culture and values of the organisation and
balance holding management to account
with encouragement and support;
the Board has reached an inflexion point,
and there is now a clear need to focus on
the longer term and forward-looking
growth strategy;
there is scope to improve the quality of
Board papers and review the
length/number of Board and Committee
meetings;
Board composition and succession
planning should continue to be a priority;
and in particular consideration should be
given to reducing the Board’s size; and
the induction programme had proved a
positive experience for new non-executive
directors, and a small number of
improvements were suggested.
2018 Performance evaluation
During September and October the 2018
Board and Committee evaluation was
externally facilitated by Independent Board
Evaluation (IBE). IBE was selected following a
competitive tender process and the Board is
satisfied that IBE have no other connection
with RBS.
IBE undertook a formal and rigorous
evaluation by:
holding 1:1 interviews with directors,
senior management and external advisers;
discussing the key themes and
recommendations for action with the
Chairman and Committee Chairmen; and
presenting Board and Committee
effectiveness reports.
This was the first performance evaluation
undertaken since the introduction of our ring-
fencing governance arrangements. It
considered the effectiveness of both the
RBSG and NWH Ltd Boards, but was
predominantly focused on RBSG. The
relatively early stage nature of the feedback
was acknowledged, given the Boards were
transitioning to the new operating model
during the review period.
Actions
An action plan has been developed in
response to the 2018 Board evaluation report,
and its implementation will be overseen by the
Group Nominations and Governance
Committee during 2019. The plan includes
measures to:
agree key objectives, drive a focused
board agenda for 2019, and prioritise
board time accordingly (including between
RBSG and NWH Ltd);
support a healthy Boardroom culture,
focused on the development of effective
working relationships between the
directors and senior management;
improve the quality of Board papers and
presentations;
proactively review Board and committee
composition and succession plans; and
further enhance the NED induction
programme.
52
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 2018.
Role and responsibilities
The Committee is responsible for reviewing
the structure, size and composition of the
Board, and membership and chairmanship of
Board Committees and recommends
appointments to the Board. 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. The Committee makes
recommendations to the Board in respect of
any consequential amendments to the
Group’s operating model.
The terms of reference of the Committee are
reviewed annually, approved by the Board
and are available at rbs.com.
Principal activity during 2018
As highlighted in the Board’s 2017
effectiveness review, the Committee
acknowledges the tenure of a number of
current Board directors and therefore made
succession planning a priority in 2018. Ring-
fencing also gave rise to a requirement to
recruit additional non-executive directors to
the boards of our material regulated
subsidiaries, which the Committee has
overseen.
In addition to recruitment, the Committee has
overseen the process to reach agreement
with the PRA in respect of a governance
model that is compatible with ring-fencing
legislation. The Committee has also spent
time considering the Group’s arrangements in
respect of legal entity governance. This has
included overseeing work aimed at continuing
to enhance the Group’s subsidiary
governance framework. As part of this work,
the Group has proposed the appointment of
individuals to act as its representative on the
boards of a number of material regulated
subsidiaries. The aim of these appointments
is to strengthen oversight and enhance
communication between the subsidiary
boards and the Group.
Membership and meetings
Penny Hughes stepped down from the
Committee with effect from 30 May 2018,
meaning that for most of 2018 the Committee
comprised the Chairman of the Board and
four independent non-executive directors.
Graham Beale also attends meetings of the
Committee in an observer capacity, following
his appointment as Senior Independent
Director of NatWest Holdings Limited.
The Committee holds at least four scheduled
meetings per year and also meets on an ad
hoc basis as required. In 2018, there were ten
meetings. Individual attendance by directors
at these meetings is shown in the table on
page 50.
Board and Committee membership
Both Spencer Stuart and Hay Korn Ferry have
been engaged during the year to support the
search for new executive and non-executive
directors. Spencer Stuart and Hay Korn Ferry
are also members of the retained executive
search panel of suppliers (managed by RBS
Executive Search) and provide leadership
advisory and senior executive search and
assessment services to the Human
Resources function within RBS. During 2018,
the Committee considered a number of
potential candidates. In June 2018, Patrick
Flynn was appointed to the Board as a non-
executive director and at the same time was
appointed to the Board’s Risk, Audit and
Technology and Innovation Committees. The
Committee also oversaw the search for a
successor to Ewen Stevenson who stepped
down from the Board on 30 September 2018.
On 1 January 2019, Katie Murray joined the
Board as executive director and Chief
Financial Officer.
Tenure of non-executive directors
The tenure of non-executive directors as at 31
December 2018 is set out below.
0 – 3 years
3 – 6 years
6+ years
42%
33%
25%
100%
Performance evaluation
The 2018 review of the effectiveness of the
Board and its senior Committees was
facilitated by Independent Board Evaluation, a
specialist board evaluation consultancy. The
Committee has considered and discussed the
outcomes of the evaluation and accepts the
findings. Overall the review concluded that the
Committee operated effectively with no
material recommendations being identified for
action. The Committee will continue to ensure
that the full Board is appropriately sighted on
the work of the Committee
The outcomes of the evaluation have been
reported to the Board and the Committee will
track progress during the year.
Boardroom Inclusion Policy
The Board operates a Boardroom Inclusion
Policy which reflects the most recent industry
targets and is aligned to the RBS Inclusion
Policy and Principles applying to the wider
bank. This policy provides a framework to
ensure that the Board attracts, motivates and
retains the best talent and avoids limiting
potential caused by bias, prejudice or
discrimination. The policy currently applies to
the most senior RBS boards: The Royal Bank
of Scotland Group plc (RBSG), NatWest
Holdings Limited, The Royal Bank of Scotland
plc, National Westminster Bank Plc and Ulster
Bank Limited. A copy of the Boardroom
Inclusion Policy is available on rbs.com>about
us.
Objectives and targets
The Boardroom Inclusion Policy’s objectives
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
53
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.
The Boardroom Inclusion Policy contains a
number of measurable objectives, targets and
ambitions reflecting the ongoing commitment
of the Board to inclusion progress. The Board
aims to meet the highest industry standards
and recommendations wherever possible.
That 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 boards)
and the Parker Report: Beyond 1 by ’21 (at
least one director from an ethnic minority
background on the boards) by 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’s performance against these
targets varied throughout 2018 as the Group
made a number of changes to its board
governance structure in order to comply with
ring-fencing legislation. These changes
included a number of appointments to the
board of NatWest Holdings Limited, the
holding company of the ring-fenced sub-
group. The boards of RBSG and NatWest
Holdings Limited meet consecutively and
share a largely common membership. When
considered together, the director population
across both boards currently meets the Parker
target and exceeds the Hampton-Alexander
target with a female representation of 39%.
Notwithstanding the largely common
membership between the two boards, RBS
remains committed to ensuring that the RBSG
board meets the targets on a standalone
basis. Following Katie Murray’s appointment
on 1 January 2019, the RBSG board
composition currently includes 31% female
representation, rising from 25% at 31
December 2018. The RBSG board also
remains committed to meeting the Parker
Target by 2020/2021.
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 16 and 86.
Howard Davies
Chairman of the Group Nominations and
Governance Committee
14 February 2019
Report of the Group Audit Committee
Letter from Brendan Nelson
Chairman of the Group Audit Committee
Dear Shareholder,
This report outlines the key areas of focus of
the Group Audit Committee (GAC) and
explains how it fulfilled its responsibilities
during 2018.
The GAC has responsibility for monitoring and
reviewing RBS’s financial reports and
disclosures, its accounting policies and
practices and standards of internal control.
The GAC’s responsibilities are set out in more
detail in its terms of reference which are
reviewed annually and are available on
rbs.com.
The Committee’s primary focus is the integrity
and quality of RBS’s financial statements.
During the year we scrutinised the quarterly,
interim and full year results announcements
and supporting documentation, and the 2018
Annual Report and Accounts.
Detailed reports from management on the key
assumptions and accounting judgements
behind RBS’s financial results, IFRS 9
expected credit losses and the conclusions of
the External Auditor and other management
reports, enabled the Committee to scrutinise
disclosures in the financial statements and the
underlying judgements and estimates were
appropriate.
Further detail on the most material issues
considered by the Committee is provided in
the report below.
Membership
Full biographical details of the GAC members
are set out on pages 47 and 48. With effect
from 1 January 2019 Mark Seligman was also
appointed to the GAC. The members are all
independent non-executive directors and each
sit on other Board Committees (as shown on
pages 47 and 48) in addition to the GAC. This
cross committee membership helps facilitate
effective governance, ensures agendas are
aligned and avoids overlap of responsibilities.
The members of GAC are selected with a
view to the expertise and experience of the
GAC as a whole and with proper regard to the
key issues and challenges facing RBS.
The Board is satisfied that all GAC members
have recent and relevant financial experience
and are 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, GAC Chairman,
Baroness Noakes Patrick Flynn and Mark
Seligman are all ‘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.
The effectiveness of RBS’s standards of
internal control, in particular controls relating
to financial management, reporting and
accounting issues, was another key focus of
the Committee.
“The Committee’s primary
focus is the integrity and
quality of RBS’s financial
statements”
RBS, in common with other large banks, was
required to deliver ring-fencing by the
beginning of 2019. Throughout 2018 the
Committee received regular updates on the
ring-fencing programme including, in
particular, its impact on financial reporting for
RBS and its subsidiaries.
During 2018 RBS resolved significant legacy
issues, in particular the settlement of the US
Department of Justice’s investigation into
Residential Mortgage Backed Securities. The
GAC was closely engaged to ensure this was
appropriately disclosed and provided for.
Similarly, the GAC kept existing provisions for
liabilities under close review throughout the
year.
2018 also saw significant developments in
relation to Brexit. Whilst Brexit was largely
discussed at Board level, given its potential
strategic impact, the Committee considered
the potential impact on the economic
environment and, subsequently on RBS’s
financial results.
Regular attendees at GAC meetings included:
the RBS Chairman; Chief Executive; Chief
Financial Officer; Deputy Chief Financial
Officer; Chief Accountant; Chief Legal Officer
and General Counsel; and the Internal and
External Auditors. The GAC also met privately
with the external auditors and separately with
Internal Audit management.
Meetings and visits
The GAC held seven scheduled meetings in
2018, four of which were held shortly prior to
submission of the quarterly financial
statements to the Board. During 2018 all
members attended the meetings scheduled
during their term as Committee members.
In conjunction with the BRC, the GAC took
part in an annual programme of visits to
control functions in order to maintain a
thorough understanding of their priorities and
operational structure. This programme
comprised two visits to Risk; two visits to
Internal Audit and a visit to Finance.
In addition, the GAC and BRC visited RBS’s
operations in India where they met with RBS
India Executive Committee members, the
local internal and external audit teams and HR
team, as well as key employee groups. During
the visit the GAC and BRC received updates
on the RBS India business units, the top risks
in the Indian business and plans for their
remediation, the people plan and Technology
strategy for India.
54
In my role as GAC Chairman I also act as
RBS’s Whistleblowing Champion. As such, I
carry responsibility for ensuring and
overseeing the integrity, independence and
effectiveness of the firm’s whistleblowing
arrangements. RBS’s whistleblowing
framework and procedures promote a culture
where individuals feel comfortable raising
concerns and challenging poor practice and
behaviour. During 2018, the FCA completed
its review of the whistleblowing arrangements
of RBS and other firms. I am pleased to report
that the FCA’s review concluded that RBS’s
arrangements were well developed and cited
several examples of good practice.
Looking forward to 2019, the GAC will
continue its focus on financial reporting;
accounting policies and internal controls,
ensuring robust scrutiny of RBS’s financial
reports and disclosures.
As you will have seen earlier in the report, I
retire as a director of the Group at the
forthcoming AGM and after 9 years as
Chairman of the GAC I will be succeeded by
Patrick Flynn who has been a valuable
member of the GAC since June 2018.
Brendan Nelson
Chairman of the Group Audit Committee
14 February 2019
Performance evaluations
The performance of the GAC was evaluated
by an external party in 2018. The evaluation
concluded that the GAC operated effectively
during 2018. The Committee was described
as thorough and diligent in tackling its
agenda. Some recommendations for
improvement were identified mainly on length
of meetings and paper submissions. The
Board and the GAC have considered and
discussed the outcomes of the evaluation and
will track progress on the recommendations
during 2019.
Evaluations of the External Auditor and
Internal Audit function are conducted each
year. The 2018 Internal Audit evaluation was
conducted by KPMG who assessed Internal
Audit against the Institute of Internal Audit
International Standards and also against
relevant regulatory guidance. The overall
findings were positive and recommendations
for improvement are being progressed by
Internal Audit and overseen by the GAC. The
2018 evaluation of the External Auditor was
conducted internally. It concluded that the
external auditor was operating effectively.
Some recommendations for continuous
improvement were identified and are being
implemented by the External Auditor.
Report of the Group Audit Committee
Matter
Accounting
judgements
Systems of
internal
control
Context of discussion How the Committee addressed the matter
The GAC focused on
a number of
accounting
judgements and
reporting issues in
the preparation of the
Group’s financial
results throughout
2018.
The Committee then
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.
GAC is particularly
interested in the
systems of internal
control relating to
financial
management,
reporting and
accounting issues. A
number of reports
were received by
GAC throughout the
year in this regard
and the effectiveness
of RBS’s internal
control systems,
including any
significant failings or
weaknesses were
evaluated.
Provisions and disclosures – The GAC debated the level and appropriateness of significant
provisions for regulatory, litigation and conduct issues including; provisions for the US RMBS
investigations; Payment Protection Insurance claims; the FCA’s investigation into RBS’s former
Global Restructuring Group; and items relating to the Central Bank of Ireland’s review of Irish
Tracker mortgages. During 2018 RBS recognised £2,014 million of litigation and conduct
provisions. The GAC also carefully reviewed the quality and transparency of RBS’s financial and
risk disclosures.
Expected Credit Loss – Judgements in relation to credit impairments and the impact of macro-
economic risks on the credit environment were discussed throughout the year. GAC focused on
the methodology applied to provisions under IFRS 9. In particular the GAC considered the potential
impact of Brexit and related negotiations on the economic environment and agreed an additional
£100 million impairment charge in this respect in Q3 2018. The Committee was satisfied that the
overall loan impairment provisions and underlying assumptions and methodologies adopted by
RBS were reasonable and applied consistently.
Valuation methodologies – The GAC considered valuation methodologies and assumptions for
financial instruments carried at fair value and scrutinized judgements made by management in
relation to the carrying value of intangible assets.
Management’s assessment of the adequacy of internal controls over financial reporting – The GAC
noted that control improvements were required in relation to the translation of the Expected Credit
Loss data under IFRS 9 and FX Reserves in discontinued operations in NatWest Markets plc. The
Committee noted the action being taken by management to address these. There were no Material
Weaknesses reported in relation to RBS Group at the year-end.
Viability statement and the going concern basis of accounting – GAC considered evidence of
RBS’s capital, liquidity and funding position and considered the process to support the assessment
of principal risks. The GAC reviewed the company’s prospects in light of its current position and the
identified principal risks. The GAC reviewed RBS’s viability and going concern statements on
behalf of the Board. (Refer to the Report of the directors for further information).
Fair balanced & understandable – The GAC oversaw the review process which supports the GAC
and Board in concluding that the disclosures in the Annual Report and Accounts, taken as a whole,
were fair, balanced and understandable and provided the information necessary for shareholders
to assess the company’s position and performance, business model and strategy. The process
included: central co-ordination of the Annual Report and Accounts by the Finance function; review
of the Annual Report and Accounts by the Executive Disclosure Committee prior to consideration
by the GAC; and a management certification process. The External Auditor also considered the fair
balanced and understandable statement as part of the audit process.
Control Environment Certification – The GAC received bi-annual updates on control environment
ratings of RBS’s franchises, functions and material subsidiaries and management’s plans to
address areas of weakness. Management’s plans to address certain control issues are covered in
more detail in the report of the Group Board Risk Committee on page 57.
Sarbanes-Oxley Act of 2002 – The GAC considered RBS’s compliance with the requirements of
the Sarbanes-Oxley Act of 2002 and was satisfied in this respect. No Material Weaknesses were
reported in RBS Group at the year-end. The GAC provided oversight of the drive to continue to
improve SOX processes and received a number of updates in this regard. The GAC are
monitoring enhancements in controls in relation to: reporting of credit exposures specifically under
the newly implemented IFRS9 accounting standard and the processes around the accounting for
foreign currency reserves.
Legal Reports – Quarterly reports on the material current and emerging legal risks and
developments affecting RBS enabled the GAC to assess the related disclosures in RBS’s financial
statements.
Notifiable Event Process – The GAC considered semi-annual reports on control breaches,
captured by RBS’s notifiable event process. All Board directors were alerted to the most significant
breaches.
Whistleblowing – The GAC received updates on the volume of whistleblowing reports, any
discernible trends and staff awareness of the processes. GAC also monitored the effectiveness of
whistleblowing procedures. The GAC Chairman acts as RBS’s Whistleblowing Champion, in line
with PRA and FCA regulations and meets regularly with RBS’s whistleblowing team.
Complaints – Updates were provided to the GAC on customer complaints. GAC focusses in
particular on any fraud related complaints, the process for managing executive complaints and
complaints relating to accounting, internal accounting controls or auditing matters.
Taxation – The GAC received an update on RBS’s tax position including the impact of ring-fencing
on tax governance, material tax risks and disputes, compliance with RBS’s tax obligations and the
main projects and external developments impacting RBS’s tax position.
Annual Risk and Control Report – The GAC also reviewed RBS’s disclosure on internal control
matters in conjunction with the related guidance from the Financial Reporting Council.
55
Report of the Group Audit Committee
Matter
Context of discussion How the Committee addressed the matter
Internal audit
External audit
Audit & non-
audit services
The Committee has
responsibility for
overseeing the
Internal Audit
function. In addition
to considering
quarterly opinions
from Internal Audit,
GAC is required to
monitor the function’s
effectiveness and
confirm its
independence and
was fully satisfied in
this regard.
Ernst & Young LLP
(EY) has been RBS’s
external auditor since
2016. The GAC has
responsibility for
monitoring EY’s
independence and
objectivity, the
effectiveness of the
audit process and for
reviewing RBS’s
financial relationship
with the External
Auditor and fixing
remuneration.
RBS has a policy in
relation to the
engagement of the
external auditors to
perform audit and
non-audit services
(the policy). GAC
reviews the policy
annually to ensure it
remains fit for
purpose. All audit and
non-audit services
are pre-approved by
the Committee to
safeguard the
external auditor’s
independence and
objectivity.
Opinions – Quarterly opinion reports updated GAC on Internal Audit’s view of the risk and control
environment and risk and control awareness of each business and function, and the risks which
could impact RBS achieving its targets. Internal Audit also outlined material and emerging
concerns identified through their audit work. In addition, Internal Audit reported on items including
Pillar 3 reporting and the whistleblowing process.
Annual Plan and Budget – GAC considered and approved Internal Audit’s plan for 2018.
Updates and anticipated changes to the plan were provided to the GAC periodically. The GAC
also considered Internal Audit’s budget. The Committee was satisfied that Internal Audit had
adequate budget and resources to deliver the plan.
Internal Audit Charter and Independence – Updates to Internal Audit’s charter reflecting
changes to RBS’s legal entity structure were noted by the GAC. The GAC also noted the Chief
Audit Executive’s independence statement.
Visits – Together with the BRC, GAC participated in two visits to Internal Audit during 2018. A
variety of issues impacting the Internal Audit function were discussed, including: resourcing and
structure; succession planning; quality assurance; the future of internal audit; and the 2019
Audit Plan.
Performance – The Chief Audit Executive continued to report to the GAC Chairman, with a
secondary reporting line to the Chief Executive for administrative purposes. The GAC assessed
the annual performance (including risk performance) of the function and Chief Audit Executive.
Evaluation – The 2018 annual review of the effectiveness of Internal Audit was undertaken
externally by KPMG. The evaluation assessed the function against the Institute of Internal
Auditor International Standards and found that it “Generally Conforms” to the requirements, and
is in line with peer organisations. There were some areas where the function “Partially
Conforms” to a limited number of requirements, but none were considered to be significant and
in most cases, steps were already being taken to address these.
Audit Partner – Jonathan Bourne has been EY’s lead audit partner for RBS since 2016. Mr Bourne
attended each meeting of the GAC in 2018.
External Audit Reports – EY reported to the GAC each quarter on their audit work and related
conclusions, including the appropriateness of judgements made by management and their
compliance with international financial reporting standards. The GAC also reviewed EY’s annual
management letter.
Audit Plan and fees – The GAC considered updates on EY’s 2018 plan and approved the 2018
audit fees including the fee for the 2018 interim results. The GAC was authorised by shareholders
at the last Annual General Meeting to fix the remuneration of the external auditors.
Annual Evaluation – An internal evaluation was carried out at the GAC’s request to assess the
independence and objectivity of the External Auditor and the effectiveness of the audit process
during 2018. GAC members, attendees, the Franchise and Functional Finance Directors and key
members of the Finance team were consulted as part of the evaluation. The evaluation assessed
the external auditor’s mindset and culture, skills, character and knowledge, quality control and
judgement. The evaluation found that the External Auditor was operating effectively. A number of
recommendations for continuous improvement were identified which are being implemented 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.
CASS Opinions – During 2018 the external auditor presented the results of its assurance
procedures on compliance with the FCA’s Client Asset Rules for RBS’s regulated legal entities for
the year ended 31 December 2017. 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.
External Auditor Report to the PRA – GAC considered EY’s 2018 written report to the PRA under
supervisory statement SS1/16. The report responded to specific questions posed by the PRA,
most of which concerned the interpretation of the IFRS 9 accounting rules by RBS. GAC also
discussed the questions received from the PRA in relation to the report required for 2019.
Under the policy, audit related services and permitted non-audit service engagements may be
approved by the Director of Finance up to certain financial thresholds. Engagements in excess of
these limits require the approval of the GAC chairman. The Director of Finance may also approve
the provision of services by the external auditor to non-consolidated subsidiaries of RBS within an
annual cap and approve engagements with the external auditor where RBS has limited or no
influence in the selection process. Where the fee for a non-audit service engagement is expected
to exceed £100,000, a competitive tender process must be held and approval of the full GAC is
required. All such approvals are reported to the GAC each quarter.
During 2018, approval was granted under the policy for the external auditors to undertake
significant engagements in relation to a gap assessment in relation to IFRS 9 reporting
infrastructure and to provide assurance over LIBOR submissions. The decision to approve EY was
made in the first case as a result of EY’s existing knowledge of RBS systems which allowed work
to commence quickly and in the second case, following a tender process. In each case the GAC
was satisfied that the engagement did not impact the external auditor’s independence.
Further details of the non-audit services that are prohibited and permitted under the policy can be
found on rbs.com. Information on fees paid in respect of audit and non-audit services carried out
by the External Auditor can be found in Note 6 to the consolidated accounts.
56
Report of the Group Board Risk Committee
Letter from Baroness Noakes
Chairman of the Group Board Risk
Committee
Dear Shareholder,
I am pleased to present my report setting out
how the Group Board Risk Committee (the
Committee or BRC) discharged its
responsibilities in 2018.
The BRC has responsibility for overseeing the
management of risks that could impact RBS’s
businesses and operations. The Committee
also monitors risk profile, risk appetite and the
promotion of a culture of risk awareness
within the organisation. The BRC’s
responsibilities are set out in more detail in its
terms of reference which are reviewed
annually by the Committee and are available
on RBS’s website: rbs.com.
RBS’s risk profile improved materially in 2018,
with progress made in relation to pensions,
the settlement of the US Department of
Justice’s investigation into Residential
Mortgage Backed Securities and, ring-fencing
implementation.
RBS, in common with other large banks, was
required to deliver both ring-fencing and key
parts of its resolution plans by the beginning
of 2019. The ring-fencing programme was a
key focus for the Committee throughout the
year and detailed progress reports were
scrutinised at each meeting.
After the successful legal restructuring of the
RBS Group on 30 April 2018, RBS began to
operate under a transitional governance
structure and BRC continued to oversee the
subsequent stages of the ring-fencing
implementation work
“RBS’s risk profile
improved materially in 2018”
A large part of the Group BRC’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 (*).
Membership
The Board Risk Committee is comprised of
five independent non-executive directors. The
details of the members and their skills and
experience are set out on pages 47 and 48.
Brendan Nelson is chairman of the Group
Audit Committee of which Baroness Noakes
and Morten Friis are also members.
Robert Gillespie is chairman of the Group
Performance and Remuneration Committee.
This common membership across
Committees helps to ensure effective
governance across the committees.
Regular attendees at meetings include: the
RBS Chairman, Chief Executive, Chief
Financial Officer, Chief Risk Officer, Chief
Legal Officer and General Counsel, Chief
Audit Executive, and the External Auditor.
External advice is sought by the Committee
where appropriate.
Meetings and visits
All members attended the nine scheduled
meetings held in 2018 during the period in
which they were Committee members. In
addition, six ad hoc meetings were arranged
to consider: Bank’s Executive Committee
(ExCo) risk and conduct performance, ExCo
risk & control objectives, risk and conduct
management performance of Franchises and
Functions, the year-end remuneration
process, the results of various phases of
internal and external stress tests; and the
capital plans required for the Ring-fencing
Transfer Scheme.
In 2018, members of the Committee
undertook a programme of visits across
various locations in conjunction with members
of the Group Audit Committee, including a
visit to India. The purpose and scope of this
programme is discussed in detail in the
Report of the Group Audit Committee on
pages 54 to 56.
The Committee also held an in-depth session
on risk reporting and held a teach-in on capital
and liquidity.
Other key areas of focus in 2018 included:
risk profile and reporting, stress testing, risk
appetite, and recovery and resolution. Further
detail on each of these key topics is provided
on the pages that follow. Brexit risks, while
considered by the BRC from time to time,
were largely discussed at Board level given
the potential strategic impact.
Now that the majority of legacy issues have
been addressed and ring-fencing delivered,
RBS is increasingly looking to the future and I
anticipate that BRC will spend progressively
more time overseeing aspects of innovation
and technology. Operational resilience, cyber
security and a satisfactory control
environment are, however, key to ensuring
that RBS can continue to provide excellent
service to its customers and these areas will
be monitored closely by the BRC in the year
ahead.
Baroness Noakes
Chairman of the Group Board Risk Committee
14 February 2019
Performance Evaluation
The annual review of the effectiveness of the
Board and its senior Committees, including
the Board Risk Committee, was conducted
externally in 2018 by independent Board
Evaluation. Overall the review concluded that
the BRC continued to operate effectively. The
Committee was described as very capable
with robust, well-established processes. The
review also made a number of
recommendations including reducing the
length of meetings and level of detail
considered by the Committee and
transitioning to a more strategic mode over
time. The Committee has considered and
discussed the outcomes of this evaluation and
accepts the findings.
The outcomes of the evaluation have been
reported to the Board and the Committee will
track progress on the recommendations
during 2019.
57
Report of the Group Board Risk Committee
Key matters considered by the Committee in 2018
Matter
Risk profile
and reporting
Structural
reform
including ring-
fencing
implementation
Stress testing
Context of discussion
A proportion of every
BRC meeting was
spent reviewing risk
reports, assessing
the most material risk
exposures relative to
strategy and risk
appetite and
scrutinising
management’s
recommendations to
monitor and control
such exposures.
The BRC oversaw
the delivery of the
separation of RBS’s
core banking
business from
activities that are
required to be outside
the ring-fence which
involved many
complex activities.
BRC also monitors
the development of
plans which would
allow RBS to be dealt
with effectively in the
event of financial
failure.
BRC devoted
considerable time to
stress testing
including the
European Banking
Authority (EBA) and
Bank of England
stress tests in
addition to its own
internal stress tests.
BRC subjected the
outputs of the tests to
a high degree of
scrutiny and
challenge.
How the Committee addressed the matter
Risk Management Reports – Top and emerging risks were presented in quarterly Risk
Management Reports, supplemented by shorter reports from the Chief Risk Officer at intervening
meetings. Key topics discussed included the macro-economic and UK credit environments, cyber
security and the implications for RBS of Brexit, geopolitical tensions and trade issues. Reports on
legal and regulatory developments, including RBS’s General Data Protection Regulation
compliance programme and significant litigation risks were also frequently considered.
Updates from Management and Subsidiary Risk Committees – Updates were received from the
Executive Risk Committee and Technical Executive Risk Forum (before it was disbanded in June
2018), as the BRC relies on the effective executive oversight of risk. In addition, quarterly reports
were received from the chairmen of the risk committees of the franchises and material regulated
subsidiaries.
Emerging Risks – Emerging risks likely to impact RBS over the next decade were considered at
each meeting and in more detail mid-year. The Committee noted three key areas of change: new
technology, competitive challenge and the geopolitical landscape.
Ring-fencing / Operational Continuity in Resolution (OCiR) – BRC considered the key execution
risks of the ring-fencing programme and oversaw the preparations for the successful
implementation of the two ring-fencing transfer schemes which were implemented during the
year. Regular updates were received from management on progress against plan and on their
level of confidence in relation to RBS’s readiness for operating in a ring-fencing compliant state
by 1 January 2019. Plans supporting the provision of Board attestations to the PRA in relation to
ring-fencing and OCiR compliance were also reviewed. Separate joint sessions with the Group
Audit Committee were held to monitor plans for operational readiness in the risk, finance and
treasury functions, including the development of legal entity specific management information.
Assurance - The outputs of integrated assurance work undertaken by Risk, Internal Audit and
KPMG (appointed to provide independent assurance on defined aspects of ring-fencing
implementation) were received by the Committee.
Recovery and Resolution– BRC continued to monitor the other elements of Resolution Planning
(outside of OCiR) in light of intensifying regulatory requirements. The Committee noted improved
engagement across RBS and from regulators during the period and monitored progress on
Minimum Requirement for own funds and Eligible Liabilities (MREL). BRC also examined a
Solvent Wind Down report* for NatWest Markets separately and the Committee reviewed the draft
2018 Recovery plan before submission to the regulator*.
ICAAPs and Budget Stress Tests - In Q1, the BRC considered the results of the 2017 ICAAPs
and ILAAs and the Reverse Stress tests for the RBS Group, NWH Ltd and NWM Plc, in addition
to feedback from the Bank of England in relation to its 2017 stress test. The scope of the stress
testing scenarios and legal entity analysis for RBS’s 2018 Budget stress test and 2018 ICAAP
and the actions being undertaken to de-risk these deliverables were considered in Q3.
Bank of England and EBA Stress Test – During the year the Committee provided challenge and
scrutiny in relation to the scenarios and traded risk factor expansions before considering the key
assumptions and judgements deployed by management in the Bank of England and EBA stress
tests. A detailed review of the outputs of the tests was carried out prior to submission to the
regulator*.
58
Report of the Group Board Risk Committee
Matter
Risk appetite
Control
environment
Bank-wide
risks
Context of discussion
Risk appetite
continued to be a key
focus of the
Committee, in
particular the way in
which the frameworks
and risk appetite
statements would
operate after
structural reform.
A number of
programmes
impacting RBS’s
control environment
were ongoing in
2018. BRC
maintained oversight
of these programmes
and of existing
internal controls for
the management of
risk.
BRC received regular
updates on key risks
to RBS and
monitored the
safeguards in place
to minimise the
impact of such risks
and ensure continuity
of service to
customers.
Accountability
and
remuneration
BRC continued to
provide oversight
over the risk
dimension of
performance and
remuneration
arrangements,
working closely with
the Performance and
Remuneration
Committee.
How the Committee addressed the matter
Frameworks - BRC reviewed the overarching Risk Management Framework; the Risk Appetite
Framework; the Risk Appetite Governance Framework and discussed how the frameworks would
relate to legal entities after ring-fencing*. Proposed risk appetite statements for strategic risks for
the Group’s main subsidiaries and franchises were also appraised by the Committee.
Board Risk Measures (BRMs) and Material Risk Appetite – The Committee scrutinised a review of
the qualitative statements of appetite for material risks and material high level measures,
challenging the rationale for some of the proposed measures*. The Committee also reviewed
escalated breaches of risk appetite and the action taken by management in response*.
Transformation - The execution risks of the bank-wide transformation programme and impact on
the control environment were kept under review at regular intervals throughout the year, including
specific updates on Open Banking and the project to build a new digital bank. BRC also
considered a 2020 refresh of the transformation portfolio and requested that risk metrics be
refreshed and recalibrated.
Control Environment Certification - Bi-annual reports on the control environment ratings of the
franchises and functions were reviewed by the Committee. Where significant control weaknesses
were identified BRC sought management’s assurance that measures were in place to ensure that
the businesses could continue to operate safely. BRC also monitored the programme to remediate
customer due diligence as well as plans to build robust processes for the future on a quarterly
basis.
Risk Culture – An assessment of risk culture was considered, including management’s plans to
increase the intensity of executive review.
Operational resilience and Cyber Security – BRC requested updates on information and cyber
security. BRC also considered data management and the potential risks inherent in distributed
ledger technology, Cloud computing and Artificial Intelligence.
Credit and Market risk - Updates were received in relation to upcoming non-traded market risk
regulations; trading book settlement risk; and the most material decisions of the Executive Credit
Group. BRC also requested a review of the UK Retail sector.
Pension risk - Following agreement being reached with RBS’s pension trustees, the Committee
received an update on pension risk appetite and measurement. Separately, a review of the
pension risk of RBS’s large corporate portfolio was undertaken and reported to the Committee.
Model risk management – The work to strengthen and validate models, including those used in
stress testing, and improve supporting governance was a continuing focus.
Conduct and compliance risk – The BRC received updates on the development of the RBS Group
Compliance and Conduct Risk Framework*.
Financial crime – The annual Group Money Laundering Reporting Officer’s Report* was reviewed
by the Committee and the Committee received an overview of RBS’s approach to crypto-assets.
The BRC also kept under review the plans to improve and remediate customer due diligence.
Capital and Liquidity – These are important areas for risk management and regulatory
requirements are intensifying. In addition to reviewing the Group, NWH Ltd and NWM Plc ICAAPs
and ILAAPs* in Q1, BRC held focused sessions on RBS’s approach to liquidity and funding
management and on capital. These sessions focused in particular on the capital requirements of
the Group and its material subsidiaries.
Data Management and GDPR – Updates were received on the work undertaken to address the
risks related to data management and to deliver compliance with GDPR.
LIBOR Programme – BRC reviewed the risks associated with the transition of LIBOR and other
IBOR rates to alternative risk free rates and a submission to regulators setting out the preparations
and actions being taken under the programme*.
Accountability – The BRC regularly considered accountability recommendations in respect of
significant material events, on-going investigations and high earners. The risk and control
objectives of members and attendees of RBS’s Executive Committee were also reviewed, with
additional focus on underlying objectives for the Chief Risk Officer.
Remuneration – The BRC reviewed the performance conditions for RBS’s Long-Term Incentive
Plans and assessment of proposed vesting levels to ensure risk management and conduct
performance was fairly reflected in vesting outcomes. The BRC also made recommendations to
the Group Performance and Remuneration Committee on reflecting risk performance in the bonus
calculation. Further detail on how risk is taken into account in remuneration decisions can be found
in the Report of the Group Performance and Remuneration Committee on pages 62 to 78.
59
Report of the Group Sustainable Banking Committee
Letter from Mike Rogers
Chairman of the Group Sustainable
Banking Committee
“Engagement sessions
continue to provide a valuable
opportunity for the Board to
listen to the external
perspective.”
Stakeholder engagement
The Committee has continued with its
stakeholder engagement programme and
during 2018 met with 16 external stakeholders
over four sessions. Topics were:
Sustainable credit;
Ethics of artificial intelligence;
Purpose; and
Transparency.
Performance evaluation
The annual review of the effectiveness of the
Group Board and its senior Committees,
including Group SBC, was conducted
externally in 2018. Group SBC has
considered the outcomes of this evaluation
and accepts the findings. Overall the feedback
on the Committee was positive, although it
was recognised that there was an opportunity
to be clearer and simpler on remit.
The outcomes of the evaluation have been
reported to the Group Board and the
Committee will follow up during the year
through the development of the pillars of
sustainable banking as described below.
Conclusion
I want to take the opportunity to thank the
Committee members and attendees for their
continued contribution and support in 2018.
I would also like to record my thanks to Penny
Hughes, my predecessor, as Chairman of the
Committee who stood down at the AGM in
May 2018. Penny was a champion for
sustainable banking and stakeholder
engagement and I look forward to building
further on the progress made under her
direction.
In preparation for 2019, the Committee has
spent time considering its remit and how best
to continue to have a long-term and strategic
focus. In future, the Committee’s work will be
structured under four pillars of: Customers
and Brands; People and Culture; the
Competitive Environment; and Society and
Environment.
I am energised to continue to lead the
Committee’s work during 2019 and look
forward to reporting on progress of the
sustainable banking agenda next year.
Mike Rogers
Chairman of the Group Sustainable Banking
Committee
14 February 2019
Dear Shareholder,
I am delighted to present my first report as
Chairman of the Group Sustainable Banking
Committee (the Committee or SBC).
The sessions continue to provide a valuable
opportunity for Board members and senior
management to listen to the external
perspective.
During the year the Committee also undertook
visits to our Private Banking and Premier
Banking businesses along with visiting the
Digital Studio in Bristol and the London
Entrepreneurial Accelerator Hub. The purpose
of these visits is to provide Board members
with customer and entrepreneur insights and
interaction.
The Committee’s programme of stakeholder
engagement was enhanced by hosting a
lunch with some of the members of the
recently formed Colleague Advisory Panel,
with the key themes of the discussion being
shared with the Board. Further information
about the Panel can be found in the Strategic
Report on page 14.
Membership, Meetings and Escalation
The structure of the Committee was amended
part way through the year in preparation for
ring-fencing. More information on ring-fencing
governance can be found on page 49 of the
Governance Report.
A Sustainable Banking Committee of NatWest
Holdings Limited (NWH Ltd SBC) was
established, with its focus on customer and
people matters within the ring-fenced bank.
Authority is delegated to Group SBC by Group
Board and a regular report of the Committee’s
activities is provided to the Group Board. The
terms of reference are available on rbs.com
and these are reviewed annually and
approved by the Group Board.
Group SBC began the year with six
independent non-executive directors, with that
changing to four independent non-executive
directors due to changes in the structure of
the Committee as referenced above. More
details of membership and attendance at
meetings can be found on page 50 of the
Governance Report.
SBC has continued to play a forward-looking
and strategic role on behalf of the Board,
focusing on its priority areas of culture;
customers; people; brand & communications;
and environmental, social and ethical (ESE)
issues.
2018 Highlights
I can report that good progress was made in
2018 with some particular areas to highlight
set out below.
Culture and people remain two areas
where the Committee focuses its efforts
via a regular culture update as well as
spotlights on wellbeing, inclusion and how
we are supporting colleagues to develop
skills and capabilities needed for the
future.
The Committee has prioritised customer
matters, having received updates from the
customer facing franchises, including
digital and mobile strategy, customer
journey management and business
banking.
The Committee recognises the importance
of customer service so time has been
dedicated to understanding the actions
needed to be taken by management to
improve RBS’s position in the customer
service rankings published by the
Competition and Markets Authority. This
was with a keen focus on management’s
longer term ambition.
The Committee has considered the
Environmental strategy, with a focus on
activity relating to colleagues and suppliers
as well as being updated on the approach
to climate change.
New areas of interest for 2018 included
RBS’s reputation and relationships with
the media.
The Committee received a spotlight on
suppliers which included how RBS
ensures it works with suppliers that share
the same values as well as understanding
the quality of supplier relationships. This
was complemented by obtaining the
internal audit perspective.
The Committee supported management in
developing a sustainable banking
dashboard which provides a consolidated
view on performance in respect of key
priorities.
60
Report of the Technology and Innovation Committee
Letter from Alison Davis
Chairman of the Technology and
Innovation Committee
“In this digital era, technology
and innovation is fundamental
to the bank’s strategy and
customers”
Dear Shareholder,
I am pleased to present the first report of the
Technology and Innovation Committee (the
Committee or TIC).
Role and responsibilities
TIC was established in September 2017 in
order to support the Board in overseeing and
monitoring RBS’s strategic direction in relation
to technology and innovation. Technology and
innovation is transforming banking and it was
agreed that a Board Committee should be
established to allow the Board to dedicate
sufficient time to this area of critical
importance to our strategy and our customers.
Authority is delegated to TIC by the Board and
a regular report of the Committee’s activities
is provided to the Board. The terms of
reference are available on rbs.com and these
are reviewed annually and approved by the
Group Board.
Board Committee structures were reviewed in
preparation for ring-fencing and the TIC has
remained a Group-level Committee, given the
strategic nature of its remit.
Membership and meetings
I have chaired the Committee since it was
established, at which time, Frank Dangeard
and Yasmin Jetha became the first members.
In June 2018, following review of the
Committee’s membership in preparation for
ring-fencing, Patrick Flynn and Lena Wilson
were appointed as members of the
Committee. Frank Dangeard continued as a
member while Yasmin Jetha stood down and
became a standing attendee following her
appointment as a Double Independent Non-
executive Director.
I am confident that the mix of relevant skills,
knowledge and commercial experience
contributed by the Committee’s members has
greatly enhanced the quality of our
discussions.
The Committee is supported by management
and the Chief Executive, Chief Administrative
Officer, Chief Risk Officer, Chief Financial
Officer, CEO Special Projects, Director of
Innovation and Director of Strategy and
Corporate Development are all standing
attendees.
The Committee held six meetings during
2018. Details of meeting attendance can be
found at page 50 of the Governance Report.
Principal activity during 2018
We know that the nature of banking services
and the way they are provided is changing
and the Committee agendas are therefore
focused across three key themes:
Digitising the core – the Committee
considered how the Group is using new
technology to improve the core business,
including how it enhances the customer
value proposition and reduces the cost
base. Each of the franchises and functions
were invited to present an update on steps
being taken to digitise their area. The
Committee has also considered data
strategy; GDPR; cyber security;
technology modernisation; and the core
infrastructure under this theme.
New revenue streams – the Committee
considered new initiatives that could
generate revenue streams, challenge
disruption and deliver innovative digital
propositions for customers.
Innovation strategy, culture and capability
– the Committee discussed how
management’s consideration of the future
innovation strategy, culture and capability
of the organisation is developing. Open
Banking, the innovation budget and
quantum computing were also discussed.
Given the focus of the Committee, it is
important that it spends time considering
external perspectives to ensure that it keeps
abreast of emerging technology and
innovation trends and can identify key threats
resulting from new business models,
technologies, processes, products and
concepts. During the year, the Committee
invited a number of speakers to meetings to
provide an external perspective and insight.
Performance evaluation
The annual review of the effectiveness of the
Board and its Committees, including the TIC,
was conducted externally in 2018. Overall, the
review concluded that the Committee
operated effectively. It included observations
regarding the remit of the Committee and the
focus of the agenda which will be taken into
account in 2019. The outcomes of the
evaluation have been reported to the Board.
Conclusion
I am delighted to chair the TIC, which
supports the Board in an area so crucial to the
future of the organisation. RBS needs to
remain relevant to customers in a changing
world and the Committee will continue to
support the Board in considering how we can
use technology and innovation to advance the
bank for our customers and shareholders. I
want to take the opportunity to thank the
Committee members and attendees for their
contribution, enthusiasm and support in 2018.
Alison Davis
Chairman of the Technology and Innovation
Committee
14 February 2019
61
Directors’ Remuneration Report
Annual statement from the
Committee Chairman
Remuneration at a glance
Directors’ Remuneration Policy
Annual Report on Remuneration
Other Remuneration Disclosures
Page
62
63
65
69
79
We have also removed variable pay for a
significant number of these employees and
increased their fixed pay. This provides more
certainty and allows employees to concentrate
on customers’ needs. As a result of these
changes, 56% of employees across the Group
are rewarded through fixed pay only.
Performance and pay decisions
The latest results demonstrate the business is
building on its return to profitability in 2017
with a clear plan to deliver sustainable returns
for shareholders. Income has risen and our
core tier 1 capital ratio remains strong,
exceeding our long-term target.
Letter from Robert Gillespie
Chairman of the Group Performance and
Remuneration Committee
“Capital strength has been a key
performance measure and I am delighted
that progress in this area has enabled RBS
to resume dividend payments.”
Dear Shareholder,
This is my second report as Chairman of the
Group Performance and Remuneration
Committee (the Committee) and it has proved
to be another busy year. We have established
additional remuneration committees for a
number of RBS subsidiaries as part of our
governance arrangements for ring-fencing.
This will provide additional oversight of
remuneration across our key legal entities
before proposals are considered by the
Committee.
In addition, the Committee spent time
considering the latest updates to reporting
regulations and the UK Corporate
Governance Code (the Code). We remain
strong supporters of reforms aimed at
improving the effectiveness, transparency and
fairness of pay structures.
Broader pay considerations
Colleague engagement – In preparation for
the new Code, we have taken steps to
supplement our existing channels for
colleagues to be heard at Board level. We
have established a Colleague Advisory Panel
to provide direct engagement with Board
members. Amongst other strategic topics, this
forum will be used to discuss executive
remuneration and how it aligns with the wider
company pay policy.
We believe that having an engaged and
inclusive workforce is a key element of a
successful business. This is why it is one of
the areas included in the performance
assessment for executive directors. The latest
opinion survey shows engagement is at its
highest level since we started measuring it
and inclusion is our highest scoring category.
We are now above the Global Financial
Services (GFS) norms in all comparable
survey categories.
Fairness and simplicity – We continue to
make good progress. The number of
employees at RBS who believe they are paid
fairly rose during the year and is significantly
above the GFS norm. In the UK, our rates of
pay continue to exceed the Living Wage. Over
the last four years we have made
improvements to starting salaries and faster
progression for those on lower levels of pay.
We are confident we pay our employees fairly
and our policies and processes are kept under
review to ensure we continue to do so.
On pensions, action was taken during the
year to significantly address the deficit in the
main defined benefit pension scheme.
Employees are provided with a range of
flexible, market-leading benefits and wellbeing
support. Over 23,000 employees have chosen
to participate in share plans, which provide
direct alignment with the company’s success
and shareholders’ interests.
Transparency – Ahead of new reporting
regulations coming into force next year, we
have included the Chief Executive to
employee pay ratios in this report along with
broader disclosures on employee
remuneration. Gender and ethnicity pay gap
information can be found in the Strategic
Report section, as well as the steps we are
taking to address the position.
Executive director pay policy
Turning to executive pay, the Directors’
Remuneration Policy was approved by
shareholders at the 2017 AGM. No changes
are being made to the policy at this time.
Variable pay is delivered entirely in shares as
long-term incentive (LTI) awards with no
annual bonus. The Chief Executive’s
management team receive a similar
remuneration construct.
The policy is based around a restrained pay
position, with lower levels of LTI awards,
reasonable performance expectations and
significant shareholdings. Shares must be
retained for the long-term, both during and
after employment. I believe this creates a
simple way of aligning executive directors’
interests with shareholders.
Executive director changes during 2018
Ewen Stevenson resigned as Chief Financial
Officer (CFO) during the year. In line with
policy, he continued to receive fixed pay until
his departure date and all outstanding LTI
awards were forfeited. No payment was made
in lieu of notice.
After a successful period as interim CFO,
Katie Murray was appointed to the Board as
CFO from 1 January 2019. Katie’s pay has
been set at a competitive level within the
approved remuneration policy. The pension
rate is 10% of salary. This is in line with the
rate applicable to the wider RBS workforce
and recognises emerging best practice.
Remuneration structures are designed to
support our strategic aims, one of which is
building a safe and sustainable business.
Capital strength has been one of the key
performance measures for executive directors
and I am delighted that progress in this area
has enabled RBS to resume paying dividends
to our ordinary shareholders.
Ross McEwan will be granted an LTI award in
early 2019, following an assessment of
performance over 2018. The assessment
determined that overall performance had been
strong, particularly in relation to capital and
people measures, but the Committee applied
a modest downwards adjustment of around
6% to the maximum grant as customer
performance was not at the desired level.
Performance has also been assessed for the
LTI award granted to the Chief Executive in
2016, following the end of the performance
period in 2018. The award will vest at 27.5%
reflecting improvements in capital strength
and employee engagement, but with no
vesting in areas where performance did not
meet targets, such as total shareholder return.
No discretion was exercised in determining
the outcome. Full details of the assessments
against the objectives and the award levels
can be found in this report.
In terms of pay decisions for our broader
employees, the bonus pool for 2018 is £335
million, which is around 2% lower than 2017.
The size of the bonus pool in recent years
reflects our transition to a smaller and simpler
bank, staffed by highly capable and engaged
people. Immediate cash bonuses continue to
be limited to £2,000.
Looking ahead
One of the main priorities for the Committee
during 2019 will be preparing the executive
directors’ remuneration policy for its renewal
at the 2020 AGM. The new Code
requirements and engagement with our
stakeholders will be part of that process. The
Committee will also look at how it can
enhance its existing role in considering wider
workforce remuneration.
I would like to thank my fellow Committee
members for their guidance and constructive
challenge during the year and I look forward
to considering how we can continue to
develop remuneration practices at RBS for the
benefit of all our stakeholders.
Robert Gillespie
Chairman of the Group Performance and
Remuneration Committee
14 February 2019
62
Directors’ Remuneration Report – at a glance
The ‘at a glance’ section summarises the key features of the executive directors’ remuneration policy and arrangements for 2018 and 2019.
Summary of the remuneration policy for executive directors approved at the 2017 AGM
Alignment via shares between executives and
Alignment with strategy of building a strong,
shareholders
simple and fair bank
Alignment with the growing external
consensus on executive pay
Built around a restrained pay position for
executives, with variable pay delivered
entirely in LTI awards.
Aligns executives with shareholders
predominantly through holding shares, both
during and after employment.
Performance assessed on factors that
executive directors would reasonably be
expected to achieve, encouraging safe and
secure growth.
Quantum and structure of pay appropriate
for a smaller, safer bank.
The maximum value of LTI award is smaller
and we have significantly increased the value
of shares that executive directors need to hold.
LTI awards will be adjusted for
underperformance or risk failings and are
released over eight years with malus and
clawback for a long-term view of performance.
Reduced complexity and quantum, in line with
the Executive Remuneration Working Group
and Government announcements on
executive pay.
Reflects emerging investor guidelines with
their common themes of restraint, meaningful
shareholdings and flexibility of pay design.
Continues to provide transparency between
performance and reward, with performance
measured against pre-set objectives and
disclosed each year.
Summary of pay construct
Chief Executive
Chief Financial Officer (from 2019)
Base salary
£1,000,000
Fixed pay
Fixed Share Allowance
100% of salary
Pension
35% of salary
Maximum LTI award (delivered in shares)
175% of salary
£750,000
100% of salary
10% of salary
200% of salary
Vesting period and conditions
Pre-grant and pre-vest performance assessments along with risk and stakeholder underpins.
Vests in equal amounts between years three to seven after grant.
12 months’ retention period following each vesting.
Malus and clawback provisions apply.
No pro-rating of LTI awards will apply in agreed good leaver circumstances.
Expected average vesting
80% of maximum over time.
Shareholding requirement
400% of salary
250% of salary
Summary of 2018 performance assessments for the Chief Executive
2018 highlights
Operating profit before tax of £3,359
million and CET1 ratio remains strong
at 16.2%, exceeding our long-term
target.
The major legacy issues have now
been resolved and 2018 saw the
payment of the first dividend in 10
years.
Arrangements for ring-fencing have
been implemented on time.
Employee engagement is at its highest
level yet and there have been
continued improvements in culture and
inclusion scores.
Customer service results, however,
are not consistently where they need
to be to achieve our long-term
ambition.
Performance assessment for
vesting of 2016 LTI award
Performance assessed against pre-set
objectives for 2016 – 2018, covering:
Economic Profit – 0% vesting.
Total Shareholder Return – 0% vesting.
Safe & Secure Bank – 12.5% vesting.
Customers & People – 15% vesting.
The performance assessment resulted in a total
vesting percentage of 27.5% due to progress in
capital strength, customer trust scores and
employee engagement. The other elements did
not meet the required performance levels for
vesting. Full details can be found in the annual
report on remuneration.
Performance assessment for
grant of 2019 LTI award
Performance assessed against pre-set objectives
for 2018, covering core areas of:
Finance & Business – capital and RoTE
targets met, ring-fencing structure in place.
Risk & Operations – risk culture target met,
control environment not met in full.
Customers – Net Promoter Score was mixed,
some but not all segments on target.
People & Culture – engagement, culture and
diversity performance all meeting targets.
While overall performance was strong, the
Committee concluded that a reduction of around
6% to the maximum grant would be appropriate
for the Chief Executive to recognise that some
areas were not fully at the desired level. A further
assessment will take place prior to any vesting
taking place. Full details can be found in the
annual report on remuneration.
63
Directors’ Remuneration Report – at a glance
Executive directors who have left/joined during the year
Ewen Stevenson
Ewen Stevenson stepped down from the Board on 30 September 2018 and left RBS on 30 November 2018. He did not receive any payment in
lieu of notice and all outstanding LTI awards were forfeited on his final date of employment.
Katie Murray
Katie Murray was appointed to the Board as Chief Financial Officer with effect from 1 January 2019. Benchmarking was undertaken for the role
and the Committee agreed a remuneration package that was considered to be positioned appropriately compared to peers both in terms of fixed
pay and projected total compensation. Remuneration includes a base salary at £750,000 per annum and a fixed share allowance of £750,000
per annum. Pension funding has been set at 10% of salary. This rate of 10% is the same as the pension rate applicable to the vast majority of
RBS employees and recognises emerging best practice under the UK Corporate Governance Code and investor guidelines.
Any variable pay awards for performance year 2019 onwards (to be made in early 2020) will be delivered as LTI awards, with a maximum award
of 200% of salary. For performance year 2018, a period prior to appointment to the Board, variable pay will continue to be awarded in line with
arrangements in place at that time.
Remuneration outcomes for executive directors in 2018
Ross McEwan
Ewen Stevenson (as at 30 September 2018) (1)
Salary
Pension & Benefits
Fixed Share Allowance
LTI award (vesting value)
(1) Ewen Stevenson also received fixed pay of £317,708 in 2018 for the period after stepping down from the Board until he left RBS on 30 November 2018.
Shareholding requirements
Ross McEwan
Shareholding
requirement
Ewen Stevenson (as at 30 September 2018)
Shareholding
requirement
Timing of payments for 2019 awards to Ross McEwan
Variable
pay
pre-grant
assessment
based on
performance
over 2018
LTI award
granted in
2019
further assessment
made before any
vesting takes place
20%
20%
20%
vests over 2022 to 2026 with a
12 month retention period
post vesting
20%
20%
Fixed pay
Fixed share
allowance
Pension &
benefits
Salary
33%
33%
33%
shares released
over three years
Year
2018
2019
2020
2021
2022
2023
2024
2025
2026
2027
Variable pay awarded to Katie Murray in 2019 for performance year 2018, a period prior to appointment to the Board, will be subject to deferral over seven years and
retention periods in line with regulatory requirements.
64
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. There are no changes requiring
shareholder approval at this time. 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.
Operation
Maximum potential value
Paid monthly in cash and reviewed annually.
The rates for 2019 are:
Chief Executive – £1,000,000
Chief Financial Officer – £750,000
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.
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.
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.
Set level of funding for standard benefits
(currently £26,250) which is subject to
review.
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 on the benefit.
The total value of benefits provided is
disclosed each year in the annual report on
remuneration.
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.
Shareholding requirements
To ensure executive directors build
and continue to hold a significant
shareholding over the long-term.
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.
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.
Chief Executive – 35% of salary
Chief Financial Officer – 10% of salary
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.
While the 2017 policy allows for pension
funding of 35% of salary for existing
executive directors and up to 25% of salary
for new executive directors, a rate of 10%
was agreed on the appointment of the new
Chief Financial Officer to align with the UK
Corporate Governance Code. The 10% rate
is in line with the wider workforce.
The maximum award for current directors
at the time of grant is capped at:
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% of the original
number of shares granted, dependent on
the delivery of sustained performance.
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. When the
applicable retention period has passed, the executive
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.
65
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.
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.
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 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.
The Chairman receives private medical cover.
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, 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
As set out in executive directors’ service contracts, RBS or the executive director is required to give 12 months’ notice to the
other party to terminate the 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), Dr Lena Wilson (2021 AGM) and Patrick Flynn (2022 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
On termination, share awards will be treated in accordance with the relevant plan rules as approved by shareholders. Under
the remuneration policy approved by shareholders at the 2017 AGM, LTI awards made in 2018 onwards 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,
regulatory requirements can effectively prevent LTI awards being granted in the year of joining. The combination of these
factors means executives at RBS could potentially receive 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 creating significant alignment with shareholders.
Removal of pro rating enables executive directors to receive an appropriate level of variable pay for the period that they work
and helps to ensure executives are motivated up to the point of departure and beyond. It 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 only 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. If good leaver treatment does not apply
then LTI awards will be forfeited on leaving.
66
Directors’ Remuneration Policy
Approach to the new UK Corporate Governance Code (the new Code)
Ahead of its formal application in 2019, detailed analysis of the new Code was undertaken in 2018 with findings presented to the Committee.
The majority of the changes are in line with existing practice at RBS. A summary of the main provisions is set out below. The Committee will
continue to monitor and reflect on best practice for these new requirements.
Area
Workforce
remuneration
and alignment
with culture
Description of provision
Remuneration Committee to
review workforce remuneration
and related policies, and the
alignment of incentives and
rewards with culture, taking
these into account when setting
the policy for executive director
remuneration.
Post-
employment
shareholding
requirements
Remuneration Committees
should develop a formal policy
for post-employment
shareholding requirements
encompassing both unvested
and vested shares.
RBS position
The Committee already considers papers on the broader employee proposition, for
example, the group-wide remuneration and deferral policy, annual pay outcomes
including diversity information, and the annual Sharesave offer for employees.
The Financial Reporting Council’s (FRC) guidance asks Remuneration Committees to
consider “How do workforce incentives support our culture and encourage the desired
behaviours?” The removal of sales incentives for front-line employees in recent years
is a good example where desired culture and remuneration proposals have been
considered together at RBS.
The Committee will review relevant culture developments and consider the potential
impact on remuneration policy. The aim is to assist the Board in its responsibility to
monitor how well culture is being embedded across the organisation and the role that
remuneration plays in that.
Under the current policy, executive directors automatically retain a significant number
of shares after they leave. Shares from fixed share allowances continue to be held for
at least three years regardless of the reason for leaving and LTI awards held by good
leavers will continue to be released up to eight years post departure.
The Committee will consider whether a more formal post-employment shareholding
requirement should be introduced when the new directors’ remuneration policy is due
to be submitted to shareholders at the 2020 AGM.
Pension
contribution
rates
The pension contribution rates
for executive directors should be
aligned with those available to
the workforce.
The FRC guidance recognises that it may not be appropriate to reduce the pension
provision for existing directors. However, good practice is for the rates to move over
time to be aligned with those of the wider workforce.
Factors in
determining
executive
director policy
Remuneration Committees
should address the following
criteria when determining
executive director policy: clarity;
simplicity; risk; predictability;
proportionality; and alignment to
culture.
As noted earlier in this report, RBS has already taken steps in this area with the
pension rate for the new Chief Financial Officer set at 10% of salary, rather than the
25% of salary allowed for under the policy for new executive directors. The rate at
10% is the same as that applicable to the majority of the wider workforce. The
position for the Chief Executive will be reviewed as part of the renewal of the
directors’ remuneration policy at the 2020 AGM.
The Committee already takes many of these factors into account when determining
executive director policy. The current policy was designed around themes of
simplicity, alignment with company strategy and culture, and ensuring rewards are
supported by sustainable, risk-adjusted long-term performance.
In terms of predictability, it is worth noting that variable pay at RBS is already
constrained by the 1:1 regulatory cap on grant. The new long-term incentive construct
is based around lower awards levels with more predictable outcomes. In addition,
there are discretionary underpins which provide scope to adjust outcomes for
significant risk, stakeholder or reputational matters not already captured in the
performance assessment.
Engagement
with colleagues
Remuneration Committee to
report on its work including
engagement with colleagues on
executive remuneration.
In 2018, we established a Colleague Advisory Panel, chaired by a designated non-
executive director. The aim of the Panel is to provide direct engagement between
colleagues and Board members. The Panel includes colleagues who volunteered to
be involved, existing representatives from trade union bodies and works councils, our
colleague-led networks and junior management teams.
Along with a broad range of strategic topics, the Panel will also be used to discuss
executive remuneration and how it aligns with the wider company pay policy. Further
information on the Panel can be found in the Strategic Report and the Report of the
directors.
Discretion and
use of malus
and clawback
Remuneration schemes and
policies should enable the use
of discretion to override
formulaic outcomes and include
provisions to withhold or recover
payments.
There is broad discretion under RBS remuneration arrangements and the Committee
has used discretion in the past to apply downwards adjustment to the formulaic
outcome of LTI vestings.
The remuneration policy and share plan rules contain malus and clawback provisions
to adjust or recover awards where appropriate. Details of the process and the
circumstances in which RBS can apply malus and clawback are set out on page 80.
67
Directors’ Remuneration Report
Wider workforce remuneration policy
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 individuals are
rewarded for delivering sustained
performance in line with risk appetite and for
demonstrating the right conduct and
behaviours.
Employees are provided with salary and
pension funding and certain roles are eligible
for benefit funding and variable pay awards.
Further details on the policy and remuneration
levels for 2018 including pay ratios can be
found later in this report.
Making RBS a great place to work
RBS is committed to providing four key things:
a fulfilling job; fair pay; excellent training and a
good leader.
Fulfilling job
The aim is for every colleague to have a clear
and fulfilling job that connects to our purpose.
Each colleague is set clear goals and
objectives that reflect RBS’s overall strategy.
Progress is reviewed throughout the year.
Wellbeing is essential for people to bring the
best of themselves to work. A range of
measures are provided to support good
physical, mental, social and financial health.
There is also an Employee Assistance
Programme where employees can access
confidential advice, support and short-term
counselling.
Flexible working is offered where this is
possible and appropriate. This allows
colleagues to explore working patterns with
their line manager and select a more flexible
approach to work that meets their current
needs.
Inclusion and diversity is another key element
of creating a great place to work and also
understanding the needs of our customers.
RBS supports a variety of colleague-led
groups that help influence strategy and
employees also undertake unconscious bias
training and mandatory annual inclusion
training.
The inclusion category in our colleague
opinion survey is the highest scoring category.
Targets are in place to improve the proportion
of women and ethnic minority leaders across
all business areas and RBS is on track to
meet these aspirations. Inclusion targets are
also part of the measures that impact
executive remuneration.
In June 2018, RBS was awarded the
‘Employer of the Year’ award at the
Women in Finance Awards.
Fair Pay
RBS is committed to providing a fair wage for
the role performed and also being very clear
on how pay works. Employees are provided
with flexibility in terms of how they wish to
receive pay to suit their personal
circumstances.
RBS continues to work closely with
the Chartered Banker Institute and
Chartered Banker Professional
Standards Board to improve
professional standards across the
industry.
A Good Leader
RBS is continuing to develop great leaders
and supporting the development of talent
across the Group. Part of this commitment is
delivering and embedding our flagship
leadership programme – Determined to lead
(Dtl). It teaches the skills to lead, manage and
coach people so they make positive behaviour
changes and improve their performance. By
the end of 2018, around 11,000 leaders had
completed their Dtl training.
Gender and ethnicity pay gaps
The latest gender and ethnicity pay gap
reporting for RBS can be found in the ‘Our
Colleagues’ section of the Strategic Report
and on the Sustainable Banking pages at
rbs.com.
Listening to colleagues
In 2018 a more frequent approach to listening
to our workforce was developed. This
provides more opportunities to improve by
assessing colleague sentiment and feedback,
and checking progress in making RBS a great
place to work.
Our colleague opinion survey provides
everyone with the opportunity to have a say
on what it feels like to work at RBS. Feedback
in terms of engagement and leadership has a
direct impact on executive pay. A survey by
the Banking Standards Board, an independent
body, is also used to help raise standards of
behaviour and competence across the UK
banking sector.
Regular engagement takes place with
colleagues and representative bodies
throughout the year. Board members visit
business areas to hear directly from
colleagues and there are regular townhall
meetings and online forums to facilitate
question and answer sessions with senior
executives.
In 2018, a new Colleague Advisory
Panel was established to enhance
the colleague voice at Board level
and a ‘meet the Board’ event took
place for the first time following the
AGM.
Fairness is built around a number of themes.
A full pay review is undertaken each year for
all salary ranges. Pay is compared against the
external market so that pay and benefits are
competitive. RBS is a fully accredited Living
Wage Employer in the UK and our rates of
pay continue to exceed the Living Wage
Foundation Benchmarks.
RBS has also implemented a more
transparent approach by moving more
employees to published salary ranges.
Improvements have been made to starting
salaries with faster progression to the rate for
the job. Investment in pay levels in recent
years has focused mostly on junior
employees, while not increasing fixed pay for
executive directors.
RBS has also removed front-line incentives
and variable pay for large numbers of
employees, with an increase to fixed pay
instead. This provides greater certainty for
these employees and allows them to focus
fully on providing the best service for
customers.
We are confident that we pay our employees
fairly and keep our HR policies and processes
under review to ensure we do so.
Flexible benefits are provided allowing
employees to change pension contributions
and choose from a range of protection,
healthcare and lifestyle options. Employees in
the UK and Republic of Ireland can also
participate in employee share plans and over
23,000 currently do so.
The number of employees at RBS
who believe they are paid fairly
increased during 2018 and is
significantly above the Global
Financial Services Norm.
Excellent training
RBS offers a number of ways for colleagues
to learn and develop. This includes technical
training, continuing professional development
and further education qualifications on the job.
Support is also provided for personal
development. This helps employees serve
customers well and also assists colleagues
with their career aspirations.
RBS remains committed to embedding a
strong service mindset through Service
Excellence training which sits at the heart of
achieving our ambition to be number 1 for
customer service, trust and advocacy.
68
Annual Report on Remuneration
The sections audited by the company's auditors, Ernst and Young LLP, are as indicated.
Single total figure of remuneration for executive directors for 2018 (audited)
Salary
Fixed share allowance (1)
Benefits (2)
Pension (3)
Total fixed remuneration
Annual bonus
Long-term incentive award (4)
Total remuneration
Ross McEwan
2018
£000
1,000
1,000
117
350
2,467
n/a
1,111
3,578
2017
£000
1,000
1,000
113
350
2,463
n/a
1,024
3,487
Ewen Stevenson (5)
2018
£000
600
600
20
210
1,430
n/a
-
1,430
2017
£000
800
800
26
280
1,906
n/a
1,418
3,324
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 with the remainder for Ross McEwan in 2018 being travel assistance in connection with company business
(£72,220), relocation expenses (£15,493) consisting of a flight allowance and assistance with tax return preparation, and home security arrangements (£2,676).
(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 2018 value relates to an LTI award granted in 2016. Performance has been assessed over the three year period to 31 December 2018 as set out below
resulting in 487,285 shares due to vest in two equal tranches in March 2020 and March 2021. No discretion was exercised by the Committee as a result of share
price appreciation or depreciation over the performance period. The estimated value above is £11,013 higher than the value of 487,285 shares at the time of
grant, as a result of the share price rising from £2.2574 to £2.28 over the period.
(5) Reflects remuneration paid to Ewen Stevenson for the period to 30 September 2018, the date he stepped down from the Board.
2016 LTI award – 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 Measures
(and weightings)
Performance for
minimum vesting
Vesting at
minimum
Performance for
maximum (100%) vesting Actual Performance
Economic Profit (25%)
(£200 million)
25%
£800 million
(£1,275 million)
Vesting
outcome
Weighted
Vesting %
0%
0%
Relative TSR (25%)
TSR at median
20%
TSR at upper
quartile
Below lower quartile
0%
0%
Safe & Secure Bank (25%)
CET1 ratio (12.5%)
Cost:income ratio (12.5%)
Vesting between 0% - 100%*
CET1 ratio target: 13% or above
CET1 ratio: 16.2%
Cost:income ratio target: 57% or below
Cost:income ratio: 72%
Vesting between 0% - 100%*
NPS target: Gap to number 1 of 2.3
NPS Gap to number 1 of 18.7
50%
12.5%
100%
0%
0%
NTS target: NatWest 63, RBS 50
NTS: NatWest 64, RBS 25
50%
60%
15%
Net Promoter Score (NPS) (7.5%)
Net Trust Score (NTS) (5%)
Engagement Index (EI) (12.5%)
EI target: 1 point above Global Financial Services
(GFS) norm
EI: 4 points above GFS norm
100%
Final vesting outcome
27.5%
* Vesting in the Safe & Secure and Customers & People categories can be qualified by Committee discretion taking into account changes in
circumstances over the period, the margin by which individual targets have been missed or exceeded, and any other relevant factors.
Economic Profit was defined as 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, HSBC, Standard Chartered, BBVA, BNP Paribas, Crédit Agricole,
Santander, Société Générale, Unicredit, ING, Intesa San Paolo and Nordea Bank.
Final outcome and discretionary underpin
If the Committee considers that the vesting outcome calibrated in line with the performance conditions above does not reflect underlying
financial results, or if the Committee is not satisfied that conduct and risk management during the performance period has been effective, then
the terms of the award allow for an underpin to be used to reduce the vesting.
In making its final judgement, the Committee considered the overall context of performance, noting significant improvements in capital strength
and employee engagement over the period and the Trust score for NatWest also meeting the target. Relative TSR, the cost:income ratio and
customer performance were not at the required level. The Committee also considered the potential impact of the US Department of Justice
charge on the Economic Profit outcome. Input was also received from the Board Risk Committee on risk performance. Taking all circumstances
into account, the Committee determined that no further adjustment was necessary under the discretionary underpin.
69
Customers & People (25%)
Split across advocacy, trust and
employee engagement
Annual Report on Remuneration
2016 LTI vesting amounts included in the total remuneration table (audited)
LTI awards were granted in March 2016. The award held by Ewen Stevenson lapsed on 30 November 2018, his final date of employment. The
performance period ended on 31 December 2018 and the performance conditions have been assessed as set out on the previous page. While
performance has been assessed, the shares will not vest until March 2020 and March 2021 and remain subject to employment conditions.
Ross McEwan
Performance category
Economic Profit
Relative TSR
Safe & Secure Bank
Customers & People
Maximum shares for performance assessment (1)
Outcome following performance assessment (27.5% vesting)
% vesting
0%
0%
50%
60%
Maximum shares (1)
442,987
442,987
442,987
442,987
1,771,948
Shares due to vest
—
—
221,493
265,792
Estimated value (2)
487,285
£1,111,010
Notes:
(1) The maximum number of shares for the performance assessment is calculated in line with the underlying award structure, however the actual number of shares
received will never exceed the number of shares capped under the approved policy and the regulatory maximum at the time of grant. Each performance
category can vest up to 100% of salary at grant as shown above. For the 2016 award, the number of shares capped at grant was 1,187,207 and therefore the
vesting outcome falls within the cap.
(2) Based on a RBS share price of £2.28, the average over the three month period from October to December 2018.
2017 LTI awards to executive directors – current assessment
The table represents an early indication of the potential vesting outcome as at 31 December 2018. Details of the final performance assessment
against targets at the end of the three year period and any use of discretion will be disclosed in the 2019 remuneration report. The Committee
may consider the proximity of legacy items to the executive directors when assessing the vesting level.
Performance category Measure
Weighting Target
Economic Profit
Economic Profit
(total Bank)
Relative Total
Shareholder
Return
Relative TSR
Safe & Secure
Bank
25%
25%
Targets set based on spot economic profit in FY2019 with vesting
range from 25% up to 100% for performance ahead of Strategic
Plan
Relative TSR performance between median and upper quartile
against comparator group results in vesting between 20% and
100%.
Cost:income ratio
12.5% C:I ratio – significant progress to 56%
CET1 ratio
12.5% CET1 ratio target of >= 13%
Advocacy
7.5% Significant progress to Number 1 in our
Customers &
People
Trust
5%
chosen segments for customer advocacy
and trust (further details below).
Employee
Engagement
12.5%
1 point above Global Financial Services
Norm.
Vesting under the Safe
& Secure and
Customers & People
categories will be
qualified by Committee
discretion taking into
account the margin by
which targets have
been missed or
exceeded and any
other relevant factors
2017 LTI award
current assessment
Broadly tracking in
range for vesting
Currently upper
quartile, which would
result in full vesting
C:I ratio is broadly in
range for vesting
CET1 ratio is in range
for full vesting
Some segments on
track but overall
behind target range
Trust broadly in range
for some vesting
Engagement tracking
above target for full
vesting
Note:
(1) There are six chosen customer segments for advocacy and five customer segments for Trust. Customer advocacy is measured by Net Promoter Score and Trust
is measured by the percentage of customers that trust RBS to ‘do the right thing’. Chosen segments reflect RBS’s key products, service channels and customer
groups. There are targets for each segment and full details will be disclosed in the 2019 report prior to any vesting. LTI awards granted in 2018 onwards have
been made under the new remuneration construct. See overleaf for further details.
LTI awards granted during 2018 (audited)
Grant date
Face value of
award (£000s)
Number of
shares awarded
% vesting at
minimum and maximum Performance Requirements
Ross McEwan
7 March 2018
1,575
592,328
Ewen Stevenson 7 March 2018
1,440
541,557
Between
0% - 100% with
no set minimum
vesting
The awards were subject to a pre-grant performance
assessment and a further assessment will take place at
the end of three years. Full details can be found in the
2017 Report and Accounts and the performance
assessment framework is also set out overleaf.
Note:
(1) Awards were granted as conditional share awards. The number of shares was calculated in line with the approved policy with the maximum potential award
being 175% of salary for the Chief Executive and 200% of salary for the Chief Financial Officer. The award price of £2.659 was based on the average share price
over five business days prior to grant. The award levels reflected a reduction of 10% to the maximum award following the pre-grant assessment of performance
over 2017. Ewen Stevenson’s award was forfeited on 30 November 2018, his final date of employment. For Ross McEwan, subject to the pre-vest assessment,
the award will be eligible to vest in equal amounts between years 2021 and 2025. Malus provisions will apply up until vest and clawback provisions will also
apply for a period of at least seven years from the date of grant. Further details on malus and clawback can be found on page 80.
70
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.
The majority of the performance variation will normally take place under the pre-grant assessment, with a further assessment prior to any
vesting taking place. 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 2019
Core area
Financial &
Business
Delivery
Risk & Control
Objectives for Performance Year 2018
Reasonable performance against RoTE budget with a
target of -1%.
Pre-grant assessment
Good financial performance for 2018. RoTE at 4.8% exceeded
the target.
CET1 ratio of 13% or more.
CET1 ratio of 16.2%, above the target.
Delivery of ring-fencing requirements to meet the 1
January 2019 implementation deadline, ensuring timely
remediation of issues throughout.
Improve the control environment. Franchise/Function
control environment to be rated 2 within appetite and
achievement of self declared forecasted control
environment ratings by the end of 2018.
Ring-fencing structure delivered as planned with all key activities
completed in order to ensure compliance. Reporting on activities
will be provided to the PRA.
While improvements had been made, a number of franchises and
functions had still to attain the desired control environment
ratings. This part of the objective was therefore not considered to
have been met in full.
Material progress towards our desired risk culture.
Positive progress towards 2 (systematic) with strong
tone from the top and effective action plans in place.
Achieve Proactive Risk Culture rating as a minimum
with no deterioration from 2017 assessment.
Risk Culture target met, with overall assessment as ‘Positive
progress towards 2 (systematic) with strong tone from the top
and effective plans in place’. With one exception, all areas had
achieved the required ‘Proactive’ Risk Culture rating.
Customers &
Stakeholder
Achieve planned progress towards becoming number 1
for customer service, trust and advocacy by 2020 in
chosen customer segments and brands.
Year-on-year improvement in engagement and
leadership indices, with a one point increase in each.
Year-on-year improvement in Culture index, with a
target of a one point increase.
People &
Culture
Progress towards target of at least 30% women in
‘senior roles’ by 2020 in each franchise and function.
Net Promoter Score performance was mixed during 2018, with
three of the six customer segments on target. While the digital
strategy was delivering positive customer advocacy, it was
recognised that progress was not consistent enough.
Engagement score increased by three points and the leadership
score increased by two points since 2017, exceeding the targets.
The Culture index had continued to improve with a three point
increase since 2017, exceeding the target.
Satisfactory progress had been made. As at Q3, there had been
a 7% increase since the targets were introduced at the end of
2014 and six of the business areas were already at or above the
30% target.
Progress towards 2025 target of number of Black Asian
Minority Ethnic (BAME)/non-white UK employees in the
top four layers of RBS, of at least 14% (UK only).
Improvements made during the year. As at Q3, eight business
areas had met their 2018 target and a further three business
areas had already reached the longer term 14% target.
Outcome of the pre-grant 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 progress had been made with strong performance particularly in
relation to capital and people scores. 2018 was seen as a milestone year with a number of important legacy issues resolved, the resumption of
dividends and arrangements in place for ring-fencing. Overall, the Committee considered that a 6% reduction was appropriate as customer and
risk performance was not fully at the desired level. The resulting award level for the Chief Executive is set out below. As the Chief Financial
Officer was appointed from 1 January 2019, the first LTI award will be granted in 2020, following an assessment of performance over 2019.
Ross McEwan
maximum LTI award level
2019 LTI award level
£1,750,000
£1,650,000
71
Annual Report on Remuneration
Pre-vest assessment for 2019 LTI awards
In addition to the pre-grant assessment
detailed on the previous page, a further
assessment of performance will take place at
the end of three years, 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
which might call into question the original
award. Once the vesting amount has been
approved, employment conditions as well as
malus and clawback 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. Adjustments
will be made if there have been failures of risk
management and in the event of
underperformance.
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:
Remained safe and secure, taking into
account our financial results and capital
position?
Been a good bank for customers taking
into account our customer and advocacy
performance?
Operated in an environment in which risk
is seen as part of the way we work and
think?
Operated in a way that reflects our stated
values?
Evidence used to support the Committee’s
assessment of these questions will include
whether there has been: a material fall in
share price, net promoter scores, employee
engagement or culture scores; a breach of
minimum capital ratio; or a material
deterioration in the risk culture or profile.
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. The underpins allow the
Committee to consider events arising during
the period between grant and the end of year
three.
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.
Performance Goals for 2019 (for the pre-
grant assessment of LTI awards to be
made in 2020)
The table below forms the basis of the pre-
grant assessment for LTI awards to be made
in early 2020. Further details on the 2019
goals and targets and the assessment of
performance against these will be set out in
the 2019 Directors’ Remuneration Report.
Core area
Performance Goals for 2019
Measures for assessing pre-grant performance for 2020 LTI awards
Financial &
Business
Delivery
Run a safe and secure bank.
Achieve planned RoTE targets for Group and NatWest Holdings (NWH Ltd).
Achieve CET1 ratio targets for Group and NWH Ltd, with appropriate
repatriation of capital to the Group.
Improve or maintain control environment.
Group and NWH Ltd achievement/maintenance and embedding of desired
control environment rating.
Risk &
Control
Compliance with ring-fencing rules.
Material progress towards our desired risk
culture target where risk is simply part of the
way we work and think.
Compliance with the minimum controls for the effective management of
compliance with ring-fencing rules.
Positive progress on risk culture rating for Group and NWH Ltd with strong
tone from the top and effective action plans in place.
Customer &
Stakeholder
People &
Culture
Increase customer advocacy for our brands
and chosen customer segments.
Achievement of targets for brands against Competition and Markets Authority
(CMA) rankings and Net Promoter Scores (NPS).
Build a strong internal customer service.
Achievement of Group and NWH Ltd targets for internal NPS and Core
Service Behaviour scores.
Provide clarity, build capability and
motivate our people.
Based on employee engagement and leadership scores for Group and NWH
Ltd.
Build up and strengthen a healthy culture.
Based on the Banking Standards Board assessment and achieving the culture
target for Group and NWH Ltd.
Improve diversity across our leaders to
create a more mature, inclusive culture.
Progress on the number of women in senior roles across the top three layers
of the Bank.
Progress on the number of BAME/non-white UK employees in the top four
layers of RBS.
For the Chief Financial Officer, performance will be assessed in line with the framework and measures above and the performance of the Finance function will also
be taken into account.
72
Annual Report on Remuneration
Payments for loss of office (audited)
Ewen Stevenson resigned as Chief Financial
Officer on 29 May 2018. He stepped down
from the Board on 30 September 2018 and
ceased to be an employee of RBS on 30
November 2018. Taking into account a range
of business factors, it was agreed that Mr
Stevenson could be released early from his
12 month notice period. No payment was
made in lieu of notice.
In line with his contractual arrangements, Mr
Stevenson continued to receive standard
payments in respect of his fixed pay for the
period up to his final date of employment.
Payments for the period from 30 September
to 30 November 2018 comprised salary
(£133,333), fixed share allowance (£133,333),
pension funding (£46,667) and benefit funding
(£4,375), a total of (£317,708) before tax.
No other remuneration payment was made in
connection with his departure and all
outstanding long-term incentive awards were
forfeited on his final date of employment.
Total remuneration for the Chairman and
non-executive directors for 2018
As part of the implementation of ring-fencing
arrangements during 2018, a number of
additional Boards and Board Committees
were established for key legal entities. The
increase in governance structures results in
additional responsibilities and time
commitment, particularly for non-executive
directors serving on the Group Board Risk
Committee and Group Audit Committee.
Where appropriate, RBSG Board directors
also received fees in respect of membership
of other subsidiary company boards and
committees including NatWest Markets Plc,
the value of which is included in the table
below. In terms of other changes during the
year, the NatWest Markets Working Group
was replaced by the NatWest Markets Plc
Board from 1 May 2018 and the UBIDAC
Board Oversight Committee was stood down
at the end of October 2018.
Taking into account that fees for these
committees had remained unchanged since
2014 and market practice by peers, the
Chairman and the executive directors agreed
it would be appropriate to raise the fees for
the Chairman of the Group Board Risk
Committee and Group Audit Committee from
£60,000 to £68,000, and for members of the
Group Board Risk Committee and Group
Audit Committee from £30,000 to £34,000.
The changes are within the 15% limit for fee
increases under the directors’ remuneration
policy and took effect from 1 October 2018.
Lena Wilson was appointed as Chair of the
Colleague Advisory Panel during 2018. This is
considered a key role that will enhance our
existing engagement mechanisms and
strengthen the colleague voice at Board level.
The Panel will also meet the new
requirements for workforce engagement
under the UK Corporate Governance Code.
After considering the time commitment,
number of meetings and responsibilities for
this role, including providing regular updates
to the Board, it was agreed that fees of
£15,000 per annum should be paid to the
Chair of the Panel with effect from 1
November 2018. The fees are equivalent to
that paid to a member of our Board Oversight
Committees.
Payments to past directors (audited)
Payments made to Ewen Stevenson during
the year are set out above and in the total
remuneration paid to executive directors table
earlier in this report. There are no other
payments to past directors to disclose for
2018.
For RBSG Board directors who also serve on
the boards and committees of NatWest
Holdings Limited, The Royal Bank of Scotland
plc, National Westminster Bank Plc and Ulster
Bank Limited, the fees below reflect
membership of all five boards and their
respective board committees.
Total single figure of remuneration for the Chairman and non-executive directors during 2018 (audited)
Fees
2018
£000
750
2017
£000
750
Benefits
2018
£000
11
2017
£000
11
Total
2018
£000
761
2017
£000
761
Chairman (composite fee)
Howard Davies (1)
Non-executive
directors (2)
Frank Dangeard (3)
Alison Davis
Patrick Flynn (4)
Morten Friis
Robert Gillespie
Penny Hughes (4)
Yasmin Jetha (4)
Brendan Nelson (3)
Baroness Noakes
Mike Rogers
Mark Seligman
Lena Wilson (3)
Board
£000
60
80
46
80
80
33
27
80
80
80
80
80
Group
N&G
£000
GAC
£000
Group
RemCo
£000
10
30
Group
SBC
£000
Group
BRC
£000
12
19
31
19
12
31
62
19
31
62
31
60
30
30
15
7
15
15
15
TIC
£000
22
60
17
10
17
SID
£000
GRG
BOC
£000
UBI DAC
BOC
£000
Other
£000
148
15
6
30
15
3
30
13
13
13
53
3
Fees
Benefits
Total
2018
£000
252
200
101
142
219
83
47
284
216
158
171
128
2017
£000
135
167
—
148
197
187
65
216
196
137
68
—
2018
£000
4
26
9
50
8
3
—
31
18
12
5
20
2018
2017
£000
£000
256
3
30
226
— 110
192
42
227
11
86
11
47
2
315
23
234
16
170
16
4
176
— 148
2017
£000
138
197
—
190
208
198
67
239
212
153
72
—
30
30
25
10
48
28
Notes:
(1) The benefits column for Howard Davies includes private medical cover.
(2) Non-executive directors are reimbursed expenses incurred in connection with travel and attendance at Board meetings. HMRC deems these expenses as
taxable where the meetings take place at the company’s main offices and RBS settles the tax on behalf of the non-executive directors.
(3) Under the ‘Other’ column, Frank Dangeard received fees as Chairman of the NatWest Markets Working Group and from 1 October 2018 received a composite
fee as Chairman of the NatWest Markets Plc (NWM Plc) Board. Brendan Nelson received fees as a member of the Board and Audit Committee of NWM Plc from
the end of April 2018. Lena Wilson joined the Board on 1 January 2018 and received fees as Chair of the Colleague Advisory Panel from 1 November 2018.
(4) Penny Hughes stepped down from the Board on 30 May 2018. Yasmin Jetha’s fees are until 30 April 2018, the date she stepped down from the RBSG Board but
she continues to receive fees as a member of the boards of NatWest Holdings Limited. Patrick Flynn joined the Board on 1 June 2018.
Key to table:
Group N&G
GAC
Group RemCo
Group BRC
Group SBC
Group Nominations and Governance Committee
Group Audit Committee
Group Performance and Remuneration Committee
Board Risk Committee
Sustainable Banking Committee
TIC
SID
GRG BOC
UBI DAC BOC
Technology and Innovation Committee
Senior Independent Director
Board Oversight Committee for the GRG business areas
Board Oversight Committee for the Ulster Bank Ireland business
73
Annual Report on Remuneration
Implementation of remuneration policy in 2019
Details of remuneration to be awarded in 2019 to executive directors are set out below. The salary, benefits, pension and fixed share allowance
for the Chief Executive are unchanged from 2018 and arrangements for the Chief Financial Officer are in line with those announced on
appointment. The LTI pre-grant assessment has been completed and the Committee recommended to the Board who approved that an LTI
award of £1,650,000 would be granted to the Chief Executive in March 2019. Details of the pre-grant assessment are set out on page 71.
Executive directors’ remuneration to be awarded in 2019
Salary
Standard benefits
Pension (% of salary)
Fixed share allowance
100% of salary (1)
LTI award following pre-grant
assessment over 2018
Ross McEwan
Katie Murray
£1,000,000
£750,000
£26,250 (2)
£350,000 (35%)
£1,000,000
£26,250 .
£75,000 (10%)
£750,000
£1,650,000
— (3)
Notes:
(1) Fixed share allowance payable broadly in arrears, currently in two instalments per year, with shares released in equal tranches over a three year period.
(2) Amount shown relates to standard benefit funding. Executive directors are also entitled to travel assistance and security arrangements and the Chief Executive
receives a flight allowance and assistance with tax returns as part of his relocation arrangements. The value of benefits received will be disclosed each year.
(3) The first LTI award will be made to Katie Murray in her capacity as an executive director in 2020, following a pre-grant assessment of performance over 2019.
For performance year 2018, a period prior to appointment to the Board, variable pay will continue to be awarded in line with arrangements in place at that time.
Chairman and non-executive directors’ annual fees for 2019
Fees for RBSG Board (1)
Chairman (composite fee)
Non-executive director basic fee
Senior Independent Director
Fees for RBSG Board Committees (1)
Group Board Risk Committee
Group Audit Committee
Group Performance and Remuneration Committee
Group Sustainable Banking Committee
Technology and Innovation Committee
GRG Board Oversight Committee
Group Nominations and Governance Committee
Other fees for RBSG Board directors
Chairman of NatWest Markets Plc (composite fee to cover all boards and committees)
Chairman of the Colleague Advisory Panel
Rates from 1 January 2019
£750,000
£80,000
£30,000
Member
£34,000
£34,000
£30,000
£30,000
£30,000
£15,000
£15,000
Chairman
£68,000
£68,000
£60,000
£60,000
£60,000
£30,000
—
£260,000
£15,000
Note:
(1) No additional fees are payable where the director is also a member of the boards and respective board committees of NatWest Holdings Limited, The Royal
Bank of Scotland plc, National Westminster Bank Plc and Ulster Bank Limited. Where appropriate, directors receive additional fees in respect of membership of
other subsidiary company boards and committees including NatWest Markets Plc. The value of fees received will be disclosed in this report each year.
Other external 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 hold 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.
74
Annual Report on Remuneration
Directors’ interests in RBS shares and shareholding requirements (audited)
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 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 can
only sell up to 25% of the shares received until the requirement is met. There are no shareholding requirements for non-executive directors.
Shareholding requirements (audited)
Ross McEwan
Shareholding
requirement
Ewen Stevenson (as at 30 September 2018)
Shareholding
requirement
Notes:
(1) Ross McEwan holds 142,925 shares from his 2015 and 2016 fixed share allowances that are included in the shares held 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.
(2) Value is based on the share price of £2.17 as at 31 December 2018 for Ross McEwan and £2.50 as at 30 September 2018 for Ewen Stevenson, the date he
stepped down from the Board. In both cases the shareholding requirement was exceeded. During the year the share price ranged from £2.03 to £3.02.
Share interests held by directors (audited)
Ross
McEwan
Ewen
Stevenson
Howard
Davies
Frank
Dangeard
Alison
Davis
Patrick
Flynn
Morten
Friis (4)
Robert
Gillespie
Penny
Hughes
Yasmin
Jetha
Brendan
Nelson
Baroness
Noakes
Mike
Rogers
Mark
Seligman
Lena
Wilson
2,302,031
Shares
held (1)
LTI awards
subject to
service (2)
LTI awards
subject to
performance (3) 2,968,335
371,098
1,182,272 80,000
5,000 20,000
— 20,000 25,000
562 20,000 12,001 41,000 20,000 20,000
6,000
513,890
2,448,749
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Notes:
(1) Shares owned beneficially as at 31 December 2018 or date of stepping down from the Board if earlier. The interests shown above include shares held by
persons closely associated with the directors. As at 14 February 2019, there were no changes to the shares held shown above. Katie Murray joined the Board
on 1 January 2019 and held 34,282 shares as at 14 February 2019.
(2) Performance assessment has taken place but awards are still subject to deferral periods and employment conditions before vesting. These awards count on a
net of tax basis towards meeting the shareholding requirement. In Ewen Stevenson’s case, the award was forfeited on his final date of employment.
(3) Still subject to performance assessment. All LTI awards held by Ewen Stevenson were forfeited on 30 November 2018, his final date of employment.
(4)
Interest is 10,000 American Depositary Receipts representing 20,000 ordinary shares.
Breakdown of all shares and share interests held by the Chief Executive as at 31 December 2018
Shares owned outright
Shares subject to conditions
Total
shares purchased
voluntarily by the
Chief Executive
shares from vested
LTI awards and fixed share
allowances released from
retention periods
shares from fixed share
allowances still subject to
retention periods
unvested LTI award from 2015 -
performance assessment has taken
place but subject to further deferral and
employment conditions prior to vesting
unvested LTI awards from 2016
to 2018 – subject to performance
assessment, deferral
and employment conditions
the vesting dates for
LTI awards are shown
in the table below.
299,458
1,442,951
559,622
371,098
2,968,335
5,641,464
Directors’ interests under the company’s share plans (audited)
Long-term incentive awards
Ross McEwan
Year of award
Awards held at
1 January 2018
Awards
granted
Award price
£
Ewen Stevenson (3)
2015
2016
2017
2018
2015
2016
2017
2018
417,486
1,187,207
1,188,800
2,793,493
578,128
952,424
954,768
2,485,320
592,328
592,328
541,557
541,557
3.74
2.26
2.41
2.66
3.74
2.26
2.41
2.66
Awards lapsed
for performance
assessment
46,388
Awards
forfeited
Awards held at
31 December 2018
Expected vesting dates
371,098 (1) 06.03.19 – 06.03.20
1,187,207 (2) 08.03.20 – 08.03.21
1,188,800 07.03.21 – 07.03.24
592,328 07.03.21 – 07.03.25
3,339,433
—
—
—
—
—
46,388
64,238
64,238
513,890
952,424
954,768
541,557
2,962,639
Notes:
(1) The performance period ended on 31 December 2017 resulting in the lapse of 46,388 shares due to the performance conditions not being met in full. The
remaining 371,098 shares will vest in two equal amounts in 2019 and 2020, subject to continued employment conditions.
(2) The performance period ended on 31 December 2018 as set out earlier in this report. Following the assessment in January 2019, it was agreed that 487,285
shares would vest in 2020 and 2021, subject to continued employment conditions. The remaining shares will be lapsed and reflected in the 2019 report.
(3) Ewen Stevenson ceased to be an employee on 30 November 2018, at which point all outstanding awards were forfeited.
75
Annual Report on Remuneration
Total Shareholder Return (TSR) performance
The graph below shows the performance of RBS over the past ten 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
FTSE 100
FTSE UK Banks
RBS
R
S
T
250
200
150
100
50
0
2008 YE 2009 YE 2010 YE 2011 YE 2012 YE 2013 YE 2014 YE 2015 YE 2016 YE 2017 YE 2018 YE
Chief Executive pay over the same period
Total remuneration (£000s) (1)
Annual bonus
against max. opportunity
LTI vesting rates
against max. opportunity (2)
2009
1,647
2010
3,687
2011
1,646
2012
1,646
2013 (1)
1,235 (SH)
393 (RM)
2014
2015
2016
2017
2018
1,878
3,492
3,702
3,487
3,578
0%
0%
85%
0%
0%
0%
0%
0%
0%
0%
n/a
n/a
n/a
n/a
n/a
73%
62%
56%
89%
41%
Notes:
(1) 2013 remuneration includes Stephen Hester (SH) as Chief Executive for the period to 30 September and Ross McEwan (RM) for October to December 2013.
(2) The maximum opportunity is set according to the approved policy and, for LTI awards granted in 2015 and onwards, the regulatory cap.
Relative importance of spend on pay
The table below shows a comparison of remuneration expenditure against other distributions and charges. These items have been included as
they reflect the key stakeholders for RBS and the major categories of distributions and charges made by RBS.
Remuneration paid to all employees (1)
Distributions to holders of ordinary shares (2)
Distributions to holders of preference shares and paid-in equity
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)
2018
£m
3,628
241
470
1,062
616
2017
£m
3,945
—
628
1,100
533
Change
(8.0%)
—
(25.2%)
(3.5%)
15.6%
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. As
the contents of other staff costs per Note 3 is different to prior years, the 2017 balance has been re-presented for consistency.
(2) In 2018 RBS paid an interim dividend of 2.0p per ordinary share. In addition, the company announced that the directors have recommended a final dividend of
3.5p per ordinary share, and a further special dividend of 7.5p per ordinary share, which are both subject to shareholders’ approval at the Annual General
Meeting on 25 April 2019.
(3) Input VAT and other indirect taxes not recoverable by RBS due to it being partially exempt.
76
Annual Report on Remuneration
Change in Chief Executive pay compared with employees
The table below shows the percentage change in remuneration for the Chief Executive between 2017 and 2018 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 remained unchanged over the period.
Chief Executive (1)
UK employees (2)
Salary
2017 to 2018 change
0%
17%
Benefits
2017 to 2018 change
0%
-51%
Annual Bonus
2017 to 2018 change
n/a
8%
Notes:
(1) Executive directors are not eligible for an annual bonus but receive variable pay in LTI awards. Standard benefit funding for executive directors remained
unchanged between 2017 and 2018. 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. This is considered to be the most representative comparator group as
it covers the majority of employees and the Chief Executive is based in the UK. The changes in salary and benefits for employees have largely been driven by a
simplification and rebalancing of fixed pay arrangements. There was no material change to total remuneration as a result of these changes. The percentage
reduction in benefits is not equal to the percentage uplift in salary because the underlying values are different and salary makes up a larger proportion of total
remuneration.
CEO to employee pay ratios
We are including the table below ahead of new reporting requirements formally applying next year. The ratios compare the total remuneration of
the Chief Executive, as set out in this report, against the remuneration of the median UK employee as well as employees at the lower and upper
quartiles. The disclosure will build up over time to cover a rolling 10-year period.
A significant proportion of the Chief Executive’s pay is delivered in LTI awards, where awards are linked to the company’s performance and
share price movements over the longer-term. Therefore, the ratios will depend significantly on LTI outcomes and may fluctuate from one year to
the next. None of the three employees identified at the 25th, 50th and 75th percentiles this year received LTI awards. The table also includes
ratios covering salary only so that a further comparison is possible as well as the remuneration values for the identified employees. The steps
that RBS takes to ensure employees are paid fairly are set out earlier in this report.
Financial
Year
2018
Methodology
A (see notes)
salary only
Pay ratios
P25
(Lower Quartile)
P50
(Median)
P75
(Upper Quartile)
Calculation
Remuneration values
Chief
Executive
Y25
(Lower Quartile)
Y50
(Median)
Y75
(Upper Quartile)
143:1
44:1
97:1
30:1
56:1 total remuneration £3,577,649
£24,946
£36,727
£63,825
19:1 salary only
£1,000,000
£22,526
£33,146
£51,302
Notes:
(1) The employees at the 25th, 50th and 75th percentiles (lower, median and upper quartile) were determined as at 31 December 2018 based on full-time equivalent
remuneration for all UK employees other than for variable pay where the actual amount to be paid has been used.
(2) ‘Option A’ methodology was selected as this is considered the most statistically accurate method under the reporting regulations. UK employees receive a
pension funding allowance set as a percentage of salary. Some employees, but not the Chief Executive, continue to participate in the defined benefit pension
scheme, under which it would be possible to recognise a higher value. For simplicity and consistency with our regulatory disclosures, the pension funding
allowance value has been included in the calculation for all employees.
(3) The data for the three individuals identified has been considered and fairly reflects pay at the relevant quartiles amongst the UK employee population. Each of
the three individuals was a full-time employee during the year and none received an exceptional award which would otherwise inflate their pay figures.
Summary of remuneration levels for employees in 2018
49,875 employees earned total remuneration up to £50,000
11,508 employees earned total remuneration between £50,000 and £100,000
4,924 employees earned total remuneration between £100,000 and £250,000
932 employees earned total remuneration over £250,000
Remuneration of the eight highest paid senior executives below Board (1)
Salary
Fixed allowance (cash)
Fixed allowance (shares)
Annual bonus
LTI awards (2)
Buyout award (3)
Total remuneration
Executive 1
£000
800
475
475
—
714
—
2,464
Executive 2
£000
800
400
400
—
714
—
2,314
Executive 3
£000
141
71
71
—
—
1,962
2,245
Executive 4
£000
792
396
396
—
460
—
2,044
Executive 5
£000
650
325
325
—
460
—
1,760
Executive 6
£000
600
300
300
—
410
—
1,610
Executive 7
£000
450
113
113
—
246
—
922
Executive 8
£000
444
111
111
—
47
—
713
Notes:
(1) Remuneration for 2018 for eight members of the Chief Executive’s executive management team.
(2) The value of the LTI awards reflects awards that were granted in 2016 and performance-assessed at the end of 2018. An estimated value is shown above based
on the average share price between October and December 2018, consistent with the method used for executive directors in this report.
(3) The buyout includes awards granted in replacement of awards forfeited on leaving a previous employer and also an award in respect of lost variable pay
opportunity for 2018.
77
Annual Report on Remuneration
Consideration of matters relating to
directors’ remuneration
Membership of the Group Performance
and Remuneration Committee
All members of the Group Performance and
Remuneration Committee (the Committee)
are independent non-executive directors.
Robert Gillespie served as Chairman of the
Committee and Alison Davis, Mike Rogers
and Mark Seligman were members of the
Committee throughout 2018. Frank Dangeard
joined the Committee with effect from 1 June
2018.
The Committee held seven scheduled
meetings in 2018 and a further four ad hoc
meetings. Details of attendance can be found
in the ‘Our Board’ section of the governance
report.
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
arrangements for executive directors;
approving performance and remuneration
arrangements for a defined ‘in scope’
population capturing members and
attendees of the Group Executive
Committee, and the direct reports of the
Chief Executive including heads of key
legal entities, control function heads and
the company secretary. The Committee
also approves arrangements where
employees earn total 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.
Summary of the principal activity of the
Committee in 2018
The tasks that the Committee undertook
during the year included reviewing and, where
appropriate, approving:
First half of 2018
2017 performance reviews and
remuneration arrangements for the
Committee’s ‘in scope’ population.
2018 performance objectives for the ‘in
scope’ population.
Variable pay allocations and the 2017
Directors’ Remuneration Report.
Vesting levels for LTI awards granted in
2015 and the interim assessment of
2016/17 LTI awards.
Remuneration governance arrangements
for ring-fencing.
Regulatory updates and submissions.
Fixed and variable pay spend across all
RBS employees, including analysis by
employee level, geography and diversity.
The Group-wide remuneration policy
principles.
Service provided by external advisers.
The bonus pool methodology.
Second half of 2018
Half-year and year-end performance
reviews for the ‘in scope’ population.
The implications of the UK Corporate
Governance Code changes and new pay
ratio disclosures.
Year end planning and external
stakeholder engagement plan.
Management’s assurance of the
implementation of the Group-wide
remuneration policy.
Fixed pay proposals across RBS for the
annual cycle.
The 2018 employee Sharesave offer.
The draft Directors’ Remuneration Report
for 2018.
2018 variable pay proposals.
Performance evaluation
The Committee has considered the findings of
the annual review of the effectiveness of the
Committee. This year the evaluation process
was conducted externally by Independent
Board Evaluation.
The Committee was felt to be fulfilling its remit
in an effective way and is trusted by the
Group Board to handle this potentially
sensitive issue well. The Committee was
encouraged to take a broad view of its agenda
and to communicate as freely as possible with
the Board so that remuneration decisions are
seen to be taken in a strategic context.
Actions were agreed as part of the evaluation
and progress will be tracked and reported to
the Committee during 2019.
Advisers to the Committee
PricewaterhouseCoopers LLP (PwC) was first
appointed as remuneration adviser by the
Committee in 2010, following a review of
potential advisers and the services provided.
An annual review of the quality of advice and
the associated level of fees was undertaken
during 2018, following which the Committee
agreed to retain the services of PwC. The
Committee will continue to review the
performance of its advisers each year. PwC is
78
a signatory to the voluntary code of conduct in
relation to remuneration consulting in the UK.
As well as receiving advice from PwC, the
Committee took account at meetings of the
views of the Chairman; the Chief Executive;
the Chief Financial Officer; the Chief HR
Officer; the Director of Reward, Pension &
Benefits; the Company Secretary; and the
Chief Risk Officer. The Committee also
received input from the Board Risk
Committee, the Group Audit Committee and
the Sustainable Banking Committee.
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.
In relation to the fees paid to PwC for advising
the Committee, a fixed fee structure has
operated since October 2017 to cover
standard services with any exceptional items
charged on a time/cost basis. The fees for
2018 in relation to directors’ remuneration
amounted to £128,625 excluding VAT (2017 -
£170,476).
Statement of shareholder voting
The tables below set out the voting by
shareholders on the resolutions to approve
the Directors’ Remuneration Policy at the
2017 AGM and the Annual Report on
Remuneration at the 2018 AGM.
Directors’ Remuneration Policy – 2017
Vote
For
Against
Withheld
No of shares
42,143,861,332
1,603,968,780
40,411,396
Percentage
96.33%
3.67%
—
Annual Report on Remuneration – 2018
Vote
For
Against
Withheld
No of shares
44,384,841,256
366,523,976
38,493,640
Percentage
99.18%
0.82%
—
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
14 February 2019
Other Remuneration Disclosures
This section contains a number of disclosures
which are required in accordance with Article
450 of the Capital Requirements Regulation.
This section should be read in conjunction
with the Directors’ Remuneration Report
starting on page 62.
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 RBS 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.
Base salary
The purpose is 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
The purpose is to provide fixed pay that
reflects the skills and experience required for
the role.
Operation
Role-based allowances are fixed allowances
which form an element of the employee’s
overall fixed remuneration for regulatory
purposes and are based on the role the
individual performs.
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
The purpose is to provide a range of flexible
and competitive benefits.
Operation
In most jurisdictions, employee benefits or a
cash equivalent are provided from a flexible
benefits account.
Pension funding forms part of fixed
remuneration and RBS does not as a rule
award discretionary pension benefits.
Annual bonus
The purpose is to support a culture where
employees recognise the importance of
serving customers well and are rewarded for
superior performance.
Operation
The annual bonus pool is based on a
balanced scorecard of measures including
Customer, People, Financial & Business
Delivery, and Risk & Control 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. A balanced scorecard
is used to align with the business strategy.
Each individual will have defined measures of
success appropriate to their role.
Risk and conduct performance is also taken
into account. Control functions are assessed
independently of the business units that they
oversee, with the objectives and remuneration
being set according to the priorities of the
control area, not the targets of the businesses
they support. The Group Chief Risk Officer
and the Chief Audit Executive have the
authority to escalate matters to Board level if
management do not respond appropriately.
Independent control functions exist for key
legal entities outside the ring-fence (NatWest
Markets Plc and RBS International), with dual
solid reporting lines into both the legal entity
Chief Executive Officer and the Group Control
Function Head.
For awards made in respect of the 2018
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
Long-term incentive awards
The purpose is to: support a culture where
good performance against a full range of
measures will be rewarded; encourage the
creation of value over the long-term; and 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 2018
performance year, the population receiving
long-term incentive awards will be limited to
executive directors and certain members of
the Group’s senior executive committees.
Awards will be subject to pre-grant and pre-
vest performance assessments that consider
progress against Customer, People, Financial
& Business Delivery, and Risk & Control
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
The requirements promote long-term
alignment between senior executives and
shareholders.
Operation
Executive directors and certain senior
executives are required to build up and hold a
shareholding equivalent to a percentage of
salary. There is a restriction on the number of
shares that individuals can sell until the
requirement is met.
Other share plans
The purpose is to offer employees in certain
jurisdictions the opportunity to acquire shares.
Operation
Employees in certain countries are eligible to
contribute to share plans which are not
subject to performance conditions.
79
Other Remuneration Disclosures
Criteria for identifying MRTs
The European Banking Authority has issued
criteria for identifying MRT roles, those staff
whose 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).
The qualitative criteria can be summarised as:
staff within the management body; senior
management; other staff with key functional or
managerial responsibilities; and staff who
individually, or as part of a Committee, have
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; and individuals who earned
more than the lowest paid identified staff per
certain qualitative 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.
Risk 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, and at a level which
would allow RBS to pay zero variable pay.
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 by the Group Board
Risk Committee (BRC) and the RBS Risk
function.
A robust process is used to assess risk
performance. A range of measures are
considered, specifically capital, liquidity and
funding risk, credit risk, market risk, pension
risk, compliance & conduct risk, financial
crime, operational risk, business risk and
reputational 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 2018 performance year, RBS
operated a robust multi-step process, which is
control function led, to assess performance
and the appropriate bonus pool by franchise
and function. At multiple points throughout the
process, reference is made to Group-wide
business performance (from both affordability
and appropriateness perspectives) and the
need to distinguish between go-forward and
resolution activities.
The process considers a balanced scorecard
of performance assessments at the level of
each franchise or function, across financial,
customer and people measures. Risk and
conduct assessments at the same level are
then undertaken to ensure that performance
achieved without appropriate consideration of
risk, risk culture 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 and other recipients is
founded on the balanced scorecard approach
used for the multi-step bonus pool process,
reflecting a consistent risk management
performance assessment.
Remuneration and culture
RBS continues to assess conduct and its
impact on remuneration as part of the annual
Group-wide bonus pool process and also via
the accountability review framework. RBS has
continued to simplify its approach to reward
and removed incentives for employees where
this could drive unintended behaviours. The
Committee will continue to review workforce
remuneration and the alignment of incentives
and reward with culture.
The governance of culture is clearly laid out
with Senior Management Function roles
having clearly defined accountabilities. The
Board and Sustainable Banking Committee
also play key roles in building our cultural
priorities. Clear measurement frameworks are
in place to measure progress.
80
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 to 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 bonus reductions - to adjust
variable pay that would have otherwise
been awarded for the current year.
Any variable pay awarded to MRTs 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 bonus 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 bonus 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 2018 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.
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
588 employees who have been identified as
MRTs.
1. Number of MRTs by business area
Number of beneficiaries
Executive Directors
Non-Executive Directors
PBB
CPB
RBSI
NatWest Markets
Corporate Functions
Control Functions
Other Business Areas
Total
Senior
mgmt
2
—
1
1
1
1
7
0
1
14
Other
MRTs
—
13
55
75
23
228
136
15
29
574
Total
2
13
56
76
24
229
143
15
30
588
2. Aggregate remuneration expenditure
Aggregate remuneration expenditure in
respect of 2018 performance was as follows:
Aggregate remuneration
Number of beneficiaries
Senior
mgmt
14
Other
MRTs
574
Total
588
Executive Directors
Non-Executive Directors
PBB
CPB
RBSI
NatWest Markets
Corporate Functions
Control Functions
Other Business Areas
Total
£m
5.77
£m
£m
5.77
—
2.95
— 2.95
21.36
18.82
2.54
36.63
33.24
3.39
1.22
6.30
5.08
3.56 152.36 155.92
60.19
48.18
— 4.81
4.81
17.31
14.66
31.14 280.10 311.24
12.01
2.65
3. Amounts and form of fixed and variable
remuneration
Fixed remuneration consisted of salaries,
allowances, pension and benefit funding.
Fixed remuneration
Number of beneficiaries
Senior
mgmt
14
Other
MRTs
574
Total
588
Executive Directors
Non-Executive Directors
PBB
CPB
RBSI
NatWest Markets
Corporate Functions
Control Functions
Other Business Areas
Total
£m
4.12
1.44
1.89
0.66
2.06
6.94
£m
£m
—
4.12
— 2.95
2.95
13.27
14.71
20.52
22.41
3.63
4.29
96.29
98.35
32.35
39.29
— 3.26
3.26
11.68
10.13
18.66 182.40 201.06
1.55
Variable remuneration awarded for 2018
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.
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
Executive Directors
Non-Executive Directors
Senior
mgmt
3
Other
MRTs
469
£m
—
—
£m
—
—
Total
472
£m
—
—
0.09
1.90
3.56
5.55
— 0.09
— 1.90
— 3.56
5.55
— 0.11
— 2.78
— 9.83
12.72
0.11
2.78
9.83
12.72
— 0.05
0.79
0.62
1.46
0.06
0.50
0.56
— 0.39
— 9.65
— 46.03
56.07
— 0.24
5.36
10.23
15.83
0.06
1.44
1.50
— 0.02
— 0.45
— 1.08
1.55
— 0.05
— 1.18
— 3.30
4.53
0.05
0.85
1.12
2.02
0.39
9.65
46.03
56.07
0.24
5.42
11.67
17.33
0.02
0.45
1.08
1.55
0.05
1.18
3.30
4.53
PBB
Cash remuneration
Deferred bonds
Deferred shares
CPB
Cash remuneration
Deferred bonds
Deferred shares
RBSI
Cash remuneration
Deferred bonds
Deferred shares
NatWest Markets
Cash remuneration
Deferred bonds
Deferred shares
Corporate Functions
Cash remuneration
Deferred bonds
Deferred shares
Control Functions
Cash remuneration
Deferred bonds
Deferred shares
Other Business Areas
Cash remuneration
Deferred bonds
Deferred shares
4. Outstanding deferred remuneration through
2018
The table below includes deferred
remuneration awarded or paid out in 2018 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
mgmt
£m
Other
MRTs
£m
Total
£m
44.59 137.10 181.69
11.73 108.16 119.89
83.75
81.99
1.76
14.39
29.16
14.77
40.17 148.51 188.68
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. Three new hire guarantees
were made in respect of the 2018
performance year.
Severance payments and / or arrangements
can be made to employees who leave RBS in
certain situations, including redundancy. Such
payments are calculated 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 year in excess of contractual payments,
local policies, standards or statutory amounts,
other than payments to three individuals of
£215,869, £81,923 and €502,877 each made
in commercial settlement of potential legal
proceedings related to the termination of
employment.
Where required, remuneration is constrained
within the limit of variable to fixed
remuneration in accordance with EBA rules.
Total
2.06
97.71
99.77
Long-term incentives
Number of beneficiaries
Executive Directors
Non-Executive Directors
PBB
CPB
RBSI
NatWest Markets
Corporate Functions
Control Functions
Other Business Areas
Total
Senior
mgmt
9
£m
1.65
—
1.10
1.50
—
1.50
3.58
—
1.10
10.43
Other
MRTs
—
Total
9
£m
£m
— 1.65
—
—
— 1.10
— 1.50
—
—
— 1.50
— 3.58
—
—
— 1.10
— 10.43
81
Definitions
PBB
CPB
RBSI
Personal & Business Banking
Commercial & Private Banking
RBS International
Other Remuneration Disclosures
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. The average ratio
between fixed and variable remuneration for
2018 is approximately 1 to 0.62. The majority
of MRTs are based in the UK.
Ratio of fixed to variable
Number of beneficiaries
Senior
mgmt
12
Other
MRTs
469
Total
481
Executive Directors
Non-Executive Directors
PBB
CPB
RBSI
NatWest Markets
Corporate Functions
Control Functions
Other Business Areas
Consolidated
ratio
ratio
1:0.69
—
ratio
— 1:0.69
1:0
1:0
1:0.77 1:0.47 1:0.50
1:0.80 1:0.69 1:0.70
1:0.85 1:0.42 1:0.49
1:0.73 1:0.65 1:0.65
1:0.89 1:0.53 1:0.58
1:0 1:0.52 1:0.52
1:0.71 1:0.52 1:0.65
1:0.80 1:0.60 1:0.62
Total remuneration by band for all
employees earning >€1 million
€ million
€1.0 - €1.5
€1.5 - €2.0
€2.0 - €2.5
€2.5 - €3.0
€3.0 - €3.5
€3.5 - €4.0
€4.0 - €4.5
€4.5 - €5.0
Total
Number of employees
2018
45
23
5
2
1
0
1
1
78
Notes:
(1) Total remuneration in the table above includes
fixed pay, pension and benefit funding and
variable pay.
(2) Executive directors are included. The table is
based on an exchange rate where applicable of
€1.13 to £1 as at 31 December 2018.
Employees who earned total remuneration of
over €1 million in 2018 represent just 0.1% of
our employees. This number reduces to 67
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.
7. Discount Rate
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 or more. The discount rate was not
used for remuneration awarded in respect of
the 2018 performance year.
82
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
2018, 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
(Group RemCo) 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
RemCo 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 RemCo,
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 47 to 82. 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 2018 to 14 February
2019, 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.
Work continued throughout 2018 to
strengthen the control environment and
progress was made across all areas.
Additionally, there was significant
management focus on Brexit planning,
readiness for the introduction of the UK’s ring-
fencing rules and the ongoing work to
enhance customer due diligence standards.
While enhancements to the wider control
environment were made, the journey of
improvement remains a continued area of
focus. RBS also continues to progress the
embedding of a strong risk culture.
The remediation of known control issues
remained an important focus of the Group
Audit Committee and the Board Risk
Committee during 2018. 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. 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
2018.
RBS has assessed the effectiveness of its
internal control over financial reporting as of
31 December 2018 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 2018,
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 2018 Annual
Report on Form 20-F.
83
The NYSE Standards require that the
compensation committee must have direct
responsibility to review and approve the Chief
Executive’s remuneration. As stated at the
start of this Compliance Report, in the case of
RBS, the Board, rather than the Group
RemCo, reserves the authority to make the
final determination of the remuneration of the
Chief Executive.
(v) The NYSE Standards require listed
companies to adopt and disclose corporate
governance guidelines. Throughout the year
ended 31 December 2018, RBS has complied
with all of the provisions of the Code (subject
to the exception described above) and the
Code does not require RBS to disclose the full
range of corporate governance guidelines with
which it complies.
(vi) The NYSE Standards require listed
companies to adopt and disclose a code of
business conduct and ethics for directors,
officers and employees, and promptly disclose
any waivers of the code for directors or
executive officers. RBS has adopted a code of
conduct which is supplemented by a number
of key policies and guidance dealing with
matters including, among others, anti-bribery
and corruption, anti-money laundering,
sanctions, confidentiality, inside information,
health, safety and environment, conflicts of
interest, market conduct and management
records. This code of conduct applies to all
officers and employees and is fully aligned to
the PRA and FCA Conduct Rules which apply
to all directors. The Code of Conduct is
available to view on RBS’s website at
rbs.com.
This Compliance report forms part of the
Corporate governance report and the Report
of the directors.
Compliance report
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 2018. 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.
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 2018 RBS
submitted its required annual written
affirmation to the NYSE, and in June 2018 it
submitted an interim written affirmation, both
confirming RBS’s full compliance with those
and other applicable provisions. More detailed
information about the Group Audit Committee
and its work during 2018 is set out in the
Group Audit Committee report on pages 54 to
56.
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 10 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. 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 entirely of independent
directors. Although the members of the Group
RemCo are deemed independent in
compliance with the provisions of the Code,
the Board has not assessed the
independence of the members
of the Group RemCo and the Group RemCo
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.
84
Report of the directors
The directors present their report together
with the audited accounts for the year ended
31 December 2018.
Other information incorporated into this report
by reference can be found at:
Page/Note
Strategic Report
Sustainability
Climate change
Viability statement
Business review
RBS Group ring-fencing
Board of directors and secretary
Corporate governance
Segmental analysis
Share Capital and other equity
Post balance sheet events
Risk factors
2
14
33
35
36
36
47
49
Note 4
Note 22
Note 35
253
Group structure
During 2018 in preparation for ring-fencing a
number of changes were made to the Group
structure. Following these changes the
company owns three main subsidiaries,
NatWest Holdings Limited (the parent of the
ring-fenced group which includes, National
Westminster Bank Plc, The Royal Bank of
Scotland plc and Ulster Bank Ireland DAC),
NatWest Markets Plc (the investment bank)
and The Royal Bank of Scotland International
(Holdings) Limited (the parent of The Royal
Bank of Scotland International Limited).
Further details of the principal subsidiary
undertakings are shown in Note 6 and a full
list of subsidiary undertakings and overseas
branches is shown in Note 10 of the parent
company accounts.
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. HMT sold a further
925 million of its holding of the company’s
ordinary shares in June 2018.
At 31 December 2018, HMT’s holding in the
company’s ordinary shares was 62.3%.
NatWest Markets N.V. (formerly Royal Bank
of Scotland N.V. renamed in 2018)
NatWest Markets N.V. (NWM N.V.), the RBS
Group’s banking entity in the Netherlands,
continues to implement its plan to be
operationally ready to serve our European
Economic Area customers when the UK
leaves
the European Union on 29 March 2019, in the
event that there is a loss of access to the EU
Single Market. NWM N.V. is expected to
become a subsidiary of NatWest Markets Plc,
subject to regulatory approvals.
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. Details of the strategy for delivering
the company’s objectives can be found in the
Strategic Report.
Results and dividends
The profit attributable to the ordinary
shareholders of the Group for the year ended
31 December 2018 amounted to £1,622
million compared with a profit of £752 million
for the year ended 31 December 2017, as set
out in the consolidated income statement on
page 176.
In 2018 RBS paid an interim dividend of £241
million, or 2.0p per ordinary share. In addition,
the company announced that the directors
have recommended a final dividend of 3.5p
per ordinary share, and a further special
dividend of 7.5p per ordinary share.
The final and special dividends recommended
by directors are subject to shareholders’
approval at the Annual General Meeting on 25
April 2019. If approved, payment will be made
on 30 April 2019 to shareholders on the
register at the close of business on 22 March
2019. The ex-dividend date will be 21 March
2019. No dividend was paid in 2017.
In the context of prior macro-prudential policy
discussions, previously RBS partially
neutralised the impact on Core Tier 1 capital
of coupon and dividend payments in relation
to hybrid capital instruments through equity
issuances of ordinary shares, this policy was
cancelled in 2018. Approximately £300 million
was raised each year in 2016 and 2017
through the issue of new ordinary shares, and
during 2018 £136 million was raised.
Employees
As at 31 December 2018, RBS employed
67,000 people (full-time equivalent basis,
including temporary workers). Details of
related costs are included in Note 3 on the
consolidated accounts.
Creating a healthy culture
Building a healthy culture that embodies Our
Values is a core priority for RBS.
Our Values, which guide the way RBS
identifies the right people to serve customers
well, and how it manages, engages and
rewards colleagues, are at the heart of Our
Code (the bank-wide Code of Conduct).
Engaging colleagues
Engaging colleagues is crucial to achieving
RBS’s ambition. Every year colleagues are
asked to share their thoughts on what it’s like
to work for RBS via a colleague opinion
survey. The results from the 2018 survey are
the most positive ever reported since
engagement started to be measured in 2002.
All key measures have improved and RBS is
now above the global financial norms in all
comparable survey categories. The continued
strengthening of the culture in RBS was also
echoed in this year’s improved Banking
Standards Board assessment which provided
further proof of progress across a range of
measures.
Rewarding employees
RBS’s approach to performance management
provides clarity for employees about how their
contribution links to RBS’s ambition.
RBS has made further progress on making
sure employees are paid fairly for the work
they do with simple and transparent pay
structures, and in the UK RBS’s rates
continue to exceed the Living Wage. More
information can be found on page 62 of the
2018 Annual Report and Accounts.
Developing colleagues
RBS offers a wide range of additional learning
opportunities. In 2018 the NextGen talent
development programme was launched for
high potential colleagues at managerial level,
helping them become the future leaders RBS
will need.
RBS also has a range of Female
Development Programmes supporting women
to reach their full potential, and helping RBS
to become fully gender balanced by 2030.
2018 also saw Sales Excellence, the
RBS bank-wide sales programme, get
underway, teaching the tools and techniques
that enable those in sales roles to be the best
at ethical, needs-based selling. More
information can be found on page 15 of the
Strategic Report and on the Sustainable
Banking pages on rbs.com.
Youth Employment
In 2018, RBS welcomed 516 people across
the Graduate and Apprenticeship schemes as
well as around 150 Interns into internship
programmes.
Health and wellbeing of colleagues
As a strong component of making RBS a
great place to work, wellbeing has
successfully delivered against three pillars –
physical, mental, and social; and in 2018 built
momentum on the fourth pillar, financial
wellbeing. Further details can be found on
page 16 of the Strategic Report and on the
Sustainable Banking pages on rbs.com.
85
At the Annual General Meeting in 2018
shareholders authorised the company to
make market purchases of up to
1,199,376,674 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 2019.
On 6 February 2019 RBS held a General
Meeting and shareholders approved a special
resolution to give authority for the Company to
make off-market purchases of up to 4.99 per
cent of the Company’s ordinary share capital
in issuance from HM Treasury (or its
nominee) at such times as the Directors may
determine is appropriate. Full details of the
proposal are set out in the Circular and Notice
of General Meeting available on
www.rbs.com. Shareholders will be asked to
renew this authorisation at the Annual
General Meeting in 2019.
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 our 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. Non-cumulative preference
share details are set out in Note 22 of the
consolidated accounts.
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.
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.
Report of the directors
Employee consultation
RBS recognises employee representatives
such as trade unions and work councils in a
number of businesses and countries, and
management regularly discuss developments
and updates on the progress of its strategic
plans with the European Employee Council
(EEC). RBS has ongoing engagement and
discussion with those bodies, given the scale
of change taking place across RBS.
Colleague Voice
In response to changes which have been
made to the UK Corporate Governance Code,
RBS has established a Colleague Advisory
Panel (“the Panel”) which is chaired by Lena
Wilson, Non-executive Director. The purpose
of the Panel is to promote greater colleague
voice in the boardroom and provide an
additional way for the Board to engage
directly with colleagues. The Panel consists of
existing employee representatives (e.g. Unite,
Financial Services Union (FSU), EEC,
Employee Led Networks, Junior
Management/Colleague Focus Groups and
colleagues who have volunteered to be
involved). Colleagues from locations outside
of the UK and Ireland also sit on the Panel to
ensure a broad, diverse range of views. In
total, there are approximately 20 colleagues
(or their representatives) who attend each
Panel meeting. The Panel does not duplicate
existing methods to inform and consult, in
particular with employee representatives,
focusing instead on broader strategic issues
facing RBS. The design of the Panel has been
built around having two-way dialogue with
clear outputs from the sessions and follow-up
to ensure it is viewed as a valuable addition to
existing colleague voice methods. More detail
can be found on the Panel on page 14 of the
Strategic Report.
Inclusion
Building a more inclusive RBS is essential for
customers and colleagues. The ambition to
be number one for customer service, trust and
advocacy will only be achieved by
understanding the needs of all colleagues and
customers.
RBS’s inclusion guidelines apply to all
colleagues globally and cover being LGBT
Innovative, Gender Balanced, Disability
Smart, Ethnically Diverse, all leading to
Inclusive Culture. Detailed information can be
found on page 16 of the Strategic Report and
on the Sustainable Banking pages on
rbs.com.
RBS has been recognised for work on
Equality, Diversity and Inclusion in 2018 by
retaining a position in the Times Top 50
Employers for Women; being recognised
again as a Top 10 Employer for Working
Families; being rated as an Exemplary Level
Employer by Carer Positive Scotland; being
named a Stonewall Global Diversity
Champion; being Platinum Ranked by
Business in the Community for both Gender
and Ethnicity work; and being upgraded to
Gold Rated Disability Standard for the
Business Disability Forum. RBS was also
proud to be named Employer of the Year by
Women in Finance 2018.
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 253
to 263. RBS’s regulatory capital resources
and significant developments in 2018 and
anticipated future developments are detailed
in the Capital, liquidity and funding section on
pages 97 to 110. This section also describes
RBS’s funding and liquidity profile, including
changes in key metrics and the build up of
liquidity reserves.
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.
UK Finance disclosure code
RBS’s 2018 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 and adopted by UK
Finance. 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)
and Disclosures on Expected Credit
Losses (DECL) Taskforce
recommendations
The EDTF, established by the Financial
Stability Board, published its report
‘Enhancing the Risk Disclosures of Banks’ in
October 2012, with an update in November
2015 covering IFRS 9 expected credit losses
(ECL). In November 2018, the DECL
Taskforce, jointly established by the Financial
Conduct Authority, Financial Reporting
Council and the Prudential Regulatory
Authority, published its phase 1 report, further
articulating EDTF (2015) recommendations.
RBS’s 2018 Annual Report and Accounts and
Pillar 3 Report reflect EDTF and have regard
to DECL Taskforce recommendations.
Authority to repurchase shares
86
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). At the 2018
Annual General Meeting, shareholders gave
authority to directors to offer a scrip dividend
alternative on any dividend paid up to the
conclusion of the Annual General Meeting in
2021.
Pursuant to the UK Listing Rules, 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
our Articles of Association. It will be proposed
at the 2019 Annual General Meeting that the
directors’ authorities to allot shares under the
Companies Act 2006 (the “Companies Act”)
be renewed. The Articles of Association may
only be amended by a special resolution at a
general meeting of shareholders.
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. Note 3 sets
out a summary of the plans.
Under the rules of certain employee share
plans, voting rights are exercised by the
Trustees of the plan on receipt of participants’
instructions. If a participant does not submit
an instruction to the Trustee no vote is
registered.
For shares held in the Company’s other
Employee Share Trusts, 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. The Trustees have chosen to
waive their entitlement to the dividend on
shares held by the Trusts. The total amount of
dividends waived during the year ended 31
December 2018 was £0.2 million.
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. In
the context of the company as a whole, these
agreements are not considered to be
significant.
Directors
The names and brief biographical details of
the current directors are shown on pages 47
and 48.
Howard Davies, Frank Dangeard, Alison
Davis, Morten Friis, Robert Gillespie, Ross
McEwan, Brendan Nelson, Baroness Noakes,
Mike Rogers, Mark Seligman and Lena
Wilson all served throughout the year and to
the date of signing of the financial statements.
Patrick Flynn was appointed on 1 June 2018
and Katie Murray was appointed on 1 January
2019.
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 2018 are shown
on page 75. 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 2018 to 14
February 2019.
Directors’ indemnities
In terms of section 236 of the Companies Act,
Qualifying Third Party Indemnity Provisions
have been issued by the company to its
directors, members of the RBS Executive
Committee, individuals authorised by the
PRA/FCA, certain directors and/or officers of
RBS subsidiaries and all trustees of RBS
pension schemes.
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.
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 2018.
Solicitor For The
Affairs of Her
Majesty’s Treasury
as Nominee for
Her Majesty’s
Treasury
Number of
shares
(millions)
% of share
class held
% of total
voting rights
held
Ordinary shares
7,509
62.3
62.3
As at 14 February 2019, there were no
changes to the shareholdings shown in the
table above.
Listing Rule 9.8.4
The information to be disclosed 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 page 264.
Political donations
At the Annual General Meeting in 2018,
shareholders gave authority under Part 14 of
the Companies Act 2006, 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 2018, 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 2019.
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 and have indicated
their willingness to continue in office. A
resolution to re-appoint EY LLP as the
company’s auditors will be proposed at the
forthcoming Annual General Meeting.
By order of the Board
Aileen Taylor
Company Secretary
14 February 2019
The Royal Bank of Scotland Group plc
is registered in Scotland No. SC45551
87
Statement of directors’ responsibilities
This statement should be read in conjunction with the responsibilities of the auditor set out in their report on pages 166 to 175.
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:
select suitable accounting policies and then apply them consistently;
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.
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, are fair, balanced and understandable and
provide 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
14 February 2019
Board of directors
Chairman
Howard Davies
Ross McEwan
Chief Executive
Katie Murray
Chief Financial Officer
Executive directors
Ross McEwan
Katie Murray
Non-executive directors
Frank Dangeard
Alison Davis
Patrick Flynn
Morten Friis
Robert Gillespie
Brendan Nelson
Baroness Noakes
Mike Rogers
Mark Seligman
Dr Lena Wilson
88
Capital and risk management
Presentation of information
Risk management framework
Introduction
Risk culture
Risk governance
Risk appetite
Risk controls and limits
Risk identification and measurement
Risk treatment and mitigation
Risk assurance
Model risk
Stress testing
Capital, liquidity and funding risk
Definitions, sources and key developments
Capital, liquidity and funding management
Minimum requirements
Measurement
Credit risk
Definition, sources and key developments
Risk governance, appetite and controls
Risk identification and measurement
Risk models
Risk mitigation
Risk assessment and monitoring
Banking activities
Trading activities
Key IFRS 9 terms and differences
Market risk
Non-traded market risk
Traded market risk
Pension risk
Compliance & conduct risk
Financial crime
Operational risk
Business risk
Reputational risk
Page
89
89
90
91
92
92
92
92
93
93
93
97
98
99
100
111
111
111
112
112
112
122
146
149
151
157
160
160
161
161
163
164
Presentation of information
Where indicated in the section headers, information in the Capital and
risk management section (pages 89 to 164) is within the scope of the
Independent auditor’s report. Where a main section header, presented
in bold, is marked as audited all sub sections are also audited.
Risk management framework
Introduction
RBS operates an integrated risk management framework, centred
around the embedding of a strong risk culture, which is designed to
achieve compliance with 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.
Effective governance, underpinned by the 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.
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 to which RBS is exposed.
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.
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
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.
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.
Given the evolving landscape, including the structural reform required
by the UK’s ring-fencing requirements, in 2018 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.
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.
89
Capital and risk management
Risk management framework continued
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.
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.
The methodology for setting, governing and embedding risk appetite
across RBS is being further enhanced with the aim of simplifying
current risk appetite processes and increasing alignment with strategic
planning and external threat assessments.
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.
This includes: taking personal responsibility for understanding and
proactively managing the risks associated with individual roles;
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; and reporting and communicating
risks transparently.
RBS’s target risk culture behaviours are embedded in Our Standards
and are clearly aligned to the core values of “serving customers”,
“working together”, “doing the right thing” and “thinking long-term”.
These act as an effective basis for a strong risk culture because Our
Standards are used for performance management, recruitment and
development.
A risk culture measurement and reporting approach has been
developed, enabling RBS to benchmark both internally and externally.
This allows RBS to assess progress in embedding its target risk
culture where risk is simply part of the way staff work and think.
Code of Conduct
Aligned to RBS’s values is the Code of Conduct. 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.
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.
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-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. Any employee falling short of the expected
standards would also be subject to internal disciplinary policies and
procedures. If appropriate, the relevant authority would be notified.
90
Capital and risk management
Risk management framework continued
Risk governance
Committee structure
The diagram illustrates RBS’s risk committee structure in 2018 and the main purposes of each committee.
RBS Group Board
Reviews and approves the risk
appetite framework and risk appetite
targets for RBS Group’s strategic risk
objectives.
Executive Committee
Manages and oversees all aspects
of RBS’s business and operations.
Group Board Risk 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.
RBS Group Executive Risk
Committee
Pension Committee
Asset & Liability Management
Committee
Acts on all material and/or
enterprise-wide risk and control
matters across the RBS Group.
Considers the financial strategy,
risk management, balance sheet
and remuneration and policy
implications of the RBS Group’s
pension schemes.
Oversees the effective
management of the current and
future balance sheet in line with
Board-approved strategy and risk
appetite.
ERC sub-committees
Responsible for the establishment of risk policies – as well as
oversight of compliance – for each relevant risk type. In addition, they
are responsible for the approval of certain risk measures and
recommendation of other measures to Group Board for approval.
Includes Retail Credit Risk Committee, Wholesale Credit Risk
Committee, Operational Risk Executive Committee, Financial Crime
Risk Executive Committee, and Reputational Risk Committee.
Capital Management &
Stress Testing Committee
Technical Asset & Liability
Management Committee
Reviews and challenges 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.
Risk management structure
The diagram illustrates RBS’s risk management structure in 2018 and key risk management responsibilities.
RBS Group Chief
Risk Officer
NatWest Holdings
Chief Executive
NatWest Holdings
Chief Risk Officer
RBS Group
Chief
Executive
NatWest Markets
Chief Executive
NatWest Markets
Chief Risk Officer
Leads Risk for RBS Group by defining and overseeing risk, conduct, compliance and
financial crime strategies, to achieve a generative risk culture and support the Group’s
ambitions and strategy. Defines overall Risk service provision requirements to enable
delivery of Group strategies, including policies, governance, frameworks, oversight and
challenge, risk culture and risk reporting. Contributes to the development of strategy,
transformation and culture as a member of Group Executive Committee.
Leads the NatWest Holdings Risk function by defining and delivering its risk, conduct,
compliance and financial crime strategies and service propositions to support NatWest
Holdings’ ambition, strategy and risk appetite, and is aligned to RBS Group strategy.
Responsibilities include policy, governance, frameworks, oversight and challenge, risk
culture and reporting. Delivers risk services across the Group in line with service level
agreements. Contributes to NatWest Holdings strategy as a member of NatWest
Holdings Limited Executive Committee.
Leads the NatWest Markets Risk function by defining and delivering its risk, conduct,
compliance and financial crime strategies and service propositions to support NatWest
Markets’ ambition, strategy and risk appetite, and is aligned to RBS Group strategy.
Responsibilities include policy, governance, frameworks, oversight and challenge, risk
culture and reporting. Contributes to NatWest Markets strategy as a member of NatWest
Markets Executive Committee.
RBSI
Chief Executive
RBSI
Chief Risk Officer
Leads the RBSI Risk function by defining and delivering its risk, conduct, compliance and
financial crime strategies and service propositions to support RBSI’s ambition, strategy
and risk appetite, and is aligned to RBS Group strategy. Responsibilities include policy,
governance, frameworks, oversight and challenge, risk culture and reporting. Contributes
to RBSI strategy as a member of RBSI Executive Committee.
Notes:
(1) While separate roles, the individual undertaking the RBS Group Chief Executive role also performs the NatWest Holdings Chief Executive role.
(2) The RBS Group Risk function is led by the RBS Group Chief Risk Officer. The RBS Group Chief Risk Officer reports directly to the RBS Group Chief Executive
and has a secondary reporting line to the chair of the Group Board Risk Committee as well as a right of access to the committee.
(3) The NatWest Holdings Chief Risk Officer (Chief Risk Officer, Ring-Fenced Bank) reports directly to the RBS Group Chief Risk Officer and the NatWest
Holdings Chief Executive, along with a secondary reporting line to the NatWest Holdings Board Risk Committee chair and right of access to the committee
including the Deputy Chairman.
(4) The NatWest Holdings Risk function provides risk management services across the RBS Group, including to the RBS Group Chief Risk Officer and – where
agreed – to the NatWest Markets and RBSI Chief Risk Officers. These services are managed, as appropriate, through service level agreements.
(5) The NatWest Holdings Risk function is independent of the NatWest Holdings customer-facing franchises and support functions. It provides oversight of risk
management ensuring that risk exposures arising from management and business activities are adequately monitored and controlled. The directors of
Financial Risk & Analytics, Compliance & Conduct, Restructuring, Risk Policy & Frameworks and Operational Risk & Services as well as the Chief Financial
Crime Officer, Chief Credit Officer, Deputy Chief Risk Officer and Head of Risk Strategy & Transformation report to the NatWest Holdings Chief Risk Officer.
The Director of Risk, Ulster Bank Ireland DAC and the Director of Compliance, Ulster Bank Ireland DAC, report to the Ulster Bank Ireland DAC Chief
Executive; they also have a reporting line to the NatWest Holdings Chief Risk Officer.
(6) The Chief Risk Officers for NatWest Markets and RBSI have dual reporting lines into the RBS Group Chief Risk Officer and the respective chief executives of
their entities. There are additional reporting lines to the NatWest Markets and RBSI Board Risk Committee chairs and a right of access to the committee.
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Capital and risk management
Risk management framework 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. All roles,
regardless of level, sit within one of these three lines.
First line of defence – Management and supervision
The first line of defence encompasses most roles within RBS,
including those in customer franchises, Technology and Services as
well as support 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 the business has effective mechanisms for identifying,
reporting and managing risk and controls.
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.
Second line of defence – Oversight and control
The second line of defence is the Risk function as well as the policy
and control elements of Human Resources, Legal and the Finance
function. Responsibilities include:
Leading the articulation, design and development of risk culture and
appetite.
Setting the standard for risk management across the Group.
Overseeing and challenging the management of risks and controls.
Analysing the aggregate risk profile and ensuring that risks are
being managed within risk appetite.
Providing expert advice to the first line on risk management,
including the application of effective risk and control frameworks
and the consideration of risk in decision-making.
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 on the
appropriateness of the design and operational effectiveness of
governance, risk management and internal controls to monitor and
mitigate material 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.
Risk appetite
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.
For certain strategic risks, risk capacity defines the maximum level of
risk the RBS Group 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 the Group’s ultimate capacity
to absorb losses.
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.
Establishing risk appetite
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 the 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. Risk profile
relative to risk appetite is reported regularly to the Board and senior
management.
Risk controls and limits
Risk controls and their associated limits are an integral part of the risk
appetite approach and a key part of embedding risk appetite in day-to-
day risk management decisions. A clear tolerance for material risk
types is set in alignment with business activities.
RBS policies directly support 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.
The financial and non-financial risks that RBS faces each day are
detailed in the Risk Directory. This provides a common risk language
to ensure consistent terminology is used across RBS. The Risk
Directory is subject to annual review. This ensures that it 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. 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.
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Capital and risk management
Risk management framework continued
Significant 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.
Risk assurance
Assurance is carried out on targeted credit risk, market risk,
compliance and conduct risk and financial crime risk activities to
provide assurance to both internal and external stakeholders including
the Board, senior management, the customer-facing franchises,
Internal Audit and the Group’s regulators. Selected key controls are
also reviewed. 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 Group’s credit portfolios and
market risk exposures to assist in the early identification of emerging
risks, as well as undertaking targeted reviews to examine specific
issues.
The adequacy and effectiveness of selected key controls owned and
operated by the second line of defence are also tested (with a
particular focus on credit risk and market risk controls). 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 are also reviewed. 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. The Risk
Assurance Committee ensures a consistent and fair approach to all
aspects of the second-line assurance review activities. The committee
also monitors and validates the ongoing programme of reviews and
tracks the remediation of the more material review actions.
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.
Key developments in 2018
In April 2018, the PRA set out its expectations on the model risk
management practices that should be adopted when using stress test
models. RBS has a strong focus on model risk management and, as a
result, practices were reviewed and, where appropriate, work to
enhance them in line with regulatory expectations continues.
RBS further invested in model risk management during 2018,
particularly given business demand and the growing complexity of
requirements, such as new regulation and AI. This included the
specification of additional IT systems to enhance capability in this
area.
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.
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
they appropriately capture underlying business rationale. For more
information relating to market risk models and pricing models, refer to
page 159.
Stress testing
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.
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:
Identify RBS-specific vulnerabilities and
risks.
Define
scenarios
Define and calibrate scenarios to examine
risks and vulnerabilities.
Assess
impact
Calculate
results and
assess
implications
Develop and
agree
management
actions
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 Committee, Board
Risk Committee and the Board.
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Capital and risk management
Risk management framework continued
Stress testing is used widely across RBS. The diagram below
summarises key areas of focus:
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:
Strategic financial and capital planning – through assessing the
impact of sensitivities and scenarios on the capital plan and capital
ratios.
Risk appetite – through gaining a better understanding of the drivers
of – and the underlying risks associated with – risk appetite.
Risk identification – through a better understanding of the risks that
could potentially impact RBS’s financial strength and capital
position.
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.
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.
Capital sufficiency – going-concern forward-looking view
With a view to ensuring that RBS and its operating subsidiaries
maintain sufficient CET1 capital, going-concern capital requirements
are assessed on a forward-looking basis – including as part of the
annual budgeting process. These assessments consider the resilience
of capital adequacy and leverage ratios under a range of hypothetical
future states. The assessments incorporate assumptions regarding a
range of regulatory and accounting aspects such as IFRS 9, taking
account of a number of factors including economic variables and
impairments.
In particular, assessments of capital requirements rely on forecasts of:
Future business performance given expectations of economic and
market conditions over the forecast period.
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.
The examination of capital requirements under adverse economic and
market conditions is assessed through stress testing.
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 2018, RBS took part in the Bank of England and European
Banking Authority stress tests. Details are set out on page 93.
Under stress testing, IFRS 9 volatility can have a more material
impact. This is because the peak-to-trough change in CET1 may be
affected by the transitions from Stage 1 to Stage 2 in stress conditions.
RBS uses stress and the peak-to-trough movements to help assess
the amount of CET1 capital it needs to hold in stress conditions, in
accordance with the capital risk appetite framework.
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.
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 undertakes the
Individual Liquidity Adequacy Assessment Process. 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.
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Capital and risk management
Risk management framework continued
Type
Description
process of resolution is owned and implemented by the Bank of
England (as UK Resolution Authority).
Idiosyncratic
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.
RBS has a multi-year programme of work through to 1 January 2022
to ensure impediments to resolvability are removed and the regulatory
resolution strategy could be executed.
Market-wide
scenario
Combined
scenario
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.
Stress testing – recovery and resolution planning
The RBS Group Recovery Plan explains how The Royal Bank of
Scotland Group plc (RBSG) and its subsidiaries as a consolidated
group would identify and respond to a financial stress event and
restore its financial position to remain viable on an ongoing basis.
The Recovery Plan ensures that risks which could delay the
implementation of a recovery strategy are highlighted and preparations
are made to minimise the impact of these risks. Preparations RBS has
taken include:
developing a series of recovery indicators to provide early warning
of potential stress events
clarifying roles, responsibilities and escalation routes to minimise
uncertainty or delay
developing a recovery playbook to provide a concise description of
the actions required during recovery
detailing a range of options to address different stress conditions
appointing dedicated option owners to reduce the risk of delay and
bandwidth concerns
The Recovery Plan is intended to enable RBS to maintain critical
services and products it provides to its customers (its critical economic
functions), maintain its important business lines (core business lines)
and operate within risk appetite whilst restoring the bank’s financial
condition.
The Recovery Plan is assessed for appropriateness on an ongoing
basis and is updated annually, in line with regulatory requirements. It is
reviewed and approved by the Board prior to submission to the PRA
each year.
Individual Recovery Plans have been prepared for NatWest Holdings
Limited, NatWest Markets Plc, RBS International Holdings Limited,
Ulster Bank Ireland DAC and NatWest Markets N.V. These plans
reflect the structure and operations of the post-ring-fenced group and
detail the recovery options, recovery indicators and escalation routes
for each entity to manage its own response to a financial stress.
If RBS was assessed by the UK authorities as failing or likely to fail the
authorities have a wide range of powers to place RBS into Resolution.
The UK’s Special Resolution Regime places an obligation on banks to
ensure they are resolvable. Resolvability is a measure of how
effectively a set of actions could be taken to manage the failure of
RBS, through execution of a preferred resolution strategy which the
Group is Single Point of Entry Bail-in of the Group Hold Co. The
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 which are not captured under Pillar
1 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
Technical Asset & Liability Management 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 fair value through
other comprehensive income 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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Capital and risk management
Risk management framework continued
Regulatory stress testing
In 2018, RBS took part in regulatory stress tests conducted by the Bank of England and the European Banking Authority. The scenarios are
hypothetical in nature and do not represent forecasts of RBS’s future business or profitability. The results of the regulatory stress tests are
carefully assessed by RBS and form part of the wider risk management of RBS.
Bank of England stress test
European Banking Authority stress test
Scenario
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.
The 2018 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 was more severe than the global
financial crisis.
Designed to evaluate the impact, over three years, of a
general macro financial downturn.
A static balance sheet assumption was made across the
period of stress and therefore mitigating actions such as
balance sheet reduction, business growth and cost savings
are not factored into the stress outcomes.
On an IFRS 9 transitional basis, the CET1 ratio
reached a low point of 9.6%, significantly above the
hurdle rate of 7.3%.
On an IFRS 9 non-transitional basis, the CET1 ratio
reached a low point of 9.2%, significantly above the
hurdle rate of 6.9%.
On an IFRS 9 transitional basis, the Tier 1 leverage
ratio low point was projected to be 5.1% under stress,
significantly above the leverage ratio hurdle rate of
3.59%.
Results
On an IFRS 9 non- transitional basis, the Tier 1
leverage ratio low-point was projected to be 4.8%
under stress, significantly above the leverage ratio
hurdle rate of 3.25%.
The stress was based on an end of 2017 balance
sheet starting position. Since then, RBS has taken a
number of actions to further improve its capital
position stress resilience, including the continued
reduction in certain credit portfolios and the resolution
of various litigation cases and regulatory
investigations.
The 2018 EBA stress test did not contain a pass/fail
threshold.
On an IFRS 9 transitional basis, RBS’s CET1 ratio under
the adverse scenario reached a low point of 9.9%
On an IFRS 9 non-transitional (fully loaded) basis, RBS’s
CET1 ratio under the adverse scenario reached a low
point of 9.48%
On an IFRS 9 transitional basis, RBS’s leverage ratio
under the adverse scenario reached a low point of
4.83%.
On an IFRS 9 non-transitional (fully loaded) basis the
leverage ratio under the adverse scenario reaches a low
point of 4.1%
The stress was based on an end of 2017 balance sheet
starting position. Since then, RBS has taken a number of
actions to further improve its capital position stress
resilience, including the continued reduction in certain
credit portfolios and the resolution of various litigation
cases and regulatory investigations.
What does
this mean?
The 2018 Bank of England and European Banking Authority stress test results demonstrated that good progress has
been made in transforming the balance sheet to a safe and sustainable position.
96
Capital and risk management
Capital, liquidity and funding risk
Definitions
Capital consists of reserves and instruments issued that are available,
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 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:
Maturity profile;
Composition of sources and uses of funding;
The quality and size of the liquidity portfolio;
Wholesale market conditions; and
Depositor and investor behaviour.
Sources of risk
Capital
The eligibility of instruments and financial resources as regulatory
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.
Additional Tier 1 (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, or is likely to
fail.
Liquidity
RBS maintains a prudent approach to the definition of liquidity
resources. RBS manages its liquidity to ensure it is always available
when and where required, taking into account regulatory, legal and
other constraints. Following ring-fencing legislation, liquidity is no
longer considered fungible across the Group and the liquidity portfolio
has been restructured during 2018 to reflect this. Principal liquidity
portfolios are maintained in the UK Domestic Liquidity Sub-Group (UK
DoLSub) (primarily in NatWest Bank Plc), UBI DAC, NatWest Markets
Plc, RBS International and NWM N.V.. Some disclosures in this
section where relevant are presented, on a consolidated basis, for
RBS, the UK DoLSub and on a solo basis for NatWest Markets plc.
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 maintains a diversified set of funding sources, including customer
deposits, wholesale deposits and term debt issuance. RBS also
retains access to central bank funding facilities.
For further details on capital constituents and the regulatory framework
covering capital, liquidity and funding requirements, please refer to the
RBS Pillar 3 Report 2018 on page 6. For MREL refer to page 8.
Key developments in 2018
RBS continued to strengthen and de-risk its capital position; CET1
ratio remains ahead of the c14% target and increased by 30 basis
points in the year to 16.2%. The directors have recommended a
final dividend of 3.5p per ordinary share, and a further special
dividend of 7.5p per ordinary share, which are both subject to
shareholders’ approval at the Annual General Meeting on 25 April
2019.
IFRS 9 adoption on 1 January 2018 favourably impacted CET1 by
30 basis points. RWAs reduced by £12.2 billion to £188.7 billion
primarily driven by the legacy business in NatWest Markets, the
impact of capital initiatives in Commercial Banking and the impact
of the non-performing loan sale and improvement in credit metrics
in Ulster Bank RoI.
CRR leverage ratio increased to 5.4% (2017 – 5.3%). UK leverage
ratio improved to 6.2% (2017 – 6.1%) in line with the balance sheet
reduction.
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 22.9% of RWAs by 1 January 2020, rising
to 26.5% by 1 January 2022. Total loss absorbing capital, based on
RBS’s interpretation of the rules and including the benefit of legacy
securities, was 30.7% of RWAs at 31 December 2018.
In 2018, RBSG plc issued approximately £7 billion MREL compliant
senior debt bringing the total MREL senior debt issues to
approximately £16 billion relative to the end state (1 January 2022)
requirements of approximately £24 billion. These funds enabled
RBSG plc to invest in £4.8 billion of NatWest Holdings MREL
eligible issuance and £5.1 billion NWM plc eligible issuance in
December 2018.
During the year, RBS changed its approach to managing liquidity in
preparation for ring-fencing. NatWest Markets left the UK DoLSub
and now manages its liquidity on a stand-alone basis.
The liquidity portfolio increased by £11 billion in 2018 to £198
billion, with primary liquidity increasing by £4 billion to £128 billion.
The increase in primary liquidity is driven by increased customer
surplus within NatWest Holdings, reduced funding requirement in
NatWest Markets and net term issuance, partially offset by
settlement of the payment to the US Department of Justice,
contribution to the Group pension fund and Term Funding Scheme
(TFS) repayment. Increase in secondary liquidity is driven primarily
by repayment of TFS, resulting in the return of previously
encumbered assets.
The rise in primary liquidity resulted in higher liquidity coverage
ratio (LCR) of 158% (2017 – 152%). The internal Stressed Outflow
coverage ratio decreased to 154% (2017 – 168%) due to stress
methodology changes and higher stressed behavioural outflows
over the three month horizon.
The net stable funding ratio is 141% (2017 – 139% on estimated
comparable basis) above the minimum target of 100%.
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.
97
Liquidity risk management
RBS manages its liquidity risk taking into account regulatory, legal and
other constraints to ensure sufficient liquidity is available where
required to cover liquidity stresses. The principal levels at which
liquidity risk is managed are:
NatWest Holdings Group
UK DoLSub
UBI DAC
NatWest Markets
NatWest Markets Securities Inc.
RBS International
NWM N.V.
The UK DoLSub is PRA regulated and comprises RBS’s four licensed
deposit taking UK banks: National Westminster Bank Plc, The Royal
Bank of Scotland plc, Coutts & Company and Ulster Bank Limited.
NatWest Markets Plc left the UK DoLSub during 2018 and now
manages its own liquidity portfolio, as required by ring-fencing
legislation.
RBS categorises its liquidity portfolio, including its locally managed
liquidity portfolios, into primary and secondary liquid assets. The size
of the liquidity portfolios are determined by referencing RBS’s liquidity
risk appetite. RBS retains a prudent approach to setting the
composition of the liquidity portfolios, which is subject to internal
policies applicable to all entities and limits over quality of counterparty,
maturity mix and currency mix.
RBS International, NWM N.V. and UBI 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.
Funding risk management
RBS manages funding risk through a comprehensive framework which
measures and monitors the funding risk on the balance sheet.
Asset and liability types broadly match. Customer deposits provide
more funding than customer loans utilise; repurchase agreements are
largely covered by reverse repurchase agreements; derivative assets
are broadly netted against derivative liabilities.
Capital and risk management
Capital, liquidity and funding risk continued
Capital management
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 is managed both on a Group consolidated level,
as well as at NatWest Holdings Group, NatWest Markets Plc, NatWest
Markets NV, and RBS International levels. In addition, NatWest
Holdings banking subsidiaries are also subject to the same principles,
processes and management as the Group of which it is a part. Note
that although the aforementioned entities are regulated in line with
Basel III principles, local implementation of the framework differs
across geographies.
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 92 and 93.
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 in the ICAAP 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, its subsidiaries 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 buy backs, redemptions, dividends and
new issuance to external investors or via internal
transactions.
Decisions on capital actions will be influenced by
strategic and regulatory requirements, risk appetite,
costs and prevailing market conditions.
As part of capital planning, RBS 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.
98
Capital and risk management
Capital, liquidity and funding risk continued
Minimum requirements
Capital adequacy ratios
The Group is subject to minimum capital requirements relative to 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
System wide
Bank specific
Total (excluding PRA buffer)(5)
Pillar 1 minimum requirements
Capital conservation buffer
Countercyclical capital buffer (1)
G-SIB buffer (2)
Pillar 2A(4)
CET1
4.5%
2.5%
0.7%
1.0%
2.0%
Total Tier 1
Total capital
6.0%
2.5%
0.7%
1.0%
2.7%
8.0%
2.5%
0.7%
1.0%
3.6%
10.7%
12.9%
15.8%
Notes:
(1)
The countercyclical capital buffer (CCyB) applied to UK designated assets is set by the Financial Policy Committee (FPC). The UK CCyB is currently 1.0%
(effective from November 2018). The rate had previously increased from 0.0% to 0.5% (effective June 2018). The Republic of Ireland CCyB is currently 0.0%,
the CBI have announced an increase to 1.0% effective July 2019. Foreign exposures may be subject to different CCyB rates depending on the rate set in
those jurisdictions. Firm specific CCyB is based on a weighted average at CCyB’s applicable to countries in which the Bank has exposures.
(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%
(3)
(4)
(5)
(6)
and 3.5%. In November 2018 the FSB announced that RBS is no longer a GSIB. From 1 January 2020, RBS will be released from this global buffer
requirement.
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 RFB 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.
From 1 January 2015, UK banks have 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.
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 to cover stress risks informed by the results of the BoE concurrent stress testing results.
The PRA requires that the level of this buffer is not publicly disclosed.
-
-
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). Where a PRA buffer is applicable, 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
Countercyclical leverage ratio buffer (1)
Additional leverage ratio buffer
Total
CET1
Total Tier 1
2.4375%
0.2500%
0.3500%
3.0375%
3.2500%
0.2500%
0.3500%
3.8500%
Note:
(1) The countercyclical leverage ratio buffer is set at 35% of the Group’s CCyB. As noted above the UK CCyB is currently 1.0% (effective from November 2018).
The rate had previously increased from 0.0% to 0.5% (effective June 2018). Foreign exposures may be subject to different CCyB rates depending on the rate set
in those jurisdictions. 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-SII additional leverage ratio
buffer, currently 0.2625% under transitional arrangements (2017 – 0.175%) increasing to 0.35% from 1 January 2019.
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)
Net stable funding ratio (NSFR) (1)
From 1 January 2018
From 1 January 2019
100%
N/A
100%
N/A
Note:
(1) In November 2016, the European Commission published its proposal for NSFR rules within the EU as part of its CRR2 package of regulatory reforms. CRR2
NSFR is expected to become the regulatory requirement in future within the EU and the UK. RBS has changed its policy on the NSFR to align with its
interpretation of the CRR2 proposals with effect from 1 January 2018.
99
Capital and risk management
Capital, liquidity and funding risk continued
Measurement
Capital, risk-weighted assets and leverage: Key metrics
The table below sets out the key Capital and Leverage ratios.
Capital
CET1
Tier1
Total
RWAs
Credit risk
Counterparty credit risk
Market risk
Operational risk
Total RWAs
Capital adequacy ratios
CET1
Tier 1
Total
2018
End-point
CRR basis (1)
£bn
30.6
34.7
41.2
137.9
13.6
14.8
22.4
188.7
%
16.2
18.4
21.8
PRA transitional
basis
£bn
30.6
36.2
44.2
137.9
13.6
14.8
22.4
188.7
%
16.2
19.2
23.4
2017
End-point
CRR basis (1)
£bn
32.0
36.0
42.8
PRA transitional
basis
£bn
32.0
39.6
47.9
144.7
15.4
17.0
23.8
200.9
%
15.9
17.9
21.3
144.7
15.4
17.0
23.8
200.9
%
15.9
19.7
23.9
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)
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
36.2
644.5
5.6%
37.9
665.2
5.7%
6.5%
36.0
679.1
5.3%
36.4
692.5
5.3%
6.1%
34.7
644.5
5.4%
35.7
665.2
5.4%
6.2%
39.6
679.1
5.8%
40.0
692.5
5.8%
6.7%
2018
2017
have been applied in full for both bases.
(2) Based on the daily average of on-balance sheet items and three month-end average of off-balance sheet items (2017 – three month-end average of both on
and off-balance sheet items).
Liquidity key metrics
The table below sets out the key liquidity and related metrics monitored by RBS.
2018
Liquidity coverage ratio (1)
Stressed outflow coverage (2)
Net stable funding ratio (3)
2017
Liquidity coverage ratio (1)
Stressed outflow coverage (2)
Net stable funding ratio (3)
UK DoLSub
153%
147%
144%
RBS
158%
154%
141%
152%
168%
132%
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 an internal measure calculated by reference to liquid assets as a percentage of net 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 as per ILAAP. This assessment is performed in accordance with PRA guidance.
(3) In November 2016, the European Commission published its proposal for NSFR rules within the EU as part of its CRR2 package of regulatory reforms. CRR2
NSFR is expected to become the regulatory requirement in future within the EU and the UK. RBS has changed its policy on the NSFR to align with its
interpretation of the CRR2 proposals with effect from 1 January 2018. The pro forma CRR2 NSFR at 31 December 2017 under CRR2 proposals is estimated to
be 139%.
100
Capital and risk management
Capital, liquidity and funding risk continued
Capital and leverage: Capital resources (audited)
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.
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
Foreseeable ordinary and special dividends
Other regulatory adjustments
2018
2017
End-point
CRR basis
£m
45,736
(496)
(4,058)
41,182
(405)
(394)
191
(740)
(494)
(6,616)
(654)
(1,326)
(105)
(10,543)
PRA
transitional
basis
£m
45,736
(496)
(4,058)
41,182
(405)
(394)
191
(740)
(494)
(6,616)
(654)
(1,326)
(105)
(10,543)
End-point
CRR basis
£m
48,330
(2,565)
(4,058)
41,707
(90)
(287)
(227)
(849)
(496)
(6,543)
(1,286)
—
28
(9,750)
PRA
transitional
basis
£m
48,330
(2,565)
(4,058)
41,707
(90)
(287)
(227)
(849)
(496)
(6,543)
(1,286)
—
28
(9,750)
CET1 capital
30,639
30,639
31,957
31,957
Additional Tier 1 (AT1) capital
Qualifying instruments and related share premium
Qualifying instruments and related share premium subject to phase out
Qualifying instruments issued by subsidiaries and held by third parties
subject to phase out
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
4,051
—
—
4,051
4,051
1,393
140
5,584
4,041
—
—
4,041
4,041
3,416
140
7,597
34,690
36,223
35,998
39,554
6,301
182
6,483
6,386
1,565
7,951
6,396
369
6,765
6,501
1,876
8,377
41,173
44,174
42,763
47,931
The table below analyses the movement in end-point CRR CET1, AT1 and Tier 2 capital for the year.
At 1 January 2018
Profit for the year
Own credit
Share capital and reserve movements in respect of employee
share schemes
Ordinary shares issued
Foreign exchange reserve
FVOCI reserves
Goodwill and intangibles deduction
Deferred tax assets
Prudential valuation adjustments
Expected loss less impairment
Pension contribution
Capital instruments issued
Net dated subordinated debt/grandfathered instruments
Foreign exchange movements
Foreseeable ordinary and special dividends
Other movements
At 31 December 2018
101
CET1
£m
31,957
1,381
(315)
77
135
308
88
(73)
109
2
632
(1,476)
(734)
(1,326)
(126)
30,639
AT1
£m
4,041
Tier 2
£m
6,765
(89)
(537)
334
10
6,483
10
4,051
Total
£m
42,763
1,381
(315)
77
135
308
88
(73)
109
2
632
(1,476)
(89)
(537)
(400)
(1,326)
(106)
41,173
Capital and risk management
Capital, liquidity and funding risk continued
Leverage exposure
The leverage exposure is based on the CRR Delegated Act.
Leverage exposure
Cash and balances at central banks
Trading assets
Derivatives
Loans
Other assets
Total assets
Derivatives
- netting and variation margin
- potential future exposures
Securities financing transactions gross up
Undrawn commitments (analysis below)
Regulatory deductions and other adjustments
CRR Leverage exposure
Claims on central banks
UK leverage exposure
End-point basis(1)
2018
£bn
88.9
75.1
133.3
318.0
78.9
694.2
(141.3)
42.1
2.1
50.3
(2.9)
644.5
(85.0)
559.5
2017
£bn
98.3
86.0
160.8
321.6
71.4
738.1
(161.7)
49.4
2.3
53.1
(2.1)
679.1
(92.0)
587.1
Notes:
(1) Based on end-point CRR Tier 1 leverage exposure under the CRR Delegated Act.
(2) 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
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.
2018
£bn
2.0
7.1
9.1
1.7
0.6
2.3
27.1
3.5
0.2
2.2
33.0
5.9
50.3
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
102
Capital and risk management
Capital, liquidity and funding risk continued
Loss absorbing capital
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 97.
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: end-point CRR non compliant
of which: holdco
of which: opcos
Tier 2 capital: end-point CRR compliant
of which: holdco
of which: opcos
Tier 2 capital: end-point CRR non compliant
of which: holdco
of which: opcos
Senior unsecured debt securities issued by:
RBSG holdco
RBS opcos
Total
RWAs
CRR leverage exposure
LAC as a ratio of RWAs
LAC as a ratio of CRR leverage exposure
2018
Balance
2017
Balance
Par
sheet Regulatory
LAC
Par
sheet Regulatory
LAC
value (1)
value
value (2)
value (3)
value (1)
value
value (2)
value (3)
£bn
30.6
£bn
30.6
£bn
30.6
£bn
30.6
£bn
32.0
£bn
32.0
£bn
32.0
£bn
32.0
4.0
—
4.0
1.4
0.1
1.5
6.8
0.5
7.3
0.1
1.9
2.0
4.0
—
4.0
1.6
0.1
1.7
6.7
0.5
7.2
0.1
2.0
2.1
4.0
—
4.0
1.4
0.1
1.5
6.3
0.3
6.6
0.1
1.4
1.5
16.8
17.1
33.9
79.3
16.8
16.9
33.7
79.3
—
—
—
44.2
4.0
—
4.0
0.5
0.1
0.6
5.1
0.5
5.6
0.1
1.6
1.7
15.5
—
15.5
58.0
188.7
644.5
30.7%
9.0%
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
4.0
—
4.0
3.5
0.1
3.6
6.4
0.5
6.9
0.1
1.5
1.6
9.3
14.4
23.7
74.5
9.2
14.7
23.9
75.2
—
—
—
48.1
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
54.5
200.9
679.1
27.1%
8.0%
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 approach to setting a minimum requirement for own funds and eligible liabilities (MREL),
published in June 2018. 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 £45.7 billion (2017 - £48.3 billion).
(5) Regulatory amounts reported for AT1, Tier 1 and Tier 2 instruments are before grandfathering restrictions imposed by CRR.
103
Capital and risk management
Capital, liquidity and funding risk continued
Roll-off profile
The following table illustrates the roll-off profile and weighted average spreads of RBS’s major wholesale funding programmes.
Senior debt roll-off profile (1)
RBSG
- amount (£m)
- weighted average rate spread (bps)
NWM Plc
- amount (£m)
- weighted average rate spread (bps)
NatWest Plc
- 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)
NWM Plc (£m)
NatWest Plc (£m)
NWM N.V. (£m)
UBI DAC (£m)
Total (£m)
As at and
for year ended
31 December
Roll-off profile
2018
16,830
205
H1 2019
535
129
H2 2019
781
283
2020
2
162
2021
—
—
2022 & 2023
7,037
224
2024 & later
8,474
187
16,523
102
3,186
13
3,239
177
4,704
123
2,066
91
2,022
80
1,306
117
329
7
253
4
77
15
—
—
—
—
—
—
—
—
3,974
27
4,097
194
1,003
—
727
147
—
1,876
—
36
—
65
—
101
—
—
—
—
3,145
99
7,852
113
—
99
—
11
—
110
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,375
418
2,222
156
2,066
91
9,059
192
13,377
200
—
—
343
—
—
343
4,049
450
90
106
—
4,695
1,763
73
—
339
76
2,252
1,375
418
5,367
122
40,424
158
6,815
658
1,159
668
76
9,377
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
The table below analyses the movement in credit risk RWAs on the end-point CRR basis during the year, by key drivers.
At 1 January 2018 (1)
Foreign exchange movement
Business movements
Risk parameter changes (2)
Methodology changes
Model updates
Other movements
At 31 December 2018
Credit risk
£bn
144.6
1.0
(11.3)
(0.9)
—
4.5
—
137.9
Counterparty
credit risk
£bn
15.4
(0.1)
(0.9)
(0.1)
—
—
(0.7)
13.6
Market risk
£bn
17.0
—
(1.4)
—
(0.2)
(0.6)
—
14.8
Operational risk
£bn
23.8
—
(1.4)
—
—
—
—
22.4
Total RWAs
£bn
200.8
0.9
(15.0)
(1.0)
(0.2)
3.9
(0.7)
188.7
Notes:
(1) There was a £0.1 billion reduction in RWAs from 31 December 2017 to 1 January 2018 reflecting the day one impact of the adoption of IFRS 9.
(2) Risk parameter changes relate to changes in credit quality metrics of customers and counterparties (such as probability of default and loss given default) as well
as IRB model changes relating to counterparty credit risk in line with EBA Pillar 3 Guidelines.
104
Capital and risk management
Capital, liquidity and funding risk continued
RWAs by segment
The chart below illustrates the concentration of risk-weighted assets by segment.
Group 100%
Group
Credit Risk
Market Risk
Operational Risk
%
80.3
7.8
11.9
UK PBB
23.9%
UK PBB
Credit Risk
Market Risk
Operational Risk
%
19.0
-
4.9
Ulster Bank RoI
7.8%
Commercial Banking
35.7%
Private Banking
5.0%
Credit Risk
Market Risk
Operational Risk
%
7.3
-
0.5
Credit Risk
Market Risk
-
Operational Risk
%
32.2
-
3.5
Credit Risk
Market Risk
Operational Risk
%
4.4
-
0.6
RBS International
3.7%
Credit Risk
Market Risk
Operational Risk
%
3.3
-
0.4
Natwest
Capital Resolution
Markets
15.1%
23.8%
Credit Risk
Market Risk
Operational Risk
%
14.0
7.8
2.0
Williams & Glyn 4.2%
Central items & other
0.1%
The table below analyses the movement in end-point CRR RWAs by segment during the year.
Total RWAs
At 1 January 2018 (1)
Foreign exchange movement
Business movements
Risk parameter changes (2)
Methodology changes
Model updates
Other movements
At 31 December 2018
Credit risk
Counterparty credit risk
Market risk
Operational risk
Total RWAs
UK PBB
£bn
43.0
—
(0.3)
0.8
—
1.7
(0.1)
45.1
35.8
—
—
9.3
45.1
Ulster
Bank
RoI
£bn
18.0
0.1
(2.2)
(1.2)
—
—
—
14.7
13.8
—
—
0.9
14.7
Commercial
Banking
£bn
71.8
0.3
(4.9)
(0.5)
—
2.9
(2.0)
67.6
61.0
—
—
6.6
67.6
Private
Banking
£bn
9.1
—
0.3
—
—
—
—
9.4
8.3
—
—
1.1
9.4
Credit Risk
Market Risk
Operational Risk
RBSI
£bn
5.1
—
0.3
—
—
(0.1)
1.6
6.9
6.2
—
—
0.7
6.9
NatWest
Markets
£bn
52.9
0.4
(8.3)
—
—
(0.6)
0.5
44.9
12.7
13.6
14.8
3.8
44.9
%
0.1
‐
‐
Central
items
& other
£bn
0.9
0.1
0.1
(0.1)
(0.2)
—
(0.7)
0.1
0.1
—
—
—
0.1
Total
£bn
200.8
0.9
(15.0)
(1.0)
(0.2)
3.9
(0.7)
188.7
137.9
13.6
14.8
22.4
188.7
Notes:
(1) There was a £0.1 billion reduction in RWAs from 31 December 2017 to 1 January 2018 reflecting the day one impact of the adoption of IFRS 9.
(2) Risk parameter changes relate to changes in credit quality metrics of customers and counterparties (such as probability of default and loss given default) as well
as IRB model changes relating to counterparty credit risk in line with EBA Pillar 3 Guidelines.
Key points
RWAs decreased by £12.2 billion (excluding the day one impact of
the adoption of IFRS 9) in 2018 primarily driven by the legacy
business in NatWest Markets, the impact of capital initiatives in
Commercial Banking and Ulster Bank RoI asset sale. These
reductions were partially offset by increases in UK PBB and RBSI.
The decrease in NatWest Markets primarily driven by the legacy
business, in addition to reductions in the core business.
The reduction within Commercial Banking was due to active capital
management, partially offset by the impact of model updates and
underlying business growth.
Ulster Bank RoI RWAs reduced principally reflecting the impact of
a non-performing loan sale and an improvement in credit metrics.
RWAs in UK PBB increased mainly due to model updates and
movements in risk parameters.
As part of the preparation for ICB ring-fencing, assets have
transferred from UK PBB, Commercial Banking and Treasury into
RBSI and NatWest Markets which are shown in other movements.
Other movements also reflects NWM Securities Inc. being granted
the regulatory waiver to use the AIRB approach to calculate it’s
counterparty credit risk capital requirements.
105
Capital and risk management
Capital, liquidity and funding risk continued
Liquidity portfolio (audited)
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. Secondary liquidity comprises assets
eligible for discount at central Banks but these do not form part of the liquid asset portfolio reported for regulatory LCR purposes or internal
stressed outflow coverage purposes.
Cash and balances at central banks
Central and local government bonds
AAA rated governments
AA- to AA+ rated governments
and US agencies
Primary liquidity
Secondary liquidity (3)
Total liquidity value
Liquidity value
2018
2017
RBS (1)
£m
83,781
UK DoLSub (2)
£m
59,745
NWM Plc
£m
11,005
RBS
£m
93,657
UK DoLSub (2)
£m
91,377
8,188
4,386
615
3,944
2,760
35,683
43,871
127,652
70,231
197,882
25,845
30,231
89,976
69,642
159,618
5,256
5,871
16,876
344
17,220
26,233
30,177
123,834
62,555
186,389
24,084
26,844
118,221
62,144
180,365
Total carrying value
Notes:
(1) RBS includes UK DoLSub, NatWest Markets plc and other significant operating subsidiaries that hold liquidity portfolios. These include RBS International, NWM
17,388
203,733
186,340
209,892
225,039
N.V. and Ulster Bank Ireland DAC who hold managed portfolios that comply with local regulations that may differ from PRA rules.
(2) UK DoLSub comprises RBS’s four licensed deposit-taking UK banks within the ring-fenced bank: National Westminster Bank Plc The Royal Bank of Scotland
plc, Coutts & Co and Ulster Bank Limited. The reduction in the UK DoLSub liquidity balances during 2018 is driven by NatWest Markets and RBS International
managing liquidity on a stand-alone basis, with NatWest Markets plc leaving the UK DoLSub during H2 2018 and RBS International building its own liquidity
portfolio.
(3) Comprises assets eligible for discounting at the Bank of England and other central banks.
106
Capital and risk management
Capital, liquidity and funding risk continued
Funding sources (audited)
The table below shows the carrying values of the principal funding sources based on contractual maturity. Balance sheet captions include
balances held at all classifications under IFRS 9/IAS 39 but excludes derivative cash collateral.
Short-term
less than
1 year
£m
178,293
131,575
309,868
6,758
46,800
53,558
3,157
4,928
—
—
8,085
2018
Long-term
more than
1 year
£m
1,499
142
1,641
15,865
564
16,429
—
25,596
5,367
1,375
32,338
299
10,236
405
29,664
291
30,360
—
—
—
—
402,170
60,644
—
22,909
Personal and corporate deposits
Personal (1)
Corporate (2)
Financial institutions deposits
Banks (3)
Non-bank financial institutions (NBFI) (4)
Debt securities in issue
Commercial papers (CP's) and certificates of deposits (CD'S)
Medium-term notes
Covered bonds
Securitisations
Subordinated liabilities
Repos (5)
Sovereign
Financial institutions
Corporate
Total funding
Of which: available in resolution (6)
CET 1 capital
CRR Leverage exposure
Funded assets
Funding coverage of CET 1 capital
Funding as a % of leverage exposure
Funding as a % of funded assets
Funding available in resolution as a % of CET1 capital
Funding available in resolution as a % of leverage exposure
Short-term
less than
1 year
£m
Total
£m
179,792
131,717
173,314
127,708
311,509
301,022
22,623
47,364
69,987
7,480
52,284
59,764
4,637
2,316
987
—
7,940
2,383
5,243
31,891
1,287
38,421
3,157
30,524
5,367
1,375
40,423
10,535
405
29,664
291
30,360
462,814
22,909
30,639
644,498
560,886
15
72%
83%
75%
4%
2017
Long-term
more than
1 year
£m
1,497
861
2,358
19,595
1,091
20,686
—
16,902
5,321
396
22,619
10,339
—
—
—
—
Total
£m
174,811
128,569
303,380
27,075
53,375
80,450
4,637
19,218
6,308
396
30,559
12,722
5,243
31,891
1,287
38,421
409,530
56,002
465,532
—
15,840
15,840
31,957
679,120
577,213
15
69%
81%
50%
2%
Notes:
(1) Includes £206 million (2017 - £190 million) of DFV deposits included in other financial liabilities on the balance sheet.
(2) Includes £428 million (2017 - £691 million) of HFT deposits included in trading liabilities and nil (2017 - £561 million) of DFV deposits included in other financial
liabilities on the balance sheet.
(3) Includes £267 million (2017 - £68 million) of HFT deposits included in trading liabilities on the balance sheet. Includes £14.0 billion (2017 - £19.0 billion) relating
to Term Funding Scheme participation and £1.8 billion (2017 - £1.8 billion) relating to RBS’s participation in central bank financing operations under the
European Central Bank’s Targeted Long-term refinancing operations.
(4) Includes £1,093 million (2017 - £543 million) of HFT deposits included in trading liabilities and £7 million (2017 - £124 million) of DFV deposits included in other
financial liabilities on the balance sheet.
(5) Includes held-for-trading repos of £25,645 million (2017 - £28,363 million) and amortised cost repos of £4,715 million (2017 - £10,058 million).
(6) Eligible liabilities (as defined in the Banking Act 2009 as amended from time to time) that meet the eligibility criteria set out in the regulations, rules, policies,
guidelines, or statements of the Bank of England including the Statement of Policy published by the Bank of England in June 2018. The balance consist of £16
billion (2017 - £8 billion) under debt securities in issue (senior MREL) and £7 billion (2017 - £8 billion) under subordinated liabilities.
107
Capital and risk management
Capital, liquidity and funding risk continued
Contractual maturity (audited)
This table shows the residual maturity of financial instruments, based on contractual date of maturity of RBS’s banking activities, including
hedging derivatives. Trading activities comprising Mandatory fair value through profit or loss (MFVTPL) assets and held-for-trading (HFT)
liabilities have been excluded from the maturity analysis due to their short-term nature and are shown in total in the table below.
2018
Central bank balances
Trading assets
Derivatives
Settlement balances
Loans to banks
Loans to customers (1)
Personal
Corporate
NBFI
Other financial assets
Total financial assets
2017
Total financial assets
Bank deposits
Bank repos
Customer repos
Customer deposits
Personal
Corporate
NBFI
Settlement balances
Trading liabilities
Derivatives
Other financial liabilities
CPs and CDs
Medium-term notes
Covered bonds
Securitisations
Customer deposits DFV
Subordinated liabilities
Other liabilities (2)
Total financial liabilities
2017
Total financial liabilities
Less than
1 month 1-3 months 3-6 months
£m
£m
£m
Banking activities
6 months
- 1 year
£m
Subtotal
£m
1-3 years
£m
3-5 years
£m
More than
5 years
£m
Total
£m
Trading
activities
£m
Total
£m
88,897
—
224
2,928
11,729
35,800
5,733
26,260
3,807
1,252
—
—
182
8,350
2,475
4,499
1,376
3,165
—
—
—
— 88,897
88,897
75,119 75,119
2,251 131,098 133,349
159
994
2,928
—
2,928
—
12,947
— 12,947
105
308,407
8,626 17,896 70,672 53,500 41,848 142,387 308,407
753
529
—
2,928
62 12,833
345
—
9
—
—
860
— 88,897
3,350
4,118
1,158
2,473
6,233 17,791 21,949 18,658 120,728 179,126
7,868 42,745 27,413 21,159 20,417 111,734
1,242 17,547
3,795 10,136
2,031
4,138
179,126
111,734
17,547
4,754 11,644 13,904 10,630 21,669 57,847
1,638 59,485
140,830 11,697 11,959 23,241 187,727 68,503 52,832 164,215 473,277 207,855 681,132
149,774 12,333 11,190 22,517 195,814 64,939 52,064 168,380 481,197 243,867 725,064
4,585
517
3,774
337,964
170,746
132,994
34,224
3,066
1,891
424
—
9,310
3,080
3,056
3,174
—
—
202
173
7
—
—
22
16
2,152
181
1,386
1,128
225
—
—
33
39
—
352,276 13,231
16
—
—
4,803
1,835
1,842
1,126
—
306
2,499
955
1,490
—
—
54
164
—
7,788
5
—
—
2,000
—
—
11
—
1
10
—
941
3,774
3,297 355,374
2,426 178,087
631 138,523
240 38,764
3,066
—
60 22,356
941
—
—
3,774
37 357,140
— 179,586
35 138,642
2 38,912
3,066
6,497 13,799
—
—
1,718
1,499
83
136
—
22,356
941
3,774
357,140
179,586
138,642
38,912
3,066
72,350 72,350
2,943 125,954 128,897
39,732
3,157
29,621
5,367
1,375
212
10,535
2,152
7,535 380,830 26,571 17,497 17,741 442,639 198,304 640,943
1,062
9,542 10,536 11,414 39,732
3,157
7,817 29,621
5,367
2,222
1,375
1,375
212
—
5,252 10,535
2,152
—
6,397 10,536
—
3,145
—
—
—
—
4,534
450
—
—
487
8,240
3,157
4,871
—
—
212
299
2,152
—
4,153
901
3,149
—
—
103
80
—
978
416
—
—
—
—
360,684 10,564
8,155
6,647 386,050 16,882 23,262 17,167 443,361 232,917 676,278
Note:
(1) Loans to customers excludes £3,318 million (2017 - £3,814 million) of Impairment provisions.
(2) Represents notes in circulation.
108
Capital and risk management
Capital, liquidity and funding risk continued
Funding gap: maturity and segment analysis
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.
Contractual maturity (1)
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
Greater
than
1-5
Less than
Customer accounts
Greater
than
1-5
Less than
1 year
years
5 years
Total
1 year
years
5 years
£bn
39
6
38
5
5
3
£bn
108
11
16
4
3
1
£bn
£bn
162
15
19
2
89
35
14
5
14
6
17
21
— — — —
319
80
143
96
£bn
183
£bn
£bn
1 —
18 — —
95
1 —
28 — —
28 — —
13 — —
1 — —
2 —
366
Total
£bn
184
18
96
28
28
13
1
368
Net surplus/(gap)
Less than
1-5
Greater
than
Behavioural maturity
Net surplus/(gap)
Less than
1-5
Greater
than
1 year
years
5 years
Total
1 year
years
5 years
Total
£bn
£bn
£bn
(108)
(38)
168
(11)
(6)
16
(16)
(37)
60
(4)
(5)
23
(3)
(5)
22
(4)
(1)
(3)
1 — —
(143)
286
(94)
£bn
22
(1)
7
14
14
(8)
1
49
£bn
£bn
£bn
8
16
(2)
1
(3)
1
(12)
20
(1)
11
1
2
10
3
1
(2)
(2)
(4)
1 — —
16
33
—
£bn
22
(1)
7
14
14
(8)
1
49
83
93
147
323
363
4 —
367
280
(89)
(147)
44
(6)
24
26
44
2018
UK PBB
UB RoI
CB
PB
RBSI
NWM
Centre
Total
2017
Total
Note:
(1) Loans to customers and customer accounts include trading assets and trading liabilities respectively and excludes reverse repos and repos.
Key points
The net customer funding surplus has increased by £5billion during
2018 to £49billion driven by £1billion deposit growth and £4billion
lending reduction
Customer deposits and customer loans are broadly matched from a
behavioural perspective.
Encumbrance (audited)
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.
The net funding surplus in 2018 is concentrated in the longer dated
buckets, reflecting the stable characteristics of customer deposits
and lending that is behaviourally shorter dated.
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.
Programmes to manage the use of assets to support funding actively
are established within UK DoLSub, UBI DAC and NatWest Markets
Plc.
109
Capital and risk management
Capital, liquidity and funding risk continued
Balance sheet encumbrance (audited)
The table shows the retained encumbered assets of the Group. Derivatives and Reverse Repos are disclosed within the credit risk section on
pages 147 and 148.
Encumbered as a result of transactions with
Pre-positioned
Unencumbered assets not pre-positioned
2018
Cash and balances at central banks
Trading assets
Derivatives
Settlement balances
Loans to banks - amortised cost
Loans to customers - amortised cost
- residential mortgages
- UK
- RoI
- credit cards
- personal loans
- other
Other financial assets
Intangible assets
Other assets
Total assets
2017
Total assets
counterparties other than central banks
Covered
debts &
SFT,
Derivatives
& encumbered
assets held
at central
securitisations and similar (2)
£bn
(1) £bn
Total (3)
£bn
banks (4)
£bn
Readily
available
(5) £bn
Other
available
(6) £bn
with central banks
—
—
—
—
0.4
7.1
2.8
—
—
2.4
—
—
—
12.7
6.7
49.1
—
—
1.0
—
—
—
—
2.4
10.4
—
—
69.6
6.7
49.1
—
—
1.4
7.1
2.8
—
—
4.8
10.4
—
—
82.3
—
—
—
—
—
110.1
2.1
—
—
4.9
—
—
—
117.1
82.2
—
—
—
6.6
20.9
8.9
3.7
5.8
2.3
46.0
—
—
176.4
—
1.3
—
—
0.4
11.5
—
0.3
2.6
91.0
0.8
—
2.3
110.2
Cannot
be used
(7) £bn
—
24.7
133.3
2.9
4.5
—
—
—
1.8
24.5
2.3
6.6
7.6
208.2
Total
£bn
82.2
26.0
133.3
2.9
11.5
32.4
8.9
4.0
10.2
117.8
49.1
6.6
9.9
494.8
Total
£bn
88.9
75.1
133.3
2.9
12.9
149.6
13.8
4.0
10.2
127.5
59.5
6.6
9.9
694.2
13.7
69.9
83.6
113.1
180.0
118.6
242.8
541.4
738.1
Notes:
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Covered debts and securitisations include securitisations, conduits, covered bonds and secured notes.
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. Securities financing transactions (SFT)
include collateral given to secure derivative liabilities.
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.
Assets pre-positioned at the central banks include loans provided as security as part of funding schemes and those encumbered under such schemes.
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.
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.
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.
110
Risk appetite
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 (for example, 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
transaction acceptance standards that set out the risk parameters
within which franchises should operate.
The Personal credit risk appetite 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 both portfolio and
product level, projected credit default rates across products and the
loan-to-value (LTV) ratio of the Personal mortgage portfolios.
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
Measure
Other
Risk – based on loss given default
for a given probability of default
Exposure
Risk – based on economic capital
and other qualitative factors
Probability of default of a sovereign
and average loss given default
Risk – based on heightened risk
characteristics
Risk controls
Credit policy standards are in place for both the Wholesale and
Personal portfolios. They are expressed as a set of mandatory
controls.
Risk identification and measurement
Credit stewardship
Risks are identified through relationship management and/or 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.
Capital and risk management
Credit risk
Definition
Credit risk is the risk that customers fail to meet their contractual
obligation to settle outstanding amounts.
The following disclosures in this section are audited:
Forbearance.
Impairment, provisioning and write-offs.
Transition from IAS 39 to IFRS 9.
Key elements of IFRS 9 impairment provisions:
o
o
o
o
Economic loss drivers (excluding economic parameters).
IFRS 9 credit risk modelling.
Significant increase in credit risk.
Asset lifetimes.
Measurement uncertainty and ECL sensitivity analysis.
Banking activities (except PDs and additional Stage 2 and Stage 3
analysis).
Trading activities.
Sources of risk
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.
Key developments in 2018
Asset quality (AQ) remained stable with 61% of the loan exposure
and other financial assets rated AQ1-AQ4 (1 January 2018 – 62%)
(equating to an indicative investment rating of BBB- or better).
New mortgage lending declined in 2018 (£32.8 billion compared to
£33.9 billion in 2017). The overall personal portfolio increased by
£1.7 billion (principally driven by growth of the mortgage portfolio).
While overall credit quality remained stable in the Wholesale
portfolio, risk appetite was tightened in certain sectors where it was
considered appropriate based on leading indicator information.
IFRS 9 Financial Instruments, which covers credit provisions, was
implemented with effect from 1 January 2018. In line with
expectations, the new accounting standard resulted in an overall
increase in provisions compared with the previous accounting
standard IAS 39. Further detail is provided later in the report.
Impairment provisions totalled £3.4 billion at the year end
representing coverage on amortised cost loans excluding balances
at central banks of 1.1%.
The ECL charge for the year was £398 million. This reflected the
relatively stable external environment.
Risk governance
Credit risk management activities include:
Defining credit risk appetite for the management of concentration
risk and credit policy to establish the key risks in the process of
providing credit and the controls that must be in place to mitigate
them.
Approving credit limits for customers.
Oversight of the first line of defence to ensure that credit risk
remains within the risk appetite set by the Board and that credit
policy controls are being operated adequately and effectively.
The Chief Credit Officer, Ring-Fenced Bank, chairs the Wholesale and
Retail Credit Risk Committees. These committees provide oversight of
the aggregated RBS credit risk profile and review, recommend or
approve risk appetite limits (depending on their materiality) within the
appetite set by the RBS Board.
The Chief Credit Officer, Ring-Fenced Bank, also chairs provisions
committees in PBB and CPB. These committees review and approve
individually assessed net expected credit losses (ECLs) above agreed
approval thresholds and review and approve the adequacy of all
portfolio level ECLs in the businesses. Similar provisions committees
operate in Ulster Bank RoI, NatWest Markets and RBSI.
111
Capital and risk management
Credit risk continued
Risk models
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
All credit grades map to an asset quality scale, used for external
financial reporting. For Wholesale customers, a master grading scale
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
or Stage 3 under IFRS 9 (where the PD is 100%).
Risk mitigation
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. Property is
used to mitigate credit risk across a number of portfolios, in particular
residential mortgage lending and commercial real estate (CRE).
The valuation methodologies for residential mortgage collateral and
CRE are detailed below.
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
Halifax quarterly regional house price index
UK House Price Index (published by the Land
Registry)
Central Statistics Office residential property price
index
The current indexed value of the property is a component of the ECL
provisioning calculation.
Commercial real estate valuations – RBS has a panel of chartered
surveying firms that cover the spectrum of geography and property
sectors in which RBS takes collateral. Suitable valuers for particular
assets are contracted through a single service agreement to ensure
consistency of quality and advice. Valuations are commissioned when
an asset is taken as security; a material increase in a facility is
requested; or a default event is anticipated or has occurred. In the UK,
an independent third-party market indexation is applied to update
external valuations once they are more than a year old and every three
years a formal independent valuation is commissioned.
In the Republic of Ireland, assets are revalued in line with the Central
Bank of Ireland threshold requirements, which permits indexation for
lower value assets, but demands regular Red Book valuations for
distressed higher value assets. The current indexed value of the
property is a component of the ECL provisioning calculation.
Counterparty credit risk
In addition to the credit risk management practices set out in this
section, RBS mitigates counterparty credit risk arising from both
derivatives transactions and repurchase agreements through the use
of market standard documentation, enabling netting (for credit risk
management only and not for accounting purposes), and through
collateralisation.
Amounts owed by RBS to a counterparty are netted against amounts
the counterparty owes RBS, in accordance with relevant regulatory
and internal policies. Netting is only applied if a netting agreement is in
place.
Risk assessment and monitoring
Practices for credit stewardship – including credit assessment,
approval and monitoring as well as the identification and management
of problem debts – differ between the Personal and Wholesale
portfolios.
Personal
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 internal
credit information as well as external data supplied from credit
reference agencies (including historical debt servicing behaviour of
customers with respect to both RBS and other lenders). RBS then sets
its lending rules accordingly, developing different rules for different
products.
The process is then largely automated, with each customer receiving
an individual credit score that reflects both internal and external
behaviours and this score is compared with the lending rules set. For
relatively high-value, complex personal loans, including some
residential mortgage lending, specialist credit managers make the final
lending decisions. These decisions are made within specified
delegated authority limits that are issued dependent on the experience
of the individual.
Underwriting standards and portfolio performance are monitored on an
ongoing basis to ensure they remain adequate in the current market
environment and are not weakened materially to sustain growth.
Wholesale
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.
Consideration is given to identifying groups of individual customers
with sufficient inter-connectedness to merit assessment as a single
risk.
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
process is facilitated through an auto-decision making 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.
112
Capital and risk management
Credit risk continued
For all other transactions credit is only granted to customers following
joint approval by an approver from the business and the credit risk
function. The joint business and credit approvers act within a
delegated approval authority under the Wholesale Credit Authorities
Framework Policy. The level of delegated authority held by approvers
is dependent on their experience and expertise with only a small
number of senior executives holding the highest approval authority.
Both business and credit approvers are accountable for the quality of
each decision taken, although the credit risk approver holds ultimate
sanctioning authority.
Transaction Acceptance Standards provide detailed transactional
lending and risk acceptance metrics and structuring guidance. As
such, these standards provide a mechanism to manage risk appetite at
the customer/transaction level and are supplementary to the
established credit risk appetite.
Credit grades (PD and LGD) are reviewed and if appropriate 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.
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
Personal
Early problem identification
Pre-emptive triggers are in place to help identify customers that may
be at risk of being in financial difficulty. These triggers are both
internal, using RBS data and external information from credit reference
agencies. Pro-active contact is then made with the customer to
establish if they require help with managing their finances. By adopting
this approach the aim is to prevent a customer’s financial position
deteriorating which may then require intervention from the Collections
and Recoveries teams.
Personal customers experiencing financial difficulty are managed by
the Collections team. If the Collections team is unable to provide
appropriate support after discussing suitable options with the
customer, management of that customer moves to the Recoveries
team. 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 process and supported by a specialist
team to ensure the customer receives appropriate support for their
circumstances.
Collections
When a customer exceeds an agreed limit or misses a regular monthly
payment the customer is contacted by RBS and requested to remedy
the position. If the situation is not regularised then, where appropriate,
the Collections team will become more fully involved and the customer
will be supported by skilled debt management staff who endeavour to
provide customers with bespoke solutions. 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 to the Recoveries team. For provisioning
purposes, under IFRS 9, exposure to customers managed by the
Collections team is categorised as Stage 2 and subject to a lifetime
loss assessment.
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 team will issue a notice of intention to default to the
customer and, if appropriate, a formal demand, while also registering
the account with 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. Exposures
subject to formal debt recovery are defaulted and categorised as
Stage 3 impaired.
Wholesale
Early problem identification
Each segment and sector 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 RBS. There are two
classifications which apply to non-defaulted customers within the
framework – Heightened Monitoring and Risk of Credit Loss. For the
purposes of provisioning, all exposures subject to the framework are
categorised as Stage 2 and subject to a lifetime loss assessment. The
framework also applies to those customers that have met RBS’s
default criteria (AQ10 exposures). Defaulted exposures are
categorised as Stage 3 impaired for provisioning purposes.
Heightened Monitoring customers are performing customers that have
met certain characteristics, which have led to significant credit
deterioration. Collectively, characteristics reflect circumstances that
may affect the customer’s ability to meet repayment obligations.
Characteristics include trading issues, covenant breaches, material PD
downgrades and past due facilities.
Heightened Monitoring customers require pre-emptive actions (outside
the customer’s normal trading patterns) to return or maintain their
facilities within RBS’s current risk appetite prior to maturity.
Risk of Credit Loss customers are performing customers that have met
the criteria for Heightened Monitoring and also pose a risk of credit
loss to RBS 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. Actions include 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 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 customers that pose the
largest risk of credit loss to RBS.
113
Capital and risk management
Credit risk continued
Appropriate corrective action is taken when circumstances emerge
that may affect the customer’s ability to service its debt (refer to
Heightened Monitoring characteristics). Corrective actions may include
granting a customer various types of concessions. Any decision to
approve a concession will be a function of specific appetite, the credit
quality of the customer, the market environment and the loan structure
and security. All customers granted forbearance are classified
Heightened Monitoring as a minimum.
Other potential outcomes of the relationship review are to: remove the
customer from the Risk of Credit Loss framework, offer additional
lending and continue monitoring, transfer the relationship to
Restructuring if appropriate, or exit the relationship.
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 specialist problem debt
management teams, depending on the size of exposure or by the
Business Banking recoveries team where a loan has been impaired.
Restructuring
For the Wholesale problem debt portfolio, customer relationships are
mainly managed by the Restructuring team (excluding customers
managed by UK PBB). The purpose of Restructuring is to protect
RBS’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.
Types of forbearance
Personal
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 provided to customers with highly flexible
mortgages.
Wholesale
In the Wholesale portfolio, forbearance may involve covenant waivers,
amendments to margins, payment concessions and loan rescheduling
(including extensions in contractual maturity), capitalisation of arrears,
and debt forgiveness or debt-for-equity swaps.
Monitoring of forbearance
Personal
For Personal portfolios, forborne loans are separated and regularly
monitored and reported while the forbearance strategy is implemented,
until they exit forbearance.
Wholesale
In the Wholesale portfolio, customer PDs and facility LGDs are re-
assessed prior to finalising any forbearance arrangement. The ultimate
outcome of a forbearance strategy is highly dependent on the
cooperation of the borrower and a viable business or repayment
outcome. Where forbearance is no longer appropriate, RBS will
consider other options such as the enforcement of security, insolvency
proceedings or both, although these are options of last resort.
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.
Provisioning for forbearance
Personal
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.
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.
Forbearance (audited)
Forbearance takes place when a concession is made on the
contractual terms of a loan/debt in response to a customer’s financial
difficulties.
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 of the customer, minimum standards are
applied when assessing, recording, monitoring and reporting
forbearance.
A loan/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 loan/debt
being less than 30 days past due. Exit criteria are not currently applied
for Wholesale portfolios.
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 likely to continue to do so.
The loan would remain in forbearance for the defined probation period
and be subject to performance criteria. These include making regular
repayments and being 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 (UK PBB collections function).
For ECL provisioning, all forborne but performing exposures are
categorised as Stage 2 and are subject to a lifetime loss provisioning
assessment.
For non-performing forborne loans, the Stage 3 loss assessment
process is the same as for non-forborne loans with the exception of
Ulster Bank RoI, where forborne loans which result in an economic
loss form a separate risk pool and are subjected to specific
provisioning treatments.
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Capital and risk management
Credit risk continued
Wholesale
Provisions for forborne loans are assessed in accordance with normal
provisioning policies. 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. Performing loans subject to forbearance treatment are
categorised as Stage 2 and subject to a lifetime loss assessment.
Forbearance may result in the value of the outstanding debt exceeding
the present value of the estimated future cash flows. This difference
will lead to a customer being classified as non-performing.
In the case of non-performing forborne loans, an individual loan
impairment provision assessment generally 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.
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 is not
dependent on a specified time period and follows the credit risk
manager’s assessment.
Impairment, provisioning and write-offs (audited)
In the overall assessment of credit risk, impairment, provisioning and
write-offs are used as key indicators of credit quality.
Transition from IAS 39 to IFRS 9 (audited)
RBS implemented IFRS 9 with effect from 1 January 2018 with no
restatement of comparatives other than the Day One impact on
implementation reflected in opening equity.
Cash flows and cash losses are unchanged by the change in
impairment framework from IAS 39 to IFRS 9. IFRS 9 has changed the
basis of loss calculation to expected loss (forward-looking), as
opposed to the incurred loss model under IAS 39, which focused only
on losses that had already occurred. There are a number of changes
as well as judgements involved in measuring ECL. New elements
include:
Move from incurred loss model to expected loss model, including
all performing assets having 12-month ECL on origination – £513
million increase in provision partly offset by the IAS 39 latent loss
provision of £390 million.
Determination of significant increase in credit risk – this moves a
subset of assets from a 12-month ECL (Stage 1) to lifetime ECL
(Stage 2) when credit risk has significantly increased since
origination – £356 million increase in provision.
Change in scope of impaired assets (Stage 3) – £73 million
increase in provision primarily reflecting assets that have defaulted
but with expectation of full recovery under IAS 39.
Incorporation of forward-looking information, including multiple
economic scenarios (MES). MES are assessed in order to identify
non-linearity of losses in the portfolio – £64 million increase in
provision.
The new IFRS 9 impairment provisions accounting standard was
implemented with effect from 1 January 2018. Set out below is further
detail regarding the impact of the transition from IAS 39 to IFRS 9
impairment provisioning, how key credit risk management activities link
to IFRS 9 impairment provisioning and the key policy and modelling
decisions that have been made in implementing IFRS 9 (refer also to
Accounting policy 14 and Note 14 on the consolidated accounts).
Key differences in moving from IAS 39 to IFRS 9 on impairment loss (audited)
31 December 2017 - IAS 39 impairment provision (1)
Removal of IAS 39 latent provision
IFRS 9 12 month ECL on Stage 1 and Stage 2
Increase in Stage 2 ECL to lifetime (discounted)
Stage 3 loss estimation (EAD and LGD)
Impact of MES
1 January 2018 - IFRS 9 ECL
Total
£m
3,832
(390)
513
356
73
64
4,448
Note:
(1) Includes £3,814 million relating to loans, less £10 million on loans that were carried at fair value and £28 million relating to FVOCI and LAR debt
securities.
Key points
Overall provisions – The overall provisioning requirement under
defaulted assets that did not carry a provision, reflecting the
expectation of full recovery under IAS 39.
IFRS 9 increased by £616 million – a 16% increase relative to IAS
39. The main driver of the increase was the requirement to hold a
minimum of 12 months of ECL on performing assets, increasing to
lifetime loss for assets that have exhibited a significant increase in
credit risk.
Performing assets – Compared with the latent loss provision held
under IAS 39 of £390 million, the ECL requirement on performing
assets (Stage 1 and Stage 2) more than doubled, increasing by
£479 million to £869 million.
Non-performing assets – The IFRS 9 provisioning requirement on
non-performing assets in Stage 3 was less affected. The ECL
requirement of £3.6 billion was £123 million (4%) higher compared
with IAS 39 impaired portfolio provisions of £3.4 billion principally on
UK PBB and Ulster Bank RoI combined – The exposures in these
two segments are primarily Personal. The ECL provisioning
requirement was £2.8 billion, an uplift of £384 million relative to the
IAS 39 provision. This was driven by the higher provisioning
requirement on performing assets, principally on the UK credit card
portfolio where provisions increased by £122 million (31% of the
total increase).
CPB and NatWest Markets – The assets are mainly Wholesale. The
ECL provisioning requirement was £1.6 billion, an uplift of £222
million relative to IAS 39. The uplift in Stage 3 assets of £83 million
was principally driven by assets defaulted but with expectation of full
recovery under IAS 39.
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Capital and risk management
Credit risk continued
Key elements of IFRS 9 impairment provisions (audited)
IFRS 9 introduced additional complexity into the determination of credit
impairment provisioning requirements. However, the building blocks
that deliver an ECL calculation already existed in RBS. Existing Basel
models were used as a starting point in the construction of IFRS 9
models, which also incorporate term extension and forward-looking
information.
Five key areas may materially influence the measurement of credit
impairment under IFRS 9 – two of these relate to model build and
three relate to their application:
Model build:
o
o
The determination of economic indicators that have most
influence on credit loss for each portfolio and the severity of
impact (this leverages existing stress testing mechanisms).
The build of term structures to extend the determination of the
risk of loss beyond 12 months that will influence the impact of
lifetime loss for assets in Stage 2.
Model application:
o
o
o
The assessment of the significant increase in credit risk and
the formation of a framework capable of consistent application.
The determination of asset lifetimes that reflect behavioural
characteristics while also representing management actions
and processes (using historical data and experience).
The determination of a base case (or central) economic
scenario which has the most material impact (of all forward-
looking scenarios) on the measurement of loss (RBS uses
consensus forecasts to remove management bias).
Policy elections and simplifications relating to IFRS 9
In addition to the five key areas above, which are relevant from period
to period, there was one further significant judgment that was made as
a one-off exercise to support the Day One implementation: this was
the application of the new IFRS 9 models to the determination of
origination date metrics. Since it is not possible to determine the
economic forecasts and alternative scenarios going backwards in time
it is necessary to use a series of assumptions to enable this process.
RBS assumed a flat economic forecast, for all dates historically. There
were some other less significant judgments, elections and
simplification assumptions that informed the ECL process; these were
not seen as ‘critical’ in determining the appropriate level of impairment
but represented choices taken by management across areas of
estimation uncertainty. The main examples of these are:
Models – for example in the case of some low default portfolios,
Basel parameter estimates have been applied for IFRS 9.
Non-modelled portfolios – certain portfolios have their Basel II
capital requirement calculated under the standardised framework for
regulatory purposes and do not have systematically modelled PDs,
EADs and LGDs. Under IFRS 9, they have bespoke treatments for
the identification of significant increase in credit risk and ECL
provisions. With respect to the latter, benchmark PDs, EADs and
LGDs are used with the benchmarks being reviewed annually for
appropriateness. The main non-modelled portfolios are Private
Banking, RBSI personal and Lombard.
Discounting of future losses – the ECL calculation is based on
expected future cash-flows. These are discounted using the
effective interest rate – for practical purposes, this is typically
applied at a portfolio level rather than being established and
operated at an individual asset level.
Multiple economic scenarios (MES) – it is the selection of the
central (or base) scenario that is most critical to the ECL calculation,
independent of the method used to generate a range of alternative
outcomes and their probabilities. Different approaches to model
MES around the central scenario have all been found of low
significance for the overall ECL impact.
Economic loss drivers
Introduction (audited)
The portfolio segmentation and selection of economic loss drivers for
IFRS 9 follow closely the approach already used in stress testing. To
enable robust modelling the forecasting models for each portfolio
segment (defined by asset class and where relevant – industry sector
and region) are based on a selected, small number of economic
factors, (typically two to four) that best explain the temporal variations
in portfolio loss rates. The process to select economic loss drivers
involves empirical analysis and expert judgment.
The most material primary economic loss drivers for Personal
portfolios include national GDP, unemployment rate, House Price
Index, and base rate for UK and Irish portfolios as relevant. In addition
to some of these loss drivers, for Wholesale portfolios, world GDP is a
primary loss driver.
Central base case economic scenario (audited)
The internal base case scenario is the primary forward-looking
economic information driving the calculation of ECL The same base
case scenario is used for RBS’s financial planning. The key elements
of the current economic base case, which includes forecasts over a
five year forecast horizon, are summarised as follows:
United Kingdom – The central scenario projects modest growth in
the UK economy, in line with the consensus outlook. Brexit related
uncertainty results in subdued confidence in the near term, placing it
in the lower quartile of advanced economies. Business investment
is weak at the start of the forecast, improving only gradually.
Consumer spending rises steadily as households benefit from falling
inflation and rising wage growth, though it is a modest upturn. The
central scenario assumes slower job growth than seen in recent
years, meaning unemployment edges up from its current historic
lows. House price growth slows, extending the current slowdown,
before picking up to low single digit growth in later years. Monetary
policy follows the market implied path for Bank of England base rate
at the time the scenarios were set, therefore it is assumed only two
further base rate increases over the next five years.
Republic of Ireland – The economy is expected to continue on its
positive trajectory with growth expected to revert closer to long run
averages in the medium term. Job growth is expected to moderate
with the unemployment remaining around 5%. Meanwhile house
price growth continues to moderate to a low single-digit pace. As
always, a small open economy such as RoI remains very sensitive
to the global economic environment and expectations can change at
short notice.
Use of the central base case in Personal
In Personal the internal base case is directly used as the central
scenario for the ECL calculations by feeding the forecasted economic
loss drivers into the respective PD and LGD models
Use of the central base case in Wholesale
As in Personal the primary input is the central base case scenario but
a further adjustment is applied to explicitly enforce a gradual reversion
to long run average credit cycle conditions from the first projected year
onwards.
This adjustment process leverages the existing Wholesale credit
models framework that utilises Credit Cycle Indices (CCI) to measure
the point-in-time default rate conditions in a comprehensive set of
region/industry groupings. The CCI are constructed by summarising
market data based point-in-time PDs for all publicly listed entities in the
respective region/industry grouping on a monthly frequency. Positive
CCI values indicate better than average conditions, i.e. low default
rates and a CCI value of zero indicates default rate conditions at long
run average levels. The CCI can be interpreted as an aggregation of
the primary economic loss drivers most relevant for each portfolio
segment into a single measure. The central base case scenario
forecasts provided at the level of economic loss drivers are fed into the
ECL calculations by first translating them into corresponding CCI
forecasts for each portfolio segment and subsequently applying the
aforementioned mean-reversion adjustment.
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Capital and risk management
Credit risk continued
Initially at transition, mean reversion was applied from year five
onwards. Since H1 2018, mean reversion is applied from the first year
onwards. The earlier application of the mean reversion adjustment was
introduced to account for two empirical observations. Firstly historic
credit loss rates in Wholesale portfolios show pronounced mean
reversion behaviour and secondly, the accuracy of economic forecasts
tends to drop significantly for horizons beyond one or two years.
Approach for MES (audited)
The response of portfolio loss rates to changes in economic conditions
is typically non-linear and asymmetric. Therefore in order to
appropriately take account of the uncertainty in economic forecasts a
range of MES are considered when calculating ECL.
Personal – the approach to MES is based on using a set of discrete
scenarios. In addition to the central base case a further four
bespoke scenarios are taken into account – a base case upside
and downside – and an additional upside and downside. The
overall MES ECL is calculated as a probability weighted average
across all five scenarios. (Refer to the Probability weightings of
scenarios section below).
The ECL impact on the Personal portfolio arising from the application
of MES over the single, central base case is relatively low, and
following review by the Provisions Committee, overlays were agreed to
ensure the expected effect of non-linearity of losses was appropriately
recognised. As at 31 December 2018, the value of the overlays was
£26 million for UK PBB and £26 million for Ulster Bank RoI.
Wholesale – the approach to MES is a Monte Carlo method that
involves simulating a large number of alternative scenarios around
the central scenario (adjusted for mean reversion) and averaging
the losses and PD values for each individual scenario into
unbiased expectations of losses (ECL) and PD.
The simulation of alternative scenarios does not occur on the level of
the individual economic loss drivers but operates on the aggregate
CCI described earlier. Since the existing Wholesale credit models for
PD and LGD were already built within the CCI framework the chosen
Monte Carlo method provided a conceptually rigorous but still efficient
approach to implement the MES requirement.
The Monte Carlo MES approach increases Wholesale ECL for Stage 1
and Stage 2 by approximately 5% above the single, central scenario
outcomes. No additional MES overlay was applied for Wholesale.
For both Personal and Wholesale, the impact from MES is factored in
to account level PDs through scalars. These MES-adjusted PDs are
used to assess whether a significant increase in credit risk has
occurred.
Key economic loss drivers – average over the five year planning
horizon (2019 to 2023 for 31 December 2018 and 2018 to 2022 for 1
January 2018) – in the most relevant planning cycle for the central
base case and two upside and downside scenarios used for ECL
modelling are set out below.
Economic parameters
UK
GDP - change
Unemployment
House Price Inflation - change
Bank of England base rate
Republic of Ireland
GDP - change
Unemployment
House Price Inflation - change
European Central Bank base rate
World GDP - change
Probability weight
Upside 2
%
2.6
3.3
4.3
1.7
4.3
4.2
9.2
1.3
3.6
31 December 2018
Upside 1 Base case Downside 1 Downside 2
%
2.3
3.8
3.3
1.3
3.6
4.6
6.8
0.8
3.2
%
1.7
5.0
1.7
1.1
3.0
5.2
4.0
0.3
2.7
%
1.5
5.6
1.1
0.5
3.1
6.0
3.2
—
2.5
%
1.1
6.9
(0.5)
—
2.8
6.8
0.8
—
2.3
12.8
17.0
30.0
25.6
14.6
Upside 2
%
2.2
5.0
4.2
1.7
3.6
5.0
6.7
0.6
2.9
5.0
1 January 2018
Upside 1 Base case Downside 1 Downside 2
%
1.3
5.5
2.7
0.2
%
1.9
5.2
3.4
1.2
%
1.7
5.3
3.1
0.8
%
1.5
5.4
2.9
0.4
3.2
5.4
5.4
0.4
2.7
2.9
5.7
4.4
0.1
2.6
2.6
5.9
3.7
0.1
2.5
15.0
60.0
15.0
2.3
6.1
3.0
—
2.4
5.0
Probability weightings of scenarios (audited)
RBS’s approach to IFRS 9 MES in Personal involves selecting a
suitable set of discrete scenarios to characterise the distribution of
risks in the economic outlook and assigning appropriate probability
weights to those scenarios. This has the following basic steps:
Scenario selection – for 2018 two upside and two downside
scenarios from Moody’s inventory of scenarios were chosen. The
aim is to obtain downside scenarios that are not as severe as stress
tests, so typically have a severity of around one in ten and one in
five of approximate likelihood, along with corresponding upsides.
Severity assessment – having selected the most appropriate
scenarios their severity is then assessed based on the behaviour of
UK GDP by calculating a variety of measures such as average GDP
growth deviation from base and peak to trough falls in GDP. These
measures are compared against a set of 1,000 model runs and it is
established what percentile in the distribution most closely
corresponds with each scenario.
Probability assignment – having established the relevant percentile
points, probability weights are assigned to ensure that the scenarios
produce an unbiased result. If the severity assessment step shows
the scenarios to be broadly symmetric, then this will result in a
symmetric probability weighting (same probability weight above and
below the base case, as was used in the first half of 2018). However
if the downsides are not as extreme as the upsides, then more
probability weight is allocated to the downsides to ensure the
unbiasedness requirement is satisfied (as was the case in the
second half of 2018). This adjustment is made purely to restore
unbiasedness, not to address any relative skew in the distribution of
risks in the economic outlook, which is dealt with through overlays
and covered in the section on UK economic uncertainty.
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Capital and risk management
Credit risk continued
UK economic uncertainty (audited)
RBS’s 2018 results were prepared during the run up to the UK leaving
the European Union, a period of elevated uncertainty over the UK
economic outlook. RBS’s approach to capturing that elevated
uncertainty is to apply an overlay to ECL. Information is used from the
earnings volatility scenario that is part of the 2018 planning process
and credit risk appetite setting. Key elements include an alternative
path the economy could take, being characterised as more severe
than the Bank of England’s “Disruptive Brexit” scenario (ACS) but less
severe than the “Disorderly Brexit” scenario and then applying
management judgement as to its likelihood. The RBS-wide overlay of
£101 million booked in the third quarter of 2018 remained in place at
the year end.
IFRS 9 credit risk modelling (audited)
IFRS 9 introduced lifetime ECL for the measurement of credit
impairment. This required the development of new models or the
enhancement of existing Basel models. IFRS 9 ECLs are calculated
using a combination of:
Probability of default.
Loss given default.
Exposure at default.
In addition, lifetime PDs (as at reporting date and at date of initial
recognition) are used in the assessment of a significant increase in
credit risk (SICR) criteria.
IFRS 9 ECL model design principles
To meet IFRS 9 requirements for ECL estimation, PD, LGD and EAD
used in the calculations must be:
Unbiased – material regulatory conservatism has been removed to
produce unbiased model estimates.
Point-in-time – recognise current economic conditions.
Forward-looking – incorporated into PD estimates and, where
appropriate, EAD and LGD estimates.
For the life of the loan – all models produce a term structure to allow
a lifetime calculation for assets in Stage 2 and Stage 3.
IFRS 9 requires that at each reporting date, an entity shall assess
whether the credit risk on an account has increased significantly since
initial recognition. Part of this assessment requires a comparison to be
made between the current lifetime PD (i.e. the current probability of
default over the remaining lifetime) with the equivalent lifetime PD as
determined at the date of initial recognition.
For assets originated before IFRS 9 was introduced, comparable
lifetime origination PDs did not exist. These have been retrospectively
created using the relevant model inputs applicable at initial recognition.
Due to data availability, two practical measures have been taken:
Where model inputs were not available at the point of initial
recognition the earliest available robust metrics were used. For
instance, since Basel II was introduced in 2008, the earliest
available and reliable production Basel PDs range from between
December 2007 and April 2008 depending on the portfolio.
Economic conditions at the date of initial recognition have been
assumed to remain constant from that point forward.
PD estimates
Personal models
Personal PD models use an Exogenous, Maturity and Vintage (EMV)
approach to model default rates by taking into account EMV effects.
The EMV approach separates portfolio default risk trends into three
components: vintage effects (quality of new business over time),
maturity effects (changes in risk relating to time on book) and
exogenous effects (changes in risk relating to changes in macro
economic conditions). This EMV methodology has been widely
adopted across the industry because it enables forward-looking
information to be modelled separately by isolating exogenous or
macroeconomic effects. Forward-looking information is incorporated
by fitting an appropriate macroeconomic model, such as the relevant
stress testing model to the exogenous component and utilising
forecasts of the relevant macro-economic factors.
Wholesale models
Wholesale PD models use the existing CCI based point-in-
time/through-the-cycle framework to convert one-year regulatory PDs
into point-in-time estimates that reflect current economic conditions
across a comprehensive set of region/industry segments.
One year point-in-time PDs are then extrapolated to multi-year PDs
using a conditional transition matrix approach. The conditional
transition matrix approach allows the incorporation of forward-looking
information, provided in the form of yearly CCI projections, by
adjusting the credit state transition probabilities according to projected,
forward-looking changes of credit conditions in each region/industry
segment.
This results in forward-looking point-in-time PD term structures for
each obligor from which the lifetime PD for a specific exposure can be
calculated according to the exposure’s residual contractual maturity.
LGD estimates
The general approach for the IFRS 9 LGD models was to leverage the
Basel LGD models with bespoke IFRS 9 adjustments to ensure
unbiased estimates, that is, the use of effective interest rate as the
discount rate and the removal of downturn calibration, indirect costs,
other conservatism and regulatory floors.
Personal
Forward-looking information has only been incorporated for the
secured portfolios, where changes in property prices can be readily
accommodated. Analysis has indicated minimal impact for the other
Personal portfolios. For UBIDAC, a bespoke IFRS 9 LGD model is
used, reflecting its specific regional market.
Wholesale
Current and forward-looking economic information is incorporated into
the LGD estimates using the existing CCI framework. For low default
portfolios (for example, sovereigns) loss data is too scarce to
substantiate estimates that vary with systematic conditions.
Consequently, for these portfolios, LGD estimates are assumed to be
constant throughout the projection horizon.
EAD estimates
Retail
The IFRS 9 Personal modelling approach for EAD is dependent on
product type.
Revolving products use the existing Basel models as a basis, with
appropriate adjustments incorporating a term structure based on
time to default.
Amortising products use an amortising schedule, where a formula is
used to calculate the expected balance based on remaining terms
and interest rates.
There is no EAD model for Personal loans. Instead, debt flow (i.e.
combined PD x EAD) is directly modelled.
Analysis has indicated that there is minimal impact on EAD arising
from changes in the economy for all Retail portfolios except
mortgages. Therefore, forward-looking information is only incorporated
in the mortgage EAD model (through forecast changes in interest
rates).
Wholesale
For Wholesale, EAD values are estimated on the basis of credit
conversion factor (CCF) models. RBS have observed historic, realised
CCF values to vary over time but there is no clear relationship
between the temporal changes in CCF and economic conditions. RBS
attribute changes in CCFs to changes in exposure management
practices.
Therefore RBS does not include forward-looking economic information
into projected CCF/EAD. To ensure CCF values reflect most recent
exposure management practices, RBS update CCF coefficients in the
model frequently (typically annually) using the last five years of
observed data.
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Capital and risk management
Credit risk continued
Governance and post model adjustments
The IFRS 9 PD, EAD and LGD models are subject to RBS’s model
monitoring and governance frameworks, which include approving post
model adjustments (PMAs) calculated to incorporate the most recent
data available and made on a temporary basis ahead of the underlying
model parameter changes being implemented. These PMAs totalled
approximately £60 million at the year end primarily in respect of PD
under-predictions. In addition, as at 31 December 2018, judgemental
ECL overlays on the UK PBB mortgage portfolio totalled £30 million,
including £15 million in respect of the repayment risk not captured in
the models that a proportion of customers on interest only mortgages
will not be able to repay the capital element of their loan at end of
term. The overlay for interest only mortgages was based on an
analysis of recent experience on customer repayments pre and post
end of term, and modelling that forward for maturities over the next ten
years. These adjustments were over and above those covering
economic uncertainty and non-linearity of losses discussed above and
are also subject to over-sight and governance by the Provisions
Committee.
Significant increase in credit risk (audited)
Exposures that are considered significantly credit deteriorated since
initial recognition are classified in Stage 2 and assessed for lifetime
ECL measurement (exposures not considered deteriorated carry a 12
month ECL). RBS has adopted a framework to identify deterioration
based primarily on movements in probability of default supported by
additional backstops. The principles applied are consistent across
RBS and align to credit risk management practices.
The framework comprises the following elements:
IFRS 9 lifetime PD assessment (the primary driver) – on modelled
portfolios the assessment is based on the relative deterioration in
forward-looking lifetime PD and is assessed monthly. To assess
whether credit deterioration has occurred, the residual lifetime PD at
balance sheet date (which PD is established at date of initial
recognition (DOIR)) is compared to the current PD. If the current
lifetime PD exceeds the residual origination PD by more than a
threshold amount deterioration is assumed to have occurred and
the exposure transferred to Stage 2 for a lifetime loss assessment.
For Wholesale, a doubling of PD would indicate a significant
increase in credit risk subject to a minimum PD uplift of 0.1%. For
Personal portfolios, the criteria varies by risk band, with lower risk
exposures needing to deteriorate more than higher risk exposures,
as outlined in the following table:
Personal
risk bands
Risk band A
Risk band B
Risk band C
Risk bandings (based
on residual lifetime
PD calculated at DOIR)
<0.762%
<4.306%
>=4.306%
PD deterioration
threshold criteria
PD@DOIR + 1%
PD@DOIR + 3%
1.7 x PD@DOIR
Qualitative high-risk backstops – the PD assessment is
complemented with the use of qualitative high-risk backstops to
further inform whether significant deterioration in lifetime risk of
default has occurred. The qualitative high-risk backstop assessment
includes the use of the mandatory 30+ days past due backstop, as
prescribed by IFRS 9 guidance, and other features such as
forbearance support, Wholesale exposures managed within the
Risk of Credit Loss framework, and for Personal, adverse credit
bureau results.
Persistence (Personal and Business Banking only) – the
persistence rule ensures that accounts which have met the criteria
for PD driven deterioration are still considered to be significantly
deteriorated for three months thereafter. This additional rule
enhances the timeliness of capture in Stage 2. It is a Personal
methodology feature and is applied to PD driven deterioration only.
The criteria are based on a significant amount of empirical analysis
and seek to meet three key objectives:
Criteria effectiveness – the criteria should be effective in identifying
significant credit deterioration and prospective default population.
Stage 2 stability – the criteria should not introduce unnecessary
volatility in the Stage 2 population.
Portfolio analysis – the criteria should produce results which are
intuitive when reported as part of the wider credit portfolio.
Asset lifetimes (audited)
The choice of initial recognition and asset duration is another critical
judgement in determining the quantum of lifetime losses that apply.
The date of initial recognition reflects the date that a transaction (or
account) was first recognised on the balance sheet; the PD
recorded at that time provides the baseline used for subsequent
determination of SICR.
For asset duration, the approach applied (in line with IFRS 9
requirements) is:
o
Term lending – the contractual maturity date, reduced for
behavioural trends where appropriate (such as, expected pre-
payment and amortisation).
o Revolving facilities – for Personal portfolios (except credit
cards), asset duration is based on behavioural life and this is
normally greater than contractual life (which would typically be
overnight). For Wholesale portfolios, asset duration is based
on annual counterparty review schedules and will be set to the
next review date.
In the case of credit cards, the most significant judgement is to reflect
the operational practice of card reissuance and the associated credit
assessment as enabling a formal re-origination trigger. As a
consequence a capped lifetime approach of up to 36 months is used
on credit card balances. If the approach was uncapped the ECL
impact is estimated at less than £90 million, compared to £75 million at
transition, with the increase primarily reflecting refinements to criteria
used to identify a significant increase in credit risk during the year.
The approach reflects RBS practice of a credit-based review of
customers prior to credit card issuance and complies with IFRS 9.
Benchmarking information indicates that peer UK banks use
behavioural approaches in the main for credit card portfolios with
average durations between three and ten years. Across Europe
durations are shorter and are, in some cases, as low as one year.
Measurement uncertainty and ECL sensitivity analysis (audited)
The recognition and measurement of ECL is highly complex and
involves the use of significant judgement and estimation. This includes
the formulation and incorporation of multiple forward-looking economic
conditions into ECL to meet the measurement objective of IFRS 9.
The ECL provision is sensitive to the model inputs and economic
assumptions underlying the estimate. Set out below is the impact of
some of the material sensitivities considered for 2018 year end
reporting. These ECL simulations are separate to the impact arising
from MES as described earlier in this disclosure, which impacts are
embedded in the reported ECL. Given the current benign environment
for impairments the focus is on downsides to the existing ECL
provision levels.
The focus of the simulations is on ECL provisioning requirements on
performing exposures in Stage 1 and Stage 2. The simulations are run
on a stand-alone basis and are independent of each other; the
potential ECL uplifts reflect the simulated impact as at the year end
balance sheet date. As default is an observed event as at the balance
sheet date, Stage 3 provisions are not subject to the same level of
measurement uncertainty, and therefore have not been considered in
this analysis. The following common scenarios have been applied
across the key Personal and Wholesale portfolios:
119
Capital and risk management
Credit risk continued
Economic uncertainty – simulating the impact arising from the
Downside 2 scenario, which is one of the five discrete scenarios
used in the methodology for Personal MES. In the simulation RBS
have assumed that the economic macro variables associated with
the Downside 2 scenario replace the existing base case economic
assumptions, giving them a 100% probability weighting for
Personal and using the Monte Carlo approach in Wholesale to
simulate the impact of MES around the base case economic
scenario.
As reflected in the economic metrics in the following table, the
Downside 2 scenario assumes a significant economic downturn
in the UK in 2019 running in to 2020 with recovery in the later
years. UK GDP turns negative in 2019 compared to the base
case assumption of continued growth, unemployment increases
and peaks at the end of 2020. House prices fall in both 2019 and
2020 before starting to recover, and interest rates are assumed
to be lower for longer. An economic slowdown is also assumed
in the Republic of Ireland in 2019 and 2020.
UK
GDP (year-on-year)
Unemployment rate
House Price Inflation (year-on-year)
Bank of England rate
Republic of Ireland
GDP (year-on-year)
Unemployment rate
House Price Inflation (year-on-year)
European Central Bank rate
World GDP (year-on-year)
Base case economic parameters
Downside 2 economic parameters
2019 Q4
2020 Q4
2021 Q4
%
1.7
4.8
1.1
1.0
4.2
5.2
5.8
—
2.7
%
1.5
5.0
0.7
1.0
2.9
5.1
2.7
—
2.4
%
1.9
5.1
1.5
1.3
2.8
5.1
3.0
0.3
2.9
2022 Q4
%
1.8
5.1
2.3
1.3
2.8
5.2
3.4
0.5
2.7
2023 Q4
2019 Q4
2020 Q4
2021 Q4
2022 Q4
2023 Q4
%
1.8
5.1
3.4
1.3
2.5
5.3
3.5
0.8
2.5
%
(1.2)
6.7
(7.0)
—
0.7
7.6
(6.7)
—
(0.8)
%
1.2
7.4
(4.5)
—
3.5
7.7
(5.4)
—
3.1
%
2.7
7.3
1.0
—
4.4
6.5
2.2
—
4.4
%
2.0
6.9
4.1
—
4.5
5.9
7.2
—
3.2
%
2.1
6.4
6.3
—
4.0
5.7
8.8
—
2.8
Mortgages – House Price Inflation (HPI) is a key economic driver
and RBS have simulated a univariate scenario of a 5% decrease in
HPI across the main mortgage portfolios. A univariate analysis
using only HPI does not allow for the interdependence across the
other key primary loss drivers to be reflected in any ECL estimate.
The simulated impact is based on 100% probability weighting to
demonstrate the sensitivity of HPI on the central base case. The
Downside 2 scenario above has house prices falling by a more
material amount, and also includes the impact of PD increases
which are not captured under the HPI univariate simulation.
RBS’s core criterion to identify a significant increase in credit risk is
founded on PD deterioration, as discussed above. Under the
simulations, PDs increase and result in exposures moving from Stage
1 to Stage 2 contributing to the ECL uplift.
This scenario has been applied to all modelled portfolios in the
analysis below, with the simulation impacting both PDs and LGDs. For
some portfolios this creates a significant impact on ECL, for others
less so but on balance the impact is deemed reasonable. In this
simulation, it is assumed the existing modelled relationship between
key economic variables and loss drivers holds good.
Portfolio risk – evaluation of the impact of a movement in one of the
key metrics, PD, simulating a relative 25% upward shift in PDs.
These common scenarios were complemented with two specific
portfolio simulations:
Wholesale portfolios – simulating the impact of PDs moving
upwards to the through-the-cycle (TTC) average from their current
point-in-time (PIT) estimate. This simulation looks solely at PD
movements, potential movements in LGD rates have not been
considered. With the current benign economic conditions wholesale
IFRS 9 PIT PDs are significantly lower than TTC PD. This scenario
shows the increase to ECL by immediately switching to TTC PDs
providing an indication of long run average expectations. IFRS 9
PDs have been used so there remains some differences to Basel
TTC PDs where conservative assumptions are required, such as
caps or floors, not permitted under the IFRS 9 best estimate
approach.
120
Capital and risk management
Credit risk continued
Economic sensitivity analysis
UK PBB
Of which: mortgages
Exposure
£bn
155.7
137.7
%
9.1
7.3
£m
£m
%
589.3 186.4 31.6
—
80.9
—
Actual position at 31 December 2018
Stage 1 and Stage 2 (1)
of which in
ECL
Exposure in
Stage 2 provision(2) Potential ECL uplift Stage 2
Common scenarios (3)
Downside 2
25% PD increase
Discrete scenarios (3)
Exposure in
Potential ECL uplift Stage 2
%
%
10.5
29.6
—
—
%
£m
11.5 174.2
—
—
HPI (4)/TTC PD (5)
potential ECL uplift
£m
%
Exposure in
Stage 2
%
5.5
6.8
7.3
Ulster Bank RoI Personal
and business banking
Of which: mortgages
12.8
12.2
11.9
11.4
100.0
85.5 —
60.5 60.5
—
24.5
—
24.4
—
Wholesale
Total
261.7
430.2
4.1
333.5 79.2 23.8
6.1 1,022.8 326.1 31.9
8.1
86.4
9.8 285.0
24.4
—
25.9
27.9
17.3
—
6.1
7.2
11.7
5.2 106.3
7.5
31.9
7.5
Notes:
(1) Reflects drawn exposure and ECL for all modelled exposure in scope for IFRS 9; in addition to loans this includes bonds, and cash. For Personal exposures,
this includes UK PBB including business banking, and also Ulster Bank RoI personal and business banking, the analysis excludes Personal exposures such as
Private Banking and RBSI.
(2) The ECL provision includes the ECL overlay taken in quarter 3 to recognise the elevated economic uncertainty in the UK in the period running up to the UK
leaving the European Union.
(3) All simulations are run on a stand-alone basis and are independent of each other, with the potential ECL uplift reflecting the simulated impact at the year end
balance sheet date.
(4) HPI is applied to the most material mortgage portfolios only, UK PBB and Ulster Bank RoI.
(5) TTC or long-run average PDs are applied to Wholesale portfolios only, excluding business banking exposures in PBB, the impact on which is included within
the PBB portfolio for this analysis.
Wholesale, the TTC PD scenario has the most significant impact on
ECL highlighting that reverting to long run average PDs is more
severe than a 25% increase in PDs or a switch to a downside
scenario. Moving to TTC PDs requires an average PD uplift of
almost 40%.
The TTC PD and 25% PD increase scenarios see a significant ECL
uplift in the property portfolio which is not observed under the
Downside 2 scenario as under the Downside 2 scenario the
Wholesale PDs begin to revert to long run averages (mean
reversion) after 12 months so do not fully capture the further
deterioration expected in the property portfolio in years 2 and 3.
Downside 2 scenario results in more corporate exposure moving to
Stage 2 than either the TTC PD or 25% PD increase scenarios. The
impact is more concentrated on shorter dated exposure, reflecting
the year 1 downturn, which has less of an impact on total ECL.
Key points
In the downside 2 scenario, the ECL requirement overall was
simulated to increase by £326 million on stage 1 and 2 exposures
from the current level of £1,023 million. The simulation estimates
the balance sheet ECL requirement as at 31 December 2018 and
assumes that the economic variables associated with the Downside
2 scenario had been RBS’s base case economic assumption at that
time.
For the UK PBB franchise, the simulated ECL uplift observed in the
Downside 2 scenario was a little higher than under the 25% PD
increase, with similar seen in the percentage of exposures
simulated to move to Stage 2.
In the Downside 2 scenario, the Ulster Bank RoI simulated uplift
was more marked than on the other simulations reflecting the
weight of mortgage assets in their personal lending portfolio, with
the adverse movement in house prices increasing the LGD. A
similar affect was observed on the UK PBB mortgage portfolio
where the mortgage ECL was simulated to increase by just over
50%, and which impact is included within the overall PBB simulated
result. The percentage of exposures simulated to move into Stage 2
in the Downside 2 scenario is notably higher than under the 25%
PD increase for the Ulster Bank RoI due to the combined impact of
the macro-economic variables utilised for the simulation.
On the univariate HPI scenario, the impact of a 5% fall in house
prices was relatively modest, the simulated impact was similar in
both UK PBB and Ulster Bank RoI. The relationship between the
required ECL and house price movements is expected to be non-
linear should the level of house prices reduce by more material
amounts, with the rate of loss accelerating when prices fall by more
than 10%. Ulster Bank RoI also observed a modest increase in the
percentage of exposures in Stage 2 reflecting small PD movements,
whereas the UK PBB simulation was restricted to the LGD effect
alone hence the percentage of assets in Stage 2 remained
unchanged.
121
Capital and risk management
Credit risk – Banking activities
All the disclosures in this section are audited with the exception of
Stage 2 analysis and Stage 3 vintage analysis.
Introduction
This section covers the credit risk profile of RBS’s banking activities.
Exposures and credit risk measures presented as of and for year
ended 31 December 2018 and at 1 January 2018 are on an IFRS 9
basis. Exposures and credit risk measures as of and for the year
ended 31 December 2017 are on an IAS 39 basis.
Refer to Accounting policy 14 and Note 14 on the consolidated
accounts for revisions to policies and critical judgements relating to
impairment loss determination.
Banking activities include a small number of portfolios that were
carried at fair value, the most significant of which was the lender-
option/buyer-option portfolio of £0.5 billion (1 January 2018 – £2.0
billion). The decrease in the portfolio reflected disposals and valuation
changes.
Financial instruments within the scope of the IFRS 9 ECL
framework (audited)
Refer to Note 11 on the consolidated accounts for balance sheet
analysis of financial assets that are classified as amortised cost (AC)
or fair value through other comprehensive income (FVOCI), the
starting point for IFRS 9 ECL framework assessment.
Financial assets
Of the total third party £471 billion AC and FVOCI balance (gross of
ECL), £463.9 billion or 98% was within the scope of the IFRS 9 ECL
framework and comprised by stage: Stage 1 £430.1 billion; Stage 2
£26.1 billion and Stage 3 £7.7 billion (1 January 2018 – £468.8 billion
of which Stage 1 £430.5 billion; Stage 2 £27.0 billion and Stage 3
£11.3 billion). Total assets within IFRS 9 ECL scope comprised the
following by balance sheet caption and stage:
Loans: £319.8 billion of which Stage 1 £286.0 billion; Stage 2 £26.1
billion and Stage 3 £7.7 billion (1 January 2018 – £321.3 billion of
which Stage 1 £283.3 billion; Stage 2 £26.8 billion and Stage 3
£11.2 billion).
Other financial assets: £144.1 billion of which Stage 1 £144.1 billion;
Stage 2 nil and Stage 3 nil (1 January 2018 – £147.4 billion of which
Stage 1 £147.2 billion; Stage 2 £0.2 billion and Stage 3 nil).
Those assets outside the IFRS 9 ECL framework were as follows:
Settlement balances, items in the course of collection, cash
balances and other non-credit risk assets of £4.9 billion. These were
assessed as having no ECL unless there was evidence that they
were credit impaired.
Equity shares of £0.5 billion as not within the IFRS 9 ECL
framework by definition.
Fair value adjustments on loans hedged by interest rate swaps,
where the underlying loan was within the IFRS 9 ECL scope – £0.9
billion.
Group-originated securitisations, where ECL was captured on the
underlying loans of £0.4 billion.
Commercial cards which operate in a similar manner to charge
cards, with balances repaid monthly via mandated direct debit with
the underlying risk of loss captured within the customer’s linked
current account of £0.4 billion.
Contingent liabilities and commitments
In addition to contingent liabilities and commitments disclosed in Note
27 on the consolidated accounts – reputationally-committed limits, are
also included in the scope of the IFRS 9 ECL framework. These are
offset by £3.6 billion out of scope balances primarily related to facilities
that, if drawn, would not be classified as AC or FVOCI, or undrawn
limits relating to financial assets exclusions. Total contingent liabilities
(including financial guarantees) and commitments within IFRS 9 ECL
scope of £168.9 billion comprised Stage 1 £161.4 billion; Stage 2 £6.9
billion and Stage 3 £0.6 billion.
122
Capital and risk management
Credit risk – Banking activities continued
Portfolio summary – segment analysis (audited)
The table below summarises gross loans and ECL, by segment and stage, within the scope of the IFRS 9 ECL framework.
31 December 2018 (1)
Loans - amortised cost
Stage 1
Stage 2
Stage 3
ECL provisions (2)
Stage 1
Stage 2
Stage 3
ECL provisions coverage (3)
Stage 1 (%)
Stage 2 (%)
Stage 3 (%)
Impairment losses
ECL charge (4)
ECL loss rate - annualised (basis points)
Amounts written-off
1 January 2018 (1)
Financial assets
Stage 1
Stage 2
Stage 3
ECL provisions (2)
Stage 1
Stage 2
Stage 3
ECL provisions coverage (3)
Stage 1 (%)
Stage 2 (%)
Stage 3 (%)
UK PBB
£m
Ulster
Bank RoI
£m
Commercial
Banking
£m
Private
Banking
£m
146,764
14,954
2,220
163,938
17,822
2,080
2,308
22,210
79,106
7,809
2,136
89,051
13,750
531
225
14,506
131
488
796
1,415
0.09
3.26
35.86
0.86
342
20.86
557
35
114
638
787
0.20
5.48
27.64
3.54
15
6.75
372
94
136
743
973
0.12
1.74
34.78
1.09
144
16.17
460
13
10
20
43
0.09
1.88
8.89
0.30
(6)
(4.14)
7
RBSI
£m
13,383
289
101
13,773
6
3
17
26
0.04
1.04
16.83
0.19
(2)
(1.45)
9
Central items
& other
£m
NWM
£m
Total
£m
8,196
407
728
9,331
6
12
106
124
0.07
2.95
14.56
1.33
(92)
(98.60)
89
6,964
27
—
6,991
285,985
26,097
7,718
319,800
—
—
—
—
—
—
—
—
(3)
(4.29)
—
285
763
2,320
3,368
0.10
2.92
30.06
1.05
398
12.45
1,494
UK PBB
£m
Ulster Commercial
Banking
£m
Bank RoI
£m
Private
Banking
£m
RBSI
£m
NWM
£m
Central
items
& other
£m
Balances at
Total central banks
£m
£m
Total
£m
145,650 19,055 84,393 12,755
333
324
163,342 25,071 96,351 13,412
14,490
3,202
2,347
3,669
8,490
3,468
7,791 11,762 52,523 333,929
10 26,972
— 11,283
8,217 13,258 52,533 372,184
307
119
995
501
144
352
1,110
1,606
0.1
2.4
34.7
1.0
29
106
1,054
1,189
0.1
4.5
28.7
4.7
58
106
1,156
1,320
0.1
1.2
33.3
1.4
18
9
27
54
0.1
2.7
8.3
0.4
5
5
28
38
0.1
1.6
23.5
0.5
2
42
190
234
—
4.2
37.9
1.8
5
1
—
6
—
10.0
—
—
261
621
3,565
4,447
0.1
2.3
31.6
1.2
96,566 430,495
5 26,977
— 11,283
96,571 468,755
1
—
—
1
—
—
—
—
262
621
3,565
4,448
0.1
2.3
31.6
0.9
Notes:
(1) The segment analysis tables as at 31 December 2018 include all loans – amortised cost within the scope of IFRS 9. The comparative tables at 1 January 2018
include all financial assets within the scope of IFRS 9, including debt securities of £50.4 billion, of which £42.7 billion related to debt securities classified as
FVOCI. ECL on these debt securities at 1 January 2018 was £28 million, of which £4 million related to those classified as FVOCI.
(2) ECL provisions are provisions on loan assets only. Other ECL provisions not included, relate to cash, debt securities and contingent liabilities, and amount to
£28 million, of which £5 million was FVOCI.
(3) ECL provisions coverage is ECL provisions divided by loans – amortised cost.
(4) ECL charge balances in the above table include a £3 million charge related to other financial assets, of which a £1 million charge related to assets at FVOCI;
and a £31 million release related to contingent liabilities.
The table below shows gross loans (excluding reverse repos) and related credit metrics by segment on an IAS 39 basis.
2017
Gross loans to banks
Gross loans to customers
Risk elements in lending (REIL)
Provisions
REIL as a % of gross loans to customers
Provisions as a % of REIL
Provisions as a % of gross loans to customers
Impairment losses/(releases)
Amounts written-off
UK PBB
£m
500
162,957
1,975
1,280
1.2
65
0.8
235
572
Ulster
Bank RoI
£m
2,447
20,623
3,282
1,131
15.9
34
5.5
60
124
Commercial
Banking
£m
697
98,182
3,196
1,162
3.3
36
1.2
362
335
Private
Banking
£m
109
13,514
95
32
0.7
34
0.2
6
4
RBSI
£m
29
8,743
103
35
1.2
34
0.4
3
6
NWM
£m
7,490
22,902
253
174
1.1
69
0.8
(137)
167
Central items
& other
£m
4,992
77
—
—
—
—
—
1
2
Total
£m
16,264
321,633
8,904
3,814
2.7
43
1.2
530
1,210
123
Capital and risk management
Credit risk – Banking activities continued
Portfolio summary – segment analysis (audited)
Key points
Total ECL provisions have reduced since transition as a result
of reduced provisioning requirements on Stage 3 impaired
assets, which reflected ongoing write-offs and debt sales,
partially offset by increases in Stage 1 and Stage 2.
Stage 3 ECL provisions – The reductions in the UK PBB
business reflected a combination of business-as-usual write-offs
and debt sale activity. For Ulster Bank RoI the significant
reduction since transition was due to the sale of legacy impaired
mortgage portfolio debt. In Commercial Banking and NatWest
Markets the reductions were mainly attributable to write-offs.
Stage 1 and Stage 2 – The increase in Stage 1 and Stage 2
ECL was driven by a number of factors. These included an ECL
uplift for economic uncertainty, which affected all businesses,
model refinements, asset migrations from Stage 3 impaired and
portfolio growth.
Provision coverage remained stable in the Stage 1 population
and increased in Stage 2, with the uplift including the effect of
methodology refinements. The Stage 3 provision coverage
reduced slightly including the effect of debt sales and underlying
business as usual movements.
The impairment charge for the year was £398 million. This
reflected the relatively stable external environment.
The reduction in the Commercial Banking portfolio reflected the
transfer of customers to RBSI and NWM as well as the
continued exit from legacy assets.
Segmental loans and impairment metrics (audited)
The table below summarises gross loans and ECL provisions, by days past due, by segment and stage, within the scope of the ECL framework.
Gross loans
Stage 2 (2)
ECL provisions (3)
Stage 2 (2)
31 December 2018 (1)
UK PBB
Personal
Wholesale
Ulster Bank RoI
Personal (4)
Wholesale
Commercial Banking
Private Banking
Personal
Wholesale
RBS International
NatWest Markets
Central items & other
Total loans excluding balances
at central banks
Personal
Wholesale
Balances at central banks
Total loans
1 January 2018 (1)
UK PBB
Ulster Bank RoI
Commercial Banking
Private Banking
RBS International
NatWest Markets
Central items & other
Total financial assets excluding
balances at central banks
Balances at central banks
Total financial assets
Total
£m
1,415
1,128
287
787
627
160
973
43
25
18
26
124
—
3,368
1,797
1,571
2
3,370
Total
£m
1,606
1,189
1,320
54
38
234
6
4,447
1
4,448
Stage 1 <30 DPD >30 DPD
£m
£m
£m
146,764 14,163
134,836 12,520
1,643
1,968
1,353
615
7,445
380
183
197
274
407
27
11,928
17,822
11,059
6,763
79,106
13,750
10,803
2,947
13,383
8,196
6,964
Total
£m
791 14,954
725 13,245
1,709
2,080
1,458
622
7,809
531
208
323
289
407
27
66
112
105
7
364
151
25
126
15
—
—
Stage 3
£m
Total
£m
2,220 163,938
1,908 149,989
13,949
22,210
14,670
7,540
89,051
14,506
11,214
3,292
13,773
9,331
6,991
312
2,308
2,153
155
2,136
225
203
22
101
728
—
Stage 1 <30 DPD >30 DPD
£m
54
48
6
11
11
—
2
5
—
5
—
—
—
£m
131
101
30
35
13
22
94
13
5
8
6
6
—
£m
434
382
52
103
73
30
134
5
3
2
3
12
—
Total
£m
488
430
58
114
84
30
136
10
3
7
3
12
—
Stage 3
£m
796
597
199
638
530
108
743
20
17
3
17
106
—
285,985 24,664
159,553 14,106
126,432 10,558
—
373,166 24,664
87,181
1,433 26,097
865 14,971
568 11,126
—
1,433 26,097
—
7,718 319,800
4,351 178,875
3,367 140,925
87,181
7,718 406,981
—
285
122
163
2
287
691
458
233
—
691
72
59
13
—
72
763 2,320
517 1,158
246 1,162
—
763 2,320
—
Stage 1
£m
145,650
19,055
84,393
12,755
7,791
11,762
52,523
333,929
96,566
430,495
Stage 1
£m
144
29
58
18
5
2
5
261
1
262
ECL provisions (3)
Stage 2
£m
352
106
106
9
5
42
1
621
—
621
Stage 3
£m
1,110
1,054
1,156
27
28
190
—
3,565
—
3,565
Financial assets
Stage 2
£m
14,490
2,347
8,490
333
307
995
10
Stage 3
£m
3,202
3,669
3,468
324
119
501
—
Total
£m
163,342
25,071
96,351
13,412
8,217
13,258
52,533
26,972
5
26,977
11,283
—
11,283
372,184
96,571
468,755
124
For the notes to this table refer to the following page.
Capital and risk management
Credit risk – Banking activities continued
Segmental loans and impairment metrics (audited)
The table below summarises gross loans and ECL provisions coverage, by days past due, by segment and stage, within the scope of the ECL
framework.
31 December 2018 (1)
UK PBB
Personal
Wholesale
Ulster Bank RoI
Personal (4)
Wholesale
Commercial Banking
Private Banking
Personal
Wholesale
RBS International
NatWest Markets
Central items and other
Total loans excluding
balances at central banks
Personal
Wholesale
Total loans
1 January 2018 (1)
Personal
- UK mortgages
- RoI mortgages
- Credit cards
- Other
Wholesale
- Property
- Corporate
- Financial institutions
- Other
Total financial assets
ECL provisions coverage
Stage 1
%
0.09
0.07
0.25
0.20
0.12
0.33
0.12
0.09
0.05
0.27
0.04
0.07
—
0.10
0.08
0.13
0.08
<30 DPD
%
3.06
3.05
3.16
5.23
5.40
4.88
1.80
1.32
1.64
1.02
1.09
2.95
—
Stage 2 (2,3)
>30 DPD
%
6.83
6.62
9.09
9.82
10.48
—
0.55
3.31
—
3.97
—
—
—
2.80
3.25
2.21
2.80
5.02
6.82
2.29
5.02
Total
%
3.26
3.25
3.39
5.48
5.76
4.82
1.74
1.88
1.44
2.17
1.04
2.95
—
2.92
3.45
2.21
2.92
Stage 3
%
35.86
31.29
63.78
27.64
24.62
69.68
34.78
8.89
8.37
13.64
16.83
14.56
—
30.06
26.61
34.51
30.06
Total
%
0.86
0.75
2.06
3.54
4.27
2.12
1.09
0.30
0.22
0.55
0.19
1.33
—
1.05
1.00
1.11
0.83
ECL
Total
charge
Loss rate
£m basis points
20.9
22.5
2.9
6.8
13.6
(6.6)
16.2
(4.1)
(5.4)
—
(1.5)
(98.6)
(4.3)
342
338
4
15
20
(5)
144
(6)
(6)
—
(2)
(92)
(3)
398
354
44
398
12.5
19.8
3.1
9.8
ECL provisions coverage
Stage 2 (2,3)
Stage 1
%
<30 DPD
%
0.09
0.01
0.07
1.71
0.80
0.07
0.07
0.14
0.03
0.01
0.06
2.54
0.56
4.44
9.11
7.99
1.88
1.13
1.90
3.57
0.85
2.25
>30 DPD
%
4.80
1.62
7.09
27.27
19.64
2.07
1.15
2.86
—
—
3.75
Total
%
2.63
0.61
4.67
9.31
8.30
1.88
1.13
1.92
3.38
0.85
2.30
Stage 3
%
28.46
11.23
26.02
53.57
59.44
35.51
32.43
36.50
65.71
—
31.60
Amounts
written-off
£m
557
420
137
372
343
29
460
7
5
2
9
89
—
1,494
776
718
1,494
Total
%
1.31
0.18
6.18
5.23
8.03
1.09
1.81
1.80
0.34
0.01
0.95
Notes:
(1) The segment analysis tables at 31 December 2018 include all loans – amortised cost within the scope of IFRS 9. The comparative tables at 1 January 2018
include all financial assets within the scope of IFRS 9, including debt securities of £50.4 billion, of which £42.7 billion related to debt securities classified as
FVOCI. ECL on these debt securities at 1 January 2018 was £28 million, of which £4 million related to those classified as FVOCI.
(2) 30 DPD – 30 days past due, the mandatory 30 days past due backstop is prescribed by IFRS 9 for significant increase in credit risk.
(3) ECL provisions on contingent liabilities and commitments are included within the Financial assets section so as not to distort ECL coverage ratios.
(4) 31 December 2018, £3 million of the write offs related to business banking portfolio in Ulster Bank RoI.
Key points
The UK PBB and Ulster Bank RoI franchises accounted for the vast
majority of Personal provisions. In Ulster Bank RoI, Personal
provisions were primarily driven by Stage 3 impairments on the
legacy mortgage book.
The Commercial Banking business accounted for the majority of
Wholesale exposures. Wholesale provisions in UK PBB reflected
exposures to business banking customers and also the commercial
businesses in RBS England & Wales/NatWest Scotland.
On performing exposures (Stage 1 and Stage 2), materially higher
ECL provision was held in credit deteriorated Stage 2 exposures
than in Stage 1, in line with expectations. This was also reflected in
provision coverage levels.
Also in line with expectations, the majority of Stage 2 exposures
were less than 30 days past due, since PD deterioration is the
primary driver of credit deterioration.
The differing cover rates between the Personal and Wholesale
portfolios – and across the business – largely reflected differences
in asset mix, including security cover, and the differing impacts of
external environment events.
125
Capital and risk management
Credit risk – Banking activities continued
Portfolio summary – sector analysis (audited)
The table below summarises financial assets and off-balance sheet exposures gross of ECL and related ECL provisions, impairment and past
due by sector, asset quality and geographical region based on the country of operation of the customer.
31 December 2018
Loans by geography
- UK
- RoI
- Other Europe
- RoW
Loans by asset quality (2,3)
- AQ1-AQ4
- AQ5-AQ8
- AQ9
- AQ10
Loans by stage
- Stage 1
- Stage 2
- Stage 3
Loans - past due analysis (4,5)
- Not past due
- Past due 1-29 days
- Past due 30-89 days
- Past due 90-180 days
- Past due >180 days
Loans - Stage 2
- Not past due
- Past due 1-29 days
- Past due 30-89 days
Weighted average life *
- ECL measurement (years)
Weighted average 12 months PDs *
- IFRS 9 (%)
- Basel (%)
ECL provisions by geography
- UK
- RoI
- Other Europe
- RoW
ECL provisions by stage
- Stage 1
- Stage 2
- Stage 3
ECL provisions coverage (%)
- Stage 1 (%)
- Stage 2 (%)
- Stage 3 (%)
ECL charge
- UK
- RoI
- Other Europe
- RoW
ECL loss rate (%)
Amounts written-off
* Not within audit scope.
Personal
Wholesale
Mortgages (1)
£m
165,081
150,233
14,350
102
396
165,081
104,989
55,139
1,287
3,666
165,081
149,760
11,655
3,666
165,081
160,165
1,714
1,048
632
1,522
11,655
9,788
1,126
741
Credit
cards
£m
4,216
4,112
104
—
—
4,216
35
3,990
69
122
4,216
2,851
1,243
122
4,216
4,027
69
40
29
51
1,243
1,172
43
28
Other
personal
£m
Total
£m
233
67
161
9,578 178,875
9,117 163,462
14,687
169
557
9,578 178,875
1,040 106,064
66,865
7,736
1,595
239
4,351
563
9,578 178,875
6,942 159,553
14,971
2,073
4,351
563
9,578 178,875
8,749 172,941
1,963
1,193
730
2,048
14,971
12,803
1,302
866
180
105
69
475
2,073
1,843
133
97
Property
£m
36,707
33,855
1,114
1,395
343
36,707
16,133
18,815
74
1,685
36,707
33,145
1,877
1,685
36,707
35,420
270
271
56
690
1,877
1,556
68
253
Corporate
£m
72,240
60,657
3,733
3,760
4,090
72,240
22,587
47,651
359
1,643
72,240
61,844
8,753
1,643
72,240
69,782
1,397
344
83
634
8,753
8,196
244
313
Total
£m
FI
£m
Sovereign
£m
Total
£m
25,011
11,611
392
5,903
7,105
25,011
22,397
2,574
5
35
25,011
24,502
474
35
25,011
24,388
604
11
1
7
474
472
1
1
319,800
6,967 140,925
272,674
3,089 109,212
22,423
7,736
2,497
12,315
12,146
1,088
12,388
11,831
293
319,800
6,967 140,925
173,983
67,919
6,802
136,066
69,201
161
2,033
438
—
7,718
3,367
4
319,800
6,967 140,925
285,985
6,941 126,432
26,097
11,126
3,367
7,718
6,967 140,925 319,800
6,923 136,513 309,454
4,276
2,313
1,821
628
870
140
3,379
1,331
26,097
11,126
23,049
10,246
1,615
313
1,433
567
42
2
—
—
22
22
—
—
22
4
8
2
3
5
3
3
4
3
3
4
0.32
0.84
839
237
602
—
—
839
23
150
666
0.51
0.02
1.29
18.17
57
38
19
—
—
0.03
368
4.03
3.52
230
227
3
—
—
230
38
120
72
5.46
1.33
9.65
59.02
87
88
(1)
—
—
2.06
79
2.77
3.50
728
707
21
—
—
728
61
247
420
7.60
0.88
11.92
74.60
210
207
3
—
—
2.19
329
0.54
1.04
1,797
1,171
626
—
—
1,797
122
517
1,158
1.00
0.08
3.45
26.61
354
333
21
—
—
0.20
776
0.75
0.95
588
518
43
22
5
588
43
39
506
1.60
0.13
2.08
30.03
30
31
(1)
—
—
0.08
292
0.97
1.43
941
615
125
53
148
941
107
200
634
1.30
0.17
2.28
38.59
13
9
(3)
8
(1)
0.02
395
0.14
0.23
41
27
2
10
2
41
12
7
22
0.16
0.05
1.48
62.86
3
6
(1)
(2)
—
0.01
31
0.06
0.06
1
1
—
—
—
1
1
—
—
0.01
0.01
—
—
(2)
(2)
—
—
—
(0.03)
—
0.75
1.01
1,571
1,161
170
85
155
1,571
163
246
1,162
1.11
0.13
2.21
34.51
44
44
(5)
6
(1)
0.03
718
0.62
1.03
3,368
2,332
796
85
155
3,368
285
763
2,320
1.05
0.10
2.92
30.06
398
377
16
6
(1)
0.12
1,494
For the notes to this table refer to the following page.
126
Capital and risk management
Credit risk – Banking activities continued
Portfolio summary – sector analysis (audited)
31 December 2018
Loans by residual maturity
- <1yr
- 1-5yr
- 5yr
Other financial assets by
asset quality (2)
- AQ1-AQ4
- AQ5-AQ8
- AQ9
- AQ10
Off-balance sheet
- Loan commitments
- Financial guarantees
Off-balance sheet by asset quality (2)
- AQ1-AQ4
- AQ5-AQ8
- AQ9
- AQ10
Personal
Credit
Other
cards personal
£m
£m
Mortgages
£m
Wholesale
Total
£m
Property Corporate
£m
£m
FI Sovereign
£m
£m
Total
£m
Total
£m
Fixed
£m
Variable
£m
165,081 4,216 9,578 178,875 36,707 72,240 25,011
919 4,960 17,123 9,533 29,788 17,602
11,244
35,184 3,297 3,816 42,297 18,797 30,772 6,167
802 119,455 8,377 11,680 1,242
118,653
—
6,967 140,925
6,362 63,285
245 55,981
360 21,659
319,800 152,557 167,243
80,408 20,534 59,874
98,278 34,250 64,028
141,114 97,773 43,341
721
4
3
642
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
105
105
—
—
—
652 8,838 134,546 144,141 144,141
10 8,110 134,546 142,771 142,771
1,363
4
3
13,228 16,613 12,229 42,070 16,044 52,730 28,761 29,277 126,812 168,882
13,228 16,613 12,229 42,070 15,335 48,569 26,684 29,276 119,864 161,934
6,948
13,228 16,613 12,229 42,070 16,044 52,730 28,761 29,277 126,812 168,882
422 9,103 21,641 11,945 36,134 27,364 29,262 104,705 126,346
12,116
41,847
71
618
1,101 15,900 3,116 20,117 3,928 16,390 1,397
—
—
15 21,730
52
—
325
—
1,363
4
3
709 4,161 2,077
19
293
—
—
—
8
283
6
165
46
160
10
—
1
10
6,948
—
—
—
—
1
1 January 2018
Personal
UK mortgages
RoI mortgages
Credit cards
Other personal (6)
Wholesale
Property
Corporate
Financial institutions
Sovereign
Total financial assets excluding balances at central banks
Balances at central banks
Total financial assets
Total contingent liabilities and commitments
Total exposure
Financial assets - asset quality (2)
- AQ1-AQ4
- AQ5-AQ8
- AQ9
- AQ10 (3)
Total credit
exposure
£m
177,196
146,556
15,549
4,247
10,844
194,988
37,877
73,667
34,064
49,380
372,184
96,571
468,755
146,800
615,555
Stage 1
£m
155,843
134,350
10,674
3,097
7,722
178,086
33,884
62,253
32,923
49,026
333,929
96,566
430,495
139,550
570,045
Total IFRS 9 credit risk exposure by stage
Stage 2 (2,3)
>30 DPD
£m
625
431
127
11
56
387
87
245
55
—
1,012
—
1,012
113
1,125
<30 DPD
£m
14,460
10,119
1,351
999
1,991
11,500
1,942
8,224
981
353
25,960
5
25,965
6,388
32,353
Total
£m
15,085
10,550
1,478
1,010
2,047
11,887
2,029
8,469
1,036
353
26,972
5
26,977
6,501
33,478
230,773
128,814
2,912
9,685
223,789
109,962
178
—
6,883
17,449
1,628
—
101
660
251
—
6,984
18,109
1,879
—
ECL
provisions
£m
2,316
262
961
222
871
2,131
685
1,325
115
6
4,447
1
4,448
Stage 3
£m
6,268
1,656
3,397
140
1,075
5,015
1,964
2,945
105
1
11,283
—
11,283
749
12,032
—
743
855
9,685
Notes:
(1) At 31 December 2018, Mortgages include £0.7 billion secured lending in Private Banking, in line with ECL calculation methodology.
(2) AQ bandings are based on Basel PDs.
(3) At 31 December 2018, AQ10 includes £0.6 billion (31 December 2017 – £0.7 billion) RoI mortgages which are not currently considered defaulted for capital
calculation purposes for RoI but included in Stage 3.
(4) 30 DPD – 30 days past due, the mandatory 30 days past due backstop as prescribed by the IFRS 9 guidance for significant increase in credit risk.
(5) Days past due – Personal products: at a high level, for amortising products, the number of days past due is derived from the arrears amount outstanding and
the monthly repayment instalment. For credit cards, it is based on payments missed, and for current accounts the number of continual days in excess of
borrowing limit. Wholesale products: the number of days past due for all products is the number of continual days in excess of borrowing limit.
(6) At 1 January 2018, mortgages other than UK and RoI were reported within other personal but at 31 December 2018 they are reported separately.
127
Capital and risk management
Credit risk – Banking activities continued
Portfolio summary – sector analysis (audited)
Wholesale forbearance
The table below summarises Wholesale forbearance, Heightened Monitoring and Risk of Credit Loss by sector. Personal forbearance is
disclosed on page 132.
2018
Forbearance (flow)
Forbearance (stock)
Heightened Monitoring and Risk of Credit Loss
2017
Forbearance (flow)
Forbearance (stock)
Heightened Monitoring and Risk of Credit Loss
FI
£m
14
15
100
11
14
144
Risk elements in lending
The table below summarises risk elements in lending by segment on an IAS 39 basis.
At 1 January 2017
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
At 31 December 2017
UK
PBB
£m
2,372
—
—
1,227
(152)
(294)
(606)
(572)
1,975
Ulster
Bank
RoI
£m
3,513
—
123
550
—
(336)
(444)
(124)
3,282
Commercial
Banking
£m
1,946
1,384
—
1,590
10
(283)
(1,116)
(335)
3,196
Provisions
The table below summarises provisions by segment on an IAS 39 basis.
Property
£m
305
477
503
417
764
739
Private
Banking
£m
105
—
—
28
(2)
—
(32)
(4)
95
Sovereigns
£m
—
—
16
Other corporate
£m
2,247
2,756
4,145
—
—
—
1,473
3,067
4,183
Total
£m
2,566
3,248
4,764
1,901
3,845
5,066
RBS
International
£m
109
—
5
62
7
(33)
(41)
(6)
NatWest
Markets
£m
2,264
(1,384)
(86)
98
8
(12)
(468)
(167)
Central
items
& other
£m
1
—
1
14
—
(1)
(13)
(2)
Total
£m
10,310
—
43
3,569
(129)
(959)
(2,720)
(1,210)
103
253
—
8,904
At 1 January 2017
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
At 31 December 2017
UK
PBB
£m
1,537
—
—
—
(572)
117
235
(37)
1,280
Ulster
Bank
RoI
£m
1,200
—
8
—
(124)
12
60
(25)
1,131
Commercial
Banking
£m
845
293
(7)
—
(335)
16
362
(12)
1,162
Private
Banking
£m
31
—
—
—
(4)
—
6
(1)
32
RBS
International
£m
38
—
—
—
(6)
1
3
(1)
35
NatWest
Markets
£m
803
(293)
(27)
(5)
(167)
10
(137)
(10)
174
Central
items
& other
£m
1
—
—
—
(2)
—
1
—
Total
£m
4,455
—
(26)
(5)
(1,210)
156
530
(86)
—
3,814
128
Capital and risk management
Credit risk – Banking activities continued
Portfolio summary – sector analysis (audited)
Key points
Geography – The majority of exposures in both the Personal and
Wholesale portfolios were in the UK and the Republic of Ireland.
Other exposures in Europe and the Rest of the World were mainly
Wholesale. Mortgages, the vast majority of which are in the UK,
accounted for more than half of the total exposure.
Asset quality – Measured against RBS’s asset quality scale, 54% of
lending exposure was rated in the AQ1-AQ4 bands at 31 December
2018. This equated to an indicative investment rating of BBB- or
above. Specifically 59% of Personal and 48% of Wholesale lending
exposure were in the AQ1-AQ4 category respectively.
Loans by stage – 90% of exposures were in Stage 1, with 8% in
Stage 2 significantly credit deteriorated. Stage 3 assets, which align
to AQ10, represented 2% of total exposures. In line with
expectations, the Personal portfolio had a higher proportion of
unsecured lending assets in Stage 2 than the mortgage portfolio. In
the Wholesale portfolio, the proportion of assets in Stage 2 was
slightly lower than in Personal overall.
Loans – Past due analysis – Stage 2: the vast majority of assets
overall were not past due, with the Stage 2 classification driven
primarily by changes in lifetime PD. (For further detail, refer to the
Significant increase in credit risk section). In mortgages, the majority
of assets past due by more than 180 days were in Ulster Bank RoI
reflecting the legacy mortgage portfolio and the residual effects from
the financial crisis. In other personal, the relatively high rate of
exposures past due by more than 90 days reflected the fact that
impaired assets can be held on balance sheet with commensurate
ECL provision for up to six years after default. Similarly in the
Wholesale portfolio, impaired assets can be held on the balance
sheet for a significant period of time while restructuring and
recovery processes are concluded.
Weighted average 12 months PDs – In Wholesale, Basel PDs,
which are based on a through-the-cycle approach, tend to be higher
than point-in-time best estimate IFRS 9 PDs, reflecting the current
state in the economic cycle, and also an element of conservatism in
the regulatory capital framework. In Personal, the Basel PDs, which
are point-in-time estimates, tend to be higher also reflecting
conservatism, higher in mortgages than other products, and an
element of default rate under-prediction in the IFRS 9 PD models.
This has been mitigated by ECL overlays of approximately £60
million at the year end, pending model calibrations being
implemented. The IFRS 9 PD for credit cards was higher than the
Basel equivalent and reflected the relative sensitivity of the IFRS 9
model to forward-looking economic drivers.
ECL provision by geography – In line with exposures by geography,
the weight of ECL related to exposures in the UK and the Republic
of Ireland. The ECL in RoI was mainly Stage 3 provisions in the
legacy Ulster Bank RoI mortgage portfolio.
ECL provision by stage and coverage – The weight of ECL by value
was in Stage 3 impaired, with similar seen in both Personal and
Wholesale. Provision coverage was progressively higher by stage
reflecting the lifetime nature of losses in both Stage 2 and Stage 3.
In the Personal portfolio, provision coverage was materially lower in
mortgages relative to credit cards and other personal reflecting the
secured nature of the facilities. For Wholesale exposures, security
and enterprise value mitigated against losses in Stage 3.
The ECL charge for the year was £398 million. This reflected the
relatively stable external environment.
Other financial assets by asset quality – Consisting almost entirely
of cash and balances at central banks and debt securities, these
assets were mainly within the AQ1-AQ4 category.
Off-balance sheet exposures by asset quality – For Personal
exposures, undrawn exposures are reflective of available credit
lines in credit cards and current accounts. Additionally, the
mortgage portfolio had undrawn exposure, where a formal offer has
been made to a customer but has not yet been drawn down. There
is also a legacy portfolio of flexible mortgages where a customer
has the right and ability to draw down further funds. The asset
quality distribution in mortgages is heavily weighted to the highest
quality bands AQ1-AQ4, with credit card concentrated in the risk
bands AQ5-AQ8. In Wholesale, 83% of undrawn exposure, relating
mainly to loan commitments, was in the AQ1-AQ4 category.
Forbearance – Completed forbearance flow in 2018 for Wholesale
was £2.6 billion compared to £1.9 billion in 2017. Forbearance
granted in the transport sector increased to £493 million from £54
million, mainly driven by a customer which has been restructured
and moved to Stage 2 from Stage 3 during the year. Forbearance
across the diverse services sector increased from £347 million to
£763 million. Of the forbearance that completed during the year,
£1.1 billion related to payment concessions (2017 – £1.4 billion) and
£1.4 billion related to non-payment concessions (2017 – £0.5
billion). Forbearance stock reduced by £0.6 billion, from £3.8 billion
to £3.2 billion, driven by a decrease in forborne exposure in the
energy and resources, property and retail and leisure sectors.
Heightened Monitoring and Risk of Credit Loss – Exposure
decreased from £5.1 billion at 31 December 2017, to £4.8 billion at
31 December 2018. There was also a decrease in the number of
customers classified as Heightened Monitoring and Risk of Credit
Loss during the year. Despite the current economic uncertainty in
the UK, the portfolio has remained stable.
129
Capital and risk management
Credit risk – Banking activities continued
Portfolio summary – sector analysis (audited)
The table below summarises both current and potential exposure by geographical region on an IAS 39 basis.
2017
UK
RoI
Other Western Europe
US
RoW (3)
Wholesale (1)
Banks and
Personal
£m
other FI's Sovereigns (2)
£m
£m
Other
£m
Current
exposure
£m
158,965
15,319
514
377
1,461
17,992
751
7,504
6,987
4,575
176,636
37,809
91,161
2,416
43,414
8,430
2,155
94,896 363,014
23,098
4,612
59,991
8,559
18,374
2,580
11,335
3,144
147,576 113,791 475,812
Banks and
Wholesale (1)
Personal
%
other FI's Sovereigns (2)
%
%
Other
%
Total
%
Total
exposure
£m
33
3
—
—
—
36
4
—
2
1
1
8
19
1
9
2
—
31
20
1
2
1
1
25
76 413,378
24,502
86,866
31,497
14,602
5
13
4
2
100 570,845
Notes:
(1) Includes SME customers managed in UK PBB Business Banking who are assigned a sector under RBS’s sector concentration framework.
(2) Includes exposures to central governments, central banks and sub-sovereigns such as local authorities.
(3) Rest of world (RoW) also includes supranationals such as the World Bank and exposure relating to ocean-going vessels which cannot be meaningfully assigned
to specific countries from a country risk perspective.
Loan asset quality
The table below summarises asset quality and impairments by banks and customers on an IAS 39 basis.
2017
Banks
Customers
AQ1-AQ4
£bn
27.7
226.8
AQ5-AQ8
£bn
2.6
109.6
AQ9
£bn
—
2.8
AQ10
£bn
—
0.7
Past due
£bn
—
6.4
Impaired
£bn
—
7.4
Impairment
provision
£bn
—
(3.8)
Total
£bn
30.3
349.9
Loan sector concentration
The table below summarises gross loans to banks and customers (excluding reverse repos) and related credit metrics by sector, on an IAS 39
basis.
2017
Central and local government
Finance
Personal - mortgage (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 customer
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
REIL
£m
—
54
3,876
937
1,119
426
1,189
147
170
446
700
330
193
35
471
—
8,904
Provisions
£m
—
44
994
763
283
298
293
64
88
193
195
145
80
21
256
390
3,814
16,264
—
—
Credit metrics
REIL
as a % of
gross loans
%
—
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
—
Provisions
as a %
of REIL
%
—
81
26
81
25
70
25
44
52
43
28
44
41
60
54
—
43
—
Provisions
as a % of
gross loans
%
—
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
—
Impairment
losses/
(releases)
£m
—
3
50
235
(82)
196
(76)
4
23
93
(32)
65
17
(18)
(10)
(14)
530
—
Note:
(1) Mortgages are reported in sectors other than personal mortgages by certain businesses based on the nature of the relationship with the customer.
Past due analysis
The table below summarises loans – amortised cost to customers that were past due at the balance sheet date but were not considered
impaired.
Number of days
Past due 1-29 days
Past due 30-59 days
Past due 60-89 days
Past due 90 days or more
By sector
Personal
Property and construction
Financial institution
Other corporate
2017
£m
3,535
902
456
1,481
6,374
130
Amounts
written-off
£m
—
7
87
424
133
36
139
25
14
81
165
48
46
13
131
—
1,210
—
2017
£m
3,731
667
24
1,952
6,374
Capital and risk management
Credit risk – Banking activities continued
Credit risk enhancement and mitigation (audited)
The table below summarises exposures of modelled portfolios within the scope of the ECL framework and related credit risk enhancement and
mitigation (CREM). Excluded from this analysis are the non modelled portfolios, primarily Private Banking and RBSI mortgage portfolios, which
are discussed in the Personal – portfolio section, including loan-to-value ratios. Refer to Policy elections and simplifications relating to IFRS 9
section for details on non-modelled portfolios.
2018
Financial assets
Cash and balances at central banks
Loans - amortised cost (3)
Personal (4)
Wholesale (5)
Debt securities
Total financial assets
Contingent liabilities and commitments
Personal (6)
Wholesale
Total off balance sheet
Total exposure
Gross
exposure
£bn
ECL
£bn
Maximum credit
risk
CREM by type
Total Stage 3 Financial (1) Property Other (2)
£bn
£bn
£bn
£bn
£bn
CREM coverage
Total Stage 3
£bn
£bn
Exposure post
CREM
Total Stage 3
£bn
£bn
87.2
302.6
164.6
138.0
57.0
446.8
31.0
126.2
157.2
604.0
—
87.2
3.2 299.4
1.7 162.9
1.5 136.5
—
57.0
3.2 443.6
31.0
—
— 126.2
— 157.2
3.2 600.8
—
5.0
2.9
2.1
—
5.0
0.3
0.3
0.6
5.6
—
—
4.1 188.1
— 151.7
36.4
4.1
—
—
4.1 188.1
4.9
—
5.9
0.6
0.6
10.8
4.7 198.9
—
19.7
—
19.7
—
19.7
—
6.1
6.1
25.8
—
211.9
151.7
60.2
—
211.9
4.9
12.6
17.5
229.4
—
4.5
2.7
1.8
—
4.5
—
—
—
4.5
87.2
87.5
11.2
76.3
57.0
231.7
26.1
113.6
139.7
371.4
—
0.5
0.2
0.3
—
0.5
0.3
0.3
0.6
1.1
Notes:
(1) Financial collateral includes cash and securities collateral.
(2) Other collateral includes guarantees, charges over trade debtors as well as the amount by which credit risk exposure is reduced through netting arrangements,
mainly cash management pooling, which give RBS a legal right to set off the financial asset against a financial liability due to the same counterparty.
(3) RBS holds collateral in respect of individual loans – amortised cost to banks and customers. This collateral includes mortgages over property (both personal
and commercial); charges over business assets such as plant and equipment, 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. Collateral values are capped at the value of the loan.
(4) On personal, Stage 3 mortgage exposures have relatively limited uncovered exposure reflecting the security held. On unsecured credit cards and other
personal borrowing, the residual uncovered amount reflects historical experience of continued cash recovery post default through on-going engagement with
customers.
(5) Stage 3 exposures post credit risk enhancement and mitigation in wholesale mainly represent enterprise value and the impact of written down collateral
values; an individual assessment to determine ECL will consider multiple scenarios and in some instances allocate a probability weighting to a collateral value
in excess of the written down value.
(6) At 31 December 2018, £0.3 billion personal Stage 3 balances primarily relate to loan commitments, the draw down of which is effectively prohibited.
The table below summarises financial asset exposures, both gross and net of offset arrangements, as well as credit mitigation and
enhancement.
Gross
IFRS Carrying Balance sheet
2017
Cash and balances at central banks
Trading assets
Derivatives
Settlement balances
Loans - amortised cost
Other financial assets
Total third party gross of short positions
exposure offset (5) value (6)
£bn
£bn
98.4
—
(32.6)
86.0
(17.1) 160.8
2.5
(12.5) 321.6
52.0
(62.9) 721.3
£bn
98.4
118.6
177.9
3.2
334.1
52.0
784.2
(0.7)
—
Collateral (1)
Exposure
post credit
Credit mitigation and
Real estate and other
offset (7) Cash (2) Securities (3) Residential (4) Commercial (4) enhancement (8) enhancement
£bn
98.4
53.2
—
2.5
60.3
51.9
266.3
£bn
—
—
—
—
(174.2)
—
(174.2)
£bn
—
(0.3)
(128.3)
—
(27.9)
—
(156.5)
£bn
—
—
(20.3)
—
(0.9)
—
(21.2)
£bn
—
—
—
—
(45.0)
(0.1)
(45.1)
£bn
—
(32.5)
(5.9)
—
(11.2)
—
(49.6)
£bn
—
—
(6.3)
—
(2.1)
—
(8.4)
Short positions
Net of short positions
(28.5)
755.7
—
(28.5)
(62.9) 692.8
—
(156.5)
—
(21.2)
—
(49.6)
—
(174.2)
—
(45.1)
—
(8.4)
(28.5)
237.8
Notes:
(1) RBS holds collateral in respect of individual loans. 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.
Includes cash collateral pledged by counterparties based on daily mark-to-market movements of net derivative positions with the counterparty.
(2)
(3) Represent the fair value of securities received from counterparties, mainly relating to reverse repo transactions as part of netting arrangements.
(4) 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 plan and equipment collateral.
(5) Relates to offset arrangements that comply with IFRS criteria and transactions cleared through and novated to central clearing houses, primarily London
Clearing House (LCH) and US Government Securities Clearing Corporation. During 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.
(6) The carrying value on the balance sheet represents the maximum exposure to credit risk by class of financial instrument.
(7) 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.
(8) Comprises credit derivatives (bought protection) and guarantees against exposures.
131
Capital and risk management
Credit risk – Banking activities continued
Personal portfolio (audited)
Disclosures in the Personal portfolio section include drawn exposure (gross of provisions). Loan-to-value (LTV) ratios are split by stage under
IFRS 9 at 31 December 2018 and by performing and non-performing status under IAS 39 at 31 December 2017.
Personal lending
Mortgages
Of which:
Owner occupied
Buy-to-let
Interest only - variable
Interest only - fixed
Mixed (1)
Impairment provisions (2)
Other personal lending (3)
Impairment provisions (2)
Total personal lending
Mortgage LTV ratios
- Total portfolio
- Stage 1
- Stage 2
- Stage 3
- Buy-to-let
- Stage 1
- Stage 2
- Stage 3
Gross new mortgage lending
of which:
Owner occupied
Weighted average LTV
Buy-to-let
Weighted average LTV
Interest only - variable rate
Interest only - fixed rate
Mixed (1)
Mortgage forbearance (4)
Forbearance flow
Forbearance stock
Current
1-3 months in arrears
> 3 months in arrears
UK
PBB
£m
Ulster
Bank RoI
£m
138,250 14,361
2018
Private
Banking
£m
9,082
122,642 13,105
1,256
188
12
68
602
330
25
7,953
1,129
3,871
3,636
2
5
1,676
19
149,883 14,691 10,758
15,608
8,358
12,229
6,036
212
11,633
909
RBSI
£m
Ulster
Bank RoI
£m
2,684 164,377 136,625 15,352
UK
PBB
£m
Total
£m
2017
Private
Banking
£m
8,421
903 18,896
489 12,906
187 16,064
1,781 145,481 118,764 13,455
1,897
260
8
79
909
348
44
7,275
1,146
4,076
2,866
2
7
1,701
19
2,739 178,071 147,705 15,700 10,122
17,861
11,245
12,584
6,039
6,124
18
16
153
835
55 13,694 11,080
833
954
1
RBSI
£m
Total
£m
2,745 163,143
1,821 141,315
924 21,828
636 16,217
96 15,554
6,140
20
27
1,096
65 13,194
898
2,810 176,337
2
56%
56%
58%
55%
53%
53%
57%
58%
29,555
28,608
69%
947
61%
43
1,189
912
446
1,338
724
350
264
62%
58%
67%
77%
64%
58%
72%
78%
1,015
1,004
73%
11
57%
—
—
1
210
2,645
1,291
261
1,093
56%
56%
58%
58%
53%
53%
53%
68%
1,846
1,689
62%
157
55%
697
764
—
11
8
6
—
2
58%
57%
55%
99%
53%
52%
57%
75%
353 32,769
57%
56%
59%
69%
54%
53%
60%
71%
56%
56%
57%
54%
69%
65%
88%
75%
55%
55%
59%
54%
58%
56%
122%
50%
57%
57%
78%
56%
30,314
890
2,243
481 33,928
241 31,542 28,504
70%
69%
68%
1,810
1,227
112
62%
60%
61%
335
753
13
1,835
1,996
43
893
913
—
875
75%
15
57%
6
1
—
667
3,991
2,021
611
1,359
440
1,384
834
304
246
201
3,893
1,779
466
1,648
1,904
63%
339
56%
902
874
—
31
7
6
—
1
319 31,602
70%
70%
2,326
162
61%
62%
1,282
39
2,758
48
893
—
5
25
12
2
11
677
5,309
2,631
772
1,906
Notes:
(1) Includes accounts which have an interest only sub-account and a capital and interest sub-account to provide a more comprehensive view of interest only
exposures.
(2) 31 December 2018 data was prepared under IFRS 9. 31 December 2017 data was prepared under IAS 39. For UK PBB this excludes a non-material amount
of provisions held on relatively small legacy portfolios.
(3) Excludes loans that are commercial in nature, for example loans guaranteed by a company and commercial real estate lending to Personal customers.
(4) The reduction in RBSI forbearance is due to reclassification.
132
Capital and risk management
Credit risk – Banking activities continued
Key points
Overall – The overall credit risk profile of the Personal portfolio,
and its performance against credit risk appetite, remained
stable during 2018.
Total lending – Total mortgage lending grew by £1.2 billion with
new lending partly offset by redemptions and repayments.
New mortgage lending was lower than 2017. Existing mortgage
stock and new business were closely monitored against agreed
risk appetite parameters. These included loan-to-value ratios,
buy-to-let concentrations, new-build concentrations and credit
quality. Underwriting standards were maintained during the
period.
Owner occupied and buy-to-let – Most of the mortgage growth
was in the owner-occupied portfolio. New mortgages in the
buy-to-let portfolio remained subdued.
LTVs – The mortgage portfolio loan-to-value ratio remained
stable. The improvement in Ulster Bank RoI reflected house
price recovery and the disposal of a portfolio of mortgages
during the year, which also contributed to the reduction in the
level of exposures in Stage 3.
Interest only – By value, the proportion of mortgages on
interest only and mixed terms (capital and interest only)
reduced, driven by fewer buy-to-let mortgages.
Regional mortgage analysis – For UK PBB, 42% of mortgage lending
was in Greater London and the South East (31 December 2017 –
43%). The level of exposure in this region remained broadly
unchanged, reflecting lower demand for buy-to-let properties as well as
mortgage redemptions. The weighted average loan-to-value for these
regions was 52% (31 December 2017 – 51%) compared to an average
of 56%.
Interest rate profile – As at 31 December 2018, 81% of customers in
the UK PBB mortgage portfolio were on fixed rates (42% on five-year
deals). In addition, 97% of all new mortgage completions in 2018 were
fixed rate mortgages (62% of which were five-year mortgages), as
customers sought to minimise the impact of potential rate rises.
Provisions – As expected, total ECL – including ECL for unsecured
lending – generally increased under the IFRS 9 methodology
compared to provisions calculated under IAS 39. The reduction in
Ulster Bank RoI mortgage provisions was driven by a sale of legacy
impaired debt.
Other lending – Total unsecured lending grew modestly in 2018, driven
by growth in the PBB personal loan portfolio. Overdraft balances have
shown a modest decline year-on-year.
Other lending asset quality – Unsecured credit quality remained stable,
reflecting active portfolio management. Credit standards and controls
were tightened across all three unsecured products to ensure that
higher risk customer performance remained within risk appetite.
Personal portfolio (audited)
Mortgage LTV distribution by stage
The table below summarises gross mortgage lending and related ECL by LTV band. Mortgage lending not within the scope of IFRS 9 ECL
reflected portfolios carried at fair value.
Mortgages
ECL
ECL provisions coverage (2)
Not within
Of which:
UK PBB
2018
≤50%
>50% and ≤70%
>70% and ≤80%
>80% and ≤90%
>90% and ≤100%
>100% and ≤110%
>110% and ≤130%
>130% and ≤150%
>150%
Total with LTVs
Other
Total
Stage 1
£m
Stage 2
£m
47,111 3,423
44,037 3,632
20,345 1,490
12,733 1,118
178
2,343
35
57
41
53
23
23
3
9
126,705 9,949
13
126,801 9,962
96
Stage 3
£m
516
459
135
81
24
8
9
6
3
1,241
4
1,245
IFRS 9 ECL
scope
£m
gross new
lending
£m
4,779
8,535
7,434
7,524
1,104
Total
£m
153 51,203
49 48,177
15 21,985
12 13,944
2,552
101
105
52
15
239 138,134 29,376
116
242 138,250 29,555
£m
2
2
1
2
1
— —
— —
— —
— —
8
179 —
8
Stage 1 Stage 2 Stage 3
£m
64
39
11
8
3
1
1
1
1
129
2
131
£m
16
23
11
12
4
2
2
1
1
72
1
73
7
1
2
—
—
3
2017
≤50%
>50% and ≤70%
>70% and ≤80%
>80% and ≤90%
>90% and ≤100%
>100% and ≤110%
>110% and ≤130%
>130% and ≤150%
>150%
Total with LTVs
Other
Total
For the notes to this table refer to the following page.
133
Total (1)
£m
82
64
23
22
8
3
3
2
2
209
3
212
Stage 1
%
—
—
—
—
—
0.1
0.1
0.1
0.1
—
—
—
Stage 2
%
0.5
0.6
0.7
1.1
2.4
4.6
5.4
6.2
6.2
0.7
4.7
0.7
Non-
Stage 3
%
12.4
8.5
8.1
10.0
12.1
14.1
14.6
13.4
17.3
10.4
53.5
10.5
Total
%
0.2
0.1
0.1
0.2
0.3
2.8
3.4
4.3
7.2
0.2
2.6
0.2
Of which:
gross new
Total
£m
Performing performing
£m
£m
50,583
47,361
20,514
13,409
2,559
130
114
58
25
134,753
512
135,265
lending
£m
527 51,110 4,593
505 47,866 8,310
150 20,664 7,709
87 13,496 8,239
2,595 1,285
36
1
14
1
10
—
5
1
8
1,342 136,095 30,139
175
1,360 136,625 30,314
144
124
63
33
530
18
Capital and risk management
Credit risk – Banking activities continued
Personal portfolio (audited)
Mortgage LTV distribution by stage
Ulster Bank RoI
2018
≤50%
>50% and ≤70%
>70% and ≤80%
>80% and ≤90%
>90% and ≤100%
>100% and ≤110%
>110% and ≤130%
>130% and ≤150%
>150%
Total with LTVs
Stage 1
£m
3,818
3,567
1,564
1,059
570
197
51
5
10
10,841
Stage 2
£m
374
365
190
184
154
80
35
5
1
1,388
2017
≤50%
>50% and ≤70%
>70% and ≤80%
>80% and ≤90%
>90% and ≤100%
>100% and ≤110%
>110% and ≤130%
>130% and ≤150%
>150%
Total with LTVs
Mortgages
Not within
ECL provisions
ECL provisions coverage (2)
Total
£m
Stage 3 IFRS 9 ECL
£m
4,655
—
4,391
—
1,995
—
1,515
—
985
—
484
—
265
—
47
—
—
24
— 14,361
£m
463
459
241
272
261
207
179
37
13
2,132
Stage 1 Stage 2 Stage 3
£m
40
47
52
82
99
85
84
20
7
516
£m
1
2
1
2
2
2
—
—
—
10
£m
5
10
11
15
17
10
6
1
1
76
Total
£m
46
59
64
99
118
97
90
21
8
602
Stage 1
%
—
—
0.1
0.2
0.4
0.9
0.8
0.3
2.1
0.1
Stage 2
%
1.4
2.7
5.5
8.3
11.1
12.8
16.6
19.1
27.2
5.4
Stage 3
%
8.6
10.3
21.5
30.2
37.7
41.1
47.0
54.7
58.9
24.2
Total
%
1.0
1.3
3.2
6.5
11.9
20.1
34.0
45.2
33.5
4.2
Performing
£m
3,743
3,600
1,858
1,420
1,070
814
378
20
23
12,926
Non-performing
£m
Total
£m
333 4,076
382 3,982
233 2,091
273 1,693
309 1,379
317 1,131
792
414
146
126
62
39
2,426 15,352
Notes:
(1) Excludes a non-material amount of provisions held on relatively small legacy portfolios.
(2) ECL provisions coverage is ECL provisions divided by drawn exposure.
Key point
ECL coverage rates increase through the LTV bands with both UK PBB and Ulster Bank RoI having only limited exposures in the highest
LTV bands. The relatively high coverage level in the lowest LTV band for UK PBB included the effect of time-discounting on expected
recoveries. Additionally, this also reflected the modelling approach that recognised an element of expected loss on mortgages that are not
subject to formal repossession activity.
134
Capital and risk management
Credit risk – Banking activities continued
Personal portfolio (audited)
UK PBB Mortgage LTV distribution by region
2018
South East
Greater London
Scotland
North West
South West
West Midlands
Rest of the UK
Total
2017
South East
Greater London
Scotland
North West
South West
West Midlands
Rest of the UK
Total
≤50%
£m
14,699
12,928
3,205
4,163
4,231
3,036
8,942
50%
≤80%
£m
17,147
9,614
5,612
7,756
6,843
5,642
17,548
80%
≤100%
£m
2,843
1,298
1,844
1,970
1,292
1,192
6,056
51,204
70,162
16,495
14,606
13,592
2,850
4,125
4,181
2,578
9,175
16,908
9,900
5,341
7,510
6,572
5,264
17,037
2,729
1,322
2,423
2,131
1,055
1,503
4,929
51,107
68,532
16,092
100%
≤150%
£m
8
3
11
6
8
4
217
257
10
3
45
11
9
6
247
331
>150%
£m
—
—
—
—
—
—
16
Weighted
Total average LTV
%
53
48
60
59
57
58
62
£m
34,697
23,843
10,672
13,895
12,374
9,874
32,779
16 138,134
—
—
—
—
—
—
33
34,253
24,817
10,659
13,777
11,817
9,351
31,421
33 136,095
56
53
48
63
59
56
61
60
56
Other
£m
27
19
8
12
9
7
34
Total
£m
34,724
23,862
10,680
13,907
12,383
9,881
32,813
Total
%
25
17
8
10
9
7
24
116 138,250
100
96
112
34
63
40
42
143
34,349
24,929
10,693
13,840
11,857
9,393
31,564
25
18
8
10
9
7
23
530 136,625
100
Commercial real estate (CRE)
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. All disclosures in the CRE section
are based on current exposure (gross of provisions and risk transfer). Current exposure is defined as: loans; the amount drawn under a credit
facility plus accrued interest; contingent obligations; the issued amount of the guarantee or letter of credit; derivatives - the mark to market
value, netted where netting agreements exist and net of legally enforceable collateral.
Total
£m
UK
£m
2017
RoI
£m
By geography and sub sector (1)
Investment
Residential (2)
Office (3)
Retail (4)
Industrial (5)
Mixed/other (6)
Development
Residential (2)
Office (3)
Retail (4)
Industrial (5)
Mixed/other (6)
Total
UK
£m
4,426
2,889
5,168
2,270
3,221
17,974
2,715
192
94
119
32
3,152
21,126
2018
RoI
£m
363
164
40
51
180
798
122
—
7
2
2
133
931
Other
£m
54
651
92
176
123
1,096
124
—
1
12
—
137
4,843
3,704
5,300
2,497
3,524
19,868
2,961
192
102
133
34
3,422
4,319
3,055
5,401
2,438
4,609
19,822
3,107
169
187
49
59
3,571
1,233
23,290
23,393
Other
£m
39
600
132
14
228
1,013
154
—
2
—
—
156
Total
£m
4,585
3,890
5,575
2,488
5,040
21,578
3,406
169
194
49
62
3,880
1,169
25,458
227
235
42
36
203
743
145
—
5
—
3
153
896
Notes:
(1) Geographical splits are based on country of collateral risk.
(2) Residential properties including houses, flats and student accommodation.
(3) Office properties including offices in central business districts, regional headquarters and business parks.
(4) Retail properties including high street retail, shopping centres, restaurants, bars and gyms.
(5)
Industrial properties including distribution centres, manufacturing and warehouses.
(6) Mixed usage or other properties that do not fall within the other categories above. Mixed generally relates to a mixture of retail/office with residential.
135
Capital and risk management
Credit risk – Banking activities continued
Commercial real estate (CRE)
CRE LTV distribution by stage (audited)
The table below summarises CRE current exposure and related ECL by LTV band.
Current exposure (gross of provisions) (1,2)
ECL provisions
ECL provisions coverage (4)
2018
2017
£m
Stage 1 Stage 2 Stage 3
£m
£m
52
8,229 245
78
4,769 297
33
43
24
11
20
7
4
15
3 111
10
42
13,589 626 385
394
55
31
53
22
6
30
10
6
Not within
IFRS 9
scope (3)
£m
795 9,321
703 5,847
476
%
£m
£m
£m
4
7
6
6
1
1
92 — —
59 — —
72 — —
140 — —
1
1
Total Stage 1 Stage 2 Stage 3
£m
£m
25
14
26
14
10
8
5
5
7
7
5
5
22
22
5
4
30
29
13 108 135
Total Stage 1 Stage 2 Stage 3
%
%
0.3
1.7 26.4
0.5
2.0 17.8
2.1
2.6 23.4
3.4 20.9
6.1
5.1 34.9 12.9
4.2 34.6
7.6
5.4 19.4 16.0
6.3 40.6 18.1
9.8 69.6 38.1
2.1 27.9
%
0.1
0.1
0.3
0.3
0.6
0.3
0.4
0.9
0.5
0.1
26 —
78 —
14
Non-
Total Performing performing
Total
£m
£m
66 9,688
119 6,740
457
200
120
55
481
73
221
853 18,035
£m
9,622
6,621
405
158
89
34
60
44
149
0.9 17,182
52
42
31
21
421
29
72
6
2
1
—
4
—
—
1,511 16,111
45
56 114
2,655 133 784
2,865 205 178
19,109 964 1,347
48
47
185 3,757
174 3,422
1,870 23,290
n/a
4
11
29
n/a
5
3
n/a
n/a
59
50
94
80
21 238 288
n/a
0.2
0.4
0.2
n/a
n/a
4.0
6.3
1.6 44.8
2.3 17.6
48
n/a
3,112
1.7
2.9
3,634
1.3 23,928
119
51
431 3,543
246 3,880
1,530 25,458
≤50%
>50% and ≤70%
>70% and ≤80%
>80% and ≤90%
>90% and ≤100%
>100% and ≤110%
>110% and ≤130%
>130% and ≤150%
>150%
Total with LTVs
Total portfolio
average LTV%
Other (5)
Development (6)
Total
Notes:
(1) CRE current exposure comprises gross lending, interest rate hedging derivatives and other assets carried at fair value that are managed as part of the
overall CRE portfolio.
Includes exposures relating to non-modelled portfolios and other exposures carried at fair value, including derivatives.
(2) The exposure in Stage 3 mainly related to legacy assets.
(3)
(4) ECL provisions coverage is ECL provisions divided by current exposure.
(5) Relates mainly to business banking, rate risk management products and unsecured corporate lending. The low Stage 3 ECL provisions coverage was driven
by a single large exposure, which has been written down to the expected recoverable amount.
(6) Relates to the development of commercial and residential properties. LTV is not a meaningful measure for this type of lending activity.
Key points (audited)
Overall – The majority of the CRE portfolio was managed in the UK
within Commercial Banking, Private Banking and UK PBB. The
remainder was managed in Ulster Bank RoI and NatWest Markets.
Business appetite and strategy remain aligned across the
segments.
2018 trends – Growth in the commercial property market slowed
during 2018.
Performance varied widely by sub-sector with strong growth from
industrials contrasting with material decline in parts of the retail
sector.
Credit quality – The CRE retail portfolio had a low default rate, with
a limited number of new defaults. The sub-sector was monitored on
a regular basis and credit quality was in line with the wider CRE
portfolio.
Economics – Fundamentals such as rental incomes, property
values and investor/occupier demand for other commercial sub-
sectors appeared more robust, however, all are exposed to some
degree to the risk of a disorderly exit from the EU. Conditions for the
mainstream residential sector remained resilient, supported by
mortgage availability and high levels of employment. However, the
higher value end of the market was characterised by low transaction
volumes.
Risk appetite – Lending criteria for commercial real estate were at
conservative levels, contributing to materially reduced leverage for
new origination in London offices and parts of the retail sector.
136
Capital and risk management
Credit risk – Banking activities continued
Flow statements (audited)
The ECL flow statements analyse the key elements that drive the
movement of ECL and related income statement over the reporting
period. The key themes are:
The flow statements capture the changes in ECL as well as the
changes in related financial assets used in determining ECL.
Exposures in this section may therefore differ from those reported in
other tables in the credit risk section, principally in relation to
exposures in Stage 1 and Stage 2. These differences do not have a
material ECL impact.
Financial assets presented in the flow statements include treasury
liquidity portfolios, comprising balances at central banks and debt
securities, as well as loans. Both modelled and non-modelled
portfolios are included.
Inter-Group transfers were a feature of the ECL flows during 2018
as a result of ring-fencing related changes. These transfers had no
impact at a RBS Group-wide level.
Stage transfers (for example, exposures moving from Stage 1 to
Stage 2) – these transfers are a key feature of the ECL movements,
with the net re-measurement cost of transitioning to a worse stage
being a primary driver of income statement charges for the period
(likewise there is an ECL benefit for accounts improving stage).
Changes in risk parameters – captures the reassessment of the
ECL within a given stage, including any ECL overlays and residual
income statement gains or losses at the point of write-off or
accounting write-down.
Other (P&L only items) – includes any subsequent changes in the
value of written-down assets (for example, fortuitous recoveries)
along with other direct write-off items such as direct recovery costs.
Note: other (P&L only items) only affects the income statement and
does not impact the balance sheet ECL movements.
Amounts written-off – represent the gross asset written-down
against accounts with ECL, including the net asset write-down for
debt sale activity.
There were small amounts of ECL flows from Stage 3 to Stage 1
during the year. This does not however indicate that accounts can
return from Stage 3 to Stage 1 directly. On a similar basis, flows
from Stage 1 to Stage 3 were observed, however this also included
legitimate transfers due to unexpected default events. The small
number of write-offs in Stage 1 and 2 reflect the effect of portfolio
debt sales and also staging at the start of the analysis period.
The impact of model changes during 2018 were not material at a
RBS Group-wide level or on the portfolios disclosed below.
Stage 1
Stage 2
Stage 3
Total
Group total
At 1 January 2018
Currency translation and other adjustments
Transfers from Stage 1 to Stage 2
Transfers from Stage 2 to Stage 1
Transfers to Stage 3
Transfers from Stage 3
Net re-measurement of ECL on stage transfer
Changes in risk parameters (model inputs)
Other changes in net exposure
Other (P&L only items - primarily fortuitous recoveries)
Income statement (releases)/charges
Amounts written-off
Other movements
At 31 December 2018
Net carrying amount
Financial
assets
£m
419,038
1,820
(18,416)
13,723
(1,205)
1,272
6,312
(3)
422,541
422,244
ECL
£m
262
(6)
(52)
228
(3)
16
(207)
34
29
1
(143)
(3)
(1)
297
Financial
assets
£m
29,637
88
18,416
(13,723)
(1,837)
1,523
(6,716)
(28)
27,360
26,588
ECL
£m
621
17
52
(228)
(108)
163
247
74
(32)
3
292
(28)
(6)
772
Financial
assets
£m
10,595
50
—
—
3,042
(2,795)
(1,633)
(1,463)
ECL
£m
Financial
assets
£m
3,565 459,270
1,958
—
—
—
—
(11)
—
—
111
(179)
447
36
(85)
(149)
249
(1,463)
(94)
(2,037)
(1,494)
7,796
5,469
2,327 457,697
454,301
The following flow statements provide insight into the material portfolios underpinning the Group flow statements.
Personal
The following flow statements are at a portfolio level.
UK PBB - mortgages
At 1 January 2018
Transfers from Stage 1 to Stage 2
Transfers from Stage 2 to Stage 1
Transfers to Stage 3
Transfers from Stage 3
Net re-measurement of ECL on stage transfer
Changes in risk parameters (model inputs)
Other changes in net exposure
Other (P&L only items)
Income statement (releases)/charges
Amounts written-off
Other movements
At 31 December 2018
Net carrying amount
124,180
(4,928)
4,245
(61)
7
4,228
—
127,671
127,661
11
(1)
15
—
—
(15)
—
—
1
(14)
—
—
10
10,621
4,928
(4,245)
(327)
235
(970)
(1)
10,241
10,167
64
1
(15)
(5)
23
11
4
(6)
—
9
(1)
(2)
74
1,353
—
—
388
(242)
(257)
(26)
1,216
1,084
157 136,154
—
—
—
—
—
—
5
(23)
17
51
(14)
(6)
48
(26)
(35)
132 139,128
3,001
(27)
138,912
ECL
£m
4,448
—
—
—
—
—
487
144
(88)
(145)
398
(1,494)
(101)
3,396
232
—
—
—
—
13
55
(20)
(5)
43
(27)
(37)
216
Key points
Overall ECL reduction was primarily driven by business-as-usual
write-offs in Stage 3.
Stage 1 ECL levels remained steady despite portfolio growth during
2018 as a result of modest PD reduction, with Stage 2 ECL showing
an increase as a result of some additional forward-looking
provisions being taken during the year.
Transfers from Stage 3 back to the performing book were higher
than those in Personal unsecured lending, due to the higher cure
activity typically seen in mortgages.
The increase in Stage 3 ECL changes in risk parameters reflected
the monthly assessment of the loss requirement, capturing
underlying changes in risk and forward-looking assessments.
Write-off of any residual shortfall following the sale of a repossessed
property typically occurs within five years, although this period can
be longer, reflecting the ongoing support for customers who engage
constructively with RBS.
137
Capital and risk management
Credit risk – Banking activities continued
Flow statements (audited)
UK PBB - credit cards
At 1 January 2018
Transfers from Stage 1 to Stage 2
Transfers from Stage 2 to Stage 1
Transfers to Stage 3
Transfers from Stage 3
Net re-measurement of ECL on stage transfer
Changes in risk parameters (model inputs)
Other changes in net exposure
Other (P&L only items)
Income statement (releases)/charges
Amounts written-off
Other movements
At 31 December 2018
Net carrying amount
Stage 1
Stage 2
Stage 3
Total
Financial
assets
£m
2,841
(739)
763
(42)
1
(192)
—
2,632
2,596
ECL
£m
52
(15)
50
(1)
1
(38)
(15)
2
3
(48)
—
—
36
Financial
assets
£m
997
739
(763)
(88)
2
343
(4)
1,226
1,108
ECL
£m
94
15
(50)
(20)
1
66
—
17
(1)
82
(4)
(1)
118
Financial
assets
£m
105
—
—
130
(3)
(45)
(81)
106
35
ECL
£m
75
—
—
21
(2)
68
(4)
—
(11)
53
(81)
(6)
71
Financial
assets
£m
3,943
—
—
—
—
106
(85)
3,964
3,739
ECL
£m
221
—
—
—
—
96
(19)
19
(9)
87
(85)
(7)
225
Key points
Overall ECL increased primarily due to increased levels of Stage 2
inflows in the first half of the year. This was the result of activity to
calibrate and refine the criteria used to identify significant increase
in credit risk, with underlying performance stable.
Transfers from Stage 2 to Stage 1 were higher than in other
personal portfolios, primarily due to the ECL assessment period
being reset when cards are re-issued.
ECL transfers from Stage 3 back to the performing book were
relatively small as expected.
The amounts in other (P&L only items) mainly reflected cash
recoveries after write-off. These benefited the income statement
without affecting ECL.
Amounts written-off primarily represented charge-offs (analogous
to write-off) which typically occurs after 12 missed payments, and
also 2018 debt sale activity.
UK PBB - other personal unsecured
At 1 January 2018
Transfers from Stage 1 to Stage 2
Transfers from Stage 2 to Stage 1
Transfers to Stage 3
Transfers from Stage 3
Net re-measurement of ECL on stage transfer
Changes in risk parameters (model inputs)
Other changes in net exposure
Other (P&L only items - primarily fortuitous recoveries)
Income statement (releases)/charges
Amounts written-off
Other movements
At 31 December 2018
Net carrying amount
4,518
(1,452)
733
(51)
2
1,325
(2)
5,073
5,019
46
(18)
42
(1)
—
(34)
2
19
—
(13)
(2)
—
54
1,790
1,452
(733)
(182)
15
(363)
(9)
1,970
1,731
164
18
(42)
(50)
4
110
58
(11)
—
157
(9)
(3)
239
705
—
—
233
(17)
(104)
(322)
495
101
582
—
—
51
(4)
114
(1)
(7)
(42)
64
(322)
(19)
394
7,013
—
—
—
—
858
(333)
7,538
6,851
792
—
—
—
—
190
59
1
(42)
208
(333)
(22)
687
Key points
Overall ECL reduction was mainly driven by debt sale activity and
business-as-usual write-offs in Stage 3, both reflected in amounts
written-off.
Increases in Stage 2 reflected the underlying performance of recent
new business growth maturing. Additionally, the ECL overlay for
economic uncertainty contributed to the uplift captured in changes
in risk parameters.
The portfolio continued to experience cash recoveries after write-
off, reported in other (P&L only items – primarily fortuitous
recoveries). This benefited the income statement without affecting
ECL.
Write-off occurs once recovery activity with the customer has been
concluded and there are no further recoveries expected, but no
later than six years after default.
138
Capital and risk management
Credit risk – Banking activities continued
Flow statements (audited)
UK PBB - business banking
At 1 January 2018
Transfers from Stage 1 to Stage 2
Transfers from Stage 2 to Stage 1
Transfers to Stage 3
Transfers from Stage 3
Net re-measurement of ECL on stage transfer
Changes in risk parameters (model inputs)
Other changes in net exposure
Other (P&L only items)
Income statement (releases)/charges
Amounts written-off
Other movements
At 31 December 2018
Net carrying amount
Stage 1
Financial
assets
£m
6,505
(691)
366
(35)
2
156
—
6,303
6,281
ECL
£m
29
(4)
12
(1)
2
(12)
(6)
3
—
(15)
—
(1)
22
Stage 2
Financial
assets
£m
684
691
(366)
(63)
9
(57)
(1)
897
854
ECL
£m
29
4
(12)
(8)
2
24
2
3
—
29
(1)
—
43
Stage 3
Financial
assets
£m
268
—
—
98
(11)
(36)
(84)
235
82
ECL
£m
224
—
—
9
(4)
43
(11)
(23)
(31)
(22)
(84)
(1)
153
Total
Financial
assets
£m
7,457
—
—
—
—
63
(85)
7,435
7,217
ECL
£m
282
—
—
—
—
55
(15)
(17)
(31)
(8)
(85)
(2)
218
Key points
Overall ECL reduction was mainly driven by business-as-usual
write-offs in Stage 3.
Stage 2 ECL did increase during the year as a result of net Stage 2
inflows from Stage 1, partly driven by PD model refinements
throughout the year.
The portfolio continued to experience cash recoveries after write-
off, reported in other (P&L only items). This benefited the income
statement without affecting ECL.
Write-off occurs once recovery activity with the customer has been
concluded and there are no further recoveries expected, but no
later than five years after default.
UK PBB - commercial
At 1 January 2018
Currency translation and other adjustments
Inter-Group transfers
Transfers from Stage 1 to Stage 2
Transfers from Stage 2 to Stage 1
Transfers to Stage 3
Transfers from Stage 3
Net re-measurement of ECL on stage transfer
Changes in risk parameters (model inputs)
Other changes in net exposure
Other (P&L only items)
Income statement (releases)/charges
Amounts written-off
Other movements
At 31 December 2018
Net carrying amount
6,771
1
(71)
(781)
389
(16)
1
(886)
—
5,408
5,399
6
—
—
(2)
6
—
—
(4)
4
(1)
(2)
(3)
—
—
9
595
—
(1)
781
(389)
(70)
25
(123)
—
818
803
11
—
—
2
(6)
(1)
—
10
—
(1)
1
10
—
—
15
126
—
(5)
—
—
86
(26)
(62)
(27)
92
49
57
—
—
—
—
1
—
19
—
(6)
1
14
(27)
(1)
43
7,492
1
(77)
—
—
—
—
(1,071)
(27)
6,318
6,251
74
—
—
—
—
—
—
25
4
(8)
—
21
(27)
(1)
67
Key point
Overall ECL reduced slightly during the year, with some modest Stage 1 and Stage 2 ECL increases being more than offset by Stage 3
write-offs, which was the key driver of the overall income statement charge for 2018.
139
Capital and risk management
Credit risk – Banking activities continued
Flow statements (audited)
Ulster Bank RoI - mortgages
At 1 January 2018
Currency translation and other adjustments
Transfers from Stage 1 to Stage 2
Transfers from Stage 2 to Stage 1
Transfers to Stage 3
Transfers from Stage 3
Net re-measurement of ECL on stage transfer
Changes in risk parameters (model inputs)
Other changes in net exposure
Other (P&L only items)
Income statement (releases)/charges
Amounts written-off
Other movements
At 31 December 2018
Net carrying amount
Stage 1
Stage 2
Stage 3
Total
Financial
assets
£m
10,650
94
(344)
414
(32)
4
(4)
—
10,782
10,771
ECL
£m
8
—
(1)
7
—
—
(6)
3
—
(2)
(5)
—
—
11
Financial
assets
£m
1,532
12
344
(414)
(124)
245
(188)
(13)
1,394
1,319
ECL
£m
72
1
1
(7)
(8)
36
(4)
(1)
(2)
2
(5)
(13)
—
75
Financial
assets
£m
3,167
15
—
—
156
(249)
(630)
(322)
2,137
1,621
ECL
£m
881
3
—
—
8
(36)
11
(23)
14
28
30
(322)
(20)
516
Financial
assets
£m
15,349
121
—
—
—
—
(822)
(335)
14,313
13,711
ECL
£m
961
4
—
—
—
—
1
(21)
12
28
20
(335)
(20)
602
Key points
The overall ECL reduction was driven by reduced ECL in Stage
3, which was subject to significant debt sale activity in 2018
(approximately £0.9 billion of gross exposures were sold during
the year).
In addition to the debt sale activity, the reduction in ECL in Stage
3 reflected ongoing improvements in underlying portfolio
performance.
The reduction in Stage 2 exposures resulted from the portfolio
debt sale and decreasing stock of exposures meeting the high-
risk backstop criteria. This reflected ongoing improvements in the
underlying portfolio performance.
Write-off generally occurs once the repossessed property has
been sold and there is a residual shortfall balance remaining
outstanding which has been deemed irrecoverable.
Wholesale
Commercial Banking
At 1 January 2018
Currency translation and other adjustments
Inter-Group transfers
Transfers from Stage 1 to Stage 2
Transfers from Stage 2 to Stage 1
Transfers to Stage 3
Transfers from Stage 3
Net re-measurement of ECL on stage transfer
Changes in risk parameters (model inputs)
Other changes in net exposure
Other (P&L only items)
Income statement (releases)/charges
Amounts written-off
Other movements
At 31 December 2018
Net carrying amount
84,228
367
(2,106)
(8,224)
5,911
(881)
1,056
(4,274)
—
76,077
75,978
58
—
(1)
(9)
52
—
11
(57)
46
(1)
—
(12)
—
—
99
9,056
47
(92)
8,224
(5,911)
(938)
937
(2,748)
—
8,575
8,435
106
(1)
—
9
(52)
(13)
89
13
8
(19)
1
3
—
—
140
3,735
29
(375)
—
—
1,819
(1,993)
(489)
(460)
2,266
1,524
1,156
(4)
(14)
—
—
13
(100)
97,019
443
(2,573)
—
—
—
—
160
41
(40)
(8)
153
(460)
(10)
742
(7,511)
(460)
86,918
85,937
1,320
(5)
(15)
—
—
—
—
116
95
(60)
(7)
144
(460)
(10)
981
Key points
ECL reduced over the course of 2018 as write-offs outweighed
ECL charges.
Stage 3 charges were mainly driven by a charge on new to
default exposures where the ECL can increase significantly
following an individual assessment.
Stage 1 and Stage 2 changes to risk parameters largely reflected
the increase in ECL for economic uncertainty and a change to the
forward-looking modelling approach for point-in-time PDs, where
PDs now revert to long-run average after one year rather than
five years.
Inter-Group transfers reflected the impact of transfers completed
in preparation of ring-fencing. The reductions in net exposure
were also related to ring-fencing changes, where short-term
borrowing was renewed in other franchises.
Release in Stage 1 was driven by a reduction in ECL for
exposures transferring from Stage 2 and Stage 3, which
previously had a lifetime ECL but are now assessed for 12 month
ECL.
140
Capital and risk management
Credit risk – Banking activities continued
Flow statements (audited)
NatWest Markets (1)
At 1 January 2018
Currency translation and other adjustments
Inter-Group transfers
Transfers from Stage 1 to Stage 2
Transfers from Stage 2 to Stage 1
Transfers to Stage 3
Transfers from Stage 3
Net re-measurement of ECL on stage transfer
Changes in risk parameters (model inputs)
Other changes in net exposure
Other (P&L only items - primarily fortuitous recoveries)
Income statement (releases)/charges
Amounts written-off
Other movements
At 31 December 2018
Net carrying amount
Note:
(1) Reflects NatWest Markets segments and include NWM N.V..
Stage 1
Stage 2
Stage 3
Total
Financial
assets
£m
9,089
252
3,590
(393)
318
—
—
19,902
—
32,758
32,751
ECL
£m
2
—
—
—
28
—
—
(26)
(5)
8
—
(23)
—
—
7
Financial
assets
£m
1,276
22
(4)
393
(318)
(3)
35
(669)
—
732
718
ECL
£m
42
(2)
1
—
(28)
—
—
5
4
(8)
—
1
—
—
14
Financial
assets
£m
456
3
374
—
—
3
(35)
(4)
(89)
708
596
ECL
£m
190
3
14
—
—
—
—
—
—
(6)
(64)
(70)
(89)
—
112
Financial
assets
£m
10,821
277
3,960
—
—
—
—
19,229
(89)
34,198
34,065
ECL
£m
234
1
15
—
—
—
—
(21)
(1)
(6)
(64)
(92)
(89)
—
133
Key points
Stage 3 financial assets include £166 million (1 January 2018 –
£105 million) purchased or originated credit impaired (POCI)
assets. No ECL impairment was held on these positions and a
£61 million impairment recovery was recognised on these POCI
assets during 2018 (included in other (P&L only items – primarily
fortuitous recoveries)).
Stage 1 and Stage 2 changes to risk parameters largely reflected
the increase in ECL for economic uncertainty, and a change to
the forward-looking modelling approach for point-in-time PDs,
where PDs now revert to long run average after one year rather
than five years.
The release in Stage 1 was driven by a reduction in ECL on
exposures transferring from Stage 2, which previously had a
lifetime ECL but are now assessed for 12 month ECL.
The increase in Stage 1 exposure was due to a combination of
transfers and short-term borrowing to governments and central
banks which are now in NatWest Markets following changes in
preparation for ring-fencing.
The portfolio experienced fortuitous recoveries, reported in other
(P&L only items – primarily fortuitous recoveries). This benefited
the income statement without affecting ECL.
Private Banking
At 1 January 2018
Currency translation and other adjustments
Inter-Group transfers
Transfers from Stage 1 to Stage 2
Transfers from Stage 2 to Stage 1
Transfers to Stage 3
Transfers from Stage 3
Net re-measurement of ECL on stage transfer
Changes in risk parameters (model inputs)
Other changes in net exposure
Other (P&L only items)
Income statement releases
Amounts written-off
Other movements
At 31 December 2018
Net carrying amount
13,046
12
23
(270)
92
(60)
7
1,100
—
13,950
13,936
18
—
—
(1)
2
—
—
(2)
(3)
—
—
(5)
—
—
14
412
1
—
270
(92)
(8)
1
(65)
—
519
509
9
2
—
1
(2)
—
—
3
(2)
(1)
—
—
—
—
10
300
—
—
—
—
68
(8)
(121)
(7)
232
213
27
—
—
—
—
—
—
1
1
(2)
(1)
(1)
(7)
(1)
19
13,758
13
23
—
—
—
—
914
(7)
14,701
14,658
54
2
—
—
—
—
—
2
(4)
(3)
(1)
(6)
(7)
(1)
43
Key points
ECL reduced due to a combination of write-offs and impairment
releases.
The majority of the release was in Stage 1, due to a reduction in
loss rates for Retail exposures.
Exposure increased in Stage 1 reflecting growth in the portfolio
(primarily mortgages driven) with minimal ECL impact due to high
credit quality.
141
Capital and risk management
Credit risk – Banking activities continued
Flow statements (audited)
RBS International
At 1 January 2018
Currency translation and other adjustments
Inter-Group transfers
Transfers from Stage 1 to Stage 2
Transfers from Stage 2 to Stage 1
Transfers to Stage 3
Transfers from Stage 3
Net re-measurement of ECL on stage transfer
Changes in risk parameters (model inputs)
Other changes in net exposure
Other (P&L only items)
Income statement (releases)/charges
Amounts written-off
Other movements
At 31 December 2018
Net carrying amount
Stage 1
Stage 2
Stage 3
Total
Financial
assets
£m
8,652
98
1,834
(299)
340
(14)
190
15,948
—
26,749
26,743
ECL
£m
5
(2)
—
—
5
—
—
(4)
2
—
(1)
(3)
—
—
6
Financial
assets
£m
385
—
95
299
(340)
(11)
4
(156)
—
276
272
ECL
£m
5
2
—
—
(5)
—
—
2
—
—
1
3
—
—
4
Financial
assets
£m
118
—
—
—
—
25
(194)
155
(9)
95
78
ECL
£m
28
(1)
—
—
—
—
—
—
—
(1)
(1)
(2)
(9)
—
17
Financial
assets
£m
9,155
98
1,929
—
—
—
—
15,947
(9)
27,120
27,093
ECL
£m
38
(1)
—
—
—
—
—
(2)
2
(1)
(1)
(2)
(9)
—
27
Key points
The reduction in ECL was driven by write-offs and Stage 3
impairment releases, both of which are primarily in the Spanish
mortgage portfolio.
The increases in exposure were partly due to new lending, but
mainly due to the establishment of a liquidity portfolio across
central and correspondent banks and sovereign bond holdings.
These exposures were in Stage 1 with very low credit risk and
contribute minimal ECL.
142
Capital and risk management
Credit risk – Banking activities continued
Stage 2 decomposition – arrears status and contributing factors
The tables below summarise Stage 2 decomposition for the Personal and Wholesale portfolios.
31 December 2018
Personal
Currently in arrears (>30 DPD)
Currently up-to-date
- PD deterioration
- Up-to-date, PD persistence
- Other driver (adverse credit, forbearance etc)
Total Stage 2
UK mortgages
Loans
£m
ECL
£m
RoI mortgages
Loans
£m
ECL
£m
Other mortgages
Loans
£m
ECL
£m
Credit cards
Loans
£m
ECL
£m
Other
Total
Loans
£m
ECL
£m
Loans
£m
ECL
£m
658
9,612
3,855
1,448
4,309
10,270
10
64
54
5
5
74
90
1,292
680
54
558
1,382
10
66
44
1
21
76
17
3 —
6
— — 1,226 114
85
— —
17
— —
12
— —
3 — 1,243 120
778
337
111
88
22
856
48
1,985 225 14,115 469
6,568 359
1,255 176
49
2,279
26
61
5,268
23
2,073 247 14,971 517
440
290
Key point
In Personal exposures, as expected, ECL coverage was higher on accounts that are more than 30 days past due. Also in line with
expectations, accounts exhibiting PD deterioration have a higher ECL coverage than accounts in Stage 2 for other reasons.
31 December 2018
Wholesale
Currently in arrears (>30 DPD)
Currently up-to-date
- PD deterioration
- Up-to-date, PD persistence
- Other driver (forbearance, RoCL etc.)
Total Stage 2
Property
Loans
£m
255
1,622
924
57
641
1,877
ECL
£m
7
32
23
1
8
39
Corporate
Loans
£m
ECL
£m
FI
Loans
£m
315
8,438
5,564
170
2,704
8,753
5
195
138
5
52
200
1
473
281
4
188
474
ECL
£m
—
7
6
—
1
7
Other
Loans
£m
—
22
8
—
14
22
Total
Loans
£m
571
10,555
6,777
231
3,547
11,126
ECL
£m
12
234
167
6
61
246
ECL
£m
—
—
—
—
—
—
Key point
In Wholesale exposures, the ECL coverage was broadly consistent in total. Coverage can vary across categories or sectors reflecting the
individual characteristics of the customer and exposure type.
Stage 2 decomposition by SICR trigger
31 December 2018
Personal trigger (1)
PD movement
PD persistence
Adverse credit bureau recorded with credit
reference agency
Forbearance support provided
Customers in collections
Other reasons (2)
Days past due >30
UK mortgages
£m
%
RoI mortgages
£m
%
Other mortgages Credit cards
%
£m
£m
%
Other
£m
%
Total
£m
%
4,273 41.6
1,450 14.1
767 55.6
3.9
54
— —
— —
793 63.8
338 27.2
1,307 63.0
440 21.2
7,140 47.7
2,282 15.2
2,996 29.2
2.0
1.4
9.6
2.1
— —
0.1
2
4.1
57
502 36.3
— —
10,270 100 1,382 100
206
144
982
219
61
4.9
— —
— —
— —
0.4
5
— —
46
3.7
— —
3 100.0
— —
3 100 1,243 100
221
242
4.9
0.6
1.7
7.3
1.2
101
13
36
151
25
3,158 21.1
1.5
1.6
1,681 11.2
1.6
2,073 100 14,971 100
247
Key point
The primary driver of credit deterioration was PD, which including persistence, accounted for the majority of movements to Stage 2. High risk
back-stops, for example, forbearance, adverse credit bureau, provide additional valuable discrimination particularly on mortgages.
31 December 2018
Wholesale trigger (1)
PD movement
PD persistence
Risk of Credit Loss
Forbearance support provided
Customers in collections
Other reasons (3)
Days past due >30
Property
£m
Corporate
%
£m
%
FI
£m
940
57
321
65
9
251
234
1,877
50.1
3.0
17.1
3.5
0.5
13.4
12.5
100
5,617
171
1,964
209
43
525
224
8,753
64.2
2.0
22.4
2.4
0.5
6.0
2.6
100
281
4
103
—
—
85
1
474
%
59.3
0.8
21.7
—
—
17.9
0.2
100
Other
£m
%
Total
£m
8
—
—
—
—
14
—
22
36.4
—
—
—
—
63.6
—
6,845
232
2,388
274
52
875
460
100 11,126
%
61.5
2.1
21.5
2.5
0.5
7.9
4.1
100
Notes:
(1)
(2)
(3)
The data table is built on a hierarchical basis from top to bottom, for example, accounts with PD deterioration may also trigger backstop(s) but are only
reported under PD deterioration.
Includes customers who have accessed payday lending, interest only mortgages past end of term, a small number of mortgage customers on a highly
flexible mortgage significantly behind their outline repayment plan and customers breaching risk appetite thresholds for new business acquisition. On the
RoI mortgage portfolio, this reflected customers who remained in probation following the conclusion of forbearance support, exposures breaching risk
appetite thresholds for new business acquisition and exposures classified as non-performing exposures under EBA requirements.
Includes customers where a PD assessment cannot be undertaken due to missing PDs.
Key point
The primary driver of credit deterioration was PD, which including persistence, accounted for 62% of Stage 2. The Risk of Credit Loss
framework accounted for a further 21% highlighting the importance of expert judgement being used to identify deterioration.
143
Capital and risk management
Credit risk – Banking activities continued
Stage 3 vintage analysis
The table below provides estimated vintage analysis of the material Stage 3 portfolios totalling 87% of the Stage 3 loans of £7.7 billion.
2018
Stage 3 loans (£bn)
Vintage (time in default):
<1 year
1-3 years
3-5 years
5-10 years
>10 years
UK PBB
mortgages
1.2
Ulster RoI
mortgages
2.1
26%
21%
14%
35%
4%
100%
7%
12%
14%
63%
4%
100%
Wholesale
3.4
22%
19%
9%
50%
—
100%
Key points
Mortgages – The proportion of the Stage 3 defaulted population
who have been in default for over five years reflected RBS’s
support for customers in financial difficulty. When customers
continue to engage constructively with RBS making regular
payments, RBS continues to support them. RBS’s provisioning
approach retains customers in Stage 3 for a life-time loss
provisioning calculation even when their arrears status reverts to
below 90 days past due.
Wholesale – The value of Stage 3 loans that have been impaired
for 5-10 years was mainly due to customers being in a protracted
formal insolvency process or subject to litigation or a complaints
process.
Asset quality (audited)
Asset quality analysis 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. 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
Probability of default range Indicative S&P rating
AQ1
AQ2
AQ3
AQ4
AQ5
AQ6
AQ7
AQ8
AQ9
0% - 0.034%
AAA to AA
0.034% - 0.048%
AA to AA-
0.048% - 0.095%
A+ to A
0.095% - 0.381%
BBB+ to BBB-
0.381% - 1.076%
BB+ to BB
1.076% - 2.153%
BB- to B+
2.153% - 6.089%
B+ to B
6.089% - 17.222%
B- to CCC+
17.222% - 100%
CCC to C
AQ10
100%
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.
144
Capital and risk management
Credit risk – Banking activities continued
Asset quality (audited)
The table below summarises asset quality bands of gross loans and ECL by stage for the Personal portfolio.
2018
UK mortgages
AQ1-AQ4
AQ5-AQ8
AQ9
AQ10
RoI mortgages
AQ1-AQ4
AQ5-AQ8
AQ9
AQ10 (1)
Other mortgages
AQ1-AQ4
AQ5-AQ8
AQ10
Credit cards
AQ1-AQ4
AQ5-AQ8
AQ9
AQ10
Other
AQ1-AQ4
AQ5-AQ8
AQ9
AQ10
Total
AQ1-AQ4
AQ5-AQ8
AQ9
AQ10
Gross loans
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
Stage 1
£m
ECL provisions
Stage 2
£m
Stage 3
£m
ECL provisions coverage
Total
£m
Stage 1
%
Stage 2
%
Stage 3
%
95,618
42,771
32
3,621
5,845
804
138,421 10,270
99,239
48,616
836
1,541
1,541
1,541 150,232
5,164
5,668
12
226
717
439
10,844
1,382
5,390
6,385
451
2,124
2,124
2,124 14,350
359
136
495
1
2
3
1
1
34
2,810
7
1
1,180
62
2,851
1,243
997
5,889
56
43
1,847
183
6,942
2,073
122
122
563
563
360
138
1
499
35
3,990
69
122
4,216
1,040
7,736
239
563
9,578
102,172
57,274
107
3,892
9,591
1,488
159,553 14,971
106,064
66,865
1,595
4,351
4,351
4,351 178,875
6
6
—
11
46
17
12
74
4
7
—
5
32
39
11
76
—
—
—
—
38
—
—
—
—
—
103
17
38
120
4
55
2
5
186
56
61
247
14
106
2
21
367
129
151
151
515
515
—
—
72
72
420
420
122
517
1,158
1,158
17
52
17
151
237
9
39
39
515
602
—
—
—
—
141
17
72
0.01
0.01
—
0.30
0.79
2.11
0.01
0.72
0.08
0.12
—
2.21
4.46
8.88
9.80
9.80
0.10
5.50
24.25
24.25
—
—
—
—
—
—
—
—
—
1.35
—
—
8.73
27.42
230
1.33
9.65
59.02
59.02
9
241
58
420
728
35
473
131
1,158
1,797
0.40
0.93
3.57
11.63
10.07
30.60
0.88
11.92
74.60
74.60
0.01
0.19
1.87
0.54
3.83
8.67
0.08
3.45
26.61
26.61
Total
%
0.02
0.11
2.03
9.80
0.16
0.17
0.61
8.65
24.25
4.20
—
—
—
—
—
3.53
24.64
59.02
5.46
0.87
3.12
24.27
74.60
7.60
0.03
0.71
8.21
26.61
1.00
Note:
(1) At 31 December 2018, AQ10 includes £0.6 billion RoI mortgages which are not currently considered defaulted for capital calculation purposes for RoI but
included in Stage 3.
Key points
The majority of exposures were in AQ1-AQ4, with a significant
proportion in AQ5-AQ8. As expected, mortgage exposures have a
higher proportion in AQ1-AQ4 than unsecured borrowing.
The relatively high level of Stage 3 impaired assets (AQ10) in RoI
mortgages reflected their legacy mortgage portfolio and the
residual effects from the financial crisis. In other personal, the
relatively high level of exposures in AQ10 reflected the fact that
impaired assets can be held on balance sheet with commensurate
ECL provision for up to six years after default.
ECL provisions coverage shows the expected trend with increased
coverage in the poorer asset quality bands, and also by stage.
145
Capital and risk management
Credit risk – Banking activities continued
Asset quality (audited)
The table below summarises asset quality bands of gross loans and ECL by stage for the Wholesale portfolio.
Gross loans
ECL provisions
ECL provisions coverage
2018
Property
AQ1-AQ4
AQ5-AQ8
AQ9
AQ10
Corporate
AQ1-AQ4
AQ5-AQ8
AQ9
AQ10
Financial institutions
AQ1-AQ4
AQ5-AQ8
AQ9
AQ10
Sovereign
AQ1-AQ4
AQ5-AQ8
AQ10
Total
AQ1-AQ4
AQ5-AQ8
AQ9
AQ10
Stage 3
£m
Total
£m
Stage 1 Stage 2
%
%
Stage 3
%
Total
%
Stage 1 Stage 2
£m
£m
Stage 3
£m
Total
£m
15,740
17,397
8
393
1,418
66
16,133
18,815
74
33,145
1,877
1,685
1,685
1,685
36,707
21,814
40,004
26
773
7,647
333
22,587
47,651
359
61,844
8,753
1,643
1,643
1,643
72,240
22,150
2,352
—
247
222
5
24,502
474
22,397
2,574
5
35
35
35
25,011
6,780
161
22
—
6,941
22
6,802
161
4
6,967
4
4
Stage 1 Stage 2
£m
8
35
—
43
13
93
1
£m
9
26
4
39
14
171
15
107
200
5
7
—
12
1
—
1
5
2
—
7
—
—
—
17
61
4
506
588
27
264
16
634
941
10
9
—
22
41
1
—
—
1
0.05
0.20
—
2.29
1.83
6.06
0.13
2.08
0.06
0.23
3.85
1.81
2.24
4.50
0.17
2.28
0.02
0.30
—
2.02
0.90
—
0.05
1.48
0.01
—
—
—
0.01
—
30.03
30.03
38.59
38.59
62.86
62.86
—
—
506
506
634
634
22
22
—
—
66,484
59,914
34
1,435
9,287
404
67,919
69,201
438
27
135
1
28
199
19
55
334
20
0.04
0.23
2.94
1.95
2.14
4.70
126,432 11,126
3,367
3,367
3,367 140,925
163
246
1,162
1,162
1,162
1,571
0.13
2.21
34.51
34.51
0.11
0.32
5.41
30.03
1.60
0.12
0.55
4.46
38.59
1.30
0.04
0.35
—
62.86
0.16
0.01
—
—
0.01
0.08
0.48
4.57
34.51
1.11
Key points
Across the Wholesale portfolio, the asset quality band distribution
differed reflecting the diverse nature of differing sectors. 48% of
Wholesale lending exposure was in the AQ1-AQ4 band.
The relatively low provision coverage for Stage 3 loans in the
property sector reflected the secured nature of the exposures.
Credit risk – Trading activities
This section covers the credit risk profile of RBS’s trading activities. All disclosures are audited.
Security funding transactions and collateral (audited)
The table below captures securities funding transactions in NWM and Treasury. All transactions that are outside netting arrangements are in
NWM.
2018
Gross
IFRS offset
Carrying value
Master netting arrangements
Securities collateral
Potential for offset not recognised under IFRS
Net
2017
Gross
IFRS offset
Carrying value
Master netting arrangements
Securities collateral
Potential for offset not recognised under IFRS
Net
Reverse repos
Of which:
can be offset
£m
65,057
(39,737)
25,320
(762)
(24,548)
(25,310)
10
Total
£m
68,044
(39,737)
28,307
(762)
(24,548)
(25,310)
2,997
84,706
(43,974)
40,732
78,991
(43,974)
35,017
(329)
(34,646)
(34,975)
5,757
(329)
(34,646)
(34,975)
42
Outside
netting
arrangements
£m
2,987
—
2,987
—
—
—
2,987
5,715
—
5,715
—
—
—
5,715
Repos
Of which:
can be offset
£m
68,940
(39,737)
29,203
(762)
(28,441)
(29,203)
—
Total
£m
70,097
(39,737)
30,360
(762)
(28,441)
(29,203)
1,157
82,395
(43,974)
38,421
80,088
(43,974)
36,114
(329)
(35,785)
(36,114)
2,307
(329)
(35,785)
(36,114)
—
Outside
netting
arrangements
£m
1,157
—
1,157
—
—
—
1,157
2,307
—
2,307
—
—
—
2,307
146
Capital and risk management
Credit risk – Trading activities continued
Derivatives (audited)
The table below summarises 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 9. A significant proportion (more than 90%) of the derivatives relate to trading activities in
NatWest Markets, the table below also includes hedging derivatives in Treasury.
Gross exposure
IFRS offset
Carrying value
Of which:
Interest rate (1)
Interest rate swaps
Options purchased
Options written
Futures and forwards
Total
Exchange rate
Spot, forwards and futures
Currency swaps
Options purchased
Options written
Total
Credit
Equity and commodity
Carrying value
GBP
£bn
Notional
USD
£bn
Euro
£bn
2018
Other
£bn
Total
£bn
2,895
5,129
4,323
1,632 13,979
2,521
3,589
3,686
740 10,536
373
1
—
1,532
7
1
629
8
—
892
—
—
3,426
16
1
13,979
Assets
£m
138,390
(5,041)
133,349
81,855
14,481
—
74
96,410
17,904
11,322
7,319
—
36,545
346
48
133,349
2017
Assets
£m
Notional
£bn
Liabilities
£m
135,673
(6,776)
Liabilities
£m
177,931 172,063
(17,557)
(17,088)
128,897 15,482 160,843 154,506
74,004
—
16,371
69
91,025
—
21,021
114
90,444 12,016 120,945 112,160
99,065
21,733
—
147
18,610
12,062
—
7,558
38,230
208
15
19,172
13,534
—
8,975
41,681
558
107
128,897 15,482 160,843 154,506
19,283
11,163
8,765
—
39,211
531
156
3,425
38
3
Counterparty mark-to-market netting
Cash collateral
Securities collateral
Net exposure
Of which outside netting arrangements
Banks (2)
Other financial institutions (3)
Corporate (4)
Government (5)
Net exposure
UK
Europe
US
RoW
Net exposure
Asset quality of uncollateralised derivative assets
AQ1-AQ4
AQ5-AQ8
AQ9
AQ10
Net exposure
(106,762)
(17,937)
(4,469)
4,181
(106,762)
(15,227)
(3,466)
3,442
2,061
1,708
(128,287) (128,287)
(18,035)
(3,952)
4,232
(20,311)
(5,850)
6,395
2,261
1,658
443
1,144
1,817
38
3,442
1,304
1,465
298
375
3,442
362
1,054
2,510
255
4,181
1,935
1,308
588
350
4,181
3,384
773
3
21
4,181
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
5,173
1,216
3
3
6,395
Notes:
(1) The notional amount of interest rate derivatives include £5,952 billion (2017 – £7,400 billion) in respect of contracts cleared through central clearing
counterparties.
(2) 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.
(3) Transactions with securitisation vehicles and funds where collateral posting is contingent on RBS’s external rating.
(4) Mainly large corporates with whom RBS may have netting arrangements in place, but operational capability does not support collateral posting.
(5) Sovereigns and supranational entities with one-way collateral agreements in their favour.
147
Capital and risk management
Credit risk – Trading activities continued
Derivatives: settlement basis and central counterparties (audited)
The table below summarises the derivative notional and fair value by trading and settlement method.
2018
Interest rate
Exchange rate
Credit
Equity and commodity
Total
2017
Interest rate
Exchange rate
Credit
Equity and commodity
Total
Notional
Traded over the counter
Settled
by central
counterparties
£bn
5,952
—
—
—
5,952
Not settled
by central
counterparties
£bn
2,942
3,422
16
1
6,381
7,400
—
—
—
7,400
3,110
3,421
38
3
6,572
Traded on
recognised
exchanges
£bn
1,642
4
—
—
1,646
1,506
4
—
—
1,510
Asset
Liability
Traded on
recognised
exchanges
£m
—
—
—
—
—
Traded
over the
counter
£m
96,410
36,545
346
48
133,349
Traded on
recognised
exchanges
£m
—
—
—
—
—
—
—
—
—
—
120,945
39,211
531
156
160,843
—
—
—
1
1
Traded
over the
counter
£m
90,444
38,230
208
15
128,897
112,160
41,681
558
106
154,505
Total
£bn
10,536
3,426
16
1
13,979
12,016
3,425
38
3
15,482
Debt securities (audited)
The table below summarises debt securities held at mandatory fair value through profit or loss by issuer as well as ratings based on the lowest
of Standard & Poor’s, Moody’s and Fitch. A significant proportion (more than 95%) of these positions are trading securities in NatWest Markets.
2018
AAA
AA to AA+
A to AA-
BBB- to A-
Non-investment grade
Unrated
Total
Short positions
2017
AAA
AA to AA+
A to AA-
BBB- to A-
Non-investment grade
Unrated
Total
Central and local government
Financial
UK
£m
—
6,834
—
—
—
—
6,834
US
£m
—
4,689
—
—
—
—
4,689
Other
£m
2,093
3,161
4,571
3,592
81
—
13,498
(6,394)
(2,008)
(13,500)
—
3,514
—
—
—
—
3,514
—
3,667
—
—
—
—
3,667
1,474
2,386
7,224
3,267
385
—
14,736
institutions
£m
1,459
773
482
802
832
572
4,920
(1,724)
1,576
984
427
796
552
255
4,590
Corporate
£m
7
120
51
285
237
8
708
Total
£m
3,559
15,577
5,104
4,679
1,150
580
30,649
(201)
(23,827)
21
168
78
493
171
43
974
3,071
10,719
7,729
4,556
1,108
298
27,481
Short positions
Credit risk – Cross border exposure
Cross border exposures comprise both banking and trading activities, including reverse repurchase agreements. Exposures comprise loans and
advances, including finance leases and instalment credit receivables, and other monetary assets, such as debt securities. The geographical
breakdown is based on the country of domicile of the borrower or guarantor of ultimate risk. Cross border exposures include non-local currency
claims of overseas offices on local residents but 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.
(20,390)
(28,527)
(1,945)
(3,490)
(2,501)
(201)
2018
Western Europe
Of which: France
Of which: Germany
Of which: Netherlands
United States
Japan
2017
France
Germany
Netherlands
United States
Japan
2016
France
Germany
Netherlands
United States
Japan
Government
£m
21,121
3,396
8,023
1,142
13,558
4,857
4,721
7,643
1,897
8,697
7,533
4,275
8,868
2,809
7,677
8,291
Banks
£m
19,003
10,209
3,086
675
5,458
2,327
11,739
5,819
798
4,494
4,879
7,045
4,836
563
6,012
5,441
148
Other
£m
16,741
1,579
1,145
3,739
8,379
405
2,320
2,165
5,395
8,048
197
2,003
2,138
6,699
8,138
375
Total
£m
56,865
15,184
12,254
5,556
27,395
7,589
18,780
15,627
8,090
21,239
12,609
13,323
15,842
10,071
21,827
14,107
Short positions Net of short positions
£m
42,762
13,558
6,857
4,571
25,292
7,578
£m
14,103
1,626
5,397
985
2,103
11
3,324
9,957
986
2,607
15
2,392
4,207
1,061
5,099
1
15,456
5,670
7,104
18,632
12,594
10,931
11,635
9,010
16,728
14,106
Capital and risk management
Credit risk continued
Key IFRS 9 terms and differences to the prior IAS accounting standard and regulatory framework (audited)
Attribute
Default/credit
impairment
IFRS 9
To determine the risk of a default occurring,
management applies a default definition that is
consistent with the Basel/regulatory definition of
default.
Assets that are defaulted are shown as credit
impaired. RBS uses 90 days past due as a
consistent measure for default across all product
classes. The population of credit impaired
assets is broadly consistent with IAS 39, though
measurement differs because of the application
of MES. Assets that were categorised as
potential problems with no impairment provision
are now categorised as Stage 3.
Probability of
default (PD)
PD is the likelihood of default assessed on the
prevailing economic conditions at the reporting
date (point in time), adjusted to take into account
estimates of future economic conditions that are
likely to impact the risk of default; it will not
equate to a long run average.
IAS 39
Default aligned to loss events,
all financial assets where an
impairment event had taken
place – 100% probability of
default and an internal asset
quality grade of AQ10 – were
classed as non-performing.
Impaired financial assets were
those for which there was
objective evidence that the
amount or timing of future cash
flows had been adversely
impacted since initial
recognition.
Regulatory PDs adjusted to
point in time metrics were used
in the latent provision
calculation.
Regulatory (CRR)
A default shall be considered to have
occurred with regard to a particular
financial asset when either or both of
the following have taken place:
– RBS considers that the customer is
unlikely to pay its credit obligations
without recourse by the institution to
actions such as realising security;
– The customer is past due more
than 90 days.
For Personal exposures, the definition
of default may be applied at the level
of an individual credit facility rather
than in relation to the total obligations
of a borrower.
The likelihood that a customer will fail
to make full and timely repayment of
credit obligations over a one year time
horizon.
For Wholesale, PD models reflect
losses that would arise through-the-
cycle; this represents a long run
average view of default levels.
For Personal, the prevailing economic
conditions at the reporting date (point-
in-time) are used.
Not applicable.
Not applicable.
Significant
increase in
credit risk
(SICR)
Forward-
looking and
multiple
scenarios
A framework incorporating both quantitative and
qualitative measures aligned to the Group’s
current risk management framework has been
established. Credit deterioration will be a
management decision, subject to approval by
governing bodies such as the Provisions
Committee.
The staging assessment requires a definition of
when a SICR has occurred; this moves the loss
calculation for financial assets from a 12 month
horizon to a lifetime horizon. Management has
established an approach that is primarily
informed by the increase in lifetime probability of
default, with additional qualitative measures to
account for assets where PD does not move, but
a high risk factor is determined.
The evaluation of future cash flows, the risk of
default and impairment loss should take into
account expectations of economic changes that
are reasonable.
More than one outcome should be considered to
ensure that the resulting estimation of
impairment is not biased towards a particular
expectation of economic growth.
Financial asset carrying values
based upon the expectation of
future cash flows.
Not applicable.
149
Capital and risk management
Credit risk continued
Key IFRS 9 terms and differences to the prior IAS accounting standard and regulatory framework (audited)
Attribute
Loss given
default (LGD)
IFRS 9
LGD is a current assessment of the amount that
will be recovered in the event of default, taking
account of future conditions. It may occasionally
equate to the regulatory view albeit with
conservatism and downturn assumptions
generally removed.
IAS 39
Regulatory LGD values were
often used for calculating
collective and latent
provisions; bespoke LGDs
were also used.
Exposure at
default (EAD)
Expected balance sheet exposure at default. It
differs from the regulatory method as follows:
– It includes the effect of amortisation; and
– It caps exposure at the contractual limit.
Based on the current drawn
balance plus future committed
drawdowns.
Regulatory (CRR)
An estimate of the amount that will
not be recovered in the event of
default, plus the cost of debt
collection activities and the delay in
cash recovery. LGD is a downturn
based metric, representing a prudent
view of recovery in adverse economic
conditions.
Models are used to provide estimates
of credit facility utilisation at the time
of a customer default, recognising
that customers may make further
drawings on unused credit facilities
prior to default or that exposures may
increase due to market movements.
EAD cannot be lower than the
reported balance sheet, but can be
reduced by a legally enforceable
netting agreement.
Not applicable.
Date of initial
recognition
Modification
The reference date used to assess a significant
increase in credit risk is as follows. Term
lending: the date the facility became available to
the customer. Wholesale revolving products: the
date of the last substantive credit review
(typically annual) or, if later, the date facility
became available to the customer. Retail Cards:
the account opening date or, if later, the date
the card was subject to a regular three year
review or the date of any subsequent limit
increases. Current accounts/overdrafts: the
account opening date or, if later, the date of
initial granting of overdraft facility or of limit
increases.
A modification occurs when the contractual cash
flows of a financial asset are renegotiated or
otherwise modified and the renegotiation or
modification does not result in derecognition. A
modification requires immediate recognition in
the income statement of any impact on the
carrying value and effective interest rate (EIR)
or examples of modification events include
forbearance and distressed restructuring. The
financial impact is recognised in the income
statement as an impairment release/(loss).
Not applicable for impairment
but defined as the date when
the entity becomes a party to
the contractual provisions of
the instrument.
Not applicable.
Modification was not
separately defined but
accounting impact arose as an
EIR adjustment on changes
that were not derecognition or
impairment events.
150
Capital and risk management
Market risk
RBS is exposed to non-traded market risk through its banking activities
and to traded market risk through its trading activities. Non-traded and
traded market risk exposures are managed separately. As a result,
each type of market risk is discussed separately. The non-traded
market risk section begins below. The traded market risk section
begins on page 157.
Pension-related activities also give rise to market risk. Refer to page
160 for more information on risk related to pensions.
Compliance with ring-fencing regulations resulted in the split of non-
traded market risk management responsibility for NatWest Holdings
and its subsidiaries from non-ring-fenced companies.
Changes in accounting treatment under IFRS 9, which took effect
from 1 January 2018, had an impact on the way certain non-traded
market risk exposures are calculated. Some structured loans were
recognised at fair value through the profit and loss on transition to
IFRS 9. However, this exposure had declined by the end of the
year, mainly due to asset disposals.
Non-traded market 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.
The following disclosures in this section are audited:
Internal banking book VaR.
Foreign exchange risk.
Equity risk.
Risk governance
Responsibility for identifying, measuring, monitoring and controlling
market risk arising from non-trading activities lies with the relevant
business. Oversight is provided by the independent Risk function.
Risk positions are reported monthly to the Executive Risk Committee
and quarterly to the Board Risk Committee, as well as to the Asset &
Liability Management Committee (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.
Sources of risk
RBS’s non-traded market risk exposure 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.
Risk appetite
RBS’s qualitative appetite is set out in the non-traded market risk
appetite statement.
Interest rate risk
Non-traded interest rate risk (NTIRR) arises from the provision to
customers of a range of banking products with 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 can give rise to volatility in net
interest income as interest rates vary. NTIRR comprises three primary
risk types: gap risk, basis risk and option risk.
Credit spread risk
Credit spread risk arises from the potential adverse economic impact
of a change 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 arises from two main sources:
Structural foreign exchange risk – arises 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 – arises 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.
Key developments in 2018
Interest rates rose in 2018 but remained low by historical standards.
The UK base rate rose from 0.5% to 0.75% in August 2018. The
five-year swap rate was 1.22% at 31 December 2018 compared to
0.98% at 31 December 2017.
Sterling weakened against the US dollar and slightly against the
euro over the year.
The persistence of low interest rates and weaker sterling partly
reflected uncertainty over Brexit.
Its quantitative appetite is expressed in terms of value-at-risk (VaR),
stressed value-at-risk (SVaR), sensitivity and stress limits, and
earnings-at-risk 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 Asset & Liability Management Committee.
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
and are actively managed.
For further information on risk appetite, refer to page 92.
Risk controls
For information on risk controls, refer to page 92.
Risk monitoring and mitigation
Interest rate risk
NTIRR factors are grouped into the following categories:
Gap risk – 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 – 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 – 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 also includes pipeline risk.
Due to the long-term nature of many retail and commercial portfolios –
and their varied interest rate repricing characteristics and maturities –
net interest income is likely to 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
151
Capital and risk management
Non-traded market risk continued
from portfolios originated in prior periods, depending on the extent to
which exposure has been hedged. To manage exposures within
appetite, RBS aggregates its interest rate positions and hedges these
externally using cash and derivatives (primarily interest rate swaps).
Credit spread risk
RBS’s bond portfolios primarily comprise high-quality securities
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.
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 to
predefined risk appetite levels under delegated authority from the
Asset & Liability Management Committee. RBS seeks to limit the
potential volatility impact on its 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 Asset & Liability Management Committee 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 the Acquisitions & Disposals Committee. Once approved by
the Acquisitions & Disposals Committee 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 risk is reported to the Asset & Liability
Management Committee monthly and capitalised as part of the
Internal Capital Adequacy Assessment Process.
Risk measurement
The market risk exposures arising 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 exposure types discussed in this
section. The following table presents one-day internal banking book VaR at a 99% confidence level, split by risk type.
Interest rate
Euro
Sterling
US dollar
Other
Credit spread
Structural foreign exchange rate
Pipeline risk (1)
Diversification (2)
Total
Average
£m
14.4
2.1
14.5
4.7
0.5
59.7
13.4
0.6
(24.9)
63.0
2018
Maximum
£m
28.2
3.9
26.0
8.7
0.7
77.8
32.7
1.3
Minimum
£m
7.3
1.0
7.9
1.4
0.3
49.4
5.9
0.3
82.3
54.9
Period end
£m
11.6
1.0
13.3
8.7
0.7
77.8
13.0
0.4
(20.5)
82.3
Average
£m
9.1
3.3
6.3
5.5
1.0
60.6
12.4
0.9
(19.2)
63.8
2017
Maximum
£m
15.3
4.3
13.8
8.8
1.1
82.4
17.2
1.7
Minimum
£m
5.6
2.3
1.8
2.1
0.8
47.4
9.3
0.2
83.1
54.4
Period end
£m
5.6
3.3
2.8
7.7
0.8
49.7
15.4
1.0
(17.3)
54.4
Notes:
(1) Pipeline risk is the risk of loss arising from personal customers owning an option to draw down a loan – typically a mortgage – at a committed rate, where interest
rate changes may result in greater or fewer customers than anticipated taking up the committed offer.
(2) 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 (audited)
On average, non-traded VaR remained broadly unchanged year on
year.
The main component of the VaR is credit spread risk. VaR peaked
at year-end, mainly driven by higher volatility in credit spreads due
to economic uncertainty that affected the UK Gilts portfolio.
Interest rate VaR peaked in January driven by the impact of
transition to IFRS 9 on interest rate exposure in the structured loan
portfolio. It subsequently declined, driven by additional hedging put
in place during H1 2018 and asset disposals during H2 2018.
Structural foreign exchange rate VaR peaked in H1 2018. The VaR
measures the residual spot sensitivity of the CET1 ratio to
exchange rate movements. CET1 ratio sensitivity to the sterling/US
dollar exchange rate increased in May when foreign exchange rate
options were exercised to hedge additional US dollar liabilities that
were recognised when the agreement in principle with the US
Department of Justice was reached.
152
Capital and risk management
Non-traded market risk continued
Structural hedging
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 (such as fixed-rate mortgages or UK
government Gilts) or by using interest rate swaps, which are generally booked as cash flow hedges of floating-rate assets, in order to provide a
consistent and predictable revenue stream.
After hedging the net interest rate exposure externally, RBS allocates income to equity or products in structural hedges by reference to the
relevant interest rate swap curve. Over time, this approach has provided a basis for stable income attribution to products and interest rate
returns. 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 three-month LIBOR), total income allocation (including three-month LIBOR),
the period end and average notional balances and the total yield (including three-month LIBOR) associated with the structural hedges managed
by RBS.
Equity structural hedging
Product structural hedging
Other structural hedges
Total
Incremental
income
£m
469
368
89
926
Total
income
£m
672
1,104
167
1,943
2018
Period end
notional
£bn
29
110
22
161
Average
notional
£bn
29
108
22
159
Total
yield
%
Incremental
income
£m
2.33
1.02
0.77
1.22
628
680
147
1,455
Total
income
£m
703
1,027
165
1,895
2017
Period end
notional
£bn
28
107
21
156
Average
notional
£bn
28
101
20
149
Total
yield
%
2.48
1.02
0.83
1.27
Equity structural hedges refer to income allocated primarily to equity and reserves. This includes NatWest Markets Plc and NatWest Holdings.
Product structural hedges refer to income allocated to customer products, for example current accounts, in NatWest Holdings. Other structural
hedges refer to hedges managed by the subsidiaries (Private Banking, Ulster Bank Limited, UBIDAC and RBSI). A significant proportion of
Other structural hedges are euro-denominated.
The table below presents the incremental income associated with product structural hedges at segment level.
UK Personal & Business Banking
Commercial Banking
Other
Total
2018
£m
242
124
2
368
2017
£m
440
235
5
680
Key points
The incremental income from the structural hedge was lower than
that in 2017 primarily due to the increase in three-month LIBOR
during 2018. The overall yield of the hedge was relatively stable.
Five-year and ten-year sterling swap rates at 31 December 2018
were 1.22% and 1.35%, respectively. Equity structural hedges
amortise over ten years whilst product hedges amortise over five
years. Other structural hedges also amortise over five years except
a small proportion of RBSI’s hedge which amortises over ten years.
Compliance with ring-fencing regulations during H2 2018 resulted in
a split of the equity structural hedge between NatWest Holdings and
NatWest Markets. Approximately £6 billion of the equity hedge was
allocated to NWM Plc in 2018.
Additionally, as a result of ring-fencing legislation, RBSI is not able
to hedge with NatWest Holdings. Instead of placing hedges with
NatWest Holdings Treasury, RBSI now hedges its structural
exposure with bonds, primarily UK government Gilts.
153
Capital and risk management
Non-traded market risk continued
Interest rate risk
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 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 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
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 from the last 500 business days. These incorporate
customer products plus associated funding and hedging transactions
as well as non-financial assets and liabilities. Behavioural assumptions
are applied as appropriate.
The non-traded interest rate risk VaR metrics for RBS’s retail and
commercial banking activities are included in the banking book VaR
table on page 153. The VaR captures the risk resulting from
mismatches in the repricing dates of assets and liabilities.
2018
Euro
Sterling
US dollar
Other
Total
2017
Euro
Sterling
US dollar
Other
Total
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 earnings
Net interest earnings are sensitive to changes in the level of interest
rates because changes to coupons on some customer products do not
always match changes in market rates of interest or central bank
policy rates.
Earnings sensitivity to rate movements is derived from a central
forecast over a 12-month period. A simplified scenario is shown below
based on the period-end balance sheet (assuming that non-interest
rate variables remain constant). Market-implied forward rates are used
to generate the base case earnings forecast, which is then subject 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 earnings table shows the expected
impact, over 12 months, to an immediate upward or downward change
of 25 and 100 basis points to all interest rates. Yield curves are
expected to move in parallel though 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 a guide to
future performance. They do not capture potential management action
in response to sudden changes in the interest rate environment.
Actions that could reduce NII sensitivity and mitigate adverse impacts
are changes in pricing strategies on 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 NII.
Parallel shifts in yield curve
+25 basis points
-25 basis points
+100 basis points
-100 basis points
£m
29
152
15
1
197
13
151
14
—
178
£m
(3)
(201)
(8)
2
(210)
(8)
(218)
(13)
(4)
(243)
£m
114
651
63
2
830
53
664
58
—
775
£m
(1)
(717)
(42)
3
(757)
(11)
(504)
(49)
(7)
(571)
Key point
Net interest earnings sensitivity to a 100-basis-point downward shift in yield curves rose in 2018 compared to 2017. In the shock scenarios,
rates fell further at 31 December 2018 than at 31 December 2017 before hitting an assumed zero per cent floor on interest rates. This was
mainly due to rises in short-term cash rates since December 2017, which increased the impact of the rate shock. This effect was not seen
in the 25-basis-point downward shift as most rates remain above zero per cent after the interest rate shock.
154
Capital and risk management
Non-traded market risk continued
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 rate changes. The benefit of structural hedges
increases (or decreases) as maturing hedges are reinvested over the three-year period.
2018
Structural hedges
Managed margin (2)
Other
Total
2017
Structural hedges
Managed margin (2)
Other
Total
+25 basis points parallel upward shift
-25 basis points parallel downward shift
Year 1
£m
32
150
15
197
33
153
(8)
178
Year 2 (1)
£m
98
171
—
269
100
170
—
270
Year 3 (1)
£m
170
170
—
340
171
178
—
349
Year 1
£m
(32)
(177)
(2)
(210)
(33)
(220)
10
(243)
Year 2 (1)
£m
(98)
(189)
—
(287)
(99)
(137)
—
(236)
Year 3 (1)
£m
(167)
(163)
—
(330)
(171)
(121)
—
(292)
Notes:
(1) The projections for Year 2 and Year 3 consider only the main drivers of earnings sensitivity, namely structural hedging and margin management.
(2) Primarily current accounts and savings accounts.
Sensitivity of fair value through other comprehensive income (FVOCI) and cash flow hedging reserves to interest rate movements.
RBS holds most of the bonds in its liquidity portfolio at fair value. Valuation changes that are not hedged (or not in effective hedge accounting
relationships) are recognised in FVOCI reserves. This is a component of credit spread risk.
Interest rate swaps are used to implement the structural hedging programme and also hedging of some personal and commercial lending
portfolios, primarily fixed rate mortgages. Generally these swaps are booked in hedge accounting relationships. Changes in the valuation of
swaps that are in effective cash flow hedge accounting relationships are recognised in cash flow hedge reserves.
The table below shows the sensitivity of FVOCI reserves and cash flow hedge reserves to a parallel shift in all rates. In this analysis, interest
rates have not been floored at zero. Hedges are assumed to be fully effective. Hedge ineffectiveness would be expected to result in a portion of
the reserve gains or losses shown below being recognised in P&L instead of reserves. Hedge ineffectiveness P&L is monitored and the
effectiveness of cash flow and fair value hedge relationships are regularly tested in accordance with IFRS requirements. Note that a movement
in the FVOCI 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.
2018
FVOCI reserves
Cash flow hedge reserves
Total
2017
FVOCI reserves
Cash flow hedge reserves
Total
+25 basis points
£m
(55)
(318)
(373)
-25 basis points
£m
55
323
378
+100 basis points
£m
(220)
(1,250)
(1,470)
-100 basis points
£m
216
1,315
1,531
(41)
(443)
(484)
42
448
490
(164)
(1,744)
(1,908)
167
1,819
1,986
Key points
The sensitivity of the cash flow hedge reserve to interest rate movements fell in 2018. In part this reflected an increase in customer demand
for longer fixed rates on mortgage products. Customers increasingly opted to fix mortgage rates for five years. This reduced the requirement
for five-year interest rate swaps.
The increase in FVOCI reserve sensitivity was driven by the increase in the bonds held in liquidity portfolios due to the establishment of the
NatWest Markets Plc liquid asset buffer as a result of ring-fencing implementation.
155
Capital and risk management
Non-traded market risk continued
Foreign exchange risk (audited)
The table below shows structural foreign currency exposures.
2018
US dollar
Euro
Other non-sterling
Total
2017
US dollar
Euro
Other non-sterling
Total
Net investments in
foreign operations
£m
553
6,428
2,600
9,581
Non-controlling
interests (NCI) (1)
£m
—
33
710
743
Net investments in
foreign operations
excluding NCI
£m
553
6,395
1,890
8,838
Net
investment
Structural foreign
currency exposures
hedges pre-economic hedges
£m
549
5,542
641
6,732
£m
(4)
(853)
(1,249)
(2,106)
766
7,160
2,493
10,419
—
61
645
706
766
7,099
1,848
9,713
(14)
(342)
(930)
(1,286)
752
6,757
918
8,427
Economic
hedges (2)
£m
(549)
—
(81)
(630)
(752)
(2,224)
(453)
(3,429)
Residual structural
foreign currency
exposures
£m
—
5,542
560
6,102
—
4,533
465
4,998
Notes:
(1) Non-controlling interests (NCI) represents the structural foreign exchange exposure not attributable to owners’ equity.
(2) Economic hedges of US dollar net investments in foreign operations represent US dollar equity securities that do not qualify as net investment 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.
Economic hedges of other currency net investments in foreign operations represent monetary liabilities that are not booked as net investment hedges.
Key points
The main driver of the reduction in structural foreign currency
exposures was lower net investment in eurozone subsidiaries as a
result of the €1.5 billion dividend paid by UBI DAC to NatWest
Holdings Limited during Q1 2018. The reduction in US dollar
exposures reflected the impact of the agreement with the US
Department of Justice in relation to RMBS conduct fines.
Euro economic hedges reduced as a result of the redemption of
equity securities.
Changes in exchange rates affect equity in proportion to structural
foreign currency exposures. At 31 December 2018, a 5%
strengthening in all foreign currencies against sterling results in a
£0.4 billion increase in equity reserves, while a 5% weakening in all
foreign currencies against sterling results in a £0.3 billion reduction
in equity reserves.
Equity risk (audited)
Equity positions are carried at fair value on the balance sheet based on available market prices where possible. If 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
2018
£m
41
303
87
431
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 FVOCI instruments only.
2018
£m
23
153
2017
£m
41
243
136
420
2017
£m
82
60
156
Capital and risk management
Traded market risk
Definition
Traded market risk is the risk arising from changes in fair value on
positions, assets, liabilities or commitments in trading portfolios as a
result of fluctuations in market prices.
The following disclosures in this section are audited:
Traded VaR (1-day 99%)
Sources of risk
Traded market risk mainly arises from RBS’s trading activities. These
activities provide a range of financing, risk management and
investment services to clients − including corporations and financial
institutions − around the world. From a market risk perspective,
activities are focused on rates; currencies; securitised products; and
traded credit. RBS undertakes transactions in financial instruments
including debt securities, as well as securities financing and
derivatives.
All material traded market risk resides in NatWest Markets. The key
categories are interest rate risk, credit spread risk and foreign currency
price risk.
Trading activities may also give rise to counterparty credit risk. For
further detail refer to the Credit risk section on page 111.
Key developments in 2018
Geopolitical risk resulted in periods of market volatility during the
year. This mainly related to threats of a trade war between China
and the US, elections in Italy and negotiations on a Brexit deal.
European interest rates remained at low levels, although the Bank
of England and US Federal Reserve continued raising rates.
Traded VaR fluctuated throughout 2018, reflecting political
developments and geopolitical risk, but remained broadly
unchanged on an average basis compared to 2017.
Risk governance
Responsibility for identifying, measuring, monitoring and controlling
market risk arising from trading activities lies with the relevant trading
business. Oversight is provided by the Market Risk function. Traded
market risk positions are reported monthly to the Executive Risk
Committee and quarterly to the Board Risk Committee. Market risk
policy statements set out the governance and risk management
framework.
Risk appetite
RBS’s qualitative appetite for traded market risk is set out in the traded
market risk appetite statement. Quantitative appetite is expressed in
terms of exposure limits. 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 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 relevant business and the Market Risk
function and implemented.
For more detail on risk appetite, refer to page 92.
Risk controls
For information on risk controls, refer to page 92.
Risk monitoring and mitigation
Traded market risk is identified and assessed by 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.
Traded market risk exposures are monitored against limits and
analysed daily by market risk reporting and control functions. A daily
report summarising the position of exposures against limits at RBS,
franchise, business and desk levels is provided to senior management
and market risk managers across the function. 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.
Business 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 business. The
loss triggers are set using both a fall-from-peak approach and an
absolute loss level. In addition, regular updates on traded market risk
positions are provided to the Executive Risk Committee and Board
Risk Committee.
Risk measurement (audited)
RBS uses VaR, SVaR and the incremental risk charge to measure
traded market risk. 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
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 interest rate risk;
credit spread risk; foreign currency price risk; equity price risk; and
commodity price risk.
When simulating potential movements in such risk factors, a
combination of absolute, relative and rescaled returns is used.
Testing of the performance and adequacy of the VaR model is done
on a regular basis through the following processes:
Back-testing – Internal and regulatory back-testing is conducted on
a daily basis. (For information on internal back-testing, refer to page
159.)
Ongoing model validation – VaR model performance is assessed
both regularly and on an ad-hoc basis if market conditions or
portfolio profile change significantly.
Model Risk Management review – As part of the model lifecycle, all
risk models (including the VaR model) are independently reviewed
to ensure the model is still fit for purpose given current market
conditions and portfolio profile.
157
Capital and risk management
Traded market risk continued
One-day 99% traded internal VaR
Traded VaR (1-day 99%)
The table below shows one-day 99% internal VaR for RBS’s trading portfolios, split by exposure type.
Interest rate
Credit spread
Currency
Equity
Commodity
Diversification (1)
Total
Average
£m
14.3
11.0
3.1
0.8
0.3
(10.5)
19.0
2018
Maximum
£m
27.3
24.2
7.6
1.6
1.0
Minimum
£m
9.2
6.9
1.4
0.3
0.1
35.6
11.7
Period end
£m
13.0
8.2
5.3
0.8
0.1
(8.8)
18.6
Average
£m
14.1
12.1
4.9
1.2
0.4
(12.8)
19.9
2017
Maximum
£m
24.5
19.4
10.0
2.1
1.3
Minimum
£m
8.8
8.8
2.3
0.4
—
29.5
13.2
Period end
£m
15.3
16.7
3.5
0.4
0.2
(15.3)
20.8
Note:
(1) RBS benefits from diversification since 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.
Key points
Although traded VaR fluctuated throughout 2018 as explained
earlier, it remained broadly unchanged year-on-year on both an
average and period-end basis.
The peaks in January, May and July were largely related to bond
syndication activity and, in the case of January, long euro rates.
158
Capital and risk management
Traded market risk continued
VaR back-testing
The main approach employed to assess the VaR model’s ongoing
performance 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 in
respect of trading activities, including intraday activities, adjusted by
stripping out fees and commissions, brokerage, and additions to and
releases from reserves 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 appropriate
remediation or development action. Both Actual and Hypo back-testing
exceptions are monitored.
The table below shows internal back-testing exceptions for the 250-business-day period to 31 December 2018 for one-day 99% traded internal
VaR compared with Actual and Hypo P&L for the major NatWest Markets businesses.
Rates
Currencies
Credit
Back-testing exceptions
Actual
4
—
—
Hypo
8
4
—
Key points
Statistically RBS would expect to see back-testing exceptions 1% of
The exceptions in the Currencies business were mainly due to
the time over the 250-day period.
market movements.
The exceptions in the Rates business were mainly driven by the
increased volatility connected with large market movements due to
political uncertainty in Italy and Spain.
Stressed VaR (SVaR)
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.
A simulation of 99% VaR is run 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% traded internal SVaR
Key point
Traded SVaR remained broadly unchanged.
Period-end
2018
£m
161
Period-end
2017
£m
172
Risks not in VaR (RNIVs)
The RNIV framework is used to identify and quantify market risks that
are not fully 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.
For quantitative disclosures on RNIVs, refer to the Market Risk section
of the Pillar 3 Report.
Stress testing
For information on stress testing, refer to page 93.
Incremental risk charge (IRC)
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) held in the trading book.
It further captures basis risk between different instruments, maturities
and reference entities.
Model validation
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 approved in NatWest Markets, with material
models subject to independent review by Model Risk Management.
For further detail on the independent model validation carried out by
Model Risk Management refer to page 93. Information relating to
pricing and market risk models is presented below.
Pricing models
Pricing models are developed by a dedicated first line team, in
conjunction with the trading desk. The models are used to value
positions for which prices are not directly observable as well as for the
risk management of the portfolio. Any pricing models that are used as
the basis for valuing portfolios and records are subject to approval and
oversight by asset-level modelled product review committees. These
committees comprise representatives of the trading, finance, market
risk, model development and model review functions. Approval
requires review and approval by these stakeholders as well as 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, which is
the valuation uncertainty arising from the choice of modelling
assumptions.
Model Risk Management quantifies the model risk, which may
include comparing the model outputs with those of alternative
models 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
the Finance function 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. RBS follows regulatory guidance
for assessing the materiality of extensions and changes to the internal
model approach for market risk. In addition to Model Risk
Management’s independent oversight – which provides additional
assurance that RBS holds appropriate capital for the market risk to
which it is exposed – the model testing team monitors the model
performance for market risk through back-testing and other processes.
159
Capital and risk management
Pension risk
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 risk
RBS has exposure to pension risk through its defined benefit schemes
worldwide. The Main section of The Royal Bank of Scotland Group
Pension Fund (the Main section) is the largest source of pension risk
with £43.8 billion of assets and £35.5 of liabilities at 31 December
2018 (2017 – £44.7 billion assets and £37.9 billion liabilities). Further
detail on RBS’s pension obligations, including sensitivities to the main
risk factors, can be found in Note 5 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.
Key developments in 2018
A Memorandum of Understanding between RBS and the Trustee of
the Main section was reached in April 2018, which enabled RBS to
bring the pension scheme into alignment with ring-fencing rules and
reduce exposure to pension risk.
RBS made a £2 billion contribution to the Main section in H2 2018
and it was agreed this could be followed by up to a further £1.5
billion of dividend linked contributions to be paid from 2020, capped
at £500 million per year.
The contribution to the scheme facilitated a reduction in the risk
profile of the fund, principally the sale of approximately £6 billion of
quoted equity exposure and the purchase of further interest rate and
inflation hedging.
Risk governance
The Pension Committee is chaired by the RBS Chief Financial Officer.
It receives its authority from the Group Executive Committee and
formulates RBS’s view of pension risk. The Pension Committee is a
key component of RBS’s approach to managing pension risk and it
reviews and monitors risk management, asset strategy and financing
issues on behalf of RBS. It also considers investment strategy
proposals from the Trustee.
For further information on Risk governance, refer to page 91.
Risk appetite
RBS maintains an independent view of the risk inherent in its pension
funds. RBS has an annually reviewed pension risk appetite statement
incorporating defined metrics against which risk is measured. RBS
undertakes regular pension risk monitoring and reporting to the Board,
the Board Risk Committee and the Pension 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 monitoring and measurement
Pension risk reports are submitted to the Executive Risk Committee
and the Board Risk Committee four times a year in the Risk
Management Quarterly Report.
RBS also undertakes stress tests and scenario analyses on its
material defined benefit pension schemes each year. These 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.
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 stress test results.
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 section also uses
derivatives to manage the allocation of the portfolio to different asset
classes and to manage risk within asset classes. The contribution
made to the Main section also facilitated a £6 billion reduction in
quoted equity exposure and an increase in interest rates and inflation
hedging in 2018.
Compliance & conduct risk
Definition
Compliance risk is the risk that the behaviour of RBS towards
customers fails to comply with laws, regulations, rules, standards and
codes of conduct. Such a failure may lead to breaches of regulatory
requirements, organisational standards or customer expectations and
could result in legal or regulatory sanctions, material financial loss or
reputational damage.
Conduct risk is the risk that the conduct of RBS and its subsidiaries
and its staff towards customers – or in the markets in which it operates
– leads to unfair or inappropriate customer outcomes and results in
reputational damage, financial loss or both.
Sources of risk
Compliance and conduct risks exist across all stages of RBS’s
relationships with its customers and arise from a variety of activities
including product design, marketing and sales, complaint handling,
staff training, and handling of confidential insider information. As set
out in Note 27 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 2018
An enhanced compliance and conduct risk framework was
developed, setting minimum standards for the management and
measurement of compliance and conduct risks across RBS.
Enhanced product monitoring and reporting was introduced.
Controls, systems and processes were revised to ensure
compliance with the UK’s ring-fencing rules.
PPI remediation continued in advance of the FCA’s August 2019
deadline for claims (refer to Note 20 on the consolidated accounts).
Work to address legacy GRG complaints continued. The process
closed to new complaints in the UK on 22 October 2018.
Product and pricing continued to be simplified for new and existing
customers.
Risk governance
RBS defines appropriate standards of compliance and conduct and
ensures adherence to those standards through its risk management
framework.
160
assessment; and improved monitoring controls and enhanced
investigation processes – the journey of improvement continues.
Risk governance
Financial crime risk is principally governed through the Financial Crime
Risk Executive Committee, which is chaired by the Chief Financial
Crime Officer. The committee reviews and, where appropriate,
escalates material risks and issues to the Group Executive Risk
Committee and the Group Board Risk Committee.
Risk appetite
RBS has no appetite to operate in an environment where systems and
controls do not enable RBS to identify, assess, monitor, manage and
mitigate financial crime risk. RBS’s systems and controls must be
comprehensive and proportionate to the nature, scale and complexity
of its businesses. RBS has no tolerance to systematically or
repeatedly breach relevant financial crime regulations and laws.
Risk controls
RBS operates a framework of preventative and detective controls
designed to ensure RBS mitigates the risk that it could facilitate
financial crime. These controls are supported by a suite of policies,
procedures and detailed instructions to ensure they operate effectively.
Risk monitoring and measurement
Financial crime risks are identified and reported through continuous
risk management and regular monthly reporting to RBS’s senior risk
committees and the Board. Quantitative and qualitative data is
reviewed and assessed to measure whether financial crime risk is
within the Group’s risk appetite.
Risk mitigation
Through the financial crime framework, RBS employs relevant policies,
systems, processes and controls to mitigate financial crime risk. This
would include the use of dedicated screening and monitoring controls
to identify people, organisations, transactions and behaviours which
might require further investigation or other actions. RBS ensures that
centralised expertise is available to detect and disrupt threats to the
Group and its customers. Intelligence is shared with law enforcement,
regulators and government bodies to strengthen national and
international defences against those who would misuse the financial
system for criminal motives.
Operational risk
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.
Sources of 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 – as well as the increasing threat of cyber
attacks – are sources of operational risk, as is the impact of natural
and man-made disasters. Operational risk can also arise from a failure
to account for changes in law or regulations or to take appropriate
measures to protect assets.
Capital and risk management
Compliance & conduct risk continued
Risk appetite
Risk appetite for compliance and conduct risks is set at Board level.
RBS Risk appetite statements articulate the levels of risk that legal
entities, franchises and functions work within when pursuing their
strategic objectives and business plans.
Risk controls
RBS operates a range of controls to ensure its business is conducted
in accordance with legal and regulatory requirements, as well as
delivering good customer outcomes. A suite of policies addressing
compliance and conduct risks set appropriate standards across RBS.
Examples of these include the Complaints Management Policy, Client
Assets & Money Policy, and Product Lifecycle Policy as well as
policies relating to customers in vulnerable situations, cross-border
activities and market abuse. Continuous monitoring and targeted
assurance is undertaken, as appropriate.
Risk monitoring and measurement
Compliance and conduct risks are measured and managed through
continuous assessment and reporting to RBS’s senior risk committees
and at Board level.
The compliance and conduct risk framework facilitates the consistent
monitoring and measurement of compliance with laws and regulations
and the delivery of consistently good customer outcomes.
The first line of defence is responsible for effective risk identification,
reporting and monitoring, with oversight, challenge and review by the
second line. Compliance and conduct risk management is also
integrated into RBS’s strategic planning cycle.
Risk mitigation
Activity to mitigate the most-material compliance and conduct risks is
carried out across RBS with specific areas of focus in the customer-
facing franchises and legal entities. Examples of mitigation include
consideration of customer needs in business and product planning,
targeted training, complaints management, as well as independent
assurance activity. Internal policies help support a strong customer
focus across RBS. Independent assessments of compliance with
applicable regulations are also carried out at a legal entity level.
Financial crime
Definition
Financial crime risk is the risk presented by criminal activity in the form
of money laundering, terrorist financing, bribery and corruption,
sanctions and tax evasion. It does not include fraud risk management.
Sources of risk
Financial crime risk may be presented if RBS’s employees, customers
or third parties undertake or facilitate financial crime, or if RBS’s
products or services are used to facilitate such crime. Financial crime
risk is an inherent risk across all of RBS’s lines of business.
Key developments in 2018
In March 2018, the Federal Reserve Board terminated a Cease &
Desist Order originally imposed in July 2011 for financial crime
compliance weaknesses identified across RBS’s US businesses
and concerns about the level of oversight that the RBS Board of
Directors had over large and complex US operations. The
termination of the Order followed a multi-year programme of work to
establish an enhanced governance and oversight framework, risk
management programme and compliance programme.
In October 2018, the Federal Reserve Board terminated a Cease &
Desist Order originally imposed in December 2013. The Order,
which related to RBS Group and RBS plc’s historical compliance
with Office of Foreign Assets Control (OFAC) economic sanctions
regulations, was terminated following a multi-year programme of
work to establish a robust, sustainable OFAC Sanctions compliance
framework.
While the financial crime governance framework was strengthened
during 2018 – along with the introduction of enhanced control
effectiveness assurance processes, enhancements to existing risk
assessment models, the introduction of a new Anti-Tax Evasion risk
161
Capital and risk management
Operational risk continued
Key developments in 2018
Risk provided oversight of several bank-wide programmes including
the Transformation portfolio, structural reform, European
Commission (EC) State Aid obligations and Brexit preparations.
Key corporate structural reform milestones were delivered, including
the implementation of the Financial Services Markets Act Part VII
and migration activities to separate the ring-fence bank from the non
ring-fenced bank.
RBS is well positioned to deliver the activities required to support
the Business Banking Switch Scheme that is due to commence in
2019, as part of the Group’s final EC State Aid obligation.
RBS has established an Innovation Risk Oversight team to provide
bank-wide oversight of its innovation portfolio to help deliver safely
and at pace.
RBS continued to review its well established incident management
and coordination procedures to manage the persistent and evolving
nature of information and cyber security risks.
Internal security improvement programmes and controls were
developed and strengthened to protect RBS and its customers. RBS
uses proactive threat management and intelligence processes to
identify, manage and mitigate credible threats.
RBS continued to reduce and simplify its technology estate through
strategic investment and Technology transformation initiatives to
limit opportunities for hackers and fraudsters. Improvements in
capability were also made to the Security Operations Centre,
strengthening controls to prevent data leakage, enhance malware
defences and management of user access to key systems.
The number of critical customer impacting incidents that RBS
experiences continues to reduce year-on-year. There were 17 such
incidents in 2018 compared to 20 in 2017.
Internal training programmes ensure all employees are aware of the
threats facing RBS and remain vigilant to unauthorised attempts to
access systems and data.
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 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,
delivers a robust operational risk management framework and culture
across RBS.
The Operational Risk function is responsible for the execution and
continuous improvement of the operational risk management
framework.
The Operational Risk Executive Committee (OREC) is responsible for
reviewing operational risk exposure; 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 changes.
Risk appetite
Operational risk appetite supports effective management of material
operational risks. It expresses the level and types of operational risk
RBS is willing to accept to achieve its strategic objectives and
business plans.
The Group-wide operational risk appetite statement encompasses the
full range of operational risks faced by its legal entities, franchises and
functions. A subset of the most material risk appetite measures are
defined as board risk measures, which are those that, should the limit
be breached, would impact on the ability to achieve business plans
and threaten stakeholder confidence.
Risk controls
The Control Environment Certification (CEC) process is a half yearly
self-assessment by the CEOs of RBS’s franchises and business units,
as well as the heads of the support and control functions, providing a
view on the adequacy and effectiveness of the internal control
environment in a consistent and comparable manner. In line with ring-
fencing requirements, from H2 2018 certificates were also produced
for the following legal entities: NatWest Holdings Limited; NatWest
Markets Plc; The Royal Bank of Scotland International Limited; Ulster
Bank Ireland DAC; and Coutts and Co.
CEC covers material risks and the underlying key controls, 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 progress
on control environment improvements, are reported to the Board,
Group Audit Committee and 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 84), and certain requirements of the UK Corporate
Governance Code.
Risk monitoring and measurement
Risk and control assessments are used across all business areas and
support functions to identify and assess material operational and
conduct risks and key controls. All risks and controls are mapped to
RBS’s Risk Directory. Risk assessments are refreshed at least
annually to ensure they remain relevant and capture any emerging
risks, with associated trigger processes to ensure risks are reassessed
at key periods of change.
The process is designed to confirm that risks are effectively managed
and prioritised in line with risk appetite. Controls are tested at the
appropriate frequency to verify that they remain fit-for-purpose and
operate effectively.
RBS uses the standardised approach to calculate its Pillar 1
operational risk capital requirement. This is based on multiplying three
years’ average historical gross income by coefficients set by the
regulator based on business line. As part of the wider Internal Capital
Adequacy Assessment Process an operational risk economic capital
model is used to assess Pillar 2A, which is a risk-sensitive add-on to
Pillar 1.The model uses historical loss data (internal and external) and
forward-looking scenario analysis that is provided by Operational Risk
to provide a risk-sensitive view of RBS’s P2A 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 financial and non
financial 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.
162
Capital and risk management
Operational risk continued
All financial impacts associated with an operational risk event are
reported against the date they were recorded in RBS’s financial
accounts. 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 2018 may relate to events that occurred, or were
identified in, prior years. RBS purchases insurance against specific
losses and to comply with statutory or contractual requirements.
Percentage and value of events
At 31 December 2018, events aligned to the clients, products and
business practices event category accounted for 98% of RBS’s
operational risk losses (compared to 93% in 2017). The increase
reflected new or additional conduct-related provisions recorded during
2018, most notably the US Department of Justice mortgage-backed
securities-related settlement.
Fraud
Clients, products and business practices (2)
Execution, delivery and process management
Employment practices and workplace safety
Value of events
£m
2018
19
1,552
12
1
1,584
2017
28
1,264
58
5
1,355
Proportion
2018
1%
98%
1%
—
100%
2017
2%
93%
4%
1%
100%
Volume of events (1)
Proportion
2018
74%
15%
10%
1%
100%
2017
74%
12%
9%
5%
100%
Notes:
(1) The calculation in the table above is based on the volume and value of events (the proportion and cost of operational risk events to RBS) where the
associated loss is more than or equal to £10,000.
(2) 2017 losses have been restated from £732 million following finalisation of material MBS-related settlements.
Operational resilience
RBS manages and monitors operational resilience through its risk and
control assessments methodology. As challenges to operational
resilience become more demanding, given a hostile cyber environment
and a greater focus on serving customers through digital platforms,
RBS is working with supervisory authorities in the UK to ensure the
provision of its products and services can be maintained regardless of
the cause of disruption.
This is underpinned by setting, monitoring and testing tolerances for
key business services, which define the amount of disruption that
could be tolerated.
Risk mitigation
Risks are mitigated by applying key preventative and detective
controls, 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.
Key controls are regularly assessed for adequacy and tested for
effectiveness. The results are monitored and, where a material change
in performance is identified, the associated risk is re-evaluated.
Business risk
Definition
Business risk is the risk that RBS does not have a strategy that is
sufficiently well defined to provide clarity on its long-term ambitions to
key internal and external stakeholders, or that it is not able to execute
upon its chosen strategy as communicated to the market, regulators
and other key stakeholders. The risk is that RBS does not deliver its
expected business performance which could give rise to a
deterioration in stakeholder trust and confidence and/or a breach of
regulatory thresholds. RBS may not be able to execute its chosen
strategy if there are material changes to RBS’s internal or external
operating environment.
Sources of risk
Business risk arises as a result of RBS’s exposure to the macro-
economy (including economic and political factors), the competitive
environment, regulatory and technological changes. In addition,
internal factors such as the ability to deliver complex change, volatility
in sales volumes, input costs, and other operational risks affect RBS’s
ability to execute its chosen strategic business plan as intended and
thus contribute to business risk.
Key developments in 2018
As part of its requirement by UK law to separate its everyday
banking services from its investment banking by 1 January 2019 –
known as ring-fencing – RBS made a number of changes to the
way its business was structured. Certain Personal & Business
Banking businesses and Commercial Banking businesses of The
Royal Bank of Scotland plc transferred to Adam & Company PLC
and National Westminster Bank Plc. The role of issuer under the
covered bond programme transferred to National Westminster
Bank Plc. Adam & Company PLC was renamed "The Royal Bank
of Scotland plc", and The Royal Bank of Scotland plc was renamed
"NatWest Markets Plc". The Royal Bank of Scotland plc
superseded the prior issuer (former RBS plc) in respect of
banknotes.
RBS also restructured the NatWest Markets Plc (former RBS plc)
capital structure. The shares in NatWest Holdings Limited, which
owns the ring-fenced sub-group, were distributed to RBS. This
separated the ring-fenced sub-group from the non-ring-fenced
entities, as required by ring-fencing legislation. RBS also
transferred the customer interest rate and foreign exchange
derivatives business of National Westminster Bank Plc to NatWest
Markets Plc.
RBS reached a civil settlement in principle with the US Department
of Justice in relation its investigation into RBS’s issuance and
underwriting of US Residential Mortgage Backed Securities
(RMBS) between 2005 and 2007, resulting in a £1.0 billion
additional provision.
UK Government Investments Limited announced the successful
completion of the disposal of part of HM Treasury's shareholding in
The Royal Bank of Scotland Group plc, representing approximately
7.7% of the ordinary share capital of the Group. HM Treasury’s
shareholding in RBS now represents 62.3% of the Group’s ordinary
share capital.
On 17 April 2018 RBS agreed a Memorandum of Understanding
(MoU) with the Trustees of the RBS Group Pension Fund in
connection with the requirements of ring-fencing. NatWest Markets
Plc cannot continue to be a participant in the Main section and
separate arrangements are required for its employees. Under the
MoU NatWest Bank made a contribution of £2 billion on 9 October
2018 to strengthen funding of the Main section in recognition of the
changes in covenant.
163
Capital and risk management
Business risk continued
RBS declared an interim ordinary dividend of 2 pence per share –
Key developments in 2018
Metrics were reviewed and enhanced to help measure reputational
the first since September 2008.
risk across the Group.
Risk governance
The Board has ultimate responsibility for business risk and for
approving strategic plans, initiatives and changes to strategic direction.
Risk appetite positions for countries and sectors identified as
presenting heightened reputational risk continued to be reviewed
and strengthened.
RBS’s strategic planning process is managed by Strategy and
Corporate Development. The Risk and Finance functions are key
contributors to strategic planning.
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 appetite
Risk Appetite defines the level and types of risk it is willing to accept in
order to achieve its strategic objectives and business plans. RBS
articulates its appetite for business risk through the implementation of
qualitative risk appetite statements and quantitative risk measures at
franchise and function level. These statements and measures help
determine the level and types of business risk RBS is willing to accept.
Risk controls
For information on risk controls, refer to page 92.
Risk monitoring and measurement
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.
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
Definition
Reputational risk is the risk to RBS’s public image from a failure to
meet stakeholders’ expectations in relation to performance, conduct or
business profile. Stakeholders include customers, investors,
employees, suppliers, government, regulators, special interest and
consumer groups, media and the general public.
Sources of risk
Reputational risk can arise from the conduct of employees; customer
activities and the sectors and countries in which they operate;
provision of products and transactions; as well as operations and
infrastructure.
Risk governance
A reputational risk policy supports reputational risk management
across RBS. Reputational risk committees in PBB, CPB, RBSI, Ulster
Bank RoI and NatWest Markets review relevant issues at an individual
franchise or entity level, while the Group Reputational Risk Committee
– which has delegated authority from the Executive Risk Committee –
opines on cases, issues, sectors and themes that represent a material
reputational risk to the Group. The Board Risk Committee oversees
the identification and reporting of reputational risk. The Sustainable
Banking Committee has a specific focus on environmental, social and
ethical issues.
Risk appetite
RBS manages and articulates its appetite for reputational risk through
a qualitative reputational risk appetite statement and quantitative
measures. RBS seeks a continued improvement in the identification,
assessment and management of customers, transactions, products
and issues that present a material reputational risk.
Risk controls
For information on risk controls, refer to page 92.
Risk monitoring and measurement
Primary reputational risk measures are in place to assess internal
activity relating to the management of reputational risk, including
training. A number of secondary risk measures – including measures
also used in the management of operational, conduct and financial
risks – are used to assess relevant external factors. Quarterly reports
on performance against these measures are provided to the Executive
Risk Committee and Board Risk Committee.
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.
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
regulators and governmental authorities, some of which have resulted
in fines, settlements and public censure. Refer to the Litigation,
investigations and reviews section of Note 27 on the consolidated
accounts.
164
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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
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
Net interest income
Non-interest income
Operating expenses
Segmental analysis
Pensions
Auditor’s remuneration
Tax
Earnings per share
Trading assets and liabilities
Derivatives
Financial instruments - classification
Financial instruments - valuation
Financial instruments - maturity analysis
Loan impairment provisions
Other financial assets
Intangible assets
Other assets
Other financial liabilities
Subordinated liabilities
Other liabilities
Non-controlling interests
Share capital and other equity
Leases
Structured entities
Asset transfers
Capital resources
Memorandum items
Analysis of the net investment in business interests and intangible assets
Analysis of changes in financing during the year
Analysis of cash and cash equivalents
Directors’ and key management remuneration
Transactions with directors and key management
Adoption of IFRS 9
Related parties
Post balance sheet events
Parent company financial statements and notes
165
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 2018. 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 2018
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:
Parent Company
Balance sheet as at 31 December 2018;
Statement of changes in equity for the year then ended;
Cash flow statement for the year then ended; and
Related notes 1 to 10 to the financial statements.
Group
Consolidated balance sheet as at 31 December 2018;
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 181 to 185;
Related Notes 1 to 35 to the financial statements;
Information identified as ‘audited’ in the Annual report on
remuneration; and
Capital and risk management section of the Business review
identified as ‘audited’.
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 Parent 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.
Conclusions relating to principal risks, going concern and viability statement
We have nothing to report in respect of the following information in the annual report, in relation to which the ISAs(UK) require us to report to
you whether we have anything material to add or draw attention to,
the disclosures in the Annual Report and Accounts that describe the principal risks and explain how they are being managed or mitigated;
the directors’ confirmation in the Annual Report and Accounts that they have carried out a robust assessment of the principal risks facing the
entity, including those that would threaten its business model, future performance, solvency or liquidity;
the directors’ statement in the financial statements about whether they considered it appropriate to adopt the going concern basis of
accounting in preparing them, and their identification of any material uncertainties to the entity’s ability to continue to do so over a period of
at least twelve months from the date of approval of the financial statements;
whether the directors’ statement in relation to going concern required under the Listing Rules in accordance with Listing Rule 9.8.6R(3) is
materially inconsistent with our knowledge obtained in the audit; or
the directors’ viability statement 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.
166
Independent auditor’s report to the members of The Royal Bank of Scotland Group plc
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.
Our response to the risk
Risk
Provisions for conduct, litigation and regulatory matters, customer remediation and claims
The continued litigious environment and
heightened regulatory scrutiny gives rise to a high
level of judgement in determining appropriate
provisions and disclosures. At 31 December
2018, the Group has reported £3.0 billion (2017:
£7.8 billion) of provisions for liabilities and
charges, including £2.0 billion (2017: £5.8 billion)
for conduct and litigation claims, including
Residential Mortgage Backed Securities (RMBS),
Payment Protection Insurance (PPI) and the
Financial Conduct Authority (FCA) review of
RBS’s treatment of Small and Medium-sized
Enterprises (SMEs) as detailed in Note 20 of the
financial statements.
We tested the design and operating effectiveness of 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, and to assess the
completeness and accuracy of data used to estimate provisions.
We examined the relevant regulatory and legal correspondence to assess
developments in key cases. For the cases which were settled during the period, such as
the investigations by the US Department of Justice (DoJ), we verified the actual
outflows, compared with the level of existing provision, considered whether further risk
existed, and evaluated the level of disclosures provided.
For the significant provisions made, such as PPI and the FCA review of RBS’s
treatment of SMEs, 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 considered the accuracy of management’s historical estimates and peer
bank settlement in similar cases. We also developed our own range of reasonable
alternative estimates and compared them to management’s provision.
Management judgement is needed to determine
whether an obligation exists and a provision
should be recorded at 31 December 2018 in
accordance with the accounting criteria set under
IAS 37.
The most significant areas of judgement are:
Adequacy of provisions: judgement is
involved in the determination of whether an
outflow in respect of identified material
conduct or legal matters are probable and
can be estimated reliably and the
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.
We received confirmations from the Group’s external counsel for significant matters to
confirm the existence of the obligation and management’s estimate of the outflow at
year-end. We corroborated management’s conclusion by challenging the underlying
information used in estimating the provisions including consideration of alternate
sources.
We considered regulatory developments and, for key cases, assessed the
reasonableness of the assumptions used by management by comparing to the results
of our independently performed benchmarking and sensitivity analysis. Where
appropriate, we involved our conduct risk specialists. We also verified historical data
and whether it supported current estimates.
We tested the disclosures provided on conduct, litigation and regulatory provisions to
determine whether they 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.
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 to the Group Audit Committee:
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; and
We obtained the RMBS settlement agreements with the US Department of Justice for the amount settled during the year. We are satisfied
that the provision for remaining matters are reasonable.
Relevant references in the Annual Report and Accounts
Report of the Group Audit Committee
Accounting policies
Note 20 on the financial statements
167
Independent auditor’s report to the members of The Royal Bank of Scotland Group plc
Risk
Impairment of loans
On 1 January 2018, a new accounting standard
for financial instruments (IFRS 9) became
effective, which introduced impairment based on
expected credit losses, rather than the incurred
loss model previously applied under IAS 39.
At 31 December 2018 the Group reported total
gross loans of £319.8 billion and £3.4 billion of
expected credit loss provisions.
Key judgements and estimates in respect of the
timing and measurement of expected credit
losses (ECL) include:
Allocation of assets to stage 1, 2, or 3 using
criteria in accordance with the accounting
standard;
Accounting interpretations and modelling
assumptions used to build the models that
calculate the ECL;
Completeness and accuracy of data used to
calculate the ECL;
Inputs and assumptions used to estimate the
impact of multiple economic scenarios;
Completeness and valuation of post model
adjustments;
Measurements of individually assessed
provisions including the assessment of
multiple scenarios; and
Accuracy and adequacy of the financial
statement disclosures.
Our response to the risk
As IFRS 9 was adopted at the start of the year, we performed audit procedures on the
opening balances to gain assurance on the transition from IAS 39. This included
evaluating the accounting interpretations for compliance with IFRS 9 and testing the
adjustments and disclosures made on transition.
We tested the design and operating effectiveness of key controls across the processes
relevant to the ECL. This included the allocation of assets into stages, model
governance, data accuracy and completeness, credit monitoring, multiple economic
scenarios, post model adjustments, individual provisions and production of journal
entries and disclosures.
We observed the key executive finance and risk committees where the inputs,
assumptions and adjustments to the ECL were discussed and approved.
We performed an overall assessment of the ECL provision levels by stage to determine
if they were reasonable considering the Group’s portfolio, risk profile, credit risk
management practices and the macroeconomic environment. We considered trends in
the economy and industries to which the Group is exposed.
We challenged the criteria used to allocate an asset to stage 1, 2 or 3 in accordance
with IFRS 9; this included peer benchmarking to assess staging levels. We tested
assets in stage 1, 2 and 3 to verify that they were allocated to the appropriate stage.
With the support of our internal modelling specialists, we tested the assumptions, inputs
and formulas used in a sample of ECL models. This included assessing the
appropriateness of model design and formulas used, considering alternative modelling
techniques and recalculating the Probability of Default, Loss Given Default and
Exposure at Default for a sample of models.
To verify data quality, we tested the data used in the ECL calculation by reconciling to
source systems. To test credit monitoring, we recalculated the risk ratings for a sample
of performing loans.
With the support of our internal economic specialists, we assessed the base case and
alternative economic scenarios, including challenging probability weights and
comparing to other scenarios from a variety of external sources, as well as EY
internally developed forecasts. We assessed whether forecasted macroeconomic
variables were appropriate, such as GDP, unemployment, interest rates and House
Price Index. With the support of our modelling specialists we challenged the correlation
and impact of the macroeconomic factors to the ECL including how non-linearity was
captured.
We assessed the completeness and appropriateness of post model adjustments and
recalculated a sample. Based on current economic conditions and market
circumstances, we considered the need for sector or systemic adjustments. We
assessed the appropriateness of the scenarios used and calculation of the overlay in
response to Brexit related economic uncertainty.
With the support of our internal valuation specialists, we recalculated a sample of
individually assessed provisions including comparing to alternative scenarios and
challenging probability weights assigned. The sample was based on a number of
factors including higher risk sectors such as construction, retail, automotive,
commercial real estate, shipping and oil and gas
We assessed the adequacy and appropriateness of disclosures for compliance with the
accounting standards including disclosure of transition from IAS 39.
Key observations communicated to the Group Audit Committee
We are satisfied that credit impairment provisions were reasonable and in compliance with IFRS 9. We highlighted the following matters to
the Group Audit Committee:
Control deficiencies were identified on the transition to IFRS 9 and several compensating controls were implemented notably in the
process to produce the financial statement disclosures;
Our testing and sensitivity analysis on the staging criteria did not identify material differences and overall, we concluded that the stage
allocation at 31 December 2018 was reasonable;
Our testing of models and model assumptions did not highlight material differences. and
For individually assessed impairments, in a few instances we reported judgemental differences in respect of the extent of the impairment
identified, however none of these differences were considered material.
Relevant references in the Annual Report and Accounts
Report of the Group Audit Committee
Credit Risk section of the Capital and risk management section
Accounting policies
Note 14 on the financial statements
168
Independent auditor’s report to the members of The Royal Bank of Scotland Group plc
Our response to the risk
Risk
Future profitability estimates impacting the recognition of deferred tax and the impairment of goodwill and, in the parent company accounts,
investments in subsidiaries.
At 31 December 2018 the Group had reported
Goodwill of £5.6 billion (2017: £5.6 billion) and
deferred tax assets of £1.4 billion (2017: £1.7
billion). The parent company has reported
investments in subsidiaries of £57.7 billion (2017:
£47.6 billion).
We tested the design and operating effectiveness of key controls over the preparation
and review of the forecasts, the significant assumptions, inputs, calculations,
methodologies and judgements.
With the support of our internal economic specialists, we tested whether key
macroeconomic assumptions, including Brexit considerations, used in the Group’s
forecasting process were reasonable. Given the uncertainty on Brexit and its
consequential impact on the macro-economic assumptions and resulting forecasts, we
considered the need for additional disclosures in the financial statements.
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. 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.
Key judgements and estimates include:
Revenue and cost forecasts which are
impacted by the Group’s transformation
programme;
Key assumptions used in the recoverability
and valuation assessments (discount rates,
growth rates, macroeconomic assumptions,
etc.);
Assumptions regarding the economic
consequences of Brexit and other political
developments over an extended period.
We assessed the reasonableness of revenue forecasts by challenging the underlying
business strategies, comparing to expected market trends and considering anticipated
balance sheet growth.
We evaluated how the discount rates and long-term growth rates used by management
compared to our reasonable ranges which were informed by peer practice, external
market data and calculations performed by our valuation specialists.
We tested how previous management forecasts, including the impact of cost reduction
programmes, compared to actual results to evaluate the accuracy of the forecasting
process. We assessed the achievability of future cost reduction plans by reviewing and
challenging the details of the underlying initiatives and how key cost ratios compared to
peer banks and commentaries from external analysts.
We evaluated how management considered alternative assumptions and performed our
own sensitivity and scenario analyses on certain key assumptions.
With the support of our taxation specialists, we assessed the estimate of future taxable
profits used to calculate the level of deferred tax assets recognised, including an
assessment of the time horizon used for the recoverability of losses and other
temporary differences.
.
Risk
Key observations communicated to the Group Audit Committee
We highlighted the following matters to the Group Audit Committee:
Sensitivity analysis of the value in use and headroom to changes in the key assumptions in the forecasts supported the carrying values of
Our response to the risk
both goodwill and investment in subsidiaries;
Our stress testing of the Group’s forecast cost reduction including the amount and timing supported the Group’s conclusion that no
impairment was required to goodwill or the investment in subsidiaries; and
We noted the inherent uncertainty predicting revenue and costs over the five-year forecasts period, particularly with respect to the impact
of Brexit, and other political developments, and disruptions in the business model over an extended period.
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 compliant with IFRS
Relevant references in the Annual Report and Accounts
Report of the Group Audit Committee
Accounting policies
Note 7 and Note 16 on the financial statements, and Note 6 on the Parent company financial statements.
169
Independent auditor’s report to the members of The Royal Bank of Scotland Group plc
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
judgement and the risk of inappropriate revenue
recognition through incorrect pricing. 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 31
December 2018 the Group reported level 3
assets of £3.3 billion (2017: £3.2 billion) and level
3 liabilities of £1.95 billion (2016: £2.2 billion).
We performed walkthroughs of transactions from inception to financial reporting to
confirm our understanding of process and controls in the area of revenue recognition.
We tested the design and operating effectiveness of controls including independent
price verification, model review and approval, collateral management, and income
statement analysis and reporting.
Tested complex model-dependent valuations using our internally developed
challenger models and review of model documentation to challenge the
appropriateness of models and the adequacy of assumptions and inputs used by the
Group;
With the support of our internal financial instrument valuation and modelling specialists
we performed the following procedures:
We re-priced instruments that had been valued using illiquid pricing inputs, using
independently obtained alternative pricing sources challenging and substantiating
any differences between management’s valuation; and
For fair value adjustments we compared the methodology used to current market
practice. We re-valued a sample of counterparty level FVA and CVA, compared
funding spreads to third party data and independently challenged illiquid CVA inputs.
We performed back-testing analysis of recent trade activity to verify the drivers of
any significant differences between book value and trade value to challenge the
impact on the fair value of similar instruments within the portfolio.
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.
The key judgements and estimates are:
Complex model-dependent valuations, which
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;
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 derivatives
including Funding Valuation Adjustments
(FVA) and 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 derivative
portfolios.
The manipulation of revenue recognition
through the inappropriate valuation of these
instruments given the level of management
judgement involved.
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 matters to the Audit Committee:
Complex-model dependent valuations were appropriate based on the output of our independent re-valuation, analysis of trade activity and
peer benchmarking;
The fair value estimates of hard-to-price portfolios appropriately reflected the Group’s planned exit route and latest available pricing
information; and
Valuation adjustments applied on derivative portfolios for credit, funding and other risks were appropriate based on our assessment of
trade activity for positions with common risk characteristics and analysis of market data. We reported a judgemental difference in respect
of the estimate involved in portfolio specific valuation adjustments, however this difference was not considered material.
Relevant references in the Annual Report and Accounts
Report of the Group Audit Committee
Accounting policies
Note 12 on the financial statements
170
Independent auditor’s report to the members of The Royal Bank of Scotland Group plc
Risk
Our response to the risk
With the support of our regulatory specialists we understood the implications of ICB for the
Group and gained an understanding of management’s process for implementing the ring-
fencing regulation. We also examined the relevant regulatory correspondence to understand
the impact and resolution of any significant findings that might impact financial reporting.
We challenged management’s assessment of the accounting impacts of ICB, including the
accounting treatment for transfers of businesses and legal entities and the appropriateness
of the interpretations used on areas of judgement, including hedge accounting and pensions,
as well as the valuation of the assets moved. We analysed significant changes to financial
information arising from legal entity changes and assessed if they were in line with our
expectations.
We tested the design and operating effectiveness of key controls and performed substantive
procedures over the transfer of balances between legal entities.
We assessed the control environment for the impairment of value of investments based on
the post-ringfencing profit forecasts for each legal entity, considering the implications of
other changes across legal entities on forecasted profitability.
We tested controls over changes to the carrying value of investments and reserves to
ensure they correctly reflected changes in ownership. This included transfers and
recycling of reserves, including merger reserves, cash flow hedge reserves and foreign
exchange reserves. We challenged the criteria applied to identified recycling events.
We tested the design and operating effectiveness of the Group’s key controls over legal
entity recharges, including the governance and implementation of changes to legal entity
recharges due to ICB. We tested adherence to internally agreed policies at a legal entity
level, including assessments on the appropriateness of transfer pricing mark-ups applied.
We tested the design and operating effectiveness of the Group’s key controls over
financial reporting as it relates to the implications of ICB and the relevant disclosures.
We assessed the quality of the disclosures including any need for additional notes. At
the Group level, we verified the transfers did not have an impact on overall
consolidation
Financial impact of structural reform
The Independent Commission on Banking’s
(ICB) structural reform required banks to
ensure certain activities and services are
undertaken in a ring-fenced bank (RFB) by 1
January 2019. The Group’s implementation
of structural reform resulted in the
reorganisation of some of the legal entities in
the Group and the transfer of assets and
liabilities between the RFB and other entities
of the group. These transfers mainly related
to the transfer of customer loans (£64.5
billion) and customer deposits (£74.6 billion)
from NWM plc to RBS plc. Ring-fencing
related transfers also included the transfer of
the RBS Treasury function and related
balances to NatWest Bank plc from NatWest
Markets plc.
Accounting and reporting risks arising
include:
Appropriate application of accounting
standards in recording the value of
assets and liabilities transferred
between legal entities, specifically with
respect to fair value and hedge
accounting in the financial statements
of the relevant entities;
Future profitability estimates at a legal
entity level, given the transfer of
activities and services, and the impact
on the impairment assessment of the
carrying value of goodwill and
investments in subsidiaries;
Accuracy of costs recorded in each
legal entity given changes to the
Group’s approach to cost recharging
and cost allocation;
Impact of the restructuring of the Group
and movement of legal entities
including the carrying value of
investments and reserves including
foreign exchange reserves; and
Accuracy of financial reporting given
changes to the legal entity financial
reporting closing processes to reflect
changes in the Group.
Key observations communicated to the Group Audit Committee
We are satisfied that the impact of structural reform has been properly accounted for and disclosed in accordance with IFRS. We highlighted
the following matters to the Group Audit Committee:
Processes and controls in place over the transfer of balances including the measurement of assets transferred were designed and
operated effectively; and
A control deficiency was identified in relation to the foreign exchange reserves. Additional procedures were performed and audit
differences identified were not considered material.
Relevant references in the Annual Report and Accounts
Report of the Group Audit Committee
Accounting policies
171
Independent auditor’s report to the members of The Royal Bank of Scotland Group plc
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 31
December 2018 the Group reported a net
pension asset of £355 million (2017: £263 million)
comprising £520 million of schemes in surplus
and £165 million of schemes in deficit (2017:
£392 million and £129 million, respectively). The
net pension asset is sensitive to changes in the
key judgements and estimates, which include:
Actuarial assumptions and inputs including
the discount rate, inflation, pension payment
and longevity to determine the valuation of
retirement benefit liabilities;
Pricing inputs and calibrations for illiquid or
complex model-dependent valuations of
certain investments held by the schemes;
Quantification of trustee’s rights to unilaterally
augment benefits (Augmentation cap) to
determine the recognition of surplus; and
Equalisation adjustments following the recent
court ruling in respect of Guaranteed
Minimum Pension (GMP)
Our response to the risk
We tested the design and operating effectiveness of key controls over the actuarial
assumptions setting process, the data inputs used in the actuarial calculation and the
measurement of the fair value of the schemes’ assets.
With the support of our actuarial specialists, we challenged the actuarial assumptions
by comparing them to our independently obtained sources and market practice. We
challenged the impact on pension liabilities of changes in financial, demographic and
longevity assumptions over the year and whether these were in line with our own
expectations.
With the support of our valuation specialists, we challenged the appropriateness of
management’s valuation methodology including the judgements made in determining
significant assumptions used in the valuation of complex and illiquid pension assets.
We tested the fair value of scheme assets by independently calculating fair value for a
sample of the assets held. Our sample included cash, equity instruments, derivative
financial instruments and illiquid assets.
In readiness for compliance with the requirements of the UK ring-fencing legislation, a
Memorandum of Understanding (MoU) was entered into with the Trustees of RBS
Group Pension Fund. We read the MoU, assessed the implications and challenged the
appropriateness of the accounting treatment in accordance with relevant accounting
standards.
With the support of our actuarial specialists, we challenged the estimation of the
augmentation cap and GMP equalisation adjustments including the inputs used in the
calculation. We also assessed the methodology and judgements made in calculating
these estimates and the associated accounting treatment in accordance with IAS 19
and IFRIC 14.
We assessed the adequacy of the disclosures made in the financial statements,
including the appropriateness of the key assumptions and sensitivities disclosed.
Key observations communicated to the Group Audit Committee
We are satisfied that the valuation and disclosure of the retirement benefit obligations are reasonable and in accordance with IFRS. We
highlighted the following matters to the Group Audit Committee:
Our benchmarking of key actuarial assumptions including the discount rate, inflation, mortality and pension payments concluded that
assumptions tested were within a reasonable range;
Independent valuation of a sample of pension assets identified no material differences; and
Management’s estimate of the impact of the GMP liability was materially consistent with our independent estimate using our own model.
Relevant references in the Annual Report and Accounts
Report of the Group Audit Committee
Accounting policies
Note 5 on the financial statements
Risk
IT systems and controls impacting financial reporting
The IT environment is complex and pervasive to
the operations of the Group due to the large
volume of transactions processed in numerous
locations daily and the reliance on automated
and IT dependent manual controls. Appropriate
IT controls are required to ensure that
applications process data as expected and that
changes are made in an appropriate manner.
Such controls contribute to mitigating the risk of
potential fraud or errors as a result of changes
to applications and data.
We assessed automated controls within business processes and the reliability of
relevant reports used as part of a manual control. This included challenging the integrity
of system interfaces, the completeness and accuracy of data feeds, automated
calculations and specific input controls.
We assessed and challenged the design and operating effectiveness of IT controls over
the applications, operating systems and databases that are relevant to financial
reporting.
We assessed and challenged system migrations and related technology changes
resulting from transformation programmes and the implementation of ICB that were
material to financial reporting.
Our response to the risk
Our audit approach relies upon IT applications
and the related control environment including:
User access management across application,
database and operating systems;
Changes to the IT environment, including
transformation that changes the IT landscape;
IT operational controls;
IT application or IT dependent controls; and
Evaluation of IT control environment at third
party service providers.
Where we identified systems outsourced to third party service providers we challenged
IT general controls through the relevant Service Organisation Controls Reports
produced by third parties and tested assessed required complementary controls
performed by the Group.
Where control deficiencies were identified, we tested remediation activities performed by
management and compensating controls in place and assessed where necessary to
mitigate any residual risk.
172
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 IT controls relevant to financial reporting operated effectively at year-end. We highlighted the following matters to the
Group Audit Committee:
Instances of user access related deficiencies were identified. Compensating controls were tested or alternate procedures were
performed; and
Exceptions were reported in some Service Organisation Controls Reports provided by third parties including Cloud providers.We tested
compensating controls with no issues noted.
Relevant references in the Annual Report and Accounts
Report of the Group Audit Committee
Accounting policies
In the prior year, our auditor’s report included key audit matters in relation to hedge effectiveness testing, including the impact on non-interest
income, and provision for restructuring costs. In 2018, given materiality and our assessment of the risk, these were not considered key audit
matters.
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.
The scoping below is consistent with the prior year.
Component
UK Personal & Business Banking
Ulster Bank RoI
Commercial Banking
Private Banking
RBS International
NatWest Markets
Central items, Treasury and Services
Scope
Key locations
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, Poland
The table below illustrates the coverage obtained from the work performed by our audit teams. 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
84%
59%
88%
15%
39%
8%
1%
2%
4%
100%
100%
100%
Full scope (1)
Specific scope (2)
Other procedures (3)
Total
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.
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.
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.
Notes
Full scope: audit procedures on all significant accounts
1)
2)
Specific scope: audit procedures on selected accounts
3) Other procedures: considered in analytical procedures
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.
173
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 £210 million (2017 materiality: £300 million), which is 5% of Group profit
before tax (2017 materiality basis was equity) and 0.6% of equity of the parent company. As the Group has been profitable for the past two
years, we changed our basis of materiality to profit before tax. This measure is consistent with the wider industry and is the standard for listed
and regulated entities and we believe it reflects the most useful measure for users of the financial statements. The materiality of the parent
company is based on equity as we consider this to be the most appropriate factor to the users of the financial statements.
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 £100 million (2017: £150 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, 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 £75 million and £40 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 £10 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.
Other information
The other information comprises the information included in the Annual Report and Accounts, including the Strategic Report (Governance,
Business review, Capital and risk management, Risk Factors ,Shareholder Information), and Important addresses 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.
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 – 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– the section describing the work of the Group Audit Committee does not appropriately address matters
communicated by us to the audit committee; or
Directors’ statement of compliance with the UK Corporate Governance Code – 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, the part of the directors’ remuneration report to be audited has been properly prepared in accordance with the Companies Act
2006.
In our opinion, based on the work undertaken in the course of the audit:
the information given in the Strategic report and the Report of the directors for the financial year for
which the financial statements are prepared is consistent with the financial statements; and
the Strategic report and the Report of the directors 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 Report of the directors.
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
174
Independent auditor’s report to the members of The Royal Bank of Scotland Group plc
Responsibilities of directors
As explained more fully in the directors’ responsibilities statement, 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.
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.
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:
The regulations, licence conditions and supervisory requirements of the Prudential Regulation Authority (PRA) and the Financial Conduct
Authority (FCA).
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)
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, 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. 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. 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 3 years, covering periods from our appointment through 31
December 2018.
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
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.
Jonathan Bourne (Senior Statutory Auditor)
for and on behalf of Ernst & Young LLP, Statutory Auditor
London
14 February 2019
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
175
Consolidated income statement for the year ended 31 December 2018
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
Impairment losses
Operating profit/(loss) before tax
Tax charge
Profit/(loss) for the year
Attributable to:
Ordinary shareholders
Preference shareholders
Dividend access share
Paid-in equity holders
Non-controlling interests
Earnings/(loss) per ordinary share
Earnings/(loss) per ordinary share - fully diluted
Note
1
2
3
14
7
8
8
2018
£m
11,049
(2,393)
8,656
3,218
(861)
1,507
—
882
4,746
13,402
(4,122)
(1,383)
(3,372)
(731)
(37)
(9,645)
3,757
(398)
3,359
(1,275)
2,084
1,622
182
—
288
(8)
2,084
13.5p
13.4p
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)
(10,401)
2,732
(493)
2,239
(824)
1,415
752
234
—
394
35
1,415
6.3p
6.3p
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)
(16,194)
(3,604)
(478)
(4,082)
(1,166)
(5,248)
(6,955)
260
1,193
244
10
(5,248)
(59.5p)
(59.5p)
The accompanying notes on pages 187 to 238, the accounting policies on pages 182 to 186 and the audited sections of the Business review:
Capital and risk management on pages 89 to 164 form an integral part of these financial statements.
176
Consolidated statement of comprehensive income for the year ended 31 December 2018
Profit/(loss) for the year
Items that do not qualify for reclassification
Remeasurement of retirement benefit schemes
- contributions in preparation for ring-fencing (1)
- other movements
Profit/(loss) on fair value of credit in financial liabilities designated at fair value
through profit or loss due to own credit risk
Fair value through other comprehensive income (FVOCI) financial assets (2)
Tax
Items that do qualify for reclassification
Fair value through other comprehensive income (FVOCI) financial assets (2)
Cash flow hedges
Currency translation
Tax
Other comprehensive (loss)/income after tax
Total comprehensive income/(loss) for the year
Attributable to:
Ordinary shareholders
Preference shareholders
Dividend access share
Paid-in equity holders
Non-controlling interests
Note
5
2018
£m
2,084
(2,053)
86
200
48
502
(1,217)
7
(581)
310
189
(75)
(1,292)
792
305
182
—
288
17
792
2017
£m
1,415
—
90
(126)
—
(10)
(46)
26
(1,069)
100
256
(687)
(733)
682
2
234
—
394
52
682
2016
£m
(5,248)
—
(1,049)
—
—
288
(761)
(94)
765
1,263
(106)
1,828
1,067
(4,181)
(5,999)
260
1,193
244
121
(4,181)
Notes:
(1) On 17 April 2018 RBS agreed a Memorandum of Understanding (MoU) with the Trustees of the RBS Group Pension Fund in connection with the requirements of
ring-fencing. NatWest Markets Plc cannot continue to be a participant in the Main section and separate arrangements are required for its employees. Under the
MoU NatWest Bank made a contribution of £2 billion on 9 October 2018 to strengthen funding of the Main section in recognition of the changes in covenant. Also
under the MoU, NatWest Markets Plc is required to make a £53 million contribution to the NWM section in Q1 2019.
(2) Refer to Note 33 for further information on the impact of IFRS 9 on classification and basis of preparation, year ended 31 December 2018 prepared under IFRS 9
and prior years under IAS 39.
The accompanying notes on pages 187 to 238, the accounting policies on pages 182 to 186 and the audited sections of the Business review:
Capital and risk management on pages 89 to 164 form an integral part of these financial statements.
177
Consolidated balance sheet as at 31 December 2018
Assets
Cash and balances at central banks
Trading assets
Derivatives
Settlement balances
Loans to banks - amortised cost
Loans to customers - amortised cost
Securities subject to repurchase agreements
Other financial assets excluding securities subject to repurchase agreements
Other financial assets
Intangible assets
Other assets
Total assets
Liabilities
Bank deposits
Customer deposits
Settlement balances
Trading liabilities
Derivatives
Other financial liabilities
Subordinated liabilities
Other liabilities
Total liabilities
Ordinary shareholders' interests
Other owners' interests
Owners’ equity
Non-controlling interests
Total equity
Total liabilities and equity
Note
2018
£m
2017
£m
11
9
10
11
11
15
16
17
11
11
9
10
18
19
20
22
21
88,897
75,119
133,349
2,928
12,947
305,089
9,890
49,595
59,485
6,616
9,805
694,235
23,297
360,914
3,066
72,350
128,897
39,732
10,535
8,954
647,745
41,182
4,554
45,736
754
46,490
98,337
85,991
160,843
2,517
11,517
310,116
13,717
38,212
51,929
6,543
10,263
738,056
30,396
361,316
2,844
81,982
154,506
30,326
12,722
14,871
688,963
41,707
6,623
48,330
763
49,093
694,235
738,056
The accompanying notes on pages 187 to 238, the accounting policies on pages 182 to 186 and the audited sections of the Business review:
Capital and risk management on pages 89 to 164 form an integral part of these financial statements.
The accounts were approved by the Board of directors on 14 February 2019 and signed on its behalf by:
Howard Davies
Chairman
Ross McEwan
Chief Executive
Katie Murray
Chief Financial Officer
The Royal Bank of Scotland Group plc
Registered No. SC45551
178
Consolidated statement of changes in equity for the year ended 31 December 2018
Called-up share capital - at 1 January
Ordinary shares issued
At 31 December
Paid-in equity - at 1 January
Redeemed/reclassified (1)
Securities issued during the year (2)
At 31 December
Share premium account - at 1 January
Ordinary shares issued
Redemption of debt preference shares (3)
Capital reduction (4)
At 31 December
2018
£m
11,965
84
12,049
4,058
—
—
4,058
887
140
—
—
1,027
2017
£m
11,823
142
11,965
4,582
(524)
—
4,058
25,693
235
748
(25,789)
887
Merger reserve - at 1 January and 31 December
10,881
10,881
FVOCI reserve - at 1 January (5)
Implementation of IFRS 9 on 1 January 2018
Unrealised gains
Realised gains
Tax
At 31 December
Cash flow hedging reserve - at 1 January
Amount recognised in equity (6)
Amount transferred from equity to earnings (7)
Tax
At 31 December (8)
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 (9)
At 31 December (8)
Capital redemption reserve - at 1 January
Capital reduction (4)
At 31 December
Retained earnings - at 1 January
Implementation of IFRS 9 on 1 January 2018 (5)
Profit/(loss) attributable to ordinary shareholders and other equity owners
Equity preference dividends paid
Paid-in equity dividends paid, net of tax
Ordinary dividends paid
Capital reduction (4)
Dividend access share dividend
Redemption of debt preference shares (3)
Redemption of equity preference shares (10)
Redemption/reclassification of paid-in equity
Realised gains in period on FVOCI equity shares, net of tax
Remeasurement of the retirement benefit schemes
- contributions in preparation for ring-fencing (11)
- other movements
- 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
At 31 December
Own shares held - at 1 January
Shares issued under employee share schemes
Own shares acquired
At 31 December
Owners’ equity at 31 December
179
2016
£m
11,625
198
11,823
2,646
(110)
2,046
4,582
25,425
268
—
—
25,693
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
(4,020)
—
(5,258)
(260)
(244)
—
—
(1,193)
—
(1,160)
(21)
—
—
(1,049)
288
—
—
(10)
(9)
(12,936)
(107)
41
(66)
(132)
255
34
97
(42)
(1)
343
227
(63)
(518)
163
(191)
2,970
195
(33)
23
123
3,278
—
—
—
17,130
(105)
2,092
(182)
(288)
(241)
—
—
—
(2,805)
—
6
(2,053)
86
539
200
(33)
(2)
(32)
14,312
(43)
87
(65)
(21)
238
—
202
(176)
(9)
255
1,030
(277)
(792)
266
227
2,888
111
(6)
(1)
(22)
2,970
4,542
(4,542)
—
(12,936)
—
1,380
(234)
(394)
—
30,331
—
(748)
—
(196)
—
—
90
(28)
(126)
18
(5)
(22)
17,130
(132)
161
(72)
(43)
45,736
48,330
48,609
Consolidated statement of changes in equity for the year ended 31 December 2018
Non-controlling interests (see Note 21) - at 1 January
Currency translation adjustments and other movements
(Loss)/profit attributable to non-controlling interests
Dividends paid
Equity withdrawn and disposals
At 31 December
Total equity at 31 December
Total equity is attributable to:
Ordinary shareholders
Preference shareholders
Paid-in equity holders
Non-controlling interests
2018
£m
763
25
(8)
(5)
(21)
754
2017
£m
795
17
35
(25)
(59)
763
2016
£m
716
111
10
—
(42)
795
46,490
49,093
49,404
41,182
496
4,058
754
46,490
41,707
2,565
4,058
763
49,093
41,462
2,565
4,582
795
49,404
Notes:
(1) 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).
(2) AT1 capital notes totalling £2.0 billion issued in August 2016.
(3) 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 was
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. The nominal value
of £0.3 million was transferred from share capital to capital redemption reserve and ordinary owners equity was reduced by £0.4 billion in respect of the
movement in exchange rates since issue.
(4) 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.
(5) Refer to Note 33 for further information on the impact of IFRS 9 on classification and basis of preparation, year ended 31 December 2018 prepared under IFRS
9 prior years under IAS 39.
(6) The amount debited direct to the cash flow hedging reserve comprised £166 million in relation to interest rate hedges less a credit of £103 million in relation to
foreign exchange hedges.
(7) The cash flow hedging reserve was reduced by £25 million in relation to foreign exchange hedges and £493 million in relation to interest rate hedges which
were credited in aggregate to net interest income.
(8) The hedging element of the cash flow hedging reserve and foreign exchange reserve relate mainly to de-designated hedges.
(9) No tax impact.
(10) During 2018, non-cumulative US dollar, Euro and Sterling preference shares were redeemed.
(11) On 17 April 2018 RBS agreed a Memorandum of Understanding (MoU) with the Trustees of the RBS Group Pension Fund in connection with the requirements
of ring-fencing. NatWest Markets Plc cannot continue to be a participant in the Main section and separate arrangements are required for its employees. Under
the MoU NatWest Bank made a contribution of £2 billion on 9 October 2018 to strengthen funding of the Main section in recognition of the changes in covenant
Also under the MoU, NatWest Markets Plc is required to make a £53 million contribution to the NWM section in Q1 2019.
The accompanying notes on pages 187 to 238, the accounting policies on pages 182 to 186 and the audited sections of the Business review:
Capital and risk management on pages 89 to 164 form an integral part of these financial statements.
180
Consolidated cash flow statement for the year ended 31 December 2018
Cash flows from operating activities
Operating profit/(loss) before tax
Interest on subordinated liabilities
Impairment releases on loans to banks and customers
Profit on sale of subsidiaries and associates
Profit on sale of securities
Defined benefit pension schemes
Provisions: expenditure in excess of charges
Depreciation, amortisation and impairment of property, plant,
equipment, goodwill and intangibles
Loss on redemption of own debt
Elimination of foreign exchange differences
Other non-cash items
Net cash outflow from trading activities
Decrease/(increase) in net loans to banks and customers
(Increase)/decrease in securities
Decrease/(increase) in other assets
Increase in trading assets and liabilities
Decrease/(increase) in derivative assets and liabilities
(Decrease)/increase in settlement balance assets and liabilities and short positions
(Decrease)/increase in banks and customers deposits
Increase/(decrease) in debt securities in issue
Decrease in other liabilities
Changes in operating assets and liabilities
Income taxes paid
Net cash flows from operating activities (1)
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 investment in business interests and intangible assets
Net cash flows from investing activities
Cash flows from financing activities
Issue of ordinary shares
Issue of other equity instruments: Additional Tier 1 capital notes
Redemption of other equity instruments
Redemption of debt preference shares
Own shares disposed/(acquired)
Redemption of subordinated liabilities
Service cost of other equity instruments
Interest on subordinated liabilities
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
2018
£m
2017
£m
2016
£m
3,359
461
(1,197)
—
(34)
(2,055)
(5,016)
718
—
(160)
767
(3,157)
2,627
(47)
258
(2,087)
1,885
(189)
(8,164)
10,068
(956)
3,395
(466)
(228)
9,062
(16,181)
264
(619)
(481)
(7,955)
144
—
(2,826)
—
22
(2,258)
(803)
(566)
(6,287)
676
2,239
572
(647)
(155)
(226)
(252)
(4,546)
762
7
(426)
(214)
(2,886)
2,466
(1,319)
(221)
—
4,169
8,658
25,449
3,326
(381)
42,147
(520)
38,741
11,656
(17,212)
405
(1,132)
(199)
(6,482)
306
—
(779)
(748)
89
(5,747)
(612)
(717)
(8,208)
(16)
(4,082)
845
(3,221)
(22)
(71)
(4,518)
4,517
919
126
(6,518)
133
(11,892)
(12,960)
16,741
1,195
—
(2,696)
104
10,418
(3,967)
(422)
8,413
(171)
(3,650)
8,599
(11,607)
447
(912)
(886)
(4,359)
300
2,046
(1,312)
—
(25)
(3,606)
(1,697)
(813)
(5,107)
8,094
28
(13,794)
122,605
108,811
24,035
98,570
122,605
(5,022)
103,592
98,570
30
Note:
(1)
Includes interest received of £10,927 million (2017 - £10,946 million, 2016 - £11,321 million) and interest paid of £2,511 million (2017 - £2,300 million,
2016 - £2,638 million).
The accompanying notes on pages 187 to 238, the accounting policies on pages 182 to 186 and the audited sections of the Business review:
Capital and risk management on pages 89 to 164 form an integral part of these financial statements.
181
Accounting policies
1. Presentation of accounts
The accounts, set out on pages 176 to 181
including these accounting policies on pages
182 to 186 and the audited sections of the
Financial review: Capital and risk management
on pages 89 to 164, are prepared on a going
concern basis (see the Report of the directors,
page 85) and in accordance with International
Financial Reporting Standards as issued by
the International Accounting Standards Board
(IASB) and interpretations as issued by the
IFRS Interpretations Committee of the IASB
and adopted by the European Union (EU)
(together IFRS). ).
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 8, 13, and 21, the
accounts are presented on an historical cost
basis.
Adoption of IFRS 9
Refer to Note 33 for details of the adoption of
IFRS 9.
Other amendments to IFRS
IFRS 15 ‘Revenue from Contracts with
Customers’ has been adopted with effect from
1 January 2018. The Accounting policy is
updated to reflect the terminology in the new
standard but it has had no effect on financial
information reported in the current or
comparative periods. Interest income and
expense continues to be recognised using the
effective interest rate method for financial
instruments measured at historical cost. There
has been no restatement of profit or loss for
comparative periods.
Other amendments to IFRS effective for 2018,
including IFRS 2 ‘Share-based payments’ and
IAS 40 ‘Investment Property’ have not 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 or expense on financial
instruments that are measured at amortised
cost and fair value through comprehensive
income is determined using the effective
interest rate method. The effective interest
rate allocates the interest income or interest
expense over the expected life of the asset or
liability at the rate that exactly discounts all
estimated future cash flows to equal 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.
Net interest income in the income statement
only relates to financial instruments measured
at amortised cost; the interest on debt
instruments classified as fair value through
OCI; and the effective part of any related
accounting hedging instruments. Other
interest relating to financial instruments
measured at fair value is recognised as part of
the movement in fair value.
Fees in respect of services are recognised as
the right to consideration accrues through the
performance of each distinct service
obligation to the customer. The arrangements
are generally contractual and the cost of
providing the service is incurred as each
service is performed. The price is usually fixed
and always determinable.
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.
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
23. 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
182
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.
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
Accounting policies
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. 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.
8. 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.
9. Foreign currencies
The Group's consolidated financial statements
are presented in sterling which is the
functional currency of the company.
Transactions in foreign currencies are
recorded in the functional currency at the
foreign exchange rate ruling at the date of the
transaction. 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 21).
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 non-
monetary financial assets classified as
available for sale, 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.
10. 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
183
other contracts with customers to lease assets
are classified as operating leases.
Finance lease receivables are included in the
balance sheet, within net loans 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.
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.
11. 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.
Accounting policies
12. 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 to the extent that it is probable that
the asset will be recovered.
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.
13. Financial instruments
On initial recognition, financial instruments are
measured at fair value. Subsequently they are
classified as follows: designated at fair value
through profit or loss; amortised cost, the
default class for liabilities; fair value through
profit or loss, the default class for assets; or
financial assets may be designated as at fair
value through other comprehensive income.
Regular way purchases of financial assets
classified as amortised cost are recognised on
the settlement date; all other regular way
transactions in financial assets are recognised
on the trade date.
Designated as at fair value through profit or
loss – a financial instrument 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 a
financial liability 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.
Amortised cost assets – have to meet both
the following criteria:
(a)
the asset is held within a business model
whose objective is solely to hold assets
to collect contractual cash flows; and
the contractual terms of the financial
asset are solely payments of principal
and interest on the outstanding balance.
(b)
Amortised cost liabilities – all liabilities that are
not subsequently measured at fair value are
measured at amortised cost.
Assets designated at fair value through other
comprehensive income – An equity instrument
may be designated irrevocably at fair value
through other comprehensive income.
Other assets have to meet both the following
criteria:
(a)
the asset is held within a business model
whose objective is both to hold assets to
collect contractual cash flows and selling
financial assets; and
the contractual terms of the financial
asset are solely payments of principal
and interest on the outstanding balance.
(b)
Fair value through profit or loss - a financial
liability is measured at fair value if it arises
from: a financial guarantee contract; a
commitment to lend at below market rates; an
obligation arising from the failed sale of an
asset; or a contingent consideration for a
business acquisition. Fair value through profit
or loss is the default classification for a
financial asset.
Reclassifications – financial liabilities cannot
be reclassified. Financial assets are only
reclassified where there has been a change in
the business model.
Fair value – 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.
Business model assessment – business
models are assessed at portfolio level, being
the level at which they are managed. This is
expected to result in the most consistent
classification of assets because it aligns with
the stated objectives of the portfolio, its risk
management, manager’s remuneration and
the ability to monitor sales of assets from a
portfolio. The criteria for classifying cash flows
as solely principal and interest are assessed
against the contractual terms of a facility, with
attention to leverage features; prepayment
and extension terms; and triggers that might
reset the effective rate of interest.
14. Impairments
At each balance sheet date each financial
asset or portfolio of loans measured at
amortised cost or at fair value through other
comprehensive income, issued financial
guarantee and loan commitment is assessed
for impairment. Loss allowances are forward-
looking, based on 12 month expected credit
losses where there has not been a significant
184
increase in credit risk rating, otherwise
allowances are based on lifetime expected
losses. Loss allowances for lease receivables
are always made on a lifetime basis.
Expected credit losses are a probability-
weighted estimate of credit losses. The
probability is determined by the risk of default
which is applied to the cash flow estimates. In
the absence of a change in credit rating,
allowances are recognised when there is
reduction in the net present value of expected
cash flows. On a significant increase in credit
risk, allowances are recognised without a
change in the expected cash flows, although
typically expected cash flows do also change;
and expected credit losses are rebased from
12 month to lifetime expectations.
On restructuring a financial asset without
causing derecognition of the original asset the
revised cash flows are used in re-estimating
the credit loss. Where restructuring causes
derecognition of the original financial asset,
the fair value of the replacement asset is used
as the closing cash flow of the original asset.
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.
The costs of loss allowances on assets held
at amortised cost are presented as
impairments in the income statement.
Allowances in respect financial guarantees
and loan commitments are presented in
administrative expenses.
Impaired loans and receivables are written off,
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.
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 months; three years
later any remaining amounts outstanding
are written off. Overdrafts and other
unsecured loans: write off occurs within six
years.
Overdrafts and other unsecured loans:
write off occurs within six years
Commercial loans: write offs are
determined in the light of individual
circumstances; the period does not exceed
five years.
Business loans are generally written off
within five years.
15. Financial guarantee contracts
Under a financial guarantee contract, the
Group, in return for a fee, undertakes to meet
a customer’s obligations under the terms of a
debt instrument if the customer fails to do so.
Accounting policies
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 13.
Amortisation is calculated so as to recognise
fees receivable in profit or loss over the period
of the guarantee.
16. Loan commitments
Provision is made for expected credit loss on
loan commitments, other than those classified
as held-for-trading. 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.
17. 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.
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.
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.
18. 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.
19. 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.
20. 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.
21. Derivatives and hedging
In accordance with IAS 39 ‘hedge
relationships’, derivative financial instruments
are initially recognised, and subsequently
measured, at fair value.
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 host is a financial
185
asset or 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
ordinary 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
Accounting policies
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.
22. 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.
23. 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 is measured by reference to the fair
value of the shares or share options on the
date the award is 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 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, 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.
24. 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
Critical accounting policy
Deferred tax
Fair value: financial instruments
Loan impairment provisions
Goodwill
Provisions for liabilities and charges
Note
7
12
14
16
20
Accounting Developments
International Financial Reporting
Standards
A number of IFRS’s and amendments to IFRS
were in issue at 31 December 2018 that
would affect the Group from 1 January 2019
or later
186
Effective 1 January 2019
IFRS 16 ‘Leases’ was issued in January 2016
to replace IAS 17 ‘Leases’. The Group will
apply the standard with effect from 1 January
2019. Lessees will capitalise operating leases
through the recognition of assets representing
the contractual rights of use. The present
value of contractual payments will be
recognised as lease liabilities.
The Group has new models and processes to
implement IFRS 16. The most significant
impact from initially applying IFRS 16 will be
to recognise rights of use assets in respect of
branches and office properties leased by the
Group under contracts classified as operating
leases under IAS 17. The present value of
other contracts is immaterial. The Group will
apply IFRS 16 on a modified retrospective
basis without restating prior years and
electing for the following exemptions on
transition at 1 January 2019. The Group will
apply IFRS 16 to contracts previously
identified as leases by IAS 17
use the incremental borrowing rate as
the discount rate
not apply IFRS 16 to operating leases
with a remaining lease term of less than
12 months or low value leases (non
property leases)
rely on the assessment of whether the
lease contract is onerous under IAS 37
at 31 December 2018 as an alternative
to performing an impairment review of
the right of use assets created on 1
January 2019 Where this is the case the
carrying amount of the assets will be
adjusted by the onerous lease provision.
exclude initial direct costs from the
measurement of the right of use asset
The opening balance sheet at 1 January 2019
will be adjusted to create a right of use asset
of approximately £1.3 billion. A lease liability
will also be recognised of £1.9 billion.
Retained earnings will decrease by £0.2
billion after tax. This will have an estimated
impact of 21 basis points on the CET 1 ratio.
Application of IFRS 16 by the Group is not
expected to have a significant impact on
lessor accounting or for finance lease
accounting by lessees.
Effective after 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, subject to IASB’s approval of a
deferral until 1 January 2022.
In February 2018 the IASB amended IAS 19
‘Employee Benefits’ to clarify the need to
update assumptions whenever there is a plan
amendment, curtailment or settlement.
The Group is assessing the effect of adopting
these standards on its financial statements.
Notes on the consolidated accounts
1 Net interest income
Loans to banks - amortised cost
Loans to customers - amortised cost
Other financial assets
Interest receivable (1)
Balances with banks
Customer deposits: demand
Customer deposits: savings
Customer deposits: other time
Other financial liabilities
Subordinated liabilities
Internal funding of trading businesses
Interest payable (1)
Net interest income
2018
£m
522
9,993
534
11,049
250
223
510
116
791
461
42
2,393
8,656
Note:
(1) Negative interest on loans is classed as interest payable and on customer deposits is classed as interest receivable.
2 Non-interest income
Net fees and commissions
Loss on redemption of own debt
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, commodities and other
Other operating income
Operating lease and other rental income
Changes in the fair value of financial assets and liabilities designated at fair value through profit
or loss
Changes in the fair value of own debt designated as at fair value through profit or loss
attributable to own credit risk
- debt securities in issue
- subordinated liabilities
Changes in fair value of other financial assets fair value through profit or loss
Hedge ineffectiveness
Profit/(loss) on disposal of amortised cost assets
Profit on disposal of fair value through other comprehensive income assets
Profit on sale of property, plant and equipment
Share of profits of associated entities
(Loss)/profit on disposal of subsidiaries and associates
Other income (1)
Non-interest income
Note:
(1) Includes income from activities other than banking. 2018 includes insurance recoveries of £357 million.
2018
£m
2,357
—
643
695
45
72
20
32
1,507
256
(26)
—
—
18
(65)
44
34
50
83
(72)
560
882
4,746
2017
£m
277
10,409
348
11,034
175
99
445
179
554
572
23
2,047
8,987
2017
£m
2,455
(7)
525
(50)
197
12
(81)
31
634
276
60
—
—
—
39
(35)
226
75
104
245
74
1,064
4,146
2016
£m
246
10,706
306
11,258
97
433
432
190
557
845
(4)
2,550
8,708
2016
£m
2,535
(126)
989
(480)
336
87
67
(25)
974
287
(13)
41
(15)
—
—
(277)
71
18
59
273
55
499
3,882
187
Notes on the consolidated accounts
3 Operating expenses
Salaries
Variable compensation
Social security costs
Pension costs
Other
Staff costs
Premises and equipment
UK bank levy
Depreciation and amortisation
Other administrative expenses (1)
Administrative expenses
Write down of goodwill and other intangible assets
2018
£m
3,002
225
307
401
187
4,122
1,383
179
731
3,193
5,486
37
9,645
2017
£m
3,180
298
318
467
413
4,676
1,565
215
808
3,108
5,696
29
10,401
2016
£m
3,771
281
388
357
327
5,124
1,388
190
778
8,555
10,911
159
16,194
Note:
(1) Includes litigation and conduct costs, net of amounts recovered. Refer to Notes 20 and 27 for further details.
The average number of persons employed, rounded to the nearest hundred, during the year, excluding temporary staff, was 67,600 (2017 -
73,400; 2016 - 82,400). The average number of temporary employees during 2018 was 4,000 (2017 - 5,000; 2016 - 6,700). The number of
persons employed 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
2018
25,800
2,900
28,700
7,800
1,900
9,700
1,600
4,500
20,900
65,400
46,600
500
4,100
14,200
65,400
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
During 2018 the reporting lines of central and support staff directly supporting a reportable Group segment were realigned to that segment.
Share-based payments
As described in the Remuneration report, the Group grants share-based awards to employees principally on the following bases:
Award plan
Sharesave
Deferred performance
awards
Long-term incentives (2)
Eligible employees
UK, Republic of Ireland,
Channel Islands, Gibraltar
and Isle of Man
All
Senior employees
Nature of award
Option to buy shares under
employee savings plan
Vesting conditions (1)
Continuing employment or leavers
in certain circumstances
Settlement
2019 to 2023
Awards of ordinary shares
Awards of conditional shares
or share options
Continuing employment or leavers
in certain circumstances
Continuing employment or leavers
in certain circumstances and/or
achievement of performance
conditions
2019 to 2025
2019 to 2025
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.
188
Notes on the consolidated accounts
3 Operating expenses continued
The fair value of options granted in 2018 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
At 1 January
Granted
Exercised
Cancelled
At 31 December
2018
2017
2016
Average
exercise price
£
2.38
1.89
2.44
2.46
2.18
Shares
under option
(million)
60
28
(4)
(9)
75
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
Options are exercisable within six months of vesting; 4.9 million options were exercisable at 31 December 2018 (2017 – 3.7 million; 2016 – 8.1
million). The weighted average share price at the date of exercise of options was £2.13 (2017 - £2.77; 2016 - £1.78). At 31 December 2018,
exercise prices ranged from £1.68 to £3.43 (2017 - £1.68 to £4.34; 2016 - £1.68 to £4.34) and the remaining average contractual life was 2.9
years (2017 - 2.9 years; 2016 – 2.9 years). The fair value of options granted in 2018 was £21 million (2017 - £21 million; 2016 - £18 million).
Deferred performance awards
At 1 January
Granted
Forfeited
Vested
At 31 December
2018
Value at
grant
£m
264
156
(21)
(166)
233
Shares
awarded
(million)
101
59
(8)
(60)
92
2017
2016
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
The awards granted in 2018 vest in equal tranches on their anniversaries, predominantly over three years.
Long-term incentives
At 1 January
Granted
Vested/exercised
Lapsed
At 31 December
Value
at grant
£m
102
12
(5)
(24)
85
2018
Shares
awarded
(million)
37
5
(2)
(8)
32
Options
over shares
(million)
2
—
—
—
2
Value at
grant
£m
119
35
(22)
(30)
102
2017
Shares
awarded
(million)
38
15
(7)
(9)
37
Options
over shares
(million)
4
—
—
(2)
2
Value at
grant
£m
153
37
(39)
(32)
119
2016
Shares
awarded
(million)
44
16
(12)
(10)
38
Options
over shares
(million)
5
—
—
(1)
4
The market value of awards vested/exercised in 2018 was £5 million (2017 - £22 million; 2016 - £40 million). There are vested options of 2
million shares exercisable up to 2020 (2017 - 2 million; 2016 - 4 million).
189
Notes on the consolidated accounts
3 Operating expenses continued
Variable compensation awards
The following tables analyse the Group's variable compensation awards for 2018.
Non-deferred cash awards (1)
Total non-deferred variable compensation
Deferred bond awards
Deferred share awards
Total deferred variable compensation
Total variable compensation (2)
Variable compensation as a % of operating profit before tax (3)
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 (2)
2018
£m
37
37
191
107
298
335
9%
89%
64%
36%
2018
£m
335
(130)
205
86
(66)
20
225
2017
£m
51
51
134
157
291
342
13%
85%
46%
54%
2017
£m
342
(133)
209
96
(7)
89
298
Change
%
(27)
(27)
43
(32)
2
(2)
2016
£m
343
(103)
240
147
(106)
41
281
Year in which income statement charge is expected to be taken for
deferred variable compensation
Variable compensation deferred from 2016 and earlier
Variable compensation deferred from 2017
Less: forfeiture of amounts deferred from prior years
Variable compensation for 2018 deferred
Actual
Expected
2016
£m
147
—
(106)
—
41
2017
£m
96
—
(7)
—
89
2018
£m
5
81
(66)
—
20
2019
£m
9
22
—
89
120
2020
and beyond
£m
4
15
—
41
60
Notes:
(1) Cash awards are limited to £2,000 for all employees.
(2) Excludes other performance related compensation.
(3) Operating profit before tax and variable compensation expense. This was previously measured against adjusted operating profit before variable compensation
expense (2017: 7%).
190
Notes on the consolidated accounts
4 Segmental analysis
Reportable segments
The directors manage RBS primarily by class of business and present
the segmental analysis on that basis. This includes the review of net
interest income for each class of business. Interest receivable and
payable for all reportable segments is therefore presented net.
Segments charge market prices for services rendered between each
other; funding charges between segments are determined by RBS
Treasury, having regard to commercial demands. The segment
performance measure is operating profit/(loss).
Reportable operating segments
The reportable operating segments are as follows:
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 helps global financial institutions and corporates
manage their financial risks and achieve their short and long-term
financial goals while navigating changing markets and regulation.
NatWest Markets does this by providing global market access,
financing, risk management and trading solutions from trading hubs in
London, Singapore and Stamford with sales offices across key
locations in the UK, EU, US and Asia.
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).
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.
Commercial & Private Banking (CPB) comprises two reportable
segments: Commercial Banking and Private Banking. Commercial
Banking serves commercial and corporate customers in the UK.
Private Banking serves UK high net worth individuals and their
business interests.
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.
2018
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
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
Total
income
£m
6,282
610
6,892
3,374
775
4,149
594
1,442
325
13,402
6,477
604
7,081
3,484
678
4,162
389
1,050
451
13,133
6,127
576
6,703
3,415
657
4,072
374
1,212
229
12,590
Operating
expenses
£m
(3,482)
(583)
Depreciation
and
amortisation
£m
—
—
Impairment
(losses)/
releases
£m
(342)
(15)
Operating
profit/(loss)
£m
2,458
12
(4,065)
(1,747)
(476)
(2,223)
(254)
(1,589)
(783)
(8,914)
(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)
(15,416)
—
(125)
(2)
(127)
(6)
(15)
(583)
(731)
—
—
—
(144)
—
(144)
(2)
49
(711)
(808)
2
—
2
(143)
—
(143)
—
(14)
(623)
(778)
(357)
(144)
6
(138)
2
92
3
(398)
(235)
(60)
(295)
(362)
(6)
(368)
(3)
174
(1)
(493)
(125)
113
(12)
(206)
3
(203)
(10)
(253)
—
(478)
2,470
1,358
303
1,661
336
(70)
(1,038)
3,359
2,413
(132)
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)
Net fees
and
commissions
£m
1,078
91
Other
non-interest
income
£m
106
75
Net
interest
income
£m
5,098
444
5,542
2,040
518
2,558
466
112
(22)
1,169
897
228
1,125
101
(33)
(5)
8,656
2,357
5,130
421
5,551
2,286
464
2,750
325
203
158
8,987
4,945
409
5,354
2,143
449
2,592
303
343
116
8,708
1,099
94
1,193
1,030
179
1,209
42
24
(13)
2,455
1,147
82
1,229
1,031
181
1,212
50
55
(11)
2,535
181
437
29
466
27
1,363
352
2,389
248
89
337
168
35
203
22
823
306
1,691
35
85
120
241
27
268
21
814
124
1,347
191
Notes on the consolidated accounts
4 Segmental analysis continued
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
Total income
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
2018
Inter
segment
£m
68
—
68
84
195
279
Total
£m
7,221
668
7,889
3,695
876
4,571
148
916
(1,411)
—
654
2,798
744
16,656
22
(3)
19
(466)
120
(346)
125
(68)
270
—
6,282
610
6,892
3,374
775
4,149
594
1,442
325
13,402
External
£m
7,153
668
7,821
3,611
681
4,292
506
1,882
2,155
16,656
6,260
613
6,873
3,840
655
4,495
469
1,510
55
13,402
2017
Inter
segment
£m
44
(4)
40
74
143
217
Total
£m
7,392
672
8,064
3,664
728
4,392
119
809
(1,185)
—
428
2,217
962
16,063
12
(5)
7
(367)
84
(283)
108
(27)
195
—
6,477
604
7,081
3,484
678
4,162
389
1,050
451
13,133
External
£m
7,348
676
8,024
3,590
585
4,175
309
1,408
2,147
16,063
6,465
609
7,074
3,851
594
4,445
281
1,077
256
13,133
2016
Inter
segment
£m
52
1
53
68
172
240
Total
£m
7,249
661
7,910
3,706
739
4,445
156
1,539
(1,988)
—
469
3,247
(126)
15,945
12
(8)
4
(372)
103
(269)
135
(84)
214
—
6,127
576
6,703
3,415
657
4,072
374
1,212
229
12,590
External
£m
7,197
660
7,857
3,638
567
4,205
313
1,708
1,862
15,945
6,115
584
6,699
3,787
554
4,341
239
1,296
15
12,590
UK
Ulster Commercial
Private
RBS
NatWest
Central items
Analysis of net fees and commissions
2018
PBB Bank RoI
Banking
Banking
International
Markets
£m
£m
£m
£m
£m
£m
Fees and commissions receivable
- Payment services
- Credit and debit card fees
- Lending (credit facilities)
- Brokerage
- Investment management, trustee and fiduciary services
- Trade finance
- Underwriting fees
- Other
Total
Fees and commissions payable
Net fees and commissions
2017
Fees and commissions receivable
- Payment services
- Credit and debit card fees
- Lending (credit facilities)
- Brokerage
- Investment management, trustee and fiduciary services
- Trade finance
- Underwriting fees
- Other
470
474
465
62
49
1
27
8
1,556
(478)
1,078
435
527
495
69
72
1
—
6
34
22
29
6
4
2
—
1
98
(7)
91
30
27
30
10
4
2
—
—
313
103
358
—
—
121
3
54
952
(55)
897
302
99
438
—
35
163
—
46
Total
Fees and commissions payable
Net fees and commissions
1,605
103
1,083
(506)
1,099
(9)
94
(53)
1,030
33
13
2
5
191
1
—
16
261
(33)
228
37
12
2
6
133
1
—
15
206
(27)
179
25
—
29
—
42
4
—
2
102
(1)
101
24
—
10
—
4
3
—
2
43
(1)
42
3
—
88
85
—
3
144
67
390
(423)
(33)
1
—
83
63
1
3
157
132
440
(416)
24
& other
£m
—
—
—
—
—
—
—
(141)
(141)
136
(5)
—
—
2
—
—
—
—
(144)
(142)
129
(13)
Total
£m
878
612
971
158
286
132
174
7
3,218
(861)
2,357
829
665
1,060
148
249
173
157
57
3,338
(883)
2,455
192
Notes on the consolidated accounts
4 Segmental analysis continued
2016
Fees and commissions receivable
- Payment services
- Credit and debit card fees
- Lending (credit facilities)
- Brokerage
- Investment management, trustee and fiduciary services
- Trade finance
- Underwriting fees
- Other
Total
Fees and commissions payable
Net fees and commissions
UK
Ulster Commercial
Private
RBS
NatWest
Central items
PBB Bank RoI
Banking
Banking
International
Markets
£m
£m
£m
£m
£m
£m
429
507
500
63
84
1
—
7
1,591
(444)
1,147
27
25
30
7
3
2
—
—
94
(12)
82
320
93
406
1
37
157
—
65
1,079
(48)
1,031
32
18
2
7
118
1
—
28
206
(25)
181
24
2
11
1
(3)
5
—
21
61
24
—
95
71
—
30
83
202
505
(11)
50
(450)
55
& other
£m
—
—
—
4
11
—
—
(211)
(196)
185
(11)
Total
£m
856
645
1,044
154
250
196
83
112
3,340
(805)
2,535
UK Personal & Business Banking
Ulster Bank RoI
2018
Assets
£m
194,247
25,193
Liabilities
£m
187,678
21,189
2017
Assets
£m
190,636
24,564
Liabilities
£m
183,410
19,853
2016
Assets
£m
181,357
24,111
Liabilities
£m
173,040
19,299
Personal & Business Banking
219,440
208,867
215,200
203,263
205,468
192,339
Commercial Banking
Private Banking
143,242
21,983
100,918
28,554
149,545
20,290
105,144
27,049
150,453
18,578
104,441
26,673
Commercial & Private Banking
165,225
129,472
169,835
132,193
169,031
131,114
RBS International
NatWest Markets
Central items & other
Total
28,398
244,531
36,641
694,235
27,663
227,399
54,344
647,745
25,867
277,886
49,268
738,056
29,077
248,553
75,877
688,963
23,420
372,496
28,241
798,656
25,280
340,471
60,048
749,252
Segmental analysis of goodwill is as follows:
At 1 January 2017 and 31 December 2017
Acquisitions
Inter-segment transfers
At 31 December 2018
UK Personal
& Business
Banking
£m
3,351
48
(9)
3,390
Commercial &
Private
Banking
£m
1,907
—
9
1,916
RBS
International
£m
300
—
—
300
Total
£m
5,558
48
—
5,606
193
Notes on the consolidated accounts
4 Segmental analysis continued
Geographical segments
The geographical analysis in the tables below has been compiled on the basis of location of office where the transactions are recorded.
2018
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
Total liabilities
Net assets attributable to equity owners and non-controlling interests
Contingent liabilities and commitments
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
Total liabilities
Net assets attributable to equity owners and non-controlling interests
Contingent liabilities and commitments
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
Total liabilities
Net assets attributable to equity owners and non-controlling interests
Contingent liabilities and commitments
UK
£m
15,351
8,223
2,183
1,308
467
12,181
3,805
624,228
588,185
36,043
121,267
15,011
8,611
2,192
570
806
12,179
3,230
662,314
626,103
36,211
128,127
14,606
8,243
2,287
790
261
11,581
(2,214)
715,685
675,089
40,596
141,963
USA
£m
300
—
12
124
119
255
(718)
32,573
31,329
1,244
—
192
(4)
97
83
22
198
Europe
£m
838
404
102
68
229
803
150
34,441
27,183
7,258
5,408
655
346
113
(24)
121
556
(580)
38,485
36,564
1,921
78
(485)
34,280
25,171
9,109
7,823
264
82
9
159
(40)
210
738
302
175
18
9
504
(1,652)
44,447
44,513
(66)
639
(266)
32,142
26,311
5,831
8,038
RoW
£m
167
29
60
7
67
163
122
2,993
1,048
1,945
208
205
34
53
5
108
200
74
2,977
1,125
1,852
22
337
81
64
7
143
295
50
6,382
3,339
3,043
51
Total
£m
16,656
8,656
2,357
1,507
882
13,402
3,359
694,235
647,745
46,490
126,883
16,063
8,987
2,455
634
1,057
13,133
2,239
738,056
688,963
49,093
136,050
15,945
8,708
2,535
974
373
12,590
(4,082)
798,656
749,252
49,404
150,691
194
Notes on the consolidated accounts
5 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 section”) 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.
The Main section corporate trustee is RBS Pension Trustee Limited
(the Trustee), a wholly owned subsidiary of National Westminster Bank
Plc, Principal Employer of the Main section. 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.
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.
Investment strategy
The assets of the Main section, which is typical of other group
schemes, represent 90% of plan assets at 31 December 2018 (2017 -
90%) and are invested in a diversified portfolio as shown below.
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 for over ten years, 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.
The Main section employs derivative instruments to achieve a desired
asset class exposure and to reduce the section’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.
Major classes of plan assets as a percentage of
total plan assets of the Main section
Equities
Index linked bonds
Government bonds
Corporate and other bonds
Real estate
Derivatives
Cash and other assets
2018
Unquoted
%
5.2%
—
—
5.2%
5.5%
6.1%
9.1%
Total
%
8.9%
40.1%
12.9%
17.4%
5.5%
6.1%
9.1%
31.1%
100.0%
Quoted
%
3.7%
40.1%
12.9%
12.2%
—
—
—
68.9%
2017
Unquoted
%
4.0%
—
—
1.0%
5.2%
8.1%
4.2%
Total
%
25.9%
30.6%
9.2%
16.8%
5.2%
8.1%
4.2%
22.5%
100.0%
Quoted
%
21.9%
30.6%
9.2%
15.8%
—
—
—
77.5%
The Main section’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
13
55
10
1
4
4
2018
Fair value
Assets
£m
347
8,132
22
277
3
1,027
Liabilities
£m
502
5,362
164
—
1
1,092
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
Swaps have been executed at prevailing market rates and within
standard market bid/offer spreads with a number of counterparty
banks, including NatWest Markets Plc.
The schemes do not invest directly in the Group but can have
exposure to the Group. The trustees of the respective UK schemes are
responsible for ensuring that indirect investments in the Group do not
exceed the 5% regulatory limit.
At 31 December 2018, the gross notional value of the swaps was £72
billion (2017 - £57 billion) and had a net positive fair value of £2,557
million (2017 - £3,045 million) against which the banks had posted
approximately 103% collateral.
195
Notes on the consolidated accounts
5 Pensions continued
Main section
Changes in value of net pension liability/(asset)
At 1 January 2017
Currency translation and other adjustments
Income statement
Statement of comprehensive income
Contributions by employer
Contributions by plan participants and other scheme
members
Liabilities extinguished upon settlement
Benefits paid
At 1 January 2018
Currency translation and other adjustments
Income statement
Net interest expense
Current service cost
Past service cost
Loss on curtailments or settlements
Present
value
of defined
Fair
value of
plan assets
£m
Asset
ceiling/
benefit minimum
obligation funding (1)
£m
4,973
—
134
1,608
—
£m
43,824 38,851
—
1,266
(9)
—
—
1,155
1,580
264
Net
pension
liability/
(asset)
£m
—
—
245
19
(264)
All schemes
Present
value
of defined
Fair
value of
plan assets
£m
Asset
ceiling/
benefit minimum
obligation funding (1)
£m
5,326
3
142
1,634
—
£m
49,229 43,990
46
1,518
4
—
46
1,285
1,728
627
4
4
—
—
(2,175)
(2,175)
44,652 37,937
—
—
—
—
—
6,715
—
—
—
—
—
—
10
10
(755)
(744)
(2,435)
(2,435)
49,746 42,378
17
20
—
—
—
7,105
(1)
1,123
—
—
—
1,123
939
190
14
—
1,143
171
—
—
—
171
(13)
190
14
—
191
1,242
—
—
—
1,242
1,043
240
14
74
1,371
179
—
—
—
179
Net
pension
liability/
(asset)
£m
87
3
375
(90)
(627)
—
(11)
—
(263)
(4)
(20)
240
14
74
308
Statement of comprehensive income
Return on plan assets excluding recognised interest income
Experience gains and losses
Effect of changes in actuarial financial assumptions
Effect of changes in actuarial demographic assumptions
Asset ceiling adjustments:
Attributable to contributions required by ring fencing
Other movements in the year
Contributions by employer
Contributions by plan participants and other scheme
members
Liabilities extinguished upon settlement
Transfer of pension assets and liabilities from Main section (2)
Benefits paid
At 31 December 2018
(1,891)
—
—
—
—
122
(2,338)
820
—
—
—
—
1,891
122
(2,338)
820
(2,090)
—
—
—
—
81
(2,537)
826
—
—
—
—
2,090
81
(2,537)
826
—
—
(1,891)
—
—
(1,396)
2,000
(468)
1,532
2,000
(468)
2,027
—
—
(2,090)
—
—
(1,630)
2,053
(546)
1,507
2,053
(546)
1,967
2,218
—
—
(2,218)
2,363
—
—
(2,363)
7
7
—
—
(198)
(276)
(2,027)
(2,027)
43,806 35,466
—
—
(78)
—
8,340
—
—
—
—
—
12
12
(259)
(259)
—
—
(2,282)
(2,282)
48,752 39,607
—
—
—
—
8,790
—
—
—
—
(355)
Notes:
(1) 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 section, where the surplus is not recognised.
(2) Includes adjustment for assets of £276 million and liabilities of £198 million transferred at no consideration to establish two separate sections of the RBS Group
Pension Fund because ring-fencing rules do not allow employees outside the ring-fenced group to be members of the Main section.
(3) The Group expects to make contributions to the Main section of £218 million in 2019.
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 Other assets, Note 17)
Net liabilities of schemes in deficit (included in Other liabilities, Note 20)
196
All schemes
2018
£m
48,752
39,607
9,145
8,790
355
2018
£m
520
(165)
355
2017
£m
49,746
42,378
7,368
7,105
263
2017
£m
392
(129)
263
Notes on the consolidated accounts
5 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 sponsor, with the support of the Scheme Actuary, agree the
assumptions used to value the liabilities and a Schedule of
Contributions required to eliminate any funding deficit. The funding
assumptions incorporate a margin for prudence over and above the
expected cost of providing the benefits promised to members, taking
into account the sponsor’s covenant and the investment strategy of the
scheme. Similar arrangements apply in the other territories where the
Group sponsors defined benefit pension schemes. The last funding
valuation of the Main section was at 31 December 2017 and next
funding valuation is due at 31 December 2020, to be agreed by 31
March 2022.
The triennial funding valuation of the Main section as at 31 December
2017 determined the funding level to be 96%, pension liabilities to be
£47 billion and the deficit to be £2 billion, which was eliminated by a £2
billion cash payment in October 2018. The average cost of the future
service of current members is 44% of basic salary before
administrative expenses and contributions from those members.
In October 2018 the Court ruled on the requirement to and method for
equalising guaranteed minimum pension benefits arising between
1990 and 1997 between men and women. In 2017 the Group
considered that equalisation would change the Main section’s defined
benefit obligation by 0.2%.The estimate was updated following the
clarity provided by the Court ruling and the impact of any future
conversion exercise to rectify the position. The £102 million cost on
revision of the previous estimate of the financial assumptions in
respect of equalisation is recognised in equity.
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. The ultimate
cost of the defined benefit obligations depends 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 section 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
Lump sum conversion rate at retirement
Longevity at age 60:
Current pensioners
Males
Females
Future pensioners, currently aged 40
Males
Females
Principal IAS 19 actuarial
assumptions
2017
%
2.6
2018
%
2.9
3.2
1.8
3.1
2.9
20
3.1
1.8
3.0
2.9
21
years
years
27.2
29.0
28.4
30.5
27.2
28.7
28.6
30.4
Principal assumptions of 2017 triennial valuation
2017
Fixed interest swap yield curve plus 0.8% per annum
RPI swap yield curve
Modelled allowance for relevant caps and floors
18%
28.1
29.7
29.3
31.5
Discount rate
The IAS 19 valuation uses a single discount rate by reference to the
yield on a basket of ‘high quality’ sterling corporate bonds. For the
triennial valuation discounting is by reference to a yield curve.
The weighted average duration of the Main section’s defined benefit
obligation at 31 December 2018 is 20 years (2017 – 21 years).
Significant judgement is required when setting the criteria for bonds to
be included in IAS 19’s basket of bonds that is used to determine the
discount rate used in the valuations. 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. Sensitivity to the
main assumptions is presented below.
197
Notes on the consolidated accounts
5 Pensions continued
The chart below shows the projected benefit payment pattern for the Main section in nominal terms. These cashflows are based on the most
recent formal actuarial valuation, effective 31 December 2017.
)
m
£
(
s
w
o
l
f
h
s
a
c
d
e
t
c
e
p
x
E
2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
0
5
10
15
20
25
30
35
40
45
50
55
60
65
70
75
80
85
90
95
100
Term (years)
The larger outflow in the first four years represents the expected level of transfers out to 31 December 2021.
The table below shows how the present value of the defined benefit obligation of the Main section would change if the key assumptions used
were changed independently. In practice the variables are somewhat correlated and do not move completely in isolation.
Increase in
(Decrease)/increase (Decrease)/increase net pension assets/
(obligations)
£m
in value of assets in value of liabilities
£m
£m
(2,214)
1,487
(5)
—
—
419
(2,218)
1,289
(7)
—
—
909
(1,644)
1,199
(1,644)
1,414
1,215
—
(1,964)
1,329
(1,964)
1,478
1,328
—
(570)
288
1,639
(1,414)
(1,215)
419
(254)
(40)
1,957
(1,478)
(1,328)
909
2018
0.25% increase in interest rates/discount rate
0.25% increase in inflation
0.25% increase in credit spreads
Longevity increase of one year
0.25% additional rate of increase in pensions in payment
Increase in equity values of 10% (1)
2017
0.25% increase in interest rates/discount rate
0.25% increase in inflation
0.25% increase in credit spreads
Longevity increase of one year
0.25% additional rate of increase in pensions in payment
Increase in equity values of 10% (1)
Note:
(1) Includes both quoted and private equity.
198
Notes on the consolidated accounts
5 Pensions continued
The defined benefit obligation of the Main section is attributable to the different classes of scheme members in the following proportions:
Membership category
Active members
Deferred members
Pensioners and dependants
The experience history of Group schemes is shown below:
2018
%
12.9
48.6
38.5
100.0
2017
%
16.2
47.3
36.5
100.0
History of defined benefit schemes
Fair value of plan assets
Present value of plan obligations
Net surplus/(deficit)
Main section
2016
£m
2017
£m
2018
£m
2014
£m
43,806 44,652 43,824 30,703 30,077 48,752 49,746 49,229 34,708 34,359
35,466 37,937 38,851 30,966 31,776 39,607 42,378 43,990 35,152 36,643
(2,284)
2014
£m
2015
£m
2015
£m
2018
£m
2017
£m
(1,699)
7,368
9,145
4,973
6,715
5,239
8,340
(263)
(444)
All schemes
2016
£m
Experience (losses)/gains on plan liabilities
Experience (losses)/gains on plan assets
Actual return on plan assets
Actual return on plan assets - %
(122)
(1,891)
(768)
(1.7%)
6 Auditor’s remuneration
(107)
1,580
2,735
658
8,562
9,872
(81)
233
(2,090)
(415)
(848)
703
6.2% 32.2% 2.3% 23.8% (1.7%)
3
4,629
5,766
794
(93)
1,728
9,254
3,013 10,708
18
5,171
6,485
6.1% 30.9% 2.2% 22.8%
258
(458)
749
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.
Amounts paid to the Group's auditors for statutory audit and other services are set out below:
Fees payable for the audit of the Group’s annual accounts (1)
- the audit of the company’s subsidiaries (1)
- audit-related assurance services (1,2)
Total audit and audit-related assurance services fees
Other assurance services
Corporate finance services (3)
Non-audit services
Total other services
2018
£m
3.5
27.5
2.9
33.9
1.3
0.2
—
1.5
2017
£m
4.0
22.9
4.3
31.2
1.7
0.2
-
1.9
2016
£m
4.0
20.7
4.0
28.7
3.4
0.2
—
3.6
Notes:
(1) The 2018 audit fee was approved by the Group Audit Committee. At 31 December 2018, £16 million has been billed in and paid in respect of 2018 Group audit
fees.
(2) Comprises fees of £1.1 million (2017 - £1.1 million) in relation to reviews of interim financial information, £1.1 million (2017 - £2.5 million) in respect of reports to
the Group’s regulators in the UK and overseas, £0.7 million (2017 - £0.7 million) in relation to non-statutory audit opinions.
(3) Comprises fees of £0.2 million (FY 2017 - £0.2 million) in respect of work performed by the auditors as reporting accountants on debt and equity issuances
undertaken by the Group.
199
Notes on the consolidated accounts
7 Tax
Current tax:
Charge for the year
Over provision in respect of prior years
Deferred tax:
(Charge)/credit for the year
Increase/(reduction) in the carrying value of deferred tax assets
Under provision in respect of prior years
Tax charge for the year
2018
£m
(1,092)
125
(967)
(280)
7
(35)
(1,275)
2017
£m
(1,018)
227
(791)
108
(30)
(111)
(824)
2016
£m
(1,126)
186
(940)
246
(317)
(155)
(1,166)
The actual tax charge differs from the expected tax (charge)/credit computed by applying the standard rate of UK corporation tax of 19% (2017
– 19.25%; 2016 – 20.00%) 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)
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
Increase/(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
2018
£m
(638)
(55)
(8)
—
(44)
(38)
(203)
(63)
47
(27)
14
7
(357)
90
(1,275)
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)
Notes:
(1) In recent years, the UK government has steadily reduced the rate of UK corporation tax, with the latest enacted rates standing at 19% from 1 April 2017 and
17% from 1 April 2020.
(2) 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.
Judgment: Tax contingencies
The Group’s income tax charge and its provisions for income taxes necessarily involve a 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 charges in the period when the matter is
resolved.
Deferred tax
Deferred tax asset
Deferred tax liability
Net deferred tax asset
2018
£m
(1,412)
454
(958)
2017
£m
(1,740)
583
(1,157)
200
Notes on the consolidated accounts
7 Tax continued
Net deferred tax asset comprised:
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 1 January 2018
Implementation of IFRS9 on 1 January 2018
(Credit)/charge to income statement
(Credit)/charge to other comprehensive income
Currency translation and other adjustments
At 31 December 2018
Accelerated
capital
allowances
£m
361
(29)
(126)
—
(14)
192
—
22
1
5
220
Pension
£m
(662)
—
3
266
—
(393)
—
(40)
(95)
—
(528)
Expense
provisions
£m
(322)
—
55
—
1
(266)
—
121
—
(14)
(159)
Financial
instruments
£m
395
—
46
(243)
—
198
16
154
(23)
4
349
Tax
losses
carried
forward
£m
(1,050)
—
121
—
(10)
(939)
—
5
—
(2)
(936)
Other
£m
137
—
(66)
(19)
(1)
51
—
46
33
(34)
96
Total
£m
(1,141)
(29)
33
4
(24)
(1,157)
16
308
(84)
(41)
(958)
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
- NatWest Markets Plc
- National Westminster Bank Plc
- Ulster Bank Limited
Total
Overseas tax losses carried forward
- Ulster Bank Ireland DAC
2018
£m
151
505
19
675
261
936
2017
£m
125
541
14
680
259
939
Critical accounting policy: Deferred Tax
The deferred tax assets of £1,412 million at 31 December 2018 (2017
- £1,740 million) principally comprise losses that arose in the UK, and
temporary differences. These deferred tax assets are recognised to
the extent that it is probable that there will be future taxable profits to
recover them.
Judgment - The Group has considered the carrying value of deferred
tax assets and concluded that, based on management’s estimates,
sufficient taxable profits will be generated in future years to recover
recognised deferred tax assets.
Estimate -These estimates are partly based on forecast performance
beyond the horizon for management’s detailed plans. They have
regard to inherent uncertainties, such as Brexit and climate change.
UK tax losses - Under UK tax rules, tax losses can be carried forward
indefinitely. As the recognised tax losses in the Group arose prior to 1
April 2015, credit in future periods is given against 25% of profits at the
main rate of UK corporation tax, excluding the Banking Surcharge 8%
rate introduced by The Finance (No. 2) Act 2015. Deferred tax assets
and liabilities at 31 December 2018 take into account the reduced
rates in respect of tax losses and temporary differences and where
appropriate, the banking surcharge inclusive rate in respect of other
banking temporary differences.
NatWest Markets Plc – NatWest Markets Plc expects that the balance
of recognised deferred tax asset at 31 December 2018 of £151 million
in respect of tax losses amounting to approximately £800 million will
be recovered by the end of 2024. Since 2012 NatWest Markets Plc
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,
£10.2 billion of losses have not been recognised in the deferred tax
balance at 31 December 2018; 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 £505 million
has been recognised in respect of total losses of £2,936 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 consumed by future taxable profits by the end of 2023.
201
Notes on the consolidated accounts
7 Tax continued
Overseas tax losses
Ulster Bank Ireland DAC – A deferred tax asset of £261 million has
been recognised in respect of losses of £2,089 million of total losses of
£8,855 million carried forward at 31 December 2018. 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 the £:€ exchange differences.
As UBIDAC continues to operate in a small open economy subject to
short term volatility and extended non-performing loan realisation
periods the company expects, in assessing its deferred tax asset on
tax losses, that they will be consumed by future taxable profits by the
end of 2027.
Unrecognised deferred tax
Deferred tax assets of £5,118 million (2017 - £6,356 million; 2016 -
£7,940, million) have not been recognised in respect of tax losses and
8 Earnings per share
other temporary differences carried forward of £25,597 million (2017 -
£30,049 million; 2016 - £33,376 million) in jurisdictions where doubt
exists over the availability of future taxable profits. Of these losses and
other temporary differences, £939 million expire within five years and
£5,992 million thereafter. The balance of tax losses and other
temporary differences carried forward has no expiry date.
Deferred tax liabilities of £257 million (2017 - £255 million; 2016 - £258
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. Changes to UK tax legislation
largely exempts from UK tax, overseas dividends received on or after
1 July 2009.
Earnings
Profit/(loss) attributable to ordinary shareholders
Weighted average number of shares (millions)
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
9 Trading assets and liabilities
Trading assets and liabilities comprise assets and liabilities held at fair value in trading portfolios.
2018
£m
1,622
12,009
52
12,061
Assets
Loans
Reverse repos
Collateral given
Other loans
Total loans
Securities
Central and local government
- UK
- US
- other
Other securities
Total securities
Total
Liabilities
Deposits
Repos
Collateral received
Other deposits
Total deposits
Debt securities in issue
Short positions
Total
2017
£m
752
11,867
69
11,936
2018
£m
24,759
19,036
1,308
45,103
6,834
4,689
13,498
4,995
30,016
75,119
25,645
20,187
1,788
47,620
903
23,827
72,350
2016
£m
(6,955)
11,692
51
11,743
2017
£m
36,272
21,558
651
58,481
3,514
3,667
14,736
5,593
27,510
85,991
28,363
22,683
1,302
52,348
1,107
28,527
81,982
202
Notes on the consolidated accounts
10 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.
Exchange rate contracts
Interest rate contracts
Credit derivatives
Equity and commodity contracts
Notional
amount
£bn
3,426
10,536
16
1
2018
Assets
£m
36,545
96,410
346
48
133,349
Liabilities
£m
38,230
90,444
208
15
128,897
Notional
amount
£bn
3,425
12,016
38
3
2017
Assets
£m
39,211
120,945
531
156
160,843
Liabilities
£m
41,681
112,160
558
107
154,506
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.
The majority of RBS’s fair value hedges involve interest rate swaps
hedging the fixed 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 due to the
movement of benchmark interest rates or foreign exchange rates on
forecast transactions and on recognised financial assets and financial
liabilities. This variability in cash flows is hedged by interest rate swaps
and forward foreign exchange contracts. 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
the relevant benchmark rate LIBOR, EURIBOR or the Bank of England
Official Bank Rate. The financial assets are loans to banks and
customer and the financial liabilities are bank and customer deposits
and LIBOR linked medium-term notes and other issued securities. The
variability in cash flows due to movements in the relevant benchmark
rate is hedged; this risk component is identified using the risk
management systems of RBS. This risk component comprises the
majority of cash flow variability risk.
For cash flow hedging relationships RBS determines that there is an
economic relationship between the hedged item and hedging
instrument via assessing the initial and ongoing effectiveness by
comparing movements in the fair value of the expected highly probable
forecast interest cash flows with movements in the fair value of the
expected changes in cash flows from the hedging interest rate swap.
Hedge effectiveness is measured on a cumulative basis over a time
period management determines to be appropriate. The method of
calculating hedge ineffectiveness is the hypothetical derivative
method. RBS uses the actual ratio between the hedged item and
hedging instrument to establish the hedge ratio for hedge accounting.
For fair value hedge relationships of interest rate risk, the hedged
items are typically large corporate fixed-rate loans, government
securities, fixed rate finance leases, fixed rate medium-term notes or
preference shares classified as debt. The hedged risk is the risk of
changes in the hedged items fair value attributable to changes in the
benchmark interest rate embedded in the hedged item. This risk
component is identified using the risk management systems of RBS.
This risk component comprises the majority of the hedged items fair
value risk.
For fair value hedge relationships RBS determines that there is an
economic relationship between the hedged items and hedging
instrument via assessing the initial and ongoing effectiveness by
comparing movements in the fair value of the hedged item attributable
to the hedged risk with movements in the fair value of the expected
changes in cash flows from the hedging interest rate swap. Hedge
effectiveness is measured on a cumulative basis over a time period
management determines to be appropriate. RBS uses either the actual
ratio between the hedged item and hedging instrument(s) or one that
minimises hedge ineffectiveness to establish the hedge ratio for hedge
accounting. RBS hedges the currency risk of its net investment in
foreign currency denominated operations with currency borrowings
and forward foreign exchange contracts. RBS reviews the value of the
investments net assets, executing hedges where appropriate to reduce
the sensitivity of capital ratios to foreign exchange rate movement.
The Group hedges currency risk in respect of its net investment in
foreign currency denominated operations with currency borrowings
and forward foreign exchange contracts. The Group reviews the value
of the investments net assets, executing hedges where appropriate, to
reduce the sensitivity of capital ratios to foreign exchange movements.
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
2018
Notional
£bn
Assets
£m
Liabilities
£m
2017
Assets
£m
Liabilities
£m
60.0
965
2,061
904
2,211
149.7
12.5
2.0
224.2
1,148
106
32
2,251
872
—
10
2,943
1,989
63
11
2,967
1,295
37
28
3,571
203
Notes on the consolidated accounts
10 Derivatives continued
The following table shows the period in which the hedging contract ends:
Fair value hedging
Hedging assets - Interest rate risk (£bn)
Hedging liabilities - Interest rate risk (£bn)
1.0
—
1.8
2.0
11.0
7.5
4.9
10.0
7.8
4.6
3.7
1.9
3.8
—
34.0
26.0
0-3 months
3-12 months
1-3 years
3-5 years
5-10 years
10-20 years
20+ years
Total
Cash flow hedging
Hedging assets
Interest rate risk (£bn)
Average fixed interest rate
Hedging liabilities
Interest rate risk (£bn)
Average fixed interest rate
Exchange rate risk (£bn)
Average USD - £ rate
Net investment hedging
Exchange rate risk (£bn)
Principal currency hedges
Average SAR - £ rate
Average CHF - £ rate
3.9
1.87
8.6
0.54
—
—
10.9
1.44
18.9
0.56
—
—
47.8
1.13
34.1
1.07
5.8
1.32
1.2
0.6
0.2
4.80
1.22
4.83
1.23
4.82
1.18
8.7
2.00
5.1
1.34
4.7
1.37
—
—
—
10.5
1.43
0.4
3.96
2.0
1.50
—
—
—
—
—
0.8
4.31
—
—
—
—
—
—
—
—
—
—
—
—
—
—
81.8
1.33
67.9
0.94
12.5
1.37
2.0
4.81
1.21
The table below analyses assets and liabilities subject to hedging derivatives.
2018
Fair value hedging - interest rate
Loans to banks and customers - amortised cost
Other financial assets - securities
Total
Other financial liabilities - debt securities in issue
Subordinated liabilities
Total
Fair value hedging - exchange rate
Other financial assets - securities
Cash flow hedging - interest rate
Loans to banks and customers - amortised cost
Bank and customer deposits
Cash flow hedging - exchange rate
Other financial liabilities - debt securities in issue
Subordinates liabilities
Total
Carrying value
(CV) of hedged
assets and liabilities
£m
Impact on
hedged items
included in CV
£m
Impact on hedged
items ceased to be
adjusted for hedging
gains or losses
£m
875
362
1,237
(19)
22
3
—
91
10
101
—
—
—
—
6,197
31,879
38,076
23,289
2,359
25,648
3
81,880
67,854
5,590
6,902
12,492
204
Notes on the consolidated accounts
10 Derivatives continued
Hedge ineffectiveness recognised in other operating income comprised:
Fair value hedging
Gains/(losses) on the hedged items attributable to the hedged risk
(Losses)/gains on the hedging instruments
Fair value hedging ineffectiveness
Cash flow hedging ineffectiveness
Total
2018
£m
54
(7)
47
(112)
(65)
2017
£m
(48)
78
30
9
39
2016
£m
1,146
(1,117)
29
(29)
—
The main sources of ineffectiveness for interest rate risk hedge accounting relationships are:
The effect of the counterparty credit risk on the fair value of the interest rate swap, which is not reflected in the fair value of the hedged item
attributable to the change in interest rate (fair value hedge).
Differences in the repricing basis between the hedging instrument and hedged cash flows (cash flow hedge); and
Upfront present values on the hedging derivatives where hedge accounting relationships have been designated after the trade date (cash
flow hedge and fair value hedge).
Additional information on cash flow hedging and hedging of net assets can be found in the Statement of Changes in Equity.
11 Financial instruments – classification
The following tables analyse financial assets and liabilities in accordance with the categories of financial instruments on an IFRS 9 basis at 31
December 2018 and on an IAS39 basis at 31 December 2017. Assets and liabilities outside the scope of IFRS 9/IAS 39 are shown within other
assets and other liabilities.
Assets
Cash and balances at central banks
Trading assets
Derivatives
Settlement balances
Loans to banks - amortised cost (3)
Loans to customers - amortised cost
Other financial assets
Intangible assets
Other assets
31 December 2018
Cash and balances at central banks
Trading assets
Derivatives
Settlement balances
Loans to banks - amortised cost (3)
Loans to customers - amortised cost
Other financial assets
Intangible assets
Other assets
31 December 2017
Held-for-
trading
£m
—
85,991
157,876
—
—
—
—
243,867
MFVTPL (1)
£m
—
75,119
131,098
—
1,638
—
207,855
DFV(2)
£m
—
—
—
—
—
—
Hedging
DFV(2) derivatives
£m
£m
—
—
2,967
Hedging
derivatives
£m
2,251
FVOCI
£m
—
—
—
46,077
—
Amortised
cost
£m
88,897
2,928
12,947
305,089
11,770
—
2,251
46,077
421,631
Available-
Loans and
for-sale receivables
£m
98,337
£m
—
—
—
190
—
—
190
—
43,968
—
—
43,968
2,517
11,517
310,116
3,643
—
—
426,130
2,967
Held-to-
maturity
£m
—
—
—
—
4,128
—
—
4,128
Other
assets
£m
6,616
9,805
16,421
Other
assets
£m
6,543
10,263
16,806
Total
£m
88,897
75,119
133,349
2,928
12,947
305,089
59,485
6,616
9,805
694,235
Total
£m
98,337
85,991
160,843
2,517
11,517
310,116
51,929
6,543
10,263
738,056
Notes:
(1) Mandatory fair value through profit or loss.
(2) Designated as at fair value through profit or loss.
(3) Includes items in the course of collection from other banks of £484 million (2017 - £1,017 million).
205
Notes on the consolidated accounts
11 Financial instruments - classification continued
Liabilities
Bank deposits (2)
Customer deposits (3)
Settlement balances
Trading liabilities
Derivatives
Other financial liabilities
Subordinated liabilities
Other liabilities
31 December 2018
Bank deposits (2)
Customer deposits (3)
Settlement balances
Trading liabilities
Derivatives
Other financial liabilities
Subordinated liabilities
Other liabilities
31 December 2017
Held-for-
trading
£m
—
—
—
72,350
125,954
—
—
—
198,304
—
—
—
81,982
150,935
—
—
—
232,917
DFV (1)
£m
—
—
—
—
—
2,840
867
—
3,707
—
—
—
—
—
4,277
939
—
5,216
Hedging
derivatives
£m
Amortised cost
£m
23,297
360,914
3,066
2,943
2,943
3,571
3,571
36,892
9,668
2,218
436,055
30,396
361,316
2,844
26,049
11,783
2,181
434,569
Other
liabilities
£m
6,736
6,736
12,690
12,690
£m
23,297
360,914
3,066
72,350
128,897
39,732
10,535
8,954
647,745
30,396
361,316
2,844
81,982
154,506
30,326
12,722
14,871
688,963
Notes:
(1) Designated as at fair value through profit or loss.
(2) Includes items in the course of transmission to other banks of £125 million (2017 - £214 million).
(3) The carrying amount of other customer accounts designated as at fair value through profit or loss is £26 million (2017 - £114 million) higher than the principal
amount.
The Group's financial assets and liabilities include:
Reverse repos
Loans to banks - amortised cost
Loans to customers - amortised cost
Trading assets
Repos
Bank deposits
Customer deposits
Trading liabilities
Amounts included in operating profit/(loss) before tax:
(Losses)/Gains on financial assets/liabilities designated as at fair value through profit or loss
2018
£m
(26)
2018
£m
3,539
9
24,759
941
3,774
25,645
2017
£m
60
2017
£m
2,152
2,308
36,272
3,839
6,669
28,363
2016
£m
(13)
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 agreements together with financial collateral received or given.
Instruments which can be offset
Potential for offset not recognised by IFRS
2018
Derivative assets
Derivative liabilities
Net position (1)
Trading reverse repos
Trading repos
Net position
2017
Derivative assets
Derivative liabilities
Net position (1)
Gross
£m
136,329
133,965
2,364
IFRS
offset
£m
(5,041)
(6,776)
1,735
Balance
sheet
£m
131,288
127,189
4,099
Effect of
master netting
and similar
agreements
£m
(106,762)
(106,762)
—
Cash
collateral
£m
(17,937)
(15,227)
(2,710)
Net amount after
Instruments
Other the effect of netting
arrangements and
related collateral
£m
2,120
1,734
386
financial
collateral
£m
(4,469)
(3,466)
(1,003)
outside
netting
arrangements
£m
2,061
1,708
353
53,148
55,864
(2,716)
(31,376)
(31,376)
—
21,772
24,488
(2,716)
(762)
(762)
—
—
—
—
(21,000)
(23,726)
2,726
175,670
170,405
5,265
(17,088)
(17,557)
469
158,582
152,848
5,734
(128,287)
(128,287)
—
(20,311)
(18,035)
(2,276)
(5,850)
(3,952)
(1,898)
Balance
sheet total
£m
133,349
128,897
4,452
24,759
25,645
(886)
160,843
154,506
6,337
36,272
28,363
7,909
10
—
10
4,134
2,574
1,560
42
—
42
2,987
1,157
1,830
2,261
1,658
603
3,403
2,307
1,096
Trading reverse repos
Trading repos
Net position
65,508
58,695
6,813
(32,639)
(32,639)
—
32,869
26,056
6,813
(329)
(329)
—
—
—
—
(32,498)
(25,727)
(6,771)
Note:
(1) The net IFRS offset balance of £1,735 million (2017 - £469 million) relates to variation margin netting reflected on other balance sheet lines.
206
Notes on the consolidated accounts
12 Financial instruments - valuation
Critical accounting policy: Fair value - financial instruments
In accordance with Accounting policies 13 and 21, financial
instruments classified as mandatory fair value through profit or loss,
held-for-trading or designated as at fair value through profit or loss and
financial assets classified as fair value through other comprehensive
income 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.
Modelled approaches may be used to measure instruments classed as
Level 2 or 3. Estimation expertise is required in the selection,
implementation and calibration of appropriate models. The resulting
modelled valuations are considered for accuracy and reliability.
Portfolio level adjustments consistent with IFRS 13 are raised to
incorporate counterparty credit risk, funding and margining risks.
Expert judgement is used in the initial measurement of modelled
products by control teams.
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 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 below.
Assets
Trading assets
Loans
Securities
Derivatives
Other financial assets
Loans
Securities
Total financial assets held at fair value
Liabilities
Trading liabilities
Deposits
Debt securities in issue
Short positions
Derivatives
Other financial liabilities
Debt securities in issue
Other deposits
Subordinated liabilities
Level 1
£m
2018
Level 2
£m
Level 3
£m
Level 1
£m
2017
Level 2
£m
—
22,003
—
—
40,132
62,135
—
—
18,941
—
—
—
—
44,983
7,312
131,513
768
6,172
190,748
47,243
791
4,886
127,709
2,348
212
867
120
701
1,836
136
507
3,300
377
112
—
1,188
280
—
—
—
19,648
10
—
37,147
56,805
—
—
23,715
2
—
—
—
58,331
7,009
159,109
—
6,450
230,899
52,109
1,057
4,796
152,886
3,141
874
939
Level 3
£m
150
853
1,724
56
505
3,288
239
50
16
1,618
262
—
—
Total financial liabilities held at fair value
18,941
184,056
1,957
23,717
215,802
2,185
Notes:
(1) Transfers between levels are deemed to have occurred at the beginning of the quarter in which the instruments were transferred.
(2) For an analysis of debt securities, by issuer, measurement classification and analysis of asset backed securities, and derivatives, by type and contract, refer to
Capital and Risk management – Credit risk.
(3) The determination of an instrument’s level cannot be made at a global product level as a single product type can be in more than one level. For example, a
single name corporate credit default swap could be in level 2 or level 3 depending on whether the reference counterparty’s obligations are liquid or illiquid.
207
Notes on the consolidated accounts
12 Financial instruments - valuation continued
Fair value hierarchy
Financial Instruments carried at fair value have been classified under
the IFRS fair value hierarchy as follows.
Level 1 – Instruments valued using unadjusted quoted prices in active
and liquid markets, for identical financial instruments. Examples
include government bonds, listed equity shares and certain exchange-
traded derivatives.
Level 2 - instruments valued using valuation techniques that have
observable inputs., Examples include 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.
Examples include cash instruments which trade infrequently, certain
syndicated and commercial mortgage loans, certain emerging markets
and derivatives with unobservable model inputs.
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 are valued directly from a price input typically
on a position by position basis and include cash, equities and most
debt securities.
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 third-party
benchmarking 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).
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.
Valuation control
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.
Independent price verification (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.
Where measurement differences are identified through the IPV
process these are grouped by fair value level and quality of data. If the
size of the difference exceeds defined thresholds adjustment to
independent levels are made.
IPV takes place at least each monthly, for all fair value positions. The
IPV control includes formalised reporting and escalation of any
valuation differences in breach of established thresholds.
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 Model Risk team.
Valuation Committees are made up of valuation specialists and senior
business representatives from various functions and oversees pricing,
reserving and valuations issues. These committees meet 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 Valuation Committees
and to discuss other relevant matters of including prudential valuation.
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
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.
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.
208
Notes on the consolidated accounts
12 Financial instruments - valuation continued
RBS 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.
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.
When valuing financial instruments in the trading book, adjustments
are made to mid-market valuations to cover bid-offer spread, funding
and credit risk. These adjustments are presented in the table below:
Adjustment
Funding – FVA
Credit – CVA
Bid – Offer
Product and deal specific
2018
£m
250
419
238
327
1,234
2017
£m
440
346
285
1,033
2,104
The reduction in valuation reserves was primarily driven by a
combination of trade close-out activity and a reallocation of product
and deal specific reserves that are now included within the discount
rate applied to the derivative cash flows. There was a net increase in
CVA due to the extension of the CVA reserve to include margin period
of risk on collateralised counterparties and a reclassification of product
and deal specific reserves to CVA.
Funding valuation adjustment (FVA)
FVA represents an estimate of the adjustment that a market participant
would make to incorporate funding costs and benefits that arise in
relation to derivative exposures. FVA is calculated as a portfolio level
adjustment.
Credit valuation adjustments (CVA)
CVA represents 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.
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
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.
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.
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.
Product and deal specific
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 2018, net gains of £59
million (2017 - £56 million) were carried forward. During the year, net
gains of £151 million (2017 - £64 million) were deferred and £148
million (2017 - £80 million) were recognised in the income statement.
Funding levels are applied to estimated potential future exposures. For
uncollateralised derivatives, the modelling of the exposure is
consistent with the approach used in the calculation of CVA, and the
counterparty contingent nature of the exposure is reflected in the
calculation. For collateralised derivatives, the exposure reflects initial
margin posting requirements.
Where system generated valuations do not accurately recover market
prices, manuals valuation adjustments are applied either at a position
or portfolio level. Manual adjustments are subject to the scrutiny of
independent control teams and are subject to monthly review by senior
management.
209
Notes on the consolidated accounts
12 Financial instruments – valuation: Level 3 ranges of unobservable inputs
Financial instrument
Valuation Technique
Unobservable inputs
Units
Trading assets and Other financial assets
Loans
Price-based
Debt securities
Equity Shares
Price-based
Price-based
Valuation
Valuation
Trading liabilities and Other financial liabilities
Customer accounts
DCF based on recoveries
Debt securities in issue
Price-based
Valuation
Derivative assets and liabilities
Credit derivatives
DCF based on recoveries
Option pricing
Interest rate & FX
derivatives
Price-based
Option pricing
Equity derivatives
Option pricing
Price
Price
Price
Discount factor
Fund NAV
Correlation
Interest rate
Price
Fund NAV
Credit spreads
Correlation
Volatility
Upfront points
Recovery rate
Price
Correlation
Volatility
Correlation
Forward
Volatility
%
GBP
GBP
%
%
%
%
CCY
GBP
bps
%
%
%
%
%
%
%
%
Points
%
2018
Low
0
0
0
8
80
High
132
154
24,181
11
120
2017
Low
0
0
0
9
80
High
101
370
585,066
13
120
(45)
(0.36)
99
1.74
(29)
(0.38)
86
2.61
21 JPY
0
136 EUR
622
56 JPY
0
149 EUR
977
18
(50)
47
0
10
90
(45)
1
(57)
864
1
500
80
80
100
40
110
99
76
92
7,106
49
0
(50)
38
0
10
(75)
0
(57)
146
7
500
80
80
99
40
100
292
95
189
11
Notes:
(1) The table above presents the range of values for significant inputs used in the valuation of level 3 assets and liabilities. The range represents the highest and
lowest values of the input parameters and therefore is not a measure of parameter uncertainty. 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, their 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.
(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.
(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, values may be 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 (NAV). Similarly for equity or bond fund investments, prices may be estimated from
valuation or credit statements using NAV or similar measures.
(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) Interest rate delta: these ranges represent the low/high marks on the relevant discounting curve.
(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 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.
210
Notes on the consolidated accounts
12 Financial instruments – valuation: 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. IFRS
requires extra disclosures in respect of level 3 instruments.
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.
Assets
Trading assets
Loans
Securities
Derivatives
Interest rate
Foreign exchange
Other
Other financial assets
Loans
Securities
Liabilities
Trading liabilities
Deposits
Debt securities in issue
Short positions
Derivatives
Interest rate
Foreign exchange
Other
Other financial liabilities
Debt securities in issue
Level 3
£m
2018
Favourable
£m
Unfavourable
£m
Level 3
£m
2017
Favourable
£m
Unfavourable
£m
10
20
120
10
10
10
50
230
40
10
—
70
10
—
10
140
(10)
(10)
(120)
(10)
(20)
(20)
(30)
(220)
(40)
(10)
—
(70)
(10)
(10)
(10)
(150)
150
853
1,340
148
236
56
505
3,288
239
50
16
1,104
358
156
262
2,185
—
30
140
10
10
—
20
210
20
—
—
120
10
10
10
170
—
(10)
(140)
(10)
(20)
—
(30)
(210)
(20)
—
—
(120)
(10)
(10)
(10)
(170)
120
701
1,487
130
219
136
507
3,300
377
112
—
808
279
101
280
1,957
211
Notes on the consolidated accounts
12 Financial instruments – valuation: level 3 sensitivities
The Level 3 sensitivities presented above 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.
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.
2018
2017
Trading Other financial
Total
Total
Trading Other financial
Total
Total
assets (3)
assets (4)
assets
liabilities
assets (3)
assets (4)
assets
liabilities
At 1 January (1)
Amounts recorded in the income statement (2)
Amounts 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
£m
2,692
(147)
—
1,307
(624)
—
871
(512)
(930)
—
2,657
£m
£m
530 3,222
31
178
23
23
19 1,326
(625)
(1)
—
—
16
887
(515)
(3)
(125) (1,055)
6
643 3,300
6
£m
£m
3,933
2,187
(593)
(344)
—
—
679
419
(231) (1,015)
371
401 1,788
(204)
(161)
(316) (2,286)
11
2,727
(2)
1,957
47
£m
604
21
2
315
(3)
—
20
—
(369)
(29)
561
£m
4,537
(572)
2
994
(1,018)
371
1,808
(161)
(2,655)
(18)
3,288
£m
2,997
(341)
—
530
(672)
—
412
(423)
(323)
5
2,185
(134)
(2)
158
6
24
4
(330)
—
(59)
271
(21)
5
(80)
276
595
(100)
Notes:
(1) Refer to Note 33 for further information on the impact of IFRS9 on classification and basis of preparation, year ended 31 December 2018 prepared under IFRS9
and prior years under IAS39.
(2) There were £185 million net losses on trading assets and liabilities (2017 - £240 million HFT) recorded in income from trading activities. Net losses on other
instruments of £190 million (2017 - £9 million gains) were recorded in other operating income and interest income as appropriate.
(3) Trading assets comprise assets held at fair value in trading portfolios.
(4) Other financial assets comprise fair value through other comprehensive income (2017 - available-for-sale), designated at fair value through profit or loss and
other fair value through profit or loss.
212
Notes on the consolidated accounts
12 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.
2018
Financial assets
Cash and balances at central banks
Settlement balances
Loans to banks
Loans to customers
Other financial assets
Securities
Financial liabilities
Bank deposits
Customer deposits
Settlement balances
Other financial liabilities
Debt securities in issue
Subordinated liabilities
Other liabilities - notes in circulation
2017
Financial assets
Cash and balances at central banks
Settlement balances
Loans to banks
Loans to customers
Other financial assets
Securities
Financial liabilities
Bank deposits
Customer deposits
Settlement balances
Other financial liabilities
Debt securities in issue
Subordinated liabilities
Other liabilities - notes in circulation
Items where fair value
approximates
carrying value
£bn
Carrying
value
£bn
Fair value
£bn
Fair value hierarchy level
Level 1
£bn
Level 2
£bn
Level 3
£bn
88.9
2.9
0.5
4.2
307.1
3.1
2.2
98.3
2.5
1.0
4.5
321.5
2.8
2.2
12.4
305.1
12.4
301.7
11.8
11.8
19.1
53.8
36.9
9.7
18.5
54.6
38.6
10.0
10.5
310.1
10.5
306.8
7.8
7.9
25.9
39.8
26.0
11.8
26.0
39.9
27.3
12.6
—
—
7.3
—
—
—
—
—
—
4.3
—
—
—
—
9.2
0.5
3.0
13.9
10.4
36.9
9.9
9.1
1.3
1.5
22.4
12.9
22.2
12.5
3.2
301.2
1.5
4.6
44.2
1.7
0.1
1.4
305.5
2.1
3.6
27.0
5.1
0.1
213
Notes on the consolidated accounts
12 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 to banks and customers
In estimating the fair value of net loans to customers and banks
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, 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.
13 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
Trading assets
Derivatives
Settlement balances
Loans to banks - amortised cost
Loans to customers - amortised cost
Other financial assets
Liabilities
Bank deposits
Customer deposits
Settlement balances
Trading liabilities
Derivatives
Other financial liabilities
Subordinated liabilities
Less than
12 months
£m
88,897
49,094
28,503
2,928
12,833
67,354
11,681
7,438
359,148
3,066
50,668
29,028
8,240
299
2018
More than
12 months
£m
—
26,025
104,846
—
114
237,735
47,804
15,859
1,766
—
21,682
99,869
31,492
10,236
Total
£m
88,897
75,119
133,349
2,928
12,947
305,089
59,485
23,297
360,914
3,066
72,350
128,897
39,732
10,535
Less than
12 months
£m
98,337
66,315
32,372
2,517
11,424
69,832
8,776
10,813
358,857
2,844
53,787
32,212
8,467
2,383
2017
More than
12 months
£m
—
19,676
128,471
—
93
240,284
43,153
19,583
2,459
—
28,195
122,294
21,859
10,339
Total
£m
98,337
85,991
160,843
2,517
11,517
310,116
51,929
30,396
361,316
2,844
81,982
154,506
30,326
12,722
214
Notes on the consolidated accounts
13 Financial instruments – maturity analysis continued
Assets and liabilities by contractual cash flow maturity
The tables below show the contractual undiscounted cash flows
receivable and payable, up to a period of 20 years, including future
receipts and payments of interest of financial assets and liabilities by
contractual maturity. The balances in the following tables do not agree
directly with the consolidated balance sheet, as the tables include all
cash flows relating to principal and future coupon payments, presented
on an undiscounted basis. The tables have been prepared on the
following basis:
Financial assets have been reflected in the time band of the latest date
on which they could be repaid, unless earlier repayment can be
demanded by RBS. Financial liabilities are included at the earliest date
on which the counterparty can require repayment, regardless of
whether or not such early repayment results in a penalty. If the
repayment of a financial instrument is triggered by, or is subject to,
specific criteria such as market price hurdles being reached, the asset
is included in the time band that contains the latest date on which it
can be repaid, regardless of early repayment.
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.
MFVTPL assets of £207.9 billion (2017 - £243.9 billion) and HFT
liabilities of £198.3 billion (2017 - £232.9 billion) have been excluded
from the following tables.
2018
Assets by contractual maturity
Cash and balances at central banks
Settlement balances
Loans to banks - amortised cost
Other financial assets (1)
Total maturing assets
Loans to customers - amortised cost
Derivatives held for hedging
Liabilities by contractual maturity
Bank deposits
Settlement balance
Other financial liabilities
Subordinated liabilities
Other liabilities (2)
Total maturing liabilities
Customer deposits
Derivatives held for hedging
Guarantees and commitments notional amount
Guarantees (3)
Commitments (4)
For notes to the above table refer to the 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
88,897
2,928
11,920
4,451
108,196
43,096
224
151,516
7,417
3,066
1,736
131
2,152
14,502
351,054
181
365,737
3,952
116,843
120,795
—
—
925
7,397
8,322
32,087
529
40,938
21
—
7,226
637
—
7,884
8,114
306
16,304
—
—
—
—
—
106
14,138
14,244
66,441
995
81,680
13,785
—
10,724
1,476
—
25,985
1,727
1,062
28,774
—
—
—
—
—
—
11,279
11,279
51,839
345
63,463
2,003
—
11,658
7,532
—
21,193
14
416
21,623
—
—
—
—
—
—
11,826
11,826
66,978
152
78,956
—
—
9,316
1,737
—
11,053
6
637
11,696
—
—
—
—
—
—
2,744
2,744
79,543
130
82,417
59
—
2,029
1,422
—
3,510
26
531
4,067
—
—
—
215
Notes on the consolidated accounts
13 Financial instruments – maturity analysis continued
2017
Assets by contractual maturity
Cash and balances at central banks
Settlement balances
Loans to banks - amortised cost
Other financial assets (1)
Total maturing assets
Loans to customers - amortised cost
Derivatives held for hedging
Liabilities by contractual maturity
Bank deposits
Settlement balances
Other financial liabilities
Subordinated liabilities
Other liabilities (2)
Total maturing liabilities
Customer deposits
Derivatives held for hedging
Guarantees and commitments notional amount
Guarantees (3)
Commitments (4)
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
2,517
10,792
3,675
115,321
45,898
281
161,500
9,180
2,844
4,360
87
2,186
18,657
356,340
212
375,209
7,718
121,229
128,947
—
—
633
5,889
6,522
32,031
832
39,385
1,740
—
4,777
2,645
—
9,162
3,843
289
13,294
—
—
94
11,960
12,054
65,077
1,336
78,467
3,614
—
10,640
1,515
—
15,769
1,052
1,188
18,009
—
—
—
11,312
11,312
52,016
334
63,662
16,023
—
3,731
1,620
—
21,374
77
526
21,977
—
—
—
12,813
12,813
68,500
166
81,479
61
—
9,762
7,746
—
17,569
20
813
18,402
—
—
—
3,638
3,638
81,995
111
85,744
71
—
49
2,582
—
2,702
28
738
3,468
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Notes:
(1) Other financial assets excludes equity shares.
(2) Other liabilities include notes in circulation.
(3) 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.
(4) 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.
216
Notes on the consolidated accounts
14 Loan impairment provisions
Loan exposure and impairment metrics
The table below summarises loans and related credit impairment measures on an IFRS 9 basis at 31 December 2018 and 1 January 2018 and
on an IAS 39 basis at 31 December 2017.
Loans - amortised cost
Stage 1
Stage 2
Stage 3
ECL provisions (2)
- Stage 1
- Stage 2
- Stage 3
ECL provision coverage (3)
- Stage 1 %
- Stage 2 %
- Stage 3 %
Impairment losses
ECL charge (4)
ECL loss rate - annualised (basis points)
Amounts written off
31 December
2018 (1)
£m
1 January
2018 (1)
£m
31 December
2017
£m
285,985
26,097
7,718
319,800
333,929
26,972
11,283
372,184
321,633
261
621
3,565
4,447
0.1
2.3
31.6
1.2
285
763
2,320
3,368
0.10
2.92
30.06
1.05
398
12.45
1,494
3,814
1.20
530
16.48
1,210
Notes:
(1) The analysis tables as at 31 December 2018 include all loans within IFRS 9 ECL scope and exclude debt securities. The comparative table at 1 January 2018
includes loans and debt securities of £50.4 billion, of which £42.7 billion related to debt securities classified as FVOCI. ECL on these debt securities at 1
January 2018 was £28 million, of which £4 million related to those classified as FVOCI.
(2) ECL provisions in the above table are provisions on loan assets only. Other ECL provisions not included, relate to cash, debt securities and contingent liabilities
and amount to £28 million, of which £5 million was FVOCI.
(3) ECL provisions coverage is ECL provisions divided by loans - amortised cost.
(4) ECL charge balances in the above table included a £3 million charge relating to other financial assets, of which a £1 million charge related to assets at FVOCI;
and a £31 million release related to contingent liabilities.
217
Notes on the consolidated accounts
14 Loan impairment provisions continued
Critical accounting policy: Loan impairment provisions
The Group's 2017 loan impairment provisions were established in
accordance with IAS 39 in respect of incurred losses. They comprised
individual and collective components as more fully explained in the
2017 Annual Report and Accounts. In 2018 the loan impairment
provisions have been established in accordance with IFRS 9.
Accounting policy 14 sets out how the expected loss approach is
applied. At 31 December 2018, customer loan impairment provisions
amounted to £3,368 million (2017 - £3,814 million). A loan is impaired
when there is objective evidence that the cash flows will not occur in
the manner expected when the loan was advanced. Such evidence
includes changes in the credit rating of a borrower, the failure to make
payments in accordance with the loan agreement; significant reduction
in the value of any security; breach of limits or covenants; 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.
The measurement of credit impairment under the IFRS expected loss
model depends on management’s assessment of any potential
deterioration in the creditworthiness of the borrower, its modelling of
expected performance and the application of economic forecasts. All
three elements require judgments that are potentially significant to the
estimate of impairment losses. Further information and sensitivity
analyses are on Page 119.
IFRS 9 ECL model design principles
To meet IFRS 9 requirements for ECL estimation, PD, LGD and EAD
used in the calculations must be:
Unbiased - material regulatory conservatism has been removed
to produce unbiased model estimates;
Point-in-time - recognise current economic conditions;
Forward-looking - incorporated into PD estimates and, where
appropriate, EAD and LGD estimates; and
For the life of the loan - all models produce a term structure to
allow a lifetime calculation for assets in Stage 2 and Stage 3.
IFRS 9 requires that at each reporting date, an entity shall assess
whether the credit risk on an account has increased significantly since
initial recognition. Part of this assessment requires a comparison to be
made between the current lifetime PD (i.e. the current probability of
default over the remaining lifetime) with the equivalent lifetime PD as
determined at the date of initial recognition.
The general approach for the IFRS 9 LGD models has been to
leverage the Basel LGD models with bespoke IFRS 9 adjustments to
ensure unbiased estimates, i.e. use of effective interest rate as the
discount rate and the removal of: downturn calibration, indirect costs,
other conservatism and regulatory floors.
For Wholesale, while conversion ratios in the historical data show
temporal variations, these cannot (unlike in the case of PD and some
LGD models) be sufficiently explained by the CCI measure and are
presumed to be driven to a larger extent by exposure management
practices. Therefore point-in-time best estimates measures for EAD
are derived by estimating the regulatory model specification on a
rolling five year window.
Approach for multiple economic scenarios (MES)
The base scenario plays a greater part in the calculation of ECL than
the approach to MES.
15 Other financial assets
2018
Mandatory fair value through profit or loss
Fair value through other comprehensive income
Amortised cost
Total
2017
Designated as at fair value through profit or loss
Available-for-sale
Loans and receivables
Held-to-maturity
Total
Debt securities
Central and local government
UK
£m
—
17,192
6,928
24,120
—
17,656
—
4,128
21,784
US
£m
—
11,767
264
12,031
—
8,461
—
—
8,461
Other
£m
—
11,329
120
11,449
—
11,454
—
—
11,454
Other
debt
£m
669
5,306
4,458
10,433
—
6,110
3,643
—
9,753
Total
£m
669
45,594
11,770
58,033
—
43,681
3,643
4,128
51,452
Equity
shares
£m
65
483
—
548
134
287
—
—
421
Other
loans
£m
904
—
—
904
56
—
—
—
56
Total
£m
1,638
46,077
11,770
59,485
190
43,968
3,643
4,128
51,929
Equity shares classified as fair value through other comprehensive income include the following entities and 2018 dividend income received;
VISA Inc. £98 million (dividend of £1 million) and Tradeweb Markets LLC £89 million (dividend of £4 million).
218
Notes on the consolidated accounts
16 Intangible assets
Cost
At 1 January
Currency translation and other adjustments
Acquisition of subsidiaries
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
Net book value at 31 December
Note:
(1) Principally internally generated software.
Goodwill
£m
18,039
77
48
—
—
18,164
12,481
77
—
—
—
12,558
5,606
2018
Other (1)
£m
2,259
9
2
364
(610)
2,024
1,274
5
(573)
271
37
1,014
1,010
Total
£m
20,298
86
50
364
(610)
20,188
13,755
82
(573)
271
37
13,572
6,616
Goodwill
£m
17,756
283
—
—
—
18,039
12,198
283
—
—
—
12,481
5,558
2017
Other (1)
£m
2,095
(3)
—
384
(217)
2,259
1,173
(5)
(145)
222
29
1,274
985
Total
£m
19,851
280
—
384
(217)
20,298
13,371
278
(145)
222
29
13,755
6,543
Intangible assets other than goodwill are reviewed for indicators of
impairment. In 2018 £37 million (2017 - £29 million) of previously
capitalised software was impaired primarily as a result of software
which is no longer expected to yield future economic benefit.
The Group’s goodwill acquired in business combinations analysed by
reportable segment in Note 4, Segmental analysis. It is reviewed
annually at 31 December for impairment. No impairment was indicated
at 31 December 2018 or 2017.
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. In
2018, the methodology was enhanced to reflect legal entity changes in
the group. Consequently certain corporate assets, represented
primarily by bonds and liquidity assets in Treasury are no longer
considered to be directly attributable or directly available to the CGUs.
These assets are, therefore, not included in the carrying value of the
CGUs, resulting in an increase in the available headroom for some
CGUs. 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. The
recoverable amounts for all CGUs at 31 December 2018 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.
Critical accounting policy: Goodwill
Critical estimates
Impairment testing involves a number of judgemental areas: the
preparation of cash flow forecasts for periods that are beyond the
normal requirements of management reporting; the assessment of
discount rates appropriate to each business; estimation of the fair
value of the CGUs; and the valuation of separable assets of each
business whose goodwill is reviewed.
The sensitivity to the more significant variables in each assessment is
presented below.
31 December 2018
UK Personal & Business Banking
Commercial & Private Banking
RBS International
31 December 2017
UK Personal & Business Banking
Commercial & Private Banking
RBS International
Break
even
discount
rate
%
27.7
17.6
18.5
21.6
13.9
12.8
Assumptions
Terminal
growth rate discount rate
%
13.1
13.0
12.9
%
1.8
1.8
1.8
Recoverable
Pre-tax amount exceeded
carrying value
£bn
14.4
4.5
0.7
Goodwill
£bn
3.4
1.9
0.3
Consequential impact of 1% Consequential impact of 5%
adverse movement in
Discount
rate
£bn
(2.2)
(1.2)
(0.2)
Terminal
growth rate
£bn
(1.4)
(0.8)
(0.2)
adverse movement
Forecast
Income
£bn
(4.0)
(2.3)
(0.4)
Forecast
cost
£bn
(1.7)
(1.0)
(0.1)
3.4
1.9
0.3
2.0
2.0
2.0
13.1
12.9
11.0
9.7
1.3
0.6
(1.8)
(1.2)
(0.4)
(1.2)
(0.8)
(0.3)
(4.0)
(2.4)
(0.4)
(1.7)
(1.0)
(0.1)
219
Notes on the consolidated accounts
17 Other assets
Property, plant and equipment
Deferred tax (Note 7)
Assets of disposal groups (1)
Prepayments
Accrued income
Interests in associates (2)
Pension schemes in net surplus (Note 5)
Tax recoverable
Other assets
Notes:
(1) Includes interest in Alawwal Bank £1,179 million (2017 - nil).
(2) Includes interest in Business Growth Fund £387 million (2017 - £316 million).
18 Other financial liabilities
Customer deposits
- designated as at fair value through profit or loss
Debt securities in issue
- designated as at fair value through profit or loss
- amortised cost
Total
19 Subordinated liabilities
Dated loan capital
Undated loan capital
Preference shares
2018
£m
4,351
1,412
1,404
435
317
404
520
37
925
9,805
2018
£m
212
2,628
36,892
39,732
2018
£m
8,262
2,127
146
10,535
2017
£m
4,602
1,740
195
392
378
1,410
392
27
1,127
10,263
2017
£m
874
3,403
26,049
30,326
2017
£m
10,394
2,169
159
12,722
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.
220
Notes on the consolidated accounts
19 Subordinated liabilities continued
Redemptions
The Royal Bank of Scotland Group plc
US$350 million 4.70% dated notes 2018
£200 million 7.387% Series 1 non-cumulative convertible £0.01 preference shares
(partial redemption)
US$1,000 million 9.118% Series 1 non-cumulative convertible preference shares of US$0.01
(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% dated notes 2042 (partial redemption)
Capital
treatment
£m
Ineligible
Ineligible
Ineligible
Ineligible
Ineligible
Ineligible
Ineligible
NatWest Markets Plc
€2,000 million 6.934% dated notes 2018
£103 million 9.5% undated subordinated bonds 2018 (callable August 2018)
€750 million 4.35% subordinated notes 2017
CHF124 million 9.375% subordinated notes 2022
CAD420 million 10.50% subordinated notes 2022
£564 million 10.50% subordinated notes 2022
AU$880 million 13.125% subordinated notes 2022
US$2,132 million 9.50% subordinated notes 2022
€100 million floating rate subordinated notes 2017
£51 million 2.35% + 5 year UK Gilts yield undated subordinated notes (callable December 2012) Ineligible
Tier 2
Ineligible
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
NWM N.V. and subsidiaries
US$500 million 4.65% dated notes 2018
US$16 million floating rate notes 2019 (partial redemption)
€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 2 capital (partial redemption)
€38 million 11.375% perpetual Tier 2 capital (partial redemption)
There were no issuances in 2018 or 2017.
Tier 2
Tier 2
Tier 2
Tier 2
Tier 2
Tier 2
Tier 2
2018
£m
267
—
—
—
—
—
—
2017
£m
—
15
48
120
186
577
360
267
1,306
1,743
103
—
—
—
—
—
—
—
—
1,846
—
—
141
2
—
—
—
143
—
—
—
—
—
645
101
255
489
548
1,724
90
51
3,903
178
178
—
—
2
80
244
326
9
6
15
221
Notes on the consolidated accounts
20 Other liabilities
Retirement benefit liabilities (Note 5)
Deferred tax (Note 7)
Liabilities of disposal groups
Notes in circulation
Current tax
Accruals
Deferred income
Other liabilities
Provisions for liabilities and charges
Provisions for liabilities and charges
At 1 January 2018
Implementation of IFRS 9 on 1 January 2018
ECL impairment charge
RMBS transfer
Transfer from accruals and other liabilities
Currency translation and other movements
Charge to income statement
Releases to income statement
Provisions utilised
At 31 December 2018
2018
£m
165
454
1
2,152
100
1,047
451
1,580
3,004
8,954
Other (3)
£m
1,950
85
(18)
—
15
(1)
429
(304)
(1,166)
990
2017
£m
129
583
10
2,186
227
1,074
469
2,436
7,757
14,871
Total
£m
7,757
85
(18)
—
7
189
2,095
(763)
(6,348)
3,004
Payment
protection
insurance
£m
1,053
—
—
—
—
—
200
—
(558)
695
Other
customer
redress
£m
870
—
—
—
(4)
8
245
(134)
(449)
536
DoJ (2)
£m
3,243
—
—
(683)
—
161
1,040
—
(3,761)
—
Litigation
and other
regulatory
£m
641
—
—
683
(4)
21
181
(325)
(414)
783
Notes:
(1) Refer to Note 33 for further details on the impact of IFRS 9 on classification and basis of preparation.
(2) The RMBS provision has been redesignated DoJ and the remaining RMBS litigation matters transferred to Litigation and other regulatory as of 1 January 2018
to reflect progress on resolution.
(3) Materially comprises provisions relating to property closures and restructuring costs. At 1 January 2018 Other provisions for liabilities and charges included
£800 million in respect of a package of remedies that would conclude its State Aid commitments which were paid during 2018.
Payment protection insurance
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 £200 million in
2018 (2017 - £175 million, 2016 - £601 million, 2015 - £600 million) bringing the cumulative charge to £5.3 billion, of which £4.2 billion (79%) in
redress and £0.4 billion in administrative expenses had been paid by 31 December 2018. Of the £5.3 billion cumulative charge, £4.8 billion
relates to redress and £0.5 billion to administrative expenses.
The principal assumptions underlying the Group’s provision in respect of PPI sales are: assessment of the total number of complaints that the
Group will receive; 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 the Group’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)
Sensitivity
Actual to
date
2,779k
89%
£1,664
£152
Future
expected
260k
90%
£1,512
£151
Change in assumption
%
+/- 5
+/- 1
+/- 5
+/- 20k claims
Consequential change in
provision
£m
+/- 18
+/- 4
+/- 18
+/- 3
Notes:
(1) 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.
(2) Average uphold rate per customer initiated claims received directly by RBS including those received via CMCs, to end of timebar for both PPI (mis-sale) and
Plevin (commission), excluding those for which no PPI policy exists.
(3) Average redress for PPI (mis-sale) and Plevin (commission) pay-outs.
(4) Processing costs per claim on a valid complaints basis, includes direct staff costs and associated overhead - excluding FOS fees.
Background information for all material provisions is given in Note 27
Critical accounting policy: Provisions for liabilities
Judgment 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.
Estimates - 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. Any difference between the final outcome and the
amounts provided will affect the reported results in the period when the matter is resolved.
222
Notes on the consolidated accounts
21 Non-controlling interests
At 1 January 2017
Currency translation and other adjustments
Profit attributable to non-controlling interests
Dividends paid
Equity withdrawn and disposals
At 1 January 2018
Currency translation and other adjustments
Profit/(loss) attributable to non-controlling interests
Dividends paid
Equity withdrawn and disposals
At 31 December 2018
22 Share capital and other equity
Allotted, called up and fully paid
Ordinary shares of £1
Non-cumulative preference shares of US$0.01 (1)
Non-cumulative preference shares of €0.01 (2)
Non-cumulative preference shares of £1 (3)
Cumulative preference shares of £1
NWM N.V.
£m
733
22
30
(20)
(59)
706
24
13
—
—
743
Other
interests
£m
62
(5)
5
(5)
—
57
1
(21)
(5)
(21)
11
Total
£m
795
17
35
(25)
(59)
763
25
(8)
(5)
(21)
754
2018
£m
12,049
—
—
—
1
2017
£m
11,965
—
—
—
1
Number of shares
2018
2017
000s
12,048,605
10
—
—
900
000s
11,964,565
26,459
2,044
54
900
Notes:
(1) 26 million shares with a total nominal value of £0.2 million were redeemed in December 2018. (2017 – 46 million shares with a total nominal value of £0.3 million
were redeemed).
(2) 2 million shares, with a nominal value of €20 thousand, were redeemed in December 2018.
(3) 54,442 shares, with a nominal value of £54 thousand, were redeemed in December 2018.
Movement in allotted, called up and fully paid ordinary shares
At 1 January 2017
Shares issued
At 1 January 2018
Shares issued
At 31 December 2018
£m
11,823
142
11,965
84
12,049
Number of
shares - 000s
11,823,163
141,402
11,964,565
84,040
12,048,605
Ordinary shares
There is no authorised share capital under the company’s constitution.
At 31 December 2018, the directors had authority granted at the 2018
Annual General Meeting to issue up to £600 million nominal of
ordinary shares other than by pre-emption to existing shareholders.
On 6 February 2019 RBS held a General Meeting and shareholders
approved a special resolution to give authority for the Company to
make off-market purchases of ordinary shares from HM Treasury (or
its nominee) at such times as the Directors may determine is
appropriate. Full details of the proposal are set out in the Circular and
Notice of General Meeting.
During 2018, the company allotted and issued the following new
ordinary shares of £1 each. 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:
Month
April
July
Number
of shares
32 million
20 million
Subscription
price per share
261.7265p
253.5641p
Sale period
2018
23 Feb–17 Apr
27 Apr–16 Jul
Gross
Proceeds
£85.0m
£50.7m
Share price
on allotment
268.4p
243.7p
In the three years to 31 December 2018, the percentage increase in
issued share capital due to non pre-emptive issuance (excluding
employee share schemes) for cash was 2.6%. In addition, the
company issued 32 million ordinary shares of £1 each in connection
with employee share plans.
In 2018 RBS paid an interim dividend of £241 million, or 2.0p per
ordinary share. In addition, the company announced that the directors
have recommended a final dividend of 3.5p per ordinary share, and a
further special dividend of 7.5p per ordinary share, which are both
subject to shareholders’ approval at the Annual General Meeting on 25
April 2019.
If approved, payment will be made on 30 April 2019 to shareholders on
the register at the close of business on 22 March 2019. The ex-
dividend date will be 21 March 2019. No dividend was paid in 2017.
Other securities
Additional Tier 1 Notes issued by RBS having the legal form of debt
are classified as equity under IFRS. Capital recognised for regulatory
purposes cannot be redeemed without Prudential Regulation Authority
consent. This includes ordinary shares, preference shares and
additional Tier 1 Notes.
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.
Non-cumulative preference shares
Non-cumulative preference shares entitle their holders to periodic non-
cumulative cash dividends at specified fixed rates for each Series
payable out of distributable profits of the company.
The company may redeem some or all of the non-cumulative
preference shares from time to time at the rates detailed in the table
below plus dividends otherwise payable for the then current dividend
period to the date of redemption.
In December 2018, the company redeemed in whole the Series S non-
cumulative preference shares of US$0.01, Series 1,2 and 3 non-
cumulative preference shares of €0.01 and Series 1 non-cumulative
preference shares of £1. 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.
223
Notes on the consolidated accounts
22 Share capital and other equity continued
Non-cumulative preference shares classified as equity
Shares of US$0.01 - Series U
Number of shares
Redemption
Redemption
in issue
10,130
Interest rate
floating
date on or after
price per share
29 September 2017 US$100,000
Note:
(1) Those preference shares where distributions are discretionary are classified as equity.
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.
Paid-in equity - comprises equity instruments issued by the company
other than those legally constituted as shares.
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.
Additional Tier 1 notes (1)
US$2.0 billion 7.5% notes callable August 2020 (2)
US$1.15 billion 8% notes callable August 2025 (2)
US$2.65 billion 8.625% notes callable
August 2021 (3)
EMTN notes
US$564 million 6.99% capital securities
(redeemed October 2017)
CAD321 million 6.666% notes
(redeemed October 2017)
Trust preferred issues: subordinated notes (4)
£93 million 5.6457% 2047
(redeemed June 2017) (5)
2018
£m
2017
£m
2016
£m
1,278
734
1,278
734
1,278
734
2,046
2,046
2,046
-
-
-
-
-
-
275
156
93
4,058
4,058 4,582
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 most recent dividend payment
due on the Series U non-cumulative dollar 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.
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.
224
Notes on the consolidated accounts
22 Share capital and other equity continued
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 2018, 8 million ordinary shares of
£1 each of the company (2017 - 16 million) were held by employee
share trusts in respect of share awards and options granted to
23 Leases
employees. During the year, the employee share trusts purchased 25
million ordinary shares and delivered 33 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.
Gross
amounts
£m
3,237
4,566
1,935
9,738
3,164
4,686
2,062
9,912
Year in which receipt will occur
2018
Within 1 year
After 1 year but within 5 years
After 5 years
Total
2017
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
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
(208)
(370)
(710)
(1,288)
(212)
(444)
(742)
(1,398)
(123)
(100)
(38)
(261)
(125)
(94)
(27)
(246)
(70)
—
—
(70)
(70)
—
—
(70)
2018
£m
(44)
233
Operating lease
assets:
future minimum
lease rentals
£m
139
325
49
513
129
257
21
407
2017
£m
283
45
271
599
2016
£m
(76)
239
Present
value
£m
2,836
4,096
1,187
8,119
2,757
4,148
1,293
8,198
2018
£m
313
11
285
609
2017
£m
(34)
221
Finance lease contracts and hire purchase agreements
Accumulated allowance for uncollectable minimum receivables
62
63
54
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.
Operating leases
- transportation
- cars and light commercial vehicles
- other
Finance lease contracts
Hire purchase agreements
2018
Year in which residual value will be recovered
2017
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
25
1
26
68
55
175
15
1
19
32
2
69
94
2
37
67
—
200
After 5
years
£m
14
—
10
38
—
62
Total
£m
148
4
92
205
57
506
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
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.
225
Notes on the consolidated accounts
24 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 - RoI
Cash deposits
2018
Debt securities in issue
Held by third
parties
£m
778
Held by
RBS (1)
£m
2,239
Total
£m
3,017
Assets
£m
2,817
221
3,038
Assets
£m
4,073
518
4,591
2017
Debt securities in issue
Held by third
parties
£m
—
Held by
RBS (1)
£m
4,688
Total
£m
4,688
Note:
(1) Debt securities retained by RBS may be pledged with central banks.
Other credit risk transfer securitisations
RBS also transfers credit risk on originated loans and mortgages without the transfer of assets to an SE. As part of this, RBS enters into credit
derivative and financial guarantee contracts with consolidated SEs. At 31 December 2018, debt securities in issue by such SEs (and held by
third parties) were £596 million (2017 - £398 million). The associated loans and mortgages at 31 December 2018 were £8,402 million (2017 -
£6,092 million).
Covered debt programme
Group companies have assigned loans to customers and debt investments to bankruptcy remote limited liability partnerships to provide security
for issues of debt securities. RBS retains all of the risks and rewards of these assets and continues to recognise them. The partnerships are
consolidated by RBS and the related covered bonds included within other financial liabilities. At 31 December 2018, £9,446 million (2017 -
£8,915) of loans to customers and £478 million (2017 - £76 million) of debt investments provided security for debt securities in issue and other
borrowing of £6,627 million (2017 - £6,307 million).
226
Notes on the consolidated accounts
24 Structured entities continued
Unconsolidated structured entities
RBS’s interests in unconsolidated structured entities are analysed below
Trading assets and derivatives
Trading assets
Derivative assets
Derivative liabilities
Total
Non trading assets
Loans to customers
Other financial assets
Total
Liquidity facilities/loan commitments
Guarantees
Asset backed
securitisation
vehicles
£m
2018
Investment
funds
and other
£m
Asset backed
securitisation
vehicles
£m
Total
£m
2017
Investment
funds
and other
£m
590
495
(223)
862
1,636
4,461
6,097
2,138
3
164
325
(332)
157
544
—
544
213
10
754
820
(555)
1,019
2,180
4,461
6,641
2,351
13
884
660
(561)
983
1,243
3,888
5,131
2,117
229
131
117
(131)
117
120
141
261
455
5
Total
£m
1,015
777
(692)
1,100
1,363
4,029
5,392
2,572
234
Maximum exposure
9,100
924
10,024
8,460
838
9,298
25 Asset transfers
Transfers that do not qualify for derecognition
RBS enters into securities repurchase, lending and total return
transactions in accordance with normal market practice which includes
the provision of additional collateral if necessary. Under standard
terms in the UK and US markets, the recipient has an unrestricted right
to sell or repledge collateral, subject to returning equivalent securities
on settlement of the transaction.
Securities sold under repurchase transactions and transactions with
the substance of securities repurchase agreements 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 transactions included on the balance sheet, are set out
below. All of these securities could be sold or repledged by the holder.
The following assets have failed derecognition (1)
Trading assets
Other financial assets
Note:
(1) Associated liabilities were £23,222 million (2017 - £23,692 million).
Assets pledged as collateral
The Group pledges collateral with its counterparties in respect of derivative liabilities and bank and other borrowings.
Assets pledged against liabilities
Trading assets
Loans to banks - amortised cost
Loans to customers - amortised cost
Other financial assets
Liabilities secured by assets
Bank deposits
Derivatives
2018
£m
14,020
9,890
23,910
2017
£m
10,463
13,717
24,180
2018
£m
35,571
1,050
25,930
713
63,264
16,326
21,884
38,210
2017
£m
36,631
738
31,312
3,397
72,078
20,226
22,956
43,182
227
Notes on the consolidated accounts
26 Capital resources
Under Capital Requirements Regulation (CRR), regulators within the European Union monitor capital on a legal entity basis, with local
transitional arrangements on the phasing in of end-point CRR.
The capital resources based on the PRA transitional basis for Bank are set out below.
PRA transitional basis
2018
£m
45,736
(496)
(4,058)
41,182
(405)
(394)
191
(740)
(494)
(6,616)
(654)
(1,326)
(105)
(10,543)
30,639
4,051
1,393
140
5,584
2017
£m
48,330
(2,565)
(4,058)
41,707
(90)
(287)
(227)
(849)
(496)
(6,543)
(1,286)
—
28
(9,750)
31,957
4,041
3,416
140
7,597
36,223
39,554
6,386
1,565
7,951
6,501
1,876
8,377
44,174
47,931
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.
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
Foreseeable ordinary and special dividends
Other regulatory adjustments
CET1 capital
Additional Tier 1 (AT1) capital
Qualifying instruments and related share premium
Qualifying instruments and related share premium subject to phase out
Qualifying instruments issued by subsidiaries and held by third parties subject to phase out
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
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.
228
Notes on the consolidated accounts
27 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 2018.
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
1 year but
less than
3 years
£m
More than
3 years but
less than
5 years
£m
Over
5 years
£m
2018
£m
2017
£m
414
582
20,934
21,930
250
211
32,535
32,996
3,952
1,992
1,148
3,052
5,305 119,879
8,445 126,883
7,718
3,391
124,941
136,050
Less than
1 year
£m
1,296
1,111
61,105
63,512
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
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: £253 million (2017 - £276 million).
2018
£m
2017
£m
232
736
1,721
2,689
17
541
3,247
220
696
1,676
2,592
18
682
3,292
229
Notes on the consolidated accounts
27 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
£257 million (2017 - £244 million; 2016 - £251 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 FSC had 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 has now repaid all outstanding loans
with the final £4.7 billion being repaid in June 2018. The loan was
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.
RBS Group has accrued £1.8 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.
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.
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.
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 261.
Litigation
Residential mortgage-backed securities (RMBS) litigation in the US
RBS companies continue to defend RMBS-related claims in the US in
which plaintiffs allege 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 RMBS
were issued. 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. In addition, NatWest Markets Securities
Inc. previously agreed to settle a purported RMBS class action entitled
New Jersey Carpenters Health Fund v. Novastar Mortgage Inc. et al.
for US$55.3 million, which has been paid into escrow pending court
approval of the settlement.
London Interbank Offered Rate (LIBOR) and other rates litigation
NatWest Markets Plc and certain other members of the Group,
including RBSG, are defendants in a number of class actions and
individual claims pending in the US (primarily in the United States
District Court for the Southern District of New York (SDNY)) with
respect to the setting of LIBOR and certain other benchmark interest
rates. The complaints allege that certain members of the Group and
other panel banks 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.
Several class actions relating to USD LIBOR, as well as more than two
dozen non-class actions concerning USD LIBOR, are part of a
coordinated proceeding in the SDNY. In December 2016, the SDNY
held that it lacks personal jurisdiction over NatWest Markets Plc with
respect to certain claims. As a result of that decision, all Group
companies have been dismissed from each of the USD LIBOR-related
class actions (including class actions on behalf of over-the-counter
plaintiffs, exchanged-based purchaser plaintiffs, bondholder plaintiffs,
and lender plaintiffs), but six non-class cases in the coordinated
proceeding remain pending against Group defendants. The dismissal
of Group companies for lack of personal jurisdiction is the subject of a
pending appeal to the United States Court of Appeals for the Second
Circuit.
Among the non-class claims dismissed by the SDNY in December
2016 were claims that the Federal Deposit Insurance Corporation
(FDIC) had asserted on behalf of certain failed US banks. On 10 July
2017, the FDIC, on behalf of 39 failed US banks, commenced
substantially similar claims against RBS companies and others in the
High Court of Justice of England and Wales. The action alleges that
the defendants breached
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Litigation, investigations and reviews
English and European competition law as well as asserting common
law claims of fraud under US law.
In addition, there are two class actions relating to JPY LIBOR and
Euroyen TIBOR, both pending before the same judge in the SDNY. In
the first class action, which relates to Euroyen TIBOR futures
contracts, the court dismissed the plaintiffs’ antitrust claims in March
2014, but declined to dismiss their claims under the Commodity
Exchange Act for price manipulation, and the case is proceeding in the
discovery phase. The second class action relates to other derivatives
allegedly tied to JPY LIBOR and Euroyen TIBOR. The court dismissed
that case on 10 March 2017 on the ground that the plaintiffs lack
standing. The plaintiffs have commenced an appeal of that decision.
There is also a class action relating to the Singapore Interbank Offered
Rate and Singapore Swap Offer Rate pending in the SDNY. In that
case, the court denied defendants’ motion to dismiss on 5 October
2018. The court’s ruling would permit certain antitrust claims to
proceed against NatWest Markets Plc and other non-RBS defendants,
however, in November 2018, the defendants filed another motion to
dismiss plaintiffs’ claims.
Four other class action complaints were filed against RBS companies
in the SDNY, each relating to a different reference rate. In the case
relating to Pound Sterling LIBOR, the court dismissed all claims
against RBS companies, for various reasons, on 21 December 2018,
and plaintiffs are seeking reconsideration of that decision. In the case
relating to the Australian Bank Bill Swap Reference Rate, the court
dismissed all claims against RBS companies for lack of personal
jurisdiction on 26 November 2018, but plaintiffs have filed an amended
complaint, which will be the subject of a further motion to dismiss. In
the case relating to Euribor, the court dismissed all claims against RBS
companies for lack of personal jurisdiction on 21 February 2017. In the
case relating to Swiss Franc LIBOR, the court dismissed all claims
against all defendants on various grounds on 25 September 2017, but
held that it has personal jurisdiction over NatWest Markets Plc and
allowed the plaintiffs to replead their complaint. Defendants’ renewed
motion to dismiss the amended complaint relating to Swiss Franc
LIBOR remains pending.
NatWest Markets Plc has also been named as a defendant in a motion
to certify a class action relating to LIBOR in the Tel Aviv District Court
in Israel.
NatWest Markets Plc is defending a claim in the High Court in London
brought by London Bridge Holdings Ltd and others, in which the
claimants allege LIBOR manipulation in connection with the sale of
interest rate hedging products. The sum claimed in that case is £446.7
million.
On 4 February 2019, a claim was issued against NatWest Markets Plc
by London Borough of Newham, in respect of certain lender option
borrower option (LOBO) loans.
Details of UK litigation claims in relation to the alleged mis-sale of
interest rate hedging products (IRHPs) involving LIBOR-related
allegations are set out under ‘Interest rate hedging products litigation’
on page 232.
In January 2019, a class action antitrust complaint was filed in the
SDNY alleging that the defendants (USD ICE LIBOR panel banks and
affiliates) have conspired to suppress USD ICE LIBOR from 2014 to
the present by submitting incorrect information to ICE about their
borrowing costs. The RBS defendants are RBSG, NatWest Markets
Plc, NatWest Markets Securities Inc., and NatWest Plc.
FX antitrust litigation
NatWest Markets Plc and certain other members of the Group,
including RBSG, are defendants in several cases relating to NatWest
Markets Plc’s foreign exchange (FX) business, each of which is
pending before the same federal judge in the SDNY.
In 2015, RBS companies paid US$255 million to settle the
consolidated antitrust class action on behalf of persons who entered
into over-the-counter FX transactions with defendants or who traded
FX instruments on exchanges. That settlement received final court
approval in August 2018. On 7 November 2018, some members of the
settlement class who opted out of the settlement filed their own non-
class complaint in the SDNY asserting antitrust claims against RBS
companies and others. On 31 December 2018, some of the same
claimants, as well as others, filed proceedings in the High Court in
London, asserting competition claims against NatWest Markets Plc
and several other banks.
Two other FX-related class actions remain pending. First, there is a
class action on behalf of ‘consumers and end-user businesses,’ which
is proceeding in the discovery phase following the SDNY’s denial of
the defendants’ motions to dismiss in March 2018. Second, there is a
class action on behalf of ‘indirect purchasers’ of FX instruments (which
plaintiffs define as persons who transacted FX instruments with retail
foreign exchange dealers that transacted directly with defendant
banks). That case is also proceeding in discovery following the
SDNY’s denial of defendants’ motion to dismiss on 25 October 2018.
RBS companies have also been named as defendants in two motions
to certify FX-related class actions in the Tel Aviv District Court in
Israel.
Certain other foreign exchange transaction related claims have been
or may be threatened against RBS companies. RBS cannot predict
whether any of these claims will be pursued, but expects that some
may.
US Treasury securities antitrust litigation
NatWest Markets Securities Inc. is a defendant in a consolidated
antitrust class action pending in the SDNY on behalf of persons who
transacted in US Treasury securities or derivatives based on such
instruments, including futures and options. The plaintiffs allege that
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
defendants’ motion to dismiss this matter remains pending.
Swaps antitrust litigation
NatWest Markets Plc and other members of the Group, including
RBSG, as well as a number of other interest rate swap dealers, are
defendants in several cases pending in the SDNY alleging violations of
the US antitrust laws in the market for interest rate swaps. There is a
consolidated class action complaint on behalf of persons who entered
into interest rate swaps with the defendants, as well as non-class
action claims by three swap execution facilities (TeraExchange,
Javelin, and trueEx). The plaintiffs allege that the swap execution
facilities would have successfully established exchange-like trading of
interest rate swaps if the defendants had not unlawfully conspired to
prevent that from happening through boycotts and other means.
Discovery in these cases is ongoing.
In addition, on 8 June 2017, TeraExchange filed a complaint against
RBS companies, including RBSG, as well as a number of other credit
default swap dealers, in the SDNY. TeraExchange alleges it would
have established exchange-like trading of credit default swaps if the
defendant dealers had not engaged in an unlawful antitrust conspiracy.
On 1 October 2018, the court dismissed all claims against RBS
companies.
Madoff
NatWest Markets N.V. (NWM N.V.) is a defendant in two actions filed
by Irving Picard, as trustee for the bankruptcy estates of Bernard L.
Madoff and Bernard L. Madoff Investment Securities LLC, in
bankruptcy court in New York. In both cases, the trustee alleges that
certain transfers received by NatWest Markets N.V. amounted to
fraudulent conveyances that should be clawed back for the benefit of
the Madoff estate.
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Litigation, investigations and reviews
In the primary action, filed in December 2010, the trustee originally
sought to recover US$75.8 million in redemptions that NWM N.V.
allegedly received from certain Madoff feeder funds and US$162.1
million that NWM N.V. allegedly received from certain swap
counterparties. In August 2018, the trustee voluntarily dismissed a
portion of this claim (relating to US$74.6 million received from certain
swap counterparties) without prejudice to-refiling at a later date.
Otherwise this action remains pending before the bankruptcy court,
where it will in due course be the subject of a motion to dismiss. In the
second action, filed in October 2011, the trustee seeks to
recover an additional US$21.8 million. In November 2016, the
bankruptcy court dismissed this case on international comity grounds,
and that decision is currently on appeal to the United States Court of
Appeals for the Second Circuit.
Thornburg adversary proceeding
Certain RBS companies were 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 sought
recovery of transfers made under certain restructuring agreements as
avoidable fraudulent and preferential transfers. On 26 October 2018,
the bankruptcy court approved a US$23.5 million settlement of this
matter. RBS companies have paid this settlement amount, which was
covered by a provision existing as of 30 September 2018.
Interest rate hedging products and similar litigation
RBS is dealing with a number of active litigation claims in the UK in
relation to the alleged mis-selling of interest rate hedging products
(IRHPs). In general claimants allege that the relevant IRHPs were mis-
sold to them, with some also alleging that misrepresentations were
made in relation to LIBOR. Claims have been brought by customers
who were considered under the UK Financial Conduct Authority (FCA)
redress programme for IRHPs, as well as customers who were outside
of the scope of that programme, which was closed to new entrants on
31 March 2015. 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 NatWest Markets 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 Court of Appeal’s judgment dismissing the appeal was handed
down on 2 March 2018. On 24 July 2018 the Supreme Court declined
the request from PAG for permission to appeal an aspect of the
judgment relating to implied representations of Sterling LIBOR rates.
The Court of Appeal’s decision may impact other IRHP and LIBOR-
related cases currently pending in the English courts, some of which
involve substantial amounts.
Separately, NatWest Markets Plc is defending claims filed in France by
five French local authorities relating to structured interest rate swaps.
The plaintiffs allege, among other things, that the swaps are void for
being illegal transactions, that they were mis-sold, and that information
/ advisory duties were breached. One of the claims is now at an end
following the Court of Appeal’s dismissal of the claim, and is not being
appealed to the Supreme Court. Three of the claims were also
dismissed but are subject to appeal to the Supreme Court. The fifth
claim remains to be heard before the lower courts.
Tax dispute
HMRC issued a tax assessment in 2012 against NatWest Markets Plc
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 lodged
an appeal, which is still to be heard, 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 civil 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 claim
approximately £71.4 million plus interest and costs and allege that
NatWest Markets Plc 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 concluded on 20 July 2018 and judgment is awaited.
US Anti-Terrorism Act litigation
NatWest Plc is defending lawsuits filed in the United States District
Court for the Eastern District of New York 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 Plc is liable for
damages arising from those attacks pursuant to the US Anti-Terrorism
Act because NatWest Plc 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 October 2017, the trial court dismissed claims against NatWest Plc
with respect to two of the 18 terrorist attacks at issue. On 14 March
2018, the trial court granted a request by NatWest Plc for leave to file
a renewed summary judgment motion in respect of the remaining
claims, which has now been filed. No trial date has been set.
NatWest Markets N.V. and certain other financial institutions, are
defendants in several actions pending in the United States District
Courts for the Eastern and Southern Districts of New York, filed 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
attacks in Iraq between 2003 and 2011. NatWest Markets Plc is also a
defendant in some of these cases.
The attacks at issue in the cases were allegedly perpetrated by
Hezbollah and certain Iraqi terror cells allegedly funded by the Islamic
Republic of Iran. According to the plaintiffs’ allegations, the 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. The first of these actions was
filed in the United States District Court for the Eastern District of New
York in November 2014. On 27 July 2018, the magistrate judge in that
case issued a report to the district court recommending that the district
court deny the defendants’ pending motion to dismiss. NatWest
Markets N.V. has requested that the district court grant the motion to
dismiss notwithstanding the magistrate’s recommendation. The other
actions are either subject to a pending motion to dismiss, or will be the
subject of such a motion in due course.
Securities underwriting litigation
NatWest Markets Securities Inc. is an underwriter defendant in several
securities class actions in the US in which plaintiffs generally allege
that an issuer of public debt or equity securities, as well as the
underwriters of the securities (including NatWest Markets Securities
Inc.), are liable to purchasers for misrepresentations and omissions
made in connection with the offering of such securities.
Investigations and reviews
RBS’s businesses and financial condition can be affected by the
actions
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Litigation, investigations and reviews
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 business in particular has been providing, and
continues to provide, 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, some of which have resulted, and others of
which may result, in investigations or proceedings.
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 companies have in recent years been involved in
investigations relating to, among other things, issuance, underwriting
and trading in RMBS and other mortgage-backed securities and
collateralised debt obligations (CDOs).
Investigations by the US Department of Justice (DoJ) and certain state
attorneys general relating to the issuance and underwriting of RMBS
were resolved in 2018. Certain other state attorneys general have
sought information regarding similar issues, and RBS is aware that at
least one such investigation is ongoing.
In October 2017, NatWest Markets Securities Inc. entered into a non-
prosecution agreement (NPA) with the United States Attorney for the
District of Connecticut (USAO) in connection with alleged
misrepresentations to counterparties relating to secondary trading in
various forms of asset-backed securities. As part of the NPA, the
USAO agreed not to file criminal charges relating to certain conduct
and information described in the NPA if NatWest Markets Securities
Inc. complies with the terms of the NPA. In October 2018, NatWest
Markets Securities Inc. agreed to a six-month extension of the NPA
while the USAO reviews the circumstances of an unrelated matter
reported during the course of the NPA.
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, and, in some
circumstances, made certain 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.
Foreign exchange related investigations
In 2014 and 2015, NatWest Markets Plc paid significant penalties to
resolve investigations into its FX business by the FCA, the CFTC, the
DoJ, and the Board of Governors of the Federal Reserve System
(Federal Reserve). As part of its plea agreement with the DoJ,
NatWest Markets Plc pled guilty to a one-count information charging
an antitrust conspiracy occurring between as early as December 2007
to at least April 2010. NatWest Markets 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. On 5 January 2017, the United States District Court for the
District of Connecticut imposed a sentence on NatWest Markets Plc
consisting of a US$395 million fine and a three-year probation, which
among other things, prohibits NatWest Markets 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
NatWest Markets 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.
As part of the settlement with the Federal Reserve, NatWest Markets
Plc and NatWest Markets Securities Inc. entered into a cease and
desist order (the FX Order). In the FX Order, which is publicly available
and will remain in effect until terminated by the Federal Reserve,
NatWest Markets Plc and NatWest Markets Securities Inc. agreed to
take certain remedial actions with respect to FX activities and certain
other designated market activities, including the creation of an
enhanced written internal controls and compliance program, an
improved compliance risk management program, and an enhanced
internal audit program. NatWest Markets Plc and NatWest Markets
Securities Inc. are obligated to implement and comply with these
programs as approved by the Federal Reserve, and are also required
to conduct, on an annual basis, a review of applicable compliance
policies and procedures and a risk-focused sampling of key controls.
NatWest Markets Plc 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. 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 2014, the FCA appointed an independent Skilled Person under
section 166 of the Financial Services and Markets Act 2000 to review
RBS’s treatment of SME customers whose relationship was managed
by RBS’s Global Restructuring Group (GRG) in the period 1 January
2008 to 31 December 2013.
The Skilled Person delivered its final report to the FCA during
September 2016, and the FCA published an update in November
2016. 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. The complaints process closed on 22 October 2018 for
new complaints in the UK and, with the exception of a small cohort of
potential complainants for whom there is an extended deadline, on 31
December 2018 for new complaints in the Republic of Ireland.
RBS made a provision of £400 million in 2016, in respect of the above
redress steps, of which £270 million had been utilised by 31 December
2018. An additional provision of £50 million was taken at 31 December
2018 reflecting the increased costs of the complaints process.
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Litigation, investigations and reviews
The FCA published a summary of the Skilled Person’s report in
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. On 31 July
2018, the FCA confirmed that it had concluded its investigation and
that it does not intend to take disciplinary or prohibitory action against
any person in relation to these matters. It has subsequently indicated
that it will shortly publish a final summary of its investigative work.
Investment advice review
As a result of an FSA review in 2013, the FCA required RBS to carry
out a past business review and customer contact exercise on a sample
of historic customers who received investment advice on certain lump
sum products, during the period from March 2012 until December
2012. The review was conducted by an independent Skilled Person
under section 166 of the Financial Services and Markets Act 2000.
Redress was paid to certain customers in that sample group.
RBS later 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. That exercise
is materially complete. Phase 2 (covering sales in 2010) started in
April 2018 and was targeted for completion by the end of 2018,
however the deadline has now been extended to April 2019.
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. Redress was paid to certain customers
who took out the structured product.
RBS provisions in relation to these matters totalled £206 million as at
31 December 2018, of which £144 million had been utilised by that
date.
Packaged accounts
RBS has had dedicated resources in place since 2013 to investigate
and resolve packaged account complaints on an individual basis. RBS
provisions for this matter totalled £444 million as at 31 December
2018. 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 made amendments to its
sales process and complaints procedures to address the findings from
that review.
FCA investigation into RBS’s compliance with the Money Laundering
Regulations 2007
On 21 July 2017, the FCA notified RBS that it was undertaking an
investigation into RBS’s compliance with the Money Laundering
Regulations 2007 in relation to certain customers. Following
amendment to the scope of the investigation, there are currently two
areas under review: (1) compliance with Money Laundering
Regulations in respect of Money Service Business customers; and (2)
the Suspicious Transactions regime in relation to the events
surrounding particular customers. The investigations in both areas are
assessing both criminal and civil culpability. RBS is cooperating with
the investigations, including responding to several information
requests from the FCA.
Systematic Anti-Money Laundering Programme assessment
In December 2018, the FCA commenced a Systematic Anti-Money
Laundering Programme assessment of RBS. RBS is responding to
requests for information from the FCA.
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 £5.3 billion to date for PPI claims,
including an additional provision of £200 million taken at Q3 2018,
reflecting greater than predicted complaints volumes. Of the £5.3
billion cumulative provision, £4.7 billion had been utilised by 31
December 2018.
FCA mortgages market study
In December 2016, the FCA launched a market study into the
provision of mortgages. On 4 May 2018 the interim report was
published. This found that competition was working well for many
customers but also proposed remedies to help customers shop around
more easily for mortgages. Following a period of consultation, the final
report is due to be published in Q1 2019.
FCA strategic review of retail banking models
On 11 May 2017 the FCA announced a strategic review of retail
banking models. The FCA used 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.
On 18 December 2018, the FCA published its final report containing a
number of findings, including that personal current accounts are an
important source of competitive advantage for major banks. Following
the review, the FCA is to continue to monitor retail banking models,
analyse new payments business models and undertake exploratory
work to understand certain aspects of SME banking.
US/Swiss tax programme
In December 2015, Coutts & Co Ltd., a member of the Group
incorporated in Switzerland, entered into a non-prosecution agreement
(the NPA) with the DoJ. This was entered into as part of the DoJ’s
programme for Swiss banks, related to its investigations of the role
that Swiss banks played in concealing the assets of US tax payers in
offshore accounts (US related accounts). 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 the 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.
Since the signing of the NPA in 2015, Coutts & Co Ltd has identified
and disclosed to the DoJ a number of US related accounts that were
not included in its original submission supporting the NPA. Coutts &
Co Ltd is in discussions with the DoJ regarding these additional
accounts and has agreed with the DoJ to undertake additional review
work, which is ongoing.
Enforcement proceedings and investigations in relation to Coutts & Co
Ltd
In February 2017, the Swiss Financial Market Supervisory Authority
(FINMA) took enforcement action against Coutts & Co Ltd with regard
to failures of money laundering checks and controls on certain client
accounts that were connected with the Malaysian sovereign wealth
fund, 1MDB, and were held with Coutts & Co Ltd. FINMA accordingly
required Coutts & Co Ltd to disgorge profits of CHF 6.5 million. There
are two administrative criminal proceedings pending before the Swiss
Finance Department against two former employees of Coutts & Co
Ltd. In addition, the Monetary Authority of Singapore (MAS)’s
supervisory examination of Coutts & Co Ltd’s Singapore branch
revealed breaches of anti-money laundering requirements. MAS
imposed on Coutts & Co Ltd financial penalties amounting to SGD 2.4
million in December 2016.
234
Notes on the consolidated accounts
27 Memorandum items continued
Litigation, investigations and reviews
In addition, Coutts & Co Ltd continues to assist with investigations and
enquiries from authorities where requested to do so.
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
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 the Group
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 in March 2017, identifying
impacted customers. The redress and compensation phase (phase 3)
commenced in Q4 2017 and is ongoing.
RBS has made provisions totalling €297 million (£266 million) to date
for this matter. Of the €297 million (£266 million) cumulative provision,
€211million (£189 million) had been utilised by 31 December 2018.
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.
RBS has made provisions totalling €167 million (£150 million) based
on expected remediation and project costs of which €41 million (£37
million) had been utilised by 31 December 2018.
28 Analysis of the net investment in business interests and intangible assets
Acquisitions and disposals
Fair value given for businesses acquired (1)
Additional investment in associates
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) 2018 includes the purchase of Free agent.
29 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
Ordinary shares issued in respect of employee share schemes
Redemption of debt preference shares
Other adjustments including foreign exchange
At 31 December
2018
£m
(113)
(9)
(122)
—
—
—
—
—
5
(364)
(481)
2017
£m
(131)
—
(131)
177
(15)
155
—
317
(1)
(384)
(199)
2016
£m
(87)
—
(87)
(400)
(5)
22
55
(328)
9
(480)
(886)
Share capital, share premium,
paid-in equity and merger reserve
2018
£m
27,791
144
—
—
144
—
80
—
—
28,015
2017
£m
52,979
306
—
(720)
(414)
(25,789)
71
748
196
27,791
2016
£m
50,577
300
2,046
(110)
2,236
—
166
—
—
52,979
Subordinated liabilities
2018
£m
12,722
2017
£m
19,419
2016
£m
19,847
(2,258)
(2,258)
(5,747)
(5,747)
(3,606)
(3,606)
71
10,535
(950)
12,722
3,178
19,419
235
Notes on the consolidated accounts
30 Analysis of cash and cash equivalents
At 1 January
- cash
- cash equivalents
Net cash outflow
At 31 December
2018
£m
2017
£m
2016
£m
98,337
24,268
122,605
(13,794)
108,811
88,414
10,156
98,570
24,035
122,605
94,832
8,760
103,592
(5,022)
98,570
Comprising:
Cash and balances at central banks
Treasury bills and debt securities
Net loans to banks
Cash and cash equivalents
Note:
(1) Includes cash collateral posted with bank counterparties in respect of derivative liabilities of £7,302 million (2017 - £6,883 million; 2016 - £6,661 million).
88,897
83
19,831
108,811
98,337
427
23,841
122,605
74,250
387
23,933
98,570
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
31 Directors' and key management remuneration
Directors' remuneration
Non Executive Directors
Chairman and executive directors
-emoluments
Amounts receivable under long-term incentive plans and share option plans
Total
2018
£0.9bn
€0.1bn
2017
£0.6bn
€0.1bn
2018
£000
2,001
4,657
6,658
—
6,658
2016
£0.5bn
€0.4bn
2017
£000
1,747
5,299
7,046
1,225
8,271
No directors accrued benefits under defined benefit schemes or money purchase schemes during 2018 and 2017.
The executive directors may participate in the company's long-term incentive plans, executive share option and sharesave schemes and details
of their interests in the company's shares arising from their participation are given in the Directors' remuneration report. Details of the
remuneration received by each director are also given in the Directors' remuneration report.
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
2018
£000
20,316
82
—
20,398
2017
£000
19,019
434
3,558
23,011
A new board and committee operating model was introduced in 2018 in order to align with UK ring-fencing requirements. The definition of key
management has been revised and now comprises members of the RBSG and NWH Ltd Boards, members of the RBSG and NWH Ltd
Executive Committees, and the Chief Executives of NatWest Markets Plc and RBS International. This is on the basis that these individuals have
been identified as Persons Discharging Managerial Responsibilities (PDMRs) of RBSG under the new governance structure.
32 Transactions with directors and key management
At 31 December 2018, amounts outstanding in relation to transactions, arrangements and agreements entered into by authorised institutions in
the Group, as defined in UK legislation, were £9,660 in respect of loans to five persons who were directors of the company at any time during
the financial period.
For the purposes of IAS 24 ‘Related Party Disclosures’, key management comprise directors of the company and Persons Discharging
Managerial Responsibilities (PDMRs) of RBSG under the new governance structure. The captions in the Group's primary financial statements
include the following amounts attributable, in aggregate, to key management:
Loans to customers
Customer deposits
2018
£000
1,544
31,361
2017
£000
3,942
23,619
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.
236
Notes on the consolidated accounts
33 Adoption of IFRS 9
The Group’s accounting policies have significantly changed on the
adoption of IFRS 9 ‘Financial Instruments’ with effect from 1 January
2018. Prior years are re-presented but there has been no restatement
of prior year data.
IFRS 9 changed the classification categories of financial assets from
IAS 39. Held-for-trading assets were classified to mandatory fair value
through profit or loss; loans and receivables were classified to
amortised cost; and available-for-sale assets were classified as fair
value through other comprehensive income unless they were deemed
to be in a fair value business model or failed the contractual cash flow
requirements under IFRS 9. There were no changes in the
classification and measurement of financial liabilities.
Loans to customers of £2.1 billion were reclassified from loans and
receivables under IAS 39 to fair value through profit or loss under
IFRS 9. As a result, their carrying value increased by £583 million.
The net increase to loan impairments under IAS 39 was £616 million
under the expected credit loss requirements of IFRS 9, including £85
million under provisions for contingent liabilities and commitments.
This includes discontinued activities which is shown below on other
assets and other liabilities
The impact on the Group’s balance sheet at 1 January 2018 and the
key movements in relation to the impact on classification and
measurement, expected credit losses and tax are as follow:
Changes to presentation
IFRS 9 impact
30 December
2017
Classification
&
re-presented measurement
£m
£m
98,337
85,991
160,843
2,517
—
11,517
—
—
—
—
—
—
Expected
credit
losses
£m
(1)
—
—
—
(3)
1 January
2018
(IFRS 9)
£m
98,336
85,991
160,843
2,517
Tax
£m
—
—
—
—
—
11,514
310,116
(2,191)
(524)
—
307,401
—
—
51,929
2,752
(3)
—
54,678
—
—
6,543
—
—
—
6,543
—
—
—
10,263
738,056
—
561
—
(531)
25
25
10,288
738,111
—
30,396
—
361,316
—
2,844
81,982
—
154,506
30,326
12,722
14,871
688,963
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
85
85
—
30,396
—
361,316
—
—
—
—
—
41
41
2,844
81,982
154,506
30,326
12,722
14,997
689,089
49,093
561
(616)
(16)
49,022
738,056
561
(531)
25
738,111
Assets
Cash and balances at central banks
Trading assets
Derivatives
Settlement balances
Loans and advances to banks
Loans to banks - amortised cost
Loans and advances to customers
Loans to customers - amortised cost
Debt securities
Equity shares
Other financial assets
Settlement balances
Derivatives
Intangible assets
Property, plant and equipment
Deferred tax
Assets of disposal groups
Other assets
Total assets
Liabilities
Deposits by banks
Bank deposits
Customer accounts
Customer deposits
Debt securities in issue
Settlement balances
Trading liabilities
Short positions
Derivatives
Other financial liabilities
Subordinated liabilities
Other liabilities
Total liabilities
Total equity
Total liabilities and equity
31 December
2017
(IAS 39)
£m
Held-for-trading
exported to
trading
assets/liabilities
£m
New
presentation
£m
98,337
30,251
349,919
78,933
450
2,517
160,843
6,543
4,602
1,740
195
3,726
738,056
46,898
398,036
30,559
2,844
28,527
154,506
12,722
14,871
688,963
49,093
738,056
—
85,991
—
—
(18,734)
—
(39,747)
—
(27,481)
(29)
—
—
—
—
—
—
—
—
—
(16,502)
—
(36,720)
—
(233)
—
81,982
(28,527)
—
—
—
—
—
—
—
—
—
160,843
2,517
(11,517)
11,517
(310,172)
310,116
(51,452)
(421)
51,929
(2,517)
(160,843)
—
(4,602)
(1,740)
(195)
6,537
—
(30,396)
30,396
(361,316)
361,316
(30,326)
—
—
—
—
30,326
—
—
—
—
—
237
Notes on the consolidated accounts
33 Adoption of IFRS 9 continued
The table below reflects the impact of IFRS 9 on total equity:
At 31 December 2017 - under IAS 39
Classification & measurement
- Mandatory fair value through profit or loss assets - adjustments following business model reviews (SPPI) (1)
- Equity shares held at cost under IAS 39 - fair value adjustments through FVOCI reserve
- Additional write-down of amortised cost assets
Expected credit losses
- Amortised cost assets
- Contingent liabilities and commitments
Tax
At 1 January 2018 - under IFRS on transition to IFRS 9
Note:
(1) Includes £583 million credit in relation to loans to customers and £4 million debit in relation to debt securities.
Total
£m
49,093
561
579
48
(66)
(616)
(531)
(85)
(16)
49,022
34 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
Government 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.
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 (Note 7) and value added tax; national
insurance contributions; local authority rates; and regulatory fees and
levies (including the bank levy (Note 3) and FSCS levies (Note 27)
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 0.296% 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.
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.
35 Post balance sheet events
On 6 February 2019, a General Meeting of shareholders authorised the directors to agree buy-backs by the company of ordinary shares from
HM Treasury. The authority is subject to renewal at the company's forthcoming Annual General Meeting.
Other than this there have been no other significant events between 31 December 2018 and the date of approval of these accounts which would
require a change to or additional disclosure in the accounts.
238
Parent company financial statements and notes
Balance sheet as at 31 December 2018
Assets
Derivatives with subsidiaries
- designated hedges
- economic hedges
Amounts due from subsidiaries - amortised cost
Amounts due from subsidiaries - MFVTPL
Investments in Group undertakings
Other financial assets
Other assets
Total assets
Liabilities
Amounts due to subsidiaries - amortised cost
Amounts due to subsidiaries - other
Derivatives with subsidiaries
- designated hedges
- economic hedges
Other financial liabilities - debt securities in issue
- amortised cost
- designated as at fair value through profit or loss
Subordinated liabilities
Other liabilities
Total liabilities
Owners’ equity
Total liabilities and equity
Note
2018
£m
2017
£m
5
6
5
7
525
18
12,036
10,755
56,747
241
26
80,348
596
39
310
135
16,817
4
7,941
119
25,961
54,387
80,348
136
27
24,983
—
47,559
104
53
72,862
113
51
213
71
9,122
80
7,864
387
17,901
54,961
72,862
Owners’ equity includes a total comprehensive profit for the year, dealt with in the accounts of the parent company, of £2,487 million (2017 -
£1,118 million profit; 2016 - £5,255 million loss).
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.
The accompanying notes on pages 242 to 252 form an integral part of these financial statements.
The accounts were approved by the Board of directors on 14 February 2019 and signed on its behalf by:
Howard Davies
Chairman
Ross McEwan
Chief Executive
Katie Murray
Chief Financial Officer
The Royal Bank of Scotland Group plc
Registered No. SC45551
239
Parent company financial statements and notes
Statement of changes in equity for the year ended 31 December 2018
Called-up share capital (1)
At 1 January
Ordinary shares issued
At 31 December
Paid-in equity
At 1 January
Securities issued during the year (2)
Redeemed/reclassified (3)
At 31 December
Share premium account
At 1 January
Ordinary shares issued
Capital reduction (4)
Redemption of debt preference shares (5)
At 31 December
Cash flow hedging reserve
At 1 January
Amount recognised in equity (6)
Amount transferred from equity to earnings (6)
Tax
At 31 December (7)
Capital redemption reserve
At 1 January
Capital reduction (4)
At 31 December
Retained earnings
At 1 January
Implementation of IFRS 9 on 1 January 2018 (8)
Profit/(loss) attributable to ordinary shareholders and other equity owners
Equity preference dividends paid
Dividend access share dividend
Ordinary dividend paid
Paid-in equity dividends paid, net of tax
Capital reduction (4)
Redemption of debt preference shares (5)
Redemption of equity preference shares (9)
Reclassification of paid-in equity
At 31 December
Owners’ equity at 31 December
2018
£m
2017
£m
2016
£m
11,965
84
12,049
4,047
—
—
4,047
887
140
—
—
1,027
20
103
(25)
(15)
83
—
—
—
38,042
231
2,424
(182)
—
(241)
(288)
—
—
(2,805)
—
37,181
54,387
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
Notes:
(1) Details of the company’s share capital are set out in Note 22 of the consolidated accounts.
(2)
AT1 capital notes totalling £2.0 billion issued in August 2016.
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).
(3)
(4) 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.
(5) 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. The nominal value of £0.3 million was transferred from share capital to capital redemption reserve and ordinary owners equity was reduced by £0.4
billion in respect of the movement in exchange rates since issue.
(6) Relates to foreign exchange hedges. Amounts transferred to earnings are recognised in net interest income.
(7)
The closing balance of the cash flow hedging reserve relates to continuing operations.
(8) Refer to Note 33 for further information on the impact of IFRS 9 on classification and basis of preparation, year ended 31 December 2018 prepared under
IFRS 9 prior years under IAS 39.
(9) During 2018, non-cumulative US dollar, Euro and Sterling preference shares were redeemed.
The accompanying notes on pages 242 to 252 form an integral part of these financial statements
240
Parent company financial statements and notes
Cash flow statement for the year ended 31 December 2018
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
Profit on disposal of investments in subsidiaries
Provision: expenditure in excess of charges
Gain on redemption of own debt
Other non-cash items
Net cash flows from trading activities
Decrease/(increase) in balances with subsidiaries
(Increase)/decrease in derivative assets and liabilities held with subsidiaries
Increase in securities
Increase in other financial assets
Increase in debt securities in issue
Increase in other financial liabilities
Change in operating assets and liabilities
Income taxes received/(paid)
Net cash flows from operating activities (1)
Sale and maturity of securities
Investment in subsidiaries
Disposal of subsidiaries and associates
Net cash flows from investing activities
Issue of ordinary shares
Issue of other equity instruments: Additional Tier 1 capital notes
Redemption of other equity instruments
Redemption of debt preference shares
Redemption of subordinated liabilities
Service cost of other equity instruments
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 (2)
2018
£m
2,341
293
—
438
399
—
(60)
—
427
3,838
2,254
(219)
(131)
(15)
7,619
316
9,824
49
13,711
—
(9,481)
—
(9,481)
144
—
(2,805)
—
(267)
(798)
(443)
(4,169)
1
62
245
307
2017
£m
1,471
(562)
—
497
(713)
(47)
(748)
(239)
562
221
2,087
234
—
(64)
2,370
61
4,688
64
4,973
264
(2,461)
119
(2,078)
306
—
(627)
(748)
(1,665)
(583)
(514)
(3,831)
(14)
(950)
1,195
245
2016
£m
(5,416)
6,106
(298)
509
1,506
—
—
—
1,247
3,654
(8,322)
39
—
(65)
1,772
36
(6,540)
(140)
(3,026)
794
—
1,744
2,538
300
2,040
(1,160)
—
(425)
(1,688)
(512)
(1,445)
122
(1,811)
3,006
1,195
The accompanying notes on pages 242 to 252 form an integral part of these financial statements.
Notes:
(1)
Includes interest received of £508 million (2017 - £999 million, 2016 - £1,066 million) and interest paid of £819 million (2017 - £777 million, 2016 - £743
million).
(2) Comprises loans to banks.
241
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 85) 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 182 to 186 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.
2 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 2018. None are expected to have an impact on the Company from
1 January 2019 or later.
IFRS 9 Transition
In July 2014, the IASB published IFRS 9 ‘Financial Instruments’ with an effective date of 1 January 2018. IFRS 9 replaced the previous 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 classification and measurement and impairment requirements were applied retrospectively by adjusting the opening balance sheet at the
date of initial application, with no requirement to restate comparative periods.
The 1 January 2018, post tax increase in equity was £0.2 billion. There has been no restatement of accounts prior to 2018.
The Group opted to early adopt the IFRS 9 amendment on negative compensation with effect from 1 January 2018.
3 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
Amounts due from subsidiaries (1)
Other financial assets
Debt securities (2)
Financial liabilities
Amounts due to subsidiaries (3)
Other financial liabilities
Debt securities in issue (2)
Subordinated liabilities (2)
2018
Carrying
value
£bn
Fair value
£bn
2017
Carrying
value
£bn
Fair value
£bn
12.0
12.0
25.0
25.4
—
0.6
16.8
7.9
—
0.5
16.7
8.3
0.1
—
9.1
8.0
0.2
—
9.8
8.8
Notes:
(1) Fair value hierarchy: level 2 - £5.0 billion (2017 - £11.3 billion) and level 3 - £7.0 billion (2017 - £14.1 billion).
(2) Fair value hierarchy level 2.
(3) Fair value hierarchy level 3.
242
Parent company financial statements and notes
4 Financial instruments - maturity analysis
Remaining maturity
The following table shows the residual maturity of financial instruments based on contractual date of maturity.
Assets
Derivatives with subsidiaries
- designated hedges
- economic hedges
Amounts due from subsidiaries - amortised cost
Amounts due from subsidiaries - MFVTPL
Other financial assets
Liabilities
Amounts due to subsidiaries - amortised cost
Derivatives with subsidiaries
- designated hedges
- economic hedges
Other financial liabilities - debt securities in issue
- amortised cost
- designated as at fair value through profit or loss
Subordinated liabilities
Less than
12 months
£m
2018
More than
12 months
£m
Total
£m
Less than
12 months
£m
2017
More than
12 months
£m
(20)
40
6,959
14
—
479
58
3
1,322
2
55
545
(22)
5,077
10,741
241
117
252
132
525
18
12,036
10,755
241
596
310
135
15,495
2
7,886
16,817
4
7,941
16
9
19,340
—
—
2
31
39
12
76
318
120
18
5,643
—
104
111
182
32
9,110
4
7,546
Total
£m
136
27
24,983
—
104
113
-
213
71
9,122
80
7,864
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.
2018
Assets by contractural maturity
Amount due to subsidiaries - amortised cost
Other financial liabilities
- amortised cost
- designated at fair value through profit or loss
Subordinated liabilities
Total maturing assets
Derivatives held for hedging
2017
Assets by contractural maturity
Amount due to subsidiaries - amortised cost
Other financial liabilities - debt securities in issue
- amortised cost
- designated at fair value through profit or loss
Subordinated liabilities
Total maturing assets
Derivatives held for hedging
0-3 months
£m
3-12 months
£m
1-3 years
£m
3-5 years
£m
5-10 years
£m
10-20 years
£m
482
158
2
113
755
38
793
—
115
1
60
176
10
186
5
19
19
46
211
1,744
—
340
2,089
27
2,116
9
209
77
640
935
3
938
1,109
2
905
2,035
192
2,227
9,611
—
6,872
16,502
40
16,542
6,270
—
1,334
7,650
20
7,670
1,451
—
808
2,470
—
2,470
18
18
44
200
1,824
4
858
2,704
110
2,814
2,715
—
858
3,591
47
3,638
6,052
—
7,149
13,245
25
13,270
—
—
1,880
2,080
—
2,080
5 Derivatives with subsidiaries – designated hedges
Fair value hedging is used to hedge loans and other financial liabilities, and cash flow hedging is used to hedge other financial liabilities and
subordinated liabilities.
Derivatives held for designated hedging purposes are as follows:
Fair value hedging - interest rate contracts
Cash flow hedging - exchange rate contracts
Total
Notional
£bn
25.5
12.5
2018
Assets
£m
419
106
525
Liabilities
£m
310
—
310
2017
Assets
£m
74
62
136
Liabilities
£m
176
37
213
243
Parent company financial statements and notes
6 Investments in Group undertakings
At 1 January
Additional investments in Group undertakings
Additions
Disposals
(Impairment)/Write back of investments
At 31 December
2018
£m
47,559
9,574
33,807
(33,900)
(293)
56,747
2017
£m
44,608
—
2,461
(72)
562
47,559
In 2018 the addition relates to the acquisition of NatWest Holdings Limited from NatWest Markets Plc (formerly The Royal Bank of Scotland Plc
renamed in 2018). On 29 June 2018, the Court of Session in Scotland approved a capital reduction which was completed on 2 July 2018 which
effected, primarily through a distribution in specie, the transfer of NatWest Holdings Limited to RBSG thereby creating the legal separation of
those RBS Group entities that are within the ring fenced sub-group from those held outside the ring-fence. The 2017 additions principally relate
to the acquisition of the Royal Bank of Scotland International (Holdings) Limited from NatWest Markets Plc. Additional investments in Group
undertakings in 2018 primarily relate to NatWest Holdings Limited.
In 2018 the impairment relates to the company’s investment in NatWest Markets Plc. The write-back in 2017 relates to the partial reversal of the
company’s investment in RFS Holdings B.V.
At 31 December 2018, NatWest Holdings Limited is the largest direct subsidiary investment and the amount by which its recoverable amount
(based on its value in use) exceeded its carrying value was £2.2 billion.
The principal subsidiary undertakings of the company are shown below. Their capital consists of ordinary shares which are unlisted. All of these
subsidiaries are included in RBS's consolidated financial statements and have an accounting reference date of 31 December.
National Westminster Bank Plc (1,3)
The Royal Bank of Scotland plc (3)
Coutts & Company (2, 3)
Ulster Bank Ireland Designated Activity Company (3)
Ulster Bank Limited (3)
NatWest Markets Plc
NatWest Markets Securities Inc. (4)
The Royal Bank of Scotland International Limited (5)
Nature of business
Banking
Banking
Private banking
Banking
Banking
Banking
Broker dealer
Financial Institution
Country of incorporation and
principal area of operation
Great Britain
Great Britain
Great Britain
Republic of Ireland
Northern Ireland
Great Britain
US
Jersey
Group interest
100%
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.
(3) Owned via NatWest Holdings Limited
(4) Owned via NatWest Markets Plc
(5) Owned via The Royal Bank of Scotland International (Holdings) Limited
For full information on all related undertakings, refer to Note 10.
244
Parent company financial statements and notes
7 Subordinated liabilities
Dated loan capital
Undated loan capital
Preference shares
Redemptions in the period are disclosed in Note 19 in the consolidated accounts.
2018
£m
7,253
687
1
7,941
2017
£m
7,213
650
1
7,864
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
US$2,250 million 6.13% dated notes 2022
US$650 million 6.425% dated notes 2043 (callable January 2034) (1)
US$2,000 million 6.00% dated notes 2023
US$1,000 million 6.10% dated notes 2023
€1,000 million 3.63% dated notes 2024 (callable March 2019)
US$2,250 million 5.13% dated notes 2024
Capital
treatment
Ineligible
Tier 2
Ineligible
Tier 2
Tier 2
Tier 2
Tier 2
2018
£m
—
1,739
501
1,572
770
918
1,753
7,253
2017
£m
265
1,665
479
1,470
737
907
1,690
7,213
Note:
(1) 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)
Capital
treatment
Ineligible
Ineligible
2018
£m
83
604
687
2017
£m
79
571
650
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)
£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 22 on the consolidated accounts.
Capital
treatment
Ineligible
2018
£m
1
1
2017
£m
1
1
8 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
Ordinary shares issued in respect of employee share schemes
Redemption of debt preference shares
Other adjustments including foreign exchange
At 31 December
Share capital, share premium,
paid-in equity and merger reserve
Subordinated liabilities
2018
£m
16,899
144
—
—
—
144
—
80
—
—
17,123
2017
£m
41,994
306
—
(627)
—
(321)
(25,789)
71
748
196
16,899
2016
£m
39,488
300
2,040
—
—
2,340
—
166
—
—
41,994
2018
£m
7,977
—
—
—
(267)
(267)
—
—
—
349
8,059
2017
£m
10,668
—
—
—
(1,665)
(1,665)
—
—
—
(1,026)
7,977
2016
£m
9,366
—
—
—
(425)
(425)
—
—
—
1,727
10,668
9 Directors’ and key management remuneration
Directors’ remuneration is disclosed in Note 31 on the consolidated accounts. The directors had no other reportable related party transactions or
balances with the company.
245
Parent company financial statements and notes
10 Related undertakings
Legal entities and activities at 31 December 2018
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.
Regulatory
Regulatory
Entity name
Activity
treatment Notes
Entity name
Activity
treatment Notes
280 Bishopsgate Finance Ltd
Adam & Company Investment Management
Ltd
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 Ltd
FreeAgent Central Ltd
FreeAgent Holdings PLC
G L Trains Ltd
Gatehouse Way Developments Ltd
Helena Productions Ltd
ITB1 Ltd
ITB2 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 (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
Lombard Corporate Finance (December 1)
Ltd
Lombard Corporate Finance (December 3)
Ltd
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
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
INV
BF
BF
BF
BF
BF
BF
BF
CI
BF
BF
OTH
BF
BF
BF
SC
SC
BF
INV
BF
BF
BF
BF
INV
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
BF
BF
CI
BF
SC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
DE
FC
FC
FC
DE
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
FC
FC
FC
FC
DE
(19)
NatWest Capital Finance Ltd
(18)
(3)
(19)
(19)
(19)
(19)
(3)
(33)
(33)
(94)
(19)
(94)
(19)
(19)
(81)
(81)
(3)
(3)
(94)
(16)
(16)
(16)
(16)
(94)
(6)
(24)
(24)
(24)
(94)
(94)
(94)
(94)
(94)
(94)
NatWest Corporate Investments
NatWest Holdings Ltd
NatWest Invoice Finance Ltd
NatWest Markets Plc
NatWest Markets Secretarial Services Ltd
NatWest Markets Secured Funding LLP
NatWest Property Investments Ltd
NatWest Trustee and Depositary Services
Ltd
NatWest Ventures Investments Ltd
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
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 (September) Ltd
R.B. Leasing Company Ltd
R.B. Quadrangle Leasing Ltd
R.B.S. Special Investments Ltd
RB Investments 3 Ltd
RBDC Administrator Ltd
RBOS (UK) Ltd
RBS AA Holdings (UK) Ltd
(94)
RBS Asset Finance Europe Ltd
(94)
(94)
(24)
(24)
(94)
(24)
(94)
(94)
(3)
(24)
(24)
(24)
(24)
(3)
(24)
(94)
(19)
(19)
(19)
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 Invoice Finance Ltd
RBS Management Services (UK) Ltd
RBS Mezzanine Ltd
RBS Property Developments Ltd
RBS Property Ventures Investments Ltd
RBS SME Investments Ltd
RBSG Collective Investments Holdings Ltd
RBSG International Holdings Ltd
RBSM Capital Ltd
RBSSAF (12) Ltd
RBSSAF (2) Ltd
RBSSAF (25) Ltd
246
BF
BF
INV
OTH
CI
SC
BF
INV
INV
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
INV
INV
BF
BF
BF
BF
BF
BF
BF
BF
OTH
SC
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
SC
BF
INV
BF
BF
BF
BF
BF
BF
BF
BF
FC
DE
FC
FC
FC
FC
FC
DE
FC
DE
FC
FC
FC
FC
FC
FC
FC
FC
DE
FC
DE
DE
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
(3)
(19)
(24)
(19)
(27)
(19)
(26)
(19)
(19)
(19)
(94)
(94)
(94)
(94)
(94)
(94)
(94)
(94)
(19)
(94)
(19)
(19)
(16)
(94)
(94)
(94)
(94)
(94)
(16)
(94)
(19)
(19)
(16)
(19)
(19)
FC
(94)
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
(33)
(33)
(19)
(16)
(19)
(19)
(16)
(19)
(19)
(16)
(27)
(16)
(3)
(16)
(16)
(16)
(94)
(94)
(94)
Parent company financial statements and notes
10 Related undertakings continued
Entity name
RBSSAF (6) Ltd
RBSSAF (7) Ltd
RBSSAF (8) Ltd
RoboScot Equity Ltd
Royal Bank Investments Ltd
Royal Bank Invoice Finance Ltd
Royal Bank Leasing Ltd
Royal Bank of Scotland (Industrial Leasing)
Ltd
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
Style Financial Services Ltd
Regulatory
Activity
treatment Notes
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
SC
BF
BF
BF
BF
FC
(94)
FC
(94)
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
(94)
(16)
(16)
(19)
(16)
(16)
(16)
(16)
(19)
(24)
(19)
(94)
(16)
(16)
(16)
Entity name
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 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 (Property Investments) Ltd
West Register (Realisations) Ltd
West Register Hotels (Holdings) Ltd
Winchcombe Finance Ltd
Regulatory
Activity
treatment Notes
BF
BF
BF
CI
BF
BF
CI
TR
BF
INV
INV
INV
BF
INV
BF
BF
FC
FC
FC
FC
FC
DE
FC
DE
FC
DE
DE
DE
DE
DE
FC
FC
(19)
(16)
(19)
(27)
(94)
(3)
(6)
(6)
(94)
(3)
(16)
(16)
(16)
(16)
(16)
(94)
The following table details active related undertakings incorporated outside the UK which are 100% owned by the Group and fully consolidated
for accounting purposes
Entity name
AA Merchant Banking B.V.
Action Corporate Services Ltd
Airside Properties AB
Airside Properties ASP Denmark AS
Airside Properties Denmark AS
Alcover A.G.
Alsecure Life Insurance PCC Ltd
Alsecure US PCC Ltd
Alternative Investment Fund B.V.
Arkivborgen KB
Artul Kiinteistöt Oy
Backsmedjan KB
BD Lagerhus AS
Bil Fastigheter i Sverige AB
Bilfastighet i Täby AB
Bilfastighet i Akalla AB
Braheberget KB
Brödmagasinet KB
C.J. Fiduciaries Ltd
Candlelight Acquisition LLC
Coutts & Co (Cayman) Ltd
Coutts & Co Ltd
Coutts & Co Trustees (Suisse) S.A.
Coutts General Partner (Cayman) V Ltd
CTB Ltd
Eiendomsselskapet Apteno La AS
Eurohill 4 KB
Förvaltningsbolaget Dalkyrkan KB
Förvaltningsbolaget Predio 3 KB
Fab Ekenäs Formanshagen 4
Fastighet Kallebäck 2:4 I Göteborg AB
Fastighets AB Flöjten I Norrköping
Fastighets AB Hammarbyvagnen
Fastighets AB Kabisten 1
Fastighets AB Stockmakaren
Fastighets AB Xalam
Fastighets Aktiebolaget Sambiblioteket
Fastighetsbolaget Holma I Höör AB
Financial Asset Securities Corp.
First Active Insurances Services Ltd
First Active Investments No. 4 Ltd
First Active Ltd
Forskningshöjden KB
Forssa Liikekiinteistöt Oy
Foundation Commercial Property Ltd
Regulatory
Activity
treatment Notes
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
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
OTH
PC
FC
FC
FC
FC
DE
DE
DE
DE
FC
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
PC
DE
FC
FC
FC
FC
PC
(67)
(70)
(45)
(51)
(51)
(95)
(28)
(28)
(67)
(45)
(47)
(45)
(46)
(45)
(45)
(44)
(45)
(45)
(89)
(21)
(60)
(75)
(49)
(80)
(96)
(46)
(45)
(45)
(45)
(47)
(45)
(45)
(45)
(45)
(45)
(45)
(45)
(45)
(21)
(97)
(97)
(97)
(45)
(47)
(89)
Entity name
Gredelinen KB
Greenwich Capital Derivatives, Inc.
Grinnhagen KB
Hatros 1 AS
Horrsta 4:38 KB
IR Fastighets AB
IR IndustriRenting AB
Isle of Man Bank Ltd
Kallebäck Institutfastigheter AB
Kastrup Commuter K/S
Kastrup Hangar 5 K/S
Kastrup V & L Building K/S
KB Eurohill
KB IR Gamlestaden
KB Lagermannen
KB Likriktaren
KEB Investors, L.P.
Keep SPV Ltd
Kiinteistö Oy Pennalan Johtotie 2
Koy Espoon Entresse II
Koy Espoon Niittysillantie 5
Koy Helsingin Mechelininkatu 1
Koy Helsingin Osmontie 34
Koy Helsingin Panuntie 11
Koy Helsingin Panuntie 6
Koy Iisalmen Kihlavirta
Koy Jämsän Keskushovi
Koy Kokkolan Kaarlenportti Fab
Koy Kouvolan Oikeus ja Poliisitalo
Koy Lohjan Huonekalutalo
Koy Millennium
Koy Nummelan Portti
Koy Nuolialan päiväkoti
Koy Päiväläisentie 1-6
Koy Peltolantie 27
Koy Puotikuja 2 Vaasa
Koy Raision Kihlakulma
Koy Ravattulan Kauppakeskus
Koy Tapiolan Louhi
Koy Vapaalan Service-Center
Läkten 1 KB
LerumsKrysset KB
Limstagården KB
Lombard Finance (CI) Ltd
Lombard Ireland Group Holdings Unlimited
247
Regulatory
Activity
treatment Notes
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
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
FC
PC
PC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
DE
FC
DE
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
FC
(45)
(21)
(45)
(46)
(45)
(45)
(45)
(12)
(45)
(51)
(51)
(51)
(45)
(45)
(45)
(45)
(52)
(74)
(47)
(47)
(47)
(47)
(47)
(47)
(47)
(47)
(91)
(47)
(47)
(47)
(47)
(47)
(47)
(47)
(47)
(47)
(47)
(47)
(47)
(47)
(45)
(45)
(45)
(89)
(97)
Parent company financial statements and notes
10 Related undertakings continued
Regulatory
Entity name
Activity
treatment Notes
Entity name
Regulatory
Activity
treatment Notes
Lombard Ireland Ltd
Lombard Manx Leasing Ltd
Lombard Manx Ltd
Lothbury Insurance Company Ltd
Minster Corporate Services Ltd
Mjälgen KB
Morar ICC Insurance Ltd
National Westminster International Holdings
B.V.
NatWest Innovation Services Inc.
NatWest Markets Group Holdings
Corporation
NatWest Markets N.V.
NatWest Markets Securities Inc.
NatWest Markets Securities Japan Ltd
Nordisk Renting AB
Nordisk Renting AS
Nordisk Renting Facilities Management AB
Nordisk Renting Kapital AB
Nordisk Renting OY
Nordisk Specialinvest AB
Nordiska Strategifastigheter Holding AB
NWM Services India Private Ltd
Nybergflata 5 AS
Pyrrhula 6,7 AB
R.B. Leasing BDA One Ltd
Random Properties Acquisition Corp. III
Random Properties Acquisition Corp. IV
RBS (Gibraltar) Ltd
RBS AA Holdings (Netherlands) B.V.
RBS Acceptance Inc.
RBS Alternative Investments (Australia) Pty
Ltd
RBS Americas Property Corp.
RBS Asia (Mauritius) Ltd
RBS Asia Financial Services Ltd
RBS Asia Futures Ltd
RBS Asia Holdings B.V.
RBS Assessoria Ltda
RBS Asset Management (Dublin) Ltd
RBS Bank (Polska) S.A.
RBS Commercial Funding Inc.
RBS Deutschland Holdings GmbH
RBS Employment (Guernsey) Ltd
RBS Equity Corporation
BF
BF
BF
BF
BF
BF
BF
BF
OTH
BF
CI
INV
INV
BF
BF
BF
BF
BF
BF
BF
SC
BF
BF
BF
INV
INV
CI
BF
CI
BF
SC
BF
BF
BF
BF
SC
BF
CI
BF
BF
SC
BF
FC
FC
FC
DE
FC
FC
DE
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
DE
DE
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
(97)
(88)
(88)
(83)
(70)
(45)
(85)
(16)
(56)
(21)
(67)
(21)
(78)
(45)
(46)
(45)
(45)
(47)
(45)
(45)
(76)
(68)
(45)
(14)
(21)
(21)
(1)
(67)
(21)
(77)
(21)
(5)
(78)
(78)
(67)
(90)
(66)
(101)
(21)
(72)
(2)
(25)
RBS European Investments SARL
RBS Financial Products Inc.
RBS Group (Australia) Pty Ltd
RBS Holdings III (Australia) Pty Ltd
RBS Holdings N.V.
RBS Holdings USA Inc.
RBS Hollandsche N.V.
RBS International Depositary Services
S.A.
RBS Investments (Ireland) Ltd
RBS Netherlands Holdings B.V.
RBS Nominees (Australia) Pty Ltd
RBS Nominees (Hong Kong) Ltd
RBS Nominees (Ireland) Ltd
RBS Nominees (Netherlands) B.V.
RBS Polish Financial Advisory Services
sp. z o.o.
RBS Prime Services (India) Private Ltd
RBS Services (Switzerland) Ltd
RBS Services India Private Ltd
RBS WCS Holding Company
Redlion Investments Ltd
Redshield Holdings Ltd
Ringdalveien 20 AS
Royhaven Secretaries Ltd
SFK Kommunfastigheter AB
Sjöklockan KB
Skinnarängen KB
Solbänken KB
Strand European Holdings AB
Svenskt Fastighetskapital AB
Svenskt Energikapital AB
Svenskt Fastighetskapital Holding AB
The RBS Group Ireland Retirement
Savings Trustee Ltd
The Royal Bank of Scotland Asia
Merchant Bank (Singapore) Ltd
The Royal Bank of Scotland International
(Holdings) Ltd
The Royal Bank of Scotland International
Ltd
Tingsbrogården KB
Tygverkstaden 1 KB
Ulster Bank (Ireland) Holdings Unlimited
Company
Ulster Bank Dublin Trust Company
Unlimited Company
Ulster Bank Holdings (ROI) Ltd
Ulster Bank Ireland Designated Activity
Company
Ulster Bank Pension Trustees (RI) Ltd
BF
BF
BF
BF
BF
BF
CI
CI
BF
BF
BF
BF
BF
BF
BF
BF
SC
SC
BF
OTH
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
TR
BF
BF
CI
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
(34)
(21)
(77)
(77)
(67)
(21)
(67)
(34)
(97)
(67)
(77)
(78)
(97)
(67)
(101)
(31)
(75)
(59)
(55)
(60)
(60)
(46)
(60)
(45)
(45)
(45)
(45)
(45)
(45)
(45)
(45)
DE
(97)
FC
FC
FC
FC
DE
(82)
(89)
(89)
(45)
(45)
INV
FC
(97)
TR
BF
CI
TR
DE
FC
FC
DE
(97)
(97)
(97)
(97)
The following table details related undertakings which are 100% owned by the Group ownership but are not consolidated for accounting
purposes
Entity name
Regulatory
Activity
treatment Notes
RBS Capital LP II
RBS Capital Trust II
RBS International Employees' Pension
Trustees Ltd
BF
BF
BF
DE
DE
DE
Entity name
RBS Retirement And Death Provision
Company Ltd
RBSG Capital Corporation
(8)
(4)
(57)
West Granite Homes Inc.
Regulatory
Activity
treatment Notes
BF
BF
INV
DE
DE
DE
(84)
(22)
(39)
The following table details active related undertakings incorporated in the UK where the Group ownership is less than 100%.
Regulatory
treatment
Accounting
treatment
Accounting
treatment
Regulatory
treatment
Entity name
% Notes
Activity
Activity
Group
Group
% Notes
Arran Cards
Funding plc
Belfast Bankers’
Clearing Company
Ltd
BGF Group Ltd
Cloud Electronics
Holdings Ltd
GWNW City
Developments Ltd
BF
BF
BF
BF
BF
FC
FC
0
(26)
EAA
EAA
IA
EAJV
PC
PC
DE
DE
25
24
20
50
(48)
(9)
(10)
(65)
Entity name
Higher
Broughton (GP)
Ltd
Higher
Broughton
Partnership LP
Isobel AssetCo
Ltd
Isobel EquityCo
Ltd
Isobel HoldCo
Ltd
248
BF
BF
BF
BF
BF
EAA
PC
41
(62)
EAA
FC
FC
FC
DE
FC
FC
FC
41
75
75
75
(54)
(30)
(30)
(30)
Parent company financial statements and notes
10 Related undertakings continued
Entity name
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
Activity
Accounting
treatment
Regulatory
treatment
Group
%
Notes
BF
BF
BF
BF
BF
BF
BF
FC
FC
FC
FC
FC
FC
EAJV
DE
FC
75
75
(30)
(30)
FC
75
(30)
FC
50
(24)
FC
75
(93)
FC
DE
75
50
(93)
(16)
Entity name
Landpower
Leasing Ltd
London Rail
Leasing Ltd
NatWest
Covered Bonds
(LM) Ltd
NatWest
Covered Bonds
LLP
NatWest
Markets Secured
Funding (LM) Ltd
RBS Sempra
Commodities
LLP
Silvermere
Holdings Ltd
Activity
Accounting
treatment
Regulatory
treatment
Group
% Notes
BF
BF
BF
BF
BF
BF
BF
FC
EAJV
FC
PC
75
50
(93)
(37)
IA
FC
FC
FC
FC
PC
20
(26)
FC
73
(3)
PC
20
(50)
FC
FC
51
95
(16)
(16)
The following table details related undertakings incorporated outside the UK where the Group ownership is less than 100%.
Entity name
Activity
Accounting
treatment
Regulatory
treatment
Group
% Notes
CI
BF
EAA
PC
40
(38)
FC
DE
0
(23)
Entity name
Nightingale CRE
2018-1 Ltd
Nightingale
Securities 2017-1
Ltd
Activity
Accounting
treatment
Regulatory
treatment
Group
% Notes
BF
BF
FC
FC
FC
DE
0
0
(32)
(32)
BF
FC
DE
(35)
Optimus KB
BF
FC
PC
51
(45)
Alawwal Bank
Ardmore Securities
No.1 DAC
Celtic Residential
Irish Mortgage
Securitisation No
14 DAC
Celtic Residential
Irish Mortgage
Securitisation No
15 DAC
Cesium Structured
Funding Ltd
CITIC Capital
China Mezzanine
Fund Ltd
Dunmore
Securities No.1
DAC
Eris Finance S.R.L.
Förvaltningsbolaget
Klöverbacken
Skola KB
Galaxy Futures
Company Ltd
German Public
Sector Finance
B.V.
0
0
0
FC
FC
DE
FC
(35)
(35)
IA
PC
33
(40)
FC
IA
FC
DE
PC
0
(23)
45
(100)
FC
51
(45)
BF
BF
BF
BF
BF
BF
BF
EAA
PC
17
(63)
BF
EAJV
PC
50
(58)
Pharos Estates
Ltd
RFS Holdings
B.V.
Sempra Energy
Trading LLC
Solar Energy
Capital Europe
SARL
Spring Allies
Jersey Ltd
Stora Kvarnen
KB
Thames Asset
Global
Securitization
No.1 Inc.
The
Drive4Growth
Company Ltd
Tulip Asset
Purchase
Company B.V.
WiĞniowy
Management sp.
Z.o.o.
OTH
BF
BF
BF
BF
BF
BF
OTH
BF
EAA
FC
DE
FC
49
98
(15)
(69)
FC
DE
51
(20)
EAJV
IA
FC
FC
IA
FC
PC
DE
33
49
(34)
(32)
FC
51
(45)
DE
0
(7)
DE
20
(42)
FC
0
(53)
SC
EAA
DE
25
(71)
Herge Holding B.V.
BF
IA
PC
63
(99)
Lunar Funding VIII
Ltd
BF
FC
DE
0
(40)
The following table details related undertakings that are not active (actively being dissolved).
Entity name
Adam & Company Group
Ltd
Arran Residential
Mortgages Funding 2010-1
plc
Arran Residential
Mortgages Funding 2011-1
plc
Arran Residential
Mortgages Funding 2011-2
plc
Aspire Oil Services Ltd
Attlee Personal Loans Plc
Bevan Loan Interest
Purchaser Plc
Celtic Residential Irish
Mortgage Securitisation No
09 plc
Accounting
treatment
Regulatory
treatment
Group
% Notes
FC
100
(18)
FC
FC
FC
FC
EAA
FC
FC
FC
FC
DE
DE
DE
FC
FC
DE
0
0
0
27
0
0
0
Entity name
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
CNW Group Ltd
Coutts Group
Dixon Motors
Developments Ltd
(26)
(26)
(26)
(98)
(26)
(26)
(87)
First Active Holdings Ltd
249
Accounting
treatment
Regulatory
treatment
Group
% Notes
FC
FC
FC
FC
FC
FC
FC
FC
DE
DE
DE
DE
FC
FC
DE
0
0
0
0
100
100
100
(35)
(35)
(35)
(35)
(19)
(3)
(3)
FC
100
(97)
Parent company financial statements and notes
10 Related undertakings continued
Accounting
treatment
Regulatory
treatment
Entity name
% Notes
Group
FC
DE
FC
DE
100
(97)
0
100
100
(26)
(19)
(16)
FC
100
(97)
DE
100
(3)
FC
DE
DE
FC
DE
FC
DE
DE
FC
DE
DE
DE
FC
FC
FC
FC
PC
FC
FC
FC
FC
FC
FC
FC
100
(86)
98
98
100
37
100
100
100
(100)
(97)
(19)
(43)
(89)
(19)
(3)
100
(26)
100
(97)
100
67
100
(3)
(36)
(19)
100
(19)
100
(16)
100
100
100
(19)
(16)
(3)
100
(19)
100
(19)
100
(19)
100
(19)
100
(19)
98
(97)
Entity name
RBS Investments Holdings
(UK) Ltd
RBS Invoice Finance
(Holdings) Ltd
RBS Life Holdings 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
RBS Trustees (Ireland) Ltd
RBSG Holdings N.V.
Riossi Ltd
RoboScot DevCap Ltd
RoboScot Ventures Ltd
Royal Bank Development
Capital Ltd
Royal Bank Project
Investments Ltd
Springwell Street
Developments (No 1) Ltd
The Royal Bank of Scotland
BERHAD
The Royal Bank of Scotland
Finance (Ireland)
UB SIG (ROI) Ltd
Ulster Bank Commercial
Services (NI) Ltd
Ulster Bank Group Treasury
Ltd
Ulster Bank Wealth
Unlimited Company
Utras Unlimited Company
Walter Property Ltd
West Register (Land) Ltd
West Register (Northern
Ireland) Property Ltd
West Register (Project
Developments) Ltd
West Register (RoI)
Property Ltd
West Register (Residential
Property Investments) Ltd
WR (NI) Property
Investments Ltd
FC
100
(19)
WR (NI) Property
Realisations Ltd
FC
FC
100
(19)
Zrko Ltd
100
(19)
Accounting
treatment
Regulatory
treatment
Group
% Notes
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
100
(19)
100
100
51
(19)
(16)
(92)
FC
100
(19)
FC
100
(16)
FC
DE
FC
FC
DE
DE
FC
DE
FC
FC
FC
FC
DE
FC
FC
FC
FC
FC
DE
DE
DE
DE
DE
DE
100
(16)
100
98
100
100
100
100
100
(19)
(61)
(73)
(24)
(16)
(16)
(3)
100
(19)
100
(24)
100
(79)
100
100
(17)
(97)
100
(13)
100
(97)
100
98
100
(97)
(97)
(97)
100
(16)
100
(6)
100
(16)
100
(97)
100
(19)
100
(6)
DE
100
(6)
DE
67
(36)
First Active Treasury Ltd
Greenock Funding No 5
Plc
Greenwich NatWest Ltd
Heartlands (Central) Ltd
Hume Street Nominees
Ltd
KUC (Public Houses) Ltd
Latam Directors Ltd
Maja Finance S.R.L.
Marnin Ltd
Mons (UK) Ltd
MSE Holdings Ltd
Mulcaster Street
Nominees Ltd
NatWest Finance Ltd
NatWest Nominees Ltd
Nevis Derivatives No. 3
LLP
Norgay Property Ltd
Property Ventures (B&M)
Ltd
Qulpic Ltd
RB Investments 2 Ltd
RB Investments 5 Ltd
RBDC Investments Ltd
RBOS Trustees Ltd
RBS Argonaut Ltd
RBS CIF Trustee Ltd
RBS Corporate Finance
Ltd
RBS Corporate
Investments (UK) Ltd
RBS Equities (UK) Ltd
RBS Equity Products
(UK) Ltd
RBS Group Investments
(UK) Ltd
RBS Holdings (Ireland)
Unlimited Company
RBS International
Corporate Holdings (UK)
Ltd
RBS International
Investment Holdings
(UK) Ltd
RBS Investments (UK)
Ltd
FC
FC
FC
FC
FC
FC
NC
FC
NC
FC
IA
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
Entity name
Adam & Company
(Nominees) Ltd
Atlas Nominees Ltd
Blydenstein Nominees
Ltd
British Overseas Bank
Nominees Ltd
Buchanan Holdings Ltd
Dixon Vehicle Sales Ltd
Dunfly Trustee Ltd
FIT Nominee 2 Ltd
FIT Nominee Ltd
Freehold Managers
(Nominees) Ltd
The following table details related undertakings that are dormant.
Accounting
treatment
Regulatory
treatment
Group
% Notes
Entity name
Accounting
treatment
Regulatory
treatment
Group
% Notes
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
DE
FC
FC
FC
FC
FC
FC
PC
FC
100
100
100
(18)
(78)
Glyns Nominees Ltd
HPUT A Ltd
(19)
HPUT B Ltd
100
(19)
100
100
100
100
100
(3)
(3)
(3)
(19)
(19)
JCB Finance Pension Ltd
Lombard Corporate
Finance (10) Ltd
Marigold Nominees Ltd
N.C. Head Office Nominees
Ltd
National Westminster Bank
Nominees (Jersey) Ltd
National Westminster Ltd
100
(19)
NatWest FIS Nominees Ltd
250
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
DE
DE
DE
FC
FC
FC
FC
FC
FC
100
100
(19)
(19)
100
(19)
88
(6)
100
100
(94)
(3)
100
(16)
100
100
100
(19)
(3)
(3)
Parent company financial statements and notes
10 Related undertakings continued
Accounting
treatment
Regulatory
treatment
% Notes
Group
Entity name
NatWest PEP Nominees
Ltd
NatWest Security Trustee
Company Ltd
Nextlinks Ltd
Nordisk Renting A/S
Nordisk Renting HB
Project & Export Finance
(Nominees) Ltd
R.B. Leasing (March) Ltd
R.B.S. Property
(Greenock) Ltd
RBOS Nominees Ltd
RBS Cards Securitisation
Funding Ltd
RBS Investment
Executive Ltd
RBS Pension Trustee Ltd
RBS Retirement Savings
Trustee Ltd
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
NC
NC
FC
FC
FC
FC
FC
FC
DE
FC
DE
FC
DE
DE
DE
FC
100
(3)
100
(19)
100
100
100
100
100
100
100
(19)
(41)
(45)
(3)
(94)
(16)
(19)
100
(89)
100
100
100
(16)
(3)
(3)
Entity name
RBS Secretarial Services
Ltd
RBS Trustees Ltd
RBSG Collective
Investments Nominees Ltd
RBSSAF (11) Ltd
RBSSAF (4) Ltd
Sixty Seven Nominees Ltd
Strand Nominees Ltd
Syndicate Nominees Ltd
TDS Nominee Company Ltd
The Royal Bank of Scotland
(1727) Ltd
W.G.T.C.Nominees Ltd
Williams & Glyn's Bank Ltd
Accounting
treatment
Regulatory
treatment
Group
% Notes
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
100
(16)
100
(16)
100
100
100
100
100
100
100
(16)
(94)
(94)
(3)
(33)
(3)
(16)
100
(16)
100
100
(19)
(3)
The following table details related undertakings that are in administration.
Entity name
Adam &
Company
Second
General
Partner Ltd
Activity
Accounting
treatment
Regulatory
treatment
Group
% Notes
Entity name
Activity
Accounting
treatment
Regulatory
treatment
Group
% Notes
BF
IA
DE
50
(64)
Uniconn Ltd
OTH
IA
DE
30
(29)
The following table details overseas branches of the Group
Subsidiary
Geographic location
Subsidiary
Coutts & Co Ltd
National Westminster Bank plc
NatWest Markets Securities Japan Ltd
(Tokyo branch)
The Royal Bank of Scotland
International Ltd
Hong Kong
Finland, France, Germany, Italy,
Netherlands, Norway, Spain,
Sweden
Japan
Gibraltar, Guernsey, Isle of Man,
Luxembourg, United Kingdom
Natwest Markets N.V.
Natwest Markets Plc
Ulster Bank Ireland DAC
Geographic location
Hong Kong, United Kingdom, Ireland,
France, Germany, Italy, Spain and
Sweden
Hong Kong, Singapore, Germany,
France, Greece, Turkey, UAE, Poland,
Ireland and India
United Kingdom
Banking and financial institution
Credit institution
Investment (shares or property) holding company
Service company
Trustee
Other
Deconsolidated
Full consolidation
Pro-rata consolidation
Equity accounting – associate
Key:
BF
CI
INV
SC
TR
OTH
DE
FC
PC
EAA
EAJV Equity accounting – joint venture
Investment accounting
IA
Not consolidated
NC
Notes:
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(3)
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(5)
(6)
(7)
(8)
(9)
(10)
(11)
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(21)
Registered addresses (UK unless stated otherwise)
1 Corral Road, GX11 1AA
1 Le Marchant Street, St. Peter Port, GY1 1LF
1 Princes Street, London, EC2R 8BP, England
100, Suite 102, White Clay Center, Newark, New Castle County, Delaware, DE 19711
10th Floor, Standard Chartered Tower, 19 Cybercity, Ebene, 72201
11-16 Donegall Square East, Belfast, BT1 5UB, Northern Ireland
114 West 47th Street, New York, 10036
1209 Orange Street, Wilmington, Delaware, DE 19801
13-15 York Buildings, London, WC2N 6JU, England
140 Staniforth Road, Darnall, Sheffield, South Yorkshire, S9 3HF, England
16 Library Place, St. Helier, JE4 8ND
2 Athol Street, Douglas, IM99 1AN
2 Donegall Square West, Belfast, BT2 7GP, Northern Ireland
22 Victoria Street, Hamilton, HM12
24 Demostheni Severi, 1st Floor, Nicosia, 1080
24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
24/26 City Quay, Dublin 2
25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
250 Bishopsgate, London, EC2M 4AA, England
251 Little Falls Drive, Wilmington, Delaware, DE 19808
2711 Centerville Road, Suite 400, Wilmington, Delaware, DE 19808
251
Country of incorporation
Gibraltar
Guernsey
UK
USA
Mauritius
UK
USA
USA
UK
UK
Jersey
Isle of Man
UK
Bermuda
Cyprus
UK
RoI
UK
UK
USA
USA
Parent company financial statements and notes
10 Related undertakings continued
Registered addresses (UK unless stated otherwise)
2711 Centerville, Road Suite 400, Wilmington, Delaware, DE 19808
28 Fitzwilliam Place, Dublin 2
280 Bishopsgate, London, EC2M 4RB, England
340 Madison Avenue, New York, 10173
35 Great St Helen's, London, EC3A 6AP, England
36 St Andrew Square, Edinburgh, EH2 2YB, Scotland
3rd Floor, Dixcart House, Sir William Place, St Peter Port, GY1 1GX
4 Atlantic Quay, 70 York Street, Glasgow, G2 8JX
40 Berkeley Square, London, W1J 5AL, England
414, Empire Complex (South Wing), Senapati Bapat Marg, Lower Parel, Mumbai, 400 013
44 Esplanade, St Helier, JE4 9WG
440 Strand, London, WC2R 0QS, England
46 Avenue J.F. Kennedy, Luxembourg-Kirchberg, L-1855
5 Harbourmaster Place, Dublin 1
70 Sir John Rogerson's Quay, Dublin 2
99 Queen Victoria Street, London, EC4V 4EH, England
Al-Dhabab Street, Riyadh, 11431
Bellevue Parkway, Suite 210, Wilmington, Delaware, DE 19809
Boundary Hall, Cricket Square, 171 Elgin Avenue, George Town, Grand Cayman, KY1-1104
c/o Adv Jan-Erik Svensson, HC Andersens Boulevard 12, Kopenhaum V, 1553
c/o Denis Crowley & Co, Chartered Accountants, Unit 6 Riverside Grove, Riverstick, Cork
c/o Gentoo Fund Services Ltd, Mill Court, La Charrotiere, St Peter Port, GY1 3GG
C/O Nordisk Renting AB, 151 36 Sodertalje Stockholm County
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
c/o Nordisk Renting AS, 9 Estaje, Klingenberggata 7, NO-0161, Oslo
c/o Nordisk Renting OY, Eteläesplanadi 12, Box 14044, FI-00130, Helsinki
C/O PINSENT MASONS LLP, The Soloist, 1 Lanyon Place, Belfast, BT1 3LP
c/o Regus Rue du Rhône Sàrl, Geneva, CH-1204
c/o SFM Corporate Services Ltd, 35 Great St Helens, London, EC3A 6AP, England
c/o Visma Services, Lyskaer 3 CD, Herlev, 104 40
Clarendon House, Two Church Street, Suite 104, Reid Street, Hamilton, HM 11
Claude Debussylaan 24, Amsterdam, 1082 MD
Cornwall Buildings, 45-51 Newhall Street, Birmingham, West Midlands, B3 3QR, England
Corporation Trust Centre, 1209 Orange St, Wilmington, Delaware, DE 19808
Corporation Trust Centre, 1209 Orange Street, Wilmington, New Castle County, Delaware
Coutts & Co Trustees (Jersey) Limited, 23/25 Broad Street, St Helier, JE4 8ND
De entree 99 -197, 1101HE, Amsterdam, Zuidoost
DLF Cyber City, Tower C, DLF Phase III, Haryana, 122 002
Estera Trust (Cayman) Limited, PO Box 1350, Clifton House, 75 Fort Street, George Town, Grand Cayman, KY1-1108
First Floor, 10/11 Exchange Place, International Financial Services Centre, Dublin 1
Floor 3, 1 St Ann Street, Manchester, M2 7LR, England
Floor 9th, SOHO Century Plaza, 1501 Century Avenue, Pudong New Area, Shanghai
FRP Advisory LLP, Apex 3, 95 Haymarket Terrace, Edinburgh, EH12 5HD, Scotland
Gate House, Turnpike Road, High Wycombe, Buckinghamshire, HP12 3NR, England
Guild House, Guild Street, IFSC, D01 K2C5, Dublin 1
Gustav Mahlerlaan 350, Amsterdam, 1082 ME
H. Heyerdahlsgate 1, Postboks 2020 Vika, Oslo
Herikerbergweg 238, Luna Arena, 1101 CM, Amsterdam Zuidoost
Hudson Trust Company Limited, Third Floor, Geneva Place, Road Town, Tortola, VG1110
Ilzecka 26 Street, Warsaw, 02-135
Junghofstrasse 22, Frankfurt am Main, D-60311
Kaya Flambayan 9, Curacao, Netherlands Antilles
La Motte Chambers, St. Helier, JE1 1BJ
Lerchenstrasse 18, Zurich, CH 8022
Level 1, Tower A, Building No 10, Phase III, DLF Cyber City, Gurgaon
Level 22, 88 Phillip Street, Sydney, NSW, 2000
Level 54, Hopewell Centre, 183 Queen's Road East
Level 9, Menara Maxis, Kuala Lumpur City Centre, Kuala Lumpur, 50088
Maples Corporate Services Limited, P.O. Box 309, 121 South Church Street, George Town, Grand Cayman, KY1-1104
One Edinburgh Quay, 133 Fountainbridge, Edinburgh, Scotland, EH3 9QG
One Raffles Quay, #23-10 South Tower, Singapore, 48583
PO Box 230, Heritage Hall, Le Marchant Street, St Peter Port, GY1 4JH
PO Box 236, First Island House, Peter Street, St Helier, JE4 8SG
PO Box 384, The Albany, South Esplanade, St Peter Port, GY1 4NF
Quartermile Two, 2 Lister Square, Edinburgh, Midlothian, EH3 9GL, Scotland
Riverside One, Sir John Rogersons Quay, Dublin 2
Royal Bank House, 2 Victoria Street, Douglas, IM1 2LN
Royal Bank House, 71 Bath Street, St Helier, JE4 8PJ
Rua Boa Vista, Sao Paulo, SP 01014-907
Södra esplanaden, 12 c/o Nordisk Renting Oy, FI-00130, Helsinki
Suite 1, 3rd Floor 11-12 St James's Square, London, SW1Y 4LB, England
The Mill, High Street, Rocester, ST14 5JW, England
The Quadrangle, The Promenade, Cheltenham, GL50 1PX, England
Tirolerweg 8, 6300, Zug
Trident Corporate Services (Bahamas) Ltd, Suite 200B, 2nd Floor, Centre of Commerce, One Bay Street, PO Box N-3944,
Ulster Bank Group Centre, George's Quay, Dublin 2
Union Plaza 6th Floor, 1 Union Wynd, Aberdeen, AB10 1DQ, Scotland
Verlengde Poolseweg 16, 4818 CL, Breda
(22)
(23)
(24)
(25)
(26)
(27)
(28)
(29)
(30)
(31)
(32)
(33)
(34)
(35)
(36)
(37)
(38)
(39)
(40)
(41)
(42)
(43)
(44)
(45)
(46)
(47)
(48)
(49)
(50)
(51)
(52)
(53)
(54)
(55)
(56)
(57)
(58)
(59)
(60)
61)
(62)
(63)
(64)
(65)
(66)
(67)
(68)
(69)
(70)
(71)
(72)
(73)
(74)
(75)
(76)
(77)
(78)
(79)
(80)
(81)
(82)
(83)
(84)
(85)
(86)
(87)
(88)
(89)
(90)
(91)
(92)
(93)
(94)
(95)
(96)
(97)
(98)
(99)
(100) Via Vittorio Alfieri 1, Conegliano, 31015
(101) Wisniowy Business Park, ul 1-go Sierpnia 8a, Warsaw 02-134
Country of incorporation
USA
RoI
UK
USA
UK
UK
Guernsey
UK
UK
India
Jersey
UK
Luxembourg
RoI
RoI
UK
Saudi Arabia
USA
Cayman Islands
Denmark
RoI
Guernsey
Sweden
Sweden
Norway
Finland
UK
Switzerland
UK
Denmark
Bermuda
Netherlands
UK
USA
USA
Jersey
Netherlands
India
Cayman Islands
RoI
UK
China
UK
UK
RoI
Netherlands
Norway
Netherlands
British Virgin Islands
Poland
Germany
Netherlands Antilles
Jersey
Switzerland
India
Australia
Hong Kong
Malaysia
Cayman Islands
UK
Singapore
Guernsey
Jersey
Guernsey
UK
RoI
Isle of Man
Jersey
Brazil
Finland
UK
UK
UK
Switzerland
Bahamas
RoI
UK
Netherlands
Italy
Poland
252
Risk factors
Principal Risks and Uncertainties
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 forecast or expected and either
directly or indirectly impact the value of its
securities in issue. These risk factors are
broadly categorised and should be read in
conjunction with the forward looking
statements section, strategic report and the
capital and risk management section of this
annual report, and should not be regarded as
a complete and comprehensive statement of
all potential risks and uncertainties facing the
Group.
Operational and IT resilience risk
The Group is subject to increasingly
sophisticated and frequent cyberattacks.
The Group is experiencing continued
cyberattacks across the entire Group, with an
emerging trend of attacks against the Group’s
supply chain, re-enforcing the importance of
due diligence and close working with the third
parties on which the Group relies. The Group
is reliant on technology, which is vulnerable to
attacks, with cyberattacks increasing in terms
of frequency, sophistication, impact and
severity. As cyberattacks evolve and become
more sophisticated, the Group will be required
to invest additional resources to upgrade the
security of its systems. In 2018, the Group
was subjected to a small but increasing
number of Distributed Denial of Service
(‘DDOS’) attacks, which are a pervasive and
significant threat to the global financial
services industry. The Group fully mitigated
the impact of these attacks whilst sustaining
full availability of services for its customers.
Hostile attempts are made by third parties to
gain access to and introduce malware
(including ransomware) into the Group’s IT
systems, and to exploit vulnerabilities. The
Group has information security controls in
place, which are subject to review on a
continuing basis, but there can be no
assurance that such measures will prevent all
DDOS attacks or other cyberattacks in the
future. See also, ‘The Group’s operations are
highly dependent on its IT systems’.
Any failure in the Group’s cybersecurity
policies, procedures or controls, may result in
significant financial losses, major business
disruption, inability to deliver customer
services, or loss of data or other sensitive
information (including as a result of an
outage) and may cause associated
reputational damage. Any of these factors
could increase costs (including costs relating
to notification of, or compensation for
customers, credit monitoring or card
reissuance), result in regulatory investigations
or sanctions being imposed or may affect the
Group’s ability to retain and attract
customers. Regulators in the UK, US and
Europe continue to recognise cybersecurity as
an increasing systemic risk to the financial
sector and have highlighted the need for
financial institutions to improve their
monitoring and control of, and resilience
(particularly of critical services) to
cyberattacks, and to provide timely notification
of them, as appropriate.
Additionally, parties may also fraudulently
attempt to induce employees, customers, third
party providers or other users who have
access to the Group’s systems to disclose
sensitive information in order to gain access
to the Group’s data or that of the Group’s
customers or employees. Cybersecurity and
information security events can derive from
human error, fraud or malice on the part of the
Group’s employees or third parties, including
third party providers, or may result from
accidental technological failure.
In accordance with the EU General Data
Protection Regulation (‘GDPR’), the Group is
required to ensure it timely implements
appropriate and effective organisational and
technological safeguards against
unauthorised or unlawful access to the data of
the Group, its customers and its employees.
In order to meet this requirement, the Group
relies on the effectiveness of its internal
policies, controls and procedures to protect
the confidentiality, integrity and availability of
information held on its IT systems, networks
and devices as well as with third parties with
whom the Group interacts and a failure to
monitor and manage data in accordance with
the GDPR requirements may result in
financial losses, regulatory fines and
investigations and associated reputational
damage. In addition, whilst the Group takes
appropriate measures to prevent, detect and
minimise attacks, the Group’s systems, and
those of third party providers, are subject to
frequent cyberattacks.
The Group expects greater regulatory
engagement, supervision and enforcement in
relation to its overall resilience to withstand IT
and related disruption, either through a
cyberattack or some other disruptive event.
However, due to the Group’s reliance on
technology and the increasing sophistication,
frequency and impact of cyberattacks, it is
likely that such attacks could have a material
impact on the Group.
Operational risks are inherent in the
Group’s businesses.
Operational risk is the risk of loss resulting
from inadequate or failed internal processes,
procedures, people or systems, or from
external events, including legal risks. The
Group operates in many countries, offering a
diverse range of products and services
supported by 65,400 employees; it therefore
has complex and diverse operations. As a
result, operational risks or losses can arise
from a number of internal or external factors.
These risks are also present when the Group
relies on outside suppliers or vendors to
provide services to it or its customers, as is
increasingly the case as the Group
implements new technologies, innovates and
responds to regulatory and market changes.
Operational risks continue to be heightened
as a result of the Group’s current cost-
reduction measures and conditions affecting
the financial services industry generally
(including Brexit and other geo-political
developments) as well as the legal and
regulatory uncertainty resulting therefrom.
This may place significant pressure on the
253
Group’s ability to maintain effective internal
controls and governance frameworks. In
particular, new governance frameworks have
recently been put into place throughout the
Group for certain Group entities, due to the
implementation of the UK ring-fencing regime
and the resulting legal entity structure. The
effective management of operational risks is
critical to meeting customer service
expectations and retaining and attracting
customer business. Although the Group has
implemented risk controls and loss mitigation
actions, and significant resources and
planning have been devoted to mitigate
operational risk, there is uncertainty as to
whether such actions will be effective in
controlling each of the operational risks faced
by the Group.
The Group’s operations are highly
dependent on its IT systems.
The Group’s operations are highly dependent
on the ability to process a very large number
of transactions efficiently and accurately while
complying with applicable laws and
regulations. 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.
Individually or collectively, any critical system
failure, prolonged loss of service availability or
material breach of data security could cause
serious damage to the Group’s ability to
provide services to its customers, which could
result in significant compensation costs or
regulatory sanctions (including fines resulting
from regulatory investigations) or a breach of
applicable regulations. 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
and could affect its regulatory approvals,
competitive position, business and brands,
which could undermine its ability to attract and
retain customers. This risk is heightened as
the Group continues to innovate and offer new
digital solutions to its customers as a result of
the trend towards online and mobile banking.
In 2018, the Group upgraded its IT systems
and technology and expects to continue to
make considerable investments to further
simplify, upgrade and improve its IT and
technology capabilities (including migration to
the Cloud) to make them more cost-effective,
improve controls and procedures, strengthen
cyber security, enhance digital services
provided to its bank customers and improve
its competitive position. Should such
investment and rationalisation initiatives fail to
achieve the expected results or prove to be
insufficient due to cost-challenges or
otherwise, this could negatively affect the
Group’s operations, its reputation and ability
to retain or grow its customer business or
adversely impact its competitive position,
thereby negatively impacting the Group’s
financial position.
Risk factors
The Group relies on attracting, retaining
and developing senior management and
skilled personnel, and is required to
maintain good employee relations.
The Group’s current and future success
depends on its ability to attract, retain and
develop highly skilled and qualified personnel,
including senior management, directors and
key employees, in a highly competitive labour
market and under internal cost reduction
pressures. This entails risk, 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 have
an adverse effect on the Group’s ability to
hire, retain and engage well-qualified
employees. The market for skilled personnel
is increasingly competitive, especially for
technology-focussed roles, thereby raising the
cost of hiring, training and retaining skilled
personnel. In addition, certain economic,
market and regulatory conditions and political
developments (including Brexit) may 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.
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 in maintaining good
employee relations. Any failure to do so could
impact the Group’s ability to operate its
business effectively.
A failure in the Group’s risk management
framework could adversely affect the
Group, including its ability to achieve its
strategic objectives.
Risk management is an integral part of all of
the Group’s activities and includes the
definition and monitoring of the Group’s risk
appetite and reporting on the Group’s risk
exposure and the potential impact thereof on
the Group’s financial condition. Financial risk
management is highly dependent on the use
and effectiveness of internal stress tests and
models and ineffective risk management may
arise from a wide variety of factors, including
lack of transparency or incomplete risk
reporting, unidentified conflicts or misaligned
incentives, lack of accountability control and
governance, lack of consistency in risk
monitoring and management or insufficient
challenges or assurance processes. Failure
to manage risks effectively could adversely
impact the Group’s reputation or its
relationship with its customers, shareholders
or other stakeholders.
The Group’s operations are inherently
exposed to conduct risks. These include
business decisions, actions or incentives that
are not responsive to or aligned with the
Group’s customers’ needs or do not reflect the
Group’s customer-focussed strategy,
ineffective product management, unethical or
inappropriate use of data, outsourcing of
customer service and product delivery, the
possibility of alleged mis-selling of financial
products and mishandling of customer
complaints. Some of these risks have
materialised in the past and ineffective
management and oversight of conduct risks
may lead to further remediation and regulatory
intervention or enforcement. The Group’s
businesses are also exposed to risks from
employee misconduct including non-
compliance with policies and regulations,
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.
The Group is seeking to embed a strong risk
culture across the organisation and has
implemented policies and allocated new
resources across all levels of the organisation
to manage and mitigate conduct risk and
expects to continue to invest in its risk
management framework. However, such
efforts may not insulate the Group from future
instances of misconduct and no assurance
can be given that the Group’s strategy and
control framework will be effective. Any failure
in the Group’s risk management framework
could negatively affect the Group and its
financial condition through reputational and
financial harm and may result in the inability to
achieve its strategic objectives for its
customers, employees and wider
stakeholders.
The Group’s operations are subject to
inherent reputational risk.
Reputational risk relates to stakeholder and
public perceptions of the Group arising from
an actual or perceived failure to meet
stakeholder expectations due to any events,
behaviour, action or inaction by the Group, its
employees or those with whom the Group is
associated. This includes brand damage,
which may be detrimental to the Group’s
business, including its ability to build or
sustain business relationships with customers,
and may cause low employee morale,
regulatory censure or reduced access to, or
an increase in the cost of, funding.
Reputational risk may arise whenever there is
a material lapse in standards of integrity,
compliance, customer or operating efficiency
and may adversely affect the Group’s ability
attract and retain customers. In particular, the
Group’s ability to attract and retain customers
(and, in particular, corporate and retail
depositors) may be adversely affected by,
amongst others: negative public opinion
resulting from the actual or perceived manner
in which the Group conducts or modifies its
business activities and operations, media
coverage (whether accurate or otherwise),
employee misconduct, the Group’s financial
performance, IT failures or cyberattacks, the
level of direct and indirect government
support, or the actual or perceived practices in
the banking and financial industry in general,
or a wide variety of other factors.
Modern technologies, in particular online
social networks and other broadcast tools
which facilitate communication with large
audiences in short time frames and with
254
minimal costs, may also significantly enhance
and accelerate the impact of damaging
information and allegations.
Although the Group has implemented a
Reputational Risk Policy to improve the
identification, assessment and management
of customers, transactions, products and
issues which represent a reputational risk, the
Group cannot be certain that it will be
successful in avoiding damage to its business
from reputational risk.
Economic and political risk
Uncertainties surrounding the UK’s
withdrawal from the European Union may
adversely affect the Group.
Following the EU Referendum in June 2016,
and pursuant to the exit process triggered
under Article 50 of the Treaty on European
Union in March 2017, the UK is scheduled to
leave the EU on 29 March 2019. The terms of
a Brexit withdrawal agreement negotiated by
the UK Government were decisively voted
against by Parliament on 15 January 2019.
The UK Government and Parliament are
currently actively engaged in seeking to
determine the terms of this departure,
including any transition period, and the
resulting economic, trading and legal
relationships with both the EU and other
counterparties currently remain unclear and
subject to significant uncertainty.
As it currently stands, EU membership and all
associated treaties will cease to apply at
23:00 on 29 March 2019, unless some form of
transitional arrangement encompassing those
associated treaties is agreed or there is
unanimous agreement amongst the UK, other
EU member states and the European
Commission to extend the negotiation period.
The direct and indirect effects of the UK’s exit
from the EU and the European Economic
Area (‘EEA’) 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 and/or cause a near-term impact on
impairments. See also ‘The Group faces
increased political and economic risks and
uncertainty in the UK and global markets’.
The longer term effects of Brexit on the
Group’s operating environment are difficult to
predict, and are 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, or
be exacerbated by, periodic financial volatility
and slower economic growth, in the UK in
particular, but also in Republic of Ireland,
Europe and potentially the global economy.
Significant uncertainty exists 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. See ‘The Group is in the
process of seeking requisite permissions to
implement its plans for continuity of business
impacted by the UK’s departure from the EU’.
Risk factors
The legal and political uncertainty and any
actions taken as a result of this uncertainty, as
well as new or amended rules, could have a
significant impact on the Group’s operations
or legal entity structure, including attendant
restructuring costs, level of impairments,
capital requirements, regulatory environment
and tax implications and as a result may
adversely impact the Group’s profitability,
competitive position, viability, business model
and product offering.
The Group is seeking the requisite
permissions to implement its plans for
continuity of business impacted by the
UK’s departure from the EU.
The Group is implementing plans designed to
continue its ability to clear euro payments and
minimise the impact on the Group’s ability to
serve non-UK EEA customers in the event
that there is an immediate loss of access to
the European Single Market on 29 March
2019 (or any alternative date) with no
alternative arrangement for continuation of
such activities under current rules (also known
as ‘Hard Brexit’).
To ensure continued ability to clear Euro
denominated payments, the Group is
finalising a third-country licence for the
Frankfurt branch National Westminster Bank
Plc (NWB) with the German regulator. In
addition, the Group is working to satisfy the
conditions of the Deutsche Bundesbank
(DBB) for access to TARGET2 clearing and
settlement mechanisms. Satisfying these DBB
conditions, which include a country legal
opinion, and accessing SEPA, Euro 1 and
TARGET2 will allow the Group (through NWB
Frankfurt branch) to continue to clear cross-
border payments in euros. The capacity to
process these euro payments is a
fundamental requirement for the daily
operations and customers of all Group
franchises, including Ulster Bank. The value
of such payments is typically in excess of €50
billion in any one day with more than 300,000
transactions. This capacity is also critical for
management of the Group’s euro-
denominated central bank cash balances of
around €23 billion. NatWest Markets Plc
(‘NWM Plc’) will use the NWB Frankfurt
branch to clear its euro payments and has
also applied for a third country license to
maintain liquidity management and product
settlement arrangements.
A draft license has recently been issued for
NWB Frankfurt branch which the Group
intends to finalise imminently. Once in place,
the third country licence branch approvals
would each become effective when the UK
leaves the EU and the current passporting
arrangements cease to apply. The Group
expects to have received the requisite third
country licenses and access to SEPA, Euro 1
and TARGET2 ahead of the UK’s departure
from the EU. However, given the quantum of
affected payments and lack of short-term
contingency arrangements, in the event that
such euro clearing capabilities were not in
place in time for a Hard Brexit or as required
in the future, it could have a material impacton
the Group and its customers.
Additionally, to continue serving most of the
Group’s EEA customers, the Group has
repurposed the banking licence of its Dutch
subsidiary, NatWest Markets N.V. (‘NWM
NV’). As announced on 6 December 2018,
the Group has requested court permission for
a FSMA transfer scheme to replicate the
master trade documentation for NWM Plc’s
non-UK EEA customers and transfer certain
existing transactions from NWM Plc to NWM
NV. Other transactions are expected to be
transferred to NWM NV during 2019 (for
example certain transactions with Corporate
and Sovereign customers and larger EEA
customers from NWM Plc, and certain
Western European corporate business from
National Westminster Bank Plc). The volume
and pace of business transfers to NWM NV
will depend on the terms and circumstances
of the UK’s exit from the EU, as well as the
specific contractual terms of the affected
products.
These changes to the Group’s operating
model are costly and require further changes
to its business operations and customer
engagement. The regulatory permissions from
the Dutch and German authorities are
conditional in nature and will require on-going
compliance with certain conditions, including
maintaining minimum capital level and deposit
balances as well as a defined local physical
presence going forward; such conditions may
be subject to change in the future. Maintaining
these permissions and the Group’s access to
the euro payment infrastructure will be
fundamental to its business going forward and
further changes to the Group’s business
operations may be required.
The Group faces increased political and
economic risks and uncertainty in the UK
and global markets.
In the UK, significant economic and political
uncertainty surrounds the terms of and timing
of Brexit. (See also, ‘Uncertainties
surrounding the UK’s withdrawal from the
European Union may adversely affect the
Group’.) In addition, 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, including more direct intervention by
the UK Government in financial markets, the
regulation and ownership of public companies
and the extent to which the government
exercises its rights as a shareholder of the
Group. This could affect, in particular, the
structure, strategy and operations of the
Group and may negatively impact the Group’s
operational performance and financial results.
The Group faces additional political
uncertainty as to how the Scottish
parliamentary process (including, as a result
of any second Scottish independence
referendum) may impact the Group. RBSG
and a number of other Group entities
(including NWM Plc) are 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
the Group’s structure, independently or in
255
conjunction with other mandatory or strategic
structural and organisational changes which
could adversely impact the Group.
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, thereby
affecting its financial performance.
The outlook for the global economy over the
medium-term remains uncertain due to a
number of factors including: trade barriers and
the increased possibility of trade wars,
widespread political instability, an extended
period of low inflation and low interest rates,
and global regional variations in the impact
and responses to these factors. Such
conditions could be worsened by a number of
factors including political uncertainty or
macro-economic deterioration in the
Eurozone, China or the US, increased
instability in the global financial system and
concerns relating to further financial shocks or
contagion (for example, due to economic
concerns in emerging markets), market
volatility or fluctuations in the value of the
pound sterling, new or extended economic
sanctions, volatility in commodity prices or
concerns regarding sovereign debt. This may
be compounded by the ageing demographics
of the populations in the markets that the
Group serves, or rapid change to the
economic environment due to the adoption of
technology and artificial intelligence. Any of
the above developments could impact the
Group directly (for example, as a result of
credit losses) or indirectly (for example, by
impacting global economic growth and
financial markets and the Group’s customers
and their banking needs).
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 may 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 and widespread public health
crises, state and privately sponsored cyber
and terrorist acts or threats, and the
responses to them by governments and
markets, could negatively affect the business
and performance of the Group.
The value of the Group’s financial instruments
may be materially affected by market risk,
including as a result of market fluctuations.
Market volatility, illiquid market conditions and
disruptions in the credit markets may make it
extremely difficult to value certain of the
Group’s financial instruments, particularly
during periods of market displacement which
could cause a decline in the value of the
Group’s financial instruments, which may
have an adverse effect on the Group’s results
of operations in future periods, or inaccurate
carrying values for certain financial
instruments.
Risk factors
In addition, financial markets are susceptible
to severe events evidenced by rapid
depreciation in asset values, which may be
accompanied by a reduction in asset liquidity.
Under these conditions, hedging and other
risk management strategies may not be as
effective at mitigating trading losses as they
would be under more normal market
conditions. Moreover, under these conditions,
market participants are particularly exposed to
trading strategies employed by many market
participants simultaneously and on a large
scale, increasing the Group’s counterparty
risk. The Group’s risk management and
monitoring processes seek to quantify and
mitigate the Group’s exposure to more
extreme market moves. However, severe
market events have historically been difficult
to predict and the Group could realise
significant losses if extreme market events
were to occur.
The Group expects to face significant risks
in connection with climate change and the
transition to a low carbon economy.
The risks associated with climate change are
subject to rapidly increasing prudential and
regulatory, political and societal focus, both in
the UK and internationally. Embedding climate
risk into the Group’s risk framework in line
with expected regulatory expectations, and
adapting the Group’s operation and business
strategy to address both the risks of climate
change and the transition to a low carbon
economy are likely to have a significant
impact on the Group.
Multilateral and UK Government undertakings
to limit increases in carbon emissions in the
near and medium term will require widespread
levels of adjustment across all sectors of the
economy, with some sectors such as
property, energy, infrastructure (including
transport) and agriculture likely to be
particularly impacted. The nature and timing
of the far-reaching commercial, technological
and regulatory changes that this transition will
entail are currently uncertain but the impact of
such changes may be disruptive, especially if
such changes do not occur in an orderly or
timely manner or are not effective in reducing
emissions sufficiently. Furthermore, the nature
and timing of the manifestation of the physical
risks of climate change (which include more
extreme specific weather events such as
flooding and heat waves and longer term
shifts in climate) are also uncertain, and their
impact on the economy is predicted to be
more acute if carbon emissions are not
reduced on a timely basis or to the requisite
extent. The potential impact on the economy
includes, but is not limited to, lower GDP
growth, significant changes in asset prices
and profitability of industries, higher
unemployment and the prevailing level of
interest rates.
UK and international regulators that are
actively seeking to develop new and existing
regulations directly and indirectly focussed on
climate change and the associated financial
risks. Such new regulations are being
developed in parallel with an increasing
market focus on the risks associated with
climate change. In October 2018, the Group’s
prudential regulator, the PRA, published a
draft supervisory standard which sets forth an
expectation that regulated entities adopt a
Board-level strategic approach to managing
and mitigating the financial risks of climate
change and embed the management of them
into their governance frameworks, subject to
existing prudential regulatory supervisory
tools (including stress testing and individual
and systemic capital requirements). Climate
risk is also subject to various legislative
actions and proposals by, among others, the
European Commission’s Sustainable Finance
initiative that focuses on incorporating climate
risk into its financial policy frameworks,
including proposals (e.g., through
amendments to MiFID II) for institutional
investors (including pension funds) to
consider and disclose climate risk criteria as
part of their investment decision, and also
proposals to consider changes to RWA
methodologies. Furthermore, credit ratings
agencies are increasingly taking into account
environmental, social and governance (‘ESG’)
factors, including climate risk, as part of the
credit ratings analysis, as are investors in their
investment decisions.
If the Group does not adequately embed
climate risk into its risk framework to
appropriately measure, manage and disclose
the various financial and physical risks it faces
associated with climate change, or fails to
adapt its strategy and business model to the
changing regulatory requirements and market
expectations on a timely basis, it may have a
material and adverse impact on the Group’s
level of business growth, its competitiveness,
profitability, prudential capital requirements,
credit ratings, cost of funding, results of
operation and financial condition.
HM Treasury (or UKGI on its behalf) could
exercise a significant degree of influence
over the Group and further offers or sales
of the Group’s shares held by HM Treasury
may affect the price of securities issued by
the Group.
In its November 2018 Autumn Budget, the UK
Government announced its intention to
continue the process of privatisation of RBSG
and to carry out a programme of sales of
RBSG ordinary shares with the objective of
selling all of its remaining shares in RBSG by
2023-2024. On 5 June 2018, the UK
Government (via HM Treasury and UK
Government Investments Limited (‘UKGI’))
disposed of approximately 7.7% of its stake in
RBSG. As at 31 December 2018, the UK
Government held 62.3% of the issued
ordinary share capital of RBSG. There can be
no certainty as to the continuation of the sell-
down process or the timing or extent of such
sell-downs which could result in a period of
prolonged period of increased price volatility
on the Group’s ordinary shares. On 6
February 2019, the Group obtained
shareholder approval to participate in certain
directed share buyback activities.
Any offers or sale, or expectations relating to
the timing thereof, of a substantial number of
ordinary shares by HM Treasury, or any
associated directed buyback activity by the
256
Group, could affect the prevailing market price
for the outstanding ordinary shares of RBSG .
In addition, UKGI manages HM Treasury’s
shareholder relationship with RBSG 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 UKGI’s position as manager of this
shareholding) means that HM Treasury or
UKGI could 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, and HM
Treasury’s approach depends on government
policy, which could change, including as a
result of a general election. The manner in
which HM Treasury or UKGI 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, including as a result of a
change in government policy.
Continued low interest rates have
significantly affected and will continue to
affect the Group’s business and results.
Interest rate risk is significant for the Group,
as monetary policy has been 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 pronounced fiscal
tightening and balance sheet repair.
However, there remains considerable
uncertainty as to the direction of interest rates
and pace of change, as set by the Bank of
England and other major central banks.
Continued sustained low or negative interest
rates could put pressure on the Group’s
interest margins and adversely affect the
Group’s profitability and prospects. In
addition, a continued period of low interest
rates and flat yield curves has affected and
may continue to affect the Group’s interest
rate margin realised between lending and
borrowing costs.
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, and falling property prices in the
markets in which the Group operates.
Changes in foreign currency exchange
rates may affect the Group’s results and
financial position.
Although the Group is now principally a UK
and ROI-focussed banking group, it is subject
to foreign exchange risk from 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 transaction entity. The Group also relies
on issuing securities in foreign currencies that
Risk factors
assist in meeting the Group’s minimum
requirements for own funds and eligible
liabilities (‘MREL’). The Group maintains
policies and procedures designed to manage
the impact of exposures to fluctuations in
currency rates. Nevertheless, changes in
currency rates, particularly in the sterling-US
dollar and euro-sterling rates, can adversely
affect the value of assets, liabilities (including
the total amount of MREL eligible
instruments), income, RWAs, capital base and
expenses and the reported earnings of the
Group’s UK and 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 eligible instruments to be
issued.
Decisions of major central banks (including by
the Bank of England, the ECB and the US
Federal Reserve) and political or market
events (including Brexit), which are outside of
the Group’s control, may lead to sharp and
sudden variations in foreign exchange rates.
Financial resilience risk
The Group may not meet its targets and be
in a position to make discretionary capital
distributions to its shareholders.
As part of the Group’s strategy, the Group has
become a principally UK and ROI-focussed
banking group and has set a number of
financial, capital and operational targets for
the Group including in respect of: cost:income
ratios, cost reductions, CET1 ratio targets,
leverage ratio targets, funding plans and
requirements, reductions in RWAs and the
timing thereof, employee engagement,
diversity and inclusion as well as
environmental, social and customer
satisfaction targets and discretionary capital
distributions to shareholders.
The Group’s ability to meet its targets and to
successfully meet its strategy is subject to
various internal and external factors and risks.
These include, but are not limited to, market,
regulatory, macroeconomic and political
uncertainties, operational risks and risks
relating to the Group’s business model and
strategy (including emerging risks associated
with ESG issues) and litigation, governmental
actions, investigations and regulatory matters.
A number of factors may impact the Group’s
ability to maintain its current CET1 ratio target
at circa 14% (over the medium term) and
make discretionary capital distributions to
shareholders, see also, ‘The Group may not
meet the prudential regulatory requirements
for capital and MREL, or manage its capital
effectively, which could trigger certain
management actions or recovery options’.
The Group’s ability to meet its cost:income
ratio target and the planned reductions in its
annual underlying costs may vary
considerably from year to year. Furthermore,
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 and its
ability to meet its other targets, including
those related to customer satisfaction.
There is no certainty that the Group’s strategy
will be successfully executed, that the Group
will meet its targets and expectations or be in
a position to distribute capital to its
shareholders, or that the Group will be a
viable, competitive or profitable banking
business.
The Group operates in markets that are
highly competitive, with increasing
competitive pressures and technology
disruption.
The markets for UK financial services, and the
other markets within which the Group
operates, are highly competitive, and the
Group 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), 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, notably 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 UK initiative on Open
Banking and other remedies imposed by the
Competition and Markets Authority (CMA)
which are designed to further promote
competition within retail banking, as well as
the competition-enhancing measures under
the Group’s Alternative Remedies Package
(see also, ‘The cost of implementing the
Alternative Remedies Package could be more
onerous than anticipated’).
Increasingly many of the products and
services offered by the Group are, and will
become, technology intensive, for example
Bό, Mettle, Esme, FreeAgent, APtimise and
Path, some of the Group’s recent fintech
ventures. The Group’s ability to develop
digital solutions that comply with related
regulatory changes 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
innovation strategy (which includes
investment in its IT capability intended to
address the material increase in customer use
of online and mobile technology for banking
as well as selective acquisitions, which carry
associated risks) 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 be more
successful in implementing innovative
technologies for delivering products or
services to their customers. The Group may
257
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.
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 or ineffective, 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 or technologies for delivering
products or services to customers and its
competitive position. Furthermore, the
development of innovative products depends
on the Group’s ability to produce underlying
high quality data, failing which its ability to
offer innovative products may be
compromised.
If the Group is unable to offer competitive,
attractive and innovative products that are
also profitable, it will lose market share, incur
losses on some or all of its activities and lose
opportunities for growth. In this context, the
Group is investing in the automation of certain
solutions and interactions within its customer-
facing businesses, including through artificial
intelligence. Such initiatives may result in
operational, reputational and conduct risks if
the technology used is defective, or is not fully
integrated into the Group’s current solutions
or does not deliver expected cost savings.
The investment in automated processes will
likely also result in increased short-term costs
for the Group.
In addition, recent and future disposals and
restructurings by the Group, cost-cutting
measures, as well as employee remuneration
constraints, may also have an impact on its
ability to compete effectively and intensified
competition from incumbents, challengers and
new entrants in the Group’s core markets
could affect the Group’s ability to maintain
satisfactory returns. Furthermore, continued
consolidation in certain sectors of the financial
services industry could result in the Group’s
remaining competitors gaining greater capital
and other resources, including the ability to
offer a broader range of products and services
and geographic diversity, or the emergence of
new competitors.
The Group has significant exposure to
counterparty and borrower risk.
The Group has exposure to many different
industries, customers and counterparties, and
risks arising from actual or perceived changes
Risk factors
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. The Group is
exposed to credit risk if a customer, borrower
or counterparty defaults, or under IFRS 9,
suffers a sufficiently significant deterioration of
credit quality under SICR (‘significant
increases in credit risk’) rules such that it
moves to Stage 2 for impairment calculation
purposes. The Group’s lending strategy and
associated processes may fail to identify or
anticipate weaknesses or risks in a particular
sector, market or borrower category, or fail to
adequately value physical or financial
collateral, which may result in an increase in
default rates for loans, which may, in turn,
impact the Group’s profitability. See also,
‘Capital and risk management — Credit Risk’.
The credit quality of the Group’s borrowers
and other counterparties is impacted by
prevailing economic and market conditions
and by the legal and regulatory landscape in
the UK and any deterioration in such
conditions or changes to legal or regulatory
landscapes could worsen borrower and
counterparty credit quality and consequently
impact the Group’s ability to enforce
contractual security rights. See also, ‘The
Group faces increased political and economic
risks and uncertainty in the UK and global
markets’. In particular, developments relating
to Brexit, or the consequences thereof, may
adversely impact credit quality in the UK, and
the resulting negative economic outlook could
drive an increased level of credit impairments
reflecting the more forward-looking nature of
IFRS 9.
Within the UK, the level of household
indebtedness remains high although the pace
of credit growth has slowed during 2018. The
ability of such households to service their
debts could be challenged by a period of high
unemployment or increased interest rates. In
particular, the Group may be affected by
volatility in property prices both in the
residential and commercial sectors (including
as a result of Brexit) given that the Group’s
mortgage loan portfolio as at 31 December
2018, amounted to £165.1 billion,
representing 52% of the Group’s total
customer loan exposure. If property prices
were to weaken this could lead to higher
impairment charges, particularly if default
rates consequently increase. In addition, the
Group’s credit risk may be exacerbated if the
collateral that it holds cannot be realised as a
result of market conditions or regulatory
intervention or if it is liquidated at prices not
sufficient to recover the full amount of the loan
or derivative exposure that is due to the
Group. This is most likely to occur during
periods of illiquidity or depressed asset
valuations.
Concerns about, or a default by, a financial
institution could lead to significant liquidity
problems and losses or defaults by other
financial institutions, since the commercial
and financial soundness of many financial
institutions is closely related and inter-
dependent as a result of credit, trading,
clearing and other relationships among these
financial institutions. Any perceived lack of
creditworthiness of a counterparty may lead to
market-wide liquidity problems and losses for
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. See also,
‘The Group may not be able to adequately
access sources of liquidity and funding.’
As a result, borrower and counterparty credit
quality may cause accelerated impairment
charges under IFRS 9, increased repurchase
demands, higher costs, additional write-downs
and losses for the Group and an inability to
engage in routine funding transactions.
The Group may not meet the prudential
regulatory requirements for capital and
MREL, or manage its capital effectively,
which could trigger certain management
actions or recovery options.
The Group is required by regulators in the UK,
the EU and other jurisdictions in which it
undertakes regulated activities to maintain
adequate financial resources. Adequate
capital also gives the Group financial flexibility
in the face of turbulence and uncertainty in the
global economy and specifically in its core UK
and European markets, as well as permitting
the Group to make discretionary capital
distributions to shareholders.
As at 31 December 2018, the Group’s CET1
ratio was 16.2% and the Group currently
targets to maintain its CET1 ratio at circa 14%
over the medium term. The Group’s target
capital ratio is based on a combination of its
expected regulatory requirements and internal
modelling, including stress scenarios and
management’s and/or the PRA’s views on
appropriate buffers above minimum operating
levels.
The Group’s current capital strategy is based
on: the expected accumulation of additional
capital through the accrual of profits over time;
the planned reduction of its RWAs through
disposals and natural attrition; capital
management initiatives which focus on
improving capital efficiency through improved
data and releasing excess capital trapped in
Group subsidiaries; and discretionary capital
distributions.
A number of factors may impact the Group’s
ability to maintain its current CET1 ratio target
and achieve its capital strategy. These
include, amongst other things:
a depletion of its capital resources
through increased costs or liabilities,
reduced profits or losses (including as a
result of extreme one-off incidents such
as cyber, fraud or conduct issues) or,
sustained periods of low or lower interest
rates, reduced asset values resulting in
write-downs, impairments, changes in
accounting policy, accounting charges or
foreign exchange movements;
a failure to reduce RWAs in accordance
within the timeline contemplated by the
Group’s capital plan;
258
an increase in the quantum of RWAs in
excess of that expected, including due to
regulatory changes;
changes in prudential regulatory
requirements including the Group’s
Total Capital Requirement set by the
PRA, including Pillar 2 requirements
and regulatory buffers, as well as any
applicable scalars; and
double leverage and reduced
upstreaming of dividends from the
Group’s subsidiaries as a result of the
Bank of England’s and/or the Group’s
evolving views on distribution of capital
within groups and the financial
performance and condition of the
Group’s subsidiaries.
A shortage of capital could in turn affect the
Group’s capital ratio, and/or ability to make
capital distributions.
In addition to regulatory capital, RBSG is
required to maintain a set quantum of MREL
set as a percentage of its RWAs. MREL
comprises loss-absorbing senior funding and
regulatory capital instruments. The Bank of
England has identified single point-of-entry as
the preferred resolution strategy for the
Group. As a result, RBSG is the only Group
entity that can externally issue securities that
count towards the Group’s MREL
requirements, the proceeds of which can then
be downstreamed to meet the internal MREL
issuance requirements of its operating entities
and intermediate holding companies as
required. The inability of the Group to reduce
its RWAs in line with assumptions in its
funding plans could result in failure to meet its
MREL requirements.
If the Group is unable to raise the requisite
amount of regulatory capital or MREL,
downstream the proceeds of MREL to
subsidiaries, as required, in the form of
internal MREL, or to otherwise meet its
regulatory capital, MREL and leverage
requirements, it may be exposed to increased
regulatory supervision or sanctions, loss of
investor confidence and constrained or more
expensive funding and be unable to make
dividend payments on its ordinary shares or
maintain discretionary payments on capital
instruments.
If, under a stress scenario, the level of capital
or MREL falls outside of risk appetite, there
are a range of recovery management actions
(focussed on risk reduction and mitigation)
that the Group could take to manage its
capital levels, which may not be sufficient to
restore adequate capital levels. Under the EU
Bank Recovery and Resolution Framework
(‘BRRD’), as implemented in the UK, a breach
of the Group’s applicable capital or leverage
requirements may trigger the application of
the Group’s recovery plan to remediate a
deficient capital position. The Group’s
regulator may request that the Group carry
out certain capital management actions or, if
the Group’s CET1 ratio falls below 7%, certain
regulatory capital instruments issued by the
Group will be written-down or converted into
equity and there may be an issue of additional
equity by the Group, which could result in the
Risk factors
dilution of the Group’s existing shareholders.
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 on acceptable
terms or at all. Separately, the Group may
address a shortage of capital by taking action
to reduce leverage exposure and/or RWAs via
asset or business disposals. Such actions
may, in turn, affect, among other things, the
Group’s product offering, credit ratings, ability
to operate its businesses, pursue its current
strategies and pursue strategic opportunities,
any of which may affect the underlying
profitability of the Group and future growth
potential. See also, ‘The Group may become
subject to the application of UK statutory
stabilisation or resolution powers which may
result in, among other actions, the write-down
or conversion of certain of the Group’s
securities, including its ordinary shares.’
The Group may not be able to adequately
access sources of liquidity and funding.
The Group is required to access sources of
liquidity and funding through retail and
wholesale deposits, as well as through the
debt capital markets. As at 31 December
2018, the Group held £384 billion in deposits.
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
reduction or cessation of deposits by foreign
wholesale depositors, which could result in a
significant outflow of deposits within a short
period of time. See also, ‘The Group has
significant exposure to counterparty and
borrower risk’. 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, materially
affect the Group’s ability to satisfy its liquidity
needs.
As at 31 December 2018, the Group’s liquidity
coverage ratio was 158%. If its liquidity
position were to come under stress, and if the
Group is unable to raise funds through
deposits or in the debt 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
negatively affect the Group’s results.
Any reduction in the credit rating assigned
to RBSG, any of its subsidiaries or any of
its respective debt securities could
adversely affect the availability of funding
for the Group, reduce the Group’s liquidity
position and increase the cost of funding.
Rating agencies regularly review the RBSG
and Group entity credit ratings, which could
be negatively affected by a number of factors,
including political and regulatory
developments, changes in rating
methodologies, changes in the relative size of
the loss-absorbing buffers protecting
bondholders and depositors, a challenging
macroeconomic environment, the impact of
Brexit, a potential second Scottish
independence referendum, further reductions
of the UK’s sovereign credit rating, market
uncertainty and the inability of the Group to
produce sustained profits.
Any reductions in the credit ratings of RBSG
or of certain Group entities (for example,
NWM Plc), including in particular downgrades
below investment grade, may affect the
Group’s access to money markets, reduce the
size of its deposit base and trigger additional
collateral or other requirements in derivatives
contracts and other secured funding
arrangements or the need to amend such
arrangements which could adversely affect
the Group’s cost of funding, its access to
capital markets and its capital instruments and
could limit the range of counterparties willing
to enter into transactions with the Group and
therefore also adversely impact its competitive
position.
The Group may be adversely affected if it
fails to meet the requirements of
regulatory stress tests.
The Group is subject to annual stress tests by
its regulator in the UK and is also subject to
stress tests by European regulators with
respect to RBSG, NWM N.V. and Ulster Bank
Ireland DAC. Stress tests are designed to
assess the resilience of banks to potential
adverse economic or financial developments
and ensure that they have robust, forward-
looking capital planning processes that
account for the risks associated with their
business profile. If the stress tests reveal that
a bank’s existing regulatory capital buffers are
not sufficient to absorb the impact of the
stress, then it is possible that the bank will
need to take action to strengthen its capital
position.
Failure by the Group to meet the quantitative
and qualitative requirements 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, reputational damage,
increased supervision and/or regulatory
sanctions, restrictions on capital distributions
and loss of investor confidence.
The Group could incur losses or be
required to maintain higher levels of
capital as a result of limitations or failure
of various models.
Given the complexity of the Group’s business,
strategy and capital requirements, the Group
relies on analytical models for a wide range of
purposes, including to manage its business,
assess the value of its assets and its risk
exposure, as well as to anticipate capital and
funding requirements (including to facilitate
259
the Group’s mandated stress testing). In
addition, the Group utilises models for
valuations, credit approvals, calculation of
loan impairment charges on an IFRS 9 basis,
financial reporting and for financial crime and
fraud risk management. The Group’s models,
and the parameters and assumptions on
which they are based, are periodically
reviewed and updated to maximise their
accuracy.
Such models are inherently designed to be
predictive in nature. Failure of these models,
including due to errors in model design or
inputs, to accurately reflect changes in the
micro and macroeconomic environment in
which the Group operates, to capture risks
and exposures at the subsidiary level, to be
updated in line with the Group’s current
business model or operations, or findings of
deficiencies by the Group’s regulators
(including as part of the Group’s mandated
stress testing) may result in increased capital
requirements or require management action.
The Group may also face adverse
consequences as a result of actions by
management based on models that are poorly
developed, implemented or used, models that
are based on inaccurate or compromised data
or as a result of the modelled outcome being
misunderstood, or by such information being
used for purposes for which it was not
designed.
The Group’s financial statements are
sensitive to the underlying accounting
policies, judgements, estimates and
assumptions.
The preparation of financial statements
requires management to make judgements,
estimates and assumptions that affect the
reported amounts of assets, liabilities, income,
expenses, exposures and RWAs. Due to the
inherent uncertainty in making estimates
(particularly those involving the use of
complex models), future results may differ
from those estimates. Estimates, judgements,
assumptions and models 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, which include loan impairment
provisions, are set out in ‘Critical accounting
policies and key sources of estimation
uncertainty’ on page 186. New accounting
standards and interpretations that have been
issued by the International Accounting
Standards Board but which have not yet been
adopted by the Group are discussed in
‘Accounting developments’ on page 186.
Changes in accounting standards may
materially impact the Group’s financial
results.
Changes in accounting standards or guidance
by accounting bodies or in the timing of their
implementation, whether immediate or
foreseeable, could result in the Group having
to recognise additional liabilities on its balance
sheet, or in further write-downs or
Risk factors
impairments and could also significantly
impact the financial results, condition and
prospects of the Group.
derivatives. Any such adjustments or fair
value changes may have a negative impact
on the Group’s results.
In January 2018, a new accounting standard
for financial instruments (IFRS 9) became
effective, which introduced impairment based
on expected credit losses, rather than the
incurred loss model previously applied under
IAS 39. The Group expects IFRS 9 to create
earnings and capital volatility, and the Group
took a £101 million impairment charge at 30
September 2018, reflecting the more
uncertain economic outlook.
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 credible,
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.
The Group will adopt IFRS 16 Leases with
effect from 1 January 2019 as disclosed in the
Accounting Policies. This is expected to
increase Other assets by £1.3 billion and
Other liabilities by £1.9 billion. While adoption
of this standard has no effect on the Group’s
cash flows, it will impact financial ratios which
may influence investors’ perception of the
financial condition of the Group.
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
The Group’s results could be adversely
affected if an event triggers the
recognition of a 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 at cost less any accumulated
impairment losses. As required by IFRS, the
Group tests goodwill for impairment at least
annually, or more frequently when events or
circumstances indicate that it might be
impaired.
An impairment test compares 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 2018, 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 economies in which the
Group operates.
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.
The Group may become subject to the
application of UK statutory stabilisation or
resolution powers which may result in,
among other actions, the write-down or
conversion of certain of the Group’s
securities, including its ordinary shares.
The Banking Act 2009, as amended (‘Banking
Act’), implements the BRRD in the UK and
creates a special resolution regime (‘SRR’).
Under the SRR, HM Treasury, the Bank of
England and the PRA and FCA (together
‘Authorities’) are granted substantial powers
to resolve and stabilise UK-incorporated
financial institutions. Five stabilisation options
exist under the current SRR: (i) transfer of all
of the business of a relevant entity or the
shares of the relevant entity to a private sector
purchaser; (ii) transfer of all or part of the
business of the relevant entity to a ‘bridge
bank’ wholly-owned by the Bank of England;
(iii) transfer of part of the assets, rights or
liabilities of the relevant entity to one or more
asset management vehicles for management
of the transferor’s assets, rights or liabilities;
(iv) the write-down, conversion, transfer,
modification, or suspension of the relevant
entity’s equity, capital instruments and
liabilities; and (v) temporary public ownership
of the relevant entity. These tools may be
applied to RBSG as the parent company or an
affiliate where certain conditions are met
(such as, whether the firm is failing or likely to
fail, or whether it is reasonably likely that
action will be taken (outside of resolution) that
will result in the firm no longer failing or being
likely to fail). Moreover, the SRR provides for
modified insolvency and administration
procedures for relevant entities, and confers
ancillary powers on the Authorities, including
the power to modify or override certain
260
contractual arrangements in certain
circumstances. The Authorities are also
empowered by order to amend the law for the
purpose of enabling the powers under the
SRR to be used effectively. Such orders may
promulgate provisions with retrospective
applicability.
Under the Banking Act, the Authorities are
generally required to have regard to specified
objectives in exercising the powers provided
for by the Banking Act. One of the objectives
(which is required to be balanced as
appropriate with the other specified
objectives) refers to the protection and
enhancement of the stability of the financial
system of the UK. Moreover, the ‘no creditor
worse off’ safeguard contained in the Banking
Act may not apply in relation to an application
of the separate write-down and conversion
power relating to capital instruments under the
Banking Act, in circumstances where a
stabilisation power is not also used; holders of
debt instruments which are subject to the
power may, however, have ordinary shares
transferred to or issued to them by way of
compensation.
Uncertainty exists as to how the Authorities
may exercise the powers granted to them
under the Banking Act. In addition, the
determination that ordinary shares, securities
and other obligations issued by the Group
may be subject to write-down, conversion or
‘bail-in’ (as applicable) is unpredictable and
may depend on factors outside of the Group’s
control. Moreover, the relevant provisions of
the Banking Act remain untested in practice.
However, if the Group is at or is approaching
the point of non-viability such that regulatory
intervention is required, any exercise of the
resolution regime powers by the Authorities
may adversely affect holders of RBSG’s
ordinary shares or other Group securities that
fall within the scope of ‘bail-in’ powers. This
may result in various actions being
undertaken in relation to the Group and any
securities of the Group, including the write-
down or conversion of certain of the Group’s
securities. There would also be a
corresponding adverse effect on the market
price of such securities.
Legal, regulatory and conduct risk
The Group’s businesses are subject to
substantial regulation and oversight,
which are constantly evolving and may
adversely affect the Group.
The Group is subject to extensive laws,
regulations, corporate governance practice
and disclosure 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, which
may increase compliance and conduct risks.
The Group expects government and
regulatory intervention in the financial services
industry to remain high for the foreseeable
future.
In recent years, regulators and governments
have focussed on reforming the prudential
regulation of the financial services industry
and the manner in which the business of
Risk factors
financial services is conducted. Among
others, measures have included: enhanced
capital, liquidity and funding requirements,
implementation of the UK ring-fencing regime,
implementation and strengthening of the
recovery and resolution framework applicable
to financial institutions in the UK, the EU and
the US, financial industry reforms (including in
respect of MiFID II), enhanced data privacy
and IT resilience requirements, enhanced
regulations in respect of the provision of
‘investment services and activities’, and
increased regulatory focus in certain areas,
including conduct, consumer protection
regimes, anti-money laundering, anti-bribery,
anti-tax evasion, payment systems, sanctions
and anti-terrorism laws and regulations. This
has 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.
In particular, the Group is required to comply
with regulatory requirements in respect of the
implementation of the UK ring-fencing regime
and to ensure operational continuity in
resolution; the steps required to ensure such
compliance entail significant costs, and also
impose significant operational, legal and
execution risk. Serious consequences could
arise should the Group be found to be non-
compliant with such regulatory requirements.
Such changes may also result in an increased
number of regulatory investigations and
proceedings and have increased the risks
relating to the Group’s ability to comply with
the applicable body of rules and regulations in
the manner and within the time frames
required.
Any of these developments (including any
failure to comply with new rules and
regulations) could have a significant impact on
the Group’s authorisations and licenses, the
products and services that the Group may
offer, its reputation and the value of its assets,
the Group’s operations or legal entity
structure, and the manner in which the Group
conducts its business. 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:
general changes in government, central
bank, regulatory or competition policy, or
changes in regulatory regimes that may
influence investor decisions in the markets
in which the Group operates;
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;
changes to 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,
the BRRD, MREL or by the Financial
Stability Board’s (‘FSB’) recommendations
on total loss-absorbing capacity (‘TLAC’);
additional rules and regulatory initiatives
and review relating to customer protection
and resolution of disputes and complaints,
including increased focus by regulators
(including the Financial Ombudsman
Service) on how institutions conduct
business, particularly with regard to the
delivery of fair outcomes for customers
and orderly/transparent markets;
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;
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 relating to foreign ownership,
expropriation, nationalisation and
confiscation of assets;
changes to corporate governance practice
and disclosure requirements, senior
manager responsibility, corporate
structures and conduct of business rules;
financial market infrastructure reforms
establishing new rules applying to
investment services, short selling, market
abuse, derivatives markets and investment
funds;
increased attention to the protection and
resilience of, and 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 as
well as IT controls and resilience, including
the GDPR;
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, changes in the scope and
administration of the Bank Levy, 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;
laws and regulations in respect of climate
change and sustainable finance (including
ESG) considerations; and
261
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 or
conflicting laws, rules or regulations by key
regulators or policymakers in different
jurisdictions, or failure by the Group to comply
with such laws, rules and regulations, may
adversely affect the Group’s business and
results. In addition, uncertainty and insufficient
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 is subject to a number of legal,
regulatory and governmental actions and
investigations including conduct-related
reviews and redress projects, the
outcomes of which are inherently difficult
to predict, and which could have an
adverse effect on the Group.
The Group’s operations are diverse and
complex and it operates in legal and
regulatory environments that expose it to
potentially significant legal proceedings, and
civil and criminal regulatory and governmental
actions. 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 such 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 ongoing reviews, investigations
and proceedings (both formal and informal) by
governmental law enforcement and other
agencies and litigation proceedings, relating
to, among other matters, the offering of
securities, conduct in the foreign exchange
market, the setting of benchmark rates such
as LIBOR and related derivatives trading, the
issuance, underwriting, and sales and trading
of fixed-income securities (including
government securities), product mis-selling,
customer mistreatment, anti-money
laundering, antitrust and various other
compliance issues. Legal and regulatory
actions are subject to many uncertainties, and
their outcomes, including the timing, amount
of fines or settlements or the form of any
settlements, which may be material and in
excess of any related provisions, are often
difficult to predict, particularly in the early
stages of a case or investigation, and the
Group’s expectation for resolution may
change.
In particular, the Group has for a number of
years been involved in conduct-related
reviews and redress projects, including a
review of certain historic customer
Risk factors
connections in its former Global Restructuring
Group (GRG), management of claims arising
from historic sales of payment protection
insurance, and a review of tracker mortgage
products in the Republic of Ireland. In relation
to the GRG review, the Group established a
complaints process in November 2016,
overseen by an independent third party. The
complaints process closed on 22 October
2018 for new complaints in the UK and, with
the exception of a small cohort of potential
complainants for whom there is an extended
deadline, on 31 December 2018 for new
complaints in the Republic of Ireland. An
additional provision of £50 million was taken
in Q4 2018, reflecting greater than predicted
complaints volumes in the week leading up to
the closure of the complaints process. In
addition, the Group continues to handle
claims in relation to historic sales of payment
protection insurance and took additional
provisions of £200 million in Q3 2018,
reflecting increased complaint volumes as the
complaint deadline of 31 August 2019
approaches. In the Republic of Ireland, UBI
DAC, remains engaged in a review of the
treatment of customers who have been sold
mortgages with a tracker interest rate or with
a tracker interest rate entitlement. A redress
and compensation exercise is ongoing in
respect of this matter. See also, ‘Litigation,
investigations and reviews’ of Note 27 on the
consolidated accounts for details of these
matters. The Group has dedicated resources
in place to manage claims and complaints
relating to the above and other conduct-
related matters. Provisions taken in respect of
such matters include the costs involved in
administering the various complaints
processes. Any failure to administer such
processes adequately, or to handle individual
complaints fairly or appropriately, could result
in further claims as well as the imposition of
additional measures or limitations on the
Group’s operations, additional supervision by
the Group’s regulators, and loss of investor
confidence.
Adverse outcomes or resolution of current or
future legal or regulatory actions, including
conduct-related reviews or redress projects,
could result in restrictions or limitations on the
Group’s operations, and could adversely
impact the Group’s capital position or its
ability to meet regulatory capital adequacy
requirements. Failure to comply with
undertakings made by the Group to its
regulators may result in additional measures
or penalties being taken against the Group.
The Group may not effectively manage the
transition of LIBOR and other IBOR rates
to alternative risk free rates.
UK and international regulators are driving a
transition from the use of interbank offer rates
(IBOR’s), including LIBOR, to alternative risk
free rates (RFRs). In the UK, the FCA has
asserted that they will not compel LIBOR
submissions beyond 2021, thereby
jeopardising its continued availability, and
have strongly urged market participants to
transition to RFRs, as has the CFTC and
other regulators in the United States. The
Group has significant exposure to IBORs
primarily on its derivatives, commercial
lending and legacy securities. Until there is
market acceptance on the form of alternative
RFRs for different products, the legal
mechanisms to effect transition cannot be
confirmed, and the impact cannot be
determined nor any associated costs
accounted for. The transition and
uncertainties around the timing and manner of
transition to RFRs represent a number of risks
for the Group, its customers and the financial
services industry more widely. These include
risks related to: legal risks (as changes may
be required to documentation for new or
existing transactions); financial risks (which
may arise from any changes in valuation of
financial instruments linked to benchmarks
rates and may impact the Group’s cost of
funds and its risk management related
financial models); pricing risks (such as
changes to benchmark rates could impact
pricing mechanisms on certain instruments);
operational risks (due to the potential
requirement to adapt IT systems, trade
reporting infrastructure and operational
processes); and conduct risks (which may
relate to communication regarding the
potential impact on customers, and
engagement with customers during the
transition period).
It is therefore currently difficult to determine to
what extent the changes will affect the Group,
or the costs of implementing any relevant
remedial action. Uncertainty as to the nature
of such potential changes, alternative
reference rates or other reforms and as to the
continuation of LIBOR or EURIBOR may
adversely affect financial instruments using
LIBOR or EURIBOR as benchmarks. The
implementation of any alternative RFRs may
be impossible or impracticable under the
existing terms of such financial instruments
and could have an adverse effect on the value
of, return on and trading market for such
financial instruments
The Group operates in markets that are
subject to intense scrutiny by the
competition authorities.
There is significant oversight by competition
authorities of the markets which the Group
operates in. The competitive landscape for
banks and other financial institutions in the
UK, the rest of Europe and the US is rapidly
changing. 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 UK retail banking sector has been
subjected to intense scrutiny by the UK
competition authorities and by other bodies,
including the FCA and the Financial
Ombudsman Service, 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.
262
These reviews raised significant concerns
about the effectiveness of competition in the
retail banking sector. The CMA’s Retail
Banking Market Order 2017 imposes
remedies primarily intended to make it easier
for consumers and businesses to compare
personal current account (‘PCA’) and SME
bank products, increase the transparency of
price comparison between banks and amend
PCA overdraft charging. These remedies
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 financial sector.
The cost of implementing the Alternative
Remedies Package could be more onerous
than anticipated.
In connection with the implementation of the
Alternative Remedies Package (regarding the
business previously described as Williams &
Glyn), an independent body (‘Independent
Body’) has been established to administer the
Alternative Remedies Package. The
implementation of the Alternative Remedies
Package has involved costs for the Group,
including but not limited to the funding
commitments of £425 million for the Capability
and Innovation Fund and £350 million for the
incentivised switching scheme, both being
administered by the Independent Body.
Implementation of the Alternative Remedies
Package may involve additional costs for the
Group and may 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 may 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 has the ability to extend the duration of
the scheme by up to twelve months, impose
penalties of up to £50 million, 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 (which comprises part of
the Alternative Remedies Package), 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 (which also comprises part of the
Alternative Remedies Package) 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 agreed to grant those customers which
Risk factors
have switched to eligible banks under the
incentivised switching scheme access to its
branch network for cash and cheque handling
services, which may impact customer service
quality for the Group’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 to the Group 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 confidence.
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, 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.
Failure to generate sufficient future taxable
profits or further changes in tax legislation
(including with respect to rates of tax) or
accounting standards may reduce the
recoverable amount of the recognised tax loss
deferred tax assets, amounting to £1.0 billion
as at 31 December 2018. Changes to the
treatment of certain deferred tax assets may
impact the Group’s capital position. In
addition, the Group’s interpretation or
application of relevant tax laws may differ
from those of the relevant tax authorities and
provisions are made for potential tax liabilities
that may arise on the basis of the amounts
expected to be paid to tax authorities. The
amounts ultimately paid may differ materially
from the amounts provided depending on the
ultimate resolution of such matters.
263
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. The company 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.
Directed Buyback Contract
On 7 February 2019, the company and HM
Treasury entered into the Directed Buyback
Contract to help facilitate the return of the
company to full private ownership through the
use of any excess capital to buy back the
company’s ordinary shares held by HM Treasury.
Under the terms of the Directed Buyback
Contract, the company may agree with HM
Treasury to make off-market purchases from time
to time of its ordinary shares held by HM
Treasury, including by way of one or more
standalone purchases, through a non-
discretionary, broker-managed directed trading
programme, or in conjunction with any offer or
sale by HM Treasury by way of an institutional
placing. Neither the company nor HM Treasury
would be under an obligation to agree to make
such off-market purchases and would only do so
subject to regulatory approval at the time.
The aggregate number of ordinary shares which
the company may purchase from HM Treasury
under the Directed Buyback Contract will not
exceed 4.99 per cent. of the company’s issued
share capital and the aggregate consideration to
be paid will not exceed 4.99 per cent. of the
company’s market capitalisation. The price to be
paid for each ordinary share will be the market
price at the time of purchase or, if the directed
buyback is in conjunction with an institutional
placing, the placing price.
Framework and State Aid 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.
The company 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, the company 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”) to replace the
company’s final outstanding commitment under
its State Aid obligations (to divest the business
previously known as Williams & Glyn).
On 25 April 2018, the Revised State Aid
Commitment Deed was replaced by the
Framework and State Aid Deed between the
company, HM Treasury and an independent
body established to facilitate and oversee the
delivery of the Alternative Remedies Package
(the “Independent Body”). Under the Framework
and State Aid Deed, the company agrees to do
all acts and things necessary to ensure that HM
Treasury is able to comply with its obligations
under any EC decision approving State Aid to the
company, including under the Alternative
Remedies Package.
Pursuant to the Framework and State Aid Deed,
the company has committed: (i) £425 million into
a fund for eligible bodies in the UK banking and
financial technology sectors to develop and
improve their capability to compete with the
company in the provision of banking services to
small and medium-sized enterprises (“SMEs”)
and develop and improve the financial products
and services available to SMEs (the “Capability
and Innovation Fund”); and (ii) £275 million to
eligible bodies to help them incentivise SME
banking customers within the division of the
company previously known as Williams & Glyn to
switch their business current accounts and loans
to the eligible bodies (the “Incentivised Switching
Scheme”). The company 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, the company may be required to
make a further contribution, capped at £50
million. The Independent Body will distribute
funds from the Capability and Innovation Fund
and implement the Incentivised Switching
Scheme.
264
Under the Framework and State Aid Deed, the
company also agreed to indemnify 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. The
provisions of the indemnity to the Independent
Body are set out in the Framework and State Aid
Deed and the provisions of the indemnity to HM
Treasury are set out in a separate agreement
between the company and HM Treasury,
described under “Deed of Indemnity” below.
The Framework and State Aid 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 the company
must repay HM Treasury any aid ordered to be
recovered under the Repayment Decision.
Deed of Indemnity
In the context of the Framework and State Aid
Deed, the company entered into a Deed of
Indemnity with HM Treasury on 25 April 2018,
pursuant to which the company agreed to
indemnify HM Treasury to cover liabilities that
may be incurred in implementing the Alternative
Remedies Package, as described under
“Framework and State Aid Deed” above.
Trust Deed
In the context of the Framework and State Aid
Deed, the company entered into a Trust Deed
with the Independent Body on 25 April 2018, to
set up a trust to administer the funds committed
by the company under the Framework and State
Aid Deed for the Alternative Remedies Package.
State Aid Costs Reimbursement Deed
Under the 2009 State Aid Costs Reimbursement
Deed, the company 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.
Shareholder information
Financial calendar
Shareholder enquiries
Analysis of ordinary shareholders
Important addresses
Principal offices
Forward-looking statements
Page
265
265
266
266
266
267
Financial calendar
Dividends
Payment dates
Cumulative preference shares 31 May and 31 December 2019
Non-cumulative preference
shares
29 March, 28 June,
30 September and
31 December 2019
Ordinary shares
30 April 2019
Ex-dividend date
Cumulative preference shares 2 May and 5 December 2019
Ordinary shares
21 March 2019
Record date
Cumulative preference shares
3 May and 6 December 2019
Ordinary shares
22 March 2019
Annual General Meeting
25 April 2019
RBS Conference Centre
RBS Gogarburn
Edinburgh, EH12 1HQ
Interim results
2 August 2019
Shareholder enquiries
You can check your shareholdings in the company 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
access this information.
You can use the website for shareholding and outstanding payment
enquiries and to change your address or download forms. You can
also sign up to E-Comms and choose to receive an email notification
when shareholder communications become available instead of paper
communications.
You can 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.
If you are a UK taxpayer, donating your shares in this way will not give
rise to either a gain or a loss for UK capital gains tax purposes. You
may be able to claim UK income tax relief on gifted shares and can do
so in various ways. Further information can be obtained from HM
Revenue & Customs.
Should you wish to donate your shares to charity please 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
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.
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 or individual who is FCA authorised. The scammer
may claim that the genuine firm's contact details on the FCA Register
(Register) are out of date and then use their own details, or copy the
website of an authorised firm, making subtle changes such as the
phone number. They may claim to be an overseas firm, which won’t
always have full contact and website details listed on the Register.
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.
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/scamsmart
265
Shareholder information
Analysis of ordinary shareholders
At 31 December 2018
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
180,212
5,103
54
2
487
22
64
185,944
160,931
23,294
967
473
214
65
185,944
Number
of shares
- millions
100.9
11,899.8
1.1
0.4
25.7
0.2
20.5
12,048.6
39.2
53.0
28.4
172.3
735.9
11,019.8
12,048.6
%
0.8
98.8
-
—
0.2
—
0.2
100.0
0.3
0.5
0.2
1.4
6.1
91.5
100.0
Important addresses
Principal offices
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
The Royal Bank of Scotland Group plc
PO Box 1000, Gogarburn, Edinburgh EH12 1HQ
Telephone: +44 (0)131 626 0000
NatWest Markets Plc
250 Bishopsgate, London, EC2M 4AA
The Royal Bank of Scotland plc
PO Box 1000, Gogarburn, Edinburgh EH12 1HQ
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 4AA
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
250 Bishopsgate, London EC2M 4AA
National Westminster Bank Plc
250 Bishopsgate, London EC2M 4AA
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
NatWest Markets Group Holdings Corp.
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
266
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; the implementation of the Alternative Remedies Package;
the continuation of the Group’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; the Group’s exposure to
political risk, economic risk, climate change risk, operational risk, conduct
risk, cyber and IT risk and credit rating risk and to various types of market
risks, including interest rate risk, foreign exchange rate risk and commodity
and equity price risk; customer experience including our Net Promotor
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 2018 Annual Report and Accounts and other risk factors and
uncertainties discussed in this document. These include the significant
risks for the Group presented by: operational and IT resilience risk
(including in respect of: the Group being subject to cyberattacks;
operational risks inherent in the Group’s business; the Group’s operations
being highly dependent on its IT systems; the Group relying on attracting,
retaining and developing senior management and skilled personnel and
maintaining good employee relations; the Group’s risk management
framework; and reputational risk), economic and political risk (including in
respect of: the uncertainties surrounding the UK’s withdrawal from the
European Union; increased political and economic risks and uncertainty in
the UK and global markets; climate change and the transition to a low
carbon economy; HM Treasury’s ownership of RBSG and the possibility
that it may exert a significant degree of influence over the Group; continued
low interest rates and changes in foreign currency exchange rates),
financial resilience risk (including in respect of: the Group’s ability to meet
targets and make discretionary capital distributions to shareholders; the
highly competitive markets in which the Group operates; deterioration in
borrower and counterparty credit quality; the ability of the Group to meet
prudential regulatory requirements for capital and MREL, or to manage its
capital effectively; the ability of the Group to access adequate sources of
liquidity and funding; changes in the credit ratings of RBSG, any of its
subsidiaries or any of its respective debt securities; the Group’s ability to
meet requirements of regulatory stress tests; possible losses or the
requirement to maintain higher levels of capital as a result of limitations or
failure of various models; sensitivity of the Group’s financial statements to
underlying accounting policies, judgements, assumptions and estimates;
changes in applicable accounting policies or rules; the value or
effectiveness of any credit protection purchased by the Group; the level
and extent of future impairments and write-downs, including with respect to
goodwill; and the application of UK statutory stabilisation or resolution
powers) and legal, regulatory and conduct risk (including in respect of: the
Group’s businesses being subject to substantial regulation and oversight;
legal, regulatory and governmental actions and investigations; the
replacement of LIBOR, EURIBOR and other benchmark rates; heightened
regulatory and governmental scrutiny (including by competition authorities);
implementation of the Alternative Remedies Package and the costs related
thereto; and changes in tax legislation).
The forward-looking statements contained in this document speak only as
at the date hereof, and the Group 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.
267