The Royal Bank of Scotland Group plc
Annual Report and Accounts 2019
We champion potential, helping people, families and businesses to thrive
rbs.com
Inside our 2019 Annual Report and Accounts
Click on title to go to page
Strategic report
2019 highlights and our future strategy
Performance against our 2019 targets
Chairman’s statement
Group Chief Executive’s statement
Our Purpose-led strategy
Outlook
2019 Performance at a glance
How we do business
Our operating environment
How we create value
Our businesses & performance
Building a more sustainable bank
Our Values
Stakeholder engagement
Our Customers
Our Colleagues
Climate-related financial disclosures
Risk Management
Risk overview
Top and Emerging Risks
Governance and compliance
Governance at a glance
Board engagement with stakeholders
Viability statement
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.
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49
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62
Capital and risk management
112
Disclosures on our capital, liquidity and funding position
and a detailed overview of the management of key risks
relating to our business operations.
Financial Statements
Our audited financial statements and related notes,
including our Independent auditor’s report.
Risk Factors
190
281
A description of certain risk factors that could adversely
affect our future results, financial condition and prospects
and cause them to be materially different.
We are a financial services company, providing
a wide range of products and services to
personal, commercial, large corporate and
institutional customers.
Approval of Strategic Report
The Strategic Report for the year ended 31 December 2019 set
out on pages 2 to 49 was approved by the Board of directors on
13 February 2020.
By order of the Board
Company Secretary
Jan Cargill
13 February 2020
Chairman
Howard Davies
Executive directors
Alison Rose-Slade
Katie Murray
Non-executive
directors
Frank Dangeard
Baroness Noakes
Alison Davis
Mike Rogers
Patrick Flynn
Mark Seligman
Morten Friis
Lena Wilson
Robert Gillespie
Approach to non-financial performance reporting
We note the requirements under the provisions of the Companies Act
2006, relating to the preparation of the Strategic Report which have
been amended by the Companies, Partnerships and Groups (Accounts
and Non-Financial Reporting) Regulations 2016, which implements EU
Directive 2014/95/EU (on non-financial and diversity information). As a
result of these changes, we have integrated non-financial information
across the Strategic Report, thereby promoting cohesive reporting of
non-financial matters. These include specific sections on where readers
can read more on our business model and policies (How we do Business;
Building a more sustainable bank), due diligence and outcome of such
policies (Governance and compliance), principal risk and mitigatory
actions (Risk Management), and performance measures (2019 highlights
and our future strategy). We have also begun reporting in accordance
with guidance from the International Integrated Reporting Council and
the recommendations of the Taskforce on Climate-related Finance
Disclosures (TCFD) (Climate-related financial disclosures).
Further information on environmental, social, employee and human
rights matters, together with detailed information on our sustainability
performance can be found on our Sustainable Banking web pages on
rbs.com
Assurance
The scope of work performed by the RBS Group’s independent auditor
as part of their review of other information included in the 2019 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 191 to 201.
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 year ended 31 December 2019.
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 conclusion.
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02
Performance against
our 2019 targets
We are building a simple, safe and
more customer focused bank
Customer experience
2019 highlights and our future strategy
Key
Customer experience
Simplifying the bank
Supporting sustainable growth
Employee engagement
Strength and sustainability
Digitally active users
(Mobile)
Two place improvement in CMA rank for both NatWest
and Royal Bank of Scotland brands (1)
7.0m
2018 6.4m
Personal CMA ranking
Commercial NPS ranking
NatWest
Royal Bank of Scotland
NatWest (2)
Royal Bank of Scotland (3)
7th 16th
-1
+2
15th
9th
No.1 No.3
—
No.1
—
No.3
Simplifying the bank
Supporting sustainable growth
Employee engagement
Reduce operating expenses
by c.£300 million (4)
Grow net lending in our retail and
commercial business by 2-3% (5)
Improve employee engagement
£310m
2018 £278m
£293.8bn
+3.7%
£283.4bn
87%
+1%
86%
Strength and sustainability
Paid and proposed dividend
Total paid and proposed dividend
Of which: will be returned to
per share in 2019
to shareholders in 2019
the UK taxpayer
22p
2018 13p
Operating profit
before tax
£2.7bn
£1.6bn
£1.7bn
£1.0bn
Progressing towards c.14% CET1
capital ratio (6)
Notes:
(1) CMA scores for NatWest Personal and Royal Bank
of Scotland Personal as at August 2018/2019
reflecting the CMA reporting cycle.
(2) England & Wales: £2 million plus turnover of the
five largest banks.
(3) Scotland: £2 million plus turnover of the three
largest banks.
(4) Reduction in total operating expenses excluding
litigation and conduct costs of £895 million
(2018 – £1,282 million) and strategic costs of
£1,381 million (2018 – £1,004 million).
(5) Comprises customer loans in our UK Personal
Banking, Ulster Bank RoI, Commercial Banking
and Private Banking operating segments.
(6) Based on end-point Capital Requirements
Regulation (CRR) Tier 1 capital and leverage
exposure under the CRR Delegated Act.
£4,232m
+£873m
2018 £3,359m
16.2%
16.2%
03
2019 highlights and our future strategy
Chairman’s
statement
Howard Davies
Chairman
2019 was another year
of positive progress for
the Bank, set against
ongoing political and
economic uncertainty.
Dear shareholders,
2019 was another year of progress for
the Bank, set against ongoing political
and economic uncertainty. Further
cost reduction, increased lending to our
personal and business customers and
more dividends for our shareholders
are all good outcomes. I am also very
pleased that we appointed Alison Rose
as Group CEO. Alison brings a wealth
of experience from many different roles
in the Group and the Board and I look
forward to continuing to work with her
as we strive to improve the Bank for our
customers.
On behalf of the Board, I would like to
thank Ross McEwan for his immense
commitment to RBS throughout his
tenure here. The Bank has undergone
a substantial transformation, and his
leadership was fundamental. I am
confident that the work he did during
his time here has set us up well for the
future.
Renaming the RBS Group
Today, we have announced that we
plan to rename our parent company.
The Royal Bank of Scotland Group plc
is intended to be renamed NatWest
Group plc later this year. As we
evolve our strategic plan, the Board
has decided that it is the right time to
align the parent name with the brand
under which the great majority of our
business is delivered. Customers will
see no change to products or services
as a result of this change and will
continue to be served through the
brands they recognise today, including
the Royal Bank of Scotland. Similarly,
our employees will also see no change
to the way they work and we will not
be moving people out of Scotland as a
result of this change.
Economic outlook and 2019
financial performance
Uncertainty continues to dominate the
political and economic environment. We
await further details of the future terms
of trade between the EU and UK and
what they mean for both the Bank and
its customers. The UK economy slowed
in 2019 with GDP growth of 1.2% in the
year. That was accompanied by lower
business investment and slowing house
price growth. More encouragingly,
unemployment is low and impairments
remain very low.
The low interest rate environment
continues to challenge income growth
for UK and European banks. Despite
that pressure, the Bank delivered a solid
performance, generating a pre-tax
operating profit of £4.2 billion and an
attributable profit of £3.1 billion or £1.6
billion excluding the FX recycling gain
following the merger of Alawwal Bank
with Saudi British Bank (SABB). Our
stake in Alawwal Bank was a position
we have been working to unwind for a
number of years as we have refocused
on the UK & Republic of Ireland. Another
04
2019 highlights and our future strategy
plans for the future. We held two such
events during 2019, one of which was
our first virtual shareholder evening.
Board changes
In addition to the change of Group
CEO, Brendan Nelson stepped down
as a non-executive director on 25
April 2019. Patrick Flynn succeeded
Brendan as Chairman of the Group
Audit Committee. Aileen Taylor
left the role of Chief Governance &
Regulatory Officer and Board Counsel,
and Company Secretary on 5 August
2019 following 19 years with RBS. Jan
Cargill, previously Deputy Secretary
and Director, Corporate Governance,
has very successfully stepped up to the
role of Chief Governance Officer and
Company Secretary. I would like, once
again, to thank Brendan and Aileen for
their contributions to the Bank over
many years.
Conclusion
Today marks an exciting and important
moment for the Bank, our customers
and our shareholders, as we look
forward and set out how our strategy
will evolve over the coming years. By
building on solid foundations, putting
a focus on Purpose at the centre of
our decision making and refreshing
our approach to deliver a better
service for customers, we will create
a more sustainable Bank, and in turn
more sustainable returns, for you, our
shareholders.
We are pleased to announce
that, subject to shareholder
approval at the Annual
General Meeting, we will
pay a final ordinary dividend
of 3 pence per share and a
special dividend of 5 pence
per share.
significant item was an additional
charge of £900 million relating to
PPI, as, along with other banks, we
experienced a significantly higher
number of claims than expected as we
approached the FCA's 29 August 2019
deadline.
The Bank reduced its operating costs
while maintaining a sound control
environment. In 2019, costs reduced
by a further £310 million, taking the
cumulative cost reduction to £4.5 billion
since 2014. The Bank’s balance sheet
remains strong, and we obtained a
clear pass in the Bank of England stress
test in December 2019. Our Common
Equity Tier 1 ratio – the key measure of
financial strength – is the highest of the
major UK banks.
Shareholder returns
We are pleased to announce that,
subject to shareholder approval at the
Annual General Meeting, we will pay
a final ordinary dividend of 3 pence
per share and a special dividend of 5
pence per share. This year, our total
ordinary dividend of 5 pence per share
is excluding the post-tax FX recycling
gains of £1.6 billion, given this is purely
an accounting adjustment. If approved,
this will mean that we have returned
£4.2 billion in capital to shareholders
since we resumed dividend payments in
2018, of which £2.6 billion has gone to
the UK taxpayer.
Looking ahead, we expect to maintain
ordinary dividends of around 40% of
attributable profit and retain approval
from shareholders to buy back shares
- equivalent to 4.99% of the RBS
Group’s issued share capital - from
HM Treasury. Any buyback of these
shares will be at the discretion of HM
Treasury, but the Board believes that
participating in government share sales
in the future is an excellent mechanism
to return excess capital to shareholders
in an efficient way.
Becoming more diverse and inclusive
Our renewed sense of purpose is
reflected in continued efforts to become
more diverse and inclusive. We are
making progress towards our goal of
having at least 30% senior women in our
top three leadership layers in each of
our businesses by 2020 and to be fully
gender balanced across the Bank by
2030.
Since the introduction of our targets, we
have seen an increase in the proportion
of women in senior roles. Currently the
top three leadership levels in 10 of our
12 business areas have more than 30%
women. On aggregate across the entire
Bank, that translates to women filling
35% of roles in the top three leadership
levels – a 6% increase since targets
were introduced.
In our top 4,000 leadership positions,
female representation has improved,
with 44% women in those roles. That is a
12% increase over the same timeframe.
So we are making progress but must
continue with momentum to meet
our ambition of having a fully gender
balanced workforce at all levels of the
organisation by 2030.
We also continue to focus on building
an ethnically diverse organisation.
Our plan involves 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
at the start of 2018 to improve the
representation of BAME/non-white
colleagues in our top four leadership
layers to at least 14% by 2025. At the
end of 2019 we had 9% BAME/non-
white colleagues in those layers and
employed 15% BAME/non-white staff
across the UK.
Listening to and engaging with
stakeholders
During 2019, we conducted regular
engagement with a broad range of
stakeholders, ensuring their views
informed our discussion and thinking.
Engagement included visits and the
‘Meet the Board’ event with colleagues.
Our Colleague Advisory Panel (CAP)
met twice in 2019, providing a valuable
mechanism for colleagues to gain a
greater understanding of the Board’s
role and provide feedback to directors.
Two-way communication is crucial for
both colleagues and Board members
and embodies the open and inclusive
culture of the Bank. Furthermore, we
hold regular retail shareholder events,
where shareholders can ask questions to
a panel of executives and Non-Executive
Directors and learn more about the
business, our progress to date and our
05
2019 highlights and our future strategy
Group Chief
Executive’s
statement
Alison Rose
Group Chief Executive
We champion potential,
helping people, families and
businesses to thrive.
Dear shareholders,
It is a privilege to be writing to you as
CEO of the company that I joined as
a graduate more than 25 years ago.
I am truly excited by the opportunity
to lead the Bank as we set out a new
commitment to become a Purpose-led
organisation, which will champion
the potential of people, families and
businesses across the communities
we serve.
A period of unprecedented disruption
We, like our customers, are living in
a period of unprecedented disruption
– whether it is the struggle to get
on the housing ladder or starting a
business, the rapid growth of disruptive
technology, an ageing population, the
emergence of the gig economy or the
existential impact of climate change.
The way people live is changing,
and their expectations of companies
are changing too. I firmly believe in
response, we have to adopt a new
approach that moves away from a
view that is defined by products and
transactions, and uses the strength
of the relationships we have with all
of our stakeholders as the real test
of our progress.
This disruption is happening against
the backdrop of a highly uncertain
economic environment. UK economic
growth remains subdued, compared
to its historic trend, and interest
rates are likely to be lower for longer.
This has an impact on our ability to
generate net interest income. Business
confidence continues to be affected
by the UK’s departure from the EU as
our customers await certainty over
the future terms of trade. Consumer
confidence on the other hand continues
to be supported by a relatively
strong UK employment market and
we are seeing good volumes in our
mortgage business as a result. We still
see opportunities to grow in our key
target markets despite some of these
challenging trends.
Purpose-led organisation – Building
more sustainable returns
Today marks a new era, as we provide
an update to our plans and a new
Purpose for the Bank that will help us
become a more sustainable business,
delivering better outcomes for our
customers and our shareholders.
We are privileged to play a central role
in the UK economy. That brings with it,
a deep responsibility to the communities
we serve and to wider society. That is
why we have a refreshed Purpose:
We champion potential, helping people,
families and businesses to thrive.
We won’t get everything right every
time, but this simple expression will
be the standard to which we will hold
ourselves.
Sustainable returns, however, can
only come from a sustainable business
model and building a Purpose-led bank
must underpin the services we provide.
06
2019 highlights and our future strategy
It also means we must play our role in
tackling the issues which hold people,
families and businesses back.
The Board and management team have
worked together to define an approach to
becoming a Purpose-led organisation
based on balancing the interests of all our
stakeholders. As part of this, we have
worked with the not-for-profit organisation
a Blueprint for Better Business.
We have informed our approach using
their framework that identifies the need
to be: Honest and Fair with Customers
and Suppliers; A Good Citizen; A
Guardian for Future Generations;
and A Responsible and Responsive
Employer as key drivers to becoming a
more sustainable business. In addition,
we have analysed what is driving
the changes in our own customer
behaviours and the subsequent trends
borne from their experiences. This
forms the building blocks for the plans
we are setting out today.
It is essential that our Purpose
underpins our strategy and the
decisions we make on the future
direction of the business. At a practical
level, we have been reviewing how to
embed Purpose within Board forums
and processes to ensure it is a central
part of how we work. We are very clear
that our Purpose must apply across the
whole organisation and to everything
we do. We are also clear that getting this
right will take time.
Three initial areas of focus where we
can make a substantial impact
We have identified three areas of focus
where we can make a substantial
impact in addressing challenges that
threaten to hold people, families and
businesses back:
• Enterprise, and the barriers that too
many face to starting a business;
• Learning, and what we can do to
improve financial capability and
confidence for our customers, as well
as establishing a dynamic learning
culture for our employees; and
• Climate, and the role we can play in
accelerating the transition to a low
carbon economy.
We have set out some significant
ambitions across these three areas that
will deliver important benefits for our
customers and the wider economy.
An ambition to take the
lead in combating the causes
of climate change
Today, we are setting a bold new
ambition – to be a leading bank in
the UK & Republic of Ireland helping
to address the climate challenge; by
making our own operations net carbon
zero in 2020 and climate positive
by 2025, and by driving material
reductions in the climate impact of
our financing activity. We are setting
ourselves the challenge to at least halve
the climate impact of our financing
activity by 2030, and intend to do what
is necessary to achieve alignment with
the 2015 Paris Agreement.
worldwide to commit to all the Climate
Group initiatives on electric vehicles
(EV100), energy productivity (EP100),
and renewable power (RE100).
In November 2019 we issued the first
exclusively social bond under ICMA's
Social Bond Principles in the UK by
any financial institution. The impact
of the lending funded by this bond will
be reported 12 months after issuance,
measuring the number of jobs created
and retained in some of the UK’s most
deprived areas.
This is good progress, but we can, and
will, do more.
This will be a significant challenge
as we, like others, do not yet fully
understand what this will require and
how it will be achieved, not least as
there is currently no standard industry
methodology or approach. Solving
this will require UK and international
industry, regulators and experts to
come together and find solutions. We
are determined to not just play our
part, but to lead on the collaboration
and co-operation that is so critical
to influencing the transition to a low
carbon economy.
As a systemic UK bank, we must play
an active role and these market leading
ambitions underline our position. This is
not only the right thing to do, it will give
us the opportunity to do more business
with our customers, as they transition to
a low carbon economy.
We are already taking positive steps in
the right direction. This year we became
one of the Founding Signatories of
the United Nations Environment
Programme Finance Initiative (UNEP
FI) Principles for Responsible Banking,
committing to begin strategically
aligning our business with the UN
Sustainable Development Goals (SDGs)
and the 2015 Paris Agreement. We have
been reviewing specific SDGs with
relevance to our Purpose focus areas
of Climate Change, Enterprise and
Learning.
Improving financial confidence and
becoming a learning organisation
We also know that we have a
responsibility to help our customers
improve their financial confidence.
Our UK-wide financial education
programme, MoneySense has now
been running for 25 years. We can
help children in schools and at home
understand the value and importance
of finance from an early age. We will
target reaching 2.5 million people
through financial capability interactions
each year. The more confidence our
customers have, the more opportunity
we will have to provide services to them.
I also want to build the confidence
and capability of our employees. We
already have one of the most qualified
workforces in the UK. Today I am setting
a target to have all front-line staff
professionally accredited within the first
twelve months of being in role.
Removing barriers to enterprise
As the largest supporter of UK business,
we already offer a wide range of
support to those who want to start a
new business. But we also know that for
many, it remains harder than it should
be. We are committed to helping create
an additional 50,000 new businesses
across the UK by 2023, through
inspiring and supporting over 500,000
people to consider enterprise as a
career option.
The Bank continues to support the
Financial Stability Board's Task Force on
Climate-related Financial Disclosures
(TCFD) - a voluntary set of guidelines
encouraging consistent climate-related
disclosures in annual reporting. In 2019,
we were one of the first companies
Our focus will be on under-represented
populations, with women making up at
least 60% of those we support and more
than 20% being Black, Asian, Minority
Ethnic-led businesses. We will also make
sure that at least 75% of the people we
support are in regions outside of London
07
2019 highlights and our future strategy
and the South East. By helping to tackle
the barriers to starting a business,
there will be more opportunities to help
companies grow.
closer to the services they need,
reduce costs and release capital for
shareholders.
Starting with strong foundations,
but with much more to do
We have built strong foundations,
but our performance doesn’t yet
match its full potential and we need to
support our customers better at the
key moments in their lives. This means
running a bank that is safe, simple and
smart – supporting our customers with
what they need and also making some
tough choices in order to deliver for
shareholders and colleagues.
Safe
Safety and soundness must underpin
everything we do. Intelligent risk-taking
is why banks exist - to find valuable and
sustainable uses for the resources in
the economy, and to help customers
achieve their ambitions. We have strong
capital and liquidity positions and are
well placed to help our customers
succeed. In today’s digital world, our
operational resilience and keeping our
customers’ data safe are top priorities.
We can never lose sight of this, even as
we look to grow. We have announced
today that we will reduce our Common
Equity Tier 1 ratio (CET 1) over the
medium to long-term to around 13-14%.
This will ensure that the Bank remains
safe, and also allow room for further
capital distributions.
Simple
We are still too complicated for our
customers. Much of the potential
value in this Bank is locked in business
lines and business models that are too
complex and generating too little return.
This complexity also creates ‘bad
costs’ – costs that provide no benefit to
customers.
This applies to parts of our NatWest
Markets business, where we have
shrunk over time but we could do more
to increase its focus on our corporate
and institutional customers and their
needs.
Today we are announcing that we
will reduce the size of this business
by around half, as measured by Risk
Weighted Assets, managing down and
optimising low-returning capital and
inefficient activities. We will build a
much smaller and simpler part of the
business which will bring customers
This action will refocus our NatWest
Markets products and services on our
corporate and institutional customers.
We estimate that for 2019, our
corporate and institutional customers
represented around £75 billion of Risk
Weighted Asset equivalents but only
generated returns of around 2% on an
underlying basis and excluding strategic
costs and litigation and conduct costs.
We believe that as we refocus NatWest
Markets, corporate and institutional
customers in the medium to long term
will represent around £60 billion of Risk
Weighted Asset equivalents and returns
will improve to around 8%.
Driving out bad costs also means
simplifying our core customer journeys,
like our account opening and lending
application processes. Aligning and
accelerating the transformation of these
with more automation and less manual
processing will save money, deliver
better controls and improve service.
We are targeting an overall cost
reduction this year of £250 million.
Smart
Taking a disciplined approach to
cost means we can make smart
investment choices, investing to
improve our services across our retail
and commercial customer bases. We
will continue to explore the potential
for partnerships across industries,
and within banking, that can help
us innovate faster and ensure our
investment is wisely spent.
We already have strong relationships
with millions of customers in this
country, but we can deepen them
even further by building propositions
that provide support throughout their
financial lives. This may mean looking to
increase our presence in certain areas
including through partnerships, where
relevant, to ensure we are helping
our customers meet their needs and
ambitions.
In recent years we have dramatically
increased the focus on innovation
across the Bank. This has positioned
us well with partners, opened up new
income lines and helped improve our
time-to-market in a number of critical
areas. There is an amazing opportunity
08
for NatWest to use its brand and market
presence to connect new technology
solutions with the problems that
hold back potential in the personal,
professional and business lives of our
customers.
This must, however, also be matched
by the financial discipline to call time
on ventures that don’t deliver and that
can’t deliver a big enough impact for
our customers and investors.
By simplifying our innovation focus,
and being disciplined on the internal
allocation of capital, we will strengthen
the core of the Bank. By making
smarter investments in services for
our customers we will deepen our
leading positions in personal, business,
commercial and corporate banking.
Delivering sustainable returns
Championing the potential of people,
families and businesses is not an add-on
to our strategy, it is our strategy. I firmly
believe this new Purpose-led approach
is what will deliver reliable returns for
our shareholders, year in, year out.
We will target a return on tangible
equity of 9%-11% from a CET 1 ratio of
13%-14% in the medium to long-term.
Subject to shareholder approval of
our 2019 final and special dividends,
we will have returned £4.2 billion to
shareholders, with £2.6 billion returned
to UK taxpayers since 2018. We have a
clear plan to continue to return capital
to our shareholders over time.
I know from experience, that we only
succeed when our customers and wider
communities succeed. I am confident
that the strategy I have outlined
will deliver sustainable long-term
shareholder returns and will also build
a Bank that the UK and Republic of
Ireland can be proud of. We will create
lasting value when we champion the
potential of those we serve. That is our
Purpose and our Strategy.
We are privileged to play
a central role in the UK
economy. That brings with
it a deep responsibility to the
communities we serve and
to wider society.
Championing enterprise and
female entrepreneurs
As we build a purpose-led bank that champions the
potential of people, families and businesses up and
down the country, we are focusing on the areas where
we can have the biggest positive impact across society.
By tackling the most important issues facing our
entrepreneurs, we can make a real difference to those
who need it most.
Our recent announcement of a £1 billion fund to support
female entrepreneurs in the UK to scale and grow is
just one way that we can help make a positive impact.
Open to both new and existing customers, the funding
represents new lending into the UK economy and is
intended to go some way to closing the gap with male
entrepreneurs.
09
2019 highlights and our future strategy
Our Purpose-led
strategy
Our areas
of focus
Our
Ambition
Our
targets
A purpose-led bank responding to the
changing needs of all stakeholders.
Being purposeful is about recognising our business
is made up of a network of relationships with
multiple stakeholders with different interests. To
be purpose-led and create long term sustainable
value we need to balance appropriately the
interests of all stakeholders and move from being
transactional to relationship focused.
Purpose will sit at the core of all our decision
making, and we will aspire to live by it every day.
Delivering on our Purpose will create longer-term,
deeper relationships with our customers helping
them to thrive throughout their lives. When our
customers succeed, our communities succeed, our
economy thrives and we too succeed.
Our Purpose
We champion potential, helping people, families and businesses to thrive
As part of our shift to being purpose-led there are currently three key areas where we
believe our business and role in society means we can make a meaningful contribution.
Enterprise
Learning
Climate
The biggest supporter of
start-ups in the UK & RoI
Leading learning
organisation; enhancing
the financial ability of the
UK & RoI and the skills
of employees
Leading bank in the
UK & RoI helping to address
the climate challenge
50k
Incremental new
businesses created by
2023 through inspiring and
supporting 500k+ people
60%
Of those inspired and
supported will be female
2.5m
People reached through
financial capability
interactions each year
Climate
positive1
Own operations by 2025
2m
Additional customers
helped to start saving
by 2023
50% 2
Of our UK & RoI customers’
homes at or above EPC or
equivalent rating C by 2030
75%
Of those inspired
and supported will be
based outside London &
South East
100%
Front-line colleagues
professionally qualified/
accredited within first 12
months in role
£20bn3
Additional funding
and financing for climate
and sustainable finance
by 2022
Our initial areas of
focus contribute to
UN Sustainable
Development
Goals
Powered by innovation, collaboration and partnerships
Notes:
1. Climate positive refers to an organisation capturing more carbon than it emits over a given period of time.
2. Percentage of aggregate UK & RoI mortgage book exposure.
3. Pursuant to Climate and Sustainable Finance Inclusion Criteria, available on RBS.com.
10
2019 highlights and our future strategy
Our purpose-led approach is supported by our Strategic
Priorities, taken together with our Bank-wide Financial Targets,
these set out how we will create value and deliver sustainable
financial returns for the benefit of all our stakeholders.
Strategic
Priorities
Supporting
customers at every
stage of their lives
Evolve our propositions
to reflect changing
customer behaviour.
Financial
Targets
£250m
Reduction in
other operating
expenses in
2020 1
Simple to
deal with
Re-engineering led
simplification to drive better
customer experience and
colleague engagement.
Greater than
3% lending
growth in
2020 2
9-11%
RoTE in the
medium to
long term
A purpose-led
bank delivering
sustainable
financial
returns
13-14% CET 1 ratio
in the medium to
long term
Sharpened
customer & capital
allocation focus
Powered by
innovation &
partnerships
Strong pace of business model
innovation and partnership.
Re-focus and re-size NatWest
Markets to meet the needs of
customers – expected to be
capital ratio accretive.
Notes:
1. Excluding operating lease depreciation.
2. Across our retail and commercial businesses.
11
2019 highlights and our future strategy
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 2019
and shows average UK GDP growth of around 1.6% from 2019 to 2023
and continued low interest rates; we expect a base rate cut in the short
term and then flat thereafter. Given the current uncertainties we will
continue to actively monitor and react to market conditions.
2020 Outlook
In the current environment,
and recognising ongoing market
uncertainty, we continue to expect
challenges on income. In addition,
we anticipate that regulatory changes
will adversely impact income in
our personal business by around
£200 million.
We plan ongoing operating cost take-
out by reducing operating expenses
excluding strategic costs, litigation
and conduct costs and operating lease
depreciation costs by £250 million in
2020 compared with 2019. We expect to
incur £0.8-1.0 billion of strategic costs
during 2020 resulting from a refocusing
of NatWest Markets and the continued
resizing of the Group’s cost base. We
anticipate that NatWest Markets exit,
restructuring and disposal costs will
be around £0.6 billion in 2020, with
around £0.4 billion as disposal losses
through income and £0.2 billion through
strategic costs.
We expect to remain below our
through-the-cycle impairment loss
rate assumption of 30-40 basis points,
although the potential impact on the
real economy of ongoing political
uncertainties and geopolitical tensions
could affect our credit loss outcome.
The threat from single name and sector
driven events remains.
We are targeting lending growth of
greater than 3% across our retail and
commercial franchises.
We expect to end 2020 with risk
weighted assets (RWAs) of around
£185-190 billion including an estimated
£10.5 billion increase associated with
the implementation of Bank of England
mortgage floors, with NatWest Markets
RWAs reducing by around £6-8 billion in
the year.
RBS Group (RBSG) capital and funding
plans focus on issuing £2-4 billion of
MREL-compliant instruments, of which
we would expect around £1 billion
to be issued under our Green, Social
and Sustainable Bond Framework,
up to £1.5 billion of AT1 and up to £2.5
billion of Tier 2 instruments. As in prior
years, we will continue to target other
funding sources to diversify our funding
structure, including senior secured from
NatWest Bank subject to funding and
liquidity considerations.
Medium term outlook
We expect to achieve a return on
tangible equity of 9-11% in the medium
to long term. In addition, we expect
ongoing operating cost take-out.
Within NatWest Markets franchise, we
anticipate that RWAs will reduce to
around £20 billion in the medium term,
which, after accounting for strategic
costs and disposal losses, is expected
to be capital ratio accretive in year one
and over the course of the transition
plan period.
We anticipate that the overall RWA
impact of Basel 3 amendments to be
around 5-10% and phased across 2021
to 2023, with the details still subject
to regulatory uncertainty on both
quantum and timing.
RBS Group capital distributions
We expect to maintain ordinary
dividends of around 40% of attributable
profit. We retain our guidance of CET1
ratio to be approximately 14% at the end
of 2021, and we will target a reduction
to 13-14% in the medium to long term.
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 dependent upon
HMT’s intentions and is limited to 4.99%
12
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 Plc
Whilst we have announced a
refocusing of the business, NatWest
Markets Plc remains a regulated entity
and is targeting to maintain a CET1
ratio above 15%, MREL ratio of at least
30%, leverage ratio of at least 4%, and to
reduce RWAs by around £14-18 billion
in the medium term.
NatWest Markets Plc, as a standalone
bank, plans to issue £3-5 billion of term
senior unsecured instruments in 2020.
Note:
(1) The targets, expectations and trends discussed in
this section represent RBS Group’s and NatWest
Markets Plc’s management current expectations
and are subject to change, including as a result of
the factors described in the “Risk Factors”
section on pages 281 to 295 and on pages 143
to 156 of NatWest Markets Plc’s 2019 Annual
Report and Accounts. These statements
constitute forward-looking statements; refer to
Forward-looking statements in this document.
Addressing regional inequality
through SME lending
As the biggest supporter of UK business, we are
committed to addressing regional inequality and
promoting economic growth, by supporting businesses
to create and retain jobs in some of the UK’s most
deprived areas. In 2019, we issued an inaugural social
bond to help conserve and create jobs in areas with the
highest levels of unemployment and lowest job creation.
This was the first exclusively social bond issued under
the International Capital Market Association’s (ICMA)
Social Bond Principles in the UK by any financial
institution, and the first issuance under our Green,
Social and Sustainable Bond Framework.
1313
2019 highlights and our future strategy
2019 Performance
at a glance
Strength and sustainability
Operating profit before tax
£m
Profit attributable to ordinary shareholders
£m
2019
2018
Income
2019
2018
4,232
2019
3,359
2018
£m
Return on tangible equity
14,253
2019
13,402
2018
Total income increased by £851 million, or 6.3%. Excluding
notable items, income decreased by £813 million, or 6.3%.
Return on tangible equity of 9.4% for 2019 and 4.7%
excluding FX recycling gains.
CET 1 ratio
%
Earnings per share
2019
2018
16.2
2019
16.2
2018
Maintained a CET1 ratio of 16.2% after accruing £2.7 billion
of distributions to shareholders and a £0.4 billion post tax
charge in respect of foreseeable pension contributions.
Ordinary dividend of 5 pence per share calculated
from earnings, excluding FX recycling gains, of
13 pence per share.
Customer experience
3,133
1,622
%
9.4
4.8
p
26.0
13.5
>70 % of UK Personal Banking and Ulster Bank
RoI customers were digitally active in 2019.
>90 % of Commercial Banking customer interactions
were via digital channels in 2019.
>50 % of sales in UK Personal Banking were
via digital channels in 2019.
>70 % of eligible Private Banking clients,
used our digital channels in 2019.
14
2019 highlights and our future strategy
Simplifying the bank
Operating expenses
£m
Cost:income ratio (1)
2019
2018
9,325
2019
9,645
2018
%
65.1
71.7
Operating expenses, excluding strategic, litigation and conduct costs reduced by £310 million, ahead of target, despite
incurring an additional £38 million of authorised push payment fraud costs in line with new industry practice.
Risk-weighted assets
2019
2018
Employee engagement
£bn
179.2
188.7
RWAs reduced by £9.5 billion during 2019 to £179.2 billion,
below our £185 – 190 billion guidance, in part reflecting
a £4.7 billion reduction associated with the Alawwal
bank merger.
Employee engagement score
%
Inclusion
2019
2018
87
86
2019
2018
%
91
90
Our most recent colleague opinion survey showed further
improvement in our key measure of engagement, we are
above the global financial services norm in all comparable
survey categories.
Supporting sustainable growth
Colleague sentiment on inclusion is at an all time high at 91
points (10 points above the global financial services norm).
Lending in our retail and
commercial businesses (2)
£bn
Gross new mortgage lending (3,4)
£bn
2019
2018
293.8
2019
283.4
2018
35.1
32.4
We continue to achieve net lending growth at attractive returns in a challenging market.
Across UK Personal Banking, Ulster Bank RoI, Commercial Banking and Private Banking;
net loans to customers increased by 3.7% in 2019, exceeding our 2-3% net loan growth
target. Gross new mortgage lending increased by £2.7 billion, 8%, in 2019.
Notes:
(1) Operating lease depreciation included in income
of £138 million (2018 - £121 million).
(2) Comprises net customer loans in our UK Personal
Banking, Ulster Bank RoI, Commercial Banking
and Private Banking operating segments.
(3) Comprises gross new mortgage lending in our UK
Personal Banking, Ulster Bank RoI and Private
Banking operating segments.
(4) Excludes additional lending to existing custmers.
We have provided £9.9 billion of funding and financing
to customers during 2018 and 2019 towards our
commitment of £10 billion to the sustainable energy
sector by the end of 2020.
Retained in the
FTSE4GOOD
Index Series.
Awarded Prime
Status by Institutional
Shareholder Services
(ISS-ESG).
One of the first companies globally to commit to
all three of The Climate Group’s initiatives around
renewable energy (RE100), electric vehicles (EV100)
and energy productivity (EP100) in our operations.
One of the Founding Signatories of the UN Principles
for Responsible Banking, committing to further
aligning our strategy to the 2015 Paris Agreement
and the UN Sustainable Development Goals (SDGs).
15
How we do business
Our operating
environment
Top and
emerging risks
Societal
Megatrends
Economic
& Political
Landscape
Technology &
Innovation
Changing
Customer
Behaviour
Reputation
& Trust
Climate
Change
Regulation
Competition
Operational
Resilience
Culture &
Colleagues
Financial
Capability,
Exclusion
& Social
inequality
Cyber
Security
Demographics
United Nations
Sustainable
Development
Goals
The topics have been mapped
to the bank’s five strategic
priorities for 2019
Customer experience
Simplifying the bank
Supporting sustainable growth
Employee engagement
Strength & sustainability
Where to
find out more
Our operating environment continues to evolve at pace across economic,
social, environmental, political, regulatory and technological boundaries.
We consider external societal megatrends and the UN Sustainable
Development Goals to inform our thinking and approach.
Chairman/CEO
statements
2019 highlights and
future strategy
Our businesses
& performance
Risk
Management
Stakeholder
engagement
/Board
engagement with
stakeholders
How we
create value
Sustainable
Banking pages
on rbs.com
Our
Customers
Our
Colleagues
Climate-related
financial
disclosures
Economic and political landscape
The UK economy continued to slow in
2019 as uncertainty in relation to the
UK’s exit from the EU weighed on
activity. Interest rate and foreign
exchange markets were also volatile in
response to the changing political
landscape. The uncertainty weighed on
business investment and contributed to
slowing house price growth. House
prices fell modestly in London and the
South East, but transaction levels
remained relatively resilient. Low
interest rates, very low unemployment
and improving wage growth supported
demand for mortgage lending.
Consumer credit growth continued to
gradually cool, influenced by regulatory
16
interventions. Despite economic
headwinds, impairments remained at
very low levels across all portfolios. A
slowing global economy and
heightened geopolitical risks,
particularly in regard to trade tensions,
further complicated the outlook.
Despite an uncertain economic outlook,
RBS remained focused on meeting the
diverse needs of customers locally,
across the UK regions and
internationally.
for all colleagues to work. Culturally,
becoming a learning organisation is a
strategic priority. We need to prepare
colleagues for the future and we
continue to focus broader development
on the Bank's Critical People
Capabilities.
Cyber Security
Disruptive cyber-attacks and fraud
remained a growing threat to the
industry in 2019. Significant investment
continues to prevent, monitor and
detect cyber-attacks and fraud. This
includes participation in industry-wide
initiatives to monitor and anticipate
developments aimed at protecting our
customers data and assets.
Demographics
Demographic shifts mean that the
needs and behaviours of our customers
are changing, amplified by rapid
technological change. Key trends
impacting our customers include
retiring later and working longer,
buying a house later in life and often
with the support of family members
and more focus on financial planning
for retirement. RBS is committed to
supporting the evolving needs of our
customers ranging from helping first
time buyers to supporting customers in
vulnerable situations.
How we do business
operational competency of UK banks,
including data breaches and technology
failures. Ensuring operational resilience
remained a commercial imperative for
RBS. To provide continuity of service for
customers with minimal disruption, RBS
must continue to monitor and assess a
diverse and evolving 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.
Regulation
RBS operates in a highly regulated
market which continues to evolve in
scope to include competition, financial
risks from climate change, customer
vulnerability, operational resilience and
cyber-attack. The Bank seeks to comply
with all regulation and welcomes the
positive impact on customers and other
stakeholders.
Reputation and Trust
Restoring trust and safeguarding
reputation remains a key priority for
most banks. RBS continues to strive
to build a reputation for serving
our customers well, and in a safe
and secure manner, in addition to
generating value for our shareholders
and broader society, through the
products, services and facilities we
provide.
Financial Capability, Exclusion
and Social Inequality
Technology and Innovation
For RBS, supporting financial capability
goes beyond delivering fair products
and great service. It also means helping
our customers, wider society and
future generations to develop good
money management skills so they are
empowered to make better financial
decisions. Against a backdrop of
weaker economic growth and social
inequality there is an increased focus
on customers in vulnerable situations
and/or precarious financial situations,
supporting our diverse range of
customers to access suitable banking
services and products.
Operational Resilience
The pace of technological change
continues to accelerate, influencing
the behaviours of our customers and
redefining traditional business models.
Technologies such as cloud computing
and machine learning offer huge
opportunities, but also create new
risks that must be closely managed.
Through 2019, RBS has invested £755
million on technology, helping to deliver
innovative solutions for our customers
whilst simplifying processes, reducing
cost and improving our resilience and
stability. For example, facial recognition
technology has allowed account
opening in under 10 minutes for
NatWest Bank personal customers.
Changing Customer Behaviour
Customers’ needs and behaviours
are changing as a result of new
technologies, demographic shifts and
changing labour patterns. Key trends
include the gig-economy which is
resulting in changing working patterns
and increasing use of new technologies
resulting in faster and tailored
customer service. RBS understands the
importance of supporting customers'
needs and focusing on customer life
journeys to tailor services and products
that meet their evolving needs and
expectations.
Climate Change
RBS recognises climate change as a
top risk and strategic priority. Ensuring
banks manage the financial risks
associated with climate change has
also risen up the regulatory agenda.
Throughout 2019 work continued to
integrate climate-related financial
risks into the risk framework and to
proactively support our customers
transition to a low carbon economy.
Competition
The level of competition in the UK
banking market remained intense
in 2019 driven by a combination of
technology, lower barriers to entry and
regulation including Open Banking.
The competitive landscape is evolving
as fintech and large technology
companies contribute to greater choice
for how banking needs are met. RBS
remained focused on innovation to
evolve our business model and deliver
first-class, compelling propositions to
our customers. The launch of RBS’s new
digital retail and business banks, Bó
and Mettle, was a significant milestone
in the evolution of our competitive
offering.
Culture and Colleagues
The Bank’s long-term success depends
on building and nurturing a healthy
culture where colleagues are engaged,
and where our working environment is
underpinned by robust risk behaviours.
We are proud to be building an
inclusive bank which is a great place
2019 has seen continued regulatory
focus and media coverage on the
17
How we do business
How we
create value
1. Our resources
2. Our business activities
Financial
We make use of shareholder
capital and other forms of financial
capital, including £369.2 billion in
customer deposits.
Natural
We make use of energy and
resources such as paper and
water to conduct our business
activities. We are one of the first
companies worldwide to commit
to all the Climate Group initiatives
on electric vehicles (EV100),
energy productivity (EP100), and
renewable power (RE100).
Infrastructure
We rely on online and mobile
banking, our high street and
Post Office branches, mobile
vans, telephony, video banking,
webchat and self service options
like ATMs and cash deposit
machines. In support of these
channels during 2019 our critical
technology systems have been
available 99.98% 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 customers in vulnerable situations 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.
18
18
How we do business
3. How we create value for our customers and society
Our long term success is dependent on serving our customers well and generating value
for society through our products, services and facilities.
Protecting
our
customers
Building
financial
capability
Jobs and
the
economy
Supporting
enterprise
Improving
digital
capability
Transition
to a low
carbon
economy
Prevented 569,660 cases of attempted fraud amounting
to £256.8 million in the UK(*) and last year reduced the third party
fraud against our customers by 8%.
We are investing £100 million over three years to combat fraud
and ensure we remain up-to-date with the latest fraud trends.
Over one million Financial Health Checks with our personal,
private and business customers (*).
MoneySense has been running for over 25 years, during which
it has helped over 7.7 million young people learn about money.
One of the largest UK employers with a workforce of 64,397.
We recruited 226 graduates and 205 apprentices in 2019.
Payment of £1.25 billion in tax to the UK Government, which
supports central government and local authority spending. (1)
We issued our inaugural Social Bond, the first from a UK financial institution
under ICMA’s Social Bond Principals, the proceeds of which finance or refinance
lending to SME’s in some of the most deprived areas of the UK. We will measure
the impact of our lending by the number of jobs created or retained.
£29.7 billion total lending to SMEs and mid-corporates
in Commercial Banking.
Since the Bank brought its Entrepreneur Accelerator network in-house
in 2018, a minimum of 1,390 jobs have been created by businesses
supported through the Accelerator programme. 1,000 of these jobs
were created between January and December 2019 (*).
The Rose Review into Female Entrepreneurship was launched by RBS
Group CEO Alison Rose. The Review made a series of recommendations
to help remove barriers facing women who want to start a business.
73% of our active personal current account customers used
either mobile or online channels (*).
Leading the way on mobile – 6.9 million active mobile app users –
finalist for ‘Best Banking App’ at the British Bank Awards in 2019.
We have provided £9.9 billion of funding and financing to customers
during 2018 and 2019 towards our commitment of £10 billion to the
sustainable energy sector by the end of 2020.
Launched our green, social and sustainability bond framework,
which paves the way for future issuance in support of our
sustainability ambitions, while enabling our customers to make
a positive impact on society or the environment.
Community
and
charitable
giving
Our employees volunteered over 90,000 hours.
We supported the DEC Cyclone Idai Appeal, raising over £111,000.
Good causes received over £4.3 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.
Keeping money safe
and accessible for our
customers
Empowering
customers to make
better financial
decisions and achieve
their goals
A responsible
business supporting
employment across
the UK and Ireland
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
More than 40,000 first time buyer mortgage customers (*).
We have helped over 180,000 new customers complete their mortgage
application this year, totalling over £31.8 billion worth of lending.
We are helping
customers to get onto
the property ladder
(1) Comprises £222 million corporate tax, £595 million irrecoverable VAT, £163 million bank levies and £270 million employer payroll taxes.
RBS became one of the Founding Signatories of the UN Principles for Responsible Banking in 2019, committing
to further align our strategy with the 2015 Paris Agreement and the UN Sustainable Development Goals. This
means we will create value in alignment with specific UN Sustainable Development Goals. In 2019 we
engaged a range of stakeholders to align our future Purpose and forward commitments in the areas of;
supporting learning, supporting enterprise and the climate change challenge, with UN Sustainable
Development Goals. Refer to Our purpose-led strategy on pages 10 and 11.
19
Teaching young people about
money and fraud
Since launching 25 years ago, MoneySense has helped
more than 7.7 million young people learn about money
and become more financially confident.
In 2019, our colleagues supported over 3,000
MoneySense workshops. And our dedication to
educating young people was recognised once again
with a Gold for Best Long-Term Commitment at the
Corporate Engagement Awards.
But we couldn’t stop there.
Following worrying research that the number of children
being used as money mules via social media has risen
by 73% in the last two years, we launched a new Fraud
Scene Investigators workshop in secondary schools.
This workshop teaches young people how to stay safe
online, particularly when they are using social media.
20
Our businesses
& performance
How we do business
UK Personal Banking
Ulster Bank RoI
Our brands
UK Personal Banking provides a
comprehensive range of banking
products and related financial services
to the personal and premier 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 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
Private Banking
Commercial Banking offers
comprehensive banking and financing
solutions to start-up, SME, 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 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
NatWest Markets
RBS International is one of the largest
banks operating in both the local
and institutional banking sectors in
the Channel Islands, Isle of Man and
Gibraltar. It also has wholesale branches
and depositary service businesses in the
UK and Luxembourg to further serve our
institutional clients.
In NatWest Markets we help our
customers manage their financial risks
and achieve their short and long-term
financial goals, whilst navigating
changing markets and regulation.
We do this by providing global market
access, financing, risk management
and trading solutions.
21
How we do business
UK Personal
Banking
UK Personal Banking is committed to making banking effortless
every day and brilliant when it matters. Customers want to manage
their money conveniently and safely and our digital channels make
it easier to bank on the go.
With security front of mind, we are
continually working to fight fraud,
identify suspicious transactions and
safeguard payments. We are the first UK
bank to pilot biometric cards, and the
only UK bank to let customers lock their
cards via our mobile banking app, yet
still get cash from an ATM.
At the end of 2019, more than two thirds
of frontline colleagues held Professional
Banker qualifications and we also
helped one million customers improve
their finances with a free financial
health check. In 2019 we also began
piloting pop-up learning sessions to help
customers develop good financial habits.
When customers want personal
support, branch colleagues are there
to help, or our community and video
bankers can take banking to them.
Investment in the latest contact centre
technology is also providing a more
personal experience over the phone.
Using our market leading app,
customers can set up a savings goal,
download statements, choose how to
repay large credit card purchases and
view details of their credit cards, current
accounts and savings with other banks.
7 million customers use our app across
personal and business banking and
almost three quarters of active current
account customers use online or mobile
banking. Reflecting the change in
customer behaviour, we also launched
our digital only offering, Bò, in the Apple
App and Google Play stores.
We continued to drive a reduction in
unnecessary paper, improving our
digital application journeys, launching
the UK’s first paperless mortgage and
increasing usage of digital statements
and correspondence. We have also
reduced energy consumption in our
branches by 22% in 2019 and all of the
electricity we purchased was from
renewable sources.
Our commitment to customers has
resulted in improved UK Personal
Banking NPS scores. NatWest moved
up three places in the CMA Service
Quality Survey rankings for ‘overall
service’ in 2019, Customer Trust in RBS
is improving. NatWest were also named
best online current account provider,
best online student account provider
and best direct current account
provider at the Your Money Awards.
2019
2018
Income (£m)
4,866
5,054
Expenses (£m)
(3,618)
(2,867)
Operating
profit (£m)
Net loans to
customers (£bn)
Risk-weighted
assets (£bn)
Return on
equity (%)
855
1,848
158.9
148.9
37.8
34.3
9.6
24.7
Despite challenging operating
conditions, UK Personal Banking
delivered an operating profit of £855
million. Operating expenses of £2,403
million, excluding strategic, litigation
and conduct costs, were 1.0% lower
than in 2018 despite incurring an
additional £29 million for push payment
fraud costs. Gross new mortgage
lending was £33.3 billion in 2019,
giving a new business market share
of approximately 12.5% supporting
balance growth of 6.7%, more than
double the market, and a stock share
of around 10.2%, whilst maintaining a
prudent approach to risk and pricing in
a very competitive market.
Using technology to make
banking more accessible
We’ve partnered with Google to pilot
a service that allows customers to do
their banking using just their voice.
Customers can use their smart speaker
or smartphone to talk to Cora and
check their bank balance and recent
transactions. There is no need for screens
or keyboards.
To develop this pilot, we’ve used new
technologies to make banking more
accessible for people who may have
difficulty using our digital channels or
coming into branch. Testing out voice
banking is also helping us to improve
service and security for our customers.
22
22
Ulster Bank
Rol
Ulster Bank RoI continues to build a more sustainable bank that
supports the communities we operate in, helping more customers
than ever to buy a home or build their businesses in 2019.
Ulster Bank RoI made significant
improvements to the home buying and
ownership journey in 2019, launching a
new Home Buying Platform that
enables customers to obtain an
agreement in principle offer and track
the progress of their mortgage
application online. We also upgraded
our branch network to better serve
customers and improve efficiency,
testing new design concepts and
technology such as Qudini; a branch
concierge tool to help customers speak
to the right person quicker.
As part of our digital first strategy, we
continue to invest in our online and
mobile banking channels, releasing new
mobile app features to help customers
create savings goals, lock and unlock
their debit card and take control of their
spending, including being able to block
transactions linked to gambling on their
credit card. Ulster Bank RoI also
launched ClearSpend, an expenses
management app that gives business
customers control of their commercial
card spending in real-time, along with
our new Rate Manager platform, which
delivers a simplified and faster fixed
rate borrowing option for our SME and
Corporate customers.
Ulster Bank RoI sponsored over 200
professional qualifications in 2019,
upskilling colleagues through
programmes such as the Personal
Banker qualification for branch staff. We
also partnered with Code Institute,
Europe's only credit rated coding
bootcamp, giving over 100 colleagues
the opportunity to participate in a five
day coding challenge.
Ulster Bank RoI continues to support
renewable energy projects in Ireland
and is always looking for ways to reduce
its own environmental footprint,
becoming the first bank in Ireland to be
accredited with the Carbon Trust
Standard for zero waste to landfill.
Startup, Ulster Bank RoI's
intrapreneurship programme, won the
Learning award at the Deloitte Financial
Services Innovation Awards in 2019. We
also received the IBEC KeepWell Mark
accreditation, an award for companies
that make their employees’ wellbeing a
priority for their business, and were
23
23
How we do business
Income (€m)
2019
647
2018
689
Expenses (€m)
(630)
(657)
Operating
profit (€m)
Net loans to
customers (€bn)
Risk-weighted
assets (€bn)
Return on
equity (%)
55
15
21.4
21.0
15.3
16.4
2.3
0.5
reaccredited with the BITC (Business in
the Community), Business Working
Responsibly Mark; the only
independently audited standard for
CSR and Sustainability in Ireland.
Operating profit of €55 million,
increased by €40 million compared to
2018 primarily as a result of higher
impairment releases and lower conduct
charges as remediation projects near
completion. Net loans to customers
increased by €0.4 billion reflecting
strong personal and commercial
lending, offset by the continued run
down of the tracker mortgage book.
Building a culture of innovation
At Ulster Bank we are empowering
our colleagues to innovate with a ‘digital-
first’ mind-set to create future solutions
for our customers.
Now in its second year, Ulster Bank’s
intrapreneurship programme, StartUp,
aims to tap into the creative spirit of our
people to solve customer problems like
a start-up company would. Through our
unique partnership with Dogpatch Labs, a
technology start-up hub based in the heart
of Dublin, colleagues are transported from
their day-to-day roles and immersed in a
start-up ecosystem that empowers them
to think differently and solve problems in a
customer centric and agile way.
How we do business
Commercial
Banking
Commercial Banking has professional relationship management at
its core and a strong regional network, providing deep sector and
business insight to help UK businesses and the UK economy succeed.
NatWest maintained its #1 NPS position
for Commercial customers (1), delivered
the first SONIA loan ahead of the
industry-wide transition away from
LIBOR, and continued to support
customers impacted by Brexit both
through the dedicated Growth Fund,
and as a founding signatory of the UK
Government’s SME Finance Charter.
We remain at the leading edge of digital
developments. Our new merchant
acquiring solution, Tyl, was launched to
our SME customers, Esme loans, our
alternative finance provider, continues
to grow, and our next generation digital
bank, Mettle, was released on Apple
App and Google Play stores. NatWest
was the first major UK commercial bank
with an API clearing offering for Faster
Payments, and the first UK bank to
release a secure biometric
authentication service for payment
approvals in Bankline Mobile, making it
easier for our customers to approve
payments on the go.
In March 2019, we launched ‘Back Her
Business’, a female-only crowdfunding
programme, which alongside the Rose
Review forms part of the Bank’s wider
ambition to reduce the entrepreneurial
gender gap. Our UK-wide network of
Entrepreneur Accelerator hubs
continues to evolve, providing support
to c.13,000 entrepreneurs in 2019.
In November 2019, we issued our
inaugural social bond, the first of its kind
by a UK Financial Institution, under
ICMA's Social Bond Principles. Our
social bond is linked to existing SME
lending in areas with the highest levels
of unemployment and lowest job
creation. We also launched a Digital and
Innovation Apprenticeship programme
to support individuals from under-
represented backgrounds and help the
Bank build a diverse workforce.
Commercial Banking secured a range
of awards in 2019: Lombard was named
Best Business Motor Finance Provider
at the Business MoneyFacts awards;
ClearSpend won Best Initiative in Mobile
Payments at the Card & Payments
Awards; FreeAgent collected three
awards including the best SME
accounting software of the year;
NatWest was named Best Trade Finance
Bank in the UK by Global Finance; and
Commercial Banking’s social
2019
2018
Income (£m)
4,318
4,602
Expenses (£m)
(2,600)
(2,487)
Operating
profit (£m)
Net loans to
customers (£bn)
Risk-weighted
assets (£bn)
Return on
equity (%)
1,327
1,968
101.2
101.4
72.5
78.4
8.4
12.1
responsibility has been recognised via
awards for Social & Community Finance
at the Alternative Investment Awards.
Operating profit of £1,327 million was
32.6% lower than 2018 primarily due to
£169 million asset disposal and fair
value gains in 2018 combined with
lower deposit and non interest income,
higher impairments and higher
strategic costs. Lending across Business
Banking, SME & Mid-Corporates and
Specialised business was £1.1 billion, or
2.1%, higher than 2018.
Note:
(1) MarketVue Business Banking Survey from
Savanta, Q4 2019 data (excl. DK). Comparison
made among brands with base > 50 in the England
& Wales, turning over more than £2 million.
Data weighted by region and turnover to be
representative of businesses in England & Wales.
Building for the future
We were approached in 2019 to provide
senior debt facilities and hedging for the
construction of Neart na Gaoithe (NNG),
EDF’s latest offshore wind farm project,
now co-owned with ESB Energy.
Found 15km into the Firth of Forth, NNG
holds the rights and licenses to develop,
build and operate the 448MW centre.
When fully operational, NNG will power
around 375,000 homes and displace
c.400k tonnes of CO2 annually, as well as
contributing to Scotland’s GDP over the
project’s lifetime.
This transaction demonstrates our
leadership in this rapidly growing sector
and showcases our commitment to
Sustainable Finance.
2424
How we do business
Private
Banking
Private Banking incorporates the Coutts and Adam & Co. brands
to provide a relationship led, digitally enabled, client engagement
model. We have been investing in the business, focusing on
efficiencies and improving client satisfaction by seeking to meet
more of our clients’ needs across the full suite of banking, lending
and wealth management products.
Understanding our clients and building
lasting connections remains at the
heart of our business model. New
clients to Private Banking increased to
2,400 in 2019, supported by a 36%
increase in referrals from the wider RBS
Group. The Coutts Client Council allows
us to hear directly from clients, from
shaping the proposition to how we build
lasting relationships with them,
contributing towards the highest client
satisfaction score since records began
in H2 2017.
Private Banking continues to deliver
against our digital strategy with more
functionality to enable clients to access
their complete financial world. Coutts24
and Adam24 call centres augment the
digital capabilities and Coutts Connect,
a social platform for clients to network,
has attracted over 1,700 registrations
since inception in 2018.
We also value what our employees say
about us; the People Council is the voice
of our colleagues and acts as
custodians of our culture plan. We
achieved our highest ever engagement
score of +87, four ahead of the Global
Financial Services norm.
As a Responsible Investor, Coutts
integrates ESG factors in investment
decision-making processes and
ownership practices. Coutts is a
signatory of the Principles for
Responsible Investing and has Tier 1
ranking from the Financial Reporting
Council for its Statement of Compliance
with the UK Stewardship Code. In 2019,
Coutts became a signatory to the
Climate Action 100+, a consortium of
asset managers who have come
together to change corporate
behaviours in some of the largest
corporate greenhouse gas emitters
globally. Private Banking recognises the
importance of our environmental
footprint and client engagement on this
topic, hosting a high profile client event
in 2019 focused on the climate crisis for
over 300 attendees, including Sir David
Attenborough and Mark Carney.
Our award-winning Coutts Institute
helps clients make a difference to the
causes and communities that they care
about and the Coutts Foundation is an
internal body which focuses on
tackling poverty. Our efforts in
philanthropy continued to be externally
recognised, with Coutts awarded Best
Private Bank for Philanthropic Services
by Global Finance at the World’s Best
Income (£m)
2019
777
2018
775
Expenses (£m)
(486)
(478)
Operating
profit (£m)
297
303
Net loans to
customers (£bn)
15.5
14.3
Assets under
Management and
Administration (1)
(£bn)
30.4
26.4
Return on
equity (%)
15.4
15.4
Note:
(1) Private Banking manages assets under
management portfolios on behalf of UK PB and
RBSI. Private Banking receives a management
fee from UK PB and clients of RBSI in respect of
providing this service.
Private Bank Awards 2019 and the
Portfolio Asset Manager award for
Innovation in 2019.
Return on equity of 15.4% was in line
with 2018. Operating profit of £297
million was 2.0% lower than in 2018
primarily due to lower deposit income
and higher strategic costs partially
offset by volume growth and lower back
office operations costs. Net loans to
customers increased by £1.2 billion, or
8.4%. Assets under management and
administration increased by £4.0 billion,
or 15.2%, reflecting positive investment
performance of £3.2 billion and net new
business of £0.8 billion.
Connecting people
Networking is important to our clients,
so we built Coutts Connect. An exclusive
networking website where Coutts clients
can talk to each other, share opportunities
and promote events.
The site complements our programme of
events and face-to-face meetings. Giving
our clients a secure online environment
where they can engage with their peers
and talk to people they may have met at
our events.
It’s simple to set up a profile with
an existing LinkedIn account. And
functionality like tags, group discussions
and private messages makes Coutts
Connect easy to use.
25
25
How we do business
RBS
International
RBSI has established itself as a specialist provider in Funds banking
onshore and offshore. It also provides retail and commercial
banking services in the Channel Islands, Gibraltar and the Isle of
Man, drawing on NatWest Holdings customer propositions. It is a
systemic bank in these locations and has focused on becoming
number one for customer service, trust and advocacy.
RBSI has started to work with trusted
technology partners to serve customers
future needs. To help colleagues
respond to rapid change, RBSI has
launched a multi-stage training
program, covering future work-force
capabilities and innovation, which will
continue into next year.
We have made it quicker to open
personal savings accounts and request
credit. For sole applicants, automated
account opening has enabled the
savings account journey for the majority
of existing customers to reduce from 14
days to 8 minutes, with over 3,000 new
accounts opened this year. There have
been 26 updates across RBSI’s Local
Banking digital channels; driven by
customer feedback, supporting a 17%
increase in mobile adoption.
Through increased investment in the
multi-currency banking platform,
eQ, we have improved the digital
experience for institutional clients.
These include a feedback tool, a live
statement view and the ability to re-
batch payments. All users have moved
to the new version of eQ, making
sure everyone has the same great
functionality and experience.
80% of our colleagues completed the
staff opinion survey. Scores improved in
all 15 categories and 13 are now above
the Global Financial Services norm.
Through volunteering and fundraising
RBSI raised £61,279 for charity. For the
11th year running, the Bank were proud
sponsors of the NatWest International
Island Games. The 2019 games, held
in Gibraltar, supported 1,700 athletes
from 22 participating islands and the
Bank’s commitment to sponsor the
Games continues in Guernsey 2021.
RBSI continues to develop its longer
term climate commitments in line
with the wider Bank strategic
response, supporting renewable
energy funds, which invest in a wide
array of renewable energy assets
including onshore and offshore wind,
solar, biomass and other renewable
technologies. Additionally, in 2019,
RBSI completed its first investor backed
leverage facility supporting investment
into large scale battery storage projects.
Income (£m)
2019
610
2018
594
Expenses (£m)
(264)
(260)
Operating
profit (£m)
Net loans to
customers (£bn)
Risk-weighted
assets (£bn)
Return on
equity (%)
344
336
14.1
13.3
6.5
6.9
25.7
24.4
Operating profit of £344 million in 2019
was 2.4% higher than 2018 primarily
due to increased volumes of customer
lending and deposits, driving a £16
million increase in income. Excluding
strategic, litigation and conduct costs,
operating expenses were £16 million
lower as a £24 million reduction in back
office operations costs was partially
offset by increased investment spend.
Net loans to customers increased £0.8
billion, or 6.0% in 2019, reflecting a
Funds sector transfer of £0.5 billion
from NatWest Markets and higher
volumes in Institutional and Local
Banking.
Supporting our local community
The Bosdet Foundation is a not for profit
organisation that supports local Charities
in Jersey. We’re helping them achieve their
vision of donating £1 million a year by 2030.
We’ve built up a great relationship with
The Bosdet Foundation which has resulted
in them borrowing £8.5 million from us to
develop their grounds into a self-catering
resort and indoor trampoline park. Now,
we’re looking to support the Foundation
on the next stage of their evolution,
providing funding to construct a further 60
self-catering apartments and a redesign
of their premises.
By lending to The Bosdet Foundation,
we’re helping the foundation make more
money and – in turn – put more money
back into the local community.
2626
NatWest
Markets
NatWest Markets (1) continued to focus on supporting clients
consistently with market leading colour, content and ideas.
In Q1 2019, NatWest Markets N.V.
commenced fully-integrated support for
RBS Group’s customers through its
Western European branch network, and
on 29 November it became a subsidiary
of NatWest Markets Plc.
In Q2 2019, Standard & Poor’s upgraded
NatWest Markets entities long-term
issuer credit rating to A-, strengthening
our credit story. NatWest Markets
continued to play a leading role in
market structural reform. We were
first-to-market with our Realised Rate
calculator and we acted as the sole
solicitation agent for the first ever
LIBOR to SONIA bond amendment
issued in the market.
sterling green market to meet a growing
regulatory focus on responsible
investing. It was also part of a group
that raised £10 billion funds in line with
the UN Sustainable Development Goals
and executed over £2 billion worth of
Social Housing issuance helping create
40,000 new homes over the next five
years to ease the UK social housing
shortage.
NatWest Markets’ commitment to clients
has been recognised by a number of
awards and surveys:
• UK Corporate FX Service Quality
Leader – 2018 Greenwich Associates
FX Study awarded in 2019
In Q3 2019 a trading support 'bot'
(Scout) was launched onto the
Symphony collaboration platform,
giving clients instant responses to
requests for the latest bond prices while
improving our efficiency.
NatWest Markets continued to develop
its track record in Environmental Social
Governance (ESG), launching its ESG
Product Framework, the first of its kind,
to provide clients with ESG-linked
investments and help develop the
• Tied No. 1 for Interest Rate Derivatives
Service Quality –Greenwich
Associates European Fixed Income
Interest Rate Derivatives 2019
• No.1 European Government Bonds by
Market Share – Gilts–Greenwich
Associates European Fixed Income
Rates 2019
• Risk Solutions House of the Year- Risk
Awards 2020 awarded in November
2019
27
27
How we do business
2019
2018
Income (£m)
1,342
1,442
Expenses (£m)
(1,418)
(1,604)
Operating
loss (£m)
Funded assets
(£bn)
Risk-weighted
assets (£bn)
(25)
(70)
116.2
111.4
37.9
44.9
Global market conditions continued to
be dominated by geo-political
uncertainty, creating challenging
conditions for our clients and us. Total
income decreased by £100 million, or
6.9%, to £1,342 million reflecting lower
core income and own credit
adjustments (OCA), partially offset by
increased legacy income following the
£444 million gain on the merger of
Alawwal bank with SABB. RWAs
decreased by £7.0 billion to £37.9 billion
driven by the £4.7 billion reduction
following the merger of Alawwal bank
with SABB and other legacy reductions.
Note:
(1) The NatWest Markets operating segment is
not the same as the NatWest Markets Plc legal
entity or group. For 2019, NatWest Markets Plc
entity includes NatWest Markets N.V. from the
29 November 2019 only, whereas the NatWest
Markets franchise excludes the Central items
& other segment. For periods prior to Q4 2019,
NatWest Markets N.V. was also excluded from the
NatWest Markets Plc entity.
Building affordable homes
We have helped to raise over £2.4 billion
of funding to the social housing sector in
2019. Helping to build more than 40,000
new homes over the next five years
and ease the chronic shortage of social
housing in the UK.
One of our largest customers,
Sovereign Housing Association is
committed to delivering 1,900 new
homes per year by 2022. So we helped
arrange a market-leading £250m
unsecured Revolving Credit Facility as
part of a syndicate and became a Joint
Lead Manager on their £375m, 29-year
bond, giving Sovereign the finance they
needed to build more social housing.
Building a more sustainable bank
Our
values
Serving customers
Doing the right thing
We exist to serve customers.
We do the right thing.
We earn their trust by
focusing on their needs and
delivering excellent service.
Working together
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 take risk seriously
and manage it prudently.
We prize fairness and diversity
and exercise judgement with
thought and integrity.
Thinking long term
We know we succeed only
when our customers and
communities succeed.
We do business in an open,
direct and sustainable way.
28
28
Stakeholder
engagement
Building a more sustainable bank
Visit rbs.com for table of engagement
issues and outcomes.
Refer to page 46 for Board engagement
with stakeholders.
Defining our Purpose together
On her first day as Group CEO, Alison
Rose set out her vision to become a
purpose-led bank. The planning had
begun more than a year ago, with
colleagues involved every step of the way.
“Our colleagues will live and breathe
our new Purpose, which is why the
conversation had to start with them.”
Alison Rose, CEO, RBS
Over 200 hours of qualitative interviews,
team events, focus groups and intranet
surveys, combined to provide a
powerful body of colleague views. The
Board’s Colleague Advisory Panel,
and Sustainable Banking Committee
enabled Board level engagement. This
dovetailed with input from external
stakeholders.
“Through the Bank’s engagement with
Blueprint, it’s heartening to see RBS set
themselves the challenge of becoming a
purpose-led company.”
Charles Wookey, CEO,
A Blueprint for Better Business
Partnering to support customers
New partnerships were established
to help customers in vulnerable
situations. SafeLives provided expertise
on policies, and training focused on
awareness raising and support. A pilot
with GamCare began using branch
space for private consultations and
talking therapies.
Leading in step with clients
Alongside our client Landsec, the Bank
achieved a global first by pledging
commitments to all three initiatives of an
international non-profit organisation.
The Climate Group’s EV100 is focused
on electric vehicles, EP100 on energy
productivity, and RE100 on renewable
electricity.
“Banks play an important role in our life,
often for many years and sometimes
for a lifetime, and they therefore have
a crucial role to play in improving the
response to abuse, using the insight and
tools they have. We’re delighted to see
NatWest’s commitment to addressing
financial abuse and look forward to
working together.”
Suzanne Jacob, OBE, CEO of SafeLives
“To be able to offer our support on
the high street in NatWest branches
will make our help more available to
the people that need it most, reducing
traditional barriers to access.”
Anna Hemmings, CEO of GamCare
“Managing our own footprint is
important in tackling climate change.
The Bank’s commitments are to switch
300 vehicles to electric, improve energy
productivity by 40% and source 100%
renewable electricity by 2025. Fulfilling
these relies on close relationships with
our suppliers. We’re also committed to
supporting customers and colleagues
on the transition towards a low carbon
economy.”
Laura Barlow, Sponsor of Sustainable Energy
Forum, RBS
“Congratulations to RBS and Landsec
on showing it is already possible for the
private sector to go further and faster in
driving the clean energy transition.”
Mike Peirce, The Climate Group
29
Experts &Civil SocietyConsumer groups, NGOs and academics who research, campaign and advocate on issues.ColleaguesOur people who create and deliver products and services and are the face of our brands.Suppliers &Strategic PartnersThe ecosystem of suppliers and partners who collaborate to deliver our products and services.InvestorsUK government, retail shareholders and investors who take interest in financial and non-financial performance.Media &Public Voices Journalists and social media influencers who bring issues to the public domain.Regulators & Policy Makers Politicians, government and regulators who undertake consultations and policy reform. Listening, engaging and partnering with stakeholders helps us to address our business impacts and improve outcomes for communities, customers and the environmentCommunitiesCustomersEnvironment Building a more sustainable bank
Our
Customers
Our ambition is to build the
best bank for customers in the
UK and Republic of Ireland
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 determined to make a difference
with the things that matter most to
our customers. We listen to customer
feedback and, via our closed-loop
feedback programme, respond to any
issues that they identify. Through fixing
our core processes we will get our core
service right first time more consistently
while at the same time innovating to
deliver better solutions.
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. The
tables on the following show NPS and
Trust scores for our key brands.
30
30
Building a more sustainable bank
Customer Advocacy and Trust Scores
Personal Banking
Q4 2019
Q3 2019
Q2 2019
Q1 2019
Q4 2018
15
-14
-10
-18
13
-9
-5
-15
11
-10
-1
-11
11
-14
-3
-7
11
-17
-10
-6
Source: Ipsos MORI FRS 6 month rolling data. Latest base sizes: 2,829 for NatWest (England & Wales); 451 for Royal Bank of Scotland (Scotland). Based on the question:
“How likely is it that you would recommend (brand) to a relative, friend or colleague in the next 12 months for current account banking?” Base: Claimed main banked
current account customers.
Source: Coyne Research 12 month rolling data. Question: “Please indicate to what extent you would be likely to recommend (brand) to your friends or family using a
scale of 0 to 10 where 0 is not at all likely and 10 is extremely likely”. Latest base sizes: 352 Northern Ireland; 1,424 Republic of Ireland.
Business Banking
Q4 2019
Q3 2019
Q2 2019
Q1 2019
Q4 2018
-7
-25
-9
-31
-9
-36
-8
-36
-9
-36
Source: Savanta MarketVue Business Banking, YE Q4 2019. Based on interviews with businesses with an annual turnover up to £2 million. Latest base sizes: 1104 for
NatWest (England & Wales), 416 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
Q4 2019
Q3 2019
Q2 2019
Q1 2019
Q4 2018
23
9
23
16
20
21
20
18
21
20
Source: Savanta MarketVue Business Banking, YE Q4 2019. Based on interviews with businesses with an annual turnover over £2 million. Latest base sizes: 586 for
NatWest (England & Wales), 100 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 also use independent experts to measure our customers’ trust in the bank. Each quarter we ask customers to what extent
they trust or distrust their bank to do the right thing. The score is a net measure of those customers that trust their bank (a lot or
somewhat) minus those that distrust their bank (a lot or somewhat).
Q4 2019
Q3 2019
Q2 2019
Q1 2019
Q4 2018
62
39
62
47
61
38
60
28
56
27
Source: Populus. Latest quarter’s data. Measured as a net % of those that trust Royal Bank of Scotland/NatWest to do the right thing, less those that do not. Latest base
sizes: 531 for NatWest (England & Wales), 214 for Royal Bank of Scotland (Scotland).
31
Building a more sustainable bank
Our
Colleagues
Engaging our colleagues is
critical to delivering on our
strategy and ambition. Being
better for our colleagues
means we are better for our
customers, and this makes
us a better bank.
Innovating for our colleagues
In 2019, for the first time, we offered our colleagues
the opportunity to present themselves in their
masculine or feminine gender expression on their
identity passes. By introducing a double-sided pass
colleagues can now carry a photo which bears a true
likeness to them irrespective of their gender identity.
Colleagues going through gender transition now have
the option to regularly update their photo as they go
through the stages of medical transition, so that they
too have an identity pass which bears resemblance
to them, and in turn can make them feel more
comfortable at work.
32
32
Building a more sustainable bank
Building a Healthy Culture
One of our core priorities is building a
healthy culture. We have clear goals to
reinforce Our Values and set ourselves
cultural priorities each year, which form
part of our leadership team's objectives.
We gather feedback from our colleagues
through our listening strategy, which
includes a bi-annual colleague opinion
survey, a Colleague Advisory Panel
that connects colleagues directly with
our Board and ‘Workplace’, our social
media platform. We also track metrics
and key performance indicators, and
feedback from regulators and industry
bodies, including the Banking Standards
Board's (BSB) annual assessment of
culture in the UK banking sector where
we have continued to make good
progress, with improvements in all nine
BSB categories(*). Having ongoing
discussion and engagement with a
number of employee representatives
such as trade unions and work councils
is vital and we regularly discuss
developments and updates on the
progress of strategic plans.
Almost 58,000, 83%, of our colleagues
completed our most recent opinion
survey, the highest participation we
have had. The results showed a further
improvement in colleague sentiment
and demonstrate that we are continuing
to improve our culture. Key measures
of engagement, leadership and culture
have increased, and we are above the
global financial services norm in all
comparable survey categories. The
results are encouraging and show that
our hard work is paying off.
Where colleagues wish to report any
concerns relating to wrong doing or
misconduct, one of the ways they can
do this is by raising their concerns via
Speak Up, the Bank’s whistleblowing
service. Our colleague 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
2019, 458 cases were raised compared
to 480 in 2018.
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.
We continue to ensure employees are
paid fairly for the work they do and are
supported by simple and transparent
pay structures in line with industry best
practices. We keep our HR policies and
processes under review to ensure we
do so. This clarity and certainty on how
we pay is also helping to improve our
employees’ financial wellbeing, which
is a priority. In the UK, our rates of pay
continue to exceed the Living Wage and
we ensure employees performing the
same roles are paid fairly. We ensure
colleagues have a common awareness
of the financial and economic factors
affecting the Bank’s performance
through quarterly ‘Results Explained’
communications and Workplace Live
events with our Group Chief Executive
Officer and Group Chief Financial
Officer. More information on our
remuneration policies and employee
share plans can be found in the 2019
Directors’ Remuneration Report in the
2019 Annual Report and Accounts.
Developing Skills and Capabilities
Culturally, becoming a learning
organisation is a strategic priority.
We need to prepare colleagues for
the future and we continue to focus
broader development on our Critical
People Capabilities. We are committed
to developing colleagues in key critical
capability areas we have identified, that
will help build the right knowledge, skills
and behaviours, to help our colleagues
stay relevant and employable, and
support our ambition and purpose.
In addition, we are encouraging agility
and shifting mindsets so that a focus
on the future, continuous learning,
knowledge sharing and reflective
practice becomes the norm.
This year we were the first UK retail
bank to launch a Data Academy, to
nurture and grow data expertise,
innovation and collaboration. We also
created an Agile Capability Hub,
providing learning content to support
colleagues to confidently engage in
new ways of working.
Gold Rated Disability Standard Employer
Business Disability Forum
Disability Confident Leader
Disability Confident Scheme
Stonewall Global Diversity Champions
Stonewall
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
Winner Working Families
Best Practice Awards
Exemplary level employer
Carer Positive Scotland
References to “colleagues” in this Report, mean all members
of our workforce (for example, contractors, agency workers).
Outstanding Employer of the Year 2019
at the Investing in Ethnicity Awards
33
Building a more sustainable bank
Professional standards are important to
us and we offer a wide range of learning
to support professional development.
We work closely with a wide range
of professional bodies, government
agencies and our peers to maintain and
grow professional standards across
the industry. We have recently become
the first bank to be awarded Corporate
Chartered status by the Chartered
Banker Institute in recognition of our
continuing investment in professional
development and our commitment to
professional values and advocacy.
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. We were awarded
a Princess Royal Training Award for our
Sales Excellence programme in 2019.
Our female, multicultural and disability
development initiatives focus on
supporting our colleagues to reach their
full potential and manage their careers
effectively. These initiatives support
our commitment in building a more
inclusive bank.
We had a second intake on our 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 Critical People
Capabilities and we received a Princess
Royal Training Award in 2019 for our
NextGen programme.
Investing in Colleagues
We have also transformed our
colleagues’ experience by deploying
new digital tools. Workday was
implemented as a new digital HR
platform in November 2019, and
includes a mobile app, giving colleagues
an experience on par with the digital
experience our customers enjoy. We
extended ServiceNow to improve how
we respond to colleagues queries, and
our HR chat bot has expanded helping
over 50,000 colleagues to answer their
basic queries. These enhancements
are enabling us to respond to the
evolving world of work and needs of our
colleagues.
Health and Wellbeing
As a strong component of making RBS a
great place to work, wellbeing initiatives
have successfully delivered against
four pillars; Physical, Mental, Social
and Financial Wellbeing. Our internal
wellbeing index has increased by a
further 2% taking us 3% above other
high performing norm companies and
10% above high performing Financial
Services 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 27,000
onsite health checks completed
across a number of our key hubs
and our Workplace Wellbeing Group
has grown to c.28,000 members.
We continue to support the Time to
Change pledge as well as signing
up to the Mental Health at Work
Commitment, and this year launched
our new wellbeing campaign Live Well,
Being You. Our month long wellbeing
campaign in May 2019 focused on each
of our four pillars with a specific focus
on Mental Health Awareness Week
and we held our third Mental Health
Conference with both internal and
external delegates.
In 2019 we again supported our
colleagues through change and
have fully utilised the services of our
Employee Assistance Programme.
In the UK the utilisation of our
assistance programme was 16%.
Our approach to
Human Rights
Modern Slavery Act
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 statement is
available on rbs.com alongside our
Human Rights Position Statement. Our
approach covers our customers, our
people and our suppliers.
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 was an early adopter of the Living
Wage to support the Bank’s position on
Modern Slavery.
34
Our Suppliers
Our Supplier Code of Conduct (SCoC),
available on rbs.com, continues to
be a contractual requirement and
we expect our suppliers to uphold
the same values and commitments
we have made on social and
environmental impacts.
Inclusion
We are proud to be building an inclusive bank which is a great place for all colleagues to work.
Building a more sustainable bank
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 2019 our permanent
headcount was 64,397. 50% were male
and 50% female. Our Inclusion plans
apply globally and are formed around
five key priorities:
Gender Balanced:
• We continue to work towards our goal
of having at least 30% senior women in
our top three leadership layers in each
of our businesses by 2020 and to be
fully gender balanced across the bank
by 2030.
• As at the 31 December 2019 we have,
on aggregate, 35% women in our
top three leadership layers, and our
pipeline (c.4000 of our most senior
roles) has 44% women.
• The mean gender pay gap for NatWest
Bank Plc is 30.4% (median: 34.1%)
and the mean bonus pay gap is 49.9%
(median: 53.8%).
• Our positive action approach for
gender, which is benchmarked
externally, is helping to ensure that
our people policies and processes are
inclusive and accessible – from how
we attract and recruit, to how we
reward and engage colleagues. We
are confident this approach is the right
one and through time, it will help us
achieve a better balance of diversity
throughout the organisation.
Disability Smart:
• We have plans in place to deliver
against all segments of our bank-wide
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.
• During 2019 we continued to roll out
our Disability Career and Personal
Development Programme for
colleagues with disabilities which
supports development and career
progression by addressing common
barriers colleagues with disabilities
can face. We also extended this
Programme externally, hosting
delegates from outside the bank at
our campus in Edinburgh.
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.
• From the start of 2018 we introduced
formal UK targets to improve the
representation of BAME /non white
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 2019 we have
on aggregate 9% BAME/non-white
colleagues in our top four leadership
layers in the UK. We employ 15%
BAME/non-white staff across the UK.
LGBT+ colleagues and customers are
welcome at RBS and will be supported.
• The 2019 Pride season has seen our
biggest and boldest attendance ever
– supporting and celebrating Pride
with customers and colleagues across
the UK, Republic of Ireland, Poland
and India, showing 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 strong
colleague led networks that have
c.20,000 members.
• We have flexible working practices
in place across the organisation and
externally we are again a Top Ten
Employer for Working Families in 2019.
• During 2019 we introduced ‘Good
Judgement’ inclusion and diversity
learning to create a solid platform
for behavioural and cultural change,
supplementing existing learning.
• For more information on our Inclusion
work, including our positive action
approaches, refer to rbs.com.
2019 Gender profile (*)
#Women
#Men
%Women
• Given our focus on becoming more
ethnically diverse and desire to
be transparent, we use the same
methodology as gender pay gap
reporting to look at our ethnicity pay
gap.
CEO
CEO – 1
CEO – 2
CEO – 3
1
3
41
262
0
13
81
472
• The bank’s mean ethnicity pay gap is
11.8% (median: 15.7%), and the mean
bonus pay gap is 24.7% (median:
12.3%), which we disclose at an RBS
Group Combined UK and Ireland
level.
100
19
34
36
44
35
CEO – 4
1579
1987
Target population
(CEO – 3 and above)
306
566
Note: We report to reflect our organisational (CEO)
levels. This method more accurately describes our
gender balance at leadership/pipeline levels. As well
as being more reflective of our organisational structure,
this enables comparison to be made externally. This
also includes NatWest Holdings CEO-1 level.
Male
Female
Executive Employees
75 (78%)
21 (22%)
Directors of Subsidiaries
207 (78%)
59 (22%)
There were 362 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.
• RBS policy is that people with
LGBT+ Innovative:
disabilities are given full and fair
consideration for employment
and subsequent training, career
development and promotion based on
merit. If colleagues become disabled,
it is the policy of RBS, wherever
possible, to retain them in their existing
jobs or to re-deploy them in suitable
alternative duties.
• 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, we are clear that
35
Creating customer solutions
The Ventures team supported, developed and
launched a number of products in 2019. And we
welcomed our first group of Digital and Innovation
apprentices to their four-year degree programme –
the first of its kind in a UK bank.
In the first half of the year, our simple payments
solution Tyl by NatWest and our unique credit facility
NatWest Rapid Cash were launched. This is giving
customers the option to increase their overdraft
against outstanding invoices and free up cash.
Later in the year we launched our free, app-based
business account for entrepreneurs, Mettle. This is
helping our customers create and send invoices and
simplify their bookkeeping.
3636
Building a more sustainable bank
Climate-related
financial disclosures
We recognise that climate change
is a critical global issue which has
significant implications for our
customers, employees, suppliers,
partners and ourselves. RBS Group has
many years’ experience in supporting
our customers’ transition to a low
carbon economy but the scale and
pace of activity required is now rapidly
accelerating. Our ambition is to be a
leading bank in the UK & RoI helping
to address the climate challenge; by
making our own operations net carbon
zero in 2020 and climate positive
by 2025, and by driving material
reductions in the climate impact of
our financing activity. We are setting
ourselves the challenge to at least halve
the climate impact of our financing
activity by 2030, and intend to do what
is necessary to achieve alignment with
the 2015 Paris Agreement.
During 2019, we committed to and
joined a number of major initiatives to
support this, including:
• Becoming a founding signatory of the
UN Environment Programme Finance
Initiative’s (UNEP FI) Principles for
Responsible Banking which commits
us to work towards aligning our
strategy with the overall objectives of
the 2015 Paris Agreement.
• Jointly the first company globally to
commit to all three of the Climate
Group’s initiatives on electric vehicles
EV100, renewable energy RE100 and
energy productivity EP100.
• Participating in the UNEP FI scenario
analysis pilot .
• Joining the Climate Financial Risk
Forum, established by the FCA and
the PRA to develop practical tools to
address climate-related financial risks.
Climate risk was classified as a top risk
in 2019 and we are working to integrate
climate related financial risks into our
core risk framework. RBS Group has
also continued to engage with investors,
NGOs and other key stakeholders on
the actions we are taking to play our
part in addressing this important issue.
We remain committed to developing our
disclosures in line with the Task Force
on Climate related Financial Disclosures
(TCFD) recommendations. The table
below summarises the work done in
2019 and future planned activity related
to each of the TCFD themes:
Theme
On-going Progress in 2019
Focus areas for 2020-2021
Governance
Focus on further increasing internal climate related
knowledge, skills and abilities at senior levels.
Climate change governance roles and responsibilities
refreshed, including Senior Managers Regime (SMR)
responsibility.
Further establish climate change reporting and
monitoring rhythm at Board and Executive level
across the RBS Group structure.
Continue to enhance Board-level and executive
knowledge and visibility of climate change related
issues ahead of broader strategic and risk appetite
integration discussions.
Strategy
Internal review of climate related risks and
opportunities. Continued engagement with external
partners to inform development of climate change
strategy.
Further develop and implement Group strategy to address
climate change that is wholly aligned to RBS Group’s
overall vision, purpose, strategy and plan.
Scenario
analysis
Detailed review of methodology and best practice
as it emerges in the market, including participating
in the UNEP FI TCFD scenario analysis pilot.
Develop our climate risk scenario modelling and stress
testing capabilities. Carry out climate scenario and stress
testing analysis, in particular as part of the 2021 climate
risk Biennial Exploratory Scenario (BES) exercise (starting
H2 2020). This will develop understanding of how climate
risk interacts with key exposures.
Risk
Management
Targeted analysis for climate change/physical risk
impact on UK residential mortgage portfolio using
a range of climate change scenarios.
Risk identification and measurement, risk management,
risk monitoring, and risk reporting to be performed in line
with principles set out in the Enterprise Wide Framework.
Commenced updating of RBS Group’s Enterprise Risk
Management Framework to include climate change in
the risk toolkit.
Continued review of the Environmental, Social, Ethical
(ESE) Risk Management sector policy positions.
Embed climate change consideration in the Bank’s risk
appetite framework in a qualitative manner until climate
risk indicators allow incorporation on a quantitative basis.
In particular, perform targeted sector and product reviews
to improve measurement and assessment of climate
related risk factors to inform future management actions.
Metrics and
Targets
Sustainable energy funding and financing target
of £10 billion for 2018-2020 substantially met in 2019
(£9.9 billion in 2018 and 2019).
Jointly the first company globally to commit to
RE100, EV100 & EP100.
Additional £20 billion funding and financing for climate
and sustainable finance between 2020 and 2022. Refer to
the strategy section for further targets set as part of our
ambition to be a leading bank in the UK and RoI helping to
address the climate challenge.
37
Building a more sustainable bank
Governance
It is recognised that climate change,
including the associated financial risks,
must have greater prominence at both
senior management and Board level
across RBS Group. Further details on
RBS Group’s Corporate Governance
structure is included on page 45.
Board and Executive-level activity
in 2019 focused on increasing the
knowledge and understanding of the
financial risks associated with climate
change and strategic opportunities.
Areas of future development include
risk appetite integration, strategic
delivery and embedding the agreed
climate risk operating model to support
Board-level reporting, including Top
Risk Reporting as well as quarterly
reporting to the Executive Risk
Committee and Board Risk Committee.
A climate governance map detailing
the relevant roles and responsibilities
of RBSG plc Board, board committees,
management committees and
individuals, as well as operational
working groups tasked with managing
the Bank’s transition, has been prepared
to support internal mobilisation and
planning. While the Sustainable Banking
Committee’s role in overseeing climate
related opportunities will continue going
forward, the Board and other board
committees will also play a prominent
role in overseeing the interaction
between climate change, strategy and
risk appetite.
The RBSG plc Board approved the
allocation of the responsibility for
identifying and managing financial risks
from climate change to the Group Chief
Risk Officer (CRO) who has been tasked
with ensuring that the financial risks
from climate change are adequately
reflected in risk management
frameworks, and that the Bank can
identify, measure, monitor, manage, and
report on its exposure to these risks.
The ESG includes cross-franchise and
functional representatives from across
NatWest Holdings Limited, NatWest
Markets Plc and RBS International;
and ensures alignment of underlying
franchise initiatives and working
groups. This includes the efforts of the
existing Sustainable Energy Forum (an
internal forum with a focus on helping
our customers transition towards a
low carbon economy) and existing or
proposed working groups at franchise
and functional level. It also oversees
activities around communication
and education as RBS Group builds
further awareness of Climate Change
considerations in support of our
ambitions.
In October, following approval through
the GCCP ESG and the Board, RBS
Group provided a response to PRA
Supervisory Statement 3/19 ‘Enhancing
banks’ and insurers’ approaches to
managing the financial risks from
climate change’ (SS 3/19). SS 3/19
required RBS Group to provide an RBSG
plc Board approved plan outlining how
the financial risks of Climate Change
will be managed. Our response outlined
a multi-phase, multi-year plan to build
out capabilities across governance,
scenario analysis and stress testing,
risk management and disclosures
(including TCFD). It recognises that the
GCCP plan will be subject to continual
monitoring and refinement to ensure
it remains responsive to both internal
and external stimuli, including market
expectations, UK Government policy and
other regulatory or international drivers.
To inform the continued development
of our plan, RBS Group continues to
enhance its participation in several
climate related initiatives, including
the UNEP FI Responsible Banking
Principles, UNEP FI TCFD scenario
analysis pilot and other TCFD working
groups and the PRA and FCA’s Climate
Financial Risk Forum.
In the second half of 2019, the existing
Climate Change Working Group (CCWG)
was formalised into an RBS Group wide
Climate Change Programme (GCCP).
Now co-chaired by the Group CRO
and Head of Large Corporates and
Institutions, the GCCP Executive
Steering Group (ESG) is responsible for
coordinating the RBS Group response
across climate related regulations, risks
and opportunities.
Strategy
Our Group CEO Alison Rose announced
on her first day that she intends to run
the Bank with the understanding that if
our customers do well, if our economy
does well and if our communities do
well, then we all succeed together. She
was clear that shared success also
means playing our part to help tackle
the problems that can hold the country
back, including the threat from climate
change. Addressing this challenge
forms a key part of our future strategy.
Our ambition to be a leading bank in
the UK and RoI helping to address the
climate challenge is supported by the
following key areas of activity:
a. Helping to end the most harmful
activity: We plan to stop lending and
underwriting to companies with
more than 15% of activities related to
thermal and lignite coal; unless they
have a credible transition plan in line
with the 2015 Paris Agreement in
place by end of 2021. We plan a full
phase-out from coal by 2030. Also,
to stop lending and underwriting to
major oil & gas producers unless they
have a credible transition plan aligned
with the 2015 Paris Agreement in
place by the end of 2021.
b. Accelerating the speed of transition:
(i) support our UK & RoI mortgage
customers to increase their
residential energy efficiency and
incentivise purchasing of the
most energy efficient homes,
with an ambition that 50% of our
mortgage book has an EPC or
equivalent rating of C or above
by 2030.
(ii) we plan to collaborate cross-
industry, and create products
and services to enable customers
to track their carbon impact.
(iii) Coutts Asset Management has
set a target to reduce the level
of carbon intensity for the equity
component of their portfolios by
25% by end of 2021.
(iv) support the drive to decarbonise
UK transport through our
Mobility Opportunity Group. This
is a multi-disciplined centre of
excellence working across the
Bank and the emerging mobility
eco-system to enable us to
invest in the development of our
product and service offering,
in addition to enhancing our
market and risk insight to
maximise the support for the
decarbonisation of UK surface
transport.
c. Championing climate solutions: we
will provide additional £20 billion
funding and financing for Climate
and Sustainable finance between
2020-2022. Additionally, we will aim
to reserve at least 25% of the spaces
38
Building a more sustainable bank
in our Entrepreneur accelerator
hubs for businesses where their
core offering supports sustainable
environmental activities (including
climate solutions).
d. Embedding climate into our culture
and decision making: We are revising
executive remuneration to reflect
achievement of climate targets.
We are also setting ourselves the
challenge to at least halve the
climate impact of our financing
activity by 2030, and intend to
do what is necessary to achieve
alignment with the 2015 Paris
Agreement. To do this, we plan to
quantify our climate impact and
set sector-specific targets by 2022.
Further to this, we will integrate the
financial and non-financial risks
arising from climate change into our
EWRMF.
We are already working to support our
customers’ ambitions to mitigate their
emissions, save energy and reduce
costs. We have many years’ experience
in supporting our customers in the
sustainable energy sector – providing
bespoke solutions to mitigate their
emissions, funding their renewable
energy generation, and financing
innovative projects to spread new and
more efficient energy technologies.
Refer to the Our purpose-led strategy
on pages 10 and 11 for further details.
In 2019, we have continued to help
our customers, both small and large,
transition towards a low carbon
economy by providing funding and
financing to the sustainable energy
sector. This includes funding for various
low carbon generation and energy
efficiency technologies, low carbon
vehicles and increasingly helping clients
raise funds through green bonds, green
loans and green private placements.
Scenario analysis
In 2019 we included a qualitative
assessment of climate risk as one of
the contributing factors in our annual
ICAAP scenario. To the extent possible,
we aim to use the insight from both
the UNEP FI TCFD scenario analysis
pilot and the BES to make a more
quantitative statement about climate
risk in the next ICAAP.
RBS Group is currently undertaking
climate scenario analysis on agriculture
and real estate sectors as part of
the UNEP FI TCFD scenario analysis
pilot. Findings from this analysis will be
published in 2020. We are using climate
scenarios aligned with the Network
for Greening the Financial System
(NGFS) recommended framework and
developed using Integrated Assessment
Models (IAM) by Potsdam Institute
for Climate Impact Research (PIK)
and the International Institute for
Applied Systems Analysis (IIASA). Both
physical and transitional risks are being
incorporated.
• prepare for the BES starting in the
second half of 2020, which will
explore three climate scenarios over
a 30-year horizon to test the financial
system’s resilience to physical and
transition climate-related risks
• develop the necessary methodology
and processes to be able to run
climate risk scenario analysis for risk
management and strategic decision
making purposes.
We recognise this is a fast evolving
space and we will be continually
reviewing and updating our approach,
scenarios and assumptions as best
practice emerges.
We are reviewing external modelling
specialists and will partner with one,
if appropriate, to supplement our
in-house analytics. We recognise the
unique nature of this risk and the need
for us to build our in house expertise.
The main outcomes of the various
scenario analysis projects we are
conducting at the moment are:
• identify at the overall portfolio
level, the climate related risks and
opportunities;
• inform our strategic response to the
climate challenge;
We are also developing our own internal
climate scenario analysis and stress
testing capability. The aim of this work
is twofold:
• embed climate within our wider
risk framework, including risk
management policies and risk
appetite.
The below table summarises the range of finance solutions and energy intelligence we provide to customers to accelerate
the transition to a low carbon economy.
Sustainable energy funding and financing:
Provide lending and wider financing to customers of all sizes for their sustainable energy projects encompassing various low
carbon generation and energy efficiency technologies, low carbon vehicles and helping clients raise funds through green bonds,
green loans and green private placements.
Products offered:
• Asset finance (provided by Lombard, one of our brands)
• Structured asset finance
• Project finance
• Support for infrastructure and renewable energy funds
Note:
• Green and sustainable bonds
• Green and sustainable private placements
• Sustainability linked loans
(1) includes financing of solar, onshore wind, offshore wind, hydro, biomass, anaerobic digestion, LED lighting, energy from waste, smart metering, offshore
transmission operators (OFTOs), interconnectors, heat pumps, air and ground source heat pumps, Gas to Grid Plants, Combined Heat & Power (CHP) and alternative
fuelled/low-carbon vehicles including hybrid buses.
In addition to the above, we can support customers through:
• RBS Social & Community Capital - our independent charity that runs a fund
to help social enterprises who have been declined a loan from a mainstream
bank. The project should be financially sustainable and deliver social impact to
the local and wider community.
• Energy audits – a service to help customers understand how they could reduce
their energy costs or generate their own renewable energy. This service is
available to all customers with an energy spend over £10,000 a year or with more
complex energy requirements. There is a cost associated with this service.
39
Building a more sustainable bank
Risk management
Within RBS Group, climate risk management builds upon
the established Environmental, Social, Ethical (ESE) Risk
Management sector policies. Credit approvals consider market
and economic factors that are relevant to our customers,
which include issues relevant to customers’ exposure to
climate risks. All credit approvals are subject to these ESE
policies which restrict exposures to high carbon emitting
subsectors including mining and energy for example.
Specifically, flooding and risks associated with building
energy efficiency are already considered as part of our
residential mortgage lending process (energy efficiency in buy
to let mortgages) and transaction acceptance standards in
commercial real estate.
We are performing an assessment of the potential financial
impact of climate change on the UK mortgage portfolio, with a
focus on flood risk from a physical risk perspective and energy
efficiency (EPC) from a transitional risk perspective. We are
using established methodologies and data from third party
providers to establish flood risk at a property level for the
UK mortgage portfolio. Factors considered include surface
flooding, river, ground water and coastal flooding on a range
of scenarios.
RBS Group will be working to embed consideration of climate
change risks into its wholesale sector framework, which forms
the basis for the Bank’s risk appetite to sectors on a qualitative
basis initially. Quantitative analysis of flood and EPC related
risk in the Commercial Real Estate portfolio will be developed
using applicable methodologies from the assessment of our
Retail mortgage portfolio.
Work to further embed climate change risk considerations within
risk frameworks will be underpinned by RBS Group-wide
training and education programmes for staff.
Flood risk assessment tool
We are currently piloting innovative climate risk tools to assess
the physical risk to our retail and commercial portfolios.
We have worked with a consortium of partners led by D-Risk
Group Ltd and Airbus Defence and Space supported by CLS
Data. We have piloted Airbus’ Geospatial Financial Hub (GFH).
The GFH maps flood risk against residential properties in
the UK using JBA Risk Management Flood Map and Climate
Change Flood Risk Indicator. The pilot calculated the physical
risks to properties now and as global temperatures change
in the future using climate data from the UK Climate Change
Risk Assessment 2017 and UK Climate Projections 2009.
Images included provide examples of the data available for
flood risk assessment for properties in an area. We have
linked this information to our portfolio to assess our exposure
to these physical risks and determine how we integrate
this and other climate considerations into our lending and
risk frameworks. This will also drive the complete data
requirements for physical risk analysis and will enable the
selection of a vendor solution for a strategic data partnership.
We are committed to the on-going use of the best performing
and most reliable data and innovative climate risk tools as
skills and knowledge in the climate space evolve.
Flood Risk
This image shows the varying degrees of river water flood
risk with the darker blue colours showing greater depth
of flooding for an event with a 1.3% annual probability of
occurring (1 in 75 years). The combined flood risk is scored
from 0 to 53 (where 53 is the highest risk possible).
© Ordnance Survey & © JBA Risk Management Limited 2020
2040 postcode flood risk indicator
This image shows the 2040 climate change flood risk
indicator which indicates for each postcode area whether
the flood risk is likely to improve (shown in green) or worsen
(shown in orange) or see no change (no colour).
© Ordnance Survey & © JBA Risk Management Limited 2020
Risk management tools
This image shows flood risk assessment using an
RBS office as a case study
Risk rating
None L
H
Combined flood
Coastal
River
Surface
Ground
20/53
0/20
20/22
0/10
0/1
postcode 2040 risk indicator
Flood
40
Slight increase
Building a more sustainable bank
Metrics and targets
Sector exposures
We are working to reduce our lending
to carbon intensive parts of the global
economy. Noted below are exposures
for certain sectors that could be
considered relevant for climate risk
purposes. Exposure represents gross
lending and the related off balance
sheet exposures in the banking book.
The amounts include all lending to
customers including sustainable
lending, as well as to environmentally
responsible customers.
Sector
Exposure
percentage(*) (1)
Personal mortgages
40.3%
Automotive
Power utilities
Agriculture
Oil and gas
Water
Chemicals
Mining and metals
2.2%
2.0%
1.3%
1.0%
0.8%
0.3%
0.3%
(1) Exposure percentage represents the
gross lending and related off balance sheet
exposure to a sector as a percentage of total
gross lending and the related off balance
sheet exposures.
We have reported on all emission sources required
under the Companies Act 2006 (Strategic Report and
Directors’ Reports) Regulations 2013. Our reporting
year runs from October 2018 to September 2019. The
emissions reporting boundary is defined as all entities
and facilities either owned or under our operational
control. *Scope 1 Emissions from fluorinated gas
losses and fuel combustion in RBS Group premises/
vehicles, **Scope 2 Emissions from electricity, district
heating and cooling used in RBS Group premises,
***Market-based Scope 2 Emissions and ****Scope
3 Emissions associated with business travel by RBS
Group employees have been calculated using the
Greenhouse Gas Protocol Corporate Standard, (2015),
Scope 2 guidance, (2015) and Scope 3 calculation
guidance, (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. Emissions factors used are from
UK Government Emissions Conversion Factors for
Greenhouse Gas Company Reporting (Department
for Business, Energy & Industrial Strategy, 2019), CO2
Emissions from Fuel Combustion (International Energy
Agency, 2018) or from relevant local authorities as
required. For more information please see our website
(https://www.rbs.com/rbs/sustainability/responsible-
business.html).
Sustainable energy funding and financing: Noted below is
the funding provided to customers during 2018 and 2019 to fulfil
our three year commitment to provide £10 billion of funding and
financing to the sustainable energy sector by 2020.
Sustainable energy lending: Loans towards low carbon and
environmental assets as well as companies and funds that operate in
this sector.
Green and sustainable bond and private placements: Debt capital
market issuance for sustainable energy projects and clients that operate
in this sector
Green and sustainable market funding: Other market funding facilities
to support customers' transition to the low carbon economy including
Sustainability Linked Loans which enables borrowers to incorporate
sustainability objectives and targets into the banking facilities.
Number
of deals
£
billion (*)
269
3.4
27
3.7
35
2.8
The above includes continued financing of low carbon generation
and energy efficiency projects, as well as an increased focus on
energy efficiency in real estate and alternative fueled vehicles.
331
9.9
Operational footprint
Between 2014 and 2019 we reduced our operational greenhouse gas emissions
(Scopes 1, 2 and 3 – Business Travel) by 61%, exceeding our Science Based Target of
45% by 2020. This has been achieved by a 39% reduction in energy consumption in our
buildings and a reduction of 60% in staff business travel.
During 2019, our UK and Ireland operations achieved Zero Waste to Landfill
accreditation from the Carbon Trust.
Jointly the first company globally to commit to all three of the Climate Group’s
initiatives on electric vehicles EV100, renewable energy RE100 and energy
productivity EP100, pledging to:
• Use only renewable electricity in our direct global operations by 2025 (RE100)
• Install electric vehicle charging infrastructure in more than 600 spaces across our
UK&I portfolio by 2030 (EV100)
• Upgrade our job need cars of around 300 vehicles to electric models by 2025(EV100)
• Reduce our energy consumption 40% by 2025 against its 2015 baseline (EP100).
As part of our RE100 commitment, RBS Group purchases 100% of its UK and Irish
energy from renewable energy sources. Globally, in 2019 RBS Group purchased 79%
of its energy from renewable sources.
Greenhouse Gas (GHG)
Emissions
Location-based CO2e emissions (Scope 1, 2 & business
travel) (tonnes) (*)
2014
(Baseline)
2018
2019 (*)
496,249
252,340 191,103
Scope 1* CO2e emissions (tonnes)
30,695
29,959
20,672
Scope 2** Market-based*** CO2e emissions (tonnes)
377,337
57,735
45,913
Scope 2 Location-based CO2e emissions (tonnes)
360,201
166,179
127,730
Scope 3**** CO2e emissions from business travel
(tonnes)
105,352
56,203
42,701
Location-based CO2e emissions per FTE(Scope 1, 2 &
business travel) (tonnes)
5.07
3.56
2.87
Total energy use (GWh)
862
619
524
41
Risk Management
Risk
overview
Prudent risk management is central to the successful delivery of the RBS strategy
Risk is an inherent part of business
activity and can arise as a result of
the wider economic environment,
market evolution, competitor activity,
regulatory policy or process error.
RBS operates an integrated risk
management framework centred
around the embedding of a strong risk
culture. It ensures tools are in place to
identify and manage both internal and
external threats.
The framework allows RBS to:
• Understand the risk environment and
•
its drivers.
Identify risks and assess potential
exposure.
• Monitor and manage risks
appropriately.
• Provide effective risk reporting to the
Board.
All RBS colleagues share ownership
of risk management. RBS uses the
three lines of defence model to define
responsibilities and accountabilities,
ensuring that risks are properly
identified, measured, monitored,
controlled and reported. Risk
management is integrated into day-
to-day business activities and key
processes, including strategic planning.
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 RBSG plc Board.
Areas of focus in 2019
Against a backdrop of slowing global
growth, evolving customer behaviour
and the uncertain political environment
in RBS’s core market, there was a
significant focus on key financial risks.
Risk management activities throughout
2019 were carried out with a strong
awareness of the potential impacts of
events in the wider environment for
both RBS and its customers. Despite
economic headwinds, the credit risk
profile was broadly stable. A rise in
impairments reflected the transition
from relatively favourable conditions
to a more normal external credit
environment. Despite periods of market
volatility resulting from geopolitical
developments, traded VaR remained
well within appetite.
The completion of the merger of
Alawwal bank and Saudi British Bank
in June 2019 led to a reduction in risk-
weighted assets (RWAs) of £4.7 billion
and further improvement in RBS’s CET1
position.
sustainable business, and an improved
cost base. The multi-year programme
to enhance risk management capability
at every level of the organisation
continues with an emphasis on training,
empowerment and proactivity.
However, the impact of the UK’s
withdrawal from the European
Union has been difficult to predict. To
minimise the risk of service disruption
to customers, NatWest Markets Plc set
up its Frankfurt branch and a number
of client migrations to NatWest Markets
N.V. were concluded. Oversight of
planning for regulatory and legislative
impacts – as well as economic impacts
– remained a critical part of forward-
looking risk management throughout
2019. This included stress testing and
scenario modelling as well as capital
planning. While the longer-term effects
on the operating environment remain
unpredictable, the potential second
and third order effects on RBS and its
customers continue to be an area of
focus. This includes planning for the
results of periodic financial volatility and
slower economic growth.
The continued low interest rate
environment presents an industry-wide
challenge. Coupled with a softening
economic outlook, sustained net
interest margin compression increases
risk to the achievement of financial
and strategic objectives. While some
rebalancing of business activity can
mitigate short-term impacts, the effect
of prolonged low interest rates over
the medium term intensifies threats
to the business model. Though RBS’s
strong capital position is helpful here,
dynamic risk management, including
consideration of funding structure and
off-balance sheet activities, has a key
role in ensuring such threats do not
disrupt the achievement of business
objectives.
Along with oversight of work to further
implement GDPR, there was significant
focus on data management in the
context of RBS’s digitisation strategy.
This was supported by a continuing
emphasis on robust data standards
designed to safeguard customer
information.
Operational resilience – especially in
terms of the continuity of key services –
was a particular focus.
There was also a strong focus on
oversight of work to further embed
compliance with ring-fencing and
operational continuity in resolution
(OCiR) rules.
RBS continues to closely monitor the
evolving regulatory environment. There
is an ongoing focus on investment in
systems and capability to ensure that
RBS is well positioned to address new
regulation and potential new themes.
Cyber security
Increasing digitisation to ensure families
and businesses can access banking
support wherever and whenever they
need to – along with the increasing
emphasis on digital services globally
– requires intense vigilance relating
to cyber security. RBS has a multi-
layered approach to its defences. While
the threat landscape continued to
evolve in 2019, further investment in
control enhancements was made. This
included new anti-malware controls
and improved security testing tooling to
quickly detect and remediate potential
vulnerabilities.
Further progress was made on the
journey towards RBS’s target of
embedding a generative risk culture
across all three lines of defence. The
aim, to make risk part of the way
colleagues work and think, supports
intelligent risk-taking, better customer
outcomes, stronger and more
Financial crime
RBS has continued to enhance the
policies, processes and systems used
to combat financial crime, in line with
the evolving threat. As changes in
technology, the economy and wider
society take place, risks relating to
money-laundering, terrorist financing,
42
Risk Management
tax evasion, bribery and corruption
and financial sanctions develop.
Understanding and responding to them
appropriately remains a key area of
focus. There was further emphasis
during 2019 on ensuring proportionate,
risk-focused customer due diligence
standards are in place and significant
investment was made in enhancing
those controls. Improvements to the
financial crime control environment
also remained a key focus.
Business model disruption
The threat of disruption to RBS’s
business model has intensified due to
a combination of new technologies,
changing customer behaviour and
the evolving regulatory landscape.
During 2019 there was a significant
focus on anticipating developments
and ensuring these were addressed by
appropriate management activities.
A number of technology-based
innovations – such as the Esme end-to-
end digital lending platform for business
customers and the new Bó banking app
for personal banking customers – were
introduced to provide cutting-edge
solutions. Effective risk management
was a vital element of the development
process and continues to be at the heart
of RBS’s technology strategy.
Climate-related financial risk
Climate-related financial risk is
classified as a top risk and is being
integrated into core risk management.
For more details, refer to pages 37 to 41.
LIBOR transition
RBS is continuing its preparations for
the full transition from LIBOR to other
interest-rate benchmarks by the end of
2021. This is a major undertaking since
a significant number of transactions
across the industry reference LIBOR.
RBS continues to work closely with
regulators and industry bodies to
manage the impact. Oversight of the
RBS-wide programme to prepare for
the transition has been a major focus
along with activities across all three
lines of defence to minimise risk and
disruption to customers (including the
launch of a tool to allow customers
using SONIA to calculate compounded
rates in all major tenors). Activity to
assess the conduct risk implications for
RBS and its customers has also been a
key focus.
Anti-bribery and corruption (ABC)
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. 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.
Model risk
Given the increasing importance and
complexity of predictive analytics,
during 2019 significant management
time was devoted to model risk. This
included improvements to the internal
model control environment and the
introduction of a model risk uncertainty
framework for stress testing to enhance
the accuracy of projections under
stress. The focus on model usage and
model risk across RBS continues to
increase, both in relation to regulatory
focus and as artificial intelligence
applications become more integral to
decision-making across the industry.
Risk-weighted assets (RWAs)
RWAs were down £9.5 billion at 31
December 2019, ending the year at
£179.2 billion (from £188.7 billion in
2018). This reduction was driven by the
completion of the merger of Alawwal
bank and Saudi British Bank as well as
revisions to LGD models in the personal
and small business asset finance
portfolio as well as reductions in market
risk capital requirements.
Common Equity Tier 1 ratio
RBS maintained a strong CET1 ratio
of 16.2%. This reflected the solid
capital position given distributions
to shareholders totalling £2.7 billion
and a £0.4 billion charge for pension
contributions. Excluding the impact
of the Alawwal bank merger and PPI,
RBS generated approximately 110
basis points of capital from attributable
profits and approximately 60 basis
points from a reduction in RWAs and
other capital movements.
Leverage ratios
The CRR leverage ratio decreased to
5.1% (2018 – 5.4%). The UK leverage
ratio decreased to 5.8% (2018 – 6.2%)
due to lower Tier 1 capital.
Stress testing
Under the 2019 Bank of England
hypothetical stress test, on an IFRS 9
transitional basis RBS’s low point CET1
ratio was 9.9%. This was significantly
above the hurdle rate of 7.2%. After
the impact of strategic management
actions, RBS’s low point CET1 ratio
improved to 10.3%. The transitional Tier
1 leverage ratio low point was projected
to be 4.7% under stress, which was
above the leverage ratio hurdle rate
of 3.56%. The Bank of England did not
require RBS to submit a revised capital
plan.
Liquidity and funding
The liquidity portfolio increased by
£1 billion to £199 billion, with primary
liquidity reducing by £3 billion to £125
billion. The reduction in primary liquidity
was driven by reduced customer
surplus in NatWest Holdings Group,
dividend payments and Term Funding
Scheme (TFS) repayment, offset by
increased net term issuance. The
increase in secondary liquidity was
driven primarily by TFS repayment,
resulting in the return of previously
encumbered assets.
Litigation and conduct
Litigation and conduct costs of £895
million included an additional provision
of £900 million in relation to PPI. This
reflected greater than expected
complaints volumes in advance of the
29 August 2019 deadline for new PPI
complaints as well as a £169 million
reimbursement under indemnification
agreements relating to residential
mortgage-backed securities.
43
Risk Management
Top and
Emerging Risks
RBS employs a continuous process for identifying and managing its top and emerging risks.
Top and emerging risks are those that could have a significant negative impact on its ability to
operate or meet its strategic objectives.
External
Economic &
Political Risks
Climate
Related Risks
Cyber Threats
Competitive
Environment
As a UK-focused bank, RBS is exposed to the economic and political risks facing the UK including risks from a
sustained period of low economic growth and low interest rates. A range of complementary approaches is used
to inform strategic planning and risk mitigation. This includes active management of portfolios and adjustment of
risk appetite, scenario planning and stress testing. In addition, RBS has implemented plans to prepare for the loss
of access to the European Single Market and continues to monitor domestic political risk including developments
in relation to a second Scottish independence referendum, as well as geopolitical risks. In the longer term,
demographic change, high levels of debt and financial inequality in the UK could all have financial impacts and,
as a result, are closely monitored with strategic plans adapted as appropriate.
Accelerating climate change may lead to heightened financial risks and faster-than-anticipated impacts on
RBS and the wider economy. These include financial loss as a result of deterioration in credit quality, market
risk exposure and operational risk. The operation and business strategy continues to be adapted to mitigate
the direct and indirect physical risks of climate change and the transition to a low carbon economy. In addition,
climate-related financial risk is being integrated into the risk management framework.
Cyber-attacks continue to increase in frequency, sophistication and severity. There is a risk that a catastrophic
cyber-attack damages the ability to do business and/or compromises data security. RBS operates a multi-
layered approach to its defences and continues to invest in a multi-year programme to build resilience and
cybersecurity capabilities. Cyber-attacks may also threaten the supply chain, reinforcing the importance of due
diligence and close working with the third parties on which RBS relies.
Target markets are highly competitive, with changes in technology, regulation, customer behaviour and
business models continuing to accelerate competitive pressure. RBS monitors the competitive environment
and adapts strategy as appropriate, remaining focused on innovating to evolve the business model to deliver
compelling propositions for customers. This includes the launch of new digital retail and business offerings,
B ´o and Mettle.
Regulatory, Legal &
Conduct Risk
RBS continues to face stringent regulatory and supervisory requirements, particularly regarding conduct,
financial crime, the use of models, and capital and liquidity management. A strong and comprehensive risk
and compliance culture continues to be embedded. RBS engages with regulators to implement new regulatory
requirements and incorporates the implications of proposed or potential regulatory activities in its strategic and
financial plans.
LIBOR transition
UK and international regulators are driving a transition from the use of interbank offer rates (IBORs), including
LIBOR, to alternative risk-free rates. Uncertainties around the transition represent a number of risks including
elevated legal and conduct risks. While a programme to manage the transition is underway, there is a risk that
this may not be done effectively.
Internal
Third Party Suppliers
Inadequate control over selection, governance and oversight of third-party suppliers could affect operational
resilience. RBS is diligent in its screening of suppliers with strict contractual obligations governing supplier
relationships and activity.
IT System Resilience
RBS continues to invest in IT infrastructure to prevent customer service disruption, which could result in
reputational and regulatory damage. To mitigate these risks, a major investment programme has significantly
improved the resilience of the systems and further progress is expected.
Culture & People Risk
There is a risk that RBS lacks sufficient capability or capacity at a senior level to deliver, or adapt to, change.
People risk is monitored closely and plans are in place to support retention of key roles, with wider programmes
supporting engagement and training for all employees. Ensuring a healthy culture remains a core priority and a
multi-year programme focused on enhancing culture, including risk culture, is ongoing.
Data Management
Ineffective management of data, including a breach in data privacy, could have material negative
impacts. RBS operates a control and policy framework governing data usage and continues to evolve
a long-term data strategy.
Change Risk
Losses may arise from a failure to successfully execute major changes to the business model. RBS continues to
implement change in line with its strategic plans while assessing the implementation risks and taking appropriate
mitigating action as required. In addition, RBS continues to strengthen its control environment.
44
44
Governance
at a glance
Our Board
Board of directors
Chairman
Howard Davies
Executive directors
Alison Rose
Katie Murray
Non-executive directors
Frank Dangeard
Alison Davis
Patrick Flynn
Morten Friis
Robert Gillespie
Baroness Noakes
Mike Rogers
Mark Seligman
(Senior Independent Director)
Lena Wilson
Company Secretary
Jan Cargill
Governance and compliance
The Board has twelve directors comprising the Chairman, two executive
directors and nine independent non-executive directors, one of whom
is the Senior Independent Director. Biographies of the directors can be
found on pages 62 and 63.
The Board is collectively responsible
for promoting the long-term success
of RBSG plc, driving both shareholder
value and contribution to wider society.
Its role is to provide leadership of RBSG
plc within a framework of prudent and
effective controls which enables risk to
be assessed and managed.
In 2019, the Board and committee
evaluation process was conducted
by the Company Secretary.
Our Board committees
In order to provide effective oversight
and leadership, the Board has
established a number of Board
committees with particular
responsibilities. The work of the
Board committees is discussed in
their individual reports. The terms
of reference for each of these
committees is available on rbs.com.
The full Governance report is on pages
62 to 111 of the 2019 Annual Report
and Accounts.
Group Audit Committee
Assists the Board in discharging its
responsibilities for monitoring the
quality of the financial statements of
RBSG plc. 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 the external
auditor.
Group Board Risk Committee
Provides oversight and advice to the
Board on current and potential future
risk exposures of RBS and future risk
profile. It reviews RBS’s compliance with
approved risk appetite and oversees a
number of 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 customers and brands;
people and culture; the competitive
environment; and society and
environment.
Group Performance and
Remuneration Committee
Responsible for approving
45
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
oversight of RBS Group's governance
arrangements.
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 Group Executive Committee
supports the Group Chief Executive
Officer (CEO) in managing RBS’s
businesses. It considers strategic,
financial, capital, risk and operational
issues affecting RBS. It reviews
and debates relevant items before
consideration by the Board.
UK Corporate Governance Code
Throughout the year ended 31
December 2019, RBSG plc has complied
with all of the provisions of the UK
Corporate Governance Code issued by
the Financial Reporting Council dated
July 2018 except in relation to provision
17 that the Group Nominations and
Governance Committee should
ensure plans are in place for orderly
succession to both the Board and
senior management and oversee the
development of a diverse pipeline
for succession, and provision 33 that the
Group Performance and Remuneration
Committee should have delegated
responsibility for setting remuneration
for the Chairman and executive
directors. The Board considers that
these are matters which should rightly
be reserved for the Board.
Governance and compliance
Board engagement
with stakeholders
This section of the Strategic Report
describes how the directors have had
regard to the matters set out in section
172(1) (a) to (f), and forms the directors’
statement required under section 414CZA,
of The Companies Act 2006.
Refer to page 29 for further details on our
stakeholder engagement activities.
Refer to pages 32 to 35 for further
details on RBS's approach to colleague
engagement.
Section 172(1) statement
The Board objectives, approved in
February 2019, identified the Board’s
key stakeholders (as set out in this
statement). During 2019, the Board
undertook a variety of activities to
engage with stakeholders and bring
their voice into the boardroom.
Customers
Customers are at the heart of
everything we do. During the year
the Board received updates on key
customer issues through customer
service performance updates and
regular business reviews. There was
also a dedicated Board session on
the Retail Banking environment. Our
directors met a range of business
and personal customers during a
programme of visits in September
2019, which provided an opportunity to
gain insights into customer issues and
challenges.
The Chairman and CEO have regular
meetings with customers to enhance
relationships and understand their
views.
In addition, the Group Sustainable
Banking Committee held two
dedicated sessions on customer
service performance and customers
in vulnerable situations, inviting the
SafeLives charity to join for the latter
session to gain a better understanding
of how the Bank can support those
suffering financial abuse.
Colleagues
The Board promotes colleague
voice in the boardroom through a
variety of channels.
During 2019, the Board engaged with
colleagues during a number of Board
and committee visits to businesses and
functions, and we also held our annual
Meet the Board event.
Our Colleague Advisory Panel (CAP),
established in 2018, met twice during
2019, providing a valuable mechanism
for directors to engage directly with
colleagues on topics of strategic interest
affecting RBS and the workforce;
and offering our colleagues a greater
understanding of the Board’s role. A
number of directors attended CAP
meetings during the year and discussion
topics included Purpose, future
strategy, executive pay, inclusion and
sustainability. Outputs were reported
to the Board and have influenced the
Board’s consideration of these topics.
In February 2019, the Banking
Standards Board presented a summary
of their 2018 culture assessment report
on RBS, and in October 2019, the Board
considered another set of encouraging
results from the annual colleague
opinion and 2019 Banking Standards
Board surveys.
The colleague opinion survey results
were one culture oversight tool
available to the Board. The survey
results confirmed to the Board that
2019 targets had been achieved
Proactively engaging
with key stakeholder
groups to understand
their views.
46
Governance and compliance
across key measurements, trends and
benchmarks in relation to leadership,
engagement and culture.
Through the Group Sustainable
Banking Committee, the Board received
a culture measurement report which
supported the Board in assessing
progress in building a healthy culture
across the Bank and alignment of
values and culture.
The Board also listened to colleague
views during the process of establishing
the Bank's Purpose, as set out more
fully on page 48.
Shareholders
All shareholders have the opportunity to
ask questions at our Annual General
Meeting (AGM) and any other General
Meetings which may be held. We also
hold regular retail shareholder events,
where shareholders can ask questions
of a panel of executives and non-
executive directors and learn more
about the business, our progress to date
and our plans for the future. We held
two such events during 2019. The first
took place in London on 10 September
2019 and on 25 November 2019 we held
our first virtual shareholder event. We
plan to hold further similar events in 2020.
Communication with RBSG plc's largest
institutional shareholders is undertaken
as part of the Investor Relations
programme. The Chairman, CEO and
Group Chief Financial Officer (CFO)
undertook an extensive programme of
meetings with our largest institutional
shareholders, including UK Government
Investments (UKGI). The Chairman’s
regular engagement with major
shareholders allows him to understand
their views on governance and
performance against strategy. The
Chairman of the Group Performance
and Remuneration Committee met with
institutional shareholders to discuss
remuneration matters, including the
executive directors' remuneration
policy and updated the Board on those
discussions. The Board met a number
of investors during September 2019 to
understand investor sentiment across a
range of issues.
In October 2019, the Chairman and
Senior Independent Director hosted a
corporate governance roundtable event
attended by a number of institutional
shareholders. Issues covered included
Purpose, Board diversity, climate
change risk and colleague voice.
Throughout the year, the Chairman
provided regular updates to the Board
on shareholder engagement, in order
to ensure the Board as a whole has a
clear understanding of the views of
shareholders. The Board also received
regular updates on investor feedback
from the CFO.
Regulators
The Board recognises the importance
of open and continuous dialogue with
our regulators. Representatives from
the Financial Conduct Authority (FCA)
attended the February 2019 Board
meeting to present and discuss their
annual Firm Evaluation letter. The
Prudential Regulation Authority (PRA)
conducted a Board effectiveness review
in 2019, which included attendance at
the October 2019 Board meeting and
meetings with directors. The Chairman
and executive directors have regular
meetings with both the FCA and PRA.
In addition, individual directors engage
regularly with our regulators through
Continuous Assessment and Proactive
Engagement meetings.
Suppliers
The Board recognises the key role our
suppliers play in ensuring we deliver
a reliable service to our customers.
In October 2019 the Board held a
suppliers’ spotlight session, which
included an overview of RBS’s suppliers
and provided insights on the Bank’s
approach towards managing key
supplier relationships, including
payment practices. The directors noted
that the Bank had performed well
against key performance indicators
in relation to payment periods. They
also discussed the future approach to
suppliers and the changing regulatory
landscape in relation to outsourcing.
Meetings with key suppliers in
September 2019 provided a first hand
opportunity for directors to hear directly
from strategic partners and to discuss
current challenges.
Community and Environment
The role of the Bank in supporting the
communities in which we operate has
been an important topic of discussion
during 2019 as the Board, together
with management, explored the
Bank’s broader purpose in society
and the UK economy. It is recognised
by the Board that climate change
must have greater prominence at
both senior management and board
levels across RBS Group. This year
the Board took steps towards building
greater knowledge and understanding
of climate-related risks through a
dedicated teach-in session. The Bank’s
high-level plan for responding to the
latest prudential expectations was
also approved by the Board, covering
deliverables across governance, risk
management, scenario analysis and
stress testing and disclosure. While
there is much to do, the Board is
encouraged by the internal mobilisation
reported and is committed to its role
in addressing and overseeing climate
risks within the Bank’s overall business
strategy and risk appetite.
“Engaging stakeholders
is crucial to the success
of a company. During
2019 we have taken
a number of steps to
enhance stakeholder
voice in the boardroom. ”
Howard Davies
Chairman
47
Governance and compliance
How stakeholder interests have
influenced decision making
RBSG plc recognises the importance
of engaging with stakeholders to
help inform its strategy and Board
decision-making. Relevant stakeholder
interests, including those of colleagues,
customers, suppliers and others are
taken into account by the Board when
it takes decisions. We define principal
decisions as those that are material,
or of strategic importance to RBSG
plc, and also those that are significant
to any of our key stakeholder groups.
In making its decisions, the Board
considers the outcomes of relevant
stakeholder engagement, as well as
the need to maintain a reputation for
high standards of business conduct,
the need to act fairly between the
members of RBSG plc and the long-
term consequences of its decisions.
The following case studies provide
some examples of how stakeholder
interests have been taken into account
in Board discussions and principal
decisions.
1 – Purpose
The interests of stakeholders
have been central to the Board’s
consideration of Purpose during 2019.
The Board believes RBS needs to be
a purpose-led bank which responds
to the changing needs of all of its
stakeholders, because when they
succeed, RBS will too. Purpose will
be embedded in decision-making
across the organisation, in order for
the Bank to generate long-term value
for shareholders and to contribute to
wider society and the communities in
which it operates.
There was an extensive period of
stakeholder engagement on our
Purpose during 2018 and 2019. A wide
range of colleagues were involved,
including the NextGen talent group
and employee led networks. Board
members heard some of this feedback
directly by attending the Colleague
Advisory Panel, and listening to
colleagues helped inform (and at times,
alter) the Board’s views on the Bank’s
core Purpose.
This feedback, alongside Board
oversight tools such as colleague
survey results and the Banking
Standards Board Survey, helped
directors to satisfy themselves that
the areas of focus being considered
for our Purpose were aligned to the
inclusion and that all nominations and
appointments are made on the basis
of individual competence, skills and
expertise measured against identified
objective criteria and taking into
account a broad range of stakeholder
interests.
3 – Capital Distributions
During 2019, the directors agreed
to seek approval from shareholders
to undertake a directed buyback of
shares, equivalent to 4.99% of RBSG
plc’s issued share capital, from UKGI.
They also approved a final 2018
year-end dividend of 3.5p and special
dividend of 7.5p in February 2019; and
a 2019 interim ordinary dividend of
2.0p and a special dividend of 12.0p in
August 2019.
In making their decisions, the
directors took into account RBSG
plc’s very strong capital position,
achieved through organic capital
build and optimising its capital usage
and confirmed their strong desire
to distribute excess capital back to
shareholders.
There is regular interaction with key
stakeholders in relation to capital
distributions. Engagement with
institutional shareholders prior to
the Board’s decisions had indicated a
desire for RBSG plc to return excess
capital in an efficient way. Institutional
shareholders also indicated a desire
for us to help UKGI reduce its stake
through directed buybacks and other
directed capital distribution methods
and voted in favour of resolutions to
do this at both a General Meeting and
AGM in 2019. In considering dividends,
the directors have ensured that RBSG
plc always has capacity to participate
in a directed buyback of UKGI’s shares
to the full extent allowed. Regulators
also confirmed they had no objection.
Passing regulatory stress tests and
operating within our capital and
double leverage risk appetite were
key determinants in the resumption
of dividends. Resuming dividends also
sent a positive message to colleagues
about the overall financial strength of
RBSG plc.
The Board will continue to take key
stakeholders’ views into account in
considering further capital distributions,
whilst promoting the long-term
sustainable success of RBSG plc.
organisation’s values, and would
support an open and inclusive culture
which values and embeds continuous
learning.
As the Purpose continued to develop
it was also tested with customers,
investors, regulators and other
stakeholders, through external market
research. A summary of the output
of this stakeholder engagement was
shared with the Board confirming the
proposed Purpose was well received.
2 – CEO Appointment
As described in the report of the
Group Nominations and Governance
Committee on pages 68 and 69, in 2019
the Board approved the appointment
of Alison Rose as Group Chief
Executive Officer with effect from 1
November 2019. From the outset, the
Board placed stakeholder interests at
the core of its objectives in the search
for Ross McEwan’s successor.
The Group Nominations and
Governance Committee, on behalf of
the Board, agreed a role specification
which required candidates to
demonstrate broad and authoritative
banking and strategic experience
that would serve to deliver long term
sustainable growth to the business
for the benefit of its shareholders and
wider stakeholders. A rigorous search
process was undertaken, involving
the consideration of both internal and
external candidates. Alison Rose was
identified as the strongest candidate
on the basis of the role specification
criteria.
In reaching its decision, the interests
of the Bank’s customers were a key
focus for the Board, particularly each
candidate’s ability to lead a business
that would be recognised as truly
customer centric. The Board also
ensured that colleague interests were
taken into account when agreeing
the critical capabilities used to assess
potential candidates. These required
candidates to demonstrate the strong
ethical and moral principles needed
to lead the culture and values of RBS
Group. The Board ensured that the
Bank’s regulators, another of its
key stakeholder groups, were kept
regularly apprised of progress during
the search.
The Board will continue to ensure that
its nominations process is based on
the principles of fairness, respect and
48
Governance and compliance
strategic direction are described in the
Strategic Report on pages 2 to 48; The
Group’s top and emerging risks are also
disclosed in the Strategic Report on
page 44;
The Group’s principal risks, including
its methodology and processes for
managing capital, liquidity and funding,
and credit risk are described in the
Capital and Risk Management section
on pages 112 to 189.
The Group’s approach to stress
testing and reverse stress testing is
also described in the Capital and Risk
Management section on pages 116
to 119.
Based on this assessment, the Board
has a reasonable expectation that
RBSG plc will be able to continue in
operation and meet its liabilities as they
fall due over the next three years to 31
December 2022.
Viability
Statement
In accordance with Provision 31 of the UK Corporate Governance Code,
the Board has assessed RBSG plc’s viability taking into account its
current position, the Board’s assessment of its business prospects, and
its principal risks. The Board considers a period of three years to be an
appropriate time frame for this assessment.
As part of this assessment the Board has considered:
RBSG plc’s long-term business and strategic plans.
RBSG plc’s risk profile and risk management practices, including the processes
by which risks are identified and mitigated.
RBSG plc’s top risks (those that could have a significant negative impact
on the RBSG plc’s ability to operate or meet its strategic objectives over
the period of the plans) and emerging risks (those that could do so over the
medium term) as well as the likely impact of those risks crystallising, both
individually and in combination.
The results of internal and regulatory stress tests (which include consideration
of the top and emerging risks within the scenario design).
RBSG plc’s current capital position and projections over the
period of the plans.
RBSG plc’s liquidity and funding profile (including projections over the
period of the plans).
The wider political, economic and regulatory environments, including the
uncertain geopolitical outlook and the implications of the UK’s exit from the
European Union.
A five year time frame is used for
planning and is the basis for internal
stress test scenarios. 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.
Threats to the achievement of those
plans – including financial, operational,
conduct and financial crime risks – are
identified and assessed through the
risk management framework and
managed within appetite approved by
the Board. The risk profile – including
an assessment of top and emerging
risks – is reported regularly to the
Group Board Risk Committee and
the Board.
A series of varying stress scenarios is
used as part of internal stress testing.
These are designed to be extreme
but plausible and take account of
potential risk management actions
and mitigation supported by the risk
management framework. Reverse
stress testing is also used to assess
scenarios and circumstances that
could make the Group’s business
model unviable. The results are
reported regularly to the Group Audit
Committee, the Group Board Risk
Committee and the Board. Regulatory
stress tests are also carried out on an
annual basis (for the Bank of England)
and a biennial basis (for the European
Banking Authority).
While a five year time frame is used
internally, levels of uncertainty
increase as the plan horizon extends.
Accordingly the Board considers
a period of three years to be an
appropriate period for the assessment
to be made since it is within the period
covered by RBSG plc’s strategic plan
as well as its regulatory and internal
stress testing.
Relevant information can be found in
the following sections of the Annual
Report and Accounts:
The Group’s principal activities,
business and operating models and
49
Business review
Presentation of information
Segmental reporting
Financial summary
Segment performance
Page
50
50
51
56
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.
Presentation of information
In the Report and Accounts, unless specified otherwise, the terms ‘the
company’ and ‘RBSG plc’ mean The Royal Bank of Scotland Group
plc; ‘RBS’ and ‘RBS Group’ mean the company and its subsidiary and
associated undertakings; ‘NWH Ltd’ means NatWest Holdings Limited;
‘NWB Plc’ means National Westminster Bank Plc; ‘RBS plc’ means
The Royal Bank of Scotland plc; ‘NWM Plc’ means NatWest Markets
Plc and ‘UBI DAC’ means Ulster Bank Ireland DAC.
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.
RBS\Finance\0000012\Secret
Segmental reporting
Re-segmentation
Effective from 1 January 2019, Business Banking was transferred from
UK Personal & Business Banking (UK PBB) to Commercial Banking as
the nature of the business, including distribution channels, products
and customers, are more closely aligned to the Commercial Banking
business. Concurrent with the transfer, UK PBB was renamed UK
Personal Banking and the previous franchise combining UK PBB and
Ulster Bank RoI was renamed Personal & Ulster. Reportable
segmental comparatives have been restated.
Franchises
RBS continues to deliver on its plan to build a strong, simple and fair
bank for both customers and shareholders. To help develop and
deliver this strategy, in the fourth quarter of 2019, Commercial &
Private Banking (CPB), combining the reportable segments of
Commercial Banking and Private Banking ceased to operate as one
business area and the franchise Personal & Ulster, combining the
reportable segments of UK Personal Banking and Ulster Bank RoI was
also disbanded. The reportable operating segments remain
unchanged and no comparatives have been restated.
Reportable operating segments
The reportable operating segments are as follows. For full business
descriptions see Note 4 on page 216.
UK Personal Banking
Ulster Bank RoI
Commercial Banking
Private Banking
RBS International (RBSI)
NatWest Markets (NWM)
Central items & other
Non-IFRS financial information
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 or non-IFRS
performance measures. These measures are adjusted for certain
items which management believe are not representative of the
underlying performance of the business and which distort period-on-
period comparison. These non-IFRS financial measures are not
measures within the scope of IFRS and are not a substitute for IFRS
financial measures. Refer to the section, ‘Non-IFRS financial
measures’, on pages 277 to 280 for further information and
calculations of non-IFRS financial measures included throughout this
document, and, where relevant, the most directly comparable IFRS
financial measures.
RBS Group ring-fencing
The UK ring-fencing legislation required the separation of essential
banking services from investment banking services from 1 January
2019. RBS Group has placed the majority of the UK and Ireland
banking business in ring-fenced banking entities under an intermediate
holding company, NatWest Holdings Limited. The Western European
corporate business continues to be transferred from the ring-fenced
bank entities to NatWest Markets N.V. (NWM N.V.), a subsidiary of
NatWest Markets Plc (NWM Plc). NWM Plc and RBS International Ltd
(RBSI Ltd) are separate banks outside the ring-fence, both
subsidiaries of RBSG plc.
NatWest Markets N.V.
NWM N.V. began transacting new business on 25 March 2019 to
ensure continuity of service to European Economic Area (EEA)
customers when the UK leaves the European Union (EU). The
activities transferred primarily relate to Markets and Corporate Lending
portfolios for EEA customers previously served from NWM Plc and the
ring-fenced bank. NWM N.V. Group was acquired by NWM Plc and
became a part of NWM Group with effect from 29 November 2019.
On 16 June 2019, the merger of Alawwal bank and SABB was
completed, with NWM N.V. receiving an aggregate 10.8%
shareholding in SABB on behalf of itself and its consortium partners.
RBS Group’s economic interest in the merged entity, amounting to
4.1%, was then sold to NWM Plc, and the balance of shares was
transferred separately to RFS Holdings B.V. consortium partners, as
part of the unwind of those arrangements. On 29 November 2019,
RBSH Group transferred to become a subsidiary of NWM Plc following
regulatory approval. At the same time, the liquidation of RFS Holdings
B.V. commenced.
RBS – Annual Report and Accounts 2019
50
Business review
Financial summary continued
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
2019
£m
8,047
6,206
14,253
(9,325)
4,928
(696)
4,232
(432)
3,800
—
3,800
3,133
39
—
367
261
3,800
2018*
£m
8,656
4,746
13,402
(9,645)
3,757
(398)
3,359
(1,208)
2,151
—
2,151
1,622
182
—
355
(8)
2,151
Performance key metrics and ratios
Return on tangible equity (%)
Bank net interest margin (RBS NIM excluding NWM) (%) (1)
Average interest earning assets (RBS excluding NWM) (£m)
Cost:income ratio (%) (2)
Earning per share (pence) - basic
2019
9.4
1.99
413,112
65.1
26.0p
2018
4.8
2.09
409,106
71.7
13.5p
*Restated for IAS12 ‘income taxes’ refer to accounting policy 1, Other amendments to IFRS, for further details.
2016*
£m
8,708
3,882
12,590
(16,194)
(3,604)
(478)
(4,082)
(1,107)
(5,189)
—
(5,189)
(6,955)
260
1,193
303
10
(5,189)
2015*
£m
8,767
4,156
12,923
(16,353)
(3,430)
727
(2,703)
(3)
(2,706)
1,541
(1,165)
(1,979)
297
—
108
409
(1,165)
2017*
£m
8,987
4,146
13,133
(10,401)
2,732
(493)
2,239
(731)
1,508
—
1,508
752
234
—
487
35
1,508
Variance
4.6
(10bps)
4,006
(6.6)
12.5p
Notes:
(1) Net interest margin is net interest income of the banking business as a percentage of interest earning assets (IEA) of the banking business.
(2) Cost:income ratio is total operating expenses less operating lease depreciation divided by total income less operating lease depreciation.
Summary consolidated balance sheet
Cash and balances at central banks
Trading assets
Derivatives
Loans to banks and customers - amortised cost
Settlement balances
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
2019
£m
77,858
76,745
150,029
337,636
4,387
61,452
14,932
723,039
389,740
73,949
206,147
9,647
43,547
9
723,039
2018
£m
88,897
75,119
133,349
318,036
2,928
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
321,633
2,517
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
320,016
5,526
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
297,020
4,116
47,004
21,378
815,408
338,326
92,299
288,023
42,613
53,431
716
815,408
RBS – Annual Report and Accounts 2019
51
Business Review
Financial summary continued
Segmental summary income statements
2019
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)
Average interest earning assets
Third party customer asset rate (3)
Third party customer funding rate (3)
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)
Average interest earning assets
Third party customer asset rate (3)
Third party customer funding rate (3)
UK Personal
Banking
£m
4,130
736
4,866
(2,403)
(290)
(925)
(3,618)
(393)
855
9.6%
74.4%
167,186
3.22%
(0.38%)
4,283
771
5,054
(2,428)
(226)
(213)
(2,867)
(339)
1,848
24.7%
56.7%
160,641
3.36%
(0.31%)
Ulster Bank
RoI
£m
400
167
567
(470)
(60)
(22)
(552)
34
49
2.3%
97.4%
25,100
2.27%
(0.16%)
444
166
610
(490)
(22)
(71)
(583)
(15)
12
0.5%
95.6%
24,834
2.41%
(0.20%)
Commercial
Banking
£m
2,842
1,476
4,318
(2,237)
(301)
(62)
(2,600)
(391)
1,327
8.4%
58.9%
145,933
3.16%
(0.43%)
2,855
1,747
4,602
(2,288)
(155)
(44)
(2,487)
(147)
1,968
12.1%
52.8%
145,318
3.02%
(0.32%)
Private
Banking
£m
521
256
777
(439)
(38)
(9)
(486)
6
297
15.4%
62.5%
21,689
2.91%
(0.43%)
518
257
775
(456)
(21)
(1)
(478)
6
303
15.4%
61.7%
20,547
2.89%
(0.25%)
RBS
International
£m
478
132
610
(244)
(20)
—
(264)
(2)
344
25.7%
43.3%
29,912
2.89%
(0.13%)
466
128
594
(260)
(9)
9
(260)
2
336
24.4%
43.8%
27,266
2.88%
(0.09%)
NatWest
Markets
£m
(188)
1,530
1,342
(1,178)
(222)
(18)
(1,418)
51
(25)
(3.2%)
105.7%
35,444
nm
nm
112
1,330
1,442
(1,213)
(238)
(153)
(1,604)
92
(70)
(2.0%)
111.2%
27,851
nm
nm
Central items
& other
£m
(136)
1,909
1,773
(78)
(450)
141
(387)
(1)
1,385
nm
nm
nm
nm
nm
(22)
347
325
(224)
(333)
(809)
(1,366)
3
(1,038)
nm
nm
nm
nm
nm
Total
RBS
£m
8,047
6,206
14,253
(7,049)
(1,381)
(895)
(9,325)
(696)
4,232
9.4%
65.1%
448,556
nm
nm
8,656
4,746
13,402
(7,359)
(1,004)
(1,282)
(9,645)
(398)
3,359
4.8%
71.7%
436,957
nm
nm
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 15%
(Ulster Bank RoI - 14% prior to Q1 2019), 12% (Commercial Banking), 13% (Private Banking - 13.5% prior to Q1 2019), 16% (RBS International) 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’ and risk-weighted assets equivalents (RWAes) incorporating the effect of capital deductions.
RBS return on equity is calculated using profit for the period attributable to ordinary shareholders. Refer to the Non-IFRS financial measures section for details
of the basis of preparation.
(2) Operating lease depreciation included in income £138 million (2018 - £121 million). Refer to the Non-IFRS financial measures section for details of the basis of
preparation.
(3) UBI DAC and RBS International manage their funding and liquidity requirements locally. Their liquid asset portfolios and non-customer related funding sources
are included within their net interest margin, but excluded from their third party asset and liability rates.
RBS – Annual Report and Accounts 2019
52
Business Review
Financial Summary continued
Income
Interest receivable (1,2)
Interest payable (1,2)
Net interest income
Net fees and commissions
Income from trading activities
Other non-interest income
Non interest income
Total income
Notable items within total income
Alawwal bank merger gain in NatWest Markets
FX recycling gain in Central items & other (3)
Legacy liability release in Central items & other
Insurance indemnity
of which:
NatWest Markets
Central items & other
IFRS volatility in Central items & other (4)
UK Personal Banking debt sale gain
FX gains/(losses) in Central items & other
Commercial Banking fair value and disposal (loss)/gain
NatWest Markets legacy business disposal loss
Variance
£m
326
(935)
(609)
154
(403)
1,709
1,460
851
3%
39%
(7%)
7%
(28%)
175%
31%
6%
2019
£m
11,375
(3,328)
8,047
2,511
1,012
2,683
6,206
14,253
444
1,459
256
—
—
—
9
49
21
(16)
(35)
2018
£m
11,049
(2,393)
8,656
2,357
1,415
974
4,746
13,402
—
—
—
357
165
192
(59)
61
(46)
169
(86)
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
(3) Includes £290 million arising on the completion of the Alawwal bank merger in June 2019, £1,102 million arising on the liquidation of RFS Holdings and £67
million in relation to dividends in UBI DAC.
(4) IFRS volatility relates to loans which are economically hedged but for which hedge accounting is not permitted under IFRS.
.
2019 compared with 2018
Total income increased by £851 million, or 6.3%. Excluding
notable items, income decreased by £813 million, or 6.3%, due to
a reduction in retail and commercial income, lower NatWest
Markets income and increased Treasury funding costs, reflecting
increased MREL costs and lower structural hedge income.
Across the retail and commercial businesses, income decreased
by £301 million, or 2.6%, excluding notable items, principally
reflecting margin pressure in a challenging market.
Bank NIM of 1.99% was 10 basis points lower than 2018,
principally reflecting competitive pressures within the personal
business and a flattening yield curve.
Structural hedges of £159 billion generated £0.6 billion of
incremental net interest income for the year, compared with £0.9
billion of incremental net interest income on a balance of £159
billion in 2018.
RBS – Annual Report and Accounts 2019
53
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
Impairment of other intangible assets
Operating expenses
Notable items within operating expenses
Push payment fraud costs
Litigation and conduct costs
of which:
US RMBS
PPI
Variance
£m
(82)
(221)
(149)
377
(387)
(462)
179
(37)
(320)
(2.2%)
(17.8%)
(8.3%)
37.5%
(30.2%)
(5.2%)
27.8%
(100.0%)
(3.3%)
2019
£m
3,567
1,020
1,638
1,381
895
8,501
824
—
9,325
38
895
(169)
900
2018
£m
3,649
1,241
1,787
1,004
1,282
8,963
645
37
9,645
—
1,282
823
200
2019 compared with 2018
Strategic costs of £1,381 million included: a £470 million charge
relating to the reduction in our property portfolio; £299 million of
technology costs; and a £178 million direct charge in NatWest
Markets relating to both the wind-down of the legacy business and
ongoing development of the core business infrastructure; with the
remaining charge largely relating to restructuring costs to achieve
cost efficiencies across front and back book operations.
Litigation and conduct cost included a £900 million PPI charge and
a £169 million reimbursement under indemnification agreements
relating to US residential mortgage-backed securities (RMBS).
Excluding strategic, litigation and conduct costs, operating
expenses reduced by £310 million, ahead of target, despite
incurring an additional £38 million of authorised push payment
fraud costs in line with new industry practice. In line with the
reduction in costs, headcount was c.3,100, or 4.6%, lower than
2018.
Impairments
Loans - amortised cost (1)
ECL provisions (2)
Impairment losses
ECL charge (3)
ECL loss rate - annualised (basis points)
Amounts written off
2019
2018*
Variance
£m
339,968
3,792
£m
320,256
3,851
£m
19,712
(59)
696
20.47
792
398
12.43
1,494
298
8
(702)
6%
(2%)
75%
65%
(47%)
*2018 data has been restated for a change to presentation of unrecognised interest. Refer to Accounting policy 1, Other amendments to IFRS for further details.
Notes:
(1) The table above summarises loans and related credit impairment measured on an IFRS 9 basis.
(2) Includes £4 million (2018 – £5 million) related to assets classified as FVOCI.
(3) Includes a £2 million charge (2018 – £3 million charge) relating to other financial assets, of which a £1 million release (2018 – £1 million charge) related to
assets classified as FVOCI; and a nil (2018 – £31 million release) related to contingent liabilities.
2019 compared with 2018
The net impairment loss of £696 million, 21 basis points of gross customer loans, increased by £298 million compared with 2018,
transitioning from a very benign period towards a more normalised external credit environment, as well as the impact of a small number of
large individual commercial charges. The cost of risk remained below the view of our normalised blended long term loss rate of 30 to 40
basis points.
Tax
Tax charge
UK corporation tax rate
Effective tax rate
2019 compared with 2018
The tax charge for the year ended 31 December 2019 is lower than
the UK statutory rate reflecting the impact of the Alawwal bank
merger gain on disposal, FX recycling gain on liquidation of RFS
Holdings, a deferred tax credit on the recognition of tax losses
following the transfer of business under the ring-fencing regulations
and adjustments in respect of prior periods. These factors have
been partially offset by the impact of conduct charges, the banking
surcharge and a reduction in the carrying value of deferred tax
assets in respect of losses in the UK and Ireland.
2019
£m
432
19.0%
10.2%
2018
£m
1,208
19.0%
36.0%
The tax charge for the year ended 31 December 2018 is higher
than the UK statutory 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 periods.
RBS – Annual Report and Accounts 2019
54
Business review
Financial summary continued
Summary consolidated balance sheet as at 31 December 2019
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
Settlement balances
Trading liabilities
Derivatives
Other financial liabilities
Subordinated liabilities
Other liabilities
Total liabilities
Total equity
Total liabilities and equity
2019
£m
2018
£m
Variance
£m
77,858
76,745
150,029
10,689
326,947
4,387
61,452
14,932
723,039
20,493
369,247
4,069
73,949
146,879
45,220
9,979
9,647
679,483
88,897
75,119
133,349
12,947
305,089
2,928
59,485
16,421
694,235
23,297
360,914
3,066
72,350
128,897
39,732
10,535
8,954
647,745
(11,039)
1,626
16,680
(2,258)
21,858
1,459
1,967
(1,489)
28,804
(2,804)
8,333
1,003
1,599
17,982
5,488
(556)
693
31,738
43,556
46,490
(2,934)
723,039
694,235
28,804
Tangible net asset value per ordinary share (pence) (1)
268p
287p
19p
Note:
(1) Tangible net asset value per ordinary share represents tangible equity divided by the number of ordinary shares in issue
(12%)
2%
13%
(17%)
7%
50%
3%
(9%)
4%
(12%)
2%
33%
2%
14%
14%
(5%)
8%
5%
(6%)
4%
7%
Total assets of £723.0 billion as at 31 December 2019 increased
by £28.8 billion, 4%, compared with 31 December 2018. This was
primarily driven by increases in loans to customers and derivatives,
partially offset by reductions in cash and balances at central banks
Cash and balances at central banks decreased by £11.0 billion,
12%, to £77.9 billion mainly as a result of Treasury liquidity
management, a £4 billion repayment to the Bank of England Term
Funding Scheme (TFS) and subordinated liability redemptions,
offset by various bond and MREL issuances.
Trading assets increased by £1.6 billion, 2%, to £76.7 billion and
trading liabilities increased by £1.6 billion, 2%, to £73.9 billion both
reflecting a moderate increase in NWM.
Movements in derivative assets, up £16.7 billion, 13%, to £150.0
billion, and liabilities, up £18.0 billion, 14% to £146.9 billion, mainly
driven by mark-to-market increases due to a downward shift in
interest rate yields and new business during the year, partially
offset by the strengthening of sterling against major currencies
since 2018 year end.
Loans to customers - amortised cost, increased by £21.9 billion,
7%, to £326.9 billion including £10 billion of net new loans to
customers in UK Personal Banking and £11 billion in Treasury as
part of liquidity management.
Other financial assets includes debt securities, equity shares and
other loans and increased by £2.0 billion, 3%, to £61.5 billion,
primarily driven by the equity holding in SABB partially offset by
liquidity management.
Other assets decreased by £1.5 billion, 9% to £14.9 billion primarily
driven by the reduction in assets of disposal group following the
Alawwal bank merger.
Bank deposits decreased by £2.8 billion, 12%, to £20.5billion, with
decreases including a £4 billion repayment of the Bank of England
TFS, partially offset by an increase in repo transactions in
Treasury.
Customer deposits increased by £8.3 billion, 2% to £369.2 billion
including increases of £5.0 billion in UK Personal banking reflecting
continued growth across current accounts and savings.
Other financial liabilities included customer deposits at fair value
through profit and loss and debt securities in issue increased by
£5.5 billion, 14%, to £45.2 billion primarily driven by £4 billion of
MREL senior debt issued by RBSG plc.
Subordinated liabilities decreased by £0.6 billion, 5% to £10.0
billion as a result of redemptions in the period of £1.1 billion, offset
by an issuance of £0.6 billion by RBSG plc.
Other liabilities increased by £0.7 billion, 8% to £9.6 billion mainly
due to the increase in lease balances following the adoption of
IFRS 16 on 1 January 2019, partially offset by reductions in
provisions in the year.
Owners’ equity decreased by £2.2 billion, 5%, to £43.5 billion,
primarily driven by the payment of ordinary dividends of £3 billion,
offset by the £3.5 billion profit for the year, which included FX
recycling of £1.5 billion.
RBS – Annual Report and Accounts 2019
55
Business Review
Segment performance
UK Personal 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
2019
£m
4,130
736
4,866
(2,403)
(290)
(925)
(3,618)
(393)
855
2018
£m
4,283
771
5,054
(2,428)
(226)
(213)
(2,867)
(339)
1,848
Variance
£m
(153)
(35)
(188)
25
(64)
(712)
(751)
(54)
(993)
(4%)
(5%)
(4%)
(1%)
28%
nm
26%
16%
(54%)
9.6%
2.47%
74.4%
24.7%
2.67%
56.7%
(15.1%)
(0.20%)
17.7%
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
Total loans to customers (amortised cost)
Loan impairment provisions
Net loans to customers
Total assets
Customer deposits
Risk-weighted assets
2019 compared with 2018
Almost three quarters of our current account customers are now
digitally active, with growing engagement and continued
improvements to their digital experience making it easier for our
customers everyday. Total digital sales volumes increased by 30%
compared with 2018, representing 53% of all sales. 63% of
personal unsecured loan sales, 66% of credit card accounts and
56% of current accounts opened were via the digital channel.
Total income was £188 million, or 3.7%, lower than 2018, impacted
by lower overall mortgage margins, an IFRS 9 accounting change
for interest in suspense recoveries of £29 million and a £12 million
decrease in debt sale gains, partially offset by strong lending
growth.
Net interest margin decreased by 20 basis points reflecting
mortgage margin pressure, as front book margins remain lower
than back book margin and the book re-prices to the current rate.
Excluding strategic, litigation and conduct costs, operating
expenses decreased by £25 million, or 1.0%, reflecting a 6.5%
reduction in headcount from digital process simplification and back
office rationalisation and lower property costs, partially offset by
increased fraud costs due to a revised customer refund approach
for authorised push payment scams, annual pay award, and
increased investment and technology costs.
Litigation and conduct costs include a £900 million charge in
respect of PPI claims following greater than predicted complaints
volumes in the lead up to the 29 August 2019 deadline.
2019
£bn
8.5
147.5
4.3
160.3
(1.4)
158.9
182.3
150.3
37.8
2018
£bn
7.6
138.5
4.0
150.1
(1.2)
148.9
171.0
145.3
34.3
Variance
£bn
0.9
9.0
0.3
10.2
(0.2)
10.0
11.3
5.0
3.5
12%
6%
8%
7%
17%
7%
7%
3%
10%
Impairment losses were £54 million higher than 2018 reflecting
lending growth and lower debt sale recoveries, partially offset by
interest in suspense recoveries following an IFRS 9 accounting
change and a £25 million lower charge for economic uncertainty
than in 2018. Default rates increased slightly since 2018, but, the
overall trend flattened in the second half of the year as a result of
unsecured risk appetite tightening.
Net loans to customers increased by £10.0 billion, or 6.7%, to
£158.9 billion. The business has maintained a prudent approach to
risk and pricing in a very competitive market, with gross new
mortgage lending in 2019 of £33.3 billion, 9.6% higher than 2018.
Mortgage new business market share increased to approximately
12.5%, supporting a stock share of around 10.2% up from 9.8% in
2018. Momentum also continued in personal advances and credit
cards, increasing by 11.8% and 7.5% respectively.
Customer deposits increased by £5.0 billion, or 3.4%, as growth
continued across current accounts and savings.
RWAs increased by £3.5 billion, or 10.2%, principally due to strong
lending, £2.2 billion, mortgage predictive loss adjustments, £0.6
billion, and an increase linked to IFRS 16 changes, £0.7 billion.
RBS – Annual Report and Accounts 2019
56
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 releases/(losses)
Operating profit
Average exchange rate - €/£
Performance ratios
Return on equity (1)
Net interest margin
Cost:income ratio
2019
€m
456
191
647
(537)
(68)
(25)
(630)
38
55
2018
€m
502
187
689
(553)
(25)
(79)
(657)
(17)
15
Variance
€m
(46)
4
(42)
16
(43)
54
27
55
40
(9%)
2%
(6%)
(3%)
172%
(68%)
(4%)
nm
nm
2019
£m
400
167
567
(470)
(60)
(22)
(552)
34
49
2018
£m
444
166
610
(490)
(22)
(71)
(583)
(15)
12
1.141
1.130
Variance
£m
(44)
1
(43)
20
(38)
49
31
49
37
(10%)
1%
(7%)
(4%)
173%
(69%)
(5%)
nm
nm
2.3%
1.59%
97.4%
0.5%
1.79%
95.6%
1.8%
(0.20%)
1.8%
2.3%
1.59%
97.4%
0.5%
1.79%
95.6%
1.8%
(0.20%)
1.8%
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
15% 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 - €/£
2019
€bn
16.0
6.3
22.3
(0.9)
21.4
29.8
29.8
21.7
15.3
2018
€bn
16.2
5.9
22.1
(1.1)
21.0
28.1
28.1
20.1
16.4
Variance
€bn
(0.2)
0.4
0.2
0.2
0.4
1.7
1.7
1.6
(1.1)
(1%)
7%
1%
(18%)
2%
6%
6%
8%
(7%)
2019
£bn
13.6
5.4
19.0
(0.8)
18.2
25.4
25.4
18.5
13.0
2018
£bn
14.5
5.3
19.8
(1.0)
18.8
25.2
25.2
18.0
14.7
1.175
1.117
Variance
£bn
(0.9)
0.1
(0.8)
0.2
(0.6)
0.2
0.2
0.5
(1.7)
(6%)
2%
(4%)
(20%)
(3%)
1%
1%
3%
(12%)
2019 compared with 2018
Ulster Bank RoI continued to strengthen its digital proposition in
2019 through enhancements to digital and mobile customer
offerings. 70% of active current account customers are now on
digital channels, with 48% using the mobile app which now
includes new app services to enable customers to lock and unlock
their debit cards, create savings goals and explore how they are
spending their money.
Total income was €42 million, or 6.1% lower than 2018 primarily
reflecting reduced income from non-performing loans (NPLs)
following the sale of a portfolio of assets, largely completed in
2018, and an income reduction from an IFRS 9 accounting change
in 2019 for interest in suspense recoveries of €23 million, with an
offsetting impact in impairments. These movements contributed to
a 20 basis points decrease in net interest margin compared with
2018.
Excluding strategic, conduct and litigation costs, operating
expenses decreased by €16 million, or 2.9%, due to reduced
project and pension costs and other efficiencies which resulted in a
headcount reduction of 6.5%, partially offset by higher levies and
increased risk and compliance costs.
A net impairment release of €38 million reflects improvements in
the performance of the loan portfolio and the accounting change for
interest in suspense recoveries, partially offset by a charge for
economic uncertainty.
Net loans to customers increased by €0.4 billion, or 1.9%, reflecting
strong lending in both the personal and commercial sectors,
partially offset by concluding the sale of a portfolio of NPLs, €0.1
billion, and a continued reduction in the tracker mortgage book.
Tracker mortgage balances reduced by €0.7 billion, or 8.4%
compared with 2018, with Tracker balances accounting for 38.2%
of total net loans at the end of 2019. The business maintained a
prudent approach to risk and pricing in a competitive market, with
gross new lending of €3.0 billion in 2019, 13.0% higher than 2018.
Customer deposits increased by €1.6 billion, or 8.0%, supporting a
reduction in the loan:deposit ratio to 98% from 105%.
RWAs reduced by €1.1 billion, or 6.7%, principally reflecting an
improvement in credit metrics and the impact of the NPL sale.
RBS – Annual Report and Accounts 2019
57
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
2019
£m
2,842
1,476
4,318
(2,237)
(301)
(62)
(2,600)
(391)
1,327
2018
£m
2,855
1,747
4,602
(2,288)
(155)
(44)
(2,487)
(147)
1,968
Variance
£m
(13)
(271)
(284)
51
(146)
(18)
(113)
(244)
(641)
(0%)
(16%)
(6%)
(2%)
94%
41%
5%
166%
(33%)
8.4%
1.95%
58.9%
12.1%
1.96%
52.8%
(3.7%)
(0.01%)
6.1%
Note:
(1) Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity based on 12% of the
monthly average of segmental RWAes, assuming 28% tax rate.
Capital and balance sheet
Loans to customers (amortised cost)
- business banking
- SME & mid-corporates
- specialised business
- large corporates & institutions
- real estate
- commercial - EU divestment
- 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
2019
£bn
6.9
29.7
16.1
21.0
21.3
5.6
1.9
102.5
(1.3)
101.2
165.4
135.0
75%
72.5
2018
£bn
6.7
30.0
18.0
18.4
20.7
7.0
2.0
102.8
(1.4)
101.4
166.4
134.4
75%
78.4
Variance
£bn
0.2
(0.3)
(1.9)
2.6
0.6
(1.4)
(0.1)
(0.3)
0.1
(0.2)
(1.0)
0.6
—
(5.9)
3%
(1%)
(11%)
14%
3%
(20%)
(5%)
(0%)
(7%)
(0%)
(1%)
0%
—
(8%)
Notes:
(1) New drawn lending and any re-financing resulting in a new facility or the opening of a new account, excluding Overdrafts and Supplier Finance.
(2) RWA intensity is defined as total risk weighted assets divided by total loans to customers (amortised cost).
2019 compared with 2018
Commercial Banking continues to focus on increasing customer
interactions through digital channels. In 2019, NatWest became the
first UK bank to launch biometric secure authentication for all
business payments via Bankline mobile. Conversation volumes
with our chat bot Cora have increased to c.16,500 per month since
inception in December 2018.
Total income decreased by £284 million, or 6.2%, reflecting asset
disposal and fair value gains of £169 million in 2018, compared
with a £16 million loss in 2019, combined with lower deposit
income and lower non-interest income. Net interest margin
decreased by 1 basis point in comparison to 2018 as a result of
lower deposit income, with lending margins broadly stable.
Excluding strategic, litigation and conduct costs, operating
expenses decreased by £51 million, or 2.2%, reflecting lower back
office operations costs and VAT recoveries, partially offset by £17
million higher operating lease depreciation, £9 million authorised
push payment fraud costs in line with new industry practice, and
higher remediation, innovation and technology spend.
Impairment losses of £391 million include a small number of single
name charges, IFRS 9 modelling adjustments and charges in
respect of increased economic uncertainty.
Commercial Banking gross new lending(1) was £19.5 billion in 2019.
Net loans to customers decreased by £0.2 billion as planned
reductions in EU divestment and Large Corporates & Institutions
Western European transfers to NatWest Markets of £0.6 billion
were partially offset by growth across the business. Lending across
Business Banking, SME & Mid-Corporate and Specialised business
increased by £1.1 billion, or 2.1%.
RWAs decreased by £5.9 billion due to model improvements,
active capital management and business transfers of £2.4 billion,
resulting in a RWA intensity(2) of 70.7% in comparison to 76.3% in
2018.
RBS – Annual Report and Accounts 2019
58
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 (AUMs) (2)
Assets under administration (AUAs) (3)
Assets under management and administration (AUMA)
Customer deposits
Loan:deposit ratio
Risk-weighted assets
2019
£m
521
256
777
(439)
(38)
(9)
(486)
6
297
2018
£m
518
257
775
(456)
(21)
(1)
(478)
6
303
Variance
£bn
3
(1)
2
17
(17)
(8)
(8)
—
(6)
15.4%
2.40%
62.5%
15.4%
2.52%
61.7%
—
(0.12%)
0.8%
2019
£bn
2.1
10.0
3.4
15.5
23.3
23.2
7.2
30.4
28.4
55%
10.1
2018
£bn
2.0
8.9
3.4
14.3
22.0
19.8
6.6
26.4
28.4
50%
9.4
Variance
£bn
0.1
1.1
—
1.2
1.3
3.4
0.6
4.0
—
0.1
0.7
1%
(0%)
0%
(4%)
81%
nm
2%
—
(2%)
5%
12%
—
8%
6%
17%
9%
15%
—
10%
7%
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% (13.5%
prior to Q1 2019 and 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) Private Banking manages assets under management portfolios on behalf of UK Personal Banking and RBSI. Prior to Q4 2018, the assets under
management portfolios of UK Personal Banking and RBSI were not included. Private Banking receives a management fee from UK Personal Banking and
clients of RBSI in respect of providing this service.
2019 compared with 2018
Private banking offers a service-led, digitally enabled experience
for its clients, with approximately 75% of eligible clients banking
with us digitally. Our client servicing model utilises both digital and
telephony through Coutts24 and Adam24, which have client
satisfaction ratings of 96% and 92% respectively. Coutts Connect,
our social platform which allows clients to network and build
working relationships with one another, now has over 1,700 active
users since launching in 2018.
Total income increased by £2 million, or 0.3%, as volume growth
and one-off benefits were partially offset by lower deposit income.
Net interest margin decreased by 12 basis points compared with
2018 primarily due to deposit margin pressure.
Excluding strategic, litigation and conduct costs, operating
expenses decreased by £17 million, or 3.7%, primarily reflecting
lower back office operations costs.
A net impairment release of £6 million reflected a number of one-off
releases.
Net loans to customers increased by £1.2 billion, or 8.4%, mainly
due to mortgage lending, relative to an increase in RWA’s of £0.7
billion, or 7.4%.
Total assets under management in Private Banking increased by
£3.4 billion, or 17.2%, reflecting positive investment performance of
£2.7 billion and net new business inflows of £0.7 billion.
Total assets under management and administration overseen by
Private Banking increased by £4.0 billion, or 15.2%, reflecting
positive investment performance of £3.2 billion and net new
business inflows of £0.8 billion.
RBS – Annual Report and Accounts 2019
59
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 (losses)/releases
Operating profit
Performance ratios
Return on equity (1)
Net interest margin
Cost:income ratio
2019
£m
478
132
610
(244)
(20)
—
(264)
(2)
344
2018
£m
466
128
594
(260)
(9)
9
(260)
2
336
Variance
£m
12
4
16
16
(11)
(9)
(4)
(4)
8
3%
3%
3%
(6%)
122%
(100%)
2%
(200%)
2%
25.7%
1.60%
43.3%
24.4%
1.71%
43.8%
1.3%
(0.11%)
(0.5%)
Note:
(1) Return on equity is based on segmental operating profit after tax adjusted for preference dividends divided by average notional equity based on 16% of the
monthly average of segmental RWAes.
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
2019
£bn
11.1
2.6
0.4
14.1
31.7
30.1
6.5
2018
£bn
10.2
2.7
0.4
13.3
28.4
27.5
6.9
Variance
£bn
0.9
(0.1)
—
0.8
3.3
2.6
(0.4)
9%
(4%)
—
6%
12%
9%
(6%)
2019 compared with 2018
RBS International’s existing personal customers can now open
individual savings accounts in an average time of 8 minutes rather
than 14 days, with over 3,000 new accounts opened this year using
the automated process. Digital adoption in personal banking has
increased by more than 17%. Over 90% of non-personal customers
who provided feedback find our electronic banking platform, eQ
easy or extremely easy to use, with 18 new features introduced into
eQ through 2019 as part of our ongoing investment in the platform.
Total income increased by £16 million, or 2.7%, due to increased
customer lending and deposits in Institutional and Local Banking.
Institutional Banking contributed 63% to income in 2019, with Local
Banking 31% and Depositary Services 6%. Net interest margin
decreased by 11 basis points compared with 2018 as deposit
margins reduced due to falling interest rates in the second half of
the year along with mortgage margin pressure.
Excluding strategic, litigation and conduct costs, operating
expenses decreased £16 million, or 6.2%, reflecting a £24 million
reduction in back office operations costs, partially offset by higher
investment spend relating to the digital proposition.
Net loans to customers increased by £0.8 billion, or 6.0%, reflecting
a Funds business transfer of £0.5 billion from NatWest Markets and
higher volumes in Institutional and Local Banking.
Customer deposits increased by £2.6 billion primarily reflecting
activity in the Funds sector and £1.1 billion growth in term and
notice deposits.
RWAs decreased by £0.4 billion as the impact of model updates
was partially offset by increased lending and business transfers.
RBS – Annual Report and Accounts 2019
60
Business Review
Segment performance continued
NatWest Markets(1)
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)
Cost:income ratio
Capital and balance sheet
Net loans to customers (amortised cost)
Total assets
Funded assets
Customer deposits
Risk-weighted assets
2019
£m
(188)
1,530
1,342
(1,178)
(222)
(18)
(1,418)
51
(25)
455
432
403
(208)
1,082
340
(80)
1,342
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
Variance
£m
(300)
200
(100)
35
16
135
186
(41)
45
(207)
—
21
9
(177)
249
(172)
(100)
nm
15%
(7%)
(3%)
(7%)
(88%)
(12%)
(45%)
(64%)
(31%)
—
5%
(4%)
(14%)
nm
(187%)
(7%)
(3.2)%
105.7%
(2.0)%
111.2%
(1.2)%
(5.5)%
2019
£bn
8.4
263.9
116.2
3.7
37.9
2018
£bn
8.4
244.5
111.4
2.6
44.9
Variance
£bn
—
19.4
4.8
1.1
(7.0)
—
8%
4%
42%
(16%)
Notes:
(1) The NatWest Markets operating segment is not the same as the NatWest Markets Plc legal entity or group. For 2019, NatWest Markets Plc entity includes
NatWest Markets N.V. from the 29 November 2019 only, whereas the NatWest Markets franchise excludes the Central items & other segment. For periods prior
to Q4 2019, NatWest Markets N.V. was also excluded from the NatWest Markets Plc entity.
monthly average of segmental risk-weighted assets incorporating the effect of capital deductions (RWAes)), assuming 28% tax rate.
(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
2019 compared with 2018
NatWest Markets continued to play a leading role in market
structural reform. We were first-to-market with our Realised Rate
calculator and we acted as the sole solicitation agent for the first
ever LIBOR to SONIA bond amendment issued in the market.
Total income decreased by £100 million, or 6.9%, reflecting lower
core income and own credit adjustments (OCA), partially offset by
increased legacy income following the £444 million gain on the
merger of Alawwal bank with SABB.
A core income reduction of £177 million, or 14.1%, was due to
challenging market conditions, most significantly in Q3 2019 when
the business was impacted by weak performance in the Rates
business.
Excluding strategic, litigation and conduct costs, operating
expenses decreased by £35 million, or 2.9%.
A net impairment release of £51 million compared with a release of
£92 million in 2018, both reflecting a small number of legacy cases.
RWAs decreased by £7.0 billion driven by the £4.7 billion reduction
following the merger of Alawwal bank with SABB and other legacy
reductions.
Central items & other
Central items not allocated
2019
£m
1,385
2018
£m
(1,038)
Variance
£m
2,423
nm
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.
2019 compared with 2018
Central items not allocated include £1,459 million of FX recycling gains, a £169 million reimbursement under indemnification agreements
relating to US residential mortgage-backed securities (RMBS) and strategic costs of £450 million. FY 2018 included a litigation and conduct
charge of £809 million, principally in respect of the settlement with the US Department of Justice.
RBS – Annual Report and Accounts 2019
61
Our Board
1
N
8
2
E
9
3
4
5
6
7
E
10
Re T
11
T Re S
A
Ri
T
N
A
Ri
12
13
Re
N
Ri
S
Ri
A N
S Re
A
N
Re
S
T
Key
A
E
N
Re
Group Audit Committee
Group Executive Committee
Group Nominations and Governance Committee
Group Performance and Remuneration Committee
Ri
S
T
Underlined
Group Board Risk Committee
Group Sustainable Banking Committee
Technology and Innovation Committee
Committee Chairman
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;
Chairman of Phoenix plc from 2012 to 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 appointments: 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 and Insurance Regulatory
Commission.
E
2 Alison Rose
Appointed: 1 November 2019
Experience: Alison has worked at RBS for 27
years. Prior to her current role, Alison was
Deputy CEO of NatWest Holdings and CEO of
the Commercial and Private Banking
business. Previous roles include Head of
Europe, Middle East and Africa, Markets &
International Banking and Global Head of
International Banking Capital and Balance
Sheet. Alison was invited by the UK
Government to lead a review of the barriers to
women starting a business and launched The
Rose Review in March 2019. Alison also
champions NatWest’s Entrepreneur
Accelerator programme, an innovative
initiative supporting start-up businesses
across the UK, and sponsors the Bank’s
employee-led networks.
External appointments: Non-executive director
of Great Portland Estates plc; Chair of the
McLaren/Deloitte Advisory Council; and sits
on the board of Coutts Charitable Foundation.
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. She was appointed Chief
Financial Officer in January 2019. 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: Chairman of the
Board of NortonLifeLock Inc. and non-
executive director of Arqiva Group Limited.
RBS – Annual Report and Accounts 2019
62
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 Corporation, Presidio
Bank and Diamond Foods, Inc, 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; non-executive director and chair
of the audit committee of Ooma Inc; and non-
executive director and chair of the audit
committee of Collibra.
N
A
Ri
T
6 Patrick Flynn
Appointed: 1 June 2018
Experience: Patrick was the Chief Financial
Officer and a member of the Executive Board
of ING Group N.V. 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 Fellow of Chartered Accountants
Ireland; and a member of the Association of
Corporate Treasurers in the UK.
External appointments: Non-executive director
of Aviva plc and chair of the audit committee,
and member of the risk and nomination
committees.
S
T
12 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 the audit
and nomination committees; Senior
Independent Director of Argentex Group plc;
and non-executive director of Scottish Power
Renewables Limited. Visiting Professor,
University of Strathclyde Business School.
Member of National Advisory Board MCR
Pathways, and Chairman of Advisory Board of
Turtle Pack Ltd.
Chief Governance Officer and Company
Secretary
13 Jan Cargill
Appointed: 5 August 2019
Experience: Jan is a chartered company
secretary with over 20 years corporate
governance experience. She was appointed
Deputy Company Secretary in 2010, and prior
to that held various roles in the legal and
secretariat functions in RBS, including Head
of Board and Shareholder Services.
Jan has a law degree and is a Fellow of the
Chartered Banker Institute. She is also an
Associate of The Chartered Governance
Institute, and has an INSEAD Certificate in
Corporate Governance.
Our Board
A Ri
7 Morten Friis
Appointed: 10 April 2014
Experience: Prior to being appointed to the
Board, 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
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 2006 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.
S
Re
10 Mike Rogers
Appointed: 26 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: Chairman of Experian
plc; Chairman of Aegon UK and Chairman of
its Remuneration Committee.
A
N Re
11 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 and 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: Senior Independent
Director of Kingfisher plc, and non-executive
director and chairman of the audit committee
of Smiths Group plc.
External appointments: Chairman of The Boat
Race Company Limited; director of Social
Finance Limited; and professor of practice,
Durham University Business School.
Ri A N
9 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 plc, Carpetright plc, John
Laing Group plc and SThree plc. She also
previously served as Deputy Chair of Ofcom.
External appointments: None
RBS – Annual Report and Accounts 2019
63
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
62
64
68
70
74
77
78
79
106
108
111
Dear Shareholder,
I am pleased to present the corporate
governance report for 2019. This has been a
noteworthy year for the Board with the
appointment of a new Group Chief Executive
Officer (CEO), and much time dedicated to
the development of RBS Group’s purpose and
strategy.
Board leadership and company purpose
In February 2019, the Board adopted a short
set of annual objectives to improve agenda
focus and ensure effective use of Board time.
During the first full year of operation of ring-
fenced governance arrangements, these
objectives also served as an important
reminder of the respective roles and
responsibilities of the RBSG plc Board and
the boards of the NWH Sub Group (NWH Ltd,
NWB Plc, RBS plc and Ulster Bank Limited).
The five themes selected provide a framework
to share some key highlights for the year from
a Board and governance perspective.
Purpose and strategy
The Board spent significant time on strategic
development and planning in 2019.
Pending the appointment of a new CEO, the
Board maintained a constructive dialogue with
executive management on development of
RBS Group’s future purpose and strategy,
including at the annual strategy offsite in June
2019.
On 1 November 2019, Alison Rose was
appointed CEO, following the resignation of
Ross McEwan. Further details on the
appointment process and the Board’s role in
that process, can be found in the Report of
the Group Nominations and Governance
Committee on page 68. Alison’s statement on
page 6 sets out the new purpose and
strategy. Alison has the Board’s full support: it
is a strategy which the Board carefully
considered, helped establish and will proudly
oversee. The Board is comfortable that it
aligns with RBS Group’s culture and values
and will deliver long-term sustainable
success.
The Board spent time discussing the
executive talent pipeline, including the
capabilities required to deliver the strategy. In
addition, it considered the diversity of the
RBS – Annual Report and Accounts 2019
succession pool; resourcing strategy; and the
range of development programmes and
support available to RBS’s future senior
leaders.
Risk and control
During 2019 the Board continued its focus on
strategic risks and conducted deep dives on
financial crime and the political and economic
environment. There was also a Board teach-in
on climate risk and the Board approved RBS’s
high-level plan for addressing the financial
risks related to climate change, a step forward
in terms of building a more sustainable Bank.
The Board held a recovery planning fire drill
which tested the management of a scenario
presenting conflicts of interest between the
RBSG plc Board and its subsidiaries. The
Board, supported by the Group Board Risk
and Group Audit Committees, continues to
monitor RBS’s overall control environment.
Customer focus
During 2019 the Board received information
on key customer issues through customer
service performance updates, fraud updates
and regular business reviews. One area of
focus has been overseeing delivery of
improved customer experience and
sustainable growth; themes on which the
Board will continue to challenge management
in 2020 and beyond, given the desire to
improve RBS Group’s service ranking scores
from the Competition and Markets Authority.
Further information on the Board’s
engagement with customers can be found on
page 46 of the Strategic Report.
Stakeholder engagement
In developing its annual objectives, the Board
identified a number of key stakeholders, and
the Board’s agenda and engagement plans
were structured to enhance the Board’s
understanding of these stakeholders’ views
and interests. This in turn has supported
informed Board discussions and decision-
making. Of particular note is the developing
role of the Colleague Advisory Panel (CAP),
which was established in 2018 in response to
the requirements of the 2018 UK Corporate
Governance Code (the Code). For further
details on the Board’s engagement with the
CAP and other key stakeholders, including
shareholders, and how stakeholder interests
have influenced the Board’s principal
decisions, see pages 46 to 48 of the Strategic
Report. Further information on RBS’s
approach to investing in and rewarding our
colleagues can be found on page 32 of the
Strategic Report (Our Colleagues).
Culture and values
The Board is responsible for leading the
development of RBS’s culture. In February
2019, the Banking Standards Board
presented a summary of their 2018 culture
assessment report on RBS, and in October
2019, the Board considered another set of
encouraging results from the annual colleague
opinion survey and the 2019 Banking
Standards Board survey. The colleague
opinion survey results were one culture
oversight tool available to the Board. The
64
survey results confirmed to the Board that
2019 targets had been achieved across key
measurements, trends and benchmarks in
relation to leadership, engagement and
culture.
The directors continue to be mindful of their
responsibility to set the “tone from the top”
and take every opportunity to role model the
desired culture both within the Boardroom and
beyond. Directors’ personal interactions with
colleagues provided useful opportunities to do
so, for example through CAP events and
business and function visits. Further, through
the Group Sustainable Banking Committee,
the Board received culture measurement
reports which helped to support the Board on
assessing progress on building a healthy
culture across the Bank and assessing
alignment between culture and values.
Board effectiveness
In 2019, the Board and committee evaluation
was conducted by the Chief Governance
Officer and Company Secretary. The review
concluded that the Board and its committees
continue to operate effectively and within their
terms of reference. A review of the Board’s
effectiveness was also carried out by the
Prudential Regulation Authority during 2019.
Further information on the 2019 internal
evaluation can be found on page 67.
Board and company secretary changes
I have already mentioned the resignation of
Ross McEwan as CEO and the appointment
of Alison Rose as Ross’s successor.
In addition, as disclosed in last year’s annual
report, Brendan Nelson stepped down as
Chairman of the Group Audit Committee on
31 March 2019, and as a non-executive
director on 25 April 2019. Patrick Flynn
succeeded Brendan as Chairman of the
Group Audit Committee.
On 5 August 2019, Aileen Taylor stood down
as Chief Governance & Regulatory Officer
and Board Counsel, and Company Secretary,
following 19 years with RBS. I am delighted
that Jan Cargill, previously Deputy Secretary
and Director, Corporate Governance, has
assumed the role of Chief Governance Officer
and Company Secretary.
2018 UK Corporate Governance Code and
2019 statutory reporting requirements
This is the first year in which RBSG plc has
reported against the Code and in accordance
with the new statutory requirements set out in
The Companies (Miscellaneous Reporting)
Regulations 2018, as they apply to RBSG plc.
In preparation for this year’s disclosures,
Board policies, processes and terms of
reference were reviewed, and adjusted to
reflect the Code and new reporting
requirements. A section 172(1) statement can
be found on page 46 of the Strategic Report.
Throughout the year RBSG plc has applied
the Principles and complied with the
Provisions of the Code, except in relation to:
Corporate governance
Provision 17 that the Group Nominations
and Governance Committee should
ensure plans are in place for orderly
succession to both the board and senior
management positions and oversee the
development of a diverse pipeline for
succession; and
Provision 33 that the Group Performance
and Remuneration Committee should have
delegated responsibility for setting
remuneration for the Chairman and
executive directors.
In both instances, the Board considers that
these are matters which should rightly be
reserved for the Board, as set out in more
detail in our statement of compliance.
In addition, the Board has delegated two
particular aspects of the Code’s provisions to
Board Committees, with regular updates
provided to the Board as appropriate:
The Group Audit Committee retains
responsibility for reviewing and monitoring
RBS’s whistleblowing procedures.
The Group Sustainable Banking
Committee considers key workforce
policies and practices (not related to pay)
to ensure they are consistent with RBS’s
values and support long term sustainable
success.
For further details please refer to the relevant
Committee reports on the following pages.
All directors are committed to observing high
standards of corporate governance, integrity
and professionalism. A statement of
compliance with the Code can be found on
page 106.
In conclusion I would like to thank my fellow
Board members for their contribution and
commitment throughout the year.
Howard Davies
Chairman of the Board
13 February 2020
Division of responsibilities
The Board has 12 directors comprising the
Chairman, two executive directors and nine
independent non-executive directors, one of
whom is the Senior Independent Director.
Director biographies and details of the Board
committees of which they are members can
be found on pages 62 and 63
Non-executive director independence
The Board considers that the Chairman was
independent on appointment and that all
current non-executive directors are
independent for the purposes of the Code. By
the time Brendan Nelson stepped down from
the Board on 25 April 2019, he had served for
9 years and 24 days. In that respect alone, Mr
Nelson did not meet the independence criteria
set out in the Code. Notwithstanding Mr
Nelson’s length of service, the Board
determined that Mr Nelson continued to be
independent in character and judgement,
offering a strong contribution to Board
discussions and debate until he stepped down
from the Board on 25 April 2019.
The Board
The Board is collectively responsible for
promoting the long-term sustainable success
of RBSG plc, driving both shareholder value
and contribution to wider society. The Board’s
role is to provide leadership of RBSG plc
within a framework of prudent and effective
controls which enables risk to be assessed
and managed. The Board sets the strategic
aims of RBSG plc and its subsidiaries,
ensures that the necessary resources are in
place for RBS Group to meet its objectives, is
responsible for the raising and allocation of
capital and reviews business and financial
performance. The Board establishes RBS’s
purpose, values and strategy and leads the
development of RBS’s culture. It ensures that
RBSG plc’s obligations to its shareholders
and other key stakeholders are understood
and met.
The Board 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.
Board Committees
In order to provide effective oversight and
leadership, the Board has established a
number of Board committees with particular
responsibilities. Please refer to page 45 of the
Strategic Report for more details. Board
committee terms of reference are available on
rbs.com.
Executive Management
The Group Board and the CEO are supported
by the Executive Committee (Group ExCo),
which considers strategic, financial, capital,
risk and operational issues affecting RBS.
Group 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 CEO
The role of Chairman is distinct and separate
from that of the CEO and there is a clear
division of responsibilities, with the Chairman
leading the Board and the CEO managing the
business day to day.
Senior Independent Director
Throughout 2019 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. They
provide constructive challenge, strategic
guidance, and specialist advice to the
executive directors and the executive
management team, and hold management to
account.
The balance between non-executive and
executive directors enables the Board to
provide clear and effective leadership across
RBS’s business activities and ensures no one
individual or small group of individuals
dominates the Board’s decision-making.
Details of the key responsibilities of the
Chairman, CEO, Senior Independent Director
and Non-executive Directors are available on
rbs.com.
Company Secretary
The Chief Governance Officer and Company
Secretary, Jan Cargill, works closely with the
Chairman to ensure effective and efficient
functioning of the Board and appropriate
alignment and information flows between the
Board and its committees.
The Company Secretary is responsible for
advising the Board and individual directors on
all governance matters, and 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.
RBS – Annual Report and Accounts 2019
65
Corporate governance
Board and Committee meetings
The table below shows Board and Committee
meeting attendance during 2019. There were
six scheduled Board meetings during 2019,
compared with nine in 2018. This reflects the
revised operating model under RBS Group’s
ring-fenced governance arrangements. 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 six ad hoc
Board meetings, four ad hoc N&G meetings,
eight ad hoc RemCo meetings, six ad hoc
BRC meetings and three ad hoc GAC
meetings. In accordance with the Code, the
Chairman and the non-executive directors met
at least once during the year without
executive directors present.
Board and committee membership and attendance 2019
Group
Nominations
and Governance
Committee
(N&G)
3/3
—
—
—
—
2/2
—
3/3
3/3
—
3/3
—
Group Audit
Committee
(GAC)
—
—
—
—
—
6/6
6/6
—
6/6
—
6/6
—
Group Board
Risk Committee
(BRC)
—
—
—
—
—
9/9
9/9
9/9
9/9
—
—
—
Board
6/6
1/1
6/6
6/6
6/6
6/6
6/6
6/6
6/6
6/6
6/6
6/6
Howard Davies
Alison Rose (1)
Katie Murray
Frank Dangeard
Alison Davis
Patrick Flynn (2)
Morten Friis
Robert Gillespie
Baroness Noakes
Mike Rogers (3)
Mark Seligman
Lena Wilson
Former Directors
Ross McEwan (4,5)
Brendan Nelson (6)
Notes:
(1) Alison Rose was appointed Group CEO and executive director on 1 November 2019.
(2) Patrick Flynn joined the Group Nominations and Governance Committee on 1 April 2019.
(3) Mike Rogers did not attend the January RemCo due to a scheduling clash with a pre-existing commitment.
(4) Ross McEwan did not attend the October Board due to a private commitment.
(5) Ross McEwan resigned as Group Chief Executive Officer and executive director on 31 October 2019.
(6) Brendan Nelson resigned as a non-executive director on 25 April 2019.
—
1/1
—
2/2
—
2/2
4/5
2/2
Group Sustainable
Banking
Committee
(SBC)
—
—
—
—
5/5
—
—
5/5
—
5/5
—
5/5
Group
Technology Performance and
Remuneration
Committee
(RemCo)
—
—
—
7/7
7/7
—
—
7/7
—
6/7
7/7
—
and Innovation
Committee
(TIC)
—
—
—
5/5
5/5
5/5
—
—
—
—
—
5/5
—
—
—
—
—
—
GRG Board Oversight Committee
The GRG Board Oversight Committee was
established in 2015 in relation to the Financial
Conduct Authority (FCA) review of the
treatment of SME customers. The Committee
oversaw and provided advice to the Board in
relation to the review, the external
independent review of GRG instigated by
RBS and other matters generally related to
GRG. The Committee was disbanded on 30
June 2019, following publication of the FCA’s
report.
How the Board operated in 2019
At each scheduled Board meeting the
directors receive reports from the Chairman,
Board Committee Chairmen, CEO, Group
Chief Financial Officer (CFO) 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.
An integral part of RBS Group’s governance
arrangements is the appointment of four
‘Double Independent Non-Executive Directors’
or ‘DINEDs’ to the boards, and board
committees, of the NWH Sub Group. The
DINEDs are independent in two respects: (i)
independent of management as non-
executives; and (ii) independent of the rest of
RBS Group by virtue of their NWH Sub
Group-only directorships. The DINEDs play a
critical role in RBS Group’s ring-fencing
governance structure, and are responsible for
exercising appropriate oversight of the
independence and effectiveness of the NWH
Sub Group’s governance arrangements,
including the ability of each board to take
decisions independently.
focusing on both technical topics and
business spotlights.
The DINEDs attend RBSG plc Board
meetings in an observer capacity.
Composition of the Board
The Board is structured to ensure that the
directors provide RBSG plc with the
appropriate combination 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 the Board has a
number of directors with substantial
experience in that area, including retail and
commercial banking. In addition, the directors
have relevant experience in customer service;
government and regulatory matters; mergers
and acquisitions; corporate restructuring;
stakeholder management; technology, digital
and innovation; finance and accountancy; risk;
and change management.
Board committees also comprise directors
with a variety of skills and experience so that
no undue reliance is placed on any one
individual.
Induction and professional development
Each new director receives a formal induction
on joining the Board, which is co-ordinated by
the Chief Governance Office and 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. During 2019 a suite
of online learning modules was developed to
further support new director induction,
In 2019, Katie Murray undertook an induction
programme following her appointment as
CFO. This programme included focus on
building existing knowledge of RBS; meetings
with relevant internal and external
stakeholders; and personal development.
Alison Rose has commenced an induction
programme following her appointment as
CEO.
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. The non-executive directors
discuss their training and professional
development with the Chairman at least
annually.
During 2019, bespoke training was arranged
for the directors on a range of subjects to
enhance their knowledge, including:
Financial crime
Political and economic outlook
Directors’ duties (including the new
statutory reporting requirements)
Retail banking environment
Suppliers’ spotlight
Climate risk
Data teach-in
Recovery fire drill
Enterprise wide risk management
(including the risk appetite framework)
RBS – Annual Report and Accounts 2019
66
Corporate governance
Inside information
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. A new Board reporting style was
embedded during 2019 which seeks to
improve the presentation of management
information in a more engaging, thoughtful
way and which covers explicitly the
stakeholder impacts relevant to decisions.
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.
The Code emphasises the importance of
ensuring directors have sufficient time to meet
their board responsibilities. Under the Code,
external appointments require prior Board
approval, with the reasons for permitting
significant appointments explained in the
annual report. In line with these requirements,
the Board considered the following during
2019:
Appointment of Patrick Flynn as a director
of Aviva plc on 16 July 2019; and
Appointment of Mike Rogers as Chairman
of Experian plc on 24 July 2019.
Following careful review of the anticipated
time commitment for the new roles in the
context of the directors’ existing portfolios,
and taking into account their respective
confirmations that they would continue to
meet their RBS responsibilities, the Board
approved these additional external
appointments.
The Board continues to monitor the
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.
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 RBSG plc’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.
Evaluation
In accordance with the Code, an external
evaluation of the Board, its Committees and
individual directors takes place every three
years. An internal evaluation takes place in
the intervening years.
Progress following the 2018 evaluation
A number of actions were progressed during
2019 in response to the findings of the 2018
external performance evaluation, which was
facilitated by Independent Board Evaluation.
Progress was overseen by the Group
Nominations and Governance Committee.
Key outcomes included:
Agreeing a set of annual objectives for the
Board. These have helped to improve
agenda focus and ensure effective use of
Board time.
Agreeing “ways of working” guidelines to
promote a healthy Boardroom culture.
Improving the quality of Board papers and
presentations through the introduction of a
new reporting style.
A comprehensive review of Board
composition and succession planning in
February 2019, which included updates to
the Board skills matrix and consideration of
contingency, medium and long-term
succession plans for key Board roles.
Further enhancing the NED induction
programme through the creation of online
learning modules covering both technical
topics and business spotlights. These
modules have been designed to serve as
reference materials for existing directors,
as well as forming part of the induction
programme.
2019 Performance evaluation
The 2019 Board evaluation was internally
facilitated by the Chief Governance Officer
and Company Secretary, Jan Cargill, during
Q4 2019. The process included:
holding 1:1 interviews with directors;
discussing key findings and
recommendations for action with the
Chairman; and
presenting a final report to the Board.
Key findings and recommendations
The conclusion of the 2019 Board evaluation
was that the Board operated effectively
throughout the year and fulfilled its
remit as set out in its terms of reference.
Directors engaged fully with the evaluation
exercise and commented positively in relation
to many aspects of the Board’s operations.
Key findings and recommendations included
the following:
Agenda focus had improved following
introduction of the Board objectives,
particularly in relation to stakeholder voice.
Further information on Board engagement
with stakeholders can be found on page 46
of the Strategic Report.
Ring-fencing governance arrangements
had embedded well. The DINED role was
clearly understood and functioning
effectively, and the recovery fire drill had
provided a useful opportunity to test the
conflicts of interest process.
Directors had responded positively to the
new reporting style for Board and
committee papers, which had driven better
quality presentations and shorter packs.
Although the Board’s size had reduced
following the departure of Brendan Nelson,
most directors still felt the Board was too
large, although not necessarily unwieldy or
unworkable.
The balance of skills, knowledge and
experience on the Board was considered
appropriate, however there was scope for
additional technology experience, to
RBS – Annual Report and Accounts 2019
67
support future strategy. Directors also
noted room for improvement on gender
and ethnic diversity.
The remits of the Group Sustainable
Banking Committee and the Technology
and Innovation Committee would benefit
from a review and refresh during 2020, to
agree areas of future focus in line with
future strategy.
Although there was some evidence of
improvements to Boardroom culture, more
focus is needed to promote good working
relationships between the Board and
executive management.
Enhancing the quality of management
information would enable the Board to
focus less on the details and spend more
time on key strategic issues.
There was clear appetite amongst Board
members to have more visibility of top
executive talent.
Actions
Following Board discussion of the evaluation
report, a number of actions were agreed for
2020, including the following:
Agree a focused set of Board objectives for
2020.
Maintain focus on Board composition and
succession planning, balancing the desire
to reduce overall Board size with the
requirement to ensure an appropriate
balance of skills, knowledge and
experience, and the need to improve
diversity.
Consider further ways to improve Board
dynamics.
Consider improvements to future
management reporting to the Board.
Develop a structured programme for the
Board to meet key executive talent.
Implementation of the 2019 Board evaluation
actions will be overseen by the Group
Nominations and Governance Committee
during 2020.
Committee evaluations
Details of the Board committee evaluations
carried out during 2019 can be found in the
committee reports.
Individual director and Chairman effectiveness
reviews
The Chairman met each director individually
to discuss their own performance and
continuing professional development and
establish whether each director continues to
contribute effectively to the company’s long-
term sustainable success. The Chairman also
shared peer feedback provided to the Chief
Governance Officer and Company Secretary
as part of the individual evaluation process.
Separately, the Senior Independent Director
sought feedback on the Chairman’s
performance from the non-executive directors,
executive directors and other key internal and
external stakeholders and discussed it with
the Chairman.
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 2019.
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 RBS 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 RBS Group. The
Committee makes recommendations to the
Board in respect of any consequential
amendments to RBS 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 2019
On 25 April 2019 it was announced that Ross
McEwan would step down as CEO and the
formal search for his successor commenced
immediately, led by the Chairman and the
Committee on behalf of the Board. Spencer
Stuart was engaged to support the
recruitment process for the new CEO and
conducted a global search for potential
external candidates as well as engaging fully
with internal candidates. This enabled the
internal candidates to be benchmarked
against the highest calibre candidates in the
market. The Committee held a number of
discussions on potential candidates,
assessing the credentials of each internal and
external candidate against the qualities and
capabilities set out in the role specification
agreed by the Committee. Following a formal,
rigorous and transparent process the
Committee recommended a final shortlist of
candidates to the Board for consideration.
Alison Rose was identified as the strongest
candidate on the basis of her extensive
banking experience and the leadership she
had already demonstrated during her time at
RBS, including as CEO, Commercial &
Private Banking and as Deputy Chief
Executive Officer of NatWest Holdings
Limited. Alison’s appointment to the Board as
CEO took effect on 1 November 2019.
Committee they may then be appointed for a
further 3 year term. Non-executive directors
may continue to serve beyond 6 years,
subject to a maximum tenure of nine years.
Spencer Stuart, Hay Korn Ferry and Sapphire
Partners have been engaged during the year
to support the Board’s executive search
activity. The firms are members of the
retained executive search panel of suppliers
(managed by RBS Executive Search).
Spencer Stuart and Hay Korn Ferry also
provide leadership advisory and senior
executive search and assessment services to
the Human Resources function within RBS.
The Committee has also continued to oversee
work aimed at further enhancing the RBS
Group’s subsidiary governance framework. As
part of this work, the Committee considered
the findings of a review of the framework and
intends to implement a number of
recommendations, including those aimed at
increasing the level of connectivity between
Group and subsidiary boards and committees.
Membership and meetings
Shortly before standing down from the Board,
Brendan Nelson stepped down from the
Committee with effect from 1 April 2019.
Patrick Flynn joined the Committee on 1 April
2019 meaning that throughout 2019 the
Committee comprised the Chairman of the
Board and four independent non-executive
directors. Graham Beale also observes
meetings of the Committee in his capacity as
Senior Independent Director of NWH Ltd and
member of the NWH Ltd Nominations
Committee.
The Committee holds a minimum of four
meetings per year and meets on an ad hoc
basis as required. In 2019, there were 7
meetings. Individual attendance by directors
at these meetings is shown in the table on
page 66.
Tenure of non-executive directors
As highlighted in the Board’s 2018
effectiveness review, the Committee
acknowledges the tenure of a number of
current Board directors and therefore made
succession planning a priority in 2019. Under
the Board Appointment Policy, non-executive
directors are appointed for an initial 3 year
term, subject to annual re-election at the
AGM. Following assessment by the
The tenure of non-executive directors as at 31
December 2019 is set out below.
0 – 3 years
3 – 6 years
6+ years
30%
40%
30%
100%
Performance evaluation
The review of the effectiveness of the Board
and its senior Committees was conducted
internally in 2019. 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 Group boards: RBSG
plc, NWH Ltd, NWB Plc, RBS plc and Ulster
Bank Limited. A copy of the Boardroom
Inclusion Policy is available on rbs.com>about
us.
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
is based on the principles of fairness, respect
and inclusion, that all nominations and
RBS – Annual Report and Accounts 2019
68
Report of the Group Nominations and Governance Committee
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 boards of RBSG plc and the NWH Sub
Group 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 44%.
Notwithstanding the largely common
membership between boards, RBS remains
committed to ensuring that the RBSG plc
Board meets the targets on a standalone
basis. Throughout 2019, significant progress
has been made towards delivering on this
commitment, including through the
appointment of Alison Rose as CEO on 1
November 2019 and Katie Murray as CFO on
1 January 2019. The RBSG plc Board is
delighted that these appointments have
contributed to a board composition currently
including 42% female representation, rising
from 25% at 31
December 2018. In measuring industry
progress against the targets, we are proud to
have been identified by the 2019 Hampton-
Alexander Review Update as one of the
year’s highest rising FTSE companies. The
RBSG plc Board also remains committed to
meeting the Parker Target by 2020/2021.
Diversity and inclusion progress, including
information about the appointment process,
will continue to be reported in the Group
Nominations and Governance Committee’s
report in the RBSG plc 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 page 35.
Howard Davies
Chairman of the Group Nominations and
Governance Committee
13 February 2020
RBS – Annual Report and Accounts 2019
69
Report of the Group Audit Committee
Letter from Patrick Flynn
Chairman of the Group Audit Committee
Dear Shareholder,
I am pleased to present my first report to you
as Chairman of the Group Audit Committee
(the GAC). This report outlines the key
responsibilities of the GAC and sets out some
of the issues it considered during 2019.
The primary purpose of the GAC is to make
sure we follow a robust process to ensure the
quarterly financial statements are suitable for
publication. The GAC also assists the RBSG
plc Board in carrying out its responsibilities
relating to accounting policies, internal control
and financial reporting functions. The GAC’s
responsibilities are set out in full in its terms of
reference which are reviewed annually by the
Committee and are available on rbs.com.
During 2019 the GAC dedicated substantial
time to the review of the RBS Group’s
financial statements, including the quarterly,
interim and full years results announcement,
annual report and Form 20-F for 2019. In
each case the financial statements were
supported by detailed reports on the
judgements applied in the preparation of the
financial statements, provision for expected
credit losses and legal developments on
litigation and investigations. The GAC also
received reports from both the internal
auditors on the internal control environment
and external auditors on internal control and
key accounting and judgemental matters.
Membership
Full biographical details of the GAC members
are set out on pages 62 and 63. The
members are all independent non-executive
directors and each sit on other Board
committees in addition to the GAC (as shown
on pages 62 and 63. This cross committee
membership helps facilitate effective
governance, ensures agendas are aligned
and avoids overlap of responsibilities.
Members of the 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 Patrick Flynn, GAC Chairman, Baroness
Noakes 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.
There have been a number of important
developments throughout 2019 which the
GAC has taken into account in performing its
duties. There was considerable economic
uncertainty throughout 2019, with Brexit being
one of the principal causes. During 2018, the
RBS Group recognised a provision of £100
million in connection with economic
uncertainty; this was kept under close review
by the GAC and was increased in 2019.
“the primary purpose of the GAC
is to make sure we follow a
robust process to ensure the
quarterly financial statements are
suitable for publication”
Following the introduction of the IFRS 9
accounting standard in 2018, during 2019 the
GAC received a number of updates on
various developments and refinements to
IFRS 9 processes.
2019 also saw the deadline for the submission
of Payment Protection Insurance (PPI) claims.
PPI has been an important area of focus for
the GAC for a number of years but the
unprecedented volume of claims in the run up
to the PPI deadline resulted in the GAC
reviewing the adequacy of provisioning and
recommending an incremental charge of £900
million in 2019.
Meetings and visits
The GAC held six scheduled meetings in
2019, four of which were held shortly prior to
submission of the quarterly financial
statements to the Board. During 2019 all
members attended the scheduled meetings.
Two ad hoc meetings were also convened in
2019, one to discuss a regulatory submission
and another to discuss PPI provisioning.
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 one visit to Finance.
Performance evaluations
The annual review of the effectiveness of the
Board and its senior Committees, including
the GAC, was conducted internally in 2019.
The GAC held a discussion session on its
performance structured around a number of
themes: operating rhythm; effectiveness;
focus and priorities; and culture and
dynamics.
Issues such as FX recycling, recoverability of
deferred tax assets, goodwill, fair value , the
valuation of financial instruments with higher
risk characteristics and investment in in
subsidiaries were other areas of review and
debate throughout the year.
As GAC Chairman I am responsible for
overseeing the performance of the internal
audit function and ensuring its independence.
I am pleased to confirm that this year’s
evaluation of the function found it to be
operating effectively with its independence
recognised as a key area of strength.
Upon assuming the role of GAC Chairman
this year, I also became RBS Group
whistleblowers’ champion. The GAC oversees
the framework and its operational
effectiveness and reports to the Board on this.
As whistleblowers’ champion I have specific
responsibility for overseeing the integrity,
independence and effectiveness of the firms
policies and procedures on whistleblowing. I
have been pleased to observe that the
framework is operating effectively in line with
our legislative and regulatory obligations and
that this has been validated by external
reviews during 2019.
Further information on all the key topics
considered by the Committee during the year
is provided on the following pages.
Patrick Flynn
Chairman of the Group Audit Committee
13 February 2020
The Committee considered that it continued to
operate effectively and identified some areas
for potential enhancement primarily relating to
timing of prior executive governance and
timescales for review of papers. The
outcomes of the evaluation have been
reported to the Board and the Committee will
track progress during 2020.
Evaluations of the External Auditor and
Internal Audit function are also conducted on
behalf of the GAC each year. During 2019 the
GAC received progress updates on the
actions arising from the previous year’s
evaluation and was satisfied that appropriate
actions had been taken.
The 2019 Internal and External Audit
evaluations were conducted internally on
behalf of the GAC. Feedback was sought from
key stakeholders across RBS, and in the case
of the Internal Audit evaluation, from the
External Auditors. The overall findings of both
evaluations were positive and the Internal and
External Auditors were both found to be
operating effectively. Some recommendations
for continuous improvement were identified
both for the Internal and External Auditors;
these are being progressed and overseen by
the GAC. Consequently the GAC has
recommended to the Board that the External
Auditors be proposed for re-appointment at
the next annual general meeting.
RBS – Annual Report and Accounts 2019
70
Report of the Group Audit Committee
Matter
Context of discussion How the committee addressed the matter
Accounting
judgements
Systems of
internal
control
The GAC considered
a number of
accounting
judgements and
reporting issues in
the preparation of
RBS Group’s
financial results
throughout 2019.
The GAC then
recommended the
quarterly, interim and
full year results
announcements, the
Annual Report and
Accounts, together
with supporting
documentation
(including Pillar 3
reports, financial
supplements and
investor
presentations) and
the Form 20-F to the
Board for approval.
The GAC is
particularly interested
in the systems of
internal control
relating to financial
management,
reporting and
accounting issues.
The GAC received a
number of reports
throughout the year
in this regard and
evaluated the
effectiveness of
RBS’s internal
control systems,
including any
significant failings or
weaknesses.
Provisions and disclosures – The GAC debated the level and appropriateness of provisions for
regulatory, litigation and conduct issues including in particular; PPI. The RBS Group received an
unprecedented volume of complaints shortly before the deadline resulting in the GAC
recommending a £900 million increase in provision 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. The GAC focused
on the methodology applied to provisions under IFRS 9. In particular the GAC considered the
impact of ongoing economic uncertainty and increased the RBS Group’s provision in this respect
by a further £55 million during 2019. 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 scrutinised judgements made by management in
relation to the carrying value of intangible assets.
Accounting Developments – The GAC considered the impact of various changes to accounting
standards during 2019, including in particular IFRS 16, in respect of leases, and amendments to
IAS 12, in respect of income taxes, both of which are reflected in this annual report. The GAC also
considered enhancements and clarifications to non-GAAP reconciliations.
Management’s assessment of the adequacy of internal controls over financial reporting – The GAC
noted that there were no Material Weaknesses for RBS Group at the year-end.
Viability statement and the going concern basis of accounting – GAC considered evidence of
RBSG plc’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 and recommended them to the Board. (Refer to the Report of the directors for further
information); and
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 Group 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 businesses, functions and material subsidiaries and management’s plans to
address areas of weakness.
Sarbanes-Oxley Act of 2002 – The GAC considered RBSG plc’s compliance with the requirements
of section 404 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.
Legal and Regulatory Reports – Quarterly reports on the material current and emerging legal and
regulatory investigations, risks and developments affecting RBS enabled the GAC to assess the
related disclosures in RBSG plc’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 monitored the effectiveness of the bank’s whistleblowing procedures
and received updates on the volume of whistleblowing reports, any trends and staff awareness of
the processes and reported to the Board on this. The GAC Chairman acts as RBS Group
Whistleblowing Champion, in line with PRA and FCA regulations and meets regularly with RBS’s
whistleblowing team.
Taxation – The GAC received an update on RBS’s tax position and discussed matters including
tax disclosures and provisions, tax risks, RBS’s tax compliance status, ongoing tax projects and
emerging tax issues.
Annual Risk and Control Report – The GAC also reviewed RBSG plc’s disclosure on internal
control matters in conjunction with the related guidance from the Financial Reporting Council.
Non-Financial Information – The GAC received a number of updates on RBS’s non-financial
information reporting framework, which has been enhanced in order to meet growing investor
interest in non-financial disclosures.
Capital – The GAC reviewed RBS’s controls over the calculation and reporting of Risk Weighted
Assets and related regulatory developments.
RBS – Annual Report and Accounts 2019
71
Report of the Group Audit Committee
Matter
Context of discussion How the committee addressed the matter
Internal audit
The GAC has
responsibility for
overseeing the
Internal Audit
function. In addition
to considering
quarterly opinions
from Internal Audit,
the GAC is required
to monitor the
function’s
effectiveness and
confirm its
independence. The
GAC was fully
satisfied in this
regard.
External audit
Ernst & Young LLP
(EY) has been RBS’s
external auditor since
2016 following a
tender process
carried out in 2014.
The GAC has
responsibility for
monitoring EY’s
independence and
objectivity, the
effectiveness of the
audit process and for
reviewing the bank’s
financial relationship
with the External
Auditor and fixing
remuneration.
Opinions – Internal Audit provided the GAC with quarterly opinion reports setting out its view of the
risk and control environment and risk and control awareness of each business and function, and
the risks which could impact the bank achieving its targets. Internal Audit also outlined material and
emerging concerns identified through their audit work. During 2019 Financial Crime and Payments
Processing were noted by Internal Audit as requiring continued focus by management and these
were therefore also key areas of scrutiny by the GAC. In addition, Internal Audit reviewed RBSG
plc’s Pillar 3 reporting and whistleblowing process, which were both found to be effective.
Annual Plan and Budget – GAC considered and approved Internal Audit’s 2019 plan and
budget at the end of 2018 and progress updates and changes to the plan were provided to the
GAC periodically throughout 2019. At the end of 2019 the GAC considered and approved
Internal Audit’s plan and budget for 2020. The Committee was satisfied that Internal Audit had
adequate budget and resources to deliver its plan.
Internal Audit Charter and Independence – The GAC reviewed and approved the Internal Audit
Charter and noted the Chief Audit Executive’s independence statement.
Visits – Together with the BRC, GAC participated in two visits to Internal Audit during 2019. A
variety of issues impacting the Internal Audit function were discussed, including: Quality
Assurance, staff engagement, strategic priorities and future readiness.
Performance – The Chief Audit Executive continued to report to the GAC Chairman, with a
secondary reporting line to the CEO for administrative purposes. The GAC assessed the
annual performance (including risk performance) of the function and Chief Audit Executive.
The Chief Audit Executive’s remuneration was also determined by the GAC Chairman with
input from the Chief Executive.
Evaluation – The 2019 evaluation of the Internal Audit function was carried out internally. Key
stakeholders across the bank, including the GAC members, attendees and the external
auditors provided feedback. The Chief Audit Executive discussed the findings of the evaluation
both with the GAC Chairman and the GAC. The overall findings were very positive and the
Internal Audit function was found to be operating effectively. Some areas for development were
identified in respect of succession planning, communications with stakeholders, future strategy
and articulation of required improvements to the control environment. These are being
progressed by Internal Audit management and overseen by the GAC.
Audit Partner – Jonathan Bourne has been EY’s lead audit partner for RBS since 2016, Mr Bourne
attended each meeting of the GAC in 2019. Mr Bourne will rotate off the RBS Group audit after the
2020 financial results are published. During 2019 the GAC discussed lead audit partner rotation,
reviewed potential successors and agreed on the lead audit partner for 2021.
External Audit Reports – EY reported to the GAC each quarter on their audit work and related
conclusions, including the appropriateness of judgements made by management and their
compliance with international financial reporting standards. The GAC also reviewed EY’s annual
management letter.
Audit Plan and fees – The GAC considered updates on EY’s 2019 plan and approved the 2019
audit fees including the fee for the 2019 interim results. The GAC was authorised by shareholders
at the last Annual General Meeting to fix the remuneration of the external auditors.
Annual Evaluation – An internal evaluation was carried out at the GAC’s request to assess the
independence and objectivity of the External Auditor and the effectiveness of the audit process
during 2019. The GAC members, attendees, business and functional Finance Directors and key
members of the Finance team were consulted as part of the evaluation. The evaluation assessed
the external auditor’s mindset and culture, skills, character and knowledge, quality control and
judgement. The evaluation found that the External Auditor was operating effectively and with
objectivity. A number of recommendations for continuous improvement were identified, including in
relation to communication, reporting and legal entity focus which are being implemented by the
External Auditor and overseen by the GAC. Following the evaluation the GAC recommended that
the Board seek the reappointment of EY as external auditor at the next annual general meeting.
FCA Client Asset Rule Opinions – During 2019 the external auditor presented the results of its
assurance procedures on compliance with the FCA’s Client Asset Rules for RBS’ regulated legal
entities for the year ended 31 December 2018. The GAC also considered the CASS Audit plan for
2019, the findings of which will be reported to the GAC once the audit is complete.
External Auditor Report to the PRA – The GAC considered EY’s written auditor report to the PRA
under supervisory statement SS1/16 for the year ended 2018. The GAC also considered the
scope of the 2019 written auditor report which the GAC will receive in 2020.
FRC AQR Review – During 2019 the FRC undertook a review of EY’s audit of RBS’s
financial statements for the year ended 31 December 2018. The findings and the actions EY will
take in response to those findings were considered by the GAC; the GAC was satisfied that none
of the findings were significant and noted that the FRC had accepted EY’s response to the review.
RBS – Annual Report and Accounts 2019
72
Report of the Group Audit Committee
Matter
Context of discussion How the committee addressed the matter
Audit & non-
audit services
RBS has a policy in
relation to the
engagement of the
external auditors to
perform audit and
non-audit services
(the policy). The GAC
reviews the policy
annually to ensure it
remains fit for
purpose. All audit and
non-audit services
are pre-approved by,
or on behalf of, the
GAC to safeguard the
external auditor’s
independence and
objectivity.
The GAC reviews and approves RBS’s audit and non-audit services policy at least annually.
During 2019 the GAC approved amendments to the policy in line with the changes set out in the
Financial Reporting Council’s revised Ethical Standard. Under the policy, audit related services
and permitted non-audit service engagements may be approved by the CFO up to certain financial
thresholds. Engagements in excess of these limits require the approval of the GAC Chairman.
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. The policy permits the
external auditor to undertake engagements which are required by law or regulation or which relate
to the provision of comfort letters in respect of debt issuances by RBS Group, provided prior
approvals are in place in accordance with the policy. The policy also allows RBS to receive
services from EY which result from a customer banking relationship, provided prior approvals are
in place in accordance with the policy. All such approvals are reported to the GAC biannually.
During 2019, approval was granted under the policy for the external auditors to undertake one
significant engagement which related to the provision of a report supporting a solvency statement
by the directors of Ulster Bank Ireland DAC in connection with a share capital reduction. The GAC
was satisfied that the engagement did not impact the external auditor’s independence.
Further details of the non-audit services policy can be found on rbs.com. Information on fees paid
in respect of audit and non-audit services carried out by the External Auditor can be found in Note
6 to the consolidated accounts.
RBS – Annual Report and Accounts 2019
73
Report of the Group Board Risk Committee
Letter from Baroness Noakes
Chairman of the Group Board Risk
Committee
Dear Shareholder
The Group Board Risk Committee (the
Committee or BRC) has an important role in
overseeing the management of risk, and this
report describes how the Committee fulfilled
this responsibility during 2019. More detail on
the remit of the Committee can also be found
in its terms of reference which are reviewed
annually and available on RBS’s website:
rbs.com.
Throughout the year BRC monitored the
uncertain economic external outlook and
RBS’s operational readiness for a ‘no-deal’
Brexit. The Committee has considered the
impacts of revenue and cost pressures and
potential impacts upon affected customers.
RBS continues to focus on Innovation and
technology and BRC looks at the associated
risks. The Committee receives regular reports
on information and cyber security, and in
2019, undertook an in-depth review of the
external threat landscape. Other matters
covered were: operational resilience more
broadly, with a focus on the continuity of
critical services; the risks associated with the
increased use of Artificial Intelligence; and the
risk profile of transitioning services to the
Cloud.
Ensuring data is appropriately managed and
of the required quality is a key enabler of
RBS’s digitisation and automation strategy.
BRC received updates on data management,
GDPR implementation and compliance with
regulatory expectations and data standards.
In H2, the Committee supported the adoption
of a set of principles to manage the emergent
risk of information ethics, which will support
consistent and robust standards of data use.
“RBS continues to focus on
innovation and technology
and BRC looks at the
associated risks”
Further information on all the key topics
considered by the Committee during the year
is provided on the following pages. Part of the
BRC’s role is to review reports and regulatory
submissions on behalf of the Board and
recommend them for approval. Where this is
the case, the report on the following pages is
annotated with an asterix (*).
2019 was another busy year for the
Committee. While some legacy issues, such
as financial crime, continue to absorb
Committee time, there is an increasing shift
towards more strategic issues. I anticipate the
Committee will build on this in 2020 in
particular as work on climate change risk
accelerates.
Baroness Noakes
Chairman of the Group Board Risk Committee
13 February 2020
Capital and liquidity are core issues for any
bank and BRC reviewed them regularly,
including in the context of the resumption of
dividends. BRC has also continued to play a
central role in the oversight of RBS’s internal
and external stress testing exercises including
enhancements to RBS’s model risk
management. The 2019 Bank of England
Annual Cyclical Scenario (ACS) stress test
results were published in Q4, and RBS
remained well above the expected hurdle rate.
Membership
BRC comprises four independent non-
executive directors. The details of the
members and their skills and experience are
set out on pages 62 and 63.
Meetings and visits
All members attended the nine scheduled
meetings held in 2019. In addition, six ad hoc
meetings were arranged generally to consider
regulatory submissions.
Performance Evaluation
The annual review of the effectiveness of the
Board and its senior Committees, including
the BRC, was conducted internally in 2019.
As in previous years, during 2019, members
of the Committee undertook a programme of
visits to the Risk, Internal Audit and Finance
functions, in conjunction with members of the
GAC.
The Committee also held in-depth meetings
on risk reporting and a horizon scanning
session with Group and NatWest Holdings
Chief Risk Officers which supplemented
management’s own routine emerging risks
process.
The Committee held a dedicated session to
discuss its performance. The session was
structured around a number of themes:
operating rhythm; effectiveness; focus and
priorities; and culture and dynamics.
The Committee considered that it continued to
operate effectively and identified some areas
for potential enhancement. This included the
structure/focus, length and frequency of
meetings.
The Committee will track progress during
2020.
Patrick Flynn is chairman of the GAC of which
Baroness Noakes and Morten Friis are also
members. Robert Gillespie is chairman of the
Group Performance and Remuneration
Committee (Remco). This common
membership across committees helps to
ensure effective governance across the
committees.
Regular attendees at meetings include: the
Group Chairman, CEO, CFO, Group Chief
Risk Officer, NWH Ltd Chief Risk Officer,
Group Chief Legal Officer and General
Counsel, Group Chief Audit Executive, and
the External Auditor. External advice is sought
by the Committee where appropriate. Two
non-executive directors of NWH Ltd attended
meetings as observers in their capacity as
members of the NWH sub Group BRC.
Meetings of RBSG plc and NWH sub Group
BRCs share much of a common agenda and
are generally run in parallel.
RBS – Annual Report and Accounts 2019
74
Report of the Group Board Risk Committee
Key matters considered by the Committee in 2019
Matter
Risk profile
and reporting
Recovery and
Resolution
Stress testing
Risk
Frameworks
Context of
discussion
Time was spent at
every BRC meeting
reviewing risk
reports, assessing
the most material
risk exposures
relative to strategy
and risk appetite
and scrutinising
management’s
actions to monitor
and control such
exposures.
BRC monitors and
challenges the
development of
plans which would
allow RBS to be
dealt with effectively
in the event of
financial failure.
As in 2018, BRC
devoted significant
time to stress
testing, challenging
and scrutinising the
outputs. This
included the Bank of
England stress test
and internal stress
tests.
BRC has played a
key role in the
review of the Risk
Management and
Risk Appetite
Frameworks, with a
fundamental review
of both constructs
taking place in 2019.
Control
environment
BRC continued its
oversight of the
programmes which
could impact RBS’s
control environment.
How the Committee addressed the matter
Risk Management Reports – Top and emerging risks were considered via quarterly Risk
Management Reports, supplemented by shorter reports at intervening meetings. Key areas of focus
included Brexit, the UK and global economic outlook, market conditions and change risk. Reports on
legal and regulatory developments and significant litigation risks were also frequently considered.
Updates from Executive and Subsidiary Risk Committees – Regular updates were received from the
Group Executive Risk Committee, as BRC relies on the effective executive oversight of risk. In
addition, quarterly reports were received from the chairmen of the risk committees of the segments
and material regulated subsidiaries.
Emerging Risks – Emerging risks likely to impact RBS over the next decade were considered at each
meeting and the Committee held a dedicated horizon scanning session to consider strategic risks.
Key topics included technological development, changing demographics, climate and resources, and
geopolitical and economic shifts.
Risk Function – Oversight of the Risk function has been an area of focus, with the Committee
receiving updates on work being undertaken to optimise the operating model and enhance
effectiveness.
Recovery and Resolution – BRC continued to monitor progress made by the Resolution Programme
to deliver resolution capabilities in line with agreed plans, including RBS’s approach to the
resolvability self-assessment. The Committee also reviewed the 2019 Recovery plan, noting the
enhancements made since the previous year *.
ICAAPs, ILAAPs and Budget Stress Tests – BRC considered the results of the 2018 ICAAPs and
ILAAPs and the Reverse Stress tests for RBS Group. An important part of the annual budgetary
cycle is an analysis of the resilience of the budget under stress and BRC looks at this in detail on
behalf of the Board. The Committee also kept under review improvements in the stress testing
processes and the related work to strengthen and validate models and improve supporting
governance.
Bank of England Stress Tests – The Committee provided challenge throughout the process of
preparing and submitting both the ACS and the Biennial Exploratory Scenario stress tests with
emphasis on the key assumptions and judgements selected by management*.
Risk Management Framework – BRC has reviewed and contributed to the development of the
Enterprise Wide Risk Management Framework, which aims to provide consistent, efficient and
effective risk management across RBS, including clarity of the three lines of defence model and Risk
function mandate. It will monitor the framework as it is implemented and embedded over the
following 12-18 months.
Risk Appetite Framework: The methodology for setting, governing and embedding risk appetite
across RBS was reviewed during 2019, with the objective of simplifying processes and further
embedding risk appetite within strategic planning. The Committee reviewed the risk appetite
framework and associated governance together with revised risk appetite statements and measures
for key risks*. BRC reviewed escalated breaches of risk appetite and the action taken by
management in response*.
Transformation – Progress on the delivery of RBS’s transformation and change programme and its
position relative to risk appetite was regularly considered by the Committee, with a particular focus
on GDPR compliance, payments and open banking.
LIBOR Transition – BRC received reports on RBS’s plans and preparedness for LIBOR transition to
new risk free rates. Consideration was given to steps being taken to mitigate key risks including
potential conduct issues, litigation risk and other risks associated with legacy transition.
Control Environment Certification – As in 2018, the Committee was provided with bi-annual reports
on the control environment ratings of the segments and functions. 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 – BRC received a high level summary of the outputs of the H1 2019 risk culture
assessment and requested management independently validated progress through a series of
structured interviews with Board, Group Exco and NWH Exco members. The Committee will review
outputs of this exercise in early 2020.
RBS – Annual Report and Accounts 2019
75
Report of the Group Board Risk Committee
Context of discussion How the Committee addressed the matter
Matter
Bank-wide
risks
Regular monitoring of
key risks is a pivotal
part of BRC’s role
both via routine risk
reporting and via
regular focused
reports.
Capital and Liquidity – These remain important areas for risk management and in addition to
reviewing the RBSG plc and NWH Ltd ICAAPS* and ILAAPs*, BRC received regular reports on
RBS’s approach to capital, liquidity and funding management and risk appetite, including double
leverage and capital buffer requirements.
Operational risk, resilience and cyber security - In addition to considering RBS’s overall approach
to resilience, BRC received regular updates in relation to the external threat landscape, potential
vulnerabilities and the control environment. BRC also received specific updates on the transition of
services to the Cloud and the use of Artificial Intelligence given the opportunities and risks
associated with both technologies and the need for an appropriate control framework.
Credit and Market risk – In addition to routine reporting on credit and market risk, updates were
received in relation to specific portfolios including large corporate exposures, commercial retail
estate, ESME loans, and NWM Plc’s prudential programme designed to deliver compliance with
capital reforms. Management of traded and non-traded market risk, the process for approval of
large transactions and the most material decisions of the Executive Credit Group, were also
considered.
Model risk management – Given the importance of models to stress testing and RBS’s digitisation
strategy, BRC dedicated time to reviewing progress in strengthening the model risk framework,
with a focus on compliance with regulatory guidelines, implementing a new model risk inventory
system and adequacy of resources.
Conduct and compliance risk – BRC conducted the annual review of the RBS Compliance and
Conduct Risk Framework and received reports on the overall conduct and compliance profile and
on individual conduct matters, including mystery shopping exercises. In the light of risk metrics
BRC challenged management to review whether there were any underlying systemic themes
which needed to be addressed.
Financial crime – The annual Group Money Laundering Reporting Officer’s Report* was reviewed
by the Committee as well as a specific report on broader financial crime matters. BRC also
received regular progress updates on the programme to improve and remediate customer due
diligence and build sustainable processes and controls for the future.
Data Management and GDPR – BRC received reports on RBS’s data management risk profile and
oversaw management’s plans to drive consistency, completeness and to simplify data
management and reduce inherent risk. The Committee spent time on data ethics which included
the introduction of information principles to support colleague decision making in relation to data.
The Committee also received bi-annual updates on the delivery of full compliance with GDPR.
Financial Risk from Climate Change – The Committee reviewed RBS’s assessment of how it
identifies and manages this risk along with the approach to strengthen the management of the
financial risks from climate change *.
Accountability – The Committee regularly considered developments in significant material events
and investigations. This included resultant accountability recommendations, with the Committee
advising RemCo on the risk aspects of these recommendations.
Remuneration – The risk and control objectives of members and attendees of Group ExCo and
NWH Exco were reviewed, with additional focus on underlying objectives for the Group Chief Risk
Officer. In addition, the Committee reviewed the Long-Term Incentive performance conditions, pre-
grant and pre-vest assessments for ExCo, ensuring fair reflection of risk and conduct management
performance in vesting outcomes. More generally, the Committee made recommendations to
RemCo on the RBS bonus calculation, ensuring appropriate consideration of risk and conduct
management performance. Proposals for the 2019 Executive Director Remuneration Policy
referred to in the Directors’ Remuneration Report were also considered by the Committee.
Further detail on how risk is taken into account in remuneration decisions can be found in the
Report of RemCo from page 79.
Accountability
and
remuneration
BRC continued to
provide oversight
over the risk
dimension of
performance and
remuneration
arrangements,
working closely with
the RemCo.
RBS – Annual Report and Accounts 2019
76
Report of the Group Sustainable Banking Committee
Letter from Mike Rogers
Chairman of the Group Sustainable
Banking Committee
“As a Committee dedicated to
sustainable banking, we
appreciate spending quality time
discussing matters such as
financial capability, society and
environment, and culture.”
Dear Shareholder,
I am pleased to present my second report as
Chairman of the Group Sustainable Banking
Committee (the Committee or SBC).
Renewed focus
The Committee spent time last year
considering its remit. This year we have
delivered a refreshed Committee model
structured under four pillars of sustainable
banking: Customers and Brands; People and
Culture; the Competitive Environment; and
Society and Environment. These have
informed our meeting structure and have
proved helpful in prioritising matters which the
Committee felt oversight and challenge, on
behalf of the RBSG plc Board, was most
valuable.
The Committee’s stakeholder engagement
model was also refreshed. Integrated
engagement sessions – more aligned to our
pillars of sustainable banking - aim to bring
internal and external voices and challenging
perspectives into the boardroom. This also
reflects the fact that the Board as a whole is
spending more time on stakeholder
engagement, which is in itself very pleasing.
We will continue to keep SBC’s focus and
responsibilities under review, particularly in
light of our renewed purpose.
Transition in thinking
RBS Group has for many years championed
sustainable banking and stakeholder
engagement.
With shareholder, regulatory and societal
expectations intensifying, embedding
sustainable banking principles and targets
within RBS Group’s broader strategic agenda
will be critical. Our renewed Committee focus
in 2019 - going beyond traditional
environmental, social and governance matters
– sought to ensure that the SBC continues to
play a forward-looking role.
There is still much to do as RBS Group
transitions to becoming purpose-led. However
as a Committee we have been reassured by
the energy shown by colleagues in driving the
sustainable banking agenda.
2019 Highlights
I am pleased to report that good progress was
made in 2019. As a Committee dedicated to
sustainable banking, we appreciate spending
quality time discussing matters such as
financial capability, society and environment,
and culture. Below are the key discussion
points and outcomes from the year:
Customer & brands
During our April 2019 meeting we focused
on how the bank creates value for
customers and how we protect and
develop our brands.
Key topics debated included sustainability
of profit pools, customer service and
fairness, reputation and brand, digital
strategy and financial capability. Outcomes
included challenging management on
pursuing marketing leading segments and
gaining better insight on the impact of cost
constraints on service innovation.
Our December 2019 meeting was a
spotlight on vulnerable customers,
focusing on our wider role in society from a
financial inclusion perspective and the
evolving compliance environment. We
heard directly from SafeLives, a charity
with whom the bank has partnered to
support the victims of financial abuse. The
session challenged us to seek clarity on
RBS Group’s financial inclusion ambition
and on better understanding the
underlying policy frameworks which
support front-line staff.
Society & environment
The June 2019 meeting centred on how
we manage wider social and
environmental issues Topics included
risks, opportunities and changing
expectations of customers, investors, and
regulators on how we approach issues like
financial health, climate change and social
inequality.
Areas of debate and challenge included
our sustainable customer ambition and
communication strategy. We agreed that
communications need to better reflect the
positive progress made.
During a later session we had the pleasure
of receiving a presentation from one of our
young bankers on a green initiative to
encourage customers to spend
sustainably. As a result, the presenter was
asked to join the internal climate
programme to progress his idea.
Competitive Environment
In September 2019 we dedicated the
Committee meeting to understanding how
the businesses identify and respond to
current and emerging competitive threats.
Against notable disruption of the sector,
the Committee challenged management
on their understanding of new entrants’
business models, changing customer
expectations and ‘non-bank’ competitors.
We debated the strategic health of our
business, took inspiration from the external
environment and discussed the impact of
technology on customers.
People & Culture
In October 2019 we debated how we build
an engaged workforce and healthy culture
for the future. We had the benefit of an
external engagement speaker from
Cognizant who challenged us on
innovative culture.
RBS – Annual Report and Accounts 2019
77
Monitoring reports considered included
OurView employee survey results, culture
measures, inclusion and wellbeing data.
We also discussed the latest Banking
Standards Board survey.
The Committee, on behalf of the Board,
considered workforce policies and
practices to ensure they are consistent
with the RBS Group’s values and support
long-term sustainable success. Outcomes
included challenging management on
future cultural ambition and agreeing to
engagement exemplars and external
insights being added to future culture
monitoring reports.
Membership, Meetings and Escalation
Membership, meetings and escalation
mechanisms have not changed since last
year’s report. In many cases the Committee
and the Sustainable Banking Committee of
NatWest Holdings Limited met concurrently.
Authority is delegated to Group SBC by
RBSG plc Board and a regular report of the
Committee’s activities is provided. The terms
of reference are available on rbs.com and
these are reviewed annually and approved by
the RBSG plc Board.
Group SBC has four non-executive directors
as members and three non-executive
directors from our ring-fenced bank board
observing, along with management attendees.
More details of membership and attendance
at meetings can be found on page 66 of the
Governance Report.
Performance evaluation
The annual review of the effectiveness of the
RBSG plc Board and its senior Committees,
was conducted internally in 2019. Overall the
feedback on the Committee was positive.
Areas of focus for 2020 will be overseeing
purposeful progress across RBS Group and
ensuing that the wider RBSG plc Board is
aware of the important topics debated by the
Committee.
Conclusion
Through the SBC, my fellow directors and I
have had the opportunity to help shape RBS
Group’s future sustainable banking strategy
and test management’s response to these
important issues. I want to take the
opportunity to thank the Committee members,
attendees and presenters for their continued
contribution and support in 2019.
2020 presents challenges and opportunities
for the sustainable banking agenda as it
enters a new leadership phase and sets its
strategic and purposeful objectives. I am
looking forward to steering future SBC
discussions and to reporting on progress next
year.
Mike Rogers
Chairman of the Group Sustainable Banking
Committee
13 February 2020
Report of the Technology and Innovation Committee
Letter from Alison Davis
Chairman of the Technology and
Innovation Committee
“Yesterday’s innovation is
today’s norm – we must
continue to challenge what
we do and how we do it to
improve tomorrow’s
customer expectations”
Dear Shareholder,
I am delighted to present the second report of
the Technology and Innovation Committee
(the Committee or TIC).
Role and responsibilities
TIC supports the RBSG plc Board in
overseeing and monitoring RBS’s strategic
direction in relation to technology and
innovation. Technology and innovation
continues to transform banking and the
Committee was 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 RBSG plc
Board and a regular report of the Committee’s
activities is provided to the Board. The terms
of reference are available on rbs.com. These
are reviewed annually and approved by the
RBSG plc Board.
Membership and meetings
The committee comprises four Non-Executive
Directors including me as chair and NED
membership has remained unchanged this
year.
Management support for the Committee also
continued with the CEO, CFO, Group Chief
Risk Officer and Chief Administrative Officer,
CEO Bó, Director of Innovation and Director
of Strategy and Corporate Development all
standing attendees.
the technology stack, the transformation of
important customer journeys, the expanding
use of artificial intelligence and new digital
sales capabilities.
We have prioritised areas where we are
making the most progress to understand what
is working and lessons learned - for example
the transformation of the customer mortgage
acquisition and renewal journey. By
introducing paperless mortgages for direct
customer and brokers, and Introducing Marge,
a mortgage digital assistant to assist
mortgage call centre agents by retrieving and
providing accurate information quickly, the
time taken to issue a mortgage offer to a
customer and confirm approval has been
significantly reduced.
.
Beyond the core – New technologies are
enabling new paradigms and business models
in financial services, and the committee
continues to spend time with management
looking at priorities for investing in and scaling
up new business models that have the
potential to meet our customers’ needs in new
ways. Examples this year included:
Bó, our digital bank, designed to help
people ‘Do Money Better’. Bó was
launched to the market in November 2019;
Tyl by NatWest, our innovative new
approach to merchant acquiring, replacing
Worldpay referrals. Launched in May
2019, customers can now use its market
leading capability; and
Mettle, a digital banking platform,
launched in November 2019 following a
successful pilot, giving small businesses a
‘new’ way to manage their finances by
combining a current account with
invoicing, payment chasing and
bookkeeping capabilities.
We also looked at innovative financial
services business getting traction and
reaching scale in other parts of the world that
might be valuable to UK customers.
The Committee held five meetings during
2019, held listening sessions with external
speakers and undertook a number of deep
dives. Details of meeting attendance can be
found at page 66 of the Governance Report.
Innovation strategy, culture and capability
To ensure a successful and sustainable
position in financial services in the future, the
bank will need to continue to evolve its
innovation strategy, culture, and capabilities.
Principal activity during 2019
The TIC has remained focused on three key
themes:
Digitising the core – A large part of the
Committee’s focus has been on overseeing
and challenging the bank’s progress in
digitising its existing core banking businesses
and leveraging new technologies such as
cloud computing, machine learning and
process automation, and mobile delivery to
improve the experience for our customers and
to modernise the way we deliver banking.
During the year the TIC has reviewed
innovation governance and how the various
innovation activities connect to the RBS
Group’s broader strategy. We have looked at
innovation spend and budgets to challenge
whether they are aligned to priorities. We
have also spent time on the emerging skills
and capabilities and ways of working that will
be critical to success in the future such as
greater agility, more collaboration, working
with external partners and ecosystems,
continuous learning, data governance and
intelligence, and discussed how we can lead
on these fronts.
As part of this theme, the Committee has
spent time on the ongoing modernisation of
External Insights
TIC has monitored developments through
engagement with third parties with whom we
partner. We obtained external views of how
RBS approached innovation and gained a
better understanding of how RBS leverages
its internal scouting network to obtain a timely
and informed view of threats and
opportunities. We met with the scouting team
to better understand how it translates
challenges and opportunities from our
franchises into innovative solutions, through
engagement with their broad network of
contacts from disruptive start-ups to well-
known technology companies.
The Committee additionally held a joint
meeting with management’s Technology
Advisory Board (TAB). Discussions centred
on areas of technology and innovation where
TAB members saw future customer
opportunities that RBS might explore further
including platform banking, identity and
privacy management.
Obtaining an external view of industry and
Fintech development remains a critical role of
the Committee, particularly given the
continued pace of change in the sector. This
ensures the bank is sighted on both
opportunities and emerging threats from
continued market disruption.
Performance evaluation
The Committee held a dedicated session to
discuss its performance. The session was
structured around a number of themes:
operating rhythm; effectiveness; focus and
priorities. The Committee considered that it
continued to operate effectively and identified
topics to be considered in the coming year
and the importance of increasing the level of
external insight gained.
The outcomes of the evaluation have been
reported to the RBSG plc Board and the
Committee will track progress during 2020.
Conclusion
I am delighted to Chair this Committee as TIC
continues to support the Board in an area
critical to the bank’s future success.
Together with my fellow directors, we will
retain our focus on monitoring the future
technology and innovation landscape and its
impact on RBS. The Committee will continue
to shape opportunities arising from
management’s response to both threats and
opportunities.
I want to take the opportunity to thank the
Committee members and attendees for their
contribution, enthusiasm and support in 2019.
Alison Davis
Chairman of the Technology & Innovation
Committee
13 February 2020
RBS – Annual Report and Accounts 2019
78
Directors’ Remuneration Report
Summary of policy and changes
Directors’ Remuneration Policy
Annual Report on Remuneration
Other Remuneration Disclosures
Page
79
82
90
102
Letter from Robert Gillespie
Chairman of the Group Performance and
Remuneration Committee
“I believe the existing remuneration policy
has served RBS well. Only a small number
of changes are proposed to align with the
latest investor guidance and market
practice.”
Dear Shareholder,
This is my third report as Chairman of the
Group Performance and Remuneration
Committee (the Committee). It has been a
busy year with a number of specific issues to
address including remuneration for the former
and new CEO and the remuneration policy for
executive directors ahead of its renewal at the
2020 AGM. I met with many of our major
shareholders and other stakeholders as part
of that process and would like to place on
record my sincere thanks for their willingness
to engage and the input provided.
Executive director pay policy
The Committee believes the current policy is
working well and is helping RBS achieve its
overall aim of building a simple, safe and
more customer focused bank. It continues in
large part to receive positive feedback from
shareholders, executive directors and our
wider workforce. In particular, it is
incentivising executive management, in a
manner that is easily understood, to act in
accordance with our aims. It also
demonstrates to the wider workforce that
across RBS Group we are following a
restrained but fair pay position within a culture
of prudent risk-taking.
The policy aims to balance lower maximum
long-term incentive (LTI) awards with more
predictable outcomes. Performance is
assessed on factors which, though
demanding, executive directors would
reasonably be expected to achieve,
encouraging safe and secure growth within
risk appetite.
Variable pay is delivered entirely in shares
with no annual bonus and the CEO’s
executive management team receive a similar
pay construct. The main performance test
takes place before granting the LTI award with
a further assessment prior to vesting to
ensure that the performance has been
sustainable. There are extensive deferral
requirements and additional retention periods
which create strong long-term alignment with
the interests of shareholders.
I recognise that the unusual nature of the
policy means it was not supported by all of the
proxy agencies in 2017. However it received a
very high level of support from shareholders
at the 2017 AGM, with over 96% of votes in
favour, and has continued to receive strong
support in subsequent years with over 99% of
votes in favour of the implementation report.
The Committee is therefore proposing minimal
changes to the policy.
In compliance with the latest UK Corporate
Governance Code (the Code) and investor
guidance, pension rates for executive
directors have been aligned with the wider
workforce at 10% of base salary and a post-
employment shareholding requirement will
apply for two years after leaving.
With RBS resuming dividends in 2018, the
Committee has considered the potential
impact on LTI awards. In line with the practice
of other major UK banks, the Committee is
proposing to have flexibility in future to grant
LTI awards using a share price which reflects
that no dividends or dividend equivalents are
paid on awards during the vesting period.
Subject to shareholders agreeing the policy,
the earliest date this methodology would be
applied would be for LTI awards granted in
2021. No other changes are proposed to
variable or fixed pay levels.
Summary of changes
Pension rate at 10% of base salary.
Post-employment shareholding
requirement for two years.
Ability to adjust LTI awards for the absence
of the right to receive dividends.
The Committee has listened to feedback from
some shareholders asking for more clarity on
how LTI awards are determined. While not a
change to policy as such, enhancements have
been made to the disclosures in this report to
provide further rationale for the factors the
Committee has taken into account when
determining LTI awards.
Executive director changes during 2019
Ross McEwan
Mr McEwan stepped down as CEO on 31
October 2019 and left RBS on 30 November
2019. No payment was made in lieu of notice.
The Board agreed that Mr McEwan qualified
for good leaver retirement, in line with the
policy agreed by shareholders. Mr McEwan’s
new role with National Australia Bank (NAB)
was not considered to compete directly and
materially with RBS given NAB’s very limited
presence in the UK. Mr McEwan’s good
leaver status will be re-evaluated prior to each
vesting date.
The 2017 LTI award held by Mr McEwan was
granted under the previous policy and was
pro-rated to his final date of employment.
Outstanding LTI awards granted in 2018 and
2019 will continue to vest on their scheduled
vesting dates, subject to the assessment of
performance and, in line with the policy, pro-
rating does not apply to these awards after
grant. Mr McEwan will also receive a further
LTI award in 2020, based on performance
during 2019 and pro-rated for time served
during the year prior to grant. Further details
are set out on page 93.
Alison Rose
Ms Rose has worked at RBS for over 27
years and was appointed CEO on 1
November 2019. Ms Rose brings extensive
experience and a track record of success,
having previously been Deputy CEO of
NatWest Holdings and CEO of the
Commercial & Private Banking business.
RBS – Annual Report and Accounts 2019
79
Remuneration arrangements were set within
the terms of the existing policy with a base
salary of £1,100,000 per annum, pension at
10% of base salary in line with the wider RBS
workforce and a fixed share allowance (FSA)
at 100% of base salary.
The salary for Ms Rose represented a 10%
increase on Mr McEwan’s salary which had
been unchanged since his appointment as
CEO in 2013, and was significantly lower than
his predecessor. If Mr McEwan had received
a salary increase in line with the wider
workforce while in role, his salary would have
been around 18% higher (£1.18m), by the end
of 2018.
In moderating the level of salary increase for
Ms Rose to below that of the wider workforce
since 2013, the Committee recognised that
salary for an internal promotion would
normally be below that of the incumbent. Any
further increases to Ms Rose’s salary will be
reviewed annually subject to satisfactory
performance and development in role.
The maximum LTI opportunity remains at
175% of base salary only (as opposed to fixed
pay), with a shareholding requirement of
400% of base salary. Ms Rose's remuneration
continues to represent a restrained pay
position in terms of comparable roles at peer
companies who also operate a bonus
arrangement and typically allow variable pay
up to a maximum of 200% of total fixed pay
(i.e. including FSA and pension).
£000s
4,500
4,261
CEO
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
1,925
1,100
136
1,100
3,876
1,540
1,100
136
1,100
Pension: 110
Benefits: 26
Maximum
Salary Pension & Benefits
Expected
FSA LTI Award
Over time, the expected value of LTI awards
is estimated at 80% of the maximum LTI
opportunity, taking into account the impact of
both the pre-grant and pre-vest tests. This
reflects the less leveraged nature of the
construct with lower award levels compared to
traditional LTI plans. Nearly 70% of expected
remuneration for executive directors is
delivered in shares.
Katie Murray
Ms Murray was appointed CFO on 1 January
2019 following a successful period as interim
CFO. Pay was set with a base salary of
£750,000 per annum, pension at 10% of base
salary and an FSA at 100% of base salary. No
changes are proposed to the CFO’s
remuneration at this time.
Directors’ Remuneration Report
£000s
3,500
3,000
2,500
2,000
1,500
1,000
500
0
3,101
1,500
750
101
750
CFO
Pension: 75
Benefits: 26
2,801
1,200
750
101
750
Maximum
Salary
Pension & Benefits
Expected
FSA LTI Award
Performance and pay decisions for 2019
As noted in the Strategic Report, performance
has been good during the year with strong
levels of capital being maintained while
making significant distributions to
shareholders through dividends. Growing
income is proving difficult in the current
economic climate, however, there has been
good progress on cost reduction plans.
Performance highlights
Operating profit before tax of £4,232
million
CET1 ratio at 16.2%, exceeding the long-
term target
Costs reduced by £310 million during
2019, ahead of target
Regular and special dividend payments
made to shareholders during 2019
Employee engagement remains high but
customer performance remains a
challenging area
2017 LTI award vesting outcome
Performance has been assessed for LTI
awards granted in 2017, following the
completion of the performance period at the
end of 2019. This was the last grant of awards
under the previous LTI construct prior to
approval of the current remuneration policy at
the 2017 AGM. While the performance cycle
has completed, the shares will vest in
tranches up to 2024 and remain subject to
malus and clawback provisions to ensure
recipients maintain a long-term focus in their
decision-making.
For Mr McEwan the performance assessment
resulted in vesting at 56.25% reflecting
improvements in total shareholder return
(TSR) and targets also being met for CET1
ratio and employee engagement. The
cost:income target was partially met whilst
economic profit and customer and trust
targets were missed. The Committee
exercised its discretion in determining that the
cost:income element should vest at the mid
point of the scale and believed this was a fair
reflection of performance.
Ms Rose and Ms Murray also received LTI
awards in 2017 in respect of their previous
roles, prior to appointment to the Board.
These awards were subject to similar
performance categories but with slightly
different weightings and with return on equity
replacing economic profit. The performance
assessment for Ms Rose and Ms Murray
resulted in 60% of the awards vesting. Full
details of the 2017 LTI assessments can be
found on page 91.
Pre-grant assessment for 2020 LTI award
Executive directors are due to receive LTI
awards in 2020 following an assessment of
performance over 2019. In line with the policy,
performance was assessed against pre-set
objectives following which the Committee
applied its judgement in reaching the level of
grant for the 2020 LTI awards.
Mr McEwan was assessed as making good
progress overall against 2019 targets. Capital
remained strong, the control environment had
improved and culture and engagement scores
remained very positive. Mr McEwan also
remained engaged until his departure, helping
to ensure a smooth handover. However,
customer targets were not met and RoTE was
behind target.
Ms Rose had a strong year, developing into
the role of Deputy CEO NatWest Holdings,
launching the Rose Review and improving risk
and culture scores in the Commercial and
Private Banking business. It was noted that
more work was needed on financial crime. Ms
Rose was considered to have made a
promising start as CEO, but the period of time
was too short for a meaningful assessment of
performance.
Ms Murray had demonstrated good overall
performance during 2019 with a seamless
transition into role, quickly establishing
credibility, and making good progress on risk
culture. Ms Murray also achieved financial
targets for cost reduction with a good focus on
people and employee engagement scores in
the Finance function.
2020 LTI awards - % of maximum award
Ross McEwan
Alison Rose
Katie Murray
69%
78%
73%
Mr McEwan’s maximum award was pro-rated,
to reflect he was employed for 11 months of
the performance year, and Ms Rose’s
percentage was based on her maximum
potential award as CEO. A further
performance assessment of 2020 LTI awards
will take place prior to vesting. Full details on
the pre-grant and pre-vest assessments can
be found on pages 92 to 94 in this report.
Broader pay considerations
The Committee also considers wider
workforce remuneration and approves the
Group-wide remuneration policy. It is
supported by subsidiary performance and
remuneration committees for all key legal
entities which review and provide input to pay
decisions at a subsidiary level and help to
ensure there is a transparent and robust
remuneration governance framework in place
across the RBS Group.
Bonus pool – Where employees are eligible
for bonus awards, a balanced scorecard is
used to assess performance across financial,
customer, people, risk and conduct measures.
The bonus pool for 2019 is £307 million,
which is around 8% less than 2018.
Immediate cash bonuses continue to be
limited to £2,000.
Fairness – The number of employees at RBS
who believe they are paid fairly increased
again during 2019 and is significantly above
the Global Financial Services norm. In the UK,
our rates of pay continue to exceed the Living
Wage foundation benchmarks. We are
confident we pay our employees fairly and our
policies and processes are kept under review
to ensure we continue to do so.
Gender and ethnicity pay gap information can
be found in the Strategic Report section. The
Committee considers these metrics to be
highly important and acknowledges there is
more work to be done to address the position.
Colleague engagement – A Colleague
Advisory Panel provides direct engagement
between colleagues and Board members.
During the year the Panel was provided with
an update on the principles of executive
director remuneration and how it aligns with
the wider company pay policy. This was
followed by a helpful question and answer
session with Panel members.
We believe that having an engaged and
inclusive workforce is a key element of a
successful business. Feedback from
colleagues forms part of the measures used in
the performance assessment before LTI
awards are granted to executive directors.
Transparency – This report has been
produced in line with the latest reporting
requirements and the Code. It includes CEO
to employee pay ratios along with broader
disclosures on employee remuneration.
Looking ahead
The Committee is also looking to ensure that
remuneration supports the goal of becoming a
purpose-led bank, helping to build financial
confidence, supporting enterprise and taking
actions to help the transition to a low carbon
economy. This will include the introduction of
measures based on the execution of RBS’s
wider ESG strategy, as detailed in the
Strategic Report, with the measures being
part of the performance assessment for future
LTI awards.
We remain committed to paying the workforce
fairly and transparently, with a focus on
paying people the right rate for the job. I
strongly believe that the remuneration policy
is the right one for RBS and its wider
stakeholders and hope that shareholders will
vote for its approval at the forthcoming AGM.
Robert Gillespie
Chairman of the Group Performance and
Remuneration Committee
13 February 2020
RBS – Annual Report and Accounts 2019
80
Directors’ Remuneration Report
Summary of the principles of the executive directors’ remuneration policy
Alignment with the aim of building a bank
that is simple, safe and customer focused
Built around a restrained pay position for
executive directors, with variable pay
delivered entirely in shares as LTI awards.
Alignment via shares between executives and
shareholders
Aligns executives with shareholders
predominantly through holding shares, both
during and after employment.
Performance is assessed using a robust
framework against pre-set objectives which,
though demanding, executive directors
would reasonably be expected to achieve,
encouraging safe and secure growth.
Appropriate for a less incentivised culture,
which is consistent with how remuneration
is structured across the wider bank.
The maximum value of LTI awards is smaller
than traditional long-term incentive plans and
there are significant shareholding
requirements in place.
Performance is assessed before grant and
again before vesting. Awards are adjusted for
underperformance or risk failings and are
released over eight years, subject to the
application of malus and clawback, for a long-
term view of performance.
The policy has received strong support from shareholders to date
Alignment with the growing external
consensus on executive pay
The current policy introduced in 2017 reflected
the Executive Remuneration Working Group
and Government announcements on executive
pay, calling for reduced complexity and
quantum.
Investors continue to call for restraint,
meaningful shareholdings and flexibility of pay
design.
The proposed amendments to the 2020 policy
will align with the Code and best practice
guidance on pension rates and post-
employment shareholding requirements.
AGM
2017 Policy
2018 Implementation
2019 Implementation
Votes in favour
96%
99%
99%
Summary of changes to the executive directors’ remuneration policy
Policy element
CEO
CFO
Changes for 2020 Policy
Fixed pay
Base salary (cash)
£1,100,000
£750,000
No further changes proposed for 2020. Salary will be
reviewed annually within the terms of the policy.
Pension (cash)
£110,000
£75,000
Pension rate has been reduced from 35% to 10% of base
salary, in line with the rate for the wider RBS workforce*.
Benefits (cash)
£26,250
£26,250
No change to the level of benefit funding.
Fixed share
allowance (shares)
£1,100,000
£750,000
The percentage of salary (100%) and release period (three
years) is unchanged. Awards will be made quarterly, rather
than biannually, in future to align with market practice.
Variable pay LTI award (shares)
Quantum
(maximum)
Vesting
period
£1,925,000
(175% of salary)
£1,500,000
(200% of salary)
No change.
Pro-rata vesting over years three to seven from grant.
No change.
Retention
12 month retention period applied to each vesting**.
No change.
Leaver terms
Awards lapse unless individual qualifies as good leaver.
No pro-rating of awards after grant in good leaver
circumstances.
No change. Details on why the disapplication of pro-rating is
considered appropriate under the RBS construct can be
found on page 86.
Performance
conditions
Pre-grant and pre-vest assessments, together with risk &
control and stakeholder perception underpins.
No change in approach to performance measurement but
some enhancements will be made to disclosures to provide
additional narrative on performance outcomes.
Expected
value
Expected to vest at 80% of maximum opportunity over
time, taking into account the pre-grant and pre-vest tests.
No change.
Other policy elements
Dividend
adjustments
No policy currently to adjust awards.
Shareholding
requirement
To hold shares
whilst employed.
400% of salary
250% of salary
Flexibility has been added that will allow LTI awards to be
granted using an adjusted share price to reflect the absence
of the right to receive dividends during the vesting period.
A post-employment shareholding requirement has been
added to fully comply with the Code and the Investment
Association’s Principles.
* 10% of base salary is in line with the rate applicable to the vast majority of the workforce. Over 99.7% of employees in the UK receive this rate.
** the combination of the vesting period and the retention period means shares are released during the four to eight years after grant.
RBS – Annual Report and Accounts 2019
81
Directors’ Remuneration Policy
Remuneration policy for executive directors
Having conducted a detailed review during 2019, the Committee concluded that the principles underpinning the current policy continue to
remain relevant for RBS. The intention of the policy is to support the strategy of building a safe, simple and customer focused bank. The table
below sets out the proposed remuneration policy for executive directors. Subject to approval from shareholders, the policy will be effective from
the date of the 2020 AGM and will apply for a maximum period of three years, until the AGM in 2023.
Fixed pay elements for current executive directors
Fixed pay is intended to provide competitive remuneration for performing the role. The intention is to have less reliance on variable pay and thus
discourage excessive risk-taking.
Purpose and link to strategy
Base Salary
To provide a competitive level of
fixed cash remuneration and aid
recruitment and retention of high
performing individuals.
Operation
Maximum potential value
Paid monthly in cash and reviewed annually.
The rates for 2020 are unchanged following the appointment
of Alison Rose as CEO on 1 November 2019:
CEO – £1,100,000
CFO – £750,000
Any future salary increases will take into
account performance in role and will be
considered against peer companies. Any
increase will not normally be greater than
the average salary increase for RBS
employees over the period of the policy.
Other than in exceptional circumstances,
the salary of an executive director will not
increase by more than 15% over the course
of this policy.
Fixed share allowance
To provide fixed pay that reflects the
skills and experience required and
responsibilities for the role.
A fixed allowance paid entirely in shares. Individuals receive
shares that vest immediately subject to any deductions
required for tax purposes and a retention period will apply.
Shares will be released annually on a pro-rata basis over
three years from the date of award.
An award of shares with an annual value of
up to 100% of base salary at the time of
award, or such higher amount which
represents such value rounded up to the
nearest whole share.
Benefits
To provide a range of flexible and
market competitive benefits that is
valued by the recipients and assist
individuals in carrying out their
duties effectively.
Pension
To encourage planning for
retirement and long-term savings.
The fixed share allowance will broadly be paid in arrears, in
four instalments per year or at any other frequency that the
Committee deems appropriate (1). The fixed share allowance
is not pensionable.
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
periodic review.
In addition, 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. On rare occasions where they are
accompanied by their spouse / partner to business events,
RBS may also meet the costs and any associated tax liability.
Executive directors are also entitled to holiday and sick pay.
Further benefits including, but not limited to, relocation
assistance may be offered in line with market practice. RBS
may also put in place certain security arrangements for
executive directors where that is deemed appropriate. RBS
may meet the cost of any tax due on these benefits.
Provision of a monthly pension allowance paid in cash and
based on a percentage of salary. Opportunity to use the cash
to participate in a defined contribution pension scheme.
CEO – 10% of base salary
CFO – 10% of base salary
The total value of benefits provided is
disclosed each year in the annual report on
remuneration.
The maximum potential value of benefits
will depend on the type of benefit and cost
of its provision, which will vary according to
market rates. Any non-standard benefits
would be subject to approval from the
Board.
In compliance with the Code, the pension
allowance rates for executive directors
under the 2020 policy have been aligned
with those of the wider RBS workforce,
currently 10% of base salary (2). The rate
may be increased or reduced in order to
remain aligned with the wider RBS
workforce.
Notes:
(1) RBS believes that delivery in shares is the most appropriate construct for a fixed allowance to executive directors, qualifying as fixed remuneration for regulatory
requirements. If regulatory requirements emerge that prohibit allowances being delivered in shares, or deem that such allowances will not qualify as fixed
remuneration, then RBS reserves the right to provide the value of the allowance in cash instead in order to ensure compliance with such requirements.
(2) 10% of base salary is in line with the rate applicable to the vast majority of the workforce. Over 99.7% of employees in the UK receive this rate.
RBS – Annual Report and Accounts 2019
82
Directors’ Remuneration Policy
Variable pay
Variable pay incentivises the delivery of sustainable long-term performance, based on RBS’s strategic objectives and its aim of becoming a
purpose-led organisation. Performance is assessed against measures which, though demanding, executive directors would reasonably be
expected to achieve, encouraging safe and secure growth. Variable pay is delivered entirely in shares with extensive deferral and retention
requirements to create strong shareholder alignment.
Purpose and
link to strategy
Variable pay
(LTI award)
To support a culture
where individuals are
rewarded for the
delivery of sustained
performance, taking into
account RBS’s strategic
objectives and purpose.
Performance will be
assessed across four
key performance areas,
and include a range of
financial and non-
financial factors to
encourage long-term
value creation for
shareholders.
Delivery in shares with
the ability to apply
malus adjustments and
clawback further
supports longer-term
alignment with
shareholders’ interests.
Maximum potential value
The maximum award for
current executive directors is
175% of salary for the CEO
and 200% of salary for the
CFO, or such higher amount
which represents such value
rounded up to the nearest
whole share.
Awards are also subject to
the regulatory requirement
that limits the value of
variable pay to the value of
fixed pay. Award levels are
set at the time of grant and
may be subject to a discount
for long-term deferral in
determining the total variable
remuneration, in line with
European Banking Authority
(EBA) guidelines.
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, depending
on performance.
Performance assessment
Using pre-grant and pre-vest
tests, performance will be
assessed in the areas of
Finance & Business Delivery,
Risk & Operations, Customers
& Stakeholder and People &
Culture.
The Committee will use a
robust framework to consider
performance against pre-set
objectives for each of the
categories, in line with RBS’s
strategic aims and purpose, but
will apply its judgement without
reference to formulaic targets
and weightings.
Risk & Control and Stakeholder
Perception underpins will also
apply which may lead to a
downwards adjustment.
The majority of the
performance variation is
expected to take place under
the pre-grant test, with the pre-
vest assessment representing
a final check that, taking all
circumstances into account,
overall performance has
remained satisfactory.
The Committee has discretion
to vary the performance factors
in appropriate circumstances.
Further details on the
performance factors and
assessment will be set out in
the annual report on
remuneration for the relevant
year.
Operation
Any variable pay awarded will be delivered as
a long-term incentive (LTI) award, paid in
shares and subject to performance
assessment and employment conditions.
LTI awards are subject to:
a one year pre-grant performance period;
a pre-vest performance assessment at
the end of a three year period, with
vesting taking place from years three to
seven after grant;
malus provisions prior to vesting and
clawback which applies for seven (and
potentially up to ten) years from the date
of award; and
a 12 month post-vesting retention period.
Awards will be subject to any other terms as
required by regulators from time to time.
The number of shares awarded may be
calculated using a share price discounted to
reflect the absence of the right to receive
dividends or dividend equivalents during the
vesting period. In the event regulations permit
the use of dividend equivalents in future,
awards may be eligible to receive dividend
equivalents instead.
With RBSG plc resuming dividend payments
to ordinary shareholders, the Committee
believes it is appropriate to have the ability to
grant LTI awards with reference to an
adjusted share price as recipients will not
receive the benefit of any dividends or
dividend equivalents during the vesting
period. Subject to shareholders approving the
policy at the 2020 AGM, the earliest date that
this discount methodology would be applied
would be for LTI awards granted in 2021.
The discounted share price will be calculated
with reference to estimated dividend yields
based on market consensus and the length of
the vesting period, and will be reviewed by an
independent advisor. For the avoidance of
doubt, there is no intention to reflect special
dividends in the calculation.
LTI awards will be delivered under the RBS
2014 Employee Share Plan, as approved by
shareholders at the 2014 AGM.
Notes to the policy table
Changes that have been made under the executive directors’ remuneration policy include: lowering the pension rate to 10% of salary; the
introduction of a post-employment shareholding requirement; and the ability to apply a discounted share price when calculating LTI awards
to reflect award-holders not being eligible to receive dividends or dividend equivalents during the vesting period.
The performance factors for variable pay awards have been chosen to reward sustained long-term performance which, together with
significant shareholding requirements, creates strong alignment with shareholders. Targets are set in line with RBS’s strategic priorities.
The fixed share allowance is part of fixed remuneration and is therefore not subject to any performance adjustment.
Executive director remuneration is considered against market positioning for similar roles.
Remuneration for executive directors broadly follows the policy for all employees but generally with a higher element of variable pay and
greater delivery in shares which are released over a long time frame.
Further details on the remuneration policy for all employees can be found on page 102.
RBS – Annual Report and Accounts 2019
83
Directors’ Remuneration Policy
Other elements of the policy for executive directors
Purpose and link to
strategy
Shareholding
requirements
To ensure executive
directors build and
continue to hold a
significant shareholding
to align their interests
with the interests of
shareholders
Operation
Executive directors are required to build up a shareholding equivalent to a
percentage of salary. The net of tax shares acquired under the fixed share
allowance will qualify towards the shareholding requirement. In the case of LTI
awards, shares will be deemed to count on a net of tax basis towards meeting the
requirement following the pre-vest performance assessment at the end of year
three. Once the respective retention periods have passed, executive directors are
permitted to dispose of up to 25% of the net of tax shares received until the
shareholding requirement is met. Any shares purchased voluntarily will count
towards the requirement but are excluded from the sale restriction.
Value
CEO - 400% of salary
CFO - 250% of salary
Requirements may be
reviewed in future but
are not expected to be
reduced.
Following cessation of employment, regardless of leaver status, executive directors
will be required to hold shares of a value equal to the lower of their shareholding
requirement immediately prior to departure or the actual shareholding on departure,
for a period of two years. A fixed number of shares for the post-employment
shareholding requirement will be determined at the date of departure. The
requirement encompasses vested and unvested shares but shares purchased
voluntarily are excluded from the post-employment shareholding requirement.
Procedures will be put in place in order to assist with the enforcement of the
shareholding requirements, both during and after employment. This includes the
executive directors agreeing to be bound by the terms of the requirements and the
use of prescribed nominee accounts to hold shares subject to restrictions.
Opportunity to contribute from salary and acquire shares under any of the
company’s all-employee share plans in operation from time to time, such as the
RBS Sharesave Plan and Buy As You Earn (part of an employee Share Incentive
Plan). These plans are not subject to performance conditions.
In approving this policy, authority is given to honour any previous commitments or
arrangements entered into with current or former directors, including share awards
granted under the 2014 Employee Share Plan. For the avoidance of doubt, all
outstanding LTI awards granted prior to 2018, where the performance cycle has
been completed, will continue to vest in line with the terms agreed at the time of
grant. Authority is also given to honour arrangements agreed with an employee prior
to appointment as an executive director that may have different terms or
performance conditions.
All-employee share plans
An opportunity to acquire
RBSG plc shares.
Legacy arrangements
To ensure RBS can
continue to honour
payments due to
executive directors.
Statutory limits imposed
by HMRC or the limits
under the relevant share
plan rules.
In line with existing
commitments and
arrangements.
Illustrative scenarios of annual remuneration for executive directors under the remuneration policy
CEO £000
3,876
40%
4%
28%
4,261
45%
3%
26%
5,224
55%
3%
21%
2,336
6%
47%
47%
28%
26%
21%
5,000
4,000
3,000
2,000
1,000
0
5,000
4,000
3,000
2,000
1,000
0
CFO £000
2,801
42%
4%
27%
27%
3,101
49%
3%
24%
24%
1,601
6%
47%
47%
3,851
59%
3%
19%
19%
Minimum
Expected
Maximum
Maximum
Minimum
Expected
Maximum
Maximum
Fixed pay
only
LTI awards
at constant
share price
LTI awards
50% share price
increase
Fixed pay
only
LTI awards
at constant
share price
LTI awards
50% share price
increase
Base Salary
Fixed share allowance
Pension & Benefits
LTI award (vesting value)
Notes:
(1) The charts above are for illustration only, with minimum representing fixed remuneration. The expected value has been calculated based on LTI awards vesting
at 80% of the maximum opportunity. This is considered appropriate for a less leveraged remuneration construct, with lower award levels and performance
assessed on factors which, though demanding, executive directors would reasonably be expected to achieve, encouraging performance within risk appetite.
(2) The first maximum assumes LTI awards vest at 100% after the performance assessment and that the share price remains unchanged for the LTI value. The
second maximum assumes both full vesting of the LTI awards and a 50% increase in the RBSG plc share price over the period from grant to vest.
(3) The benefits figure includes standard benefit funding as outlined in the policy but excludes any potential other benefits under the policy such as travel
assistance in connection with company business. The value of any taxable business expenses will be disclosed in the total remuneration table each year.
RBS – Annual Report and Accounts 2019
84
Directors’ Remuneration Policy
Remuneration for the Chairman and non-executive directors
A review was undertaken on the remuneration policy for the Chairman and the non-executive directors. The only amendment proposed under
the new remuneration policy is that the Chairman will be entitled to life insurance cover, provided the costs are considered by the Board to be
reasonable. Offering life insurance for the role of Chairman is in line with the practice by most of the other major UK banks.
Purpose and link to
strategy
Fees
To provide a
competitive level of
fixed remuneration that
reflects the skills,
experience and time
commitment required
for the role.
Benefits
To provide a level of
benefits in line with
market practice.
Operation
Fees are paid monthly in cash. The Board retains discretion to
pay fees in cash, shares or a combination of the two.
Maximum potential value
The rates for the year ahead are set out in
the annual report on remuneration.
Any future increases to fees will be
considered against fees paid to directors of
comparable companies and will not
normally be greater than the average
inflation rate or salary increases for the
wider RBS workforce over the period of the
policy, taking into account that any change
in responsibilities, role or time commitment
may merit a larger increase. Other than in
exceptional circumstances, fees will not
increase by more than 15% over the course
of this policy.
The value of the private medical and life
insurance 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 level of remuneration reflects the responsibility and time
commitment required and the level of fees paid to directors of
comparable major UK companies.
Fees are reviewed regularly and the Board may choose to apply
an increase on an annual or less frequent basis, within the limits
set out in this policy. Additional fees may be paid for new Board
Committees provided these are not greater than fees payable for
the existing Board Committees as detailed in the annual report on
remuneration.
No variable pay is provided so that the Chairman and non-
executive directors can maintain appropriate independence, focus
on long-term decision making and constructively challenge
performance of the executive directors.
Reimbursement of reasonable out-of-pocket expenses incurred in
connection with the performance of duties.
The Chairman and non-executive directors are entitled to travel
assistance in connection with company business, including the
use of a car and driver where deemed appropriate. Where this is
a taxable benefit for the recipient, RBS will meet the cost of any
tax due on the benefit. On rare occasions where they are
accompanied by their spouse / partner to business events, RBS
may also meet the costs and any associated tax liability. Other
benefits may be offered in line with market practice.
The Chairman is entitled to private medical cover and life
insurance cover will also be offered provided that the costs are
considered by the Board to be reasonable.
Recruitment policy
RBSG plc has a Boardroom Inclusion Policy which aims to promote diversity and inclusion in the composition of the Board. The framework
aims to ensure RBS can attract, motivate and retain the best talent and avoid limiting potential caused by bias, prejudice or discrimination.
RBS values and promotes inclusion in all areas of recruitment and employment. The key elements of the recruitment policy for directors are
set out below.
The policy on the recruitment of new directors aims to be competitive and to structure pay in line with the policy applicable to current
directors, based on the elements of pay detailed in the policy table, recognising that some adjustment to quantum may be necessary to
secure the preferred candidate.
The pension allowance for new executive directors will be in line with that of the wider RBS workforce, currently 10% of base salary,
compliant with the Code.
In the event of an internal promotion, existing commitments can continue to be honoured.
Buy-out arrangements exist which allow for the replacement of awards forfeited or payments foregone when an individual joins RBS. Any
awards made will comply 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. No sign-on awards will be offered on joining.
Any awards granted following the recruitment of a candidate may be made under RBS’s employee share plans in place from time to time or
under the relevant provisions in the Listing Rules and will need to comply with regulatory requirements. Full details will be disclosed in the
next remuneration report following recruitment.
The maximum level of variable pay which may be granted to new executive directors will be guided by, but not limited to, arrangements for
existing executive directors. In any event this will not exceed the limit of one times the level of fixed pay, comprising salary, fixed share
allowance, pension and benefits, and valued according to EBA guidelines. The maximum level excludes any buy-out arrangements.
RBS – Annual Report and Accounts 2019
85
Directors’ Remuneration Policy
Other policy elements
Provision
Notice and
termination
provisions
Operation
Executive directors
As set out in executive directors’ service contracts, RBSG plc or the executive director is required to give 12 months’ notice to
the other party to terminate the employment. The Committee will ensure that any proposals relating to termination payments
are fair and reasonable and recognise that failure is not rewarded. There are no pre-determined provisions for compensation
on termination. There is discretion for RBS to make a payment in lieu of notice (on base 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 reflecting their
responsibilities and time commitments. 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.
Under the Board Appointment Policy, non-executive directors are appointed for an initial term of three years, subject to annual
re-election by shareholders. At the end of this initial term, a further three year term may be agreed. Non-executive directors
may be invited to serve beyond six years, up to a maximum tenure of nine years. The Chairman is not subject to the Board
Appointment Policy but is subject to the requirements relating to the maximum tenure period for chairs under the Code. All
directors stand for annual election or re-election by shareholders at the company’s AGM.
Effective dates of appointment for non-executive directors:
Frank Dangeard – 16 May 2016
Alison Davis – 1 August 2011
Patrick Flynn – 1 June 2018
Morten Friis – 10 April 2014
Robert Gillespie – 2 December 2013
Baroness Noakes – 1 August 2011
Mike Rogers – 26 January 2016
Mark Seligman – 1 April 2017
Lena Wilson – 1 January 2018
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.
Fixed share allowances
Shares will continue to be released over the applicable retention period helping to ensure that former executive directors
maintain an appropriate interest in RBS shares. In all leaver circumstances, executive directors will continue to be eligible to
receive a pro-rated fixed share allowance to reflect the period up to the termination date.
LTI awards
LTI awards normally lapse on leaving unless the termination is for one of a limited number of specified ‘good leaver’ reasons
or in exceptional circumstances the Committee may exercise its discretion to determine that an individual qualifies as a good
leaver. LTI awards held by good leavers will normally vest on the original vesting dates, subject to the performance conditions
being met.
In line with typical practice, awards will be pro-rated for the period worked during the financial year prior to the grant of the
award. For LTI awards made in 2018 onwards, following the grant, no further pro-rating will occur. Awards will also generally
be made to good leavers in respect of the final year of employment, again pro-rated for the period worked during the financial
year prior to the grant of the award, and based on performance against the objectives set. The rationale for this approach is
set out below.
No pro-rating after grant is fundamental to RBS’s LTI construct and allows for a fair level of value to be delivered to the
executives whilst having significantly lower maximum variable pay levels compared to peers.
RBS operates an LTI only construct, whilst peers also offer annual bonus awards (which typically are also not subject to
pro-rating after grant).
Therefore, without the removal of pro-rating, executives at RBS could potentially receive no variable pay for the year of
joining, in line with regulatory requirements, or in the final year of employment.
The main emphasis of the performance assessment is on the pre-grant test, given the award has already been ‘earned’ to
a large extent by the time of grant.
The removal of pro-rating 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, including through
malus and clawback.
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 Group, 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.
Factors the Committee would expect to be present before agreeing to good leaver treatment under retirement include:
whether the individual has been in role for at least five years, or otherwise qualifies for retirement under RBS’s policy, has
demonstrated satisfactory performance, is not leaving to work in a capacity considered to be competing directly and materially
with RBS, and is leaving at a time and in a manner that is agreed with the Board.
RBS – Annual Report and Accounts 2019
86
Directors’ Remuneration Policy
Provision
Contractual
provisions
Discretion
Operation
Contracts include standard clauses covering remuneration arrangements and discretionary incentive plans (as set out in this
report), referencing reimbursement of reasonable out-of-pocket expenses incurred in performance of duties, annual leave,
redundancy terms and sickness absence, the performance review process, directors’ and officers’ insurance, the disciplinary
procedure and terms for dismissal in the event of personal underperformance or breaches of RBS policies. The Committee
retains the discretion to make payments (including but not limited to professional and outplacement fees) to facilitate smooth
handovers, mitigate against legal claims and/or procure reasonable assistance with investigations or claims, subject to any
payments being made pursuant to a settlement or release agreement.
The Committee has certain discretionary powers under the company’s employee share plan rules. For example, the
Committee has discretion to determine whether an individual would qualify as a good leaver on departure and also to decide
that awards held by good leavers should vest earlier than the normal vesting date. Such discretions would only be used to
ensure a fair outcome for the director and for shareholders, taking into account the circumstances of departure, the
performance of the director and the need for an orderly transition. If discretion is applied in these circumstances then it will be
disclosed in the annual report on remuneration.
Further discretions include the ability to: treat LTI awards in a range of ways in the event of a change of control, including the
ability for LTI awards to be exchanged for new awards; change any performance measures, targets, and to adjust awards if
major events occur (for example corporate transactions and capital raisings); and make administrative changes to the plan
rules. In addition, the Committee retains discretion to apply malus and clawback to LTI awards. When assessing performance,
the Committee is able to exercise its judgement to determine the appropriate vesting of LTI awards, supported by the
application of underpins, which helps to avoid any potentially unintended outcomes that might arise from the application of
performance criteria.
The Committee retains discretion to make minor amendments to the Directors’ Remuneration Policy to reflect changing legal
or regulatory requirements or guidelines (including but not limited to any PRA or FCA revisions to their remuneration rules and
the EBA remuneration guidelines). For the avoidance of doubt, no material changes would be made to the advantage of
directors without reverting to shareholders for approval.
Malus and
clawback
Malus allows the amount of any unvested variable pay awards to be reduced, potentially to zero, prior to payment. Clawback
allows for recovery of variable pay awards that have already vested. Any variable pay awarded to executive directors in
respect of the 2014 performance year 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 can be extended to ten years where there are outstanding
internal or regulatory investigations at the end of the normal seven year clawback period.
the individual failing to meet appropriate standards of fitness and propriety;
Circumstances in which RBS may apply malus or clawback include:
conduct which results in significant financial losses for RBS;
an individual’s misbehaviour or material error;
RBS or the individual’s 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 as it deems appropriate.
RBS – Annual Report and Accounts 2019
87
Directors’ Remuneration Report
Approach to the 2018 UK Corporate Governance Code
The Committee undertook a review and where appropriate made changes to remuneration policy and practices in order to comply with the
changes under the Code, as set out below. The Committee will continue to monitor and reflect on best practice developments.
Provision
Post-employment
shareholding requirement
RBS approach to compliance
A formal post-employment shareholding requirement will be introduced for executive directors under the
new policy, in order to fully comply with the Code and Investment Association Principles of Remuneration.
The requirement will apply for two years at a level equal to the lower of the shareholding requirement
immediately prior to departure or the actual shareholding on departure.
Pension rate aligned with
the wider workforce
The pension rate for executive directors under the new policy will be aligned with the rate applicable to the
wider workforce, currently 10% of base salary.
RBS moved to this approach on the appointment of the CFO in January 2019 and this was also applied on
the appointment of the new CEO in November 2019.
The Committee considers a range of papers on the broader workforce, for example, the RBS Group-wide
remuneration policy principles, annual pay outcomes across RBS Group including diversity information,
bonus pool allocations and the deferral policy, and the annual Sharesave offer for employees.
Culture is part of a suite of measures used to assess progress in building a healthy and inclusive workplace
and performance against culture targets directly impacts the variable pay of both senior executives and other
employees. Executive remuneration is based around a less incentivised construct to encourage safe &
secure growth and the governance of culture is clearly laid out with specific Senior Management Function
roles having defined accountabilities, which is taken into account in their pay decisions.
The Committee works closely with the Group Sustainable Banking Committee (SBC), which has a specific
focus on people and culture. The decision to remove front-line incentives for large numbers of employees in
recent years to support the desired culture was something that both committees supported.
In 2019, the committees held a joint session to review the employee value proposition and will continue to
consider culture and topics of shared interest, such as the financial wellbeing of the wider workforce.
The remuneration policy for executive directors has been designed around themes of simplicity, alignment
with strategy and culture and ensuring rewards are supported by risk-adjusted performance.
The LTI construct is based on lower maximum award levels and reasonable performance expectations,
which helps to create more predictable outcomes and encourage safe and secure growth.
RBS operates within a 1:1 regulatory cap of variable to fixed pay which is considered to be a restrained and
proportionate approach to executive remuneration.
A Colleague Advisory Panel has been established in compliance with the Code. The Committee Chairman
has met with the Panel to discuss executive remuneration and how it aligns with the wider pay policy.
Engagement will continue with the Panel on an annual basis and if the Panel expresses any concerns on
pay matters these would be raised with the Committee. Further information on the Panel and how the views
of colleagues are taken into account is set out below.
There is the ability to apply discretion in appropriate circumstances and the Committee has used discretion
in the past to apply downwards adjustments to LTI outcomes.
The remuneration policy and share plan rules contain malus and clawback provisions to adjust or recover
awards where appropriate. Further details of the process and the circumstances in which RBS can apply
malus and clawback are set out on page 103.
Review workforce
remuneration and
alignment with culture
Consider factors such as
clarity, simplicity, risk,
predictability,
proportionality and
alignment to culture when
determining the policy
Engagement with
colleagues
Discretion and use of
malus and clawback
Engagement with shareholders
Every year an extensive consultation is
undertaken with major shareholders and other
stakeholders prior to the Committee making
any final decisions on remuneration and
variable pay awards. In late 2019 and early
2020, around 20 meetings took place with a
number of institutional shareholders, UK
Government Investments (UKGI) and other
stakeholders. A range of topics were
discussed including arrangements for the new
CEO and the proposed changes to the
remuneration policy as outlined in this report.
There was broad support from shareholders
for the executive director remuneration
arrangements. The alignment of pension rates
with the wider workforce and the introduction
of a post-employment shareholding
requirement for executive directors were seen
as positive developments. A number of
shareholders acknowledged the need for RBS
to remain competitive on pay while some also
highlighted that any further increases to
quantum would need to be carefully justified.
The Committee took these views into account.
Shareholders also highlighted the importance
of pay outcomes reflecting performance and
the need for good disclosure, given RBS’s
bespoke performance assessment framework.
The Committee Chairman explained how LTI
performance was still assessed using pre-set
objectives and a robust framework but without
formulaic weightings which could lead to
unintended consequences. The Committee
Chairman confirmed that plans were already
in place to enhance the LTI disclosures in this
report which was widely welcomed.
Shareholders were also generally supportive
of good leaver status being applied to Mr
McEwan and went on to discuss broader
topics such as culture and the company’s
approach to climate change. A number of
climate-related measures have been added to
the 2020 performance goals for executive
directors, as explained later in this report.
More generally, meetings also take place with
RBSG plc’s retail shareholders allowing Board
members to hear directly from the wider
shareholder base on any matters of
importance. Two such events were held in
2019 with more planned for 2020.
Shareholders continue to play a vital role in
developing remuneration practices and the
Committee is very grateful for their
involvement in the process.
Consideration of employees' views
The Committee retains oversight of the
remuneration policy for all employees to
ensure there is a fair and consistent approach
throughout the organisation, and considering
employees’ views is part of that process.
A colleague opinion survey provides all
colleagues with the opportunity to have a say
on what it feels like to work at RBS (twice per
year). Nearly 58,000 colleagues from across
RBS took part in the latest survey. The 2019
report shows steady improvement since last
year, and RBS compares favourably against
benchmarks for Global Financial Services and
High Performing companies across the board.
Feedback from colleagues is included in the
measures that impact executive pay.
RBS – Annual Report and Accounts 2019
88
Directors’ Remuneration Report
Engagement with colleagues*
Engagement on remuneration generally takes
place with representatives from UNITE in
Great Britain and Offshore and the Financial
Services Union in Ulster Bank. There is a
well-developed process in place to listen to
the views of the workforce. This provides
opportunities to improve by assessing
colleague sentiment, and checking progress
in making RBS a great place to work. Regular
engagement takes place with colleagues
throughout the year. Board members visit
business areas to hear directly from
colleagues and there are frequent townhall
meetings and question and answer sessions
with senior executives.
Colleague Advisory Panel (CAP)
In 2018, the CAP was established in order to
enhance existing mechanisms for colleague
engagement. The Panel is chaired by Lena
Wilson as a designated non-executive
director, with the aim of facilitating dialogue
between colleagues and Board members. The
CAP includes colleagues who volunteered to
be involved, representatives from trade union
bodies and works councils, the colleague-led
networks and junior management teams.
The CAP met twice in 2019 and provided
views to the Board on areas such as purpose,
digital strategy, culture, executive pay and
performance management. In May, the CAP
heard directly from the Committee Chairman
on how executive remuneration aligns with the
broader reward policy. The November 2019
meeting included an update from the CEO on
future strategy and discussions were also held
on inclusion and sustainable banking.
Following each meeting, a summary is
provided to the Board and a subsequent
follow-up call is held so that members of the
CAP can hear how their views were shared
and what happened as a result. Feedback has
been very positive to date with members
highlighting the variety of topics and good
discussions with Board members and viewing
the CAP as a safe environment to voice
opinions and hear Board insights.
Members described the CAP as engaging,
informative, insightful and transparent.
Wider workforce remuneration policy
Consistent with the principles for executive
remuneration, 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 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 2019 including pay ratios can be
found later in this report. Many employees are
shareholders through the company’s
employee share plans and have the ability to
express their views on executive pay by
voting on the Directors’ Remuneration Policy.
Making RBS a great place to work
Fulfilling job
The aim is for every colleague to have a clear
and fulfilling job that connects to RBS’s
purpose. Each colleague is set clear goals
and objectives that reflect RBS’s 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: physical
wellbeing, encouraging a healthy lifestyle;
mental wellbeing to challenge the stigma of
mental health and encourage colleagues to
talk; financial wellbeing on helping colleagues
make the most of their money; and social
wellbeing to connect with the community and
to support inclusion and volunteering. 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 needs.
Diversity and inclusion is at the core of RBS
culture. RBS is recognised in Bloomberg’s
Global Gender Equality Index, holds Leader
level in the UK Government’s Disability
Confident Scheme and is regularly in the top
Stonewall Global equality index. The inclusion
category in the colleague opinion survey
continues to score highly, and around 20,000
colleagues who are members of employee-led
networks continue to educate and drive the
inclusion conversation.
RBS has a positive action approach to
improve the proportion of women and ethnic
minority leaders across all business areas.
Targets to improve gender and BAME/non-
white representation are part of the measures
that impact executive remuneration.
RBS has supported key causes, including
being a founding signatory of the UK
Government’s Race Equality Charter, and
retained its status as a Stonewall Top Global
Employer, one of just 14 organisations to
feature on the 2019 list.
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.
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 with rates of pay
that continue to exceed the Living Wage
Foundation Benchmarks.
RBS has a clear, simple and transparent
reward structures for all employees. A review
of employees’ pay takes place each year and
focuses on moving them to the right rate of
RBS – Annual Report and Accounts 2019
89
pay for their job. Investment in pay levels in
recent years has focused mostly on junior
employees.
RBS has 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. HR
policies and processes are kept under review
to ensure employees are paid fairly.
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
around 22,500 employees currently do so.
The number of employees at RBS who
believe they are paid fairly increased further
during 2019 and is significantly above the
Global Financial Services Norm.
Excellent training
Culturally, becoming a learning organisation is
a strategic priority. RBS needs to prepare
colleagues for the future and is committed to
developing colleagues in key critical capability
areas. This will help to build the right
knowledge, skills and behaviours, to help
people stay relevant and employable, and
support RBS’s ambition and purpose. There is
a focus on the future, continuous learning,
knowledge sharing and reflective practice.
RBS continues to innovate learning to support
core and common capability needs by
creating a blend of learning experiences (e.g.
classroom, webinar, e-learning and video) to
support personal development, individual
capability or prepare people for future roles.
RBS also remains committed to embedding a
strong service and sales mindset with training
which supports the business strategy on
customer service, trust and advocacy.
A Good Leader
RBS is continuing to develop great leaders
and supporting the development of talent
across RBS Group. This is driven by a
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. Around 11,000 leaders have
completed their Dtl training to date.
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 rbs.com.
* References to “colleagues” in the Directors’
Remuneration Report include all members of
the workforce, for example contractors and
agency workers as well as employees.
Annual Report on Remuneration
Where indicated in the section headers, information is within the scope of the Independent auditor’s report. Where a main section header,
presented in bold, is marked as audited, all subsequent sub sections are also audited, the end of the audited section is marked by ∆.
Single total figure of remuneration for executive directors for 2019 (audited)
Ross McEwan (5)
Alison Rose (6)
Katie Murray (6)
Base salary
Fixed share allowance (1)
Benefits (2)
Pension (3)
Total fixed remuneration
Annual bonus
Long-term incentive award (4)
Total variable remuneration
Total remuneration
2019
£000
833
833
69
292
2,027
n/a
2,039
2,039
4,066
2018
£000
1,000
1,000
117
350
2,467
n/a
1,111
1,111
3,578
2019
£000
183
183
10
18
394
n/a
1,007
1,007
1,401
2018
£000
—
—
—
—
—
—
—
—
—
2019
£000
750
750
26
75
1,601
n/a
140
140
1,741
2018
£000
—
—
—
—
—
—
—
—
—
Notes:
(1) 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 for all at £26,250 per annum. Ross McEwan also received travel assistance (£40,124), relocation expenses (£4,757)
consisting of assistance with tax return preparation, and home security arrangements (£1,786) and Alison Rose received travel assistance (£5,584) and home
security arrangements (£446). The figures reflect the period served as an executive director.
(3) The executive directors receive a monthly cash allowance and can choose to participate in the company’s defined contribution pension arrangements.
(4) The 2019 value relates to LTI awards granted in 2017 with the performance assessed at the end of December 2019 as set out below. No discretion was
exercised by the Committee as a result of the share price changing over the performance period. The estimated value above is £148,778 lower than the value
of the shares at the time of grant, as a result of the share price falling from £2.4142 to £2.25 over the period.
(5) Reflects fixed remuneration paid to Ross McEwan for the period to 31 October 2019, the date he stepped down from the Board, together with an estimate of
the vesting value of the 2017 LTI award which was pro-rated to his final date of employment. Mr McEwan also received fixed remuneration of £198,020 for the
period after stepping down from the Board until 30 November 2019, the date he ceased to be employed by RBS, see page 96 for further details.
(6) Alison Rose was appointed as CEO on 1 November 2019 and Katie Murray was appointed as CFO on 1 January 2019. Remuneration above includes fixed
pay since appointment to the Board together with the estimated vesting value of the full 2017 LTI award, including the performance period prior to appointment.
∆
2017 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.
Vesting at Performance for maximum
Performance for
Performance Measures
minimum vesting minimum (100%) vesting
(and weightings)
Actual Performance
Vesting Weighted
outcome vesting %
Economic Profit (25%)
(£875 million)
25%
£125 million
Below threshold for vesting
0% 0.00%
Relative TSR (25%)
TSR at median 20%
TSR at upper quartile Above upper quartile
100% 25.00%
Safe & Secure Bank (25%)
CET1 ratio (12.5%)
Cost:income ratio (12.5%)
Customers & People (25%)
Split across advocacy, trust
and employee engagement
Net Promoter Score (NPS) (7.5%)
Net Trust Score (NTS) (5%)
Engagement Index (EI) (12.5%)
Final vesting outcome
Vesting between 0% - 100%*
CET1 ratio target: 13% or above
LTI cost:income ratio target: significant progress
to 56%
Vesting between 0% - 100%*
NPS target: significant progress to number 1 in our
chosen segments
CET1 ratio: >13%
LTI cost:income ratio: 62%
NPS: Missed all six NPS targets
Trust target: significant progress to number 1 in
our chosen segments
NTS: Missed four of the five trust
targets
100%
50%
18.75%
0%
0%
12.50%
EI target: increase employee engagement
EI: increased from 75 to 87
100%
56.25%
* 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.
There were six chosen customer segments for advocacy and five customer segments for Trust. Customer advocacy was measured by Net
Promoter Score and Trust was 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. Economic Profit was defined as profit after tax and preference share charges less tangible
net asset value multiplied by the cost of equity. There is a weighted peer group for relative TSR performance. The companies and weightings for
this award were: Barclays and Lloyds (200%), HSBC (100%), and Standard Chartered, BBVA, BNP Paribas, Crédit Agricole, Santander,
Société Générale, Unicredit, ING, Intesa San Paolo and Nordea Bank (all weighted 50%).
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 Relative TSR, employee engagement and the strong capital position. Set
against this, customer performance was poor and the Committee determined that economic profit should not be adjusted for strategic costs. As
a result, both these categories did not vest. Input was also received from the Group Board Risk Committee (BRC) on risk performance. In line
with the table above, the Committee had exercised its discretion in determining that the cost:income element should vest at the mid point of the
scale and believed this was a fair reflection of performance. Taking all circumstances into account, the Committee determined that no further
adjustment was necessary under the discretionary underpin.
RBS – Annual Report and Accounts 2019
90
Annual Report on Remuneration
2017 LTI award – final assessment of performance measures (audited)
2017 LTI vesting amounts included in the total remuneration table
LTI awards were granted in March 2017 to Ross McEwan and also to Alison Rose and Katie Murray in respect of their roles prior to becoming
executive directors. The performance period ended on 31 December 2019 and the performance conditions have been assessed as set out on
the previous page and below. The awards will vest between March 2020 and March 2024 and remain subject to malus and clawback provisions.
Ross McEwan
The maximum number of shares for the performance assessment for Mr McEwan is calculated in line with the underlying award structure, where
each of the four performance categories can vest up to 100% of salary at the time of grant. However, the actual number of shares received can
never exceed the number of shares capped under the approved policy and the regulatory maximum at the time of grant. There are checks in
place to ensure that these limits are not breached. Pro-rating has been applied to Mr McEwan’s 2017 LTI award reflecting that 35 of the 36
months in the performance period had been completed by his final date of employment, 30 November 2019. As set out below, the number of
shares following the performance assessment falls within the maximum number of shares capped at the time of grant.
Performance category and weightings (see previous page for details)
Economic Profit (25%)
Relative TSR (25%)
Safe & Secure Bank (25%)
Customers & People (25%)
Maximum shares for performance assessment
Outcome following performance assessment (56.25% vesting)
Outcome following performance assessment and application of pro-rating to date of cessation
Maximum shares capped at the time of grant
Maximum shares following the application of pro-rating to date of cessation
Final vesting outcome post pro-rating
Estimated
value (1)
Vesting
Maximum
Shares
Ross McEwan
per category
0%
100%
75%
50%
shares
414,216
414,216
414,216
414,216
1,656,864
due to vest
—
414,216
310,662
207,108
931,986
906,077
1,188,800
1,155,753
906,077 £2,038,673
Alison Rose and Katie Murray
Awards are based on similar performance areas as those applicable for Ross McEwan. While the weightings differ across the performance
categories, the outcome of the performance assessment reflects that set out on the previous page for the executive director award other than a
return on tangible equity (RoTE) measure which replaced economic profit for the LTI population below Board in 2017. The RoTE target was not
deemed to have been met at the end of 2019. No discretion was exercised by the Committee in determining the outcomes below.
Alison Rose
Katie Murray
Performance category and weightings
RoTE (10%)
Relative TSR (25%)
Cost income ratio (10%)
CET1 ratio (15%)
Customer advocacy (15%)
Customer trust (10%)
Employee engagement (15%)
Maximum shares under the award
Outcome following performance assessment (60% vesting)
Vesting per
category
0%
100%
50%
100%
0%
0%
100%
Estimated
value (1)
Maximum
shares
74,559
186,398
74,559
111,838
111,838
74,559
111,838
745,589
Shares due
to vest
—
186,398
37,280
111,838
—
—
111,838
Estimated
value (1)
Maximum
shares
10,397
25,993
10,397
15,595
15,595
10,397
15,595
103,969
Shares due
to vest
—
25,993
5,199
15,595
—
—
15,595
447,354 £1,006,547
62,382 £140,360
Note:
(1) Based on a RBS share price of £2.25, the average over the three month period from October to December 2019.
Scheme interests awarded during 2019 (audited)
Name
Grant date
Face value of
award (£000s)
Number of
shares awarded
% vesting at
minimum and
maximum
Performance Requirements
∆
Ross McEwan 7 March 2019
1,650
625,712
Alison Rose
7 March 2019
1,500
568,829
Between
0% - 100% with
no set minimum
vesting
The awards were subject to a pre-grant assessment of
performance over 2018 and a further assessment will take
place following the end of the 2020 financial year. Further
details of the LTI performance assessment framework can
be found in the 2018 Report and Accounts and overleaf.
Katie Murray
7 March 2019
719
272,613
n/a
Award was subject to a performance assessment over the
2018 financial year.
Notes:
(1) Awards were granted as conditional share awards. The number of shares was calculated taking into account performance and the maximum potential award for
each individual. The award price of £2.637 was based on the average share price over five business days prior to grant. Ross McEwan subsequently left RBS
and qualified for good leaver treatment as set out earlier in this report. The pre-grant assessment of performance for Alison Rose related to a period prior to
becoming an executive director. Subject to the pre-vest assessment, these awards will be eligible to vest in equal amounts between years 2022 and 2026.
Service conditions and malus provisions apply up until vest, and clawback provisions apply for a period of at least seven years from the date of grant.
(2) Katie Murray received a deferred share award in March 2019 in respect of performance year 2018, a period prior to appointment to the Board, and was
therefore not eligible to receive an LTI award in 2019. The award price of £2.637 was based on the average share price over five business days prior to grant.
The award will be eligible to vest in equal amounts between years 2019 and 2026. Service conditions and malus provisions apply up until vest, and clawback
provisions apply for a period of at least seven years from the date of grant.
∆
RBS – Annual Report and Accounts 2019
91
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 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 LTI
awards compared to traditional LTI structures, creating more predictable outcomes and encouraging safe and secure growth within risk appetite.
The Committee will follow a robust process to review performance against pre-set goals relevant to RBS’s strategic aims for that year, but will
apply its judgement without a formulaic range for vesting or mechanistic 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 can
consider if there are any other factors that would lead to a downwards adjustment. Awards may be reduced, potentially down to zero, further to
the application of either the pre-grant or pre-vest tests where there has been significant underperformance or risk management failings.
Risk & Control
Improve or
maintain control
environment.
Material
progress
towards desired
risk culture.
Pre-grant assessment for LTI awards to be made in 2020
Core area and goals Performance targets for 2019 (1)
Achieve planned RoTE targets:
5.1% for RBS Group
10.2% for NWH Group (being NWH
Financial &
Business Delivery
Pre-grant assessment
RoTE for 2019 was as follows:
4.7% for RBS Group
4.8% for NWH Group (2).
Run a safe and
secure bank.
Ltd and its subsidiaries).
Achieve CET1 ratio targets:
15.5% for RBS Group
14.4% for NWH Group and with
appropriate repatriation
of capital to the RBS Group.
CET1 ratio for 2019 was as follows:
16.2% for RBS Group
15.7% for NWH Group, with £1.5bn
of capital repatriated to the RBS
Group.
RBS Group and NWH Group
achieve/maintain and embed a control
environment rating of 2.
Most areas had achieved the required
control environment ratings, but four
business units continued to have a
control environment rating of 3.
Summary
RoTE for both RBS Group and
NWH Group was behind target
largely due to increased PPI
charges, margin pressure and,
in the case of the Group RoTE
target, lower income in NatWest
Markets.
RBS Group and NWH Group
CET1 ratio ahead of target.
The Risk management
performance across the RBS
Group is improving, but the
Group as a whole, and also
NWH Group, had not attained
the required target.
Compliance with the minimum controls for
the effective management of compliance
with ring-fencing rules, as set out in the
ring-fencing policy.
Positive progress towards a (‘1’)
generative risk culture rating with strong
tone from the top and effective action
plans in place. As a minimum, RBS Group
and NWH Group to achieve (‘2’)
systematic risk culture rating.
Ring-fencing compliance maintained in
line with policy and reporting on activities
provided to the PRA.
No evidence to indicate non-
compliance with work continuing
on embedding policy and
controls.
Good progress made towards risk culture
target, with a risk culture rating of
systematic having been achieved across
all but two business units.
While risk culture has continued
to improve in line with the
trajectory set in 2015, the 2019
target was not fully met.
Customer &
Stakeholder
Meaningfully
Increase customer
advocacy for brands
and chosen
segments. Build a
strong internal
customer service.
Achievement of targets for brands and
chosen segments against Competition
and Markets Authority (CMA) rankings
and Net Promoter Scores (NPS).
See note (3) below for full details.
Customer performance was mixed during
2019, with a number of the customer
targets not met. See note (3) below for
details of the Customer targets and
performance.
Achievement of progress based on
working together surveys with targets:
internal NPS of -5 for RBS Group and
NWH Group
core service behaviour score of 65 for
RBS Group and NWH Group.
Internal NPS was-18
the core service behaviours score
was 57.
Customer performance remains
a difficult area, with limited
progress having been achieved
outside of NatWest Commercial
and Coutts & Company
(Coutts).
Targets not met with the internal
NPS and core service behaviour
score both having declined
since 2018.
RBS – Annual Report and Accounts 2019
92
Annual Report on Remuneration
Pre-grant assessment for LTI awards to be made in 2020
Core area and goals Performance targets for 2019 (1)
People & Culture
Provide clarity,
build capability
and motivate our
people. Build up
and strengthen a
healthy culture.
Improve diversity
across leaders to
create a more
mature, inclusive
culture.
Employee engagement index (EI) and
leadership index (LI) scores:
EI target of 87
LI target of 81
Pre-grant assessment
EI and LI scores both increased by 2
points from 2018, to 87 (EI) and 81
(LI), resulting in both targets being
met.
Scores from the Banking Standards Board
assessment on culture:
culture target of 78
The culture score also increased by 2
to 79, resulting in the target being
met.
Progress by RBS Group and NWH Group
on the number of women in senior roles
across the top three layers of the Group
globally by 2020.
Satisfactory progress has been made. As
at Q3, 8 out of 12 business units had met
the target, with a further 2 of the
remaining 4 such areas expected to
achieve the target by year end.
Progress by RBS Group and NWH Group
on the number of BAME/non-white UK
employees in the top four layers of the
Group by 2025.
While the in year target of 10% was not
met, good progress was made towards
the longer term 2025 target.
Summary
Overall RBS has seen
improvements in all RBS Our
View assessed measures as a
result of an increase in EI , LI
and culture scores across most
business units. A limited number
of such areas experienced a
slight degradation on high EI, LI
and culture scores year on year.
The RBS target is to have 30%
or more women in senior roles
across each business unit by
2020 globally. While this specific
target has not yet been met, the
overall RBS Q3 actual was
35%.
The 2019 actual was 9% of
BAME/non-white UK employees
in the top four layers of the
Group.
Notes:
(1) The performance of the Finance function in contributing to the overall targets was also taken into account for Katie Murray as CFO. Alison Rose was the CEO of
Commercial & Private Banking prior to becoming CEO in November 2019 and the performance of those business areas was also assessed in terms of
contribution to the NWH Group targets.
(2) Tangible equity based upon a simple full year average.
(3) Brand CMA and NPS targets together with the scores achieved are set out below:
Business area
NatWest
Commercial
NPS
NatWest
Business CMA
Royal Bank
Business NPS
Coutts NPS
NatWest Personal
CMA
Royal Bank
Personal CMA
Ulster RoI
Personal NPS
Target
21 and 1st
57% or 6th
Score
23 and 1st
50% and 9th
-27
-31
37
43
63% or 7th
52% or 13th
-5 or 2nd
61% and 7th
46% and 16th
-15 and 3rd
Outcome of the pre-grant assessment for the 2020 LTI award
The Committee also received advice from the BRC and SBC in making its final assessment. The Committee assessed non-formulaic
measures in order to determine the pre-grant assessment, as follows:
There were positive indicators of performance during the year
However performance was not fully at the desired level
Full year net lending growth across UK Personal Banking,
Ulster Bank RoI, Commercial Banking and Private Banking
was 3.7%, which was well in excess of the stated target of 2-
3%.
RBS continued to maintain a strong capital position. Further
progress was also made on simplifying the bank with lower
costs in 2019.
On people measures, employee engagement was at its
highest since measurement began in 2002. The RBS ‘Our
View’ employee engagement survey scores also saw an
improvement of an average of two points per assessed
category, which scored RBS higher than the Global Financial
Services benchmark. Good progress was also made with
regards to longer term diversity and inclusion targets.
With a couple of notable exceptions in NatWest Commercial and
Coutts, customer performance was not considered by the
Committee to be at the level expected.
The Committee noted that risk management performance had
improved, although four business units were still to attain the
desired ‘2’ control environment rating. Similarly, on risk culture, all
but two business units had by year end achieved a ‘systematic’ risk
culture rating.
On financial measures, RoTE was behind target due to increased
PPI charges and margin pressure and full year core income for
NatWest Markets was adverse to plan.
As part of its ‘performance in the round’ judgement, the Committee noted the lack of progress in certain key areas, with poor financial and
customer performance considered a significant lag on the areas of improvement for 2019. The Committee concluded that this should be
reflected by an award level for Ross McEwan of 69% of the maximum possible award. Mr McEwan’s award was also pro-rated to reflect
that he was employed for 11 months of the performance year. In the case of Katie Murray, an award level of 73% of the maximum possible
award was proposed, the relative increase compared to Mr McEwan’s award being justified by strong risk management performance within
the Finance function, which achieved a control environment rating of 2 and a systematic risk culture. The Committee also determined an
award level for Alison Rose of 78% of the maximum possible award, based on the new CEO LTI maximum, which was primarily driven by
Ms Rose’s performance in her previous role, notable achievements being the launch of the Rose review and progress on risk and culture.
Maximum award level under the policy
Agreed award level following the pre-grant performance assessment
Ross McEwan (1)
£1,750,000
£1,100,000
Alison Rose
£1,925,000
£1,500,000
Katie Murray
£1,500,000
£1,100,000
Note:
(1) Ross McEwan’s agreed award level for the 2020 LTI award represents a 26% reduction compared to his 2019 LTI award, which was considered by the
Committee to be representative of a weaker overall performance in 2020 across key finance and customer performance areas.
RBS – Annual Report and Accounts 2019
93
Annual Report on Remuneration
Pre-vest assessment for 2020 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.
Four core questions will be considered as part of the pre-vest assessment. In determining the final vesting level of the award, the Committee will
consider both individual and collective performance which means that there may be different vesting levels by participant. The process that will
be followed to determine whether sustainable performance has been delivered is as follows:
When assessing the performance of the year for which the award was granted, and “knowing what we know now”, has RBS:
1. Remained safe and secure, taking into account financial results and capital position?
2. Been a good bank for customers taking into account customer and advocacy performance?
3. Operated in an environment in which risk is seen as part of the way we work and think?
4. Operated in a way that reflects its stated values?
Evidenced by:
i.
ii.
iii.
iv.
v.
vi.
Has RBS breached a minimum capital ratio over the period? (core assessment question 1)
Has there been a material fall in the RBS share price over the period (core assessment question 1)
Has NPS fallen across the business? (core assessment question 2)
Have there been indicators of a material deterioration in the risk culture or profile, taking into account annual assessments by
the Risk function and the BRC? (core assessment question 3)
Has the Banking Standards Board survey position fallen materially? (core assessment question 4)
Have employee engagement scores fallen materially? (core assessment question 4)
NO
YES
Achievement of “threshold level
of sustainable performance” has
been evidenced.
Three further questions to be considered:
1.
Is the underperformance due to factors within management’s reasonable control in the
circumstances?
2. Can the underperformance be linked back to the performance year to which the award relates,
No adjustment proposed subject
to the underpins below.
3.
rather than performance developments since?
Is it appropriate to reflect the underperformance in the current pre-vest test (i.e. if the
underperformance has not been adequately reflected in other ways such as subsequent pre-
grant tests and awards in the interim)?
If the answer to each of these questions is “Yes”, the Committee may decide that a reduction on
pre-vest is appropriate, and it has the discretion to decide the amount.
Risk & Control and Stakeholder Perception underpins
In addition, the Committee will consider the potential application of Risk & Control and Stakeholder Perception underpins following advice
from the BRC and the SBC. This provides scope to consider significant risk, stakeholder or reputational matters not already captured in
the performance assessment. The underpins also allow the Committee to consider events arising during the period between grant and the
end of year three.
Performance Goals for 2020 (for the pre-grant assessment of LTI awards to be made in 2021)
The table below forms the basis of the pre-grant assessment for LTI awards to be made in early 2021, with performance assessed across four
core areas using a balanced scorecard and with measures that align with RBS’s purpose. It should be noted that the pre-grant assessment for
LTI awards operates over a one-year period based on strategic targets for that year, and in this respect it has some similarities to the operation
of annual bonus awards rather than traditional long-term incentive awards. Targets are disclosed in advance where these are not deemed
commercially sensitive. There are no weightings set for the performance categories as the Committee follows a robust process to review
performance against pre-set goals but applies its judgement without reference to formulaic weightings. Full details on the 2020 targets and the
assessment of performance against these will be set out in the 2020 Directors’ Remuneration Report.
Core area and
purpose
Performance Goals for
2020
Measures for assessing pre-grant performance
for 2021 LTI awards
Targets
Scorecard
Financial &
Business
Delivery
Purpose
alignment
Has a
Purpose
which delivers
long term
sustainable
performance
Run a safe and secure
bank.
Achieve RBS Group cost reduction target based
on operating expense reduction.
RBS Group cost reduction of £250m.
Achieve CET1 ratio target for RBS Group and
NWH Group, with appropriate repatriation of
capital to the RBS Group.
Targets will be disclosed as part of the
performance assessment in the 2020
Directors’ Remuneration Report.
Achieve net loan growth target for Retail and
Commercial franchises consisting of UK Personal
Banking, Ulster, Private, Commercial and RBSI.
Progress towards execution of the NatWest
Markets strategic review. To be measured with
reference to RWA reduction and capital accretion.
Retail and Commercial net lending growth of
>3%.
NWM RWA reduction of £6-8billion and
capital ratio accretive in year 1.
RBS – Annual Report and Accounts 2019
94
Annual Report on Remuneration
Core area and
purpose
Performance Goals
for 2020
Measures for assessing pre-grant performance for
2021 LTI awards
Targets
Scorecard
Risk & Control
Purpose
alignment
Has a Purpose
which delivers
long term
sustainable
performance
Scorecard
Customer &
Stakeholder
Purpose
alignment
Honest & Fair
with Customers
and Suppliers
A Good Citizen
A Guardian for
Future
Generations
Scorecard
People &
Culture
Purpose
alignment
A
Responsible
and
Responsive
Employer
Maintain a robust
control environment.
Material progress
towards the desired
risk culture target
where ‘risk is part of
the way we work
and think’.
Meaningful increase
in customer
advocacy for key
customer journeys.
Creation of new
businesses,
irrespective of
gender, background
or geography.
To be a leading
bank helping to
address the climate
challenge.
Achieve or maintain an effective control
environment rating, including progress on
Financial Crime improvement plans, with control
and risk implications considered in strategic and
cost change programmes.
RBS Group and NWH Group to achieve a
control environment rating of 2, with RBS
Group and NWH Group change programmes
managed and executed within policy and risk
appetite.
Effective management of compliance with the
ring-fencing rules across NWH Group.
Compliance with minimum controls under ring-
fencing rules.
Achieve or maintain a ‘systematic’ risk culture
rating which reflects target risk management
practices and behaviours in line with the
Enterprise Wide Risk Management Framework.
Positive progress towards (‘1’) generative with
RBS Group and NWH Group to be rated (‘2’)
systematic as a minimum.
Achievement of targets across the top 5
customer journeys to be prioritised for
transformation in 2020.
Build trust with our
customers
Achievement of improved net trust scores for
NatWest and Royal Bank of Scotland.
Creation of 6,500 new businesses, ensuring
everyone has the same opportunity to progress
irrespective of gender, background or
geography.
Net Promoter Score improvement of:
8 points for account opening;
4 points for paying a person or bill;
2 points for keeping purchases and payments
safe;
8 points for commercial lending; and
3 points for business servicing.
Net trust score improvement of 6 percentage-
points for NatWest (England & Wales) and
improvement of 10 percentage-points for
Royal Bank of Scotland (Scotland).
Create an additional 6,500 new businesses
with support being distributed as follows: 75%
to the UK regions outside London & South
East, 60% to females, 20% to BAME
individuals and 10% to people intending to
create purpose-led businesses.
Progress towards climate positive operations by
2025.
Reduce carbon emissions from our direct
operational footprint by 10%.
Funding and financing for climate and
sustainable finance.
Increase new funding and financing for climate
and sustainable finance to £6.5bn in 2020.
Set sector specific targets for emissions
reduction.
Build the capability
of our colleagues to
realise their
potential.
Build up and
strengthen a healthy
culture.
Embed our shared
purpose across the
business and
brands.
Develop a diverse
workforce and
inclusive
environment
Based on achieving the capability targets for
RBS Group and NWH Group as measured
through the RBS ‘Our View’ colleague survey.
Based on the Banking Standards Board
assessment and achieving the culture target for
RBS Group and NWH Group, as measured
through the RBS ‘Our View’ colleague survey.
Based on achieving the shared purpose target
for RBS Group and NWH Group, as measured
through the RBS ‘Our View’ colleague survey.
Progress on the number of women in senior
roles across the top three layers of RBS Group.
Progress on the number of BAME/non-white UK
employees in the top four layers of RBS Group.
Based on achieving the inclusion target for RBS
Group and NWH Group, as measured through
the RBS ‘Our View’ colleague survey.
RBS will set sector-specific targets for high
impact sectors that are scenario-based for
aggregate balance sheet alignment to the
objectives of the 2015 Paris Agreement, and
be in a position to publish such targets at or
before the time of the FY2020 results
announcements to give full transparency to all
our stakeholders.
RBS Group and NWH Group to be 12 points
above the Global Financial Services Norm.*
RBS Group and NWH Group to be equal to
the Banking Standards Board norm.*
RBS Group and NWH Group to be 1 point
above the Banking Standards Board norm.
To increase the percentage of females in the
top three layers of RBS Group from 35% to
36% on aggregate.
To increase the percentage of BAME/non-
white UK employees in the top four layers from
9% to 10% on aggregate.
RBS Group and NWH Group to be 10 points
above the Global Financial Services Norm.
*Willis Towers Watson’s Global Financial Services Norm. The Banking Standards Board norm is based on the average score across all participating banks.
For the CFO, performance will be assessed in line with the framework above and the performance of the Finance function will also be taken into account.
RBS – Annual Report and Accounts 2019
95
Annual Report on Remuneration
Payments for loss of office (audited)
On 25 April 2019, Ross McEwan announced his intention to retire as CEO. He stepped down from the Board on 31 October 2019 and ceased to
be an employee on 30 November 2019. Both parties agreed that the notice period would be brought to an end on 30 November 2019 and that
no payment would be made in lieu of notice. In line with his contractual arrangements, Mr McEwan 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 1 November to 30 November 2019
comprised salary (£83,333), fixed share allowance (£83,333), pension funding (£29,167) and benefit funding (£2,188), a total of £198,020 before
tax.
The Board agreed that Mr McEwan qualified for good leaver treatment, as per the requirements in the policy section of this report, in respect of
his unvested LTI awards. Mr McEwan was in his sixth year as CEO and was planning to retire to New Zealand. After announcing his intention,
Mr McEwan was subsequently approached by, and then accepted an appointment with, National Australia Bank (NAB). The Board considered
all the circumstances and NAB was not viewed as competing directly and materially with RBS given its very limited presence in the UK and,
therefore, all the retirement criteria were deemed to have been met. Should Mr McEwan decide to take on a different role in future, then the
good leaver criteria would be re-tested.
In line with good leaver status, outstanding LTI awards granted in 2018 and 2019 will continue to vest on their scheduled vesting dates and pro‐
rating will not apply. The 2017 LTI award was granted under the previous remuneration structure and pro‐rating will apply based on Mr
McEwan’s final date of employment. All awards remain subject to a performance assessment prior to vesting and the potential application of
malus and clawback provisions. In line with the policy, Mr McEwan remained eligible for a further LTI award to be granted in 2020 in respect of
his performance during 2019 and pro-rated to reflect his employment ended on 30 November 2019. This included the requirement to provide an
orderly handover as a condition of his good leaver status. As set out on page 93, an LTI award of £1,100,000 was agreed in respect of the 2019
performance year. Any vesting of awards will be disclosed in the Directors' Remuneration Report for the relevant year.
Payments to past directors (audited)
Payments made to Ross McEwan 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 2019.
∆
Total remuneration for the Chairman and non-executive directors for 2019
The GRG Board Oversight Committee was stood down at the end of June 2019. There were no other changes to Committees during the year
and the level of fees remained unchanged. For RBSG plc Board directors who also serve on the boards and committees of NatWest Holdings
Limited, National Westminster Bank Plc, The Royal Bank of Scotland plc and Ulster Bank Limited, the fees below reflect membership of all five
boards and their respective board committees. Where appropriate, RBSG plc 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.
Total single figure of remuneration for the Chairman and non-executive directors during 2019 (audited)
∆
Chairman (composite fee)
Howard Davies (1)
Non-executive directors (2)
Frank Dangeard (3)
Alison Davis
Patrick Flynn
Morten Friis
Robert Gillespie
Brendan Nelson (3)
Baroness Noakes
Mike Rogers
Mark Seligman
Lena Wilson
Fees
2019
£000
750
2018
£000
750
Benefits
2019
£000
11
2018
£000
11
Total
2019
£000
761
2018
£000
761
GRG
Fees
Board N&G GAC BRC SBC
£000
£000
£000
£000
£000
TIC RemCo
£000
£000
£000
SID BOC CAP Other
£000
260
£000
£000
80
80
80
80
26
80
80
80
80
11
15
4
15
68
34
17
34
15
34
60
30
34
34
34
8
68
30
30
60
30
30
30
60
30
30
8
10
8
31
30
8
15
2019
£000
260
200
223
148
227
96
205
170
197
155
2018
£000
252
200
101
142
219
284
216
158
171
128
Benefits
2019
£000
4
24
10
35
19
12
17
12
8
11
2018
£000
4
26
9
50
8
31
18
12
5
20
Total
2019
£000
264
224
233
183
246
108
222
182
205
166
2018
£000
256
226
110
192
227
315
234
170
176
148
No variable pay is provided to the Chairman and non-executive directors in line with the Code.
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 a composite fee as Chairman of the NatWest Markets Plc (NWM Plc) Board. Brendan Nelson also received
fees as a member of the NWM Plc Board and these are shown above for the period to 25 April 2019, the date he stood down from the RBSG plc Board.
Key to table:
N&G
GAC
BRC
SBC
TIC
Group Nominations and Governance Committee
Group Audit Committee
Group Board Risk Committee
Group Sustainable Banking Committee
Technology and Innovation Committee
RemCo
SID
GRG BOC
CAP
Group Performance and Remuneration Committee
Senior Independent Director
Board Oversight Committee for the GRG business areas
Colleague Advisory Panel
∆
RBS – Annual Report and Accounts 2019
96
Annual Report on Remuneration
Implementation of remuneration policy in 2020
Details of remuneration to be awarded in 2020 to executive directors are set out below. The salary, benefits, pension and fixed share allowance
for the CEO and CFO 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 LTI awards would be granted as set out below. Details of the pre-grant assessment can be found
on pages 92 to 93.
Executive directors’ remuneration to be awarded in 2020
Alison Rose
Katie Murray
Salary
£1,100,000
£750,000
Standard benefits (1)
£26,250
£26,250
Pension (% of salary)
£110,000 (10%)
£75,000 (10%)
Fixed share allowance LTI award following pre-grant
assessment over 2019
£1,500,000
£1,100,000
100% of salary (2)
£1,100,000
£750,000
Notes:
(1) Amount shown relates to standard benefit funding. Executive directors are also entitled to travel assistance and security arrangements in line with the policy.
The value of benefits received will be disclosed each year.
(2) Fixed share allowance payable broadly in arrears, currently in two instalments per year but moving to four instalments per year following the AGM, with shares
released in equal amounts over a three year period.
Timing of payments to executive directors
Variable pay
pre-grant
assessment
based on
performance
over 2019
LTI award
granted in
2020
further assessment
made before any
vesting takes place
20%
20%
20%
20%
20%
vests over 2023 to 2027 with
a 12 month retention period
post vesting
Fixed pay
33%
33%
33%
shares released
over three years
Fixed share
allowance
Pension &
benefits
Base salary
Year
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
Chairman and non-executive directors’ annual fees for 2020
The fees are unchanged from 2019.
Fees for RBSG plc Board (1)
Chairman (composite fee)
Non-executive director basic fee
Senior Independent Director
Fees for RBSG plc Board Committees (1)
Group Board Risk Committee
Group Audit Committee
Group Performance and Remuneration Committee
Group Sustainable Banking Committee
Technology and Innovation Committee
Group Nominations and Governance Committee
Other fees for RBSG plc 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 2020
£750,000
£80,000
£30,000
Member
£34,000
£34,000
£30,000
£30,000
£30,000
£15,000
Chairman
£68,000
£68,000
£60,000
£60,000
£60,000
—
£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, National
Westminster Bank Plc, The Royal Bank of Scotland 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 new external directorships, taking into account the nature of the
appointment. Details of the directorships held by directors can be found in the biographies section of the corporate governance report.
RBS – Annual Report and Accounts 2019
97
Annual Report on Remuneration
Directors’ interests in RBSG plc shares and shareholding requirements (audited)
The shareholding requirement is to hold shares to the value of 400% of salary for the CEO and 250% of salary for the CFO. Following the pre-
vest performance assessment of LTI awards at the end of year three, shares will be deemed to count on a net of tax basis towards meeting the
shareholding requirement. Once the respective retention periods have passed, executive directors are permitted to dispose of up to 25% of the
net of tax shares received until the shareholding requirement is met. Under the policy being proposed at the 2020 AGM, a post-employment
shareholding requirement will also be introduced. Executive directors will be required to hold shares of a value equal to the lower of their
shareholding requirement immediately prior to departure or the actual shareholding on departure, for a period of two years. A fixed number of
shares for the post-employment shareholding requirement will be determined at the date of departure.
∆
Shareholding requirements (audited)
Notes:
(1) Mr McEwan holds 115,322 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. Mr McEwan exceeded his
shareholding requirement at the date he stepped down from the Board while Ms Rose and Ms Murray are making progress towards their requirements, having
only been appointed to the Board during 2019.
(2) The calculation is based on a share price of £2.13 as at 31 October 2019 for Mr McEwan, the date he stepped down from the Board, and £2.40 as at 31
December 2019 for Ms Rose and Ms Murray. During the year the share price ranged from £1.78 to £2.70.
Share interests held by directors
Ross
Alison
Katie
Howard
Frank
Alison
Patrick Morten
Robert Brendan Baroness
Mike
McEwan
Rose
Murray
Davies Dangeard
Davis
Flynn Friis (5) Gillespie
Nelson Noakes Rogers
Mark
Seligman
(6)
Lena
Wilson
2,483,768 1,205,945 250,222 100,000 5,000 20,000
— 20,000 25,000 12,001 41,000 20,000 30,000 20,000
672,834 300,023 420,538
2,406,840 1,803,324 103,969
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Sharesave options (4)
—
—
3,486
Shares held (1)
LTI / deferred awards
subject to service (2)
LTI awards subject
to performance (3)
Notes:
(1) Shares owned beneficially as at 31 December 2019 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 13 February 2020, there were no changes to the shares held shown above, other than the acquisition of 68
shares by Katie Murray at the end of January 2020 as part of one of the company’s employee share plans.
(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.
(3) Awards shown are still subject to the pre-vest performance assessment and also subject to deferral periods and employment conditions before vesting.
(4) Interests held under the Sharesave plan where employees can choose to save from their salary with an option to buy shares at the end of the savings period.
(5) The share interest held is over 10,000 American Depositary Receipts representing 20,000 ordinary shares.
(6) 10,000 shares are held in the name of M Seligman & Co Ltd, of which Mr Seligman and Louise Seligman are shareholders.
∆
RBS – Annual Report and Accounts 2019
98
Annual Report on Remuneration
Directors’ interests under the company’s share plans (audited)
Year of
award
Awards held at
1 January 2019
Awards
granted
Award
price £
Awards Awards lapsed
vested for performance
Awards
Awards held at
forfeited 31 December 2019
Ross McEwan (1)
LTI award 2015
LTI award 2016
LTI award 2017
LTI award 2018
LTI award 2019
371,098
1,187,207
1,188,800
592,328
625,712
3,339,433 625,712
Alison Rose
LTI award 2015
LTI award 2016
LTI award 2017
LTI award 2018
LTI award 2019
196,926
620,183
745,589
488,906
568,829
2,051,604 568,829
Katie Murray
Deferred award 2016
LTI award 2016
Deferred award 2017
LTI award 2017
Sharesave 2017
Deferred award 2018
Sharesave 2018
Deferred award 2019
1,772
56,260
68,345
103,969
1,585
133,979
1,901
272,613
367,811 272,613
3.74 185,549
2.26
2.41
2.66
2.64
699,922
185,549
699,922
98,463
418,623
98,463
418,623
1,772
17,087
26,796
28,801
74,456
37,975
37,975
3.74
2.26
2.41
2.66
2.64
2.26
2.26
2.41
2.41
2.27
2.66
1.89
2.64
185,549
487,285
1,188,800
592,328
625,712
3,079,674
98,463
201,560
745,589
488,906
568,829
2,103,347
—
18,285
51,258
103,969
1,585
107,183
1,901
243,812
527,993
(2)
(2)
(3)
(2)
(2)
(3)
(2)
(2)
(3)
(4)
(2)
(4)
(2)
Expected vesting dates
06.03.20
08.03.20 – 08.03.21
07.03.21 – 07.03.24
07.03.21 – 07.03.25
07.03.22 – 07.03.26
06.03.20
08.03.20 – 08.03.21
07.03.20 – 07.03.24
07.03.21 – 07.03.25
07.03.22 – 07.03.26
08.03.20 – 08.03.21
07.03.20 – 07.03.22
07.03.21 – 07.03.22
18.12.2020
07.03.20 – 07.03.23
18.12.2021
07.03.20 – 07.03.26
Notes:
(1) Interests for Ross McEwan are as at 31 October rather than 31 December 2019. As noted earlier in the report, the Committee agreed that good leaver treatment
should apply. Outstanding LTI awards will continue to vest on their scheduled vesting dates subject to the assessment of performance where appropriate.
(2) Performance assessment has taken place and outstanding awards remain subject to deferral and service or good leaver conditions before vesting.
(3) The performance period ended on 31 December 2019 with the vesting outcomes determined in January 2020, as set out earlier in this report. In the case of
Ross McEwan, the 2017 award was pro-rated to reflect that he was employed for 35 of the 36 months covering the performance period.
(4) Award granted under the all-employee Sharesave plan. The award price is the option price at which shares can be bought at the end of the savings period.
∆
Total Shareholder Return (TSR) performance
The graph below shows the performance of RBSG plc 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 as a further comparison. Source: Datastream
FTSE 100
250
FTSE UK Banks
200
RBS
R
S
T
150
100
50
0
2009 YE 2010 YE 2011 YE 2012 YE 2013 YE 2014 YE 2015 YE 2016 YE 2017 YE 2018 YE 2019 YE
CEO pay over the same period
2010
2011
Total remuneration (£000s) (1)
3,687
1,646
2012
2013
1,235 (SH)
1,646 393 (RM)
Annual bonus against
max. opportunity
LTI vesting rates against
maximum opportunity (2)
85%
0%
0%
0%
0%
0% (SH)
0%
0% (SH)
2014
2015
2016
2017
2018
2019
1,878
3,492
3,702
3,487
3,578 4,066 (RM)
1,401 (AR)
n/a
n/a
n/a
n/a
n/a
n/a
73%
62%
56%
89%
41% 78% (RM)
60% (AR)
Notes:
(1) For 2013 and 2019 the table reflects where more than one individual has served as CEO during the year. The CEOs are Stephen Hester (SH), Ross McEwan
(RM) and Alison Rose (AR) with figures based on the single total figure of remuneration for the relevant year.
(2) The maximum opportunity is set according to the approved policy and, for LTI awards granted in 2015 and onwards, the regulatory cap.
RBS – Annual Report and Accounts 2019
99
Annual Report on Remuneration
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)
2019
£m
3,516
3,018
406
890
637
2018
£m
3,628
241
470
1,062
616
Change
-3.09%
1152%
-13.62%
-16.20%
3.41%
Notes:
(1) Remuneration paid to all employees represents total staff expenses per Note 3 to the Financial Statements, exclusive of social security and other staff costs.
(2) In 2019 RBS paid a final dividend of 3.5p and a special dividend of 7.5p per ordinary share in respect of financial year 2018, and an interim dividend of 2.0p and
a further special dividend of 12.0p per ordinary share in respect of financial year 2019. The directors have recommended a final dividend of 3.0p per ordinary
share and a special dividend of 5.0p per ordinary share in respect of financial year 2019, subject to shareholders’ approval at the Annual General Meeting on 29
April 2020.
(3) Input VAT and other indirect taxes not recoverable by RBS due to it being partially exempt.
Change in CEO’s pay compared with employees
The table below shows the annual percentage change in remuneration for the CEO 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. Under the
remuneration policy the CEO also receives a fixed share allowance and is eligible for LTI awards rather than annual bonus.
Chief Executive Officer (1)
UK employees (3)
Salary
2018 to 2019 change
1.66%
3.05%
Benefits
2018 to 2019 change (2)
0%
1.25%
Annual Bonus
2018 to 2019 change
n/a
-6.30%
Notes:
(1) Alison Rose was appointed CEO on a salary that was 10% higher than her predecessor, as outlined earlier in this report. As the change was effective from 1
November 2019, the annual percentage change in salary from the 2018 to 2019 financial year is 1.66%.
(2) Standard benefit funding for executive directors remained unchanged between 2018 and 2019. The benefits excludes other any benefits such as travel
assistance in connection with company business and any relocation benefits, the value of which is disclosed each year in the total remuneration table.
(3) RBSG plc is a holding company and it does not have any employees. The data above is based on full year average salary costs of UK based employees of RBS
Group. This is considered to be the most representative comparator group as it covers the majority of employees and the CEO is based in the UK.
CEO to employee pay ratios
The ratios compare the total remuneration of the CEO, 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 CEO’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 median ratio is reflective of a diverse range of roles and pay levels across RBS as a large financial services company. For each individual,
RBS is committed to paying a fair rate for the role performed, using consistent reward policies and with opportunities for progression. The steps
that RBS takes to ensure employees are paid fairly are set out earlier in this report. The higher total remuneration ratios in 2019 compared to
2018 are primarily a result of the increase in the LTI vesting amount included in the CEO single figure of remuneration. The vesting related to
the 2017 LTI award which was the last under the previous remuneration construct. Under this construct, there was a high degree of volatility in
vesting outcomes with largely formulaic outcomes. The current remuneration policy aims to create more predictable LTI outcomes. The position
year on year based on a comparison of salary only is unchanged.
Financial
Year
Methodology
2018
2019
A
A
total remuneration
salary only
total remuneration
salary only
P25
(Lower Quartile)
143:1
44:1
175:1
44:1
Pay ratios
P50
P75
(Median) (Upper Quartile) Calculation
Chief Executive
97:1
30:1
118:1
30:1
56:1 total remuneration
19:1 salary only
69:1 total remuneration
19:1 salary only
£3,577,649
£1,000,000
£4,516,873
£1,016,667
Remuneration values
Y25
(Lower Quartile)
Y50
Y75
(Median) (Upper Quartile)
£63,825
£51,302
£65,684
£52,439
£24,946 £36,727
£22,526 £33,146
£25,742 £38,199
£23,253 £34,051
Supplementary information on pay ratio table:
(1) The data for 2019 is based on remuneration earned by Ross McEwan and Alison Rose, as set out in the single figure of remuneration table in this report, but
with the LTIP vesting value for Alison Rose pro-rated to exclude the period prior to becoming CEO.
(2) The employees at the 25th, 50th and 75th percentiles (lower, median and upper quartile) were determined as at 31 December of the relevant year, 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.
(3) ‘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 neither of the CEOs that served during the year, 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 regulatory disclosures, the
pension funding allowance value has been included in the calculation for all employees.
(4) The data for the three employees 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 2019
46,152 employees earned total remuneration up to £50,000
12,117 employees earned total remuneration between £50,000 and £100,000
5,218 employees earned total remuneration between £100,000 and £250,000
910 employees earned total remuneration over £250,000
RBS – Annual Report and Accounts 2019
100
Annual Report on Remuneration
Membership of the Group Performance
and Remuneration Committee
All members of the Committee are
independent non-executive directors. In order
to be considered for the role of Committee
Chairman, an individual must first have served
on a remuneration committee for at least 12
months.
During 2019, Robert Gillespie was Chairman
of the Committee and Alison Davis, Mike
Rogers, Mark Seligman and Frank Dangeard
were members. The Committee held seven
scheduled meetings in 2019 and a further
eight ad hoc meetings. Details of attendance
can be found in the corporate governance
report on page 66.
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 and NWH
Executive Committees, the direct reports
of the CEO and heads of key legal
entities, control function heads and the
Company Secretary. The Committee also
approves arrangements where employees
earn total compensation above £1 million;
and
setting the remuneration framework and
principles for employees identified as
Material Risk Takers (MRTs) falling within
the scope of UK regulatory requirements.
The remuneration policy operated as intended
during the year, with adjustments made for
performance where appropriate. The
Committee reviews performance for senior
executives and also the implementation of the
remuneration policy for all employees. One of
the key tasks for the Committee in 2019 was
considering and engaging with shareholders
on the renewal of the executive directors’
remuneration policy, with decisions shared
with the Board for final approval.
To mitigate 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.
Attendees also play an important role in
advising the Committee. In order to avoid any
potential conflict of interest, no attendee is
present when their own remuneration is
discussed. The Group Chief HR Officer may
be present when discussions take place on
senior executive pay, as there is considerable
benefit from her participation, but is never
present when specific details of her own
remuneration are discussed.
The terms of reference of the Committee are
reviewed annually and available on rbs.com.
Summary of the principal activity in 2019
Tasks undertaken by the Committee included
reviewing and, where appropriate, approving:
agreed to retain the services of PwC. The
Committee will continue to review the
performance of its advisers each year.
First half of 2019
2018 performance assessments and
remuneration arrangements for the
Committee’s ‘in scope’ population.
2019 performance objectives for the ‘in
scope’ population.
Assessments of vesting levels for LTI
awards granted in 2016 and 2017.
Regulatory updates and submissions.
Fixed and variable pay spend across all
RBS employees, including analysis by
employee level, geography and diversity.
The renewal of the Executive Directors’
Remuneration Policy and the RBS Group-
wide remuneration policy principles.
Second half of 2019
Half-year and year-end performance
reviews for the ‘in scope’ population.
Remuneration arrangements for the
departure of Ross McEwan and the
appointment of Alison Rose.
The plan to engage with stakeholders on
remuneration proposals.
Management’s assurance of the
implementation of the RBS Group-wide
remuneration policy.
Fixed pay proposals for the year ahead.
The 2019 employee Sharesave offer.
2019 variable pay proposals and the 2019
Directors’ Remuneration Report.
The Committee also held a ‘masterclass’
session with the SBC, which allowed both
committees to gain an in-depth understanding
of the Employee Value Proposition at RBS.
Performance evaluation
The 2019 performance evaluation was
conducted internally by the Chief Governance
Officer and Company Secretary. The
evaluation was structured around: operating
rhythm; purpose & priorities; subsidiary
oversight; and culture & dynamics. Members
were comfortable the Committee had been
effective and were supportive of the approach
taken on subsidiary governance. The
connectivity with the Board and other
committees was also viewed as working well.
The masterclass was praised as an important
part of the annual cycle and it was felt to be
important that the Committee continued to
play an active role in reviewing the changing
nature of the workforce and the impact on
remuneration. Some mixed views were
expressed on the length of meetings and
papers. Actions arising from the evaluation
will be tracked during 2020.
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 2019, following which the Committee
PwC is a signatory to the voluntary code of
conduct in relation to remuneration consulting
in the UK. As well as receiving advice from
PwC, the Committee took account at
meetings of the views of the Chairman; the
CEO; the CFO; the Group Chief HR Officer;
the Director of Reward & Employment; and
the Group Chief Risk Officer. The Committee
also received input from the BRC, the GAC
and the SBC. Input is also received from
Performance and Remuneration Committees
for key legal entities across RBS Group.
PwC provides professional services in the
ordinary course of business including
assurance, advisory, tax and legal advice to
RBS subsidiaries. The Committee is satisfied
that the advice received is independent and
objective, and receives an annual statement
setting out protocols that have been followed
by PwC to maintain independence. There are
no connections between PwC and individual
directors to be disclosed.
Fees paid to PwC for advising the Committee
are based on a fixed fee structure to cover
standard services with any exceptional items
charged on a time/cost basis. Fees for 2019 in
relation to directors’ remuneration amounted
to £194,463 excluding VAT (2018 - £128,625).
Statement of shareholder voting
The tables below set out the latest resolutions
to approve the Directors’ Remuneration Policy
and the Annual Report on Remuneration.
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 – 2019
Vote
For
Against
Withheld
No of shares
43,761,530,456
338,658,320
212,446,568
Percentage
99.23%
0.77%
—
Shareholder dilution and share sourcing
The company has previously used a
combination of new issue and market
purchase shares to satisfy the exercise of
share options and the vesting of share awards
under its employee share plans. In future, the
company is intending to use shares
purchased by the RBS Group Employee
Share Ownership Trust and any available
treasury shares to satisfy obligations under
such plans.
RBS’s employee share plans contain best
practice dilution limits that govern the number
of shares that may be issued to satisfy share
plan awards. Such limits will continue to be
monitored.
Robert Gillespie
Chairman of the Group Performance and
Remuneration Committee
13 February 2020
RBS – Annual Report and Accounts 2019
101
Other Remuneration Disclosures
This section contains a number of disclosures
which are required in accordance with Article
450 of the Capital Requirements Regulation,
the Basel Committee on Banking Supervision
Pillar 3 disclosure requirements and the EBA
guidelines on sound remuneration policies.
This section should be read in conjunction
with the Directors’ Remuneration Report
starting on page 79.
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 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.
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 2019
performance year, the population receiving
long-term incentive awards will be limited to
executive directors and certain members of
RBS 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.
Employee share plans
The purpose is to provide an efficient way for
employees to hold shares in RBS, which
helps to encourage long-term thinking and
provides a direct involvement in RBS’s
performance.
Operation
Employees in certain jurisdictions are offered
the opportunity to acquire shares in RBS
through employee share plans. Any shares
held are not subject to performance
conditions.
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 business area 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 (NWM Plc
and RBS International), with dual solid
reporting lines into both the legal entity CEO
and the RBS Group Control Function Head.
For awards made in respect of the 2019
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 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.
During 2020, RBS will consider its approach
to new remuneration requirements proposed
under the fifth iteration of the Capital
Requirements Directive.
RBS – Annual Report and Accounts 2019
102
Other Remuneration Disclosures
Criteria for identifying MRTs
The EBA has issued criteria for identifying
MRT roles, which captures 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).
We identify MRTs for four key ‘institutions’
within the RBS Group: The Royal Bank of
Scotland Group plc; NatWest Holdings
Limited; NWM Plc; and The Royal Bank of
Scotland International (Holdings) Limited. The
MRT criteria are applied for each of these
institutions, and consequently some MRTs are
identified in relation to one or more of these
entities.
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 the 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 not aligned
with 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 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 2019 performance year, RBS
operated a robust multi-step process, which is
control function led, to assess performance
and the appropriate bonus pool by business
area 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 business area 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 CEO will make
a final recommendation to the Committee,
informed by all the previous steps in the
process and her strategic view of the
business. The Committee will then make an
independent decision on the final bonus pool
taking all of these earlier steps into account.
The assessment process for LTI awards to
executive directors and other recipients is
founded on a balanced scorecard approach.
The scorecard is aligned with 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.
RBS – Annual Report and Accounts 2019
103
The governance of culture is clearly laid out
with specific Senior Management Function
roles having clearly defined accountabilities,
which is taken into account in their pay
decisions. The Board and SBC also play key
roles in building cultural priorities. Clear
measurement frameworks are in place to
measure progress.
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
to 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.
Potential outcomes under the accountability
review process are:
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.
As part of the acceptance of variable pay
awards, MRTs must agree to terms that state
that malus and clawback may be applied. Any
variable pay awarded to MRTs in respect of
the 2014 performance year 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 can be
extended to ten years for MRTs who perform
a ‘senior management function’ 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 malus, clawback or
in-year bonus reduction may apply include:
conduct which results in significant
financial losses for RBS;
the individual failing to meet appropriate
standards of fitness and propriety;
an individual’s misbehaviour or material
error;
RBS or the individual’s 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 deems appropriate.
During 2019 a number of issues and events
were considered under the accountability
review framework. The outcomes covered a
range of actions including reduction (to zero
where appropriate) of unvested awards
through malus and suspension of awards
pending further investigation.
Other Remuneration Disclosures
Remuneration of MRTs
The quantitative disclosures below are made
in accordance with regulatory requirements in
relation to 754 employees who have been
identified as MRTs for RBSG plc. The number
of MRTs has increased from 588 last year,
largely as a result of changes made to MRT
identification in order to comply with ring-
fencing rules, with identification taking place
for four key ‘institutions’. Further detail on
remuneration of MRTs identified for subsidiary
institutions is included in Pillar 3 reporting,
which can be found on rbs.com.
1. Number of MRTs by business area
Number of beneficiaries
RBSG plc EDs
Other RBS Group EDs
RBSG plc NEDs
Other RBS Group NEDs
Corporate Functions
Control Functions
NatWest Holdings
NatWest Markets
RBSI
Total
Senior
mgmt
3
13
—
—
6
3
2
—
—
27
Other
MRTs
—
—
11
32
86
218
149
166
65
727
Total
3
13
11
32
92
221
151
166
65
754
One individual is included in the table above
as they have been identified as an MRT in
relation to a role with a subsidiary entity.
However, they do not receive any
remuneration for this role and are not an MRT
in relation to their core role with the RBS
Group. Therefore no remuneration is included
for this individual in the remaining tables. In
addition, there are two MRTs who are
contractors and are paid through third party
agency via invoices. They are listed in the
table above, but as these two individuals do
not receive salary or bonus from RBS Group
they have been excluded from the remaining
tables.
2. Aggregate remuneration expenditure
Aggregate remuneration expenditure in
respect of 2019 performance was as follows:
Aggregate remuneration
Number of beneficiaries
Senior
mgmt
27
Other
MRTs
724
Total
751
RBSG plc EDs
Other RBS Group EDs
RBSG plc NEDs
Other RBS Group NEDs
Corporate Functions
Control Functions
NatWest Holdings
NatWest Markets
RBSI
Total
£m
9.56
12.13
£m
£m
—
9.56
— 12.13
2.78
2.49
53.67
72.73
53.81
— 110.30 110.30
9.74
— 9.74
41.12 286.09 327.21
— 2.78
— 2.49
43.57
66.84
50.37
10.10
5.89
3.44
Definitions for tables
RBSG plc EDs
Executive directors of RBSG plc
Other RBS
Group EDs
Executive directors of subsidiaries within
the RBS Group
RBSG plc NEDs Non-executive directors of RBSG plc
Other RBS
Group NEDs
Non-executive directors of subsidiaries
within the RBS Group
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
27
Other
MRTs
724
Total
751
RBSG plc EDs
Other RBS Group EDs
RBSG plc NEDs
Other RBS Group NEDs
Corporate Functions
Control Functions
NatWest Holdings
NatWest Markets
RBSI
Total
£m
5.86
8.16
—
—
6.89
3.44
2.04
£m
£m
5.86
—
8.16
—
2.78
2.78
2.49
2.49
36.28
29.39
51.20
47.76
36.62
34.58
78.48
— 78.48
7.29
7.29
—
26.39 202.77 229.16
Variable remuneration awarded for 2019
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
RBSG plc EDs
Other RBS Group EDs
Cash remuneration
Deferred bonds
Deferred shares
RBSG plc NEDs
Other RBS Group NEDs
Corporate Functions
Cash remuneration
Deferred bonds
Deferred shares
Control Functions
Cash remuneration
Deferred bonds
Deferred shares
NatWest Holdings
Cash remuneration
Deferred bonds
Deferred shares
NatWest Markets
Cash remuneration
Deferred bonds
Deferred shares
RBSI
Cash remuneration
Deferred bonds
Deferred shares
Senior
mgmt
14
Other
MRTs
596
£m
—
£m
—
Total
610
£m
—
0.02
0.46
2.09
2.57
—
—
— 0.02
— 0.46
— 2.09
— 2.57
—
—
—
—
0.00
0.12
0.99
1.11
0.16
3.57
10.45
14.18
— 0.40
— 7.98
— 10.71
19.09
0.01
0.06
0.34
0.41
0.25
4.80
10.73
15.78
— 0.27
— 6.50
— 25.05
— 31.82
— 0.11
— 1.52
— 0.82
— 2.45
0.16
3.69
11.44
15.29
0.40
7.98
10.71
19.09
0.26
4.86
11.07
16.19
0.27
6.50
25.05
31.82
0.11
1.52
0.82
2.45
RBS – Annual Report and Accounts 2019
104
Total
4.08
83.32
87.40
Long-term incentives
Number of beneficiaries
Senior
mgmt
12
Other
MRTs
—
Total
12
RBSG plc EDs
Other RBS Group EDs
RBSG plc NEDs
Other RBS Group NEDs
Corporate Functions
Control Functions
NatWest Holdings
NatWest Markets
RBSI
Total
£m
3.70
1.40
—
—
2.10
2.45
1.00
—
—
10.65
£m
£m
— 3.70
— 1.40
—
—
—
—
— 2.10
— 2.45
— 1.00
—
—
—
—
— 10.65
4. Outstanding deferred remuneration through
2019
The table below includes deferred
remuneration awarded or paid out in 2019 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 (retained)
Paid out (released)
Reduced from prior years
Unvested at year end
Senior
mgmt
£m
Other
MRTs
£m
Total
£m
40.18 140.40 180.58
12.48 109.77 122.25
12.92
12.74
87.86
85.24
21.28
12.92
41.49 139.28 180.77
0.18
2.62
8.36
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. One new hire guarantee was
made to an MRT for £100,000 in respect of
the 2019 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 to MRTs
during the year in excess of contractual
payments, local policies, standards or
statutory amounts, other than payments to
two individuals of €25,000 and £180,000.
None of the individuals were senior
management and each payment was made in
commercial settlement of potential legal
proceedings related to the termination of
employment. Severance payments made do
not reward failure or misconduct in line with
regulatory requirements.
Where required, remuneration is constrained
within the limit of variable to fixed
remuneration in accordance with EBA
guidelines.
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
2019 is approximately 1 to 0.48. The majority
of MRTs are based in the UK.
Ratio of fixed to variable
Number of beneficiaries
Senior
mgmt
26
Other
MRTs
596
Total
622
RBSG plc EDs
Other RBS Group EDs
RBSG plc NEDs
Other RBS Group NEDs
Corporate Functions
Control Functions
NatWest Holdings
NatWest Markets
RBSI
Consolidated
ratio
ratio
1:0.63
1:0.49
—
—
ratio
— 1:0.63
— 1:0.49
—
—
—
—
1:0.52 1:0.50 1:0.51
1:0.71 1:0.42 1:0.44
1:0.69 1:0.51 1:0.52
— 1:0.47 1:0.47
— 1:0.38 1:0.38
1:0.58 1:0.47 1:0.48
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
More than €4.0
Total
Number of employees
2019
49
10
8
2
2
1
0
72
Employees who earned total remuneration of
over €1 million in 2019 represent just 0.1% of
RBS Group employees. This number reduces
to 68 employees if pension and benefit
funding is excluded. 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 CEOs responsible for each area and
their direct reports.
Employees managing large business
Notes:
(1) Total remuneration in the table above includes
fixed pay, pension and benefit funding and
variable pay.
(2) Where applicable, the table is based on an
average exchange rate of €1.14 to £1 for 2019.
areas.
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 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 2019 performance year.
RBS – Annual Report and Accounts 2019
105
Compliance report
Statement of compliance
RBS Group is committed to high standards of
corporate governance, business integrity and
professionalism in all its activities.
Throughout the year ended 31 December
2019, RBSG plc has applied the Principles
and complied with all of the Provisions of the
UK Corporate Governance Code issued by
the Financial Reporting Council dated July
2018 (the “Code”) except in relation to:
Provision 17, in respect of the requirement
that the Group Nominations and
Governance Committee should ensure
plans are in place for orderly succession to
both the board and senior management
positions and oversee the development of a
diverse pipeline for succession; and
Provision 33 that the Group Performance
and Remuneration Committee (“Group
RemCo”) should have delegated
responsibility for setting remuneration for
the Chairman and executive directors.
In respect of Provision 17, the RBSG plc
Board considers this is a matter of significant
importance which should rightly be reserved
for the full Board. Adopting this approach
ensures that all directors have an opportunity
to contribute to succession planning
discussions for Board and senior
management, in support of achieving an
appropriate balance of skills, experience,
knowledge and diversity at senior levels within
RBS and on the Board. It also means that all
directors have an opportunity to review,
consider and become familiar with the next
generation of executive leaders.
In respect of Provision 33, the RBSG plc
Board also considers that this is a matter
which should rightly be reserved for the Board
and this is an approach the Board 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 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. A copy of the Code can be
found at www.frc.org.uk.
The Board does not anticipate any changes to
its approach on these aspects of the Code.
Further information on how RBSG plc has
applied the Principles, and complied with the
Provisions, of the Code can be found in the
Governance section of this Report, which
includes cross-references to relevant sections
of the Strategic Report and other related
disclosures.
RBSG plc 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. RBSG plc 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 2019 to 13 February
2020, 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. 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 RBS’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 RBS’s approach to risk
management are given in the Capital & Risk
Management section.
Work continued throughout 2019 to
strengthen the control environment and
progress was made across all areas.
Additionally, there was significant
management focus on Brexit planning,
delivery of regulatory programmes and 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, particularly in ensuring the operational
resilience of RBS, as well as compliance with
financial crime requirements, where controls
are being strengthened. 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 2019. 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 RBS’s system of
internal control, RBSG plc’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
RBSG plc 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 2019.
RBSG plc has assessed the effectiveness of
its internal control over financial reporting as
of 31 December 2019 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'.
RBS – Annual Report and Accounts 2019
106
Compliance Report
Based on its assessment, management has
concluded that, as of 31 December 2019,
RBS’s internal control over financial reporting
is effective.
RBSG plc is also required to provide an
Annual Written Affirmation to the NYSE of its
compliance with the mandatory applicable
NYSE Standards.
RBSG plc’s auditors have audited the
effectiveness of RBS’s internal control over
financial reporting and have given an
unqualified opinion.
Management's report on RBSG plc’s internal
control over financial reporting will be filed
with the Securities and Exchange
Commission as part of the 2019 Annual
Report on Form 20-F.
Disclosure controls and procedures
As required by US regulations, management
(including the Group CEO and Group CFO)
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 2019.
Based on this evaluation, management
(including the Group Chief Executive Officer
and Chief Financial Officer) concluded that
RBSG plc’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”), RBSG plc is not required to comply
with all of the NYSE governance 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.
The GAC 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 January
2019 RBSG plc submitted an interim written
affirmation and in March 2019 it submitted its
required annual affirmation to the NYSE, both
confirming RBSG plc’s full compliance with
those and other applicable provisions. More
detailed information about the GAC and its
work during 2019 is set out in the GAC report
on pages 70 to 73.
RBSG plc’s Board 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. RBSG plc follows the Code’s
requirements in determining the
independence of its directors and currently
has 9 independent non-executive directors,
one of whom is the senior independent
director.
(ii) The NYSE Standards require non-
management directors to hold regular
sessions without management present, and
that independent directors meet at least once
a year. The Code requires the Chairman to
hold meetings with non-executive directors
without the executives present and non-
executive directors are to meet without the
Chairman present at least once a year to
appraise the Chairman’s performance and
RBSG plc 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
RemCo are deemed independent in
compliance with the provisions of the Code,
the Board has not assessed the
independence of the members of the RemCo
and 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. The NYSE Standards require that
the compensation committee must have direct
responsibility to review and approve the
CEO’s remuneration. As stated at the start of
this Compliance Report, in the case of RBSG
plc, the Board rather than the RemCo
reserves the authority to make the final
determination of the remuneration of the CEO.
(v) The NYSE Standards require listed
companies to adopt and disclose corporate
governance guidelines. Throughout the year
ended 31 December 2018, RBSG plc has
complied with all of the provisions of the Code
(subject to the exception described above)
and the Code does not require RBSG plc 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. RBSG plc 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.
RBS – Annual Report and Accounts 2019
107
Report of the directors
The directors present their report together
with the audited accounts for the year ended
31 December 2019.
Other information incorporated into this report
by reference can be found at:
Page/Note
Strategic Report
Our Colleagues
Climate-related financial disclosures
Governance at a glance
Board engagement with stakeholders
and section 172 statement
Viability statement
Business review
Board of directors and secretary
Corporate governance
Segmental analysis
Share Capital and other equity
Post balance sheet events
Risk factors
2
32
37
45
46
49
50
62
64
Note 4
Note 21
Note 33
281
RBS Group structure
During 2018 in preparation for ring-fencing a
number of changes were made to the RBS
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 parent of NatWest Markets N.V.) 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 2019, HMT’s holding in the
company’s ordinary shares was 62.1%.
NatWest Markets N.V.
NatWest Markets N.V. (NWM N.V.), RBS
Group’s banking entity in the Netherlands,
began transacting new business on 25 March
2019 to ensure continuity of service to
European Economic Area (EEA) customers
following the UK’s exit from the European
Union (EU). NWM N.V. Group was acquired
by NWM Plc, and became a part of NWM
Group, with effect from 29 November 2019.
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
UK company law provides that dividends can
only be paid if a company has sufficient
distributable profits available to cover the
dividend. A company’s distributable profits are
its accumulated, realised profits not previously
distributed or capitalised, less its
accumulated, realised losses not previously
written off in a reduction or re-organisation of
capital.
The profit attributable to the ordinary
shareholders of RBSG plc for the year ended
31 December 2019 amounted to £3,133
million compared with a profit of £1,622 million
for the year ended 31 December 2018, as set
out in the consolidated income statement on
page 202.
In 2019 RBSG plc announced and paid an
interim dividend of £241 million, or 2.0p per
ordinary share (2018 - £241 million, or 2.0p
per ordinary share) and a special dividend of
£1,449 million, or 12.0p per ordinary share
(2018 – nil). In addition, the company
announced that the directors have
recommended a final dividend of £364 million,
or 3.0p per ordinary share (2018 – £422
million, or 3.5p per ordinary share), and a
further special dividend of £606 million, or
5.0p per ordinary share (2018 – £904 million,
or 7.5p per ordinary share).
The final and special dividends recommended
by directors are subject to shareholders’
approval at the Annual General Meeting on 29
April 2020. If approved, payment will be made
on 4 May 2020 to shareholders on the register
at the close of business on 27 March 2020.
The ex-dividend date will be 26 March 2020.
Subject to above mentioned condition, the
payment of interim dividends on ordinary
shares is at the discretion of the Board.
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 281
to 295. RBS’s regulatory capital resources
and significant developments in 2019 and
anticipated future developments are detailed
in the Capital, liquidity and funding section on
pages 120 to 131. 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
RBSG plc’s 2019 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). The DECL Taskforce, jointly
established by the Financial Conduct
Authority, Financial Reporting Council and the
Prudential Regulatory Authority, published its
phase 2 report recommendations in
December 2019. RBSG plc’s 2019 Annual
Report and Accounts and Pillar 3 Report
reflect EDTF and have regard to DECL
Taskforce recommendations.
Authority to repurchase shares
At the Annual General Meeting in 2019
shareholders authorised the company to
make market purchases of up to
1,208,998,976 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 2020.
On 6 February 2019 RBSG plc held a General
Meeting and shareholders approved a special
resolution to give authority for RBSG plc 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. This authority was renewed at
the 2019 Annual General Meeting and
Shareholders will be asked to renew this
RBS – Annual Report and Accounts 2019
108
Report of the directors
authorisation at the Annual General Meeting
in 2020.
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 21 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.
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 2020 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. A special
resolution seeking authority to amend the
company’s articles is being put to
shareholders at the 2020 AGM.
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 2019 was £4.8 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 62
and 63.
Howard Davies, Frank Dangeard, Alison
Davis, Morten Friis, Patrick Flynn, Robert
Gillespie, Katie Murray, Baroness Noakes,
Mike Rogers, Mark Seligman and Lena
Wilson all served throughout the year and to
the date of signing of the financial statements.
Alison Rose was appointed on 1 November
2019.
Brendan Nelson resigned from the Board on
25 April 2019. Ross McEwan resigned from
the Board on 31 October 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 2019 are shown
on page 98. 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 2019 to 13
February 2020.
Directors’ indemnities
In terms of section 236 of the Companies Act,
Qualifying Third Party Indemnity Provisions
have been issued by the company to its
directors, members of the RBS Group and
NWH Executive Committees, individuals
authorised by the PRA/FCA, certain directors
and/or officers of RBS subsidiaries and all
trustees of RBS pension schemes.
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 2019.
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
62.1
62.1
As at 13 February 2020, 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 296.
RBS – Annual Report and Accounts 2019
109
Report of the directors
Political donations
At the Annual General Meeting in 2019,
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 2019, 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 2020.
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
Ernst & Young LLP (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
Jan Cargill
Company Secretary
13 February 2020
The Royal Bank of Scotland Group plc
is registered in Scotland No. SC45551
RBS – Annual Report and Accounts 2019
110
Statement of directors’ responsibilities
This statement should be read in conjunction with the responsibilities of the auditor set out in their report on pages 191 to 201.
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
RBS 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 RBS 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 RBS 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
13 February 2020
Board of directors
Chairman
Howard Davies
Alison Rose-Slade
Group Chief Executive Officer
Katie Murray
Group Chief Financial Officer
Executive directors
Alison Rose
Katie Murray
Non-executive directors
Frank Dangeard
Alison Davis
Patrick Flynn
Morten Friis
Robert Gillespie
Baroness Noakes
Mike Rogers
Mark Seligman
Lena Wilson
RBS – Annual Report and Accounts 2019
111
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 testing and monitoring
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, measurement and models
Risk mitigation, assessment and monitoring
Problem debt management and forbearance
Economic loss drivers
Credit risk modelling
Banking activities
Trading activities
Market risk
Non-traded market risk
Traded market risk
Market risk – other disclosures
Pension risk
Compliance & conduct risk
Financial crime risk
Climate-related financial risk
Operational risk
Model risk
Reputational risk
Page
Page
112
112
112
113
115
115
115
116
116
116
120
121
122
123
132
132
132
133
133
136
139
142
170
174
180
183
185
185
186
186
187
189
189
Presentation of information
Where indicated in the section headers, information in the Capital and
risk management section (pages 112 to 189) is within the scope of the
Independent auditor’s report. Where a main section header, presented
in bold, is marked as audited, all subsequent sub sections are also
audited, the end of the audited section is marked by ∆.
Risk management framework
Introduction
RBS operates an integrated risk management framework, which is
centred around the embedding of a strong risk culture. The framework
ensures the tools and capability are in place to facilitate risk
management and decision-making across the organisation.
Risk appetite, supported by a robust set of principles, policies and
practices, defines the levels of tolerance for a variety of risks and
provides a structured approach to risk-taking within agreed
boundaries.
All RBS colleagues share ownership of the way risk is managed,
working together to make sure business activities and policies are
consistent with risk appetite.
The methodology for setting, governing and embedding risk appetite is
being further enhanced with the aim of revising current risk appetite
processes and increasing alignment with strategic planning and
external threat assessments.
During 2019, a number of enhancements to the risk management
framework were developed in advance of full implementation of a new
enterprise-wide risk management framework beginning in 2020. There
was a significant management focus on the new framework, including
enhancements to appetite, the three lines of defence model and the
governance of certain risk types. These were presented to the senior
risk governance committees and the RBSG plc Board, resulting in final
approval of the new framework in December 2019.
Risk culture
Risk culture is at the centre of both the risk management framework
and risk management practice. RBS’s risk culture target is to make risk
part of the way employees work and think.
A focus on leaders as role models and action to build clarity, develop
capability and motivate employees to reach the required standards of
behaviour are key to achieving the risk culture target. Colleagues are
expected to:
Take personal responsibility for understanding and proactively
managing the risks associated with individual roles.
Respect risk management and the part it plays in daily work.
Understand the risks associated with individual roles.
Align decision-making to RBS’s risk appetite.
Consider risk in all actions and decisions.
Escalate risks and issues early; taking action to mitigate risks and
learning from mistakes and near-misses.
Challenge others’ attitudes, ideas and actions.
Report and communicate risks transparently.
The 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.
Training
A wide range of learning, both technical and behavioural, is offered
across the risk disciplines. This training can be mandatory, role-
specific or for personal development and enables colleagues to
develop the capabilities and confidence to manage risk effectively.
Code of Conduct
RBS’s Code of Conduct provides guidance on expected behaviour and
sets out the standards of conduct that support the values. The code
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.
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. The RBS 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.
RBS – Annual Report and Accounts 2019
112
Capital and risk management
Risk management framework continued
Risk governance
Committee structure
The diagram illustrates RBSG plc’s risk committee structure in 2019 and the main purposes of each committee.
RBSG plc Board
Reviews and approves the risk appetite framework and qualitative statements of risk appetite
for all key risks. Monitors performance against risk appetite. Considers any material risks and
approves, as appropriate, recommended actions escalated by the Group Board Risk
Committee.
Group Board
Risk Committee
Oversees the
management of risks
that could affect RBS’s
businesses and
operations. Monitors
risk profile, risk appetite
and the promotion of a
risk-aware culture
across RBS. Reviews
current and potential
risk exposures, future
risk strategy and the
effectiveness of the risk
management
framework.
Group Pension
Committee
Considers the financial
strategy, risk
management, balance
sheet,
remuneration and policy
implications of RBS’s
pension schemes.
Approves material
compliance, policy or
remuneration-related
changes.
Group Audit
Committee
Assists the Board in
carrying out its
accounting, internal
control and financial
reporting responsibilities.
Reviews and monitors
the effectiveness of
internal controls systems
relating to financial
management and
compliance with financial
reporting, asset
safeguarding and
accounting laws.
Group Asset &
Liability
Management
Committee
Oversees the
effective
management
of the current and
future balance sheet
in line with
Board-
approved
strategy and
risk appetite, under
normal and under stress
conditions.
Group
Executive
Committee (1)
Responsible for
managing strategic,
financial, capital,
risk and operational
issues.
Monitors the
implementation
of culture change
and considers
executive succession
planning.
Group Executive
Risk Committee
Acts on all material
and/or enterprise-wide
risk and control matters
across RBS. Reviews
the risk appetite
framework and strategic
risk appetite and
recommends them for
submission to the Board
Risk Committee.
Reputational Risk
Committee
Acts on referrals from
business and function
risk committees,
reviewing decisions
which have significant
reputational implications.
Oversees
the application of
reputational
risk frameworks.
Note:
(1) Operated as a Board committee during 2019.
RBS – Annual Report and Accounts 2019
113
Capital and risk management
Risk management framework continued
Risk management structure
The diagram illustrates RBS’s risk management structure in 2019 and key risk management responsibilities.
Group
Chief Risk
Officer
Leads the RBS Risk function. Defines and delivers the risk,
conduct, compliance and financial crime strategies. Defines
overall risk service provision requirements to enable delivery of
RBS 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 the Group Executive Committee.
NWH Chief
Executive
Officer
NWH Chief
Risk Officer
Leads the NWH Risk function. Responsibilities include policy,
governance, frameworks, oversight and challenge, risk culture
and reporting. Delivers risk services across RBS governed by
appropriate service level agreements. Contributes to NWH
strategy as a member of the NWH
Executive Committee.
Group Chief
Executive
Officer
RBS Chief
Executive
NWM
Chief Executive
Officer
NWM Chief
Risk Officer
Leads the NWM Risk function. Responsibilities include policy,
governance, frameworks, oversight and challenge, risk culture
and reporting. Contributes to NWM strategy as a member of
the NWM Executive Committee.
RBSI Chief
Executive
Officer
RBSI
Chief Risk
Officer
Leads the RBSI Risk function. Responsibilities include policy,
governance, frameworks, oversight and challenge, risk culture and
reporting. Contributes to RBSI strategy as a member of the RBSI
Executive Committee.
Notes:
(1) The Group Chief Executive Officer also performs the NWH Chief Executive Officer role.
(2) The NWH Risk function provides risk management services across NWH, including to the NWH Chief Risk Officer and – where agreed – to NWM and RBSI
Chief Risk Officers. These services are managed, as appropriate, through service level agreements.
(3) The NWH Risk function is independent of the NWH customer-facing franchises and support functions. Its structure is divided into three parts (Directors of Risk,
Specialist Risk Directors and Chief Operating Officer) to facilitate effective management of the risks facing NWH. Risk committees in the customer businesses
and key functional risk committees oversee risk exposures arising from management and business activities and focus on ensuring that these are adequately
monitored and controlled. The directors of Risk, Personal Banking; Risk, Commercial & Private Banking; Risk, Services & Functions and Operational Risk;
Compliance & Conduct; Financial Risk & Analytics and Restructuring as well as the Chief Operating Officer report to the NWH Chief Risk Officer. The Chief
Financial Crime Officer reports to the NWH Chief Risk Officer, along with a secondary reporting line to the Group 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 NWH Chief Risk Officer.
(4) The Chief Risk Officers for NWM and RBSI have dual reporting lines into the Group Chief Risk Officer and the respective chief executive officers of their entities.
There are additional reporting lines to the NWM and RBSI Board Risk Committee chairs and a right of access to the committee.
RBS – Annual Report and Accounts 2019
114
Capital and risk management
Risk management framework continued
Three lines of defence
RBS uses the industry-standard three lines of defence model to
articulate accountabilities and responsibilities for managing risk. It
supports the embedding of effective risk management throughout the
organisation. All roles below the CEO sit within one of these three
lines. The CEO ensures the efficient use of resources and the effective
management of risks as stipulated in the risk management framework
and is therefore considered to be outwith the three lines of defence
principles.
First line of defence
The first line of defence incorporates most roles in RBS, including
those in the customer-facing franchises, Technology and Services as
well as support functions such as Human Resources, Legal and
Finance.
The first line of defence is empowered to take risks within the
constraints of the risk management framework and policies as well
as the risk appetite statements and measures set by the Board.
The first line of defence is responsible for managing its direct risks.
With the support of specialist functions such as Legal, HR and
Technology, it is also responsible for managing its consequential
risks by identifying, assessing, mitigating, monitoring and reporting
risks.
Second line of defence
The second line of defence comprises the Risk function and is
independent of the first line.
The second line of defence is empowered to design and maintain
the risk management framework and its components. It undertakes
proactive risk oversight and continuous monitoring activities to
confirm that the Group engages in permissible and sustainable
risk-taking activities
The second line of defence advises on, monitors, challenges,
approves, escalates and reports on the risk-taking activities of the
first line, ensuring that these are within the constraints of the risk
management framework and policies as well as the risk appetite
statements and measures set by the Board.
Third line of defence
The third line of defence is the Internal Audit function and is
independent of the first and second lines.
The third line of defence is responsible for providing independent
and objective assurance to the Board, its subsidiary legal entity
boards and executive management on the adequacy and
effectiveness of key internal controls, governance and the risk
management in place to monitor, manage and mitigate the key
risks to RBS and its subsidiary companies achieving their
objectives.
The third line of defence executes its duties freely and objectively
in accordance with the Institute of Internal Auditor’s Code of Ethics
& Standards.
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.
Strategic risks are those that threaten the safety and soundness of
RBS and its ability to achieve strategic objectives. For certain strategic
risks, risk capacity defines the maximum level of risk RBS can assume
before breaching constraints determined by regulatory capital and
liquidity needs, the operational environment, and from a conduct
perspective. Articulating risk capacity helps determine where risk
appetite should be set, ensuring there is a buffer between internal risk
appetite and RBS’s ultimate capacity to absorb losses.
Risk appetite 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
In line with RBS’s risk appetite framework, 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, business, 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 and
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.
They ensure that appropriate controls are set and monitored.
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.
RBS – Annual Report and Accounts 2019
115
Capital and risk management
Risk management framework continued
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 that are due to risk
mitigation actions) are considered. Monitoring and review processes
are in place to evaluate results. Early identification, and effective
management of, changes in legislation and regulation are critical to the
successful mitigation of compliance and conduct risk. The effects of all
changes are managed to ensure the timely achievement of
compliance. Those changes assessed as having a high or medium-
high impact are managed more closely. Significant and emerging risks
that could affect future results and performance are reviewed and
monitored. Action is taken to mitigate potential risks as and when
required. Further in-depth analysis, including the stress testing of
exposures relative to the risk, is also carried out.
Risk testing and monitoring
Targeted credit risk, compliance & conduct risk and financial crime risk
activities are subject to testing and monitoring to confirm to both
internal and external stakeholders – including the Board, senior
management, the customer-facing businesses, Internal Audit and
RBS’s regulators – that risk owned policies and procedures are being
correctly implemented and operating adequately and effectively.
Selected key controls are also reviewed. Thematic reviews and deep
dives are also carried out where appropriate.
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 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.
Anti-money laundering, sanctions, and anti-bribery and corruption
processes and controls are also tested and monitored. This helps
provide an independent understanding of the financial crime control
environment, whether or not controls are adequate and effective and
whether financial crime risk is appropriately identified, managed and
mitigated.
The Risk Testing & Monitoring Forum and methodology ensures a
consistent approach to all aspects of the second-line review activities.
The forum also monitors and validates the annual plan and ongoing
programme of reviews.
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 and evaluate 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 current and projected P&L
and balance sheet.
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 senior committees
including the Executive Risk Committee, the
Board Risk Committee and the Board.
Stress testing is used widely across RBS. The diagram below
summarises 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
RBS – Annual Report and Accounts 2019
116
Capital and risk management
Risk management framework continued
Specific areas that involve capital management include:
Strategic financial and capital planning – by assessing the impact
of sensitivities and scenarios on the capital plan and capital ratios.
Risk appetite – by gaining a better understanding of the drivers of,
Capital allocation
RBS has mechanisms to allocate capital across its legal entities and
businesses. These aim to optimise the use 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.
and the underlying risks associated with, risk appetite.
Risk identification – by better understanding the risks that could
potentially affect RBS’s financial strength and capital position.
Risk mitigation – by identifying actions to mitigate risks, or those
that could be taken, in the event of adverse changes to the
business or economic environment. Key risk mitigating actions are
documented in RBS’s recovery plan.
Reverse stress testing is also carried out in order to identify
circumstances that may lead to specific, defined outcomes such as
business failure. Reverse stress testing allows potential vulnerabilities
in the business model to be examined more fully.
Capital sufficiency – going concern forward-looking view
Going concern capital requirements are examined on a forward-
looking basis – including as part of the annual budgeting process – by
assessing the resilience of capital adequacy and leverage ratios under
hypothetical future states. These assessments include assumptions
about regulatory and accounting factors (such as IFRS 9). They are
linked to economic variables and impairments and seek to
demonstrate that RBS and its operating subsidiaries maintain sufficient
CET1 capital. A range of future states are tested. In particular, capital
requirements are assessed:
Based on a forecast of future business performance, given
expectations of economic and market conditions over the forecast
period.
Based on a forecast of future business performance under
adverse economic and market conditions over the forecast period.
Scenarios of different severity may be examined.
Governance
Capital management is subject to substantial review and governance.
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
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. This ensures any build-up of stress is
detected early and the response escalated appropriately through
recovery planning.
Internal assessment of liquidity
Under the liquidity risk management framework, RBS maintains the
Individual Liquidity Adequacy Assessment Process. This includes
assessment of net stressed liquidity outflows under a range of extreme
but plausible stress scenarios detailed in the table below.
Type
Description
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.
The examination of capital requirements under normal economic and
adverse market conditions enables RBS to determine whether its
projected business performance meets internal and regulatory capital
requirements.
Market-wide
scenario
A market stress event affecting all participants in a
market through contagion, potential counterparty
failure and other market risks. RBS is affected under
this scenario but no more severely than any other
participants with equivalent exposure.
Combined
scenario
This scenario models the combined impact of an
idiosyncratic and market stress occurring at once,
severely affecting funding markets and the liquidity of
some assets.
RBS uses the most severe combination of these to set the internal
stress testing scenario which underpins its internal liquidity risk
appetite. This complements the regulatory liquidity coverage ratio
requirement.
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 stress tests
run by regulatory authorities to test industry-wide vulnerabilities under
crystallising global and domestic systemic risks. In 2019, RBS took
part in the Bank of England stress test exercise. Details are set out on
page 119.
Stress and peak-to-trough movements are used to help assess the
amount of CET1 capital RBS 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 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 assess RBS’s specific capital requirements through the Pillar 2
framework.
RBS – Annual Report and Accounts 2019
117
Capital and risk management
Risk management framework continued
Stress testing – recovery and resolution planning
The RBS recovery plan explains how RBS and its subsidiaries – as a
consolidated group – would identify and respond to a financial stress
event and restore its financial position so that it remains viable on an
ongoing basis.
The recovery plan ensures risks that could delay the implementation of
a recovery strategy are highlighted and preparations are made to
minimise the impact of these risks. Preparations 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
capacity concerns.
The plan is intended to enable RBS Group to maintain critical services
and products it provides to its customers, maintain its core business
lines and operate within risk appetite while restoring RBS Group’s
financial condition. It is assessed for appropriateness on an ongoing
basis and is updated annually. The plan is reviewed and approved by
the Board prior to submission to the PRA each year. Individual
recovery plans are also prepared for NatWest Holdings Limited,
NatWest Markets Plc, RBS International (Holdings) Limited, Ulster
Bank Ireland DAC and NatWest Markets N.V. These plans detail the
recovery options, recovery indicators and escalation routes for each
entity.
Fire drill simulations of possible recovery events are used to test the
effectiveness of the RBS and individual legal entity recovery plans.
The fire drills are designed to replicate possible financial stress
conditions and allow senior management to rehearse the responses
and decisions that may be required in an actual stress. The results and
lessons learnt from the fire drills are used to enhance RBS’s approach
to recovery planning.
Under the resolution assessment part of the PRA rulebook, RBS is
required to carry out an assessment of its preparations for resolution,
submit a report of the assessment to the PRA and publish a summary
of this report. The initial report submission to the PRA is in Q4 2020.
RBS has a programme of work in place to carry out these
requirements.
Resolution would be implemented if RBS was assessed by the UK
authorities to have failed and the appropriate regulator put it into
resolution. The process of resolution is owned and implemented by the
Bank of England (as the UK resolution authority). A multi-year
programme is in place to further develop resolution capability in line
with regulatory requirements.
Stress testing – market risk
Non-traded market risk
Non-traded exposures are reported to the PRA on a quarterly basis as
part of the Stress Testing Data Framework. This provides the regulator
with an overview of RBS’s banking book interest rate exposure. The
report includes 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 Bank of England
and European Banking Authority stress exercises. RBS also produces
an internal scenario analysis as part of its financial planning cycles.
Non-traded exposures are capitalised through the ICAAP. It covers
gap risk, basis risk, credit spread risk, pipeline risk, structural foreign
exchange risk, prepayment risk and accounting volatility risk. The
ICAAP is completed with a combination of value and earnings
measures. The total non-traded market risk capital requirement is
determined by adding the different charges for each sub risk type. The
ICAAP methodology captures at least ten years of historical volatility,
produced with 99% confidence level. Methodologies are reviewed by
RBS Model Risk and the results are approved by the Capital
Management & Stress Testing Committee.
Traded market risk
RBS carries out daily market risk stress testing to identify
vulnerabilities and potential losses in excess of, or not captured in,
value-at-risk. The calculated stresses measure the impact of changes
in risk factors on the fair values of the trading and fair value through
other comprehensive income portfolios.
RBS 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. The
results for relevant scenarios are reported to senior management.
Stress testing – climate
RBS will be carrying out climate scenario and stress-testing analysis
as part of the Bank of England’s 2021 biennial exploratory scenario.
The exercise will explore three distinct climate scenarios over a 30-
year horizon to test the financial system’s resilience to climate-related
risks
RBS is also participating in the United Nations Environment
Programme Finance Initiative focusing on analysis of how physical and
transition risks could affect the agriculture and real estate sectors.
RBS – Annual Report and Accounts 2019
118
Capital and risk management
Risk management framework continued
Regulatory stress testing
In 2019, RBS took part in the regulatory stress tests conducted by the Bank of England. The scenario was hypothetical in nature and does not
represent a forecast 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.
Scenario
Bank of England stress test
Designed to assess the resilience of major UK banks to tail risk events. The severity of the test is related to
policymakers’ assessments of risk levels across markets and regions.
The 2019 stress test examined the impact over five years of deep simultaneous recessions in the UK and
global economies – including sharp falls in asset prices and a 30% depreciation in sterling, leading to a rise in
inflation and a rise in bank rate. The economic scenario in the test was more severe than the global financial
crisis.
Under the 2019 Bank of England stress test, on an IFRS 9 transitional basis, the CET1 ratio reached a low
point of 9.9%. This was above the hurdle rate of 7.2%.
After the impact of management actions, RBS’s low point CET1 ratio increased to 10.3%. This was significantly
above the hurdle rate of 7.2%.
The transitional Tier 1 leverage ratio was projected to be 4.7% under stress, again above the leverage ratio
Results
hurdle rate of 3.56%.
The stress was based on an end-of-2018 balance sheet starting position. Since then, RBS has continued to
take 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.
In light of the outcomes from the stress test, the Bank of England did not require RBS to submit a revised
capital plan.
The 2019 Bank of England stress test result demonstrated that the balance sheet remains in a safe and
sustainable position.
On an IFRS 9 transitional basis, the reduction in the CET1 ratio from the start point to the minimum stressed
ratio before the impact of strategic management actions or AT1 conversion improved from 660 basis points in
2018 to 630 basis points in 2019.
What does this mean?
RBS – Annual Report and Accounts 2019
119
Capital and risk management
Capital, liquidity and funding risk
Definitions (audited)
Regulatory 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
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 RBS Group. 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 Limited 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 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 (audited)
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 the CET1 ratio falls below a pre-
specified level.
Tier 2 capital. Tier 2 capital is RBS Group’s supplementary capital
and provides loss absorption on a gone concern basis. Tier 2
capital absorbs losses after Tier 1 capital. It typically consists of
subordinated debt securities with a minimum maturity of five years.
Minimum requirement for own funds and eligible liabilities (MREL)
In addition to capital, other specific loss-absorbing instruments,
including senior notes issued by RBS 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 RBS Group has failed, or is likely
to fail.
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 2019 on page 6. For MREL refer to page 8.
∆
Key developments in 2019
RBS continued to strengthen and de-risk its capital position; CET1
ratio remains ahead of the c14% target. The directors have
recommended a final dividend of 3p per ordinary share, and a
further special dividend of 5p per ordinary share, which are both
subject to shareholders’ approval at the Annual General Meeting in
April 2020.
RWAs reduced by £9.5 billion to £179.2 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 decreased to 5.1% (2018 – 5.4%) due to lower
Tier 1 capital. UK leverage ratio decreased to 5.8% (2018 – 6.2%).
In 2019, RBSG plc issued approximately £4 billion MREL compliant
senior debt bringing the total MREL senior debt issues to
approximately £20 billion relative to the end state (1 January 2022)
requirements of approximately £24 billion. In addition, RBSG plc
also issued a £0.6bn Tier 2 subordinated note.
The liquidity portfolio increased by £1 billion in 2019 to £199 billion,
with primary liquidity reducing by £3 billion to £125 billion. The
reduction in primary liquidity is driven by reduced customer surplus
within NatWest Holdings, dividend payments in the year and Term
Funding Scheme (TFS) repayment, offset by increased net term
issuance. The increase in secondary liquidity is driven primarily by
repayment of TFS, resulting in the return of previously encumbered
assets.
The reduction in primary liquidity resulted in lower liquidity
coverage ratio (LCR) of 152% (2018 – 158%) and lower internal
Stressed Outflow coverage ratio of 149% (2018 – 154%).
The net stable funding ratio is 141% (2018 – 141%) above the
minimum target of 100%.
The regulatory agenda continues to evolve rapidly in the UK,
Europe and internationally. RBS manages its capital, liquidity and
funding to meet both current and future regulatory requirements
whilst ensuring that RBS continues to serve customers well.
RBS – Annual Report and Accounts 2019
120
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:
RBS Group
NatWest Holdings Group
UK DoLSub
UBI DAC
NatWest Markets Plc
NatWest Markets Securities Inc.
RBS International Limited
NWM N.V.
The UK DoLSub is PRA regulated and comprises RBS’s four licensed
deposit-taking UK banks: National Westminster Bank Plc (NWB Plc),
The Royal Bank of Scotland plc (RBS plc), Coutts & Company and
Ulster Bank Limited.
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 Limited, 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 an RBS Group consolidated
level, as well as at NWH Group, NatWest Markets Plc, NatWest
Markets N.V. and RBS International Limited levels. In addition, NWH
Group banking subsidiaries are also subject to the same principles,
processes and management as RBS 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 RBS 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 forecast view. Other elements of capital management, including
risk appetite and stress testing, are set out on pages 115 and 116.
Produce
capital
plans
Assess
capital
adequacy
Inform
capital
actions
Capital plans are produced for RBS 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 RBS
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 RBS
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 RBS Group uses to monitor
and manage capital risk on a going and gone concern basis, including
the risk of excessive leverage.
RBS – Annual Report and Accounts 2019
121
Capital and risk management
Capital, liquidity and funding risk continued
Minimum requirements
Capital adequacy ratios
RBS Group is subject to minimum capital requirements relative to RWAs. The table below summarises the minimum ratios of capital to RWAs
that the consolidated Group is expected to meet. Different minimum capital requirements may apply to individual legal entities or sub-groups.
Minimum requirements
System wide
Type
Pillar 1 minimum requirements
Capital conservation buffer
Countercyclical capital buffer (1)
G-SIB buffer (2)
Bank specific
Total (excluding PRA buffer) (4)
Pillar 2A (3)
CET1
4.5%
2.5%
0.8%
1.0%
1.9%
10.7%
Total Tier 1
6.0%
2.5%
0.8%
1.0%
2.6%
12.9%
Total capital
8.0%
2.5%
0.8%
1.0%
3.4%
15.7%
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%
increasing to 2.0%, effective December 2020. The Republic of Ireland CCyB is currently 1.0%, following the CBI increase in 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 rates applicable
to countries in which the Bank has exposures.
(2) Global Systemically Important Financial Institutions (G-SIFIs), as designated by the Financial Stability Board (FSB), are subject to an additional capital buffer of
between 1% and 3.5%. In November 2018 the FSB announced that RBS is no longer a G-SIB. From 1 January 2020, RBS is released from this global buffer
requirement.
(3) 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.
(4) RBS Group may be subject to a non-disclosable PRA buffer requirement as set by the PRA. The PRA buffer consists of three components:
a. A risk management and governance buffer that is set as a scalar of the Pillar 1 and Pillar 2A requirements. The scalar could extend up to 40%.
b. A Group risk buffer to cover the excess capital requirements that subsidiaries or sub-groups may have in excess of their share of RBS Group.
c. A buffer to cover stress risks informed by the results of the BoE concurrent stress testing results.
(5) The capital conservation buffer, the countercyclical capital buffer, the G-SIB buffer and systemic risk buffer (where applicable) make up the combined buffer. If
RBS 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 RBS 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 RBS 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.
(6) For more information on potential changes to regulation which may impact the RBS Group’s capital requirements, refer to the Summary of changes table in the
Disclosure Framework section of the 2019 RBS Group Pillar 3 disclosure.
Leverage ratios
The table below summarises the minimum ratios of capital to leverage exposure under the binding PRA UK leverage framework applicable for
RBS Group. The CRR2 amendments to the CRR will introduce a binding 3% Tier 1 minimum capital leverage ratio for Group, sub-groups and
individual legal entities from 28 June 2021.
Type
Minimum ratio
Countercyclical leverage ratio buffer (1)
Additional leverage ratio buffer (2)
Total
CET1
2.4375%
0.2940%
0.3500%
3.0815%
Total Tier 1
3.2500%
0.2940%
0.3500%
3.8940%
Notes:
(1) The countercyclical leverage ratio buffer is set at 35% of RBS Group’s CCyB. As noted above the UK CCyB is currently 1.0%, increasing to 2.0% from
December 2020. Foreign exposures may be subject to different CCyB rates depending on the rate set in those jurisdictions.
(2) The PRA minimum leverage ratio requirement is supplemented with a G-SII additional leverage ratio buffer of 0.35%. From 1 January 2020 RBS will be
released from the global systemic buffer.
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)
Note:
(1) The CRR2 amendments to the CRR will introduce a binding NSFR requirement from 28 June 2021.
100%
—
RBS – Annual Report and Accounts 2019
122
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. Refer to Note 25 on the consolidated accounts for a more detailed breakdown of
regulatory capital.
Capital
CET1
Tier1
Total
RWAs
Credit risk
Counterparty credit risk
Market risk
Operational risk
Total RWAs
Capital adequacy ratios
CET1
Tier 1
Total
Leverage ratios
Tier 1 capital (£bn)
CRR leverage exposure (£bn)
CRR leverage ratio (%)
Average Tier 1 capital (£bn) (2)
Average leverage exposure (£bn) (2)
Average leverage ratio (%) (2)
UK leverage ratio (%)
2019
2018
End-point PRA transitional
End-point PRA transitional
CRR basis (1)
£bn
29.1
33.1
38.0
131.0
12.6
13.0
22.6
179.2
%
16.2
18.5
21.2
33.1
643.9
5.1%
33.8
685.5
4.9%
5.8%
basis
£bn
29.1
34.6
40.8
131.0
12.6
13.0
22.6
179.2
%
16.2
19.3
22.8
34.6
643.9
5.4%
35.3
685.5
5.2%
6.1%
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
34.7
644.5
5.4%
35.7
665.2
5.4%
6.2%
basis
£bn
30.6
36.2
44.2
137.9
13.6
14.8
22.4
188.7
%
16.2
19.2
23.4
36.2
644.5
5.6%
37.9
665.2
5.7%
6.5%
Notes:
(1) CRR as implemented by the Prudential Regulation Authority in the UK, with effect from 1 January 2014. All regulatory adjustments and deductions to CET1
have been applied in 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.
The table below analyses the movement in end-point CRR CET1, AT1 and Tier 2 capital for the year.
At 1 January 2019
Profit for the year
Own credit
Share capital and reserve movements in respect of employee
share schemes
Foreign exchange reserve
FVOCI reserves
Goodwill and intangibles deduction
Deferred tax assets
Prudential valuation adjustments
Expected loss less impairment
Capital instruments issued
Capital instruments redeemed
Net dated subordinated debt/grandfathered instruments
Foreign exchange movements
Foreseeable ordinary and special dividends
Foreseeable charges
Other movements
At 31 December 2019
CET1
£m
30,639
1,442
287
(28)
(1,935)
(205)
(6)
(17)
63
487
—
—
—
—
(968)
(365)
(340)
29,054
AT1
£m
4,051
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
4,051
Tier 2
£m
6,483
—
—
—
—
—
—
—
—
—
566
(890)
(1,059)
(200)
—
—
—
4,900
Total
£m
41,173
1,442
287
(28)
(1,935)
(205)
(6)
(17)
63
487
566
(890)
(1,059)
(200)
(968)
(365)
(340)
38,005
RBS – Annual Report and Accounts 2019
123
Capital and risk management
Capital, liquidity and funding risk continued
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
End-point basis(1)
2019
£bn
77.9
76.7
150.0
399.1
19.3
723.0
(157.8)
43.0
2.2
42.5
(9.0)
643.9
2018
£bn
88.9
75.1
133.3
377.5
19.4
694.2
(141.3)
42.1
2.1
50.3
(2.9)
644.5
Claims on central banks
UK leverage exposure (2)
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
(73.6)
570.3
(85.0)
559.5
maturity that is equal or longer than that of the central bank claims.
Liquidity key metrics
The table below sets out the key liquidity and related metrics monitored by RBS.
Liquidity coverage ratio (1)
Stressed outflow coverage (2)
Net stable funding ratio (3)
2019
RBS Group
152%
149%
141%
UK DoLSub
145%
134%
137%
2018
RBS Group
158%
154%
141%
UK DoLSub
153%
147%
142%
Notes:
(1) 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. Note that a methodology change was applied to the Stressed Outflow
Coverage calculation during 2019 to incorporate surplus liquidity held across all Group entities for the RBS metric, as well as incorporate all intra-group
cashflows for the UK DoLSub. This resulted in a 7% improvement in the Stressed Outflow Coverage ratio for RBS and a 5% reduction in the ratio for UK
DoLSub at 31 December 2019.
(3) The CRR2 amendments to the CRR will introduce a binding NSFR requirement from 28 June 2021.
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.
2019
£bn
2.0
3.5
5.5
1.7
0.4
2.1
25.8
3.1
0.1
1.5
30.5
4.4
42.5
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
RBS – Annual Report and Accounts 2019
124
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 120.
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 plc (holdco)
of which: RBSG plc 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 plc holdco
RBSG plc opcos
Total
RWAs
CRR leverage exposure
LAC as a ratio of RWAs
LAC as a ratio of CRR leverage exposure
2019
Balance
2018
Balance
Par
value (1)
£bn
29.1
sheet Regulatory
value (2)
value
£bn
£bn
29.1
29.1
LAC
value (3)
£bn
29.1
Par
value (1)
£bn
30.6
sheet Regulatory
value (2)
value
£bn
£bn
30.6
30.6
LAC
value (3)
£bn
30.6
4.0
—
4.0
1.4
0.1
1.5
6.2
0.5
6.7
0.1
1.6
1.7
4.0
—
4.0
1.6
0.1
1.7
6.4
0.5
6.9
0.1
1.8
1.9
18.6
21.1
39.7
19.2
20.7
39.9
4.0
—
4.0
1.4
0.1
1.5
4.8
0.1
4.9
0.1
1.2
1.3
—
—
—
82.7
83.5
40.8
4.0
—
4.0
0.5
0.1
0.6
4.7
0.4
5.1
0.1
1.6
1.7
19.2
—
19.2
59.7
179.2
643.9
33.3%
9.3%
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
16.8
17.1
33.9
16.8
16.9
33.7
4.0
—
4.0
1.4
0.1
1.5
6.3
0.3
6.6
0.1
1.4
1.5
—
—
—
79.3
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%
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’s 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 £43.5 billion (2018 - £45.7 billion).
(5) Regulatory amounts reported for AT1, Tier 1 and Tier 2 instruments are before grandfathering restrictions imposed by CRR.
RBS – Annual Report and Accounts 2019
125
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 plc
- amount (£m)
- weighted average rate spread (bps)
NWM Plc
- amount (£m)
- weighted average rate spread (bps)
NatWest Bank Plc
- amount (£m)
- weighted average rate spread (bps)
NWM N.V.
- amount (£m)
- weighted average rate spread (bps)
NWM S.I.
- 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 - amount (£m)
Weighted average rate spread (bps)
Subordinated debt instruments roll-off profile (2)
RBSG plc (£m)
NWM Plc (£m)
NatWest Bank Plc (£m)
NWM N.V. (£m)
UBI DAC (£m)
Total (£m)
As at and
for year ended
31 December 2019
H1 2020
H2 2020
Roll-off profile
2021
2022
2023 & 2024
2025 & later
19,247
194
18,771
82
1,517
9
204
23
223
129
1,142
448
5,948
113
47,052
139
6,492
589
1,123
546
73
8,823
2
162
5,263
69
1,296
8
102
24
—
—
—
—
1,252
26
7,915
53
81
—
700
11
—
792
—
—
—
—
7
224
2,294
82
4,027
69
2,766
85
8,457
211
3,114
106
10,781
181
1,307
108
221
12
102
22
—
—
—
—
1,753
150
4,370
104
—
96
—
—
—
96
—
—
—
—
—
—
—
—
—
—
—
—
—
—
4
64
—
—
—
—
4,027
69
2,777
86
—
—
333
—
—
333
1,708
274
90
—
—
2,072
—
—
—
—
81
98
—
—
2,943
129
14,595
172
4,702
147
—
105
—
4,954
—
—
—
—
138
150
1,142
448
—
—
13,368
203
1
72
—
430
73
576
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 2019
Foreign exchange movement
Business movements
Risk parameter changes (1)
Methodology changes
Model updates
Other movements (2)
At 31 December 2019
Credit risk
£bn
137.9
(1.2)
1.6
(0.3)
—
(1.7)
(5.3)
131.0
Counterparty
credit risk
£bn
13.6
(0.3)
(0.8)
—
—
—
0.1
12.6
Market risk Operational risk
£bn
22.4
—
0.2
—
—
—
—
22.6
£bn
14.8
—
(1.1)
—
—
(0.7)
—
13.0
Total RWAs
£bn
188.7
(1.5)
(0.1)
(0.3)
—
(2.4)
(5.2)
179.2
Notes:
(1) 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.
(2) The movement in the Other category primarily reflected a £4.6billion reduction in credit risk reflecting the completion of the merger of Alawwal bank and SABB,
a £2.0 billion reduction reflecting revision of the treatment of nostros in line with CRR requirements, partially offset by a £1.3 billion increase following the
adoption of IFRS 16.
RBS – Annual Report and Accounts 2019
126
Capital and risk management
Capital, liquidity and funding risk continued
RWAs by segment
The table below analyses the movement in end-point CRR RWAs by segment during the year.
Total RWAs
At 1 January 2019
Foreign exchange movement
Business movements
Risk parameter changes (1)
Methodology changes
Model updates
Other movements (2)
At 31 December 2019
UK Personal
Banking
£bn
34.3
—
2.1
1.4
—
—
—
37.8
Ulster
Bank RoI
£bn
14.7
(0.6)
(0.4)
(1.1)
—
0.4
—
13.0
Commercial
Banking
£bn
78.4
(0.4)
(0.4)
(0.4)
—
(2.1)
(2.6)
72.5
Private
Banking
£bn
9.4
—
0.6
—
—
—
0.1
10.1
RBSI
£bn
6.9
(0.1)
0.1
(0.1)
—
—
(0.3)
6.5
NatWest Central items
& other
Markets
£bn
£bn
0.1
44.9
(0.2)
(0.2)
0.3
(2.4)
—
(0.1)
—
—
—
(0.7)
1.2
(3.6)
1.4
37.9
Total
£bn
188.7
(1.5)
(0.1)
(0.3)
—
(2.4)
(5.2)
179.2
Credit risk
Counterparty credit risk
Market risk
Operational risk
Total RWAs
Notes:
(1) 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
131.0
12.6
13.0
22.6
179.2
11.9
—
0.1
1.0
13.0
8.9
0.1
—
1.1
10.1
30.2
0.1
—
7.5
37.8
63.3
0.2
0.1
8.9
72.5
9.6
12.2
12.8
3.3
37.9
1.4
—
—
—
1.4
5.7
—
—
0.8
6.5
as IRB model changes relating to counterparty credit risk in line with EBA Pillar 3 Guidelines.
(2) The movement in the Other category primarily reflected a £4.6 billion reduction in credit risk reflecting the completion of the merger of Alawwal bank and SABB,
a £2.0 billion reduction reflecting revision of the treatment of nostros in line with CRR requirements, partially offset by a £1.3 billion increase following the
adoption of IFRS 16. Other also reflects transfers between segments with £1.2 billion transferring from Commercial Banking to NatWest Markets and £1.1 billion
transferring from Commercial Banking to Central items & other.
Key points
RWAs decreased by £9.5 billion in 2019, with credit risk reducing
by £6.9 billion, market risk by £1.8 billion and counterparty credit
risk by £1.0 billion.
The reduction in credit risk primarily reflected: a £4.6 billion
reduction due to the completion of the merger of Alawwal bank and
SABB, a £2.0 billion reduction due to revision in the treatment of
nostros, a £1.7 billion reduction from revisions to LGD models and
decreases due to foreign exchange movements. These were offset
by increases in UK Personal Banking asset size due to increased
lending and a £1.3 billion increase following the adoption of IFRS
16.
The reduction in market risk, primarily under the internal model
approach, reflected a reduction in the capital multiplier, changes in
interest rate and foreign exchange risks reducing the VaR/SVaR
based requirements and a reduction in eurozone bond position
risks. Furthermore there was a £0.7 billion decrease due to model
update improvements.
The counterparty credit risk decrease primarily reflected decreased
exposures and the impact of foreign exchange movements. CVA
also decreased, primarily reflecting the reduction in the capital
multiplier.
Liquidity portfolio
The table below shows the liquidity portfolio by product, with primary liquidity aligned to internal stressed outflow coverage and regulatory LCR
categorisation. Secondary liquidity comprises assets eligible for discount at central banks, which do not form part of the liquid asset portfolio for
LCR or stressed outflow purposes.
Cash and balances at central banks
AAA to AA- rated governments
A+ and lower rated governments
Government guaranteed issuers, Public sector entities and
Government sponsored entities
International Organisations and Multilateral development banks
LCR level 1 bonds
LCR level 1 Assets
LCR level 2 Assets
Non-LCR Eligible Assets
Primary liquidity
Secondary liquidity (3)
Total liquidity value
Liquidity value
2019
2018
RBS Group (1)
£m
74,289
46,622
1,277
UK DoLSub (2)
£m
51,080
34,585
—
RBS Group (1)
£m
85,723
38,179
1,587
UK DoLSub (2)
£m
63,951
27,603
—
251
2,393
50,543
124,832
—
88
124,920
74,431
199,351
90
1,717
36,392
87,472
—
—
87,472
73,332
160,804
254
2,036
42,056
127,779
—
—
127,779
70,231
198,009
100
1,437
29,140
93,091
—
—
93,091
69,642
162,733
Notes:
(1) RBS includes UK DoLSub, NatWest Markets Plc and other significant operating subsidiaries that hold liquidity portfolios. These include RBS International
Limited, NWM 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 & Company and Ulster Bank Limited.
(3) Comprises assets eligible for discounting at the Bank of England and other central banks.
(4) Liquidity portfolio table approach has been aligned to the ILAAP methodology, with 2018 comparative restated.
RBS – Annual Report and Accounts 2019
127
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.
Bank deposits
Repos
Other bank deposits (1)
Customer deposits
Repos
Non-bank financial institutions
Personal
Corporate
Trading liabilities (2)
Repos (3)
Derivative collateral
Other bank and customer deposits
Debt securities in issue - Medium term notes
Other financial liabilities
Customer deposits
Debt securities in issue:
Commercial papers and certificates of deposit
Medium term notes
Covered bonds
Securitisations
Subordinated liabilities
Total funding
Of which: available in resolution (4)
Short-term
less than
1 year
£m
2,598
6,688
9,286
1,765
48,759
183,124
133,450
367,098
27,885
21,509
710
659
50,763
4,272
4,592
3,051
—
11,915
160
439,222
—
2019
Long-term
more than
1 year
£m
—
11,207
11,207
—
352
1,210
587
2,149
896
1,103
1,999
6
29,262
2,897
1,140
33,305
9,819
58,479
26,168
Total
£m
—
2,598
17,895
20,493
1,765
49,111
184,334
134,037
369,247
27,885
21,509
1,606
1,762
52,762
—
4,278
33,854
5,948
1,140
45,220
9,979
497,701
26,168
Short-term
less than
1 year
£m
941
6,497
7,438
3,774
46,115
178,087
131,173
359,149
25,645
20,187
1,342
56
47,230
212
3,157
4,872
—
—
8,241
299
422,357
—
2018
Long-term
more than
1 year
£m
—
15,859
15,859
—
149
1,499
117
1,765
—
446
847
1,293
Total
£m
941
22,356
23,297
3,774
46,264
179,586
131,290
360,914
25,645
20,187
1,788
903
48,523
—
212
—
24,749
5,367
1,375
31,491
10,236
60,644
22,909
3,157
29,621
5,367
1,375
39,732
10,535
483,001
22,909
Notes:
(1) Includes £10.0 billion (2018 - £14.0 billion) relating to Term Funding Scheme participation and £1.7 billion (2018 - £1.8 billion) relating to RBS’s participation in
central bank financing operations under the European Central Bank’s targeted long-term financing operations.
(2) Excludes short positions of £21.2 billion (2018 - £23.8 billion).
(3) Comprised central & other bank repos of £6.6 billion (2018 - £5.0 billion), other financial institution repos of £19.0 billion (2018 - £20.1billion) and other corporate
repos of £2.3 billion (2018 - £0.6 billion).
(4) 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 £19.2
billion (2018 - £16 billion) under debt securities in issue (senior MREL) and £6.9 billion (2018 - £7 billion) under subordinated liabilities.
∆
RBS – Annual Report and Accounts 2019
128
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.
2019
Central bank balances
Trading assets
Derivatives
Settlement balances
Loans to banks
Loans to customers (1)
Personal
Corporate
NBFI
Other financial assets
Total financial assets
2018
Total financial assets
2019
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
Subordinated liabilities
Lease liabilities
Other liabilities (2)
Total financial liabilities
2018
Total financial liabilities
Less than
1 month 1-3 months 3-6 months
£m
—
—
—
—
998
11,565
3,545
4,284
3,736
2,385
14,948
£m
—
—
—
—
178
13,591
2,566
4,608
6,417
3,360
17,129
£m
77,858
—
22
4,387
9,469
37,069
6,155
24,577
6,337
1,171
129,976
Banking activities
6 months
- 1 year
£m
—
—
5
—
31
19,201
6,645
7,947
4,609
3,193
Subtotal
£m
77,858
—
27
4,387
10,676
81,426
18,911
41,416
21,099
10,109
22,430 184,483
1-3 years
£m
—
—
42
—
5
59,120
25,609
27,884
5,627
15,116
74,283
Trading
activities
£m
—
76,745
More than
5 years
£m
—
—
65
—
—
Total
£m
77,858
—
3-5 years
£m
—
—
68
—
8
Total
£m
77,858
76,745
202 149,827 150,029
4,387
—
4,387
—
10,689
10,689
— 330,631
43,200 146,885 330,631
— 189,127
19,247 125,360 189,127
— 111,194
20,113 111,194
21,781
30,310
—
30,310
2,172
61,452
715
60,737
8,883
52,159 173,579 484,504 227,287 711,791
1,412
26,629
140,646
11,697
11,959
22,810 187,112
67,692
52,582 164,145 471,531 209,601 681,132
4,192
2,213
1,765
346,430
176,129
127,019
43,282
4,069
—
—
577
339
188
50
—
8
21
2,109
361,384
660
200
—
10,020
3,382
3,266
3,372
—
—
1
4,157
1,533
2,622
2
—
13
34
—
15,085
545
5
—
5,377
1,586
2,182
1,609
—
—
2
3,361
1,075
1,033
1,253
—
36
47
—
9,373
1,291
180
—
6,688
2,598
1,765
3,506 365,333
2,027 183,124
983 133,450
48,759
496
4,069
—
—
—
—
3
11,915
3,820
4,272
1,325
4,592
749
3,051
1,746
—
—
160
103
194
92
2,109
—
8,992 394,834
11,169
—
—
2,101
1,210
556
335
—
—
4
10,455
3
10,452
—
—
2,393
313
—
26,435
38
—
—
21
—
4
17
—
—
4
13,112
3
10,212
2,897
—
4,931
246
—
18,352
17,895
—
17,895
—
2,598
—
2,598
—
—
1,765
—
1,765
27 367,482
— 367,482
— 184,334
— 184,334
27 134,037
— 134,037
49,111
—
49,111
—
4,069
—
4,069
—
73,949
—
—
73,949
22 146,857 146,879
11
45,220
—
9,738
4,278
—
—
33,854
—
8,598
5,948
—
—
1,140
—
1,140
9,979
—
2,495
1,823
—
1,070
2,109
—
—
13,341 452,962 220,806 673,768
45,220
4,278
33,854
5,948
1,140
9,979
1,823
2,109
352,276
13,065
7,512
7,535 380,388
25,603
17,116
16,867 439,974 200,969 640,943
Notes:
(1) Loans to customers excludes £3.7 billion (2018 - £3.3 billion) of Impairment provisions.
(2) Represents notes in circulation.
∆
RBS – Annual Report and Accounts 2019
129
Capital and risk management
Capital, liquidity and funding risk continued
Senior notes and subordinated liabilities - residual maturity profile by instrument type (audited)
The table below shows RBS Group’s debt securities in issue and subordinated liabilities by residual maturity.
Trading
liabilities
Other financial liabilities
Debt securities in issue
Debt securities
in issue
MTNs
£m
659
321
217
565
1,762
56
374
92
381
903
Commercial
paper
and CDs
£m
4,272
3
3
—
4,278
3,157
3,157
MTNs
£m
4,592
10,452
10,212
8,598
33,854
4,872
6,397
10,536
7,816
29,621
2019
Less than 1 year
1-3 years
3-5 years
More than 5 years
Total
2018
Less than 1 year
1-3 years
3-5 years
More than 5 years
Total
The table below shows the currency breakdown.
2019
Commercial paper and CDs
MTNs
Covered bonds
Securitisation
Subordinated liabilities
Total
2018 Total
Covered
bonds Securitisation
£m
—
—
—
1,140
1,140
£m
3,051
—
2,897
—
5,948
Subordinated
liabilities
£m
160
2,393
4,931
2,495
9,979
3,145
2,222
5,367
GBP
£m
2,266
1,573
3,105
672
697
8,313
1,375
1,375
USD
£m
401
15,287
—
—
8,353
24,041
299
450
4,534
5,252
10,535
EUR
£m
1,572
16,445
2,843
468
929
22,257
Total
£m
12,075
12,848
18,043
12,233
55,199
8,328
9,992
15,070
16,665
50,055
Other
£m
39
2,311
—
—
—
2,350
Total notes
in issue
£m
12,734
13,169
18,260
12,798
56,961
8,384
10,366
15,162
17,046
50,958
Total
£m
4,278
35,616
5,948
1,140
9,979
56,961
6,743
19,867
22,893
1,455
50,958
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.
1-5
Loans to customers
Greater
than
years 5 years
£bn
110
10
19
£bn
37
6
45
Less
than
1 year
£bn
12
2
38
5
6
18
—
81
6
5
4
—
103
4
3
1
—
147
1-5
Contractual maturity (1)
Customer accounts
Greater
than
years 5 years
£bn
—
—
—
£bn
1
—
1
Less
than
1 year
£bn
150
18
135
28
30
13
2
376
—
—
1
—
3
—
—
—
—
—
Total
£bn
159
18
102
15
14
23
—
331
2019
UK PB
UB RoI
CB
Private
Banking
RBSI
NWM
Centre
Total
2018
Total
∆
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.
Net surplus/(gap)
Behavioural maturity
Net surplus/(gap)
Less
than
1 year
£bn
138
16
97
1-5
Greater
than
years 5 years
£bn
(110)
(10)
(19)
£bn
(36)
(6)
(44)
23
24
(5)
2
295
(6)
(5)
(3)
—
(100)
(4)
(3)
(1)
—
(147)
Less
than
1 year
£bn
1
—
1
(2)
1
(2)
2
1
Total
£bn
(8)
—
34
13
16
(9)
2
48
Total
£bn
151
18
136
28
30
14
2
379
1-5
Greater
than
years 5 years
£bn
—
1
(12)
£bn
(9)
(1)
45
5
2
(6)
—
36
10
13
(1)
—
11
Total
£bn
(8)
—
34
13
16
(9)
2
48
80
96
143
319
366
2 —
368
286
(94)
(143)
49 —
33
16
49
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 reduced by £1 billion
during 2019 to £48 billion driven by £11 billion deposit growth and
£12 billion loan growth.
Customer deposits and customer loans are broadly matched from
a behavioural perspective.
The net funding surplus in 2019 is concentrated in the longer
dated buckets, reflecting the stable characteristics of customer
deposits and lending that is behaviourally shorter dated.
RBS – Annual Report and Accounts 2019
130
Capital and risk management
Capital, liquidity and funding risk continued
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.
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.
Ring-fenced to meet regulatory requirement, where RBS has in
place an operational continuity in resolution (OCIR) investment
mandate wherein PRA requires critical service providers to hold
segregated liquidity buffers covering at least 50% of their annual
fixed overheads.
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 actively support
funding are established within UK DoLSub, UBI DAC and NatWest
Markets Plc.
Balance sheet encumbrance (audited)
The table shows the retained encumbrance assets of RBS Group.
Encumbered as a result of transactions
with
Pre-positioned
Collateral
Unencumbered assets not pre-positioned
2019
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
2018
Total assets
counterparties other than central banks & encumbered ring - fenced
to meet reg
requirement
assets held
at central
SFT,
derivatives
Covered
debts &
securitisations
(1)
£bn
—
—
—
—
0.5
11.8
and similar (2) Total (3)
banks (4)
£bn
4.3
51.2
—
—
—
0.5
—
—
—
—
0.5
9.0
—
—
65.0
£bn
4.3
51.2
—
—
0.5
12.3
8.5
2.2
—
—
1.6
9.0
—
—
77.3
£bn
—
—
—
—
—
115.6
109.9
2.8
—
—
2.9
—
—
—
115.6
(5)
£bn
—
—
—
—
—
—
—
—
—
—
—
2.4
—
—
2.4
8.5
2.2
—
—
1.1
—
—
—
12.3
with central banks
Readily
available
(6)
£bn
73.6
0.7
—
—
9.7
53.9
Other
available
(7)
£bn
—
0.8
—
—
0.2
108.5
28.8
7.9
4.0
5.4
7.8
48.8
—
—
186.7
12.3
—
0.5
2.5
93.2
0.5
—
1.9
111.9
Cannot
be used (8)
Total
Total
£bn
—
24.0
150.0
4.4
0.3
36.6
—
—
—
2.3
34.3
0.8
6.6
6.4
229.1
£bn
73.6
25.5
150.0
4.4
10.2
199.0
41.1
7.9
4.5
10.2
135.3
50.1
6.6
8.3
527.7
£bn
77.9
76.7
150.0
4.4
10.7
326.9
159.5
12.9
4.5
10.2
139.8
61.5
6.6
8.3
723.0
12.7
69.6
82.3
117.1
1.3 176.4 110.2
206.9
493.5
694.2
Notes:
(1) Covered debts and securitisations include securitisations, conduits, covered bonds and secured notes.
(2) Repos and other secured deposits, cash, coin and nostro balance held with the Bank of England as collateral against deposits and notes in circulation are
included here rather than within those positioned at the central bank as they are part of normal banking operations. Securities financing transactions (SFT)
include collateral given to secure derivative liabilities.
(3) Total assets encumbered as a result of transactions with counterparties other than central banks are those that have been pledged to provide security and are
therefore not available to secure funding or to meet other collateral needs.
(4) Assets pre-positioned at the central banks include loans provided as security as part of funding schemes and those encumbered under such schemes.
(5) Ring-fenced to meet regulatory requirement includes assets ring fenced to meet operational continuity in resolution (OCIR) investment mandate.
(6) 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.
(7) 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.
(8) 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.
(9)
(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.
∆
RBS – Annual Report and Accounts 2019
131
Capital and risk management
Credit risk
Definition (audited)
Credit risk is the risk that customers and counterparties fail to meet
their contractual obligation to settle outstanding amounts.
Sources of risk (audited)
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 2019
Asset quality (AQ) deteriorated slightly with 53% of the lending
exposure rated AQ1-AQ4 (2018 – 54%) (equating to an indicative
investment rating of BBB- or better).
The overall personal portfolio increased by £10 billion, largely
driven by growth of the UK mortgage portfolio.
Wholesale portfolio risk appetite was tightened for certain sectors
based on leading indicator information, macroeconomic
uncertainty and Brexit preparedness.
The overall expected credit loss (ECL) charge for the year was
£696 million, up from £398 million in 2018; primarily this reflected
the transitioning from a very benign period towards a more
normalised external credit environment as well as the impact of a
small number of large individual commercial charges. The cost of
risk at 20 basis points remained below RBS’s view of a
normalised blended long-term loss rate of 30 to 40 basis points.
Risk governance (audited)
RBS operates a Credit Risk function, which provides oversight of
frontline credit risk management activities.
Governance activities include:
Defining credit risk appetite for the management of concentration
risk and credit policy to establish the key causes of risk in the
process of providing credit and the controls that must be in place
to mitigate them.
Approving and monitoring credit limits.
Oversight of the first line of defence to ensure that credit risk
remains within the appetite set by the Board and that controls are
being operated adequately and effectively.
∆
Risk appetite
RBS’s approach to Wholesale credit is governed by a comprehensive
credit risk appetite framework. The framework is monitored and
actions are taken to adapt lending criteria as appropriate. Credit risk
appetite aligns to the strategic risk appetite set by the Board. The
framework has been designed to reflect factors 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 framework and risk appetite limits. The framework is
supported by a suite of transaction acceptance standards that set out
the risk parameters within which businesses should operate.
The Personal credit risk appetite framework sets limits that measure
and control the quality and concentration of both existing and new
business for each relevant 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 the Wholesale credit risk appetite framework, the four formal
frameworks used – and their basis for classification – are detailed in
the following table.
∆
Basis for classification
Measure
Other
Risk – based on loss given default
for a given probability of default
Framework
Single name
concentration
∆
Sector
Exposure
Country
Product and
asset class
Risk – based on economic capital
and other qualitative factors
Risk – based on sovereign default
risk, political stability and
macroeconomic factors
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 (audited)
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.
A key aspect of credit risk stewardship is monitoring signs of customer
stress, and when identified, applying appropriate debt management
actions.
∆
Risk models
Credit risk models is the collective term used to describe all models,
frameworks and methodologies used to calculate probability of default
(PD), exposure at default (EAD), loss given default (LGD), maturity
and the production of credit grades.
Credit risk models are designed to provide:
An assessment of customer and transaction characteristics.
A meaningful differentiation of credit risk.
Accurate internal default, loss and exposure at default estimates
that are used in the capital calculation or wider risk management
purposes.
Asset quality
All credit grades map to an asset quality scale, used for financial
reporting. For Wholesale customers, a master grading scale is used
for internal management reporting across portfolios. 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%).
Counterparty credit risk
Counterparty credit risk arises from the obligations of customers under
derivative and securities financing transactions.
RBS mitigates counterparty credit risk through collateralisation and
netting agreements, which allow amounts owed by RBS to a
counterparty to be netted against amounts the counterparty owes
RBS.
RBS – Annual Report and Accounts 2019
132
Capital and risk management
Credit risk continued
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 generally
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.
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.
Customers are aggregated as a single risk when sufficiently
interconnected.
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. Credit approvals are subject to
environmental, social and ethical risk policies which restrict exposure
to certain highly carbon intensive industries as well as those with
potentially heightened reputational impacts.
For lower risk transactions below specific thresholds, credit decisions
can be approved through self-sanctioning within the business. This
process is facilitated through an auto-decision making system, which
utilises scorecards, strategies and policy rules. Such credit decisions
must be within the approval authority of the relevant business
sanctioner.
For all other transactions credit is only granted to customers following
joint approval by an approver from the business and the credit risk
function or by two credit officers. 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.
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 using 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.
RBS – Annual Report and Accounts 2019
133
Capital and risk management
Credit risk continued
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, unless it is 90 days past due, in which case it is
categorised as Stage 3.
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. An option that
may also be considered, is the sale of unsecured debt. 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.
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. 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. The purpose of
Restructuring is to protect RBS’s capital. Restructuring does this by
working with corporate and commercial customers in financial difficulty
on their restructuring and repayment strategies. Restructuring will
always aim to recover capital fairly and efficiently.
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 a
repayment strategy is deemed appropriate. The objective is to find a
mutually acceptable solution, including restructuring of existing
facilities, repayment or refinancing.
Where a solvent outcome is not possible, insolvency may be
considered as a last resort. However, helping the customer return to
financial health and restoring a normal banking relationship is always
the preferred outcome.
RBS – Annual Report and Accounts 2019
134
Capital and risk management
Credit risk continued
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.
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 or partial capital and interest
arrangements. 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.
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.
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 Personal Banking 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.
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.
∆
RBS’s IFRS 9 provisioning models, which used existing Basel models
as a starting point, incorporate term structures and forward-looking
information. Regulatory conservatism within the Basel models has
been removed as appropriate to comply with the IFRS 9 requirement
for unbiased ECL estimates.
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).
Refer to Accounting policy 13 for further details.
∆
RBS – Annual Report and Accounts 2019
135
Capital and risk management
Credit risk continued
Economic loss drivers (audited)
Introduction
The most material economic loss drivers for Personal portfolios include
national GDP, unemployment rate, house price indices, and base rate
for the UK and the Republic of Ireland. In addition to some of these
loss drivers, world GDP is a primary loss driver for Wholesale
portfolios.
Central base case economic scenario
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 financial planning by RBS with the exception
of the yield curve, as a result of the different timing of the exercises.
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 base case economic 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 there are two base rate
cuts over the next five years, whereas the yield curve used for
financial planning assumes one base rate cut.
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 unemployment remaining around 5%. Meanwhile house
prices are expected to grow at 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 the aggregate credit cycle conditions
arising from the base case to explicitly enforce a gradual reversion to
long run average conditions starting from the first projected year
onwards.
The application of the mean reversion adjustment is based on 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 multiple economic scenarios (MES)
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 economic scenarios is considered when calculating ECL.
Personal – 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 for further details).
The ECL impact on the Personal portfolio arising from the systematic
application of MES over the single, central base case was relatively
low at less than 1%, in line with 2018. Losses are expected to increase
on a non-linear basis in the event of an economic downturn, and for
UK Personal Banking, this effect was included within the overlay for
UK economic uncertainty detailed on page 138. At the end of 2018, an
overlay of £26 million covering non-linearity of losses had been held
separately. For Ulster Bank RoI, a separate overlay of £25 million
(2018 – £26 million) covering non-linearity of losses continued to be
held.
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
Credit Cycle Indices (CCI) that underpin the Wholesale credit models.
CCIs measure portfolio level default rate conditions expressed as an
index value. An index value of zero represents long run average
default rates. Negative and positive index values represent default
rates above and below long run averages respectively. The Monte
Carlo MES approach increases Wholesale modelled ECL for Stage 1
and Stage 2 by approximately 7% (2018 – 5%) above the single,
central scenario outcomes. No additional non-linearity overlay was
applied for Wholesale, similar to 2018, with the final reported ECL
inclusive of the systematic MES uplift from the Monte Carlo modelling
and also the overlay for economic uncertainty detailed below.
For both Personal and Wholesale, the impact from MES is factored
into account level PDs through scalars. These MES-adjusted PDs are
used to assess whether a significant increase in credit risk has
occurred. The MES impact on the size of Stage 2 is proportionate to
the MES ECL impacts across Personal and Wholesale, as set out
above.
Key economic loss drivers
The tables and commentary below provide an update on the base case economics used at 31 December 2019, and also the MES used for
Personal portfolios. The average over the five year horizon (2020 to 2024) for the central base case and two upside and downside scenarios
used for ECL modelling, are set out below. It is compared with the five year average (2019 to 2023) of the 2018 scenarios. The graph shows the
quarterly GDP year-on-year growth rates across the MES. Subsequently, the annual figures for key variables across the UK and Republic of
Ireland are shown. Finally, the extreme points table show the best and worst readings for three key variables in the two upside and two
downside scenarios, highlighting the most challenging points in the downside scenarios and the strongest points in the upside scenarios.
RBS – Annual Report and Accounts 2019
136
Capital and risk management
Credit risk continued
Economic loss drivers (audited)
The 2019 base case GDP growth and interest rate assumptions are pessimistic compared to 2018 as consensus outlook and market implied
interest rate projections worsened over the year. Unemployment rate projections are less extreme in the 2019 downside scenarios as RBS
aimed to align the Downside 2 scenario with Office for Budget Responsibility’s analysis of a hard Brexit scenario.
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
Upside 2
Upside 1 Base case Downside 1 Downside 2
Upside 2
Upside 1 Base case Downside 1 Downside 2
2019
2018
%
2.4
3.6
4.1
1.0
3.9
3.9
5.3
1.6
3.8
%
2.2
3.9
3.3
0.7
3.6
4.3
4.7
0.9
3.3
%
1.6
4.4
1.6
0.3
2.8
4.8
2.9
—
2.8
%
1.3
4.7
0.8
—
2.4
5.7
2.2
—
2.5
%
0.9
5.2
(1.0)
—
1.9
6.9
1.0
—
%
2.6
3.3
4.3
1.7
4.3
4.2
9.2
1.3
%
2.3
3.8
3.3
1.3
3.6
4.6
6.8
0.8
%
1.7
5.0
1.7
1.1
3.0
5.2
4.0
0.3
%
1.5
5.6
1.1
0.5
3.1
6.0
3.2
—
%
1.1
6.9
(0.5)
—
2.8
6.8
0.8
—
2.1
3.6
3.2
2.7
2.5
2.3
Probability weight
12.7
14.8
30.0
29.7
12.7
12.8
17.0
30.0
25.6
14.6
UK Gross domestic product
5%
4%
3%
2%
1%
0%
-1%
-2%
-3%
Q1
2012
Q4
2012
Q3
2013
Q2
2014
Q1
2015
Q4
2015
Q3
2016
Q2
2017
Q1
2018
Q4
2018
Q3
2019
Q2
2020
Q1
2021
Q4
2021
Q3
2022
Q2
2023
Q1
2024
Q4
2024
Q3
2025
Q2
2026
Q1
2027
Q4
2027
Q3
2028
Upside 2
Upside 1
Base case
Downside 1
Downside 2
UK GDP - annual growth
Upside 2
%
1.3
3.5
3.6
2.2
1.5
1.4
2019
2020
2021
2022
2023
2024
UK unemployment rate
Upside 1 Base case Downside 1 Downside 2
%
1.1
(1.3)
—
1.9
2.1
1.9
%
1.1
(0.1)
1.2
2.0
1.7
1.6
%
1.4
3.2
3.0
1.9
1.5
1.5
%
1.2
1.1
1.7
1.7
1.7
1.6
Upside 2
%
4.0
3.7
3.5
3.5
3.6
3.8
Q4 2019
Q4 2020
Q4 2021
Q4 2022
Q4 2023
Q4 2024
UK House Price Inflation - annual growth
Upside 1 Base case Downside 1 Downside 2
%
4.1
5.1
5.5
5.4
5.3
5.1
%
4.1
4.8
4.8
4.7
4.6
4.6
%
4.0
3.8
3.8
3.8
3.9
4.0
%
4.1
4.4
4.4
4.4
4.4
4.4
2019
2020
2021
2022
2023
2024
Upside 2
%
1.7
5.7
8.2
4.2
1.7
0.9
Upside 1 Base case Downside 1 Downside 2
%
1.4
(3.6)
(7.7)
(1.9)
3.0
5.2
%
1.5
(1.1)
(2.7)
0.8
3.1
3.9
%
1.7
4.5
6.0
3.1
1.4
1.4
%
1.5
1.0
0.9
1.5
2.0
2.6
Republic of Ireland GDP - annual growth
%
4.1
2019
5.9
2020
4.5
2021
2.9
2022
2.4
2023
2024
2.2
Republic of Ireland unemployment rate
Upside 2
%
4.1
6.3
5.1
3.3
2.4
2.2
Upside 1 Base case Downside 1 Downside 2
%
3.7
(0.1)
0.5
3.1
3.2
2.7
%
3.8
1.7
2.2
3.2
2.6
2.4
%
3.9
3.4
2.8
2.7
2.6
2.4
Q4 2019
Q4 2020
Q4 2021
Q4 2022
Q4 2023
Q4 2024
Republic of Ireland House Price Inflation - annual growth
Upside 1 Base case Downside 1 Downside 2
%
5.3
7.0
7.3
6.9
6.9
6.9
Upside 2
%
4.6
3.8
3.6
3.8
4.3
4.5
%
4.9
4.8
4.8
4.8
4.9
5.0
%
5.1
5.8
5.8
5.5
5.7
5.8
%
4.7
4.0
4.0
4.2
4.6
4.9
2019
2020
2021
2022
2023
2024
Upside 2
%
3.8
9.3
6.3
4.5
3.1
3.1
Upside 1 Base case Downside 1 Downside 2
%
3.1
(4.7)
(3.8)
4.2
5.0
4.4
%
3.3
(0.8)
0.1
4.4
3.5
3.6
%
3.5
2.9
1.5
3.2
3.4
3.7
%
3.9
8.3
4.9
3.8
3.0
3.2
RBS – Annual Report and Accounts 2019
137
Capital and risk management
Credit risk continued
Economic loss drivers (audited)
Extreme points
UK
GDP (year-on-year)
Unemployment
House Price Inflation (year-on-year)
Republic of Ireland
GDP (year-on-year)
Unemployment
House Price Inflation (year-on-year)
Best points
Worst points
H2 2019
H2 2018
H2 2019
H2 2018
Upside 2 Upside 1
Upside 2 Upside 1 Downside 1 Downside 2 Downside 1 Downside 2
%
4.6
3.5
8.9
%
4.0
3.8
6.7
%
5.0
2.8
9.1
%
4.1
3.4
7.0
%
(0.2)
4.9
(3.5)
%
(1.8)
5.5
(8.4)
%
(0.1)
5.9
(2.8)
%
(1.9)
7.4
(7.3)
Best points
Worst points
H2 2019
H2 2018
H2 2019
H2 2018
Upside 2 Upside 1
Upside 2 Upside 1 Downside 1 Downside 2 Downside 1 Downside 2
%
6.6
3.6
10.3
%
6.3
4.0
9.1
%
14.0
3.6
22.0
%
10.2
4.1
16.3
%
0.5
5.8
(2.6)
%
(2.1)
7.3
(8.4)
%
(0.2)
6.5
(2.5)
%
(3.0)
7.8
(8.2)
Probability weightings of scenarios
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 involves the following steps:
Scenario selection – 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 they 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
growth, deviation from baseline and peak to trough falls. These
measures are compared against a set of 1,000 model runs,
following which, a percentile in the distribution is established which
most closely corresponds to the scenario.
Probability assignment – Having established the relevant
percentile points, probability weights are assigned to ensure that
the scenarios produce an unbiased result.
UK economic uncertainty
RBS’s approach is designed to capture the historic variability and
distribution of economic risks. RBS’s approach to capturing these
incremental or skewed forward-looking risks is to apply an overlay to
ECL of £170 million (2018 – £127 million). To calculate the value of
this overlay, information was used from prevailing downside sensitivity
scenario analyses. The underlying economics were broadly aligned to
published International Monetary Fund and Office for Budget
Responsibility hard Brexit scenarios and management judgement was
applied on the likelihood of this alternative path for the economy
emerging. The value of the overlay was increased once during the
year, in the third quarter, when management judged uncertainty to be
more pronounced. The value of the overlay was subsequently
reviewed in the fourth quarter, when management concluded that it
was appropriate to leave it unchanged reflecting the ongoing elevated
economic uncertainty.
∆
RBS – Annual Report and Accounts 2019
138
Capital and risk management
Credit risk continued
Credit risk modelling (audited)
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 the significant increase in
credit risk criteria.
IFRS 9 ECL model design principles
To meet IFRS 9 requirements, PD, LGD and EAD used in ECL
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 PD, LGD and EAD models produce
term structures 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 probability of default
over the remaining lifetime at the reporting date) 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.
PD estimates
Personal models
Personal PD models use the Exogenous, Maturity and Vintage (EMV)
approach to model default rates. 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). The EMV
methodology has been widely adopted across the industry because it
enables forward-looking economic information to be systematically
incorporated into PD estimates.
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 economic conditions observed
at the reporting date across a comprehensive set of region/industry
segments.
One year point-in-time PDs are subsequently extended to life-time
PDs using a conditional transition matrix approach. The conditional
transition matrix approach allows for the incorporation of forward-
looking economic information into the life-time PDs.
LGD estimates
The general approach for the IFRS 9 LGD models is to leverage
corresponding Basel LGD models with bespoke adjustments to ensure
estimates are unbiased and where relevant forward-looking.
Personal
Forward-looking information has only been incorporated for the
secured portfolios, where changes in property prices can be readily
accommodated. Analysis has shown minimal impact of economic
conditions on LGDs for the other Personal portfolios. For Ulster Bank
RoI, a bespoke IFRS 9 mortgage LGD model is used, reflecting its
specific regional market.
Wholesale
Forward-looking economic information is incorporated into LGD
estimates using the existing CCI framework. For low default portfolios,
including sovereigns and banks, loss data is too scarce to substantiate
estimates that vary with economic conditions. Consequently, for these
portfolios, LGD estimates are assumed to be constant throughout the
projection horizon.
EAD estimates
Personal
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 projected using product specific credit
conversion factors (CCF), closely following the product segmentation
and approach of the respective Basel model. However, the CCFs are
estimated over multi-year time horizons to produce unbiased model
estimates.
No explicit forward-looking information is incorporated, on the basis
that analysis has shown that temporal variations in CCFs are largely
attributable to changes in exposure management practices rather than
economic conditions.
Governance and post model adjustments
The IFRS 9 PD, EAD and LGD models are subject to RBS’s model risk
policy that stipulates periodic model monitoring, periodic re-validation
and defines approval procedures and authorities according to model
materiality. Post model adjustments (PMAs) are applied where
necessary to incorporate the most recent data available and are made
on a temporary basis ahead of the underlying model parameter
changes being implemented.
For UK Personal Banking, these PMAs netted to a total overlay of
approximately £40 million at the year end. This included £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. In
addition, judgemental ECL overlays totalling approximately £38 million
were held. In credit cards, a £30 million ECL overlay was in place in
respect of a withheld systematic model release in recognition of
expected future modelling developments. For mortgages, a judgmental
overlay of £8 million was held in respect of the perceived forward-
looking incremental risk on buy-to-let lending.
For Ulster Bank RoI, there was a £6 million ECL reduction in their
unsecured lending portfolio ahead of the underlying model parameter
change being updated.
For Wholesale portfolios, PMAs increased ECL by £58 million relating
to expected model enhancements to PD and LGD. In addition,
judgemental ECL overlays increased ECL by £10 million.
These adjustments were over and above those detailed in the UK
economic uncertainty section and are also subject to oversight and
governance by the Provisions Committee.
∆
RBS – Annual Report and Accounts 2019
139
Capital and risk management
Credit risk continued
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:
Risk bandings (based
on residual lifetime
PD calculated at DOIR)
<0.762%
<4.306%
>=4.306%
Personal
risk bands
Risk band A
Risk band B
Risk band C
Qualitative high-risk backstops – the PD assessment is
PD deterioration
threshold criteria
PD@DOIR + 1%
PD@DOIR + 3%
1.7 x PD@DOIR
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 customers 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 significant increase in credit risk.
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, in line with analysis at the
end of 2018.
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 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 on page 141 is the
impact of some of the material sensitivities considered for 2019 year
end reporting. These ECL simulations are separate to the impact
arising from MES and UK economic uncertainty as described earlier in
this disclosure, which impacts are embedded in the reported ECL.
The primary 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 impacts 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, with the exception of a univariate HPI
sensitivity. The following common scenarios have been applied across
the key Personal and Wholesale portfolios:
Economic uncertainty – simulating the impact arising from the
Downside 2 and Upside 2 scenarios, which are two 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 these scenarios replace the existing base
case economic assumptions, giving them a 100% probability
weighting and thus serving as a single economic scenario.
These scenarios have been applied to all modelled portfolios in the
analysis below, with the simulation impacting both PDs and LGDs.
Modelled overlays present in the underlying ECL estimates are also
sensitised. As expected, the scenarios create differing impacts on ECL
by portfolio and the impacts are deemed reasonable. In this simulation
it is assumed that existing modelled relationships between key
economic variables and loss drivers hold but in practice other factors
would also have an impact, e.g. potential customer behaviour
changes, policy changes by lenders that might impact on the wider
availability of credit.
RBS – Annual Report and Accounts 2019
140
Capital and risk management
Credit risk continued
Measurement uncertainty and ECL sensitivity analysis (audited)
These broader economic scenarios were complemented with two
specific portfolio simulations:
Wholesale portfolios – simulating the impact of PDs and LGDs
moving upwards to the through-the-cycle (TTC) average from their
current point-in-time (PIT) estimate. With the current relatively
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 measures providing an
indication of long run average expectations. IFRS 9 measures
have been used so there remains some differences to Basel TTC
equivalent measures, where conservative assumptions are
required, such as caps or floors, not permitted under the IFRS 9
best estimate approach.
Mortgages – House Price Inflation (HPI) is a key economic driver
and RBS have simulated a univariate scenario of a 20% 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.
PDs are not impacted in this scenario analysis. The simulated
impact is based on 100% probability weighting to demonstrate the
isolated sensitivity of HPI against base ECL estimates.
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 impact.
Actual position at 31 December
2019
Stage 1 and Stage 2 (1)
of which in
Exposure
Stage 2
£bn
%
ECL
provision
(2)
£m
Common scenarios (2,3)
Downside 2
Upside 2
Discrete scenarios (2,3)
Exposure in
Exposure in HPI (4) / TTC PD (5) Exposure
Potential ECL
impact
£m
%
Stage 2
Potential ECL impact
Stage 2
potential ECL impact in Stage 2
%
£m
%
%
£m
%
%
Personal and business banking
UK
Of which: mortgages
Stage 1 and Stage 2
RoI
Of which: mortgages
Stage 1 and Stage 2
Wholesale
Total
Personal banking
UK: mortgages
Stage 3
RoI: mortgages
Stage 3
164.5
8.8% 642.6
94.6 14.7%
9.7%
(77.8) (12.1%)
8.7%
145.8
7.0%
12.2
9.8%
94.7
45.3
— —
—
—
—
—
28.8 30.5%
7.0%
18.5 41%
14.8%
(1.9)
(4.2%)
9.6%
11.7
9.3%
41.2
— —
—
—
—
—
0.6 1.5%
261.8
438.5
88.0 25.0%
4.4% 352.4
6.2% 1,040.3 201.2 19.3%
(82.4) (23.4%)
5.7%
7.5% (162.2) (15.6%)
3.6% 136.0 38.6%
5.7%
9.2%
7.6%
1.3
— 214.2
1.9
— 580.8
12.4 5.8%
22.9 3.9%
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, the analysis
excludes non-modelled portfolios such as Private Banking and RBSI.
(2) The ECL provision includes the ECL overlay taken to recognise elevated Brexit related economic uncertainty.
(3) All simulations are run on a stand-alone basis and are independent of each other, with the potential ECL impact reflecting the simulated impact at the year end
balance sheet date.
(4) HPI is applied to the most material mortgage portfolios only, namely UK Personal Banking and Ulster Bank RoI. The impacts for Stage 3 are included
separately.
(5) TTC or long-run average PDs and LGDs are applied to Wholesale portfolios only (excluding business banking exposures which reside in the Personal and
business banking section).
(6) Refer to page 135 for details of base case economic scenarios.
(7) 2018 comparative details are not included as the sensitivity scenario analysis relates to the 2019 balance sheet position. Refer to the 2018 Annual Report and
Accounts for the sensitivity analysis carried out at that time.
Key points
In the Downside 2 scenario, the ECL requirement overall was
simulated to increase by £201 million on Stage 1 and 2 exposures
from the current level of £1,040 million. The simulation estimates
the balance sheet ECL requirement as at 31 December 2019 and
assumes that the economic variables associated with the
Downside 2 scenario had been RBS’s base case economic
assumption at that time.
The sensitivity of Personal portfolios to Downside 2 has reduced
over time. This is mainly because compared to 2018, the path
assumed for the unemployment rate in the Downside 2 scenario is
lower. The RoI portfolio simulated uplift was more significant than
on the other portfolios, reflecting the weight of mortgage assets in
their personal lending portfolio, with the adverse movement in
unemployment rates increasing the size of Stage 2. A similar effect
was observed on the UK Personal Banking mortgage portfolio
where the mortgage ECL was simulated to increase by just over
25%, and which impact is included within the overall Personal and
Business banking, UK, simulated result.
The Upside 2 scenario indicates a slightly lower release to ECL for
Personal and Business Banking, UK, and Wholesale compared to
the Downside 2 uplift. This is intuitive given the shape of the
Upside 2 economics and non-linearity of losses to the downside.
The reduced Upside 2 impact on the RoI mortgage portfolio is
reflective of currently favourable Irish economic conditions and
portfolio composition. Further improvements in Irish macro
economic variables are not expected to materially impact ECL in
the RoI mortgage portfolio.
HPI scenario, the impact of a 20% fall in house prices was
illustrated for Stage 1 and 2 ECL, where the impacts were
relatively modest. Additionally, the HPI reduction impacts on the
Stage 3 ECL for both UK and RoI have been shown specifically for
this scenario, given the relevance to measurement sensitivity in
Stage 3. The relationship between the required ECL and house
price movements is expected to be nonlinear should the level of
house prices reduce by more material amounts. For the RoI
portfolio, a relatively modest increase in ECL is observed for this
simulation driven by relatively low LTVs and LGD modelling
changes in 2019. MES uplifts are not included in the single
scenario simulations.
For Wholesale, the TTC scenario has the most significant impact
on ECL highlighting that reverting to long run average PDs and
LGDs is more severe than a switch to the Downside 2 scenario.
Moving to TTC PDs requires an average PD uplift of almost 60%.
The TTC scenario shows a higher ECL impact compared to the
Downside 2 scenario given the relative severity of the TTC view.
Furthermore, the TTC scenario assumes the higher PDs remain
heightened at TTC levels over the simulation period, thus driving
higher losses across the latter years of the scenario period
compared to Downside 2.
∆
RBS – Annual Report and Accounts 2019
141
Capital and risk management
Credit risk – Banking activities
Introduction
This section details the credit risk profile of RBS’s banking activities.
Refer to Accounting policy 13 and Note 14 on the consolidated
accounts for revisions to policies and critical judgements relating to
impairment loss determination.
Presentation of interest in suspense recoveries
In March 2019, the IFRS Interpretations Committee (IFRIC) issued an
agenda decision on the presentation of unrecognised interest when a
credit-impaired financial asset (commonly referred to as a Stage 3
financial asset) is subsequently paid in full or is no longer credit-
impaired. This concluded that the difference arising from the additional
interest recovered must be recognised as a reversal of impairment
rather than within interest revenue. This affects both recognition and
the reversal of the ECL allowance.
RBS Group changed its accounting policy in line with the IFRIC
decision. Hence, the carrying amount of the financial assets within the
scope of the provisions of the decision as well as the associated ECL
allowance on the statement of financial position have been adjusted
and the comparative period restated. The coverage ratio for the
current and comparative periods have been adjusted and restated
accordingly. There has been no restatement of the comparative period
in statement of profit or loss on the grounds of materiality.
Refer to Accounting policy 1, Other amendments to IFRS, for further
details.
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
Balance sheet total gross AC/FVOCI
In scope of IFRS 9 ECL framework
% in scope
Loans - in scope
Stage 1
Stage 2
Stage 3
Other financial assets - in scope
Stage 1
Out of scope of IFRS 9 ECL framework
2019
£bn
484.3
475.5
98%
340.0
305.5
27.9
6.6
135.5
135.5
8.8
2018*
£bn
471.5
464.4
99%
320.3
286.0
26.1
8.2
144.1
144.1
7.1
*2018 data has been restated for a change to presentation of unrecognised interest. Refer to Accounting policy 1, Other amendments to IFRS, for further details.
The 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 £6.1 billion (2018 - £4.9
billion). These were assessed as having no ECL unless there was
evidence that they were credit impaired.
Equity shares of £0.9 billion (2018 - £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 – £1.1
billion (2018 - £0.9 billion).
RBS Group-originated securitisations, where ECL was captured on
the underlying loans of £0.4 billion (2018 - £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 £0.3 billion (2018 - £0.4 billion).
Contingent liabilities and commitments
In addition to contingent liabilities and commitments disclosed in Note
26 on the consolidated accounts – reputationally-committed limits, are
also included in the scope of the IFRS 9 ECL framework. These are
offset by £2.6 billion (2018 - £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 £127.9 billion (2018 -
£168.9 billion) comprised Stage 1 £121.7 billion (2018 - £161.4 billion);
Stage 2 £5.6 billion (2018 - £6.9 billion) and Stage 3 £0.6 billion (2018
- £0.6 billion).
∆
RBS – Annual Report and Accounts 2019
142
Capital and risk management
Credit risk – Banking activities continued
Portfolio summary – segment analysis (audited)
The table below shows gross loans and ECL, by segment and stage, within the scope of the IFRS 9 ECL framework.
2019
Loans - amortised cost
Stage 1
Stage 2
Stage 3
Of which: individual
Of which: collective
ECL provisions (1)
Stage 1
Stage 2
Stage 3
Of which: individual
Of which: collective
ECL provisions coverage (2,3)
Stage 1 (%)
Stage 2 (%)
Stage 3 (%)
Impairment losses
ECL charge (4)
Stage 1
Stage 2
Stage 3
Of which: individual
Of which: collective
ECL loss rate - annualised (basis
points) (3)
Amounts written-off
Of which: individual
Of which: collective
UK Personal
Banking
£m
Ulster
Bank RoI
£m
Commercial
Banking
£m
Private
Banking
£m
RBS
International
£m
NatWest
Markets
£m
Central items
& other
£m
144,513
13,558
1,902
—
1,902
159,973
18,544
1,642
2,037
68
1,969
22,223
88,100
11,353
2,162
1,497
665
101,615
114
467
823
—
823
1,404
0.08
3.44
43.27
0.88
393
(90)
256
227
—
227
29
53
693
22
671
775
0.16
3.23
34.02
3.49
(34)
(37)
(35)
38
—
38
152
214
1,021
602
419
1,387
0.17
1.88
47.22
1.36
391
(66)
99
358
328
30
14,956
587
207
207
—
15,750
7
7
29
29
—
43
0.05
1.19
14.01
0.27
(6)
(14)
—
8
8
—
14,834
545
121
121
—
15,500
4
6
21
21
—
31
0.03
1.10
17.36
0.20
2
(5)
5
2
2
—
9,273
180
169
158
11
9,622
10
5
131
122
9
146
0.11
2.78
77.51
1.52
(51)
—
(8)
(43)
(35)
(8)
15,282
3
—
—
—
15,285
6
—
—
—
—
6
0.04
—
—
0.04
1
—
1
—
—
—
Total
£m
305,502
27,868
6,598
2,051
4,547
339,968
322
752
2,718
796
1,922
3,792
0.11
2.70
41.19
1.12
696
(212)
318
590
303
287
24.57
(15.30)
38.48
(3.81)
1.29
(53.00)
0.65
20.47
235
—
235
85
5
80
450
345
105
1
1
—
5
5
—
16
16
—
—
—
—
792
372
420
For the notes to this table refer to the following page.
RBS – Annual Report and Accounts 2019
143
Capital and risk management
Credit risk – Banking activities continued
Portfolio summary – segment analysis (audited)
2018*
Loans - amortised cost
Stage 1
Stage 2
Stage 3
Of which: individual
Of which: collective
ECL provisions (1)
Stage 1
Stage 2
Stage 3
Of which: individual
Of which: collective
ECL provisions coverage (2,3)
Stage 1 (%)
Stage 2 (%)
Stage 3 (%)
Impairment losses
ECL charge (4)
Stage 1
Stage 2
Stage 3
Of which: individual
Of which: collective
ECL loss rate - annualised (basis
points) (3)
Amounts written-off
Of which: individual
Of which: collective
UK Personal
Banking
£m
Ulster
Bank RoI
£m
Commercial
Banking
£m
134,836
13,245
1,988
—
1,988
150,069
17,822
2,080
2,476
68
2,408
22,378
91,034
9,518
2,574
1,695
879
103,126
129
198
1,068
621
447
1,395
0.14
2.08
41.49
1.35
147
(29)
42
134
167
(33)
101
431
677
—
677
1,209
0.07
3.25
34.05
0.81
339
(75)
248
166
—
166
22.59
445
—
445
36
115
808
29
779
959
0.20
5.53
32.63
4.29
15
(7)
(2)
24
1
23
6.70
372
5
367
Private
Banking
£m
13,750
531
233
233
—
14,514
14
10
27
27
—
51
0.10
1.88
11.59
0.35
(6)
(5)
—
(1)
(1)
—
RBSI
£m
13,383
289
108
108
—
13,780
6
4
23
23
—
33
0.04
1.38
21.30
0.24
(2)
(3)
3
(2)
(2)
—
NWM
£m
Central items
& other
£m
8,196
407
795
756
39
9,398
7
14
179
150
29
200
0.09
3.44
22.52
2.13
(92)
(23)
1
(70)
(69)
(1)
6,964
27
—
—
—
6,991
4
—
—
—
—
4
0.06
—
—
0.06
(3)
(1)
—
(2)
(2)
—
14.25
(4.13)
(1.45)
(97.89)
(4.29)
572
189
383
7
7
—
9
9
—
89
62
27
—
—
—
Total
£m
285,985
26,097
8,174
2,860
5,314
320,256
297
772
2,782
850
1,932
3,851
0.10
2.96
34.03
1.20
398
(143)
292
249
94
155
12.43
1,494
272
1,222
*2018 data has been restated for a change to reportable segments and a change to presentation of unrecognised interest. Refer to Note 4 on the consolidated
accounts and Accounting policy 1, Other amendments to IFRS, for further details.
Includes £4 million (2018 – £5 million) related to assets classified as FVOCI.
Notes:
(1)
(2) ECL provisions coverage is calculated as ECL provisions divided by loans - amortised cost.
(3) ECL provisions coverage and ECL loss rates are calculated on third party loans and related ECL provisions and charge respectively.
(4)
Includes a £2 million charge (2018 – £3 million charge) related to other financial assets, of which a £1 million release (2018 – £1 million charge) related to
assets classified as FVOCI; and nil (2018 – £31 million release) related to contingent liabilities.
The table above shows gross loans only and excludes amounts that are outside the scope of the ECL framework. Refer to page 142 for Financial
instruments within the scope of the IFRS 9 ECL framework for further details. Other financial assets within the scope of the IFRS 9 ECL framework were
cash and balances at central banks totalling £76.1 billion and debt securities of £59.4 billion (2018 – £87.2 billion and £57.0 billion respectively).
(5)
Key points
Total ECL provisions reduced slightly. The increase in Stage 1
ECL was more than offset by reductions in Stage 2 and Stage 3.
UK Personal Banking ECL provisions – The increase in Stage 1
and Stage 2 was a result of a combination of portfolio growth and
also slight increases in PD reflective of small uplifts in actual
default rates, as well as additional ECL raised due to on-going
economic uncertainty. The rise in Stage 3 reflected the steady flow
of new defaults which have increased slightly year-on-year,
however, in unsecured lending the trend flattened in the second
half of the year as a result of risk appetite tightening.
balance reduced as write-offs and repayments offset new charges.
Stage 2 loans and advances increased primarily due to model
enhancements and increases in exposures managed in the Risk of
Credit Loss framework, leading to net transfers from Stage 1.
NatWest Markets ECL coverage reduced primarily driven by lower
ECL balances, however, Stage 3 increased significantly following
the disposal of one large purchased or originated credit impaired
asset with no ECL.
Provision coverage reduced slightly overall with increases in Stage
3 coverage for both individual and collectively assessed
exposures, offset by a slight decrease in Stage 2.
Ulster Bank RoI – the ECL reduction reflected the continued
The impairment charge – for the year was £696 million, up from
positive effects from the external environment as well as a residual
benefit in 2019 from a 2018 debt sale.
Commercial Banking ECL provisions – ECL balances reduced
slightly with increases in Stage 1 and Stage 2 offset by a decrease
in Stage 3. Despite increased ECL charges, primarily due to a
small number of material individual provisions, model
enhancements and increased economic uncertainty, the ECL
£398 million in 2018; primarily this reflected the transitioning from
a very benign period towards a more normalised external credit
environment as well as the impact of a small number of large
individual commercial charges. The cost of risk at 20 basis points
remained below RBS’s view of a normalised blended long-term
loss rate of 30 to 40 basis points.
∆
RBS – Annual Report and Accounts 2019
144
Capital and risk management
Credit risk – Banking activities continued
Segmental loans and impairment metrics (audited)
The table below shows gross loans and ECL provisions, by days past due, by segment and stage, within the scope of the ECL framework.
Gross loans
Stage 2 (1)
Not past
Stage 1
£m
18,544
10,858
7,686
due 1-29 DPD >30 DPD
2019
£m
£m
£m
UK Personal Banking 144,513 11,921
1,034
Ulster Bank RoI
104
1,405
Personal (3)
96
944
Wholesale
8
461
Commercial Banking
254
88,100 10,837
Private Banking
63
478
14,956
Personal
60
180
11,630
Wholesale
3
298
3,326
RBS International
18
520
14,834
Personal
17
27
2,799
Wholesale
1
493
12,035
NatWest Markets
4
176
9,273
Central items & other 15,282
—
3
Total loans
305,502 25,340
of which:
Personal
Wholesale
2018*
UK Personal Banking 134,836 11,442
1,815
Ulster Bank RoI
1,211
Personal (3)
604
Wholesale
8,801
Commercial Banking
307
Private Banking
125
Personal
182
Wholesale
250
RBS International
25
Personal
225
Wholesale
407
NatWest Markets
Central items & other
27
285,985 23,049
Total loans
of which:
Personal
Wholesale
17,822
11,059
6,763
91,034
13,750
10,803
2,947
13,383
2,855
10,528
8,196
6,964
1,079
153
142
11
286
73
58
15
24
24
—
—
—
159,553 12,803
126,432 10,246
169,800 13,072
135,702 12,268
1,303
312
1,207
270
£m
497
Total Stage 3
£m
£m
603 13,558 1,902 159,973
1,642 2,037 22,223
133
1,145 1,877 13,880
105
8,343
160
28
262 11,353 2,162 101,615
207 15,750
192 12,103
3,647
121 15,500
65
2,914
56 12,586
9,622
— 15,285
1,477 1,051 27,868 6,598 339,968
Total Stage 1
£m
114
29
12
17
152
7
3
4
4
1
3
10
6
322
587
281
306
545
50
495
180
3
46
41
5
7
6
1
—
—
169
15
ECL provisions (2)
Stage 2 (1)
Not past
due 1-29 DPD >30 DPD
£m
£m
£m
47
45
375
8
6
39
6
6
20
2
—
19
7
12
195
1
—
6
1
—
2
—
—
4
—
—
6
—
—
1
—
—
5
—
—
5
—
—
—
63
63
626
Total Stage 3
£m
£m
467
53
32
21
Total
£m
823 1,404
775
693
635
591
140
102
214 1,021 1,387
43
29
7
29
23
3
14
6
4
31
21
6
14
12
1
17
9
5
146
5
131
6
— —
752 2,718 3,792
755 15,034 4,036 188,870
296 12,834 2,562 151,098
7
622
180
725 13,245 1,988 150,069
112 2,080 2,476 22,378
105 1,458 2,296 14,813
7,565
430 9,518 2,574 103,126
233 14,514
151
531
211 11,222
25
208
126
3,292
323
108 13,780
15
289
91
10
3,005
59
17 10,775
5
230
9,398
—
407
6,991
—
27
1,615 1,433 26,097 8,174 320,256
795
—
22
865 14,971 4,585 179,109
568 11,126 3,589 141,147
130
192
398
228
51
12
54
9
503 1,449 2,082
249 1,269 1,710
101
36
13
23
129
14
5
9
6
3
3
7
4
297
122
175
339
92
62
30
182
4
2
2
4
—
4
14
—
635
403
232
44
11
11
—
8
1
1
—
—
—
—
—
—
64
56
8
48
12
12
—
8
5
—
5
—
—
—
—
—
73
60
13
431
115
85
30
677 1,209
959
808
673
771
188
135
198 1,068 1,395
51
27
10
32
24
3
19
3
7
33
23
4
20
17
—
13
6
4
200
14
179
4
— —
772 2,782 3,851
519 1,391 2,032
253 1,391 1,819
*2018 data has been restated for a change to reportable segments and a change to presentation of unrecognised interest. Refer to Note 4 on the consolidated
accounts and Accounting policy 1, Other amendments to IFRS, for further details.
For the notes to this table refer to the following page.
RBS – Annual Report and Accounts 2019
145
Capital and risk management
Credit risk – Banking activities continued
Segmental loans and impairment metrics (audited)
ECL provisions coverage
Stage 2 (1,2)
ECL
2019
UK Personal Banking
Ulster Bank RoI
Personal (3)
Wholesale
Commercial Banking
Private Banking
Personal
Wholesale
RBS International
Personal
Wholesale
NatWest Markets
Central items and other
Total loans
Of which:
Personal
Wholesale
Stage 1
%
0.08
0.16
0.11
0.22
0.17
0.05
0.03
0.12
0.03
0.04
0.02
0.11
0.04
0.11
Not past
due
%
3.15
2.78
2.12
4.12
1.80
1.26
1.11
1.34
1.15
3.70
1.01
2.84
—
2.47
1-29 DPD
%
4.35
5.77
6.25
—
4.72
—
—
—
—
—
—
—
—
4.27
>30 DPD
%
7.79
6.02
5.71
7.14
2.67
2.17
2.44
—
—
—
—
—
—
5.99
0.08
0.14
3.04
1.86
4.23
4.44
7.15
3.04
Total
%
3.44
3.23
2.79
4.23
1.88
1.19
1.07
1.31
1.10
2.00
1.01
2.78
—
2.70
3.35
1.94
Stage 3
%
43.27
34.02
31.49
63.75
47.22
14.01
11.98
40.00
17.36
18.46
16.07
77.51
—
41.19
35.90
49.53
Total
%
0.88
3.49
4.57
1.68
1.36
0.27
0.24
0.38
0.20
0.48
0.14
1.52
0.04
1.12
1.10
1.13
Total
charge
Loss rate
£m basis points
24.57
(15.30)
(11.53)
(21.57)
38.48
(3.81)
4.13
(30.16)
1.29
—
1.59
(53.00)
0.65
20.47
393
(34)
(16)
(18)
391
(6)
5
(11)
2
—
2
(51)
1
696
Amounts
written-off
£m
235
85
69
16
450
1
1
—
5
5
—
16
—
792
382
314
20.23
20.78
310
482
0.07
0.20
0.12
0.34
0.14
0.10
0.05
0.31
0.04
0.11
0.03
0.09
0.06
0.10
4.08
7.19
7.75
—
2.80
1.37
1.72
—
—
—
—
—
—
3.96
2.96
5.07
5.12
4.97
2.07
1.30
1.60
1.10
1.60
—
1.78
3.44
—
2.76
2018*
UK Personal Banking
Ulster Bank RoI
Personal (3)
Wholesale
Commercial Banking
Private Banking
Personal
Wholesale
RBS International
Personal
Wholesale
NatWest Markets
Central items and other
Total loans
Of which:
Personal
Wholesale
*2018 data has been restated for a change to reportable segments and a change to presentation of unrecognised interest. Refer to Note 4 on the consolidated
accounts and Accounting policy 1, Other amendments to IFRS, for further details.
Notes:
(1) 30 DPD – 30 days past due, the mandatory 30 days past due backstop is prescribed by IFRS 9 for significant increase in credit risk.
(2) ECL provisions on contingent liabilities and commitments are included within the Financial assets section so as not to distort ECL coverage ratios.
(3) Includes a £5 million release and a £3 million write off (2018 - £1 million charge and £3 million write-off) related to the business banking portfolio in Ulster Bank
22.59
6.70
13.50
(6.61)
14.25
(4.13)
(5.35)
—
(1.45)
6.66
(3.71)
(97.89)
(4.29)
12.43
445
372
343
29
572
7
5
2
9
9
—
89
—
1,494
34.05
32.63
29.31
75.00
41.49
11.59
11.37
13.64
21.30
18.68
35.29
22.52
—
34.03
6.62
10.71
11.43
—
1.86
3.31
—
3.97
—
—
—
—
—
5.09
0.81
4.29
5.20
2.49
1.35
0.35
0.29
0.58
0.24
0.67
0.12
2.13
0.06
1.20
3.25
5.53
5.83
4.82
2.08
1.88
1.44
2.17
1.38
—
1.74
3.44
—
2.96
339
15
20
(5)
147
(6)
(6)
—
(2)
2
(4)
(92)
(3)
398
19.76
3.12
30.34
38.76
3.47
2.27
0.08
0.14
3.15
2.26
4.30
2.56
6.94
2.29
1.13
1.29
354
44
776
718
RoI.
Key points
UK Personal Banking and Ulster Bank RoI accounted for the vast
majority of Personal provisions. In Ulster Bank RoI, Personal
provisions were primarily driven by Stage 3 impairments in the
legacy mortgage portfolio which continue to reduce reflecting
improved customer engagement and the positive effects from the
external economic environment. For UK Personal Banking, the
year-on-year increase reflected a combination of portfolio growth
and also slight increases in PD. This was primarily due to small
uplifts in actual default rates, however, in unsecured lending the
trend flattened in the second half of the year as a result of risk
appetite tightening. Additional ECL was also raised as a result of
the ongoing uncertain economic outlook. Provision coverage
increased slightly.
The UK Personal Banking charge for the year of £393 million, 25
basis points, increased slightly year-on-year (2018 – 23 basis
points) reflecting a slight rise in default rates and also lower
recoveries and impairment benefits from debt sales.
In Ulster Bank RoI, there was a net impairment release of £34
million for the year driven by portfolio improvements, the impact of
debt sales, write-backs on legacy defaulted stock and an IFRS 9
accounting adjustment for interest in suspense recoveries.
Commercial Banking accounted for the majority of Wholesale
exposures. The Commercial Banking charge for the year of £391
million, 38 basis points, increased year-on-year (2018 – 14 basis
points) primarily due to a small number of material individual
provisions, model enhancements and increased economic
uncertainty. Stage 3 provisions were the largest contributor to the
overall ECL provisions which reduced during the year as increased
charges for Stage 3 impairments were more than offset by higher
write-offs and repayments. Provision coverage overall remained
broadly stable with increases in Stage 3 coverage for both
individual and collective assessments, offset by a slight decrease in
Stage 2.
NatWest Markets impairment releases were primarily from legacy
assets.
In performing exposures (Stage 1 and Stage 2), materially higher
ECL provision was held in credit-deteriorated Stage 2 exposures
than in Stage 1. This was in line with expectations and was also
reflected in provision coverage levels.
The majority of Stage 2 exposures were less than 30 days past
due. This was in line with expectations, since PD deterioration is
the primary driver of credit deterioration.
The differing cover rates between the Personal and Wholesale
portfolios largely reflected differences in asset mix, including
security cover, and the differing effects of external environment
events.
∆
RBS – Annual Report and Accounts 2019
146
Capital and risk management
Credit risk – Banking activities continued
Portfolio summary – sector analysis (audited)
The table below shows 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.
Personal
Credit
Other
Wholesale
Total
Mortgages (1)
cards
personal
Total
Property
Corporate
FI
Sovereign
Total
2019
Loans by geography
- UK
- RoI
- Other Europe
- RoW
Loans by asset quality (2,6)
- AQ1
- AQ2
- AQ3
- AQ4
- AQ5
- AQ6
- AQ7
- AQ8
- AQ9
- AQ10
Loans by stage
- Stage 1
- Stage 2
- Stage 3
- Of which: individual
- Of which: collective
Loans - past due analysis (3,4)
- 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
- Of which: individual
- Of which: collective
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
£m
174,003
160,431
13,572
—
—
174,003
3,837
2,866
277
92,520
58,051
5,253
5,326
1,379
1,217
3,277
174,003
159,261
11,465
3,277
235
3,042
174,003
169,536
1,578
955
495
1,439
11,465
9,798
1,050
617
£m
£m
95
—
—
—
—
—
375
786
1,211
1,531
393
66
116
£m
4,478 10,389 188,870
4,383 10,176 174,990
13,880
213
—
—
—
—
4,478 10,389 188,870
4,502
665
2,866
—
277
—
93,520
625
60,545
1,708
9,808
3,344
9,185
2,328
2,564
792
1,567
284
4,036
643
4,478 10,389 188,870
7,436 169,800
3,103
15,034
2,310
1,259
4,036
643
116
256
21
—
3,780
622
116
4,478 10,389 188,870
9,473 183,322
4,313
1,785
43
1,114
36
609
30
56
2,040
15,034
1,259
13,072
1,204
1,207
29
755
26
164
123
84
545
2,310
2,070
128
112
£m
36,371
33,644
1,310
921
496
36,371
4,474
2,490
2,465
6,574
10,419
5,809
2,853
302
90
895
36,371
32,896
2,580
895
646
249
36,371
35,445
317
82
26
501
2,580
2,466
49
65
£m
4,169
4,350
3,857
496
5,561
14,660
19,584
13,470
11,404
1,478
468
1,649
£m
71,042 36,266
58,666 22,564
513
5,120
8,069
71,042 36,266
2,272 17,841
1,763
2,939
9,979
2,027
811
867
20
6
13
71,042 36,266
59,689 35,707
546
13
7
6
71,042 36,266
68,730 36,214
36
7
—
9
546
534
5
7
1,339
271
148
554
9,704
9,266
214
224
9,704
1,649
1,137
512
£m
2
—
5
£m
£m
7,419 151,098 339,968
3,479 118,353 293,343
23,039
9,159
3,167
10,719
328 10,719
12,867
445 12,867
7,419 151,098 339,968
31,020
1,931 26,518
9,395
1,780
6,529
14,762
3,520 14,485
41 31,254 124,774
92,682
107 32,137
29,901
3 20,093
24,339
30 15,154
4,366
1,802
2,131
564
6,598
2,562
7,419 151,098 339,968
7,410 135,702 305,502
27,868
4 12,834
6,598
2,562
5
2,051
1,795
5
4,547
767
—
7,419 151,098 339,968
7,365 147,754 331,076
3,531
1,746
54
1,474
360
—
783
174
—
3,104
—
1,064
27,868
4 12,834
25,342
4 12,270
1,475
268
—
1,051
296
—
9
2
6
5
6
6
3
1
6
6
0.31
0.81
964
342
622
—
—
964
25
118
821
24
797
0.55
0.02
1.03
25.05
25
28
(3)
—
—
0.01
78
3.86
3.59
261
259
2
—
—
261
40
132
89
—
89
5.83
1.29
10.48
76.72
104
105
(1)
—
—
2.32
76
2.98
3.75
857
846
11
—
—
857
65
253
539
11
528
8.25
0.87
10.95
83.83
253
261
(8)
—
—
2.44
156
0.54
1.03
2,082
1,447
635
—
—
2,082
130
503
1,449
35
1,414
1.10
0.08
3.35
35.90
382
394
(12)
—
—
0.20
310
0.63
0.96
494
424
39
28
3
494
45
47
402
236
166
1.36
0.14
1.82
44.92
33
64
(2)
(29)
—
0.09
250
0.98
1.25
1,181
800
117
130
134
1,181
124
198
859
521
338
1.66
0.21
2.04
52.09
283
230
(16)
117
(48)
0.40
219
0.13
0.20
28
14
3
9
2
28
16
4
8
4
4
0.08
0.04
0.73
61.54
(4)
(4)
1
—
(1)
(0.01)
13
0.05
0.07
7
4
1
1
1
7
7
—
—
—
—
0.09
0.09
—
—
2
2
—
—
—
0.03
—
0.60
0.83
1,710
1,242
160
168
140
1,710
192
249
1,269
761
508
1.13
0.14
1.94
49.53
314
292
(17)
88
(49)
0.21
482
0.56
0.94
3,792
2,689
795
168
140
3,792
322
752
2,718
796
1,922
1.12
0.11
2.70
41.19
696
686
(29)
88
(49)
0.20
792
For the notes to this table refer to page 150.
RBS – Annual Report and Accounts 2019
147
Capital and risk management
Credit risk – Banking activities continued
Portfolio summary – sector analysis (audited)
2019
Loans by residual maturity
- <1 year
- 1-5 year
- 5 year
Other financial assets by asset quality (2)
- AQ1-AQ4
- AQ5-AQ8
- AQ9
Off-balance sheet (5)
- Loan commitments
- Financial guarantees
Off-balance sheet by asset quality (2,5)
- AQ1-AQ4
- AQ5-AQ8
- AQ9
- AQ10
For the notes to this table refer to page 150.
Personal
Credit
Other
Wholesale
Mortgages
cards personal
Total Property Corporate
FI Sovereign
Total
Total
£m
£m
£m
£m
£m
174,003 4,478 10,389 188,870 36,371 71,042 36,266
3,996 2,750 3,480 10,226
7,318 24,539 27,299
8,771 1,728 5,769 16,268 19,774 31,215 7,922
9,279 15,288 1,045
£m
£m
161,236
—
—
—
—
— 1,140 162,376
—
—
—
—
—
—
—
—
—
—
—
—
3
441
2
14,348 16,686 12,332 43,366 15,383 51,390 16,742
14,345 16,686 12,285 43,316 14,739 47,883 15,417
3,507 1,325
14,348 16,686 12,332 43,366 15,383 51,390 16,742
13,506 3,818 10,049 27,373 11,364 34,852 15,397
3,948 16,228 1,340
4
1
832 12,588 2,271 15,691
17
285
4
276
49
261
12
—
11
60
644
1
9
47
50
—
£m
£m
—
—
£m
7,419 151,098 339,968
74,859
5,477 64,633
76,343
1,164 60,075
778 26,390 188,766
110 12,185 123,170 135,465 135,465
110 11,742 122,906 134,758 134,758
705
264
2
—
1,022 84,537 127,903
1,021 79,060 122,376
5,527
5,477
1,022 84,537 127,903
89,970
37,245
81
607
984 62,597
38 21,554
64
—
322
—
705
2
1
—
—
—
—
RBS – Annual Report and Accounts 2019
148
Capital and risk management
Credit risk – Banking activities continued
Portfolio summary – sector analysis (audited)
2018*
Loans by geography
- UK
- RoI
- Other Europe
- RoW
Loans by asset quality (2,6)
-AQ1
-AQ2
-AQ3
-AQ4
-AQ5
-AQ6
-AQ7
-AQ8
- AQ9
- AQ10
Loans by stage
- Stage 1
- Stage 2
- Stage 3
of which: individual
of which: collective
Loans - past due analysis (3,4)
- 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
of which: individual
of which: collective
ECL provisions coverage (%)
- Stage 1 (%)
- Stage 2 (%)
- Stage 3 (%)
ECL charge
- UK
- RoI
- Other Europe
- RoW
ECL loss rate (%)
Amounts written-off
Property Corporate
£m
Mortgages (1)
£m
165,302
150,312
14,491
102
397
165,302
2,324
403
1,442
100,820
42,091
2,699
8,663
1,686
1,287
3,887
165,302
149,760
11,655
3,887
266
3,621
165,302
160,222
1,727
1,064
659
1,630
11,655
9,788
1,126
741
Personal
Credit
Cards
£m
4,218
4,114
104
—
—
4,218
—
—
—
35
1,029
1,170
1,504
287
69
124
4,218
2,851
1,243
124
—
124
4,218
4,027
69
40
30
52
1,243
1,172
43
28
Other
personal
£m
236
67
161
473
—
—
2,509
2,226
2,314
687
239
574
Total
£m
9,589 179,109
9,125 163,551
14,831
169
558
9,589 179,109
2,797
403
1,442
567 101,422
45,629
6,095
12,481
2,660
1,595
4,585
9,589 179,109
6,942 159,553
14,971
2,073
4,585
574
301
35
4,284
539
9,589 179,109
8,749 172,998
1,976
1,209
759
2,167
14,971
12,803
1,302
866
180
105
70
485
2,073
1,843
133
97
£m
36,790
33,921
1,121
1,400
348
36,790
4,854
2,060
2,196
7,023
9,171
5,386
3,959
299
74
1,768
36,790
33,145
1,877
1,768
1,304
464
36,790
35,451
271
273
57
738
1,877
1,556
68
253
Wholesale
Total
1,294
1,626
5,098
3,762
3,772
4,135
FI
£m
72,370 25,020
60,701 11,610
392
5,912
7,106
72,370 25,020
7,284
1,751
2,305
14,569 11,057
1,388
20,056
757
12,730
417
13,403
12
1,462
5
359
44
1,773
72,370 25,020
61,844 24,502
474
44
23
21
72,370 25,020
69,869 24,397
604
11
1
7
474
472
1
1
1,397
349
90
665
8,753
8,196
244
313
8,753
1,773
1,232
541
Sovereign
£m
Total
£m
£m
6,967 141,147 320,256
3,090 109,322 272,873
22,603
7,772
2,497
12,340
12,171
1,087
12,440
11,882
293
6,967 141,147 320,256
18,982
16,185
2,753
6,976
6,573
1,136
12,483
2,884
13,925
32,678 134,100
29
76,365
30,736
121
24,980
18,885
12
30,287
17,806
27
4,434
1,774
1
2,033
438
—
8,174
3,589
4
6,967 141,147 320,256
6,941 126,432 285,985
26,097
11,126
8,174
3,589
2,860
2,559
5,314
1,030
6,967 141,147 320,256
6,923 136,640 309,638
4,290
2,314
1,844
635
907
148
3,577
1,410
26,097
11,126
23,049
10,246
1,615
313
1,433
567
42
2
—
—
22
22
—
—
22
4
—
4
8
2
3
5
3
3
4
3
3
4
0.32
0.84
1,060
316
744
—
—
1,060
23
151
886
27
859
0.64
0.02
1.30
22.79
57
38
19
—
—
0.03
368
4.03
3.52
233
230
3
—
—
233
38
120
75
—
75
5.52
1.33
9.65
60.48
87
88
(1)
—
—
2.06
79
2.77
3.50
739
715
24
—
—
739
61
248
430
14
416
7.71
0.88
11.96
74.91
210
207
3
—
—
2.19
329
0.54
1.04
2,032
1,261
771
—
—
2,032
122
519
1,391
41
1,350
1.13
0.08
3.47
30.34
354
333
21
—
—
0.20
776
0.75
0.95
672
585
50
27
10
672
43
40
589
358
231
1.83
0.13
2.13
33.31
30
31
(1)
—
—
0.08
292
0.97
1.43
1,085
665
156
71
193
1,085
111
203
771
432
339
1.50
0.18
2.32
43.49
13
9
(3)
8
(1)
0.02
395
0.14
0.23
55
31
2
19
3
55
14
10
31
19
12
0.22
0.06
2.11
70.45
3
6
(1)
(2)
—
0.01
31
0.06
0.06
7
4
1
1
1
7
7
—
—
—
—
0.10
0.10
—
—
(2)
(2)
—
—
—
(0.03)
—
0.75
1.01
1,819
1,285
209
118
207
1,819
175
253
1,391
809
582
1.29
0.14
2.27
38.76
44
44
(5)
6
(1)
0.03
718
0.62
1.03
3,851
2,546
980
118
207
3,851
297
772
2,782
850
1,932
1.20
0.10
2.96
34.03
398
377
16
6
(1)
0.12
1,494
*2018 data has been restated for a change to presentation of unrecognised interest. Refer to Accounting policy 1, Other amendments to IFRS, for further details.
**Not within audit scope.
For the notes to this table refer to the following page.
RBS – Annual Report and Accounts 2019
149
Capital and risk management
Credit risk – Banking activities continued
Portfolio summary – sector analysis (audited)
2018*
Loans by residual maturity
- <1 year
- 1-5 year
- 5 year
Other financial assets by asset quality (2)
- AQ1-AQ4
- AQ5-AQ8
- AQ9
- AQ10
Off-balance sheet (5)
- Loan commitments
- Financial guarantees
Off-balance sheet by asset quality (2,5)
- AQ1-AQ4
- AQ5-AQ8
- AQ9
- AQ10
Personal
Wholesale
Credit
Other
cards personal
£m
£m
£m
Total
£m
Total
£m
Mortgages
£m
—
—
—
—
—
—
Property Corporate
£m
919 4,966
11,260
35,233 3,299 3,820
118,809
—
—
—
—
—
803 119,612
—
—
—
—
—
Total
FI Sovereign
£m
£m
£m
6,967 141,147 320,256
165,302 4,218 9,589 179,109 36,790 72,370 25,020
80,530
63,385
6,362
9,555 29,860 17,608
17,145
56,069
245
98,421
6,170
42,352 18,839 30,815
1,242
8,396 11,695
21,693 141,305
360
8,838 134,546 144,141 144,141
652
8,110 134,546 142,771 142,771
10
1,363
642
721
4
—
4
3
—
3
42,070 16,044 52,730 28,761 29,277 126,812 168,882
42,070 15,335 48,569 26,684 29,276 119,864 161,934
6,948
42,070 16,044 52,730 28,761 29,277 126,812 168,882
21,641 11,945 36,134 27,364 29,262 104,705 126,346
41,847
20,117
71
19
618
293
—
—
—
—
—
13,228 16,613 12,229
13,228 16,613 12,229
—
13,228 16,613 12,229
422 9,103
12,116
1,101 15,900 3,116
10
—
3,928 16,390
46
160
21,730
52
325
105
105
—
—
—
1,397
—
—
1,363
4
3
709 4,161
15
—
—
—
—
—
6
165
8
283
1
10
2,077
6,948
—
—
—
1
*2018 data has been restated for a change to presentation of unrecognised interest. Refer to Accounting policy 1, Other amendments to IFRS, for further details.
Notes:
(1)
(2) AQ bandings are based on Basel PDs and mapping is as follows:
Includes a portion of secured lending in Private Banking, in line with ECL calculation methodology.
Internal asset quality
Probability of default
Indicative S&P
band
AQ1
AQ2
AQ3
AQ4
AQ5
AQ6
AQ7
AQ8
AQ9
AQ10
range
0% - 0.034%
0.034% - 0.048%
0.048% - 0.095%
0.095% - 0.381%
0.381% - 1.076%
1.076% - 2.153%
2.153% - 6.089%
6.089% - 17.222%
17.222% - 100%
100%
rating
AAA to AA
AA to AA-
A+ to A
BBB+ to BBB-
BB+ to BB
BB- to B+
B+ to B
B- to CCC+
CCC to C
D
£0.3 billion (2018 – £0.3 billion) of AQ10 Personal balances primarily relate to loan commitments, the draw down of which is effectively prohibited.
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.
(3)
(4) 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.
(5) Off-balance sheet exposures are managed in line with regulatory requirements. Therefore, any change in regulatory treatment is considered a business
change. The decrease of £41.0 billion during the year primarily relates to revision of the treatments of nostros in line with the CRR requirements.
(6) AQ10 includes £0.6 billion (2018 - £0.6 billion) of RoI mortgages which are not currently considered defaulted for capital calculation purposes for RoI but
included in Stage 3.
Wholesale forbearance
The table below shows Wholesale forbearance, Heightened Monitoring and Risk of Credit Loss by sector. Personal forbearance is disclosed on
page 153.
2019
Forbearance (flow)
Forbearance (stock)
Heightened Monitoring and Risk of Credit Loss
2018
Forbearance (flow)
Forbearance (stock)
Heightened Monitoring and Risk of Credit Loss
FI
£m
35
35
107
14
15
100
Property
£m
546
675
1,209
305
477
503
Sovereign Other corporate
£m
2,254
3,223
4,207
£m
—
—
—
—
—
16
2,247
2,756
4,145
Total
£m
2,835
3,933
5,523
2,566
3,248
4,764
RBS – Annual Report and Accounts 2019
150
Capital and risk management
Credit risk – Banking activities continued
Portfolio summary – sector analysis (audited)
Key points
Geography – The vast majority of exposures were in the UK and
the Republic of Ireland. Other exposures in Europe and the rest of
the world were Wholesale in nature. 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, 53%
of lending exposure was rated in the AQ1-AQ4 bands at 31
December 2019, compared to 54% in 2018. This equated to an
indicative investment rating of BBB- or above. Specifically, 54% of
Personal (2018 – 59%) and 52% of Wholesale lending exposure
(2018 – 48%) were in the AQ1-AQ4 category respectively. The
movement in Personal was primarily driven by UK mortgages, with
a movement in assets from AQ4-AQ5, which was reflective of a
slight increase in the portfolio default rate from a low level that
included the effect of the natural seasoning of strong business
growth in prior years.
Loans by stage – The percentage of exposures in Stage 2,
significantly credit deteriorated, remained broadly unchanged in
the year at 8.2% (2018 – 8.1%). Stage 3 assets, which align to
AQ10, represented 1.9% of total exposures, and was down in the
year (2018 – 2.6%). Similar to 2018, the Personal portfolio had a
higher proportion of unsecured lending assets in Stage 2 than the
mortgage portfolio. The percentage of the Wholesale portfolio in
Stage 2 and Stage 3 was similar to that in the Personal portfolio.
Loans – Past due analysis – 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 their legacy mortgage portfolio and the residual
effects from the financial crisis. In other Personal, the relatively
high level 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
(refer to Governance and post model adjustments on page 139.)
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. PDs overall remained broadly
stable. The rise in other personal was reflective of slight increases
in default rates addressed by risk appetite tightening. Overall
Wholesale PDs slightly improved compared with the prior year,
primarily driven by reductions in the property sector.
ECL provision by geography – In line with exposures by
geography, the vast majority of ECL related to exposures in the
UK and the Republic of Ireland. The ECL in the Republic of
Ireland, was mainly in Stage 3 impaired assets in the legacy Ulster
Bank RoI mortgage portfolio which reduced during the year.
ECL provision by stage and coverage – The majority 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. At a total Wholesale level, the Stage 3
provision coverage increased versus 2018. In Ulster Bank RoI, the
reduction in Stage 3 ECL reflected improved customer
engagement and the positive effects from the external economic
environment as well as a residual benefit in 2019 from a 2018 debt
sale.
The ECL Impairment charge for the year was £696 million up from
£398 million in 2018; primarily this reflected the transitioning from
a very benign period towards a more normalised external credit
environment as well as the impact of a small number of large
individual commercial charges. The cost of risk at 20 basis points
remained below RBS’s view of a normalised blended long-term
loss rate of 30 to 40 basis points.
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 were reflective of available credit
lines in credit cards and current accounts. Additionally, the
mortgage portfolio had undrawn exposure, where a formal offer
had been made to a customer but had not yet been drawn down.
There was also a legacy portfolio of flexible mortgages where a
customer had the right and ability to draw down further funds. The
asset quality distribution in mortgages remained heavily weighted
to the highest quality bands AQ1-AQ4, with credit card
concentrated in the risk bands AQ5-AQ8. In Wholesale, the
significant majority of undrawn exposure, relating mainly to loan
commitments, was in the AQ1-AQ4 category.
Forbearance – Completed forbearance flow in 2019 for Wholesale
was £2.8 billion (2018 – £2.6 billion). Forbearance granted in the
property sector increased to £546 million (2018 – £305 million),
driven by individually significant exposures. Retail and Leisure
forbearance flow increased to £535 million (2018 – £425 million).
Of the forbearance that completed during the year, £1.3 billion
(2018 – £1.1 billion) related to payment concessions and £1.5
billion (2018 – £1.4 billion) related to non-payment concessions.
Forbearance stock increased by £0.7 billion, from £3.2 billion to
£3.9 billion, primarily due to an increase in forborne exposure in
the transport, property, services and retail and leisure sectors.
Both flow and stock volumes were lower than in 2018.
Heightened Monitoring and Risk of Credit Loss – Exposure
increased to £5.5 billion (2018 – £4.8 billion). Exposure in the
property sector increased to £1.2 billion (2018 – £0.5 billion) driven
by individually significant exposures. Individual case numbers in
the property sector and across the Heightened Monitoring and
Risk of Credit Loss portfolio in its entirety were marginally lower,
despite the economic uncertainty during the year.
∆
RBS – Annual Report and Accounts 2019
151
Capital and risk management
Credit risk – Banking activities continued
Credit risk enhancement and mitigation (audited)
The table below shows exposures of modelled portfolios within the scope of the ECL framework and related credit risk enhancement and
mitigation (CREM).
Maximum credit risk
CREM by type
CREM coverage
Stage 3 Financial (1) Property Other (2)
£bn
£bn
£bn
£bn
Total Stage 3
£bn
£bn
Exposure post CREM
Total Stage 3
£bn
£bn
2019
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 (6,7)
Wholesale
Total off-balance sheet
Total exposure
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 (6,7)
Wholesale
Total off-balance sheet
Total exposure
Gross
exposure
£bn
76.1
340.0
188.9
151.1
59.4
475.5
43.4
84.5
127.9
603.4
87.2
320.2
179.1
141.1
57.0
464.4
42.1
126.8
168.9
633.3
ECL
£bn
—
3.8
2.1
1.7
—
3.8
—
—
—
3.8
—
3.8
2.0
1.8
—
3.8
—
—
—
3.8
Total
£bn
76.1
336.2
186.8
149.4
59.4
471.7
43.4
84.5
127.9
599.6
87.2
316.4
177.1
139.3
57.0
460.6
42.1
126.8
168.9
629.5
—
3.9
2.6
1.3
—
3.9
0.3
0.3
0.6
4.5
—
5.4
3.2
2.2
—
5.4
0.3
0.3
0.6
6.0
—
—
11.5 212.1
0.1 172.7
39.4
—
11.5 212.1
11.4
—
—
28.3
—
28.3
—
28.3
—
251.9
172.8
79.1
—
251.9
—
0.6
0.6
4.4
6.3
10.7
12.1 222.8
—
6.3
6.3
34.6
4.4
13.2
17.6
269.5
—
—
4.1 202.1
— 164.1
38.0
4.1
—
—
4.1 202.1
—
27.3
—
27.3
—
27.3
—
233.5
164.1
69.4
—
233.5
4.9
—
5.9
0.6
0.6
10.8
4.7 212.9
—
6.1
6.1
33.4
4.9
12.6
17.5
251.0
—
3.4
2.4
1.0
—
3.4
—
—
—
3.4
—
4.8
3.0
1.8
—
4.8
—
—
—
4.8
76.1
84.3
14.0
70.3
59.4
219.8
39.0
71.3
110.3
330.1
87.2
82.9
13.0
69.9
57.0
227.1
37.2
114.2
151.4
378.5
—
0.5
0.2
0.3
—
0.5
0.3
0.3
0.6
1.1
—
0.6
0.2
0.4
—
0.6
0.3
0.3
0.6
1.2
*2018 data has been restated for a change to presentation of unrecognised interest, refer to Accounting policy 1, Other amendments to IFRS, for further details. Also
restated for the inclusion of non-modelled portfolios, primarily Private Banking and RBS International mortgage portfolios and associated CREM amounts.
Notes:
(1) Includes cash and securities collateral.
(2) Includes guarantees, charges over trade debtors, other asset finance related physical collateral 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) 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) £0.3 billion (2018 – £0.3 billion) Personal Stage 3 balances primarily relate to loan commitments, the draw down of which is effectively prohibited.
(7) The Personal gross exposure value includes £9.6 billion (2018 – £7.9 billion) in respect of pipeline mortgages where a committed offer has been made to a
customer but where the funds have not yet been drawn down. When drawn down, the exposure would be covered by a security over the borrower’s property.
∆
RBS – Annual Report and Accounts 2019
152
Capital and risk management
Credit risk – Banking activities continued
Personal portfolio (audited)
Disclosures in the Personal portfolio section include drawn exposure (gross of provisions).
2019
2018*
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 (4)
Of which:
Owner occupied
Weighted average LTV
Buy-to-let
Weighted average LTV
Interest only - variable rate
Interest only - fixed rate
Mixed (1)
Forbearance flow
Forbearance stock
Current
1-3 months in arrears
> 3 months in arrears
UK Personal
Banking
£m
147,489
Ulster
Bank RoI
£m
13,598
Private
RBS
Banking International
£m
UK Personal
Banking
£m
2,620 173,662 138,250
Total
£m
£m
9,955
132,698
14,791
6,279
12,891
6,288
309
12,778
1,087
160,267
12,593
1,005
165
9
61
622
308
13
13,906
8,714
1,241
3,646
4,604
1
13
1,767
16
11,722
1,747 155,752 122,642
15,608
17,911
8,358
10,461
12,229
17,745
6,036
6,370
282
955
11,633
15,133
920
1,117
2,900 188,795 149,883
874
371
241
20
11
280
1
57%
57%
58%
55%
53%
52%
57%
59%
31,857
30,779
69%
1,078
60%
56
1,275
1,074
450
1,212
623
338
251
60%
57%
67%
73%
61%
57%
69%
75%
1,184
1,175
75%
10
58%
—
—
1
177
2,229
1,149
157
923
57%
57%
60%
70%
54%
54%
57%
58%
2,112
1,889
65%
222
60%
688
993
—
4
2
1
—
1
58%
57%
64%
80%
53%
53%
51%
66%
355
248
71%
107
63%
4
51
4
5
11
9
1
1
57%
57%
59%
66%
54%
52%
59%
67%
35,508
34,091
69%
1,417
60%
748
2,319
1,079
636
3,454
1,782
496
1,176
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
Ulster
Bank RoI
£m
14,503
13,235
1,268
188
12
69
743
331
26
14,834
62%
58%
67%
77%
64%
58%
72%
78%
1,015
1,005
73%
11
57%
—
—
1
212
2,778
1,327
268
1,183
RBS
Private
Banking International
£m
£m
9,089
Total
£m
2,687 164,529
7,959
1,130
3,874
3,639
2
12
1,678
21
10,767
1,784 145,620
18,909
12,909
16,067
6,125
1,056
13,697
968
2,742 178,226
903
489
187
18
19
55
1
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
241
68%
112
61%
13
43
—
16
17
14
1
3
57%
56%
59%
69%
54%
53%
60%
72%
32,769
31,543
69%
1,227
60%
753
1,996
913
0
685
4,141
2,071
619
1,452
*2018 data has been restated for a change to presentation of unrecognised interest. Refer to Accounting policy 1, Other amendments to IFRS, for further details.
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) For UK Personal Banking this excludes a non-material amount of provisions held on relatively small legacy portfolios.
(3) Comprises unsecured lending except for Private Banking, which includes both secured and unsecured lending. It excludes loans that that are commercial in
nature.
(4) UK Personal Banking excludes additional lending to existing customers.
Key points
The overall credit risk profile of the Personal portfolio, and its
performance against credit risk appetite, remained stable during
2019.
Total mortgage lending grew by £9.1 billion with new lending partly
offset by redemptions and repayments.
New mortgage lending was higher than in 2018. The existing
mortgage stock and new business were closely monitored against
agreed risk appetite parameters. These included LTV ratios, buy-
to-let concentrations, new-build concentrations and credit quality.
Underwriting standards were maintained during the period.
Owner occupied and buy-to-let – Mortgage growth was driven by
the owner occupied portfolio. New mortgages in the buy-to-let
portfolio remained subdued as tax and regulatory changes in the
UK reduced borrower activity.
LTVs – The new lending and the mortgage portfolio weighted
average LTV ratio remained stable, reflecting slower UK house
price growth.
Interest only – By value, the proportion of mortgages on interest
only and mixed terms (capital and interest only) reduced. This was
driven by low proportions of buy to-let and owner occupied interest
only new business.
Regional mortgage analysis – 43% of the stock of lending was in
Greater London and the South East (2018 – 42%). The average
weighted LTV for these regions was 53% (2018 – 51%) compared
to 57% for all regions.
Interest rate profile – 86% of customers in the UK Personal
Banking mortgage portfolio were on fixed rates (58% on five-year
deals). In addition, 99% of all new mortgage completions were
fixed-rate deals (57% of these were five-year deals).
Other lending – UK Personal Banking balances continued to
increase, up 9.8%, with growth observed across both credit card
and loan portfolios.
Provisions – The decrease in mortgage provision was primarily
due to reduced provisioning requirements in Ulster Bank RoI,
reflected improved customer engagement and the continued
positive effects from the external environment. In Other personal,
the increase was primarily a result of Stage 3 assets and reflected
the steady flow of new defaults which increased slightly year-on-
year, however, in unsecured lending the trend flattened in the
second half of the year as a result of risk appetite tightening.
Other lending asset quality – Overall new lending quality was
stable in 2019, with observed deterioration in loans addressed by
management actions. Credit card new business quality improved
in 2019 due to the introduction of credit enhancements to online
marketing controls and new product offers.
RBS – Annual Report and Accounts 2019
153
Capital and risk management
Credit risk – Banking activities continued
Personal portfolio (audited)
Mortgage LTV distribution by stage
The table below shows 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 provisions
ECL provisions coverage (2)
UK Personal Banking
2019
≤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
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
Ulster Bank RoI
2019
≤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
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
£m
£m
47,746 3,375
47,224 3,804
23,235 1,568
14,030 1,111
174
34
38
22
6
Stage 1 Stage 2 Stage 3
£m
511
463
150
85
20
8
7
6
3
135,747 10,132 1,253
1
135,768 10,135 1,254
3,401
42
47
19
3
21
3
Not within
IFRS 9
ECL
scope
£m
Of which:
gross new
lending
Total
£m
£m
4,661
159 51,791
8,723
91 51,582
8,366
39 24,992
8,675
25 15,251
1,208
3,610
15
—
85
1
—
93
1
—
48
1.0
—
12
—
332 147,464 31,633
224
25
332 147,489 31,857
—
Stage 1 Stage 2 Stage 3 Total (1)
£m
111
100
42
32
10
4
4
3
2
308
1
309
£m
£m
19
2
29
3
14
2
12
2
4
1
2
—
2
—
—
1
— —
10
83
— —
83
10
£m
90
68
26
18
5
2
2
2
2
215
1
216
Stage 1 Stage 2 Stage 3
%
17.6
14.7
17.1
20.5
25.4
25.3
33.5
27.7
45.7
17.0
81.2
17.1
%
—
—
—
—
—
0.1
0.1
0.1
0.1
—
0.1
—
%
0.6
0.8
0.9
1.1
2.5
5.1
6.1
6.3
6.5
0.8
4.2
0.8
47,111 3,423
44,037 3,632
20,345 1,490
12,733 1,118
178
35
41
23
9
516
459
135
81
24
8
9
6
3
126,705 9,949 1,241
4
126,801 9,962 1,245
2,343
57
53
23
3
13
96
153 51,203 4,779
49 48,177 8,535
15 21,985 7,434
12 13,944 7,524
7 2,552 1,104
—
1
101
—
2
105
—
—
52
—
—
15
239 138,134 29,376
179
116
242 138,250 29,555
3
2
2
1
2
1
—
—
—
—
8
—
8
16
23
11
12
4
2
2
1
1
72
1
73
98
60
17
12
4
2
2
1
1
197
3
200
116
85
29
26
9
4
4
2
2
277
4
281
—
—
—
—
—
0.1
0.1
0.1
0.1
—
—
—
0.5
0.6
0.7
1.1
2.4
4.6
5.4
6.2
6.2
0.7
4.7
0.7
19.0
13.0
12.4
15.4
18.5
21.6
22.4
20.5
26.4
15.9
81.9
16.1
Mortgages
ECL provisions
ECL provisions coverage (2)
£m
4,107
3,382
1,381
1,132
381
167
82
8
7
Stage 1 Stage 2 Stage 3
£m
475
409
219
217
188
151
152
46
15
10,647 1,079 1,872
£m
308
274
151
145
102
57
36
3
3
3,818
3,567
1,564
1,059
570
197
51
5
10
465
475
260
295
284
229
205
46
15
10,841 1,388 2,274
374
365
190
183
153
80
35
5
3
Not within
Of which:
IFRS 9 ECL
gross new
Total
scope
lending
£m
£m
£m
— 4,890
107
— 4,065
231
— 1,751
356
— 1,494
484
671
—
3
375
—
2
270
—
1
—
57
—
—
25
—
— 13,598 1,184
Stage 1 Stage 2 Stage 3
£m
97
90
60
76
72
67
78
30
11
581
£m
£m
7
4
7
3
4
2
5
1
3
1.0
2
—
—
2
— —
— —
30
11
109
— 4,657
235
— 4,407
356
— 2,014
306
— 1,537
3
— 1,007
5
506
—
1
291
—
—
56
—
—
—
28
— 14,503 1,015
1
2
1
2
2
2
—
—
—
10
5
10
11
15
17
10
6
1
1
76
41
63
70
106
121
107
110
29
10
657
Total
£m
108
100
66
82
76
69
80
30
11
622
47
75
82
123
140
119
116
30
11
743
Stage 1 Stage 2 Stage 3
%
20.5
22.0
27.5
35.1
38.6
44.0
51.3
64.7
71.4
31.0
%
2.3
2.6
3.0
3.0
2.9
3.5
4.9
4.1
8.2
2.8
%
0.1
0.1
0.1
0.1
0.2
0.3
0.3
0.6
0.3
0.1
—
—
0.1
0.2
0.4
0.9
0.8
0.3
2.1
0.1
1.4
2.7
5.5
8.3
11.1
12.8
16.6
19.1
27.2
5.4
8.9
13.3
27.0
35.7
42.7
46.6
53.8
63.3
66.3
28.9
Total
%
0.2
0.2
0.2
0.2
0.3
4.4
5.0
6.5
15.2
0.2
3.2
0.2
0.2
0.2
0.1
0.2
0.4
3.4
4.0
5.2
9.1
0.2
3.6
0.2
Total
%
2.2
2.5
3.8
5.5
11.3
18.4
29.7
51.9
44.6
4.6
1.0
1.7
4.1
8.0
13.9
23.5
40.0
53.8
40.1
5.1
*2018 data has been restated for a change to presentation of unrecognised interest. Refer to Accounting policy 1, Other amendments to IFRS, for further details.
Notes:
(1) Excludes a non-material amount of provisions held on relatively small legacy portfolios.
(2) ECL provisions coverage is ECL provisions divided by mortgages.
Key point
ECL coverage rates increase through the LTV bands with both UK Personal Banking 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 Personal Banking 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.
RBS – Annual Report and Accounts 2019
154
Capital and risk management
Credit risk – Banking activities continued
Personal portfolio (audited)
UK Personal Banking Mortgage LTV distribution by region
2019
South East
Greater London
Scotland
North West
South West
West Midlands
Rest of the UK
Total
2018
South East
Greater London
Scotland
North West
South West
West Midlands
Rest of the UK
Total
≤50%
£m
14,175
13,199
3,395
4,449
4,482
3,086
9,004
51,790
14,699
12,928
3,205
4,163
4,231
3,036
8,942
51,204
50%
≤80%
£m
19,390
10,496
5,946
8,420
7,374
6,109
18,839
76,574
17,147
9,614
5,612
7,756
6,843
5,642
17,548
70,162
80%
≤100%
£m
3,920
1,504
1,726
1,524
1,391
1,520
7,276
18,861
2,843
1,298
1,844
1,970
1,292
1,192
6,056
16,495
100%
≤150%
£m
7
4
3
4
5
5
198
226
8
3
11
6
8
4
217
257
>150%
£m
—
—
—
—
—
—
13
13
Weighted
Total average LTV
%
56
49
60
58
57
60
63
57
£m
37,492
25,203
11,070
14,397
13,252
10,720
35,330
147,464
34,697
—
23,843
—
10,672
—
13,895
—
12,374
—
9,874
—
16
32,779
16 138,134
53
48
60
59
57
58
62
56
Other
£m
7
4
1
2
2
1
8
25
Total
£m
37,499
25,207
11,071
14,399
13,254
10,721
35,338
147,489
27
19
8
12
9
7
34
34,724
23,862
10,680
13,907
12,383
9,881
32,813
116 138,250
Total
%
25
17
8
10
9
7
24
100
25
17
8
10
9
7
24
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 the building materials sub sector). The sector is reviewed
regularly by 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.
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
4,507
2,916
5,277
2,457
3,672
18,829
2,464
78
134
85
16
2,777
21,606
2019
RoI
£m
462
183
63
18
187
913
165
17
2
2
2
188
1,101
Other
£m
27
83
62
115
56
343
5
—
1
—
—
6
349
Total
£m
UK
£m
2018*
RoI
£m
Other
£m
Total
£m
4,996
3,182
5,402
2,590
3,915
20,085
2,634
95
137
87
18
2,971
23,056
4,437
2,891
5,173
2,272
3,229
18,002
2,732
192
95
119
32
3,170
21,172
363
164
40
51
180
798
122
—
7
2
2
133
931
54
651
97
176
128
1,106
124
—
1
12
—
137
1,243
4,854
3,706
5,310
2,499
3,537
19,906
2,978
192
103
133
34
3,440
23,346
*2018 data has been restated for a change to presentation of unrecognised interest. Refer to Accounting policy 1, Other amendments to IFRS, for further details.
Notes:
(1) Geographical splits are based on country of collateral risk.
(2) Properties including houses, flats and student accommodation.
(3) Properties including offices in central business districts, regional headquarters and business parks.
(4) Properties including high street retail, shopping centres, restaurants, bars and gyms.
(5) Properties including distribution centres, manufacturing and warehouses.
(6) Properties that do not fall within the other categories above. Mixed generally relates to a mixture of retail/office with residential.
RBS – Annual Report and Accounts 2019
155
Capital and risk management
Credit risk – Banking activities continued
Commercial real estate (CRE)
CRE LTV distribution by stage (audited)
The table below shows CRE current exposure and related ECL by LTV band.
Current exposure (gross of provisions) (1,2)
ECL provisions
ECL provisions coverage (4)
2019
≤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
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
Total portfolio
average LTV%
Other (5)
Development (6)
Total
Stage 1 Stage 2 Stage 3
£m
40
148
51
15
22
52
46
18
37
£m
8,787
4,945
269
61
50
18
20
3
63
£m
468
252
38
19
81
13
26
6
6
Not within
IFRS 9 ECL
scope (3)
£m
Total
£m
837 10,132
846 6,191
367
97
154
83
93
27
106
9
2
1
—
1
—
—
Stage 1 Stage 2 Stage 3 Total (1)
£m
27
46
21
4
17
5
17
7
25
£m
£m
8
8
7
6
1
1
—
1
2
—
— —
—
1
— —
1
—
£m
11
33
19
3
15
5
16
7
24
Stage 1 Stage 2 Stage 3
%
27.5
22.3
37.3
20.0
68.2
9.6
34.8
38.9
64.9
%
1.7
2.4
2.6
5.3
2.5
—
3.8
—
16.7
%
0.1
0.1
0.4
—
—
—
—
—
—
Total
%
0.3
0.9
5.9
4.2
11.1
6.0
18.5
25.9
23.6
14,216
909
429
1,696 17,250
16
20
133
169
0.1
2.2
31.0
1.1
46%
658
2,377
55% 101%
123
149
144
272
696
17,251 1,330
48%
48%
1,905 2,835
178 2,971
3,779 23,056
8,229
4,769
394
55
31
53
22
6
30
13,589
45%
2,655
2,865
19,109
245
297
43
11
7
4
3
10
6
626
54
80
35
26
22
16
116
11
48
408
795 9,323
703 5,849
478
94
61
73
145
27
84
1,511 16,134
6
2
1
—
4
—
—
56% 114%
799
133
205
196
964 1,403
48%
47%
185 3,772
174 3,440
1,870 23,346
— —
4
5
4
8
28
29
4
7
6
6
1
1
— —
— —
— —
— —
1
—
1
—
13
14
— —
5
4
3
11
21
29
—
54
73
260
16
16
10
7
9
6
27
5
35
131
—
65
98
294
—
63
85
317
27
28
12
7
9
6
27
6
36
158
—
74
112
344
—
0.8
0.3
0.2
0.1
0.1
0.3
—
—
—
—
—
—
0.1
—
0.2
0.4
0.2
—
2.7
1.5
2.1
1.6
2.0
2.3
—
—
—
—
10.0
16.7
2.1
—
3.8
1.5
2.2
—
43.9
50.7
37.4
29.6
20.0
28.6
26.9
40.9
37.5
23.3
45.5
72.9
32.1
—
8.1
50.0
21.0
—
6.8
3.0
1.6
0.3
0.5
2.5
7.6
15.0
8.2
19.1
22.2
42.9
1.1
—
2.1
3.4
1.6
*2018 data has been restated for a change to presentation of unrecognised interest. Refer to Accounting policy 1, Other amendments to IFRS, for further details.
Notes:
(1) Comprises gross lending, interest rate hedging derivatives and other assets carried at fair value that are managed as part of the overall CRE portfolio.
(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
Includes exposures relating to non-modelled portfolios and other exposures carried at fair value, including derivatives.
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 and Private Banking. Business appetite
and strategy remain aligned across the segments.
2019 trends – Portfolio exposure reduced slightly during 2019, with
new business and refinance activity lower than in previous years.
CRE retail capital values have continued to decline in 2019.
The retail property market continued to be affected by structural
change which resulted in a significant number of CVA’s and material
capital value falls. In contrast, the office and industrial sectors
remained generally positive with solid demand and stable or rising
values. An unfavourable Brexit remains the key risk, most notably to
the London office market. The mainstream residential housing
market was relatively resilient, however a continual slowing of sales
was evident particularly for properties above the Help to Buy
threshold. Price growth slowed, with some areas softening, most
notably in London and the Southeast.
Credit quality – Heightened Monitoring inflows are stable from a
volume perspective but have increased in value due to some larger
CRE retail exposures that have entered the framework. The sub-
sector was monitored on a regular basis and despite the challenges
in the sub-sector, the CRE retail portfolio had a manageable default
rate, with a limited number of new defaults.
Risk appetite – Lending criteria for commercial real estate are
considered conservative, with lower leverage required for new
London office originations and most parts of the retail sector.
∆
RBS – Annual Report and Accounts 2019
156
Capital and risk management
Credit risk – Banking activities continued
Flow statements (audited)
The flow statements that follow show the main ECL and related
income statement movements. They also show the changes in ECL as
well as the changes in related financial assets used in determining
ECL. Due to differences in scope, 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. Other points to
note:
Financial assets include treasury liquidity portfolios, comprising
balances at central banks and debt securities, as well as loans.
Both modelled and non-modelled portfolios are included.
Stage transfers (for example, exposures moving from Stage 1 to
Stage 2) 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. Similarly, there is an ECL
benefit for accounts improving stage.
Changes in risk parameters shows 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.
Other (P&L only items) affects the income statement but does not
affect 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 ECL flows from Stage 3 to Stage 1. This does not
however indicate that accounts returned from Stage 3 to Stage 1
directly. On a similar basis, there were flows from Stage 1 to Stage
3 including transfers due to unexpected default events. The small
number of write-offs in Stage 1 and Stage 2 reflect the effect of
portfolio debt sales and also staging at the start of the analysis
period.
RBS continues to hold post model adjustments (PMAs) on a
temporary basis ahead of the underlying model parameter changes
being implemented, as well as on certain portfolio segments where
management judge additional ECL is required. The impact of any
change in PMAs during the year is reported under changes in risk
parameters, as are any impacts arising from changes to the
underlying models. Refer to the Governance and post model
adjustments section for further details.
Reporting enhancements since 31 December 2018, now mean all
movements are captured monthly and aggregated. Previously, for
example, the main Personal portfolios were prepared on a six
month movement basis. Additionally, as noted earlier, interest
suspended post default is now included within Stage 3 ECL, with
2018 data restated. The movement in the value of suspended
interest during the year is reported under currency translation and
other adjustments.
RBS Group total
At 1 January 2019
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
Unwinding of discount
At 31 December 2019
Net carrying amount
At 1 January 2018
2018 movements
At 31 December 2018*
Net carrying amount
Stage 1
Stage 2
Stage 3
Total
Financial
assets
£m
422,541
(5,660)
(28,289)
20,558
(441)
411
19,485
(1)
428,604
428,282
419,038
3,503
422,541
422,244
ECL
£m
297
(4)
(112)
317
(3)
40
(276)
(43)
107
—
(212)
(1)
—
322
262
35
297
Financial
assets
£m
27,360
(196)
28,289
(20,558)
(3,167)
1,306
(4,399)
(5)
28,630
27,878
29,637
(2,277)
27,360
26,588
ECL
£m
772
(5)
112
(317)
(241)
118
572
(187)
(67)
—
318
(5)
—
752
621
151
772
Financial
assets
£m
8,251
(57)
—
—
3,608
(1,717)
(2,164)
(786)
7,135
4,417
10,595
(2,344)
8,251
5,469
ECL
£m
2,782
(40)
—
—
244
(158)
574
304
(107)
(181)
590
(786)
(95)
2,718
3,565
(783)
2,782
Financial
assets
£m
458,152
(5,913)
—
—
—
—
12,922
(792)
464,369
460,577
459,270
(1,118)
458,152
454,301
ECL
£m
3,851
(49)
—
—
—
—
870
74
(67)
(181)
696
(792)
(95)
3,792
4,448
(597)
3,851
*2018 data has been restated for a change to reportable segments and a change to presentation of unrecognised interest. Refer to Note 4 on the consolidated
accounts and Accounting policy 1, Other amendments to IFRS, for further details.
2018 movements included transfers from Stage 1 to Stage 2 of £18,416 million (ECL – £52 million), transfers from Stage 2 to Stage 1 of
£13,723 million (ECL – £228 million), transfers into Stage 3 of £3,042 million (ECL – £111 million) and transfers from Stage 3 of £2,795 million
(ECL – £179 million). An additional ECL of £487 million was recognised as a result of these cumulative transfers. It also included amounts
written-off of £1,494 million.
RBS – Annual Report and Accounts 2019
157
Capital and risk management
Credit risk – Banking activities continued
Flow statements (audited)
UK Personal Banking - mortgages
At 1 January 2019
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
Unwinding of discount
At 31 December 2019
Net carrying amount
At 1 January 2018
2018 movements
At 31 December 2018*
Net carrying amount
Stage 1
Stage 2
Stage 3
Total
Financial
assets
£m
127,671
—
(7,536)
5,866
(14)
21
9,617
—
135,625
135,613
124,180
3,491
127,671
127,661
ECL
£m
10
—
(1)
15
—
1
(15)
2
—
—
(13)
—
—
12
11
(1)
10
Financial
assets
£m
10,241
—
7,536
(5,866)
(662)
409
(1,375)
—
10,283
10,197
10,621
(380)
10,241
10,167
ECL
£m
74
—
1
(15)
(20)
32
31
(6)
(11)
—
14
—
—
86
64
10
74
Financial
assets
£m
1,286
21
—
—
676
(430)
(247)
(17)
1,289
1,074
1,353
(67)
1,286
1,084
ECL
£m
202
21
—
—
20
(33)
15
58
(15)
(28)
30
(17)
(36)
215
157
45
202
Financial
assets
£m
139,198
21
—
—
—
—
7,995
(17)
147,197
146,884
136,154
3,044
139,198
138,912
ECL
£m
286
21
—
—
—
—
31
54
(26)
(28)
31
(17)
(36)
313
232
54
286
*2018 data has been restated for a change to reportable segments and a change to presentation of unrecognised interest. Refer to Note 4 on the consolidated
accounts and Accounting policy 1, Other amendments to IFRS, for further details.
In Stage 3, the ECL cost within changes in risk parameters reflected
the monthly assessment of the loss requirement, capturing
underlying portfolio movements.
Write-off occurs once the repossessed property has been sold and
there is a residual shortfall balance remaining outstanding. Write-off
would typically be within five years from default but can be longer.
Key points
The increase in ECL in Stage 1 and Stage 2 was reflective of
portfolio growth and also due to a slight increase in the portfolio
default rate from a low level that included the effect of the natural
seasoning of strong business growth in prior years. The rise in Stage
2 also included the effect of a small increase in ECL related to
forward-looking economic uncertainty.
ECL transfers from Stage 3 to Stage 1 and Stage 2 were higher
than those in unsecured lending, due to the higher cure activity
typically seen in mortgages.
In Stage 3, the increase included the effect of an accounting
methodology change relative to the treatment of interest suspended
post default. The value of suspended interest is now reported within
the ECL balance and has naturally grown during the year. Under
IAS 39, low LTV exposures continued to have interest recognised to
income rather than being suspended; under IFRS 9 from the start of
2018, all Stage 3 mortgages irrespective of LTV have interest
suspended. The value of suspended interest within the reported
ECL is therefore expected to naturally grow over the initial years of
IFRS 9, until it reaches a steady state.
RBS – Annual Report and Accounts 2019
158
Capital and risk management
Credit risk – Banking activities continued
Flow statements (audited)
UK Personal Banking - credit cards
At 1 January 2019
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
Unwinding of discount
At 31 December 2019
Net carrying amount
At 1 January 2018
2018 movements
At 31 December 2018*
Net carrying amount
Stage 1
Stage 2
Stage 3
Total
Financial
assets
£m
2,632
(1,265)
1,056
(20)
—
401
—
2,804
2,766
2,841
(209)
2,632
2,596
ECL
£m
36
(25)
74
—
—
(53)
(24)
30
—
(47)
—
—
38
52
(16)
36
Financial
assets
£m
1,226
1,265
(1,056)
(123)
9
(75)
—
1,246
1,115
997
229
1,226
1,108
ECL
£m
118
25
(74)
(40)
6
154
(74)
16
—
96
—
—
131
94
24
118
Financial
assets
£m
108
—
—
143
(9)
(39)
(76)
127
39
105
3
108
35
ECL
£m
73
—
—
40
(6)
55
8
—
(7)
56
(76)
(6)
88
75
(2)
73
Financial
assets
£m
3,966
—
—
—
—
287
(76)
4,177
3,920
3,943
23
3,966
3,739
ECL
£m
227
—
—
—
—
156
(90)
46
(7)
105
(76)
(6)
257
221
6
227
*2018 data has been restated for a change to reportable segments and a change to presentation of unrecognised interest. Refer to Note 4 on the consolidated
accounts and Accounting policy 1, Other amendments to IFRS, for further details.
Key points
ECL increased overall during the period. In Stage 3, the natural flow
of new defaults, which reduced slightly year-on-year, have been
higher than customer repayments and debt write-offs. The sale of
Stage 3 impaired debt in 2018 reduced the ongoing business-as-
usual flow of write-offs, and the level of debt sales in 2019 was
significantly lower than in 2018.
The portfolio continued to experience cash recoveries after write-off
which are reported in other (P&L only items). These benefited the
income statement without affecting ECL. The level was lower
compared to the prior year reflecting the debt sales executed in
2018.
Charge-off (analogous to partial write-off) typically occurs after 12
The rise in Stage 2 ECL included the effect of an increase in ECL
missed payments.
related to forward-looking economic uncertainty.
RBS – Annual Report and Accounts 2019
159
Capital and risk management
Credit risk – Banking activities continued
Flow statements (audited)
UK Personal Banking - other personal unsecured
At 1 January 2019
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
Unwinding of discount
At 31 December 2019
Net carrying amount
At 1 January 2018
2018 movements
At 31 December 2018*
Net carrying amount
Stage 1
Stage 2
Stage 3
Total
Financial
assets
£m
5,073
(1)
(2,527)
1,292
(11)
4
1,587
—
5,417
5,354
4,518
555
5,073
5,019
ECL
£m
54
(1)
(42)
82
—
1
(62)
9
22
—
(31)
—
—
63
46
8
54
Financial
assets
£m
1,970
(1)
2,527
(1,292)
(332)
38
(660)
—
2,250
1,998
1,790
180
1,970
1,731
ECL
£m
239
(1)
42
(82)
(105)
14
229
(46)
(38)
—
145
—
—
252
164
75
239
Financial
assets
£m
503
4
—
—
343
(42)
(61)
(139)
608
90
705
(202)
503
101
ECL
£m
402
4
—
—
105
(15)
112
79
(9)
(39)
143
(139)
(21)
518
582
(180)
402
Financial
assets
£m
7,546
2
—
—
—
—
866
(139)
8,275
7,442
7,013
533
7,546
6,851
ECL
£m
695
2
—
—
—
—
279
42
(25)
(39)
257
(139)
(21)
833
792
(97)
695
*2018 data has been restated for a change to reportable segments and a change to presentation of unrecognised interest. Refer to Note 4 on the consolidated
accounts and Accounting policy 1, Other amendments to IFRS, for further details.
Key points
The overall increase in ECL was primarily in Stage 3, including the
effect of a modest increase in the rate of default during the year,
however, the trend flattened in the second half of the year as a
result of risk appetite tightening. Additionally, there was a loss rate
model adjustment that increased ECL.
In addition, the sale of Stage 3 impaired debt in 2018 reduced the
ongoing business-as-usual flow of write-offs, with the actual value of
debts sales in 2019 also lower than the prior year.
The increase in Stage 1 and Stage 2 balances and ECL was a
result of a combination of portfolio growth and a small increase in
default rates being reflected in slightly increased ECL requirements.
The portfolio continued to experience cash recoveries after write-off
which are reported in other (P&L only items). These benefited the
income statement without affecting ECL. The level was lower
compared to the prior year reflecting the debt sales executed in
2018.
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.
RBS – Annual Report and Accounts 2019
160
Capital and risk management
Credit risk – Banking activities continued
Flow statements (audited)
Ulster Bank RoI - mortgages
At 1 January 2019
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
Unwinding of discount
At 31 December 2019
Net carrying amount
At 1 January 2018
2018 movements
At 31 December 2018*
Net carrying amount
Stage 1
Stage 2
Stage 3
Total
Financial
assets
£m
10,782
(548)
(1,329)
1,480
(40)
13
245
—
10,603
10,592
10,650
132
10,782
10,771
ECL
£m
11
(1)
(4)
22
(2)
—
(17)
2
—
—
(15)
—
—
11
8
3
11
Financial
assets
£m
1,394
(63)
1,329
(1,480)
(278)
294
(110)
(2)
1,084
1,054
1,532
(138)
1,394
1,319
ECL
£m
75
(2)
4
(22)
(27)
33
2
(30)
(1)
—
(29)
(2)
—
30
72
3
75
Financial
assets
£m
2,278
(91)
—
—
318
(307)
(266)
(57)
1,875
1,294
3,167
(889)
2,278
1,621
ECL
£m
657
(18)
—
—
29
(33)
4
27
(9)
19
41
(57)
(19)
581
881
(224)
657
Financial
assets
£m
14,454
(702)
—
—
—
—
(131)
(59)
13,562
12,940
15,349
(895)
14,454
13,711
ECL
£m
743
(21)
—
—
—
—
(11)
(1)
(10)
19
(3)
(59)
(19)
622
961
(218)
743
*2018 data has been restated for a change to reportable segments and a change to presentation of unrecognised interest. Refer to Note 4 on the consolidated
accounts and Accounting policy 1, Other amendments to IFRS, for further details.
Key points
The overall ECL reduction reflected the completion of the
remainder of Ulster Bank RoI’s 2018 sale of non-performing loans
in H1 2019 and ongoing improvements in underlying portfolio
performance.
The transfers into Stage 3 were reflective of the implementation
of the broader Stage 3 definition, with £230 million of exposures
re-classified as Stage 3 assets under the new definition.
The reduction in Stage 2 ECL was driven by the implementation
of the broader Stage 3 definition and the re-allocation of post-
model adjustments to Stage 3 assets.
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. There is no
set time period within which write-offs can occur.
RBS – Annual Report and Accounts 2019
161
Capital and risk management
Credit risk – Banking activities continued
Flow statements (audited)
Commercial Banking - excluding business banking
At 1 January 2019
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
Unwinding of discount
At 31 December 2019
Net carrying amount
At 1 January 2018
2018 movements
At 31 December 2018*
Net carrying amount
Stage 1
Stage 2
Stage 3
Total
Financial
assets
£m
81,485
(527)
(454)
(12,165)
7,679
(233)
315
3,150
—
79,250
79,127
90,999
(9,514)
81,485
81,377
ECL
£m
108
—
(1)
(25)
69
(1)
31
(82)
(1)
25
—
(58)
—
—
123
64
44
108
Financial
assets
£m
9,393
(73)
(45)
12,165
(7,679)
(1,382)
451
(1,825)
—
11,005
10,834
9,651
(258)
9,393
9,238
ECL
£m
155
(1)
—
25
(69)
(23)
15
84
(6)
(9)
—
69
—
—
171
117
38
155
Financial
assets
£m
2,473
58
(1)
—
—
1,615
(766)
(708)
(391)
2,280
1,461
3,861
(1,388)
2,473
1,573
ECL
£m
900
(18)
16
—
—
24
(46)
298
86
(43)
(20)
321
(391)
(7)
819
1,213
(313)
900
Financial
assets
£m
93,351
(542)
(500)
—
—
—
—
617
(391)
92,535
91,422
104,511
(11,160)
93,351
92,188
ECL
£m
1,163
(19)
15
—
—
—
—
300
79
(27)
(20)
332
(391)
(7)
1,113
1,394
(231)
1,163
*2018 data has been restated for a change to reportable segments and a change to presentation of unrecognised interest Refer to Note 4 on the consolidated
accounts and Accounting policy 1, Other amendments to IFRS, for further details.
Key points
ECL decreased overall with write-offs exceeding the level of
impairment charges on new into default cases.
Increases in Stage 1 and Stage 2 ECL were offset by write-offs in
Stage 3.
Improvements in underlying risk metrics which are reflected in
changes to risk parameters in Stage 1 and Stage 2 were offset by
model enhancements and increases related to economic
uncertainty.
The distribution of assets across stages remained broadly in line
with 2018, with model enhancements and increases in exposures
managed in the Risk of Credit Loss framework driving the majority
of the net movement from Stage 1 to Stage 2.
Stage 3 income statement charges increased compared to 2018.
This was primarily due to a small number of individually significant
impairment charges which also affected the transfers to Stage 3.
For loans that are individually assessed for impairment, the timing of
write-off is determined on a case-by-case basis. Such loans are
reviewed regularly and write-offs are prompted by bankruptcy,
insolvency, renegotiation and similar events.
RBS – Annual Report and Accounts 2019
162
Capital and risk management
Credit risk – Banking activities continued
Flow statements (audited)
Commercial - business banking
At 1 January 2019
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
Unwinding of discount
At 31 December 2019
Net carrying amount
At 1 January 2018
2018 movements
At 31 December 2018*
Net carrying amount
Stage 1
Stage 2
Stage 3
Total
Financial
assets
£m
6,303
—
(924)
680
(17)
7
289
—
6,338
6,310
6,505
(202)
6,303
6,281
ECL
£m
22
—
(6)
20
—
2
(19)
4
5
—
(10)
—
—
28
29
(7)
22
Financial
assets
£m
897
—
924
(680)
(144)
27
(257)
—
767
722
684
213
897
854
ECL
£m
43
—
6
(20)
(21)
7
50
(12)
(8)
—
30
—
—
45
29
14
43
Financial
assets
£m
245
3
—
—
161
(34)
(60)
(58)
257
57
268
(23)
245
82
ECL
£m
163
3
—
—
21
(9)
60
36
(13)
(50)
33
(58)
(3)
200
224
(61)
163
Financial
assets
£m
7,445
3
—
—
—
—
(28)
(58)
7,362
7,089
7,457
(12)
7,445
7,217
ECL
£m
228
3
—
—
—
—
91
28
(16)
(50)
53
(58)
(3)
273
282
(54)
228
*2018 data has been restated for a change to reportable segments and a change to presentation of unrecognised interest. Refer to Note 4 on the consolidated
accounts and Accounting policy 1, Other amendments to IFRS, for further details.
Key points
The ECL increase overall was mainly due to an uplift in Stage 3
reflective of loss rate model adjustments. The flow of new defaults
increased in 2019 compared to 2018 reflecting an uplift in default
rates (particularly for low value, unsecured lending which
represented 18% of stock), which has been addressed through a
tightening of risk appetite.
Stage 1 ECL increased slightly. Stage 2 ECL remained broadly
unchanged despite the reduction in Stage 2 exposure, and included
the effect of an increase in ECL relating to economic uncertainty.
The portfolio continued to benefit from cash recoveries post write-
off, which are reported as other (P&L only items).
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.
RBS – Annual Report and Accounts 2019
163
Capital and risk management
Credit risk – Banking activities continued
Flow statements (audited)
NatWest Markets (1)
At 1 January 2019
Currency translation and other adjustments
Inter-group transfers
Transfers from Stage 1 to Stage 2
Transfers from Stage 2 to Stage 1
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
At 31 December 2019
Net carrying amount
At 1 January 2018
2018 movements
At 31 December 2018*
Net carrying amount
Stage 1
Stage 2
Stage 3
Total
Financial
assets
£m
32,758
(1,394)
324
(235)
464
975
—
32,892
32,882
9,089
23,669
32,758
32,751
ECL
£m
7
—
1
—
2
(2)
(4)
6
—
—
—
10
2
5
7
Financial
assets
£m
732
(16)
72
235
(464)
(371)
—
188
183
1,276
(544)
732
718
ECL
£m
14
—
1
—
(2)
1
—
(9)
—
(8)
—
5
42
(28)
14
Financial
assets
£m
775
(27)
—
—
—
(549)
(16)
183
52
456
319
775
596
ECL
£m
179
(14)
(16)
—
—
—
(2)
—
(41)
(43)
(16)
131
190
(11)
179
Financial
assets
£m
34,265
(1,437)
396
—
—
55
(16)
33,263
33,117
10,821
23,444
34,265
34,065
ECL
£m
200
(14)
(14)
—
—
(1)
(6)
(3)
(41)
(51)
(16)
146
234
(34)
200
*2018 data has been restated for a change to reportable segments and a change to presentation of unrecognised interest. Refer to Note 4 on the
consolidated accounts and Accounting policy 1, Other amendments to IFRS, for further details.
Note:
(1) Reflects the NatWest Markets segment and includes NWM N.V..
Key points
Stage 3 financial assets included £4 million (2018 – £166 million)
purchased or originated credit impaired (POCI) assets. No ECL
impairment was held on these positions and a £35 million
impairment recovery was recognised on these POCI assets during
the year (included in other (P&L only items)).
The reduction in Stage 3 exposure was mainly due to the resolution
and closure of one significant asset.
Changes to risk parameters and the reduction in Stage 2 exposure
during the year reflected an improvement in underlying credit risk
metrics.
Continued exit from legacy assets resulted in a net release of ECL
provision.
∆
RBS – Annual Report and Accounts 2019
164
Capital and risk management
Credit risk – Banking activities continued
Stage 2 decomposition – arrears status and contributing factors
The tables below show Stage 2 decomposition for the Personal and Wholesale portfolios.
2019
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
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
RoI mortgages
Other mortgages
Credit cards
Other
Loans
£m
ECL
£m
Loans
£m
ECL
£m
Loans
£m
ECL
£m
Loans
£m
ECL
£m
Loans
£m
ECL
£m
Total
Loans
£m
528
9,860
4,184
1,812
3,864
10,388
658
9,612
3,855
1,448
4,309
10,270
14
73
60
5
8
87
10
65
55
5
5
75
21
1,056
208
252
596
1,077
90
1,292
680
54
558
1,382
3
28
15
4
9
31
10
66
44
1
21
76
— —
— —
— —
— —
— —
— —
3 —
— —
— —
— —
— —
3 —
16
6
1,243 126
92
20
14
1,259 132
727
422
94
17
6
1,226 114
85
17
12
1,243 120
778
337
111
92
657
19
2,218 234 14,377
6,601
1,482 188
29
3,026
4,750
17
2,310 253 15,034
540
196
88
856
22
1,985 226 14,115
6,568
1,255 177
2,279
26
5,268
23
2,073 248 14,971
440
290
ECL
£m
42
461
355
58
48
503
48
471
361
49
61
519
Key point
Overall, Stage 2 balances remained broadly stable with some variances by product type. The reduction in the Other driver category reflected
an enhancement to the treatment of certain credit bureau data items. As expected, ECL coverage was higher on accounts that are more
than 30 days past due. Also, in line with expectations, up-to-date accounts exhibiting PD deterioration have a higher ECL coverage than
accounts in Stage 2 for other reasons.
2019
Wholesale
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
2018
Wholesale
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
Property
Loans
£m
ECL
£m
Corporate
Loans
£m
ECL
£m
FI
Loans
£m
Other
ECL
£m
Loans
£m
ECL
£m
Total
Loans
£m
57
2,523
1,386
45
1,092
2,580
255
1,622
924
57
641
1,877
2
45
28
1
16
47
7
33
23
1
9
40
219
6
9,485 192
6,083 144
5
183
3,219
43
9,704 198
315
5
8,438 198
5,564 139
170
5
54
2,704
8,753 203
7 —
4
3
2 —
1
4
539
368
169
546
— —
283
4 — 12,551
7,840
3 —
230
— —
1 —
4,481
4 — 12,834
ECL
£m
8
241
175
6
60
249
1 —
10
6
4 —
4
10
473
281
188
474
— —
571
22 — 10,555
8 —
6,777
— —
231
3,547
14 —
22 — 11,126
12
241
168
6
67
253
Key points
Overall, Stage 2 ECL balances remained broadly stable. Coverage
can vary across categories or sectors reflecting the individual
characteristics of the customer and exposure type.
The increase in exposures reported as Stage 2 was due to model
enhancements and increases in exposures managed in the Risk of
Credit Loss framework, which led to a net transfer of balances from
Stage 1.
RBS – Annual Report and Accounts 2019
165
Capital and risk management
Credit risk – Banking activities continued
Stage 2 decomposition by a significant increase in credit risk trigger
2019
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
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
%
£m
Credit cards
£m
%
Other
£m
%
Total
£m
%
4,583 44.0
1,815 17.5
223 20.7
252 23.4
— —
— —
742
422
59.0
33.5
1,538 66.6
542 23.5
7,086 47.1
3,031 20.2
3,236 31.2
1.6
1.3
3.3
1.1
10,388 100.0
163
137
339
115
— —
0.3
3
6.9
74
525 48.7
— —
1,077 100.0
— —
— —
— —
— —
— —
— —
59
—
3
33
—
4.7
—
0.2
2.6
—
1,259 100.0
102
10
36
56
26
3,397 22.6
1.2
1.7
6.3
0.9
2,310 100.0 15,034 100.0
4.4
0.4
1.6
2.4
1.1
176
250
953
141
4,273
1,450
41.6
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
206
144
982
219
29.2
2.0
1.4
9.6
2.1
10,270 100.0
—
2
57
—
0.1
4.1
502 36.3
—
1,382 100.0
—
— —
— —
— —
— —
3 100.0
3 100.0
61
4.9
— —
0.4
5
46
3.7
— —
1,243 100.0
101
13
36
151
25
3,158 21.1
1.5
1.6
1,681 11.2
1.6
2,073 100.0 14,971 100.0
4.9
0.6
1.7
7.3
1.2
221
242
247
Key point
The primary driver of credit deterioration was PD, which including persistence, accounted for the majority of movements into Stage 2. High
risk back-stops, for example, forbearance and adverse credit bureau, provide additional valuable discrimination particularly on mortgages.
The reduction in the Other driver category reflected an enhancement to the treatment of certain credit bureau data items, with this reduction
offset by an increase in the level of accounts triggering PD deterioration.
2019
Wholesale trigger (1)
PD movement
PD persistence
Risk of credit loss
Forbearance support provided
Customers in collections
Other reasons (3)
Days past due >30
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
%
Other
£m
%
Total
£m
%
1,416
45
915
31
10
146
17
54.8
1.7
35.5
1.2
0.4
5.7
0.7
2,580 100.0
6,129
183
2,394
140
47
659
152
63.1
1.9
24.7
1.4
0.5
6.8
1.6
9,704 100.0
368
3
69
29
—
71
6
67.4
0.5
12.6
5.3
—
13.0
1.1
546 100.0
940
57
321
65
9
251
234
50.1
3.0
17.1
3.5
0.5
13.4
12.5
1,877 100.0
5,617
171
1,964
209
43
525
224
64.2
2.0
22.4
2.4
0.5
6.0
2.6
8,753 100.0
281
4
103
—
—
85
1
59.3
0.8
21.7
—
—
17.9
0.2
474 100.0
75.0
—
—
—
—
25.0
—
61.7
3
1.8
—
26.3
—
1.6
—
0.4
—
6.8
1
—
1.4
4 100.0 12,834 100.0
7,916
231
3,378
200
57
877
175
36.4
—
—
—
—
63.6
—
61.5
8
2.1
—
21.5
—
2.5
—
0.5
—
7.9
14
—
4.1
22 100.0 11,126 100.0
6,845
232
2,388
274
52
875
460
Notes:
(1) The table is prepared 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.
mortgage significantly behind their repayment plan and customers breaching risk appetite thresholds for new business acquisition.
(2) Includes customers that have accessed payday lending, interest only mortgages past end of term, a small number of mortgage customers on a highly flexible
(3) 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 63% of Stage 2. The Risk of Credit Loss
framework accounted for a further 26%, highlighting the importance of expert judgement being used to identify deterioration. The increase in
Stage 2 exposure balances was primarily as a result of modelling changes and increases in exposures managed in the Risk of Credit Loss
framework, led to a net transfer of exposure from Stage 1.
RBS – Annual Report and Accounts 2019
166
Capital and risk management
Credit risk – Banking activities continued
Stage 3 vintage analysis
The table below shows estimated vintage analysis of the material Stage 3 portfolios totalling 83% of the Stage 3 loans of £6.6 billion.
Stage 3 loans (£bn)
Vintage (time in default):
<1 year
1-3 years
3-5 years
5-10 years
>10 years
2019
UK Personal
Banking Ulster Bank RoI
mortgages
1.9
mortgages
1.3
32%
23%
11%
26%
8%
100%
13%
12%
23%
44%
8%
100%
2018
UK Personal
Banking Ulster Bank RoI
mortgages
2.3
mortgages
1.2
26%
21%
14%
35%
4%
100%
7%
31%
16%
44%
2%
100%
Wholesale
2.3
37%
14%
9%
40%
—
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)
The table below shows asset quality bands of gross loans and ECL, by stage, for the Personal portfolio.
Gross loans
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
Stage 1
£m
ECL provisions
Stage 2
£m
Stage 3
£m
2019
UK mortgages
AQ1-AQ4
AQ5-AQ8
AQ9
AQ10
RoI mortgages
AQ1-AQ4
AQ5-AQ8
AQ9
AQ10 (1)
Credit cards
AQ1-AQ4
AQ5-AQ8
AQ9
AQ10
Other personal
AQ1-AQ4
AQ5-AQ8
AQ9
AQ10
Total personal
AQ1-AQ4
AQ5-AQ8
AQ9
AQ10
90,494
58,039
96
—
2,579
6,939
870
—
148,629 10,388
— 93,073
— 64,978
966
—
1,414
1,414
1,414 160,431
6,215
4,416
1
—
10,632
364
2,734
5
—
3,103
1,231
6,127
78
—
7,436
212
615
250
—
1,077
11
1,187
61
—
1,259
59
2,045
206
—
2,310
6,427
—
5,031
—
251
—
1,863
1,863
1,863 13,572
—
—
—
116
116
375
3,921
66
116
4,478
—
1,290
—
8,172
—
284
643
643
643 10,389
6
8
—
—
14
4
7
—
—
11
1
39
—
—
40
4
59
2
—
65
98,304
2,861
71,316 10,786
1,387
—
169,800 15,034
180
—
— 101,165
— 82,102
1,567
—
4,036
4,036
4,036 188,870
15
113
2
—
130
7
55
25
—
87
4
19
8
—
31
1
112
19
—
132
5
195
53
—
253
17
381
105
—
503
Total
£m
13
63
25
240
341
8
26
8
581
623
2
151
19
89
261
9
254
55
539
857
—
—
—
240
240
—
—
—
581
581
—
—
—
89
89
—
—
—
539
539
—
—
—
1,449
1,449
32
494
107
1,449
2,082
ECL provisions coverage
Stage 3
%
Stage 2
%
Stage 1
%
0.01
0.01
—
—
0.01
0.06
0.16
—
—
0.10
0.27
1.43
—
—
1.29
0.32
0.96
2.56
—
0.87
0.02
0.16
1.11
—
0.08
0.27
0.79
2.87
—
0.84
1.89
3.09
3.20
—
2.88
9.09
9.44
31.15
—
10.48
8.47
9.54
25.73
—
10.95
0.59
3.53
7.57
—
3.35
—
—
—
16.97
16.97
—
—
—
31.19
31.19
—
—
—
76.72
76.72
—
—
—
83.83
83.83
—
—
—
35.90
35.90
Total
%
0.01
0.10
2.59
16.97
0.21
0.12
0.52
3.19
31.19
4.59
0.53
3.85
28.79
76.72
5.83
0.70
3.11
19.37
83.83
8.25
0.03
0.60
6.83
35.90
1.10
RBS – Annual Report and Accounts 2019
167
Capital and risk management
Credit risk – Banking activities continued
Asset quality (audited)
Gross loans
Stage 1
£m
Stage 2
£m
Stage 3
£m
Total
£m
Stage 1
£m
ECL provisions
Stage 2
£m
Stage 3
£m
2018*
UK mortgages
AQ1-AQ4
AQ5-AQ8
AQ9
AQ10
RoI mortgages
AQ1-AQ4
AQ5-AQ8
AQ9
AQ10 (1)
Other mortgages (1)
AQ1-AQ4
AQ5-AQ8
AQ10
Credit cards
AQ1-AQ4
AQ5-AQ8
AQ9
AQ10
Other personal
AQ1-AQ4
AQ5-AQ8
AQ9
AQ10
Total personal
AQ1-AQ4
AQ5-AQ8
AQ9
AQ10
95,618
42,771
32
—
3,621
5,845
804
—
138,421 10,270
— 99,239
— 48,616
836
—
1,621
1,621
1,621 150,312
5,164
5,668
12
—
10,844
226
717
439
—
1,382
5,390
—
6,385
—
451
—
2,265
2,265
2,265 14,491
359
136
—
495
34
2,810
7
—
2,851
997
5,889
56
—
6,942
1
2
—
3
1
1,180
62
—
1,243
43
1,847
183
—
2,073
—
—
1
1
—
—
—
124
124
—
—
—
574
574
360
138
1
499
35
3,990
69
124
4,218
1,040
7,736
239
574
9,589
6
6
—
—
12
4
7
—
—
11
—
—
—
—
—
38
—
—
38
4
55
2
—
61
102,172
57,274
107
—
3,892
9,591
1,488
—
159,553 14,971
— 106,064
— 66,865
1,595
—
4,585
4,585
4,585 179,109
14
106
2
—
122
11
47
17
—
75
5
32
39
—
76
—
—
—
—
—
103
17
—
120
5
187
56
—
248
21
369
129
—
519
Total
£m
17
53
17
230
317
9
39
39
656
743
—
—
—
—
—
141
17
75
233
9
242
58
430
739
—
—
—
230
230
—
—
—
656
656
—
—
—
—
—
—
—
75
75
—
—
—
430
430
—
—
—
1,391
1,391
35
475
131
1,391
2,032
ECL provisions coverage
Stage 3
%
Stage 2
%
Stage 1
%
0.01
0.01
—
—
0.01
0.08
0.12
—
—
0.10
—
—
—
—
—
1.35
—
—
1.33
0.40
0.93
3.57
—
0.88
0.01
0.19
1.87
—
0.08
0.30
0.80
2.11
—
0.73
2.21
4.46
8.88
—
5.50
—
—
—
—
—
8.73
27.42
—
9.65
11.63
10.12
30.60
—
11.96
0.54
3.85
8.67
—
3.47
—
—
—
14.19
14.19
—
—
—
28.96
28.96
—
—
—
—
—
—
—
60.48
60.48
—
—
—
74.91
74.91
—
—
—
30.34
30.34
Total
%
0.02
0.11
2.03
14.19
0.21
0.17
0.61
8.65
28.96
5.13
—
—
—
—
—
3.53
24.64
60.48
5.52
0.87
3.13
24.27
74.91
7.71
0.03
0.71
8.21
30.34
1.13
*2018 data has been restated for a change to presentation of unrecognised interest. Refer to Accounting policy 1, Other amendments to IFRS, for further details.
Notes:
(1) AQ10 includes £0.6 billion (2018 - £0.6 billion) of RoI mortgages which are not currently considered defaulted for capital calculation purposes for RoI but
included in Stage 3.
(2) In 2019, other mortgages are reported as UK, reflecting country of lending origination.
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
movement in UK mortgages was primarily in bands AQ4-AQ5 and
was reflective of a slight increase in the portfolio default rate from a
low level that included the effect of the natural seasoning of strong
business growth in prior years.
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. The year-on-year reduction was due
to improved customer engagement and the positive effects from the
external environment, as well as a residual benefit in 2019 from a
2018 debt sale.
In Other Personal, the relatively high level of exposures in AQ10
reflected that impaired assets can be held on the balance sheet,
with commensurate ECL provision for up to six years after default.
The year-on-year increase included the effect of a modest rise in
the rate of default, however, the trend flattened in the second half of
the year as a result of risk appetite tightening.
In addition, the sale of Stage 3 impaired debt in 2018 reduced the
ongoing business-as-usual flow of write-offs, with the actual value of
debts sales in 2019 also lower than the prior year.
ECL provisions coverage shows the expected trend with increased
coverage in the poorer asset quality bands, and also by stage.
RBS – Annual Report and Accounts 2019
168
Capital and risk management
Credit risk – Banking activities continued
Asset quality (audited)
The table below shows asset quality bands of gross loans and ECL, by stage, for the Wholesale portfolio.
2019
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
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
Gross loans
ECL provisions
ECL provisions coverage
Stage 1
Stage 2
Stage 3
£m
£m
£m
Total
£m
Stage 1
Stage 2
Stage 3
Total
Stage 1
Stage 2
Stage 3
£m
£m
£m
£m
%
%
%
15,590
17,268
38
—
32,896
22,373
37,133
183
—
59,689
32,297
3,406
4
—
35,707
7,268
142
—
7,410
413
2,115
52
—
2,580
616
8,803
285
—
9,704
225
319
2
—
546
4
—
—
4
— 16,003
— 19,383
90
—
895
895
895 36,371
— 22,989
— 45,936
468
—
1,649
1,649
1,649 71,042
— 32,522
3,725
—
—
6
13
13
13 36,266
—
—
5
5
7,272
142
5
7,419
77,528
1,258
57,949 11,237
339
—
135,702 12,834
225
—
— 78,786
— 69,186
564
—
2,562
2,562
2,562 151,098
15,740
17,397
8
—
33,145
21,814
40,004
26
—
61,844
22,150
2,352
—
—
24,502
6,780
161
—
6,941
393
1,418
66
—
1,877
773
7,647
333
—
8,753
247
222
5
—
474
22
—
—
22
— 16,133
— 18,815
74
—
1,768
1,768
1,768 36,790
— 22,587
— 47,651
359
—
1,773
1,773
1,773 72,370
— 22,397
2,574
—
5
—
44
44
44 25,020
—
—
4
4
6,802
161
4
6,967
66,484
59,914
34
—
1,435
9,287
404
—
126,432 11,126
— 67,919
— 69,201
438
—
3,589
3,589
3,589 141,147
7
38
—
—
45
12
111
1
—
124
7
9
—
—
16
7
—
—
7
33
158
1
—
192
8
35
—
—
43
14
96
1
—
111
6
8
—
—
14
7
—
—
7
35
139
1
—
175
6
36
5
—
47
11
169
18
—
198
1
2
1
—
4
—
—
—
—
—
—
—
402
402
—
—
—
859
859
—
—
—
8
8
—
—
—
—
13
74
5
402
494
23
280
19
859
1,181
8
11
1
8
28
7
—
—
7
18
207
24
—
249
—
—
—
1,269
1,269
51
365
25
1,269
1,710
9
27
4
—
40
14
174
15
—
203
5
4
1
—
10
—
—
—
—
—
—
—
589
589
—
—
—
771
771
—
—
—
31
31
—
—
—
—
17
62
4
589
672
28
270
16
771
1,085
11
12
1
31
55
7
—
—
7
28
205
20
—
253
—
—
—
1,391
1,391
63
344
21
1,391
1,819
0.04
0.22
—
—
0.14
0.05
0.30
0.55
—
0.21
0.02
0.26
—
—
0.04
0.10
—
—
0.09
0.04
0.27
0.44
—
0.14
0.05
0.20
—
—
0.13
0.06
0.24
3.85
—
0.18
0.03
0.34
—
—
0.06
0.10
—
—
0.10
0.05
0.23
2.94
—
0.14
1.45
1.70
9.62
—
1.82
1.79
1.92
6.32
—
2.04
0.44
0.63
50.00
—
0.73
—
—
—
—
—
—
—
44.92
44.92
—
—
—
52.09
52.09
—
—
—
61.54
61.54
—
—
—
—
1.43
1.84
7.08
—
1.94
—
—
—
49.53
49.53
2.29
1.90
6.06
—
2.13
1.81
2.28
4.50
—
2.32
2.02
1.80
20.00
—
2.11
—
—
—
—
1.95
2.21
4.95
—
2.27
—
—
—
33.31
33.31
—
—
—
43.49
43.49
—
—
—
70.45
70.45
—
—
—
—
—
—
—
38.76
38.76
Total
%
0.08
0.38
5.56
44.92
1.36
0.10
0.61
4.06
52.09
1.66
0.02
0.30
16.67
61.54
0.08
0.10
—
—
0.09
0.06
0.53
4.43
49.53
1.13
0.11
0.33
5.41
33.31
1.83
0.12
0.57
4.46
43.49
1.50
0.05
0.47
20.00
70.45
0.22
0.10
—
—
0.10
0.09
0.50
4.79
38.76
1.29
*2018 data has been restated for a change to presentation of unrecognised interest. Refer to Accounting policy 1, Other amendments to IFRS, for further details.
Key points
Across the Wholesale portfolio, the asset quality band distribution
differed, reflecting the diverse nature of the sectors. 52% (2018 –
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.
∆
RBS – Annual Report and Accounts 2019
169
Capital and risk management
Credit risk – Trading activities
This section details the credit risk profile of RBS’s trading activities.
Securities financing transactions and collateral (audited)
The table below shows securities funding transactions in NatWest Markets and Treasury. Balance sheet captions include balances held at all
classifications under IFRS 9.
2019
Gross
IFRS offset
Carrying value
Reverse repos
Of which:
can be offset
£m
73,348
(39,247)
34,101
Outside
netting
arrangements
£m
808
—
808
Total
£m
74,156
(39,247)
34,909
Repos
Of which:
can be offset
£m
69,020
(39,247)
29,773
Outside
netting
arrangements
£m
2,474
—
2,474
Total
£m
71,494
(39,247)
32,247
Master netting arrangements
Securities collateral
Potential for offset not recognised under IFRS
Net
(562)
(33,178)
(33,740)
1,169
(562)
(33,178)
(33,740)
361
—
—
—
808
(562)
(29,211)
(29,773)
2,474
(562)
(29,211)
(29,773)
—
2018
Gross
IFRS offset
Carrying value
68,044
(39,737)
28,307
65,057
(39,737)
25,320
2,987
—
2,987
70,097
(39,737)
30,360
68,940
(39,737)
29,203
Master netting arrangements
Securities collateral
Potential for offset not recognised under IFRS
Net
(762)
(24,548)
(25,310)
2,997
(762)
(24,548)
(25,310)
10
—
—
—
2,987
(762)
(28,441)
(29,203)
1,157
(762)
(28,441)
(29,203)
—
—
—
—
2,474
1,157
—
1,157
—
—
—
1,157
∆
RBS – Annual Report and Accounts 2019
170
Capital and risk management
Credit risk – Trading activities continued
Derivatives (audited)
The table below shows derivatives by type of contract. The master netting agreements and collateral shown 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 also includes hedging derivatives in Treasury.
2019
2018
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
Counterparty mark-to-market netting
Cash collateral
Other financial 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
Notional
Euro
£bn
USD
£bn
GBP
£bn
Liabilities
£m
138,390 135,673
(6,776)
3,311 5,048 4,710 1,994 15,063 150,029 146,879 13,979 133,349 128,897
£m
160,942 158,603
(10,913) (11,724)
Liabilities Notional
£bn
Assets
£m
Assets
£m
Other
£bn
(5,041)
Total
£bn
89,646
15,300
—
11
956 11,293 104,957
86,123
—
13,198
10
81,855 74,004
—
14,481
— 16,371
69
74
99,331 10,536 96,410 90,444
2,911 3,306 4,120
30,728
10,296
—
6,117
17,904 18,610
11,322 12,062
—
7,558
47,141 3,426 36,545 38,230
208
15
15,063 150,029 146,879 13,979 133,349 128,897
30,348
8,795
5,649
—
44,792
280
—
7,319
—
346
48
359
48
16
1
580 1,038 3,750
17
—
3
—
10
—
399 1,733
6
3
1
—
(122,697) (122,697)
(18,685) (17,296)
(1,276)
5,610
4,207
(4,292)
4,355
2,092
(106,762) (106,762)
(17,937) (15,227)
(3,466)
3,442
1,708
(4,469)
4,181
2,061
857
4,088
639
26
5,610
3,153
1,898
331
228
5,610
621
1,020
2,452
262
4,355
2,052
1,393
428
482
4,355
3,361
972
22
4,355
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
24
4,181
Notes:
(1) The notional amount of interest rate derivatives include £7,090 billion (2018 – £5,952 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.
∆
RBS – Annual Report and Accounts 2019
171
Capital and risk management
Credit risk – Trading activities continued
Derivatives: settlement basis and central counterparties (audited)
The table below shows the third party derivative notional and fair value by trading and settlement method.
2019
Interest rate
Exchange rate
Credit
Equity and commodity
Total
2018
Interest rate
Exchange rate
Credit
Equity and commodity
Total
Notional
Traded over the counter
Not settled
Settled
Traded on
recognised
by central
by central
exchanges counterparties counterparties
£bn
2,610
3,747
17
2
6,376
£bn
7,090
—
—
—
7,090
£bn
1,593
3
—
1
1,597
1,642
4
—
—
1,646
5,952
—
—
—
5,952
2,942
3,422
16
1
6,381
Total
£bn
11,293
3,750
17
3
15,063
10,536
3,426
16
1
13,979
Asset
Liability
Traded on
recognised
exchanges
£m
—
—
—
—
—
Traded
over the
counter
£m
104,957
44,792
280
—
150,029
Traded on
recognised
exchanges
£m
—
—
—
—
—
Traded
over the
counter
£m
99,331
47,141
359
48
146,879
—
—
—
—
—
96,410
36,545
346
48
133,349
—
—
—
—
—
90,444
38,230
208
15
128,897
∆
Debt securities (audited)
The table below shows 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.
2019
AAA
AA to AA+
A to AA-
BBB- to A-
Non-investment grade
Unrated
Total
Short positions
2018
AAA
AA to AA+
A to AA-
BBB- to A-
Non-investment grade
Unrated
Total
Short positions
Central and local government
UK
£m
—
4,897
—
—
—
—
4,897
US
£m
—
5,458
—
—
—
—
5,458
Other
£m
2,197
2,824
3,297
6,508
76
—
14,902
Financial
institutions
£m
1,188
333
755
872
298
420
3,866
Corporate
£m
5
87
109
895
150
48
1,294
Total
£m
3,390
13,599
4,161
8,275
524
468
30,417
(4,340)
(1,392)
(13,749)
(1,620)
(86)
(21,187)
—
6,834
—
—
—
—
6,834
—
4,689
—
—
—
—
4,689
2,093
3,161
4,571
3,592
81
—
13,498
1,459
773
482
802
832
572
4,920
7
120
51
285
237
8
708
(6,394)
(2,008)
(13,500)
(1,724)
(201)
3,559
15,577
5,104
4,679
1,150
580
30,649
(23,827)
∆
RBS – Annual Report and Accounts 2019
172
Capital and risk management
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 shows cross border
exposures greater than 0.5% of RBS’s total assets.
2019
Western Europe
Of which: France
Germany
Italy
Luxembourg
Netherlands
Spain
United States
Japan
2018
Western Europe
Of which: France
Germany
Italy
Netherlands
Spain
United States
Japan
Jersey
Government
£m
21,646
3,097
6,597
3,757
4
971
2,410
14,441
2,722
21,121
3,396
8,023
2,179
1,142
891
13,558
1,857
—
Banks
£m
8,989
1,943
3,903
532
38
626
260
5,754
2,685
19,003
10,209
3,086
248
675
450
5,458
2,327
5
Other
£m
23,490
4,365
1,270
880
4,592
5,692
1,410
7,974
302
16,741
1,579
1,145
584
3,739
1,848
8,379
405
3,064
Total
£m
54,125
9,405
11,770
5,169
4,634
7,289
4,080
28,169
5,709
56,865
15,184
12,254
3,011
5,556
3,189
27,395
7,589
3,069
Short
positions
£m
14,370
2,497
2,371
3,642
2
541
2,493
1,483
12
14,103
1,626
5,397
1,796
985
1,164
2,103
11
2
Net of short
positions
£m
39,755
6,908
9,399
1,527
4,632
6,748
1,587
26,686
5,697
42,762
13,558
6,857
1,215
4,571
2,025
25,292
7,578
3,067
RBS – Annual Report and Accounts 2019
173
Capital and risk management
Market risk (audited)
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 and discussed separately.
The non-traded market risk section begins below. The traded market
risk section begins on page 180. Pension-related activities also give
rise to market risk. Refer to page 185 for more information on risk
related to pensions.
∆
Non-traded market risk
Definition (audited)
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.
∆
Sources of risk (audited)
The key sources of non-traded market risk are: interest rate risk; credit
spread risk; foreign exchange risk; equity risk; and accounting volatility
risk.
Each of these risk types are largely managed separately. For detailed
qualitative and quantitative information on each of them, refer to the
separate sub-sections following the VaR table below.
∆
Key developments in 2019
Non-traded market risk is managed separately on both sides of the
ring-fence. It continues to be aggregated and monitored against
risk appetite at RBS level.
Following the Alawwal bank merger, RBS holds a minority equity
holding in SABB. This investment in the newly merged entity is
held in NWM Plc. The investment is held at fair value. Changes in
value are recognised in reserves. This exposure is now captured
in the VaR table below.
The disposal of the lender-option/borrower-option (LOBO) loan
portfolio was completed during 2019, reducing RBS’s exposure to
changes in the credit spread compared to the 2018 year-end.
Interest rates remained low in 2019, reflecting partly uncertainty
over Brexit but also broader uncertainty. The Bank of England
base rate remained unchanged at 0.75% but market expectations
were for lower interest rates in the longer term. The five-year swap
rate fell to 0.81% at 31 December 2019 compared to 1.22% at 31
December 2018, which contributed to slightly lower returns on the
structural hedge.
RBS’s net interest earnings sensitivity was consistently positively
sensitive to higher interest rates.
After a period of weakness, sterling strengthened in the fourth
quarter of 2019 against both the US dollar and the euro. Against
the US dollar, sterling was 1.32 at 31 December 2019 compared to
1.28 at 31 December 2018. Against the euro, sterling was 1.18 at
31 December 2019 compared to 1.12 at 31 December 2018.
RBS continued to manage the sensitivity of its CET1 capital ratio
to exchange rate movements, mainly through its net investment
hedging programme. Increased capitalisation of NWM Plc’s US
branch reduced the branch’s debt funding and NWM Plc’s
regulatory exposure to fluctuations in the US dollar exchange rate
against sterling.
Risk governance (audited)
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.
∆
Risk appetite
RBS’s qualitative appetite is set out in the non-traded market risk
appetite statement.
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.
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 115.
Risk controls
For information on risk controls, refer to page 115.
Risk measurement (audited)
Non-traded internal VaR (1-day 99%)
The following table presents one-day internal banking book Value-at-Risk (VaR) at a 99% confidence level, split by risk type. RBS’s VaR metrics
are explained on page 176. Each of the key risk types are discussed in greater detail in their individual sub-sections following this table.
2019
2018
Interest rate
Euro
Sterling
US dollar
Other
Credit spread
Structural foreign exchange rate
Equity
Pipeline risk (1)
Diversification (2)
Total
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
54.9
82.3
Minimum
£m
8.0
0.7
8.0
3.4
0.2
49.2
7.2
31.6
0.2
—
48.1
Period end
£m
8.2
1.3
8.0
5.2
0.7
59.7
8.6
33.5
0.2
(45.6)
64.6
Maximum
£m
14.0
2.3
14.1
6.0
0.7
59.7
23.8
38.6
0.9
—
64.6
Average
£m
14.4
2.1
14.5
4.7
0.5
59.7
13.4
—
0.6
(24.9)
63.0
Average
£m
11.0
1.3
10.8
4.6
0.4
55.6
15.2
34.5
0.4
(57.1)
59.6
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
Period end
£m
11.6
1.0
13.3
8.7
0.7
77.8
13.0
—
0.4
(20.5)
82.3
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
Since June 2019, total VaR has included an equity component
reflecting the equity exposure to SABB following the merger with
Alawwal. However, given the offsetting diversification benefit,
average VaR was at similar levels to the previous year.
Structural foreign exchange VaR fell on a period-end basis driven
by the merger.
Interest rate VaR decreased mainly due to the disposals of the
LOBO loans.
∆
RBS – Annual Report and Accounts 2019
174
Capital and risk management
Non-traded market risk continued
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 the following three primary risk types:
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.
To manage exposures within its risk appetite, RBS aggregates interest
rate positions and hedges its residual exposure, primarily with interest
rate swaps.
Structural hedging aims to reduce gap risk and the sensitivity of
earnings to interest rate shocks. It also provides some protection
against prolonged periods of falling rates. Structural hedging is
explained in greater detail below, followed by information on how RBS
measures NTIRR from both an economic value-based and an
earnings-based perspective.
Structural hedging
RBS has 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
399
183
61
643
Total
income
£m
644
1,094
166
1,904
2019
Period end
notional
£bn
Average
notional
£bn
Total
yield
%
Incremental
income
£m
Total
income
£m
2018
Period end
notional
£bn
25
111
21
157
27
111
21
159
2.36
0.99
0.79
1.20
469
368
89
926
672
1,104
167
1,943
29
110
22
161
Average
notional
£bn
29
108
22
159
Total
yield
%
2.33
1.02
0.77
1.22
Equity structural hedges refer to income allocated primarily to equity and reserves. As a result of ring-fencing in the UK, equity structural hedges
were allocated to NatWest Holdings Group and NatWest Markets. At 31 December 2019, the equity structural hedge notional was allocated
between the two businesses in a ratio of approximately 80/20 respectively.
Product structural hedges refer to income allocated to customer products by NWH Treasury, mainly current accounts and customer deposits in
Commercial Banking and UK Personal Banking (excluding Ulster Bank). Other structural hedges refer to hedges managed by UBI DAC, Private
Banking, Ulster Bank Limited, and RBS International Limited.
At 31 December 2019, approximately 90% of structural hedges were sterling-denominated. A significant proportion of other structural hedges,
around 33%, were euro-denominated, mainly in UBI DAC.
The table below presents the incremental income associated with product structural hedges at segment level.
UK Personal Banking
Commercial Banking
Other
Total
Note:
(1) 2018 data restated as presented in the H1 2019 Company Announcement.
Key points
Incremental income in excess of three-month LIBOR fell in 2019
compared to 2018. This was primarily due to three-month LIBOR
fixings rising by approximately 0.15% on average, resulting in less
income benefit from the hedge.
The overall yield of the structural hedge fell in 2019. Five-year and
ten-year sterling swap rates were 0.81% and 0.93% respectively at
31 December 2019, down from 1.22% and 1.35% at 31 December
2018. At 1.20%, the overall yield was higher than swap rates at 31
December 2019.
2019
£m
85
98
—
183
2018
£m
166
200
2
368
The equity hedge notional decreased in 2019, partly due to the
impact of individual banks reviewing their hedge notionals at ring-
fencing, but also other impacts, including PPI. In 2019, Private
Banking and UBI DAC increased the tenor of some hedges from
five to ten years reflecting the equity component. The total weighted
average life of the structural hedge at 31 December 2019 was
approximately three years.
RBS – Annual Report and Accounts 2019
175
Capital and risk management
Non-traded market risk continued
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 including all cash flows. Earnings-based approaches
measure the potential impact on the income statement of changes in
interest rates over a defined horizon, generally one to three years.
RBS uses VaR as its value-based approach and sensitivity of net
interest earnings as its earnings-based approach.
These two approaches provide complementary views of the impact of
interest rate risk on the balance sheet at a point in time. The scenarios
employed in the net interest earnings sensitivity approach may
incorporate assumptions about how RBS and its customers will
respond to a change in the level of interest rates. In contrast, the VaR
approach measures the sensitivity of the balance sheet at a point in
time. Capturing all cash flows, VaR also highlights the impact of
duration and repricing risks beyond the one-to-three-year period
shown in earnings sensitivity calculations.
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 presented earlier in this section. The VaR captures the risk
resulting from mismatches in the repricing dates of assets and
liabilities.
It also includes any mismatch between the maturity profile of external
hedges and RBS’s target maturity profile for the hedge.
Sensitivity of net interest earnings
Net interest earnings are sensitive to changes in the level of interest
rates, mainly because maturing structural hedges are replaced at
higher or lower rates and changes to coupons on managed rate
customer products do not match changes in market rates of interest or
central bank policy rates.
Earnings sensitivity is derived from a market-implied forward rate
curve. Assumptions are applied to this curve to derive central bank
policy rates. A simple scenario is shown that projects forward earnings
over a 12-month period based on the 31 December 2019 balance
sheet. A base-case earnings forecast is derived from the market-
implied rate curve, which is then subject to interest rate shocks. The
difference between the base-case 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 of an immediate upward or downward change of 25 and 100
basis points to all interest rates. Yield curves are expected to move in
parallel except that interest rates are assumed to floor at zero per cent
or, for euro rates, at the current negative rate. At 31 December 2019,
the floor also affects sterling interest rates, reducing the size of the
down-rate shock at most maturities.
Reported sensitivities should not be considered a forecast of future
performance in these rate scenarios. The projections do not capture
potential management action in response to unexpected changes in
the interest rate environment. Actions that could reduce interest
earnings sensitivity include changes in pricing strategies on customer
loans and deposits as well as hedging. Management action may also
be taken to stabilise total income also taking into account non-interest
income.
Parallel shifts in yield curve
2019
Euro
Sterling
US dollar
Other
Total
2018
Euro
Sterling
US dollar
Other
Total
+25 basis points
£m
25
172
16
(1)
212
-25 basis points +100 basis points -100 basis points
£m
(3)
(706)
(52)
5
(756)
£m
(2)
(158)
(11)
1
(170)
£m
129
716
66
(3)
908
29
152
15
1
197
(3)
(201)
(8)
2
(210)
114
651
63
2
830
(1)
(717)
(42)
3
(757)
Key point
The increased sensitivity to upward shifts and the reduced sensitivity to a downward 25-basis-point shift partly reflect changes to estimates
of how product pricing will respond to interest rate shocks. These estimates are reviewed regularly and are influenced by the overall level
of interest rates, RBS’s competitive position and other strategic considerations.
RBS – Annual Report and Accounts 2019
176
Capital and risk management
Non-traded market risk continued
The tables below show the net interest earnings sensitivity of structural hedges and managed rate accounts 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 simple 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 impact of structural hedges increases as more maturing hedges are reinvested over the three-year period.
2019
Structural hedges
Managed margin (2)
Other
Total
2018
Structural hedges
Managed margin (2)
Other
Total
+25 basis points parallel upward shift
-25 basis points parallel downward shift
Year 1
Year 2 (1)
Year 3 (1)
£m
31
195
(14)
212
32
150
15
197
£m
97
195
292
98
171
—
269
£m
168
196
364
170
170
—
340
Year 1
£m
(27)
(158)
15
(170)
(32)
(177)
(2)
(210)
Year 2 (1)
Year 3 (1)
£m
(90)
(127)
£m
(154)
(128)
(217)
(282)
(98)
(189)
—
(287)
(167)
(163)
—
(330)
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.
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. Cash flow hedges are assumed to be fully effective and interest rate hedges of bonds in the liquidity
portfolio are also assumed to be subject to fully effective hedge accounting. Hedge accounting ineffectiveness would result in some deviation
from the results below, with some gains or losses recognised in P&L instead of reserves. Hedge ineffectiveness P&L is monitored and the
effectiveness of cash flow and fair value hedge relationships is 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.
2019
FVOCI reserves
Cash flow hedge reserves
Total
2018
FVOCI reserves
Cash flow hedge reserves
Total
+25 basis points
£m
(56)
(153)
(209)
-25 basis points +100 basis points -100 basis points
£m
210
638
848
£m
(227)
(597)
(824)
£m
55
155
210
(55)
(318)
(373)
55
323
378
(220)
(1,250)
(1,470)
216
1,315
1,531
Key point
The sensitivity of cash flow hedge reserves to upward and downward shocks in the yield curve fell in 2019. This partly reflected increased
customer demand for five-year fixed-rate mortgage terms. This reduced RBS’s requirement to hedge liabilities over five years with interest
rate swaps.
RBS – Annual Report and Accounts 2019
177
Capital and risk management
Non-traded market risk continued
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.
RBS’s bond portfolios primarily comprise high-quality securities
maintained as a liquidity buffer to ensure it 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
Non-traded foreign exchange risk arises from three 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.
Foreign exchange risk (audited)
The table below shows structural foreign currency exposures.
Forecast earnings or costs in foreign currencies – RBS assesses its
potential exposure to forecast foreign currency income and
expenses. RBS hedges forward some forecast expenses.
The most 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.
2019
US dollar
Euro
Other non-sterling
Total
2018
US dollar
Euro
Other non-sterling
Total
Net investments in
Non-controlling
Net investments in
foreign operations
foreign operations
interests (NCI) (1)
excluding NCI
£m
1,519
5,914
1,498
8,931
553
6,428
2,600
9,581
£m
—
—
—
—
—
33
710
743
£m
1,519
5,914
1,498
8,931
553
6,395
1,890
8,838
Net
hedges
Structural foreign
investment currency exposures
pre-economic
hedges
£m
1,519
5,264
847
7,630
£m
—
(650)
(651)
(1,301)
(4)
(853)
(1,249)
(2,106)
549
5,542
641
6,732
Economic
Residual structural
foreign currency
hedges (2)
exposures
£m
(1,519)
—
—
(1,519)
(549)
—
(81)
(630)
£m
—
5,264
847
6,111
—
5,542
560
6,102
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 (audited)
The decrease in net investments in foreign operations mainly
reflected the merger of Alawwal bank with SABB, which was
followed by the liquidation of RFS Holdings B.V., as a result of
which non-controlling interests decreased to nil. The decrease in
residual structural foreign currency exposures was due to lower
equity investment in eurozone businesses following dividend
payments and increased hedging of non-sterling businesses
other than Alawwal bank.
RBS’s equity shareholding in SABB is held as FVOCI equity
shares by NWM Plc and is therefore not included in the above
table. Please refer to the equity risk table. The SABB equity
shares are not hedged for foreign exchange risk.
Changes in foreign currency exchange rates affect equity in
proportion to structural foreign currency exposures pre-economic
hedges. For example, at 31 December 2019, a 5% strengthening in
foreign currencies against sterling would result in a gain of £0.4
billion in equity while a 5% weakening in foreign currencies against
sterling would result in a loss of £0.4 billion in equity.
∆
RBS – Annual Report and Accounts 2019
178
Capital and risk management
Non-traded market risk continued
Equity risk (audited)
Non-traded equity risk is the potential variation in income and reserves arising from changes in equity valuations. Equity exposures may arise
through strategic acquisitions, venture capital investments and restructuring arrangements.
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.
Equity positions are carried at fair value on the balance sheet based on market prices where available. 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 equity positions in the banking book.
Exchange-traded equity
Private equity
Other
2019
£m
627
249
76
952
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.
2019
£m
114
(40)
2018
£m
41
303
87
431
2018
£m
23
153
Key point
The increase in equity investments reflects the SABB FVOCI equity shares acquired by NWM Plc from NWM N.V. following the Alawwal
bank and SABB merger.
∆
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.
Accounting volatility can be mitigated through hedge accounting.
However, residual volatility will remain in cases where accounting rules
mean that hedge accounting is not an option, or where there is some
hedge ineffectiveness. Accounting volatility risk is reported to the Asset
& Liability Management Committee monthly and capitalised as part of
the Internal Capital Adequacy Assessment Process.
RBS – Annual Report and Accounts 2019
179
Capital and risk management
Traded market risk
Definition (audited)
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.
∆
Sources of risk (audited)
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.
∆
Key developments in 2019
Geopolitical risk resulted in periods of market volatility during the
year as a result of increased political and economic risks and
uncertainty in the UK and global markets.
Despite this volatility, traded VaR remained well within appetite
throughout the year.
Risk governance (audited)
Market risk policy statements set out the governance and risk
management framework. Responsibility for identifying, measuring,
monitoring and controlling market risk arising from trading activities lies
with the relevant trading business. The Market Risk function
independently advises on, monitors and challenges the risk-taking
activities undertaken by the trading business ensuring these are within
constraints of the market risk framework, policies, and risk appetite
statements and measures.
∆
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 limits at RBS level comprise value-at-risk
(VaR) and stressed value-at-risk (SVaR). More details on these are
provided on the following pages.
For each trading business, a document known as a dealing authority
compiles details of all applicable limits and trading restrictions. The
desk-level mandates comprise qualitative limits related to the product
types within the scope of each desk, as well as quantitative metrics
specific to the desk’s market risk exposures. These additional limits
and metrics aim to control various risk dimensions such as exposure
size, aged inventory, currency and tenor.
The limits are reviewed to reflect changes in risk appetite, business
plans, portfolio composition and the market and economic
environments. The limit review has been enhanced to improve the
alignment between traded market risk exposure and capital usage.
This is done by analysing the relationship between VaR and SVaR and
the NWM Plc solo CET1 ratio.
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 115.
Risk controls
For information on risk controls, refer to page 115.
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
RBS – Annual Report and Accounts 2019
180
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 desk,
business, franchise and RBS 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
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.
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. (Information on internal back-testing is provided in
this section. Information on regulatory back-testing appears in the
Pillar 3 report).
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. For further detail on the
independent model validation carried out by Model Risk
Management refer to page 189. More information relating to
pricing and market risk models is presented in the Pillar 3 report.
Capital and risk management
Traded market risk continued
One-day 99% traded internal VaR
25
20
15
10
m
£
5
0
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Total Trading VaR
FX VaR
Interest Rate VaR
Equity VaR
Credit VaR
Commodity VaR
Traded VaR (1-day 99%) (audited)
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
9.7
10.5
4.0
0.7
0.2
(10.3)
14.8
2019
Maximum
£m
16.9
14.5
10.5
2.2
0.5
Minimum
£m
6.3
7.0
1.6
0.3
0.0
21.5
10.1
Period end
£m
10.6
10.6
3.2
0.9
0.1
(11.3)
14.1
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
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
Despite market volatility driven by geopolitical risk throughout
the year, traded VaR remained well within appetite.
The decrease in the average VaR compared to 2018 is
attributed to peaks in H1 2018 due to long euro rates
positioning and bond syndication activity.
∆
RBS – Annual Report and Accounts 2019
181
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.
.
The table below shows internal back-testing exceptions in the major NatWest Markets businesses for the 250-business-day period to 31
December 2019. Internal back-testing compares one-day 99% traded internal VaR with Actual and Hypo P&L.
Two types of profit and loss (P&L) are used in back-testing
comparisons: Actual P&L and Hypothetical (Hypo) P&L. For more
details on the back-testing approach, refer to the Pillar 3 report.
Rates
Currencies
Credit
Back-testing exceptions
Actual
2
2
—
Hypo
4
6
—
Key points
Statistically RBS would expect to see back-testing exceptions 1% of
the time over the 250-day period.
The exceptions in the Rates business were mainly driven by market
moves in sterling and euro rates.
The exceptions in the Currencies business were mainly driven by
volatility in the foreign exchange market, including movements in
the euro/sterling and sterling/US dollar exchange rates.
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
Period-end
2019
£m
90
Period-end
2018
£m
161
Key point
The decrease in period-end SVaR was driven by a reduction of SVaR tail risk due to hedging undertaken to address market volatility.
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 further qualitative and 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 116.
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. For further qualitative and quantitative
disclosures on the IRC, refer to the Market Risk section of the Pillar 3
Report.
RBS – Annual Report and Accounts 2019
182
Capital and risk management
Market risk – other disclosures
Replacement of Interbank Offered Rates (IBORs) (audited)
Central banks and regulators in major jurisdictions (notably the UK, the
EU, the US, Switzerland and Japan) have convened working groups to
find, and implement the transition to, suitable replacements for IBOR
based interest rates.
RBS is fully engaged in the IBOR replacement discussions in the key
markets where it operates. Meanwhile, it continues to implement plans
to appropriately mitigate the risks associated with the expected
discontinuation of certain unsecured IBOR-referenced benchmark
interest rates, including the LIBOR. In this regards, RBS:
has reviewed, or is in the process of reviewing, the fall-back
The FCA, which regulates the London Interbank Offered Rate (LIBOR)
in the UK, has announced that it will not compel panel banks to
contribute to LIBOR after 2021. The EU regulation on benchmark
interest rates imposed conditions under which only compliant
benchmarks may be used in new contracts after 2021.
In the UK, the Sterling Overnight Index Average (SONIA) has been
selected as the preferred near Risk Free Rate (RFR) for the sterling
markets. This rate is based on the overnight interest rates in wholesale
markets and can be compounded over a lending period, which allows
a term structure to be built.
Following this decision, the Bank of England announced that all
LIBOR-linked financial instruments should be transitioned to SONIA by
the end of 2021. Transition mechanisms have been established and
market participants are in the process of converting their LIBOR-linked
contracts into RFR contracts.
The transition to RFR means that, in line with the transition provisions
and to deal with the basis risk between the IBOR-based benchmark
rates and the RFRs, a spread had to be added to the preferred RFR to
maintain the original economics of the contract. This is dependent on
the tenor of the original IBOR based rate.
language for LIBOR-linked instruments, notably floating-rate notes,
capital instruments, LIBOR-referenced syndicated loans, asset-
backed securities and LIBOR-referenced bilateral loan
arrangements – in line with the recommendations of the Alternative
Reference Rates Committee, the International Swaps and
Derivatives Association and the International Organisation of
Securities Commissions and the requirements of the EU
benchmarks Regulation.
has been actively engaged in the discussions which led to the
transition relief being provided by the International Accounting
Standards Board (IASB) in relation to hedge accounting under both
IAS 39 – ‘Financial instruments – Recognition and Measurement’
(IAS 39) and IFRS 9 – ‘Financial Instruments’ (IFRS 9).
continues to engage with regulators and standard setters in relation
to the additional items for which relief is being considered, notably
accounting for modifications of financial instruments.
continues to liaise with regulators, standard setters, industry groups
and customers on other relevant matters as the transition to risk-
free rates progresses.
is in the process of adjusting its products, processes and
information systems to deal with the expected effects of the
discontinuation of LIBOR, notably the transition and calculation
rules.
∆
Based on our current assessment the chart and tables below provide an overview of the proportion of the key line items in the balance sheet
that are sensitive to IBOR-based rates and associated contractual maturities.
Derivative assets
17%
14%
26%
2%
41%
Loans to customers - AC
16%
3%
5%
Other financial liabilities
3%
4%
1%
14%
Subordinated liabilities
6%
4%
8%
76%
78%
82%
GBP LIBOR
USD LIBOR
EURO (IBOR)
Other IBOR related
Non-sensitive
0%
20%
40%
60%
80%
100%
The graph above excludes capital instuments as these are not sensitive to IBOR-based rates.
RBS – Annual Report and Accounts 2019
183
Capital and risk management
Market risk – other disclosures continued
The following tables show the balance sheet categories by average contractual maturity.
Average contractual maturity
Asset derivatives
< 1 year
1-2 years
3-5 years
> 5 years
5%
8%
9%
22%
3%
17%
16%
16%
GBP LIBOR
USD LIBOR
EURO (IBOR)
Loans to customers - amortised cost
< 1 year
1-2 years
3-5 years
> 5 years
Other financial liabilities
< 1 year
1-2 years
3-5 years
> 5 years
Subordinated liabilities
< 1 year
1-2 years
3-5 years
> 5 years
49%
62%
67%
5%
11%
—
—
—
—
—
—
—
20%
13%
11%
—
—
10%
5%
—
8%
—
—
26%
Other IBOR
Non Sensitive
Total
—
3%
2%
1%
1%
2%
2%
—
22%
20%
14%
2%
54%
—
2%
—
83%
51%
32%
32%
—
—
—
94%
66%
70%
81%
92%
4%
100%
98%
74%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
9%
21%
41%
29%
30%
23%
20%
1%
1%
—
—
6%
34%
—
—
—
Linkage to balance sheet
The table below analyses RBS’s balance sheet by non-trading and trading business.
Assets
Cash and balances at central banks
Trading assets
Reverse repos
Securities
Other
Derivatives
Settlement balances
Loans to banks
Loans to customers
Other financial assets
Other assets
Total assets
Liabilities
Bank deposits
Customer deposits
Settlement balances
Trading liabilities
Repos
Short positions
Other
Derivatives
Other financial liabilities
Subordinated liabilities
Other liabilities
Total liabilities
2019
Non-trading
business
£bn
Trading
business
£bn
77.8
0.2
—
—
0.2
2.4
0.6
10.5
326.7
61.5
14.9
494.6
20.5
369.0
0.6
0.1
—
—
0.1
4.1
44.2
10.0
9.7
458.2
0.1
76.5
24.1
30.1
22.3
147.6
3.8
0.2
0.2
—
—
228.4
—
0.2
3.5
73.8
27.9
21.2
24.7
142.8
1.0
—
—
221.3
Total
£bn
77.9
76.7
24.1
30.1
22.5
150.0
4.4
10.7
326.9
61.5
14.9
723.0
20.5
369.2
4.1
73.9
27.9
21.2
24.8
146.9
45.2
10.0
9.7
679.5
2018
Non-trading
business
£bn
Trading
business
£bn Primary risk factor
88.8
0.5
—
—
0.5
0.4
0.2
12.8
304.7
59.5
16.5
483.4
23.3
360.7
0.2
—
—
—
—
0.1
38.4
10.5
9.0
442.2
0.1 Interest rate
74.6
24.8 Interest rate
30.0 interest rate, credit spreads, equity
19.8 Interest rate
132.9 Interest rate, credit spreads, equity
2.7 Settlement
0.1 Interest rate
0.4 Interest rate
— Interest rate, credit spreads, equity
—
210.8
— Interest rate
0.2 Interest rate
2.9 Settlement
72.3
25.6 Interest rate
23.8 Interest rate, credit spreads
22.9 Interest rate
128.8 Interest rate, credit spreads
1.3 Interest rate
— Interest rate
—
205.5
Total
£bn
88.9
75.1
24.8
30.0
20.3
133.3
2.9
12.9
305.1
59.5
16.5
694.2
23.3
360.9
3.1
72.3
25.6
23.8
22.9
128.9
39.7
10.5
9.0
647.7
Notes:
(1) Non-trading businesses are entities that primarily have exposures that are not classified as trading book. For these exposures, with the exception of pension-
related activities, the main measurement methods are sensitivity analysis of net interest income, internal non-traded VaR and fair value calculations. For more
information refer to the non-traded market risk section above.
(2) Trading businesses are entities that primarily have exposures that are classified as trading book under regulatory rules. For these exposures, the main methods
used by RBS to measure market risk are detailed in the traded market risk section above.
(3) Foreign exchange risk affects all non-sterling denominated exposures on the balance sheet across trading and non-trading businesses, and therefore has not
been listed in the above tables.
RBS – Annual Report and Accounts 2019
184
Capital and risk management
Pension risk
Definition
Pension 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 £46.5 billion of assets and £39.7 billion of liabilities at 31
December 2019 (2018 – £43.8 billion of assets and £35.5 billion of
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 estimated to be 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 2019
During 2019, the Scheme Actuary’s annual funding update,
undertaken as at 31 December 2018, showed that the Main
section was fully funded on the basis used for formal triennial
funding valuations. This funding position was reached following the
£2 billion sponsor contribution made in 2018 while the Trustee
reduced the investment risk in the Main section and added further
protection against the potential impact of interest rate and inflation
movements on the Main section’s liabilities, as agreed through the
Memorandum of Understanding in 2018.
Risk governance
The Group Pension Committee is chaired by the Chief Financial
Officer. During 2019, it received its authority from the Group Executive
Committee and formulated RBS’s view of pension risk. The Group
Pension Committee is a key component of RBS’s approach to
managing pension risk and it reviews and monitors risk management,
asset and liability strategy and financing issues on behalf of RBS. It
also considers investment strategy proposals from the Trustee of the
Main section.
For further information on Risk governance, refer to page 113.
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 Group 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 is monitored by the Executive Risk Committee and the
Board Risk Committee by way of the quarterly Risk Management
Report.
RBS also undertakes stress tests 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
Following risk mitigation measures taken by the Trustee in recent
years, the Main section is now well protected against interest rate and
inflation risks and is being run on a low risk basis with relatively small
equity risk exposure. 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 potential impact of climate change is one of the factors considered
in managing the assets of the Main section. The Trustee monitors the
risk to its investments from changes in the global environment and
invests, where return justifies the risk, in sectors that reduce the
world’s reliance on fossil fuels, or that may otherwise promote
environmental benefits. Further details regarding the Main section
Trustee’s approach to managing climate change risk can be found in
its Responsible Ownership Policy.
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 26 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 2019
Policies were simplified and enhanced to reflect regulatory changes
and technical training delivered across the lines of defence.
Ongoing investment in regulatory technology.
Planning for LIBOR transition continued including an extended
SONIA pilot and further industry engagement.
Preparations continued for a number of Brexit outcomes.
Enhanced operational capabilities to cope with unprecedented
volumes of PPI mis-selling claims.
Risk governance
RBS defines appropriate standards of compliance and conduct and
ensures adherence to those standards through its risk management
framework. Relevant compliance and conduct matters are escalated
through Executive Risk Committee and Board Risk Committee.
RBS – Annual Report and Accounts 2019
185
Capital and risk management
Compliance & conduct risk continued
Risk appetite
Risk appetite for compliance and conduct risks is set at Board level.
Risk appetite statements articulate the levels of risk that legal entities,
businesses and functions work within when pursuing their strategic
objectives and business plans.
Risk controls
A range of controls is operated to ensure the business delivers good
customer outcomes and is conducted in accordance with legal and
regulatory requirements. 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
carried out 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 businesses and legal entities. Examples of mitigation include
consideration of customer needs in business and product planning,
targeted training, complaints management, as well as independent
monitoring 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 risk
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 2019
Enhanced financial crime risk assessment processes were
implemented to enable improved identification and mitigation of
financial crime risks.
Improvements were made to transaction monitoring alert
processes, including the use of risk-based artificial intelligence to
facilitate focus on activity of higher concern.
Financial crime policies were refreshed and updated to reflect
changes to the regulatory environment and industry best practice.
Risk governance
The Financial Crime Risk Executive Committee, which is chaired by
the Group Chief Financial Crime Risk Officer, is the principal financial
crime risk management forum. The committee reviews and, where
appropriate, escalates material financial crime risks and issues across
RBS to the Executive Risk Committee and the Board Risk Committee.
Risk appetite
There is no appetite to operate in an environment where systems and
controls do not enable the identification, assessment, monitoring,
management and mitigation of financial crime risk. RBS’s systems and
controls must be comprehensive and proportionate to the nature, scale
and complexity of its businesses. There is 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 RBS’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 RBS
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.
Climate-related financial risk
Definition
Climate-related financial risk is the threat of financial loss associated
with the impact of climate change and the political, economic and
environmental responses to it.
Sources of risk
Physical risks can arise from climate and weather-related events such
as heatwaves, droughts, floods, storms and sea level rises. They can
potentially result in financial losses, impairing asset values and the
creditworthiness of borrowers. RBS could be exposed to physical risks
directly by the impacts on its property portfolio and, indirectly, by the
impacts on the wider economy as well as impacts on the property and
business interests of its customers.
Transition risks can arise from the process of adjustment towards a
low-carbon economy. Changes in policy, technology and sentiment
could prompt reassessment of customers’ financial risk and may lead
to falls in the value of a large range of assets. RBS could be exposed
to transition risks directly through the costs of adaptation within
economic sectors and markets as well as supply chain disruption
leading to financial impacts on RBS and its customers. Potential
indirect effects include the erosion of RBS’s competitiveness,
profitability, or potential reputation damage.
Key developments in 2019
Climate-related financial risk was classified as a top risk.
A strategy has been developed to embed the financial risks
arising from climate change in RBS’s risk management
framework.
RBS developed a multi-phase, multi-year plan to build out
capabilities across governance, risk management, scenario
analysis & stress testing, and disclosures.
In Q4 2019, a pilot project was launched with a consortium of
partners to assess physical risk to elements of RBS’s retail and
commercial portfolios.
RBS – Annual Report and Accounts 2019
186
Capital and risk management
Climate-related financial risk continued
Risk governance
The RBS Board is responsible for addressing and overseeing the
financial risks from climate change within RBS’s overall business
strategy and risk appetite. The potential impact, likelihood and
preparedness of climate-related financial risk is reported quarterly to
the Board and Board Risk Committee.
The Chief Risk Officer is accountable for ensuring the financial risks
from climate change are captured in RBS’s risk management
framework and for ensuring RBS can measure, monitor, manage and
report those risks.
In H2 2019, RBS’s climate change working group was formalised into
an RBS-wide Climate Change Programme (GCCP), with an executive
steering group co-chaired by the Chief Risk Officer. The GCCP
steering group, which includes cross-franchise and functional
representation from RBS’s subsidiary entities, provides executive-level
support, advice and resource direction on climate change strategy,
including both risk management and climate-related business
opportunities.
The management of climate-related threats requires a strategic
approach that considers how decisions today affect future financial
risks. A Board-approved plan has been developed to integrate the
management of climate-related risks within the risk management
framework.
Risk appetite
As part of RBS’s strategy for managing climate-related financial risk, it
will be incorporated in the setting of appetite for all relevant risk
disciplines. If it is deemed to have a material impact on a particular risk
discipline then changes to relevant policies and procedures will be
made accordingly. Availability of data and the robustness of risk
measurement methodologies will influence the timing of any proposed
changes.
Risk monitoring and measurement
Plans have been developed to ensure climate-related financial risks
are considered in the tools made available to risk disciplines for risk
monitoring and measurement purposes.
A process is underway to identify where climate risk requires the use
of new key data elements, new risk metrics and enhancement of risk
methodologies. The outputs of the Bank of England’s 2021 biennial
exploratory scenario will be used to further enhance RBS’s capabilities
for the measurement of climate-related risks.
RBS Group continues to participate in several industry-wide initiatives
to develop consistent risk measurement methodologies. RBS Group is
a founding signatory of the United Nations Environment Programme
Finance Initiative (UNEP FI) Principles for Responsible Banking,
which aims to promote sustainable finance around the globe. Through
UNEP-FI, RBS Group is participating in three thematic modules
exploring how climate change will affect real estate, agriculture and
land use. It is also represented on the Climate Financial Risk Forum,
established by the PRA and FCA to shape the financial service
industry’s response to the challenges posed by climate risk.
For further detail, please see Strategic Report from page 37 to 41.
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.
Key developments in 2019
There was an improvement in the operational risk profile, indicated
by an improved control environment, with residual elements under
close management.
A focus remained on maintaining operational resilience and
ensuring preparedness for external threats and challenges such as
cyber attacks and Brexit.
The threat landscape continued to evolve during 2019 and RBS
invested in control enhancements to keep pace. This included new
anti-malware controls and improved security testing to quickly
detect and remediate vulnerabilities.
Progress was made in embedding an innovation framework to help
deliver innovative solutions to customers safely and at pace.
Following the introduction of ring-fencing and Operational
Continuity in Resolution requirements, a consistent approach was
introduced to identify and capture the risk associated with service
provision of service between its legal entities.
There was an increased focus on ensuring the security and
business strategies were aligned. Security is considered at the
outset of new business projects to ensure they are delivered in a
safe and secure manner. The number of critical customer
impacting incidents continued to reduce year-on-year. There were
14 criticality 1 incidents in 2019 compared to 19 in 2018.
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, reporting and escalating key concerns to Executive Risk
Committee and Board Risk Committee.
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.
RBS – Annual Report and Accounts 2019
187
Capital and risk management
Operational risk continued
The RBS-wide operational risk appetite statement encompasses the
full range of operational risks faced by its legal entities, businesses
and functions.
A subset of the most material risk appetite measures are
defined as board risk measures, which are those that align to strategy
and should the limit be breached, would impact on the ability to
achieve business plans and threaten stakeholder confidence.
Risk controls and mitigation
The Control Environment Certification (CEC) process is a half yearly
self-assessment by the CEOs of RBS’s principal businesses, functions
and legal entities, providing a consistent and comparable view on the
adequacy and effectiveness of the internal control environment.
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 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 106), and certain requirements of the UK Corporate
Governance Code.
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.
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 and also ensure risks are reassessed.
The process is designed to confirm that risks are effectively managed
in line with risk appetite. Controls are tested at the appropriate
frequency to verify that they remain fit-for-purpose and operate
effectively to reduce identified risks.
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 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.
Operational resilience
RBS manages and monitors operational resilience through its risk and
control assessments methodology. This is underpinned by setting and
monitoring risk indicators and performance metrics for key business
services. Progress continues on the response to regulator
expectations on operational resilience, with involvement in a number of
industry wide operational resilience forums. This enables a more
holistic view of RBS’s operational resilience risk profile and the pace of
ongoing innovation and change, internally and externally.
Progress also continues on the response to the EBA Guidelines on
Outsourcing Arrangements which were issued on 25 February 2019.
This ensures that increases in outsourcing (as seen across the
industry), to increase efficiency and further embrace new technologies,
is managed safely.
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.
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 2019 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 2019, events aligned to the clients, products and
business practices (CBPB) event category accounted for 94% of
RBS’s operational risk losses (2018 – 98%), with fraud accounting for
5% (2018 – 2%).
The decrease in CBPB reflected a fall in losses associated with legacy
conduct-related matters, with the increase in fraud primarily due to the
introduction of the Contingent Reimbursement Model in May 2019,
which resulted in RBS having increased liability for reimbursing
customers impacted by Authorised Push Payment scams.
Fraud
Clients, products and business practices
Execution, delivery and process management
Employment practices and workplace safety
Technology and infrastructure failures
£m
2019
51
1,026
7
1
1
1,086
Value of events
2018
33
1,581
5
—
—
1,619
Proportion
2019
5%
94%
1%
—
—
100%
2018
2%
98%
—
—
—
100%
Volume of events (1)
Proportion
2019
93%
3%
3%
1%
—
100%
2018
89%
6%
4%
1%
—
100%
Note:
(1) 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.
RBS – Annual Report and Accounts 2019
188
Capital and risk management
Model risk
Definition
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).
Reputational risk
Definition
Reputational risk is the threat 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
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 and impairment provisions. 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.
Governance
A governance framework is in place to ensure policies and processes
relating to models are appropriate and effective. Issues are escalated
to senior management, through the Model Risk Forum, and the
relevant business and function risk committees. The committees also
consider whether a model can be approved for use. Models used for
regulatory reporting may additionally require regulatory approval
before implementation.
Risk appetite
Model risk appetite is defined in the model risk appetite statement and
approved by the Board. Model owners and model users are
responsible for monitoring performance against appetite, reporting on
the model population and carrying out any necessary remediation for
positions outside appetite.
Risk controls
Validation for material models is conducted by an independent risk
function. Validation also ensures models are developed and
implemented appropriately and that their operational environment is fit
for purpose. Reviews of relevant models are carried out for new
models or amendments to existing models and as part of an ongoing
programme to assess model performance. 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.
Risk monitoring and measurement
The appropriateness of approved risk models is reassessed 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. The initial assessment considers 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.
Risk mitigation
Model risk is mitigated by ensuring adherence to policies and
procedures relating to the approval, validation and ongoing monitoring
of material models.
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. Unexpected external events can also pose a
reputational risk to RBS.
Key developments in 2019
Updated existing environmental, social and ethical risk acceptance
criteria to reflect changes in the wider external environment.
Enhanced existing escalation processes for businesses and
improved reputational risk management in functions.
Consideration of climate change issues within the reputational risk
framework.
Risk governance
A reputational risk policy supports reputational risk management
across RBS. Reputational risk committees review relevant issues at an
individual business or entity level, while the 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 RBS. 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 continuous improvement in the identification,
assessment and management of customers, transactions, products
and issues that present a material reputational risk.
Risk controls
Standards of conduct are in place across RBS requiring strict
adherence to policies, procedures and ways of working to ensure
business is transacted in a way that meets – or exceeds – stakeholder
expectations.
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. External, unexpected,
events that could cause reputational damage are generally mitigated
through RBS’s Top and Emerging Risks process.
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 26 on the consolidated
accounts.
RBS – Annual Report and Accounts 2019
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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
Net interest income
1
Non-interest income
2
Operating expenses
3
Segmental analysis
4
Pensions
5
Auditor’s remuneration
6
Tax
7
Earnings per share
8
Trading assets and liabilities
9
Derivatives
10
Financial instruments - classification
11
Financial instruments - valuation
12
Financial instruments - maturity analysis
13
Loan impairment provisions
14
Other financial assets
15
Intangible assets
16
Other assets
17
Other financial liabilities
18
Subordinated liabilities
19
Other liabilities
20
Share capital and other equity
21
Leases
22
Structured entities
23
Asset transfers
24
Capital resources
25
Memorandum items
26
Analysis of the net investment in business interests and intangible assets
27
Analysis of changes in financing during the year
28
Analysis of cash and cash equivalents
29
Directors’ and key management remuneration
30
Transactions with directors and key management
31
Related parties
32
33
Post balance sheet events
RBSG plc financial statements and notes
RBS – Annual Report and Accounts 2019
190
Independent auditors’ 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 2019. In our opinion:
the Group and Parent Company’s 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 2019 and of the Group’s profit for the year then ended;
the Group 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 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 2019;
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 2019;
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;
Related Notes 1 to 33 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’ explanation 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.
Key audit matters
Key audit matters are those matters that, in our professional judgement, 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.
RBS – Annual Report and Accounts 2019
191
Independent auditors’ 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 2019, the Group had reported
goodwill of £5.6 billion (2018: £5.6 billion) and
deferred tax assets of £0.7 billion (2018: £1.0
billion). The parent company has reported
investments in subsidiaries of £55.8 billion (2018:
£56.7 billion).
We evaluated the design and operating effectiveness of controls over the preparation
and review of the forecasts, the significant assumptions (such as discount rate and
long-term growth rate) used in the value in use model, inputs, calculations,
methodologies and judgements. This included testing controls over the macroeconomic
assumptions in addition to the overall revenue and cost projections, as well as the
precision applied to these.
With the support of our internal economic specialists, we tested whether
macroeconomic assumptions, including Brexit and other geopolitical considerations,
used in the Group’s forecasting process were reasonable by comparing to external
sources, as well as EY internally developed forecasts. Considering the recent
developments on Brexit and the continued uncertainty relating to the macroeconomic
environment and its consequential impact on the forecasts, we evaluated the adequacy
of 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 and include
the risk of management bias. 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.
Judgements and especially challenging, complex
and subjective assumptions that are difficult to
audit due to the forward-looking nature and
inherent uncertainties associated with such
assumptions include:
Revenue and cost forecasts which are also
impacted by the Group’s strategic review;
Assumptions used in the recoverability and
valuation assessments (discount rates, growth
rates, macroeconomic assumptions, etc.); and
Assumptions
regarding
economic
consequences of Brexit and other political
developments over an extended period.
the
Among other procedures, we assessed the reasonableness of revenue forecasts by
evaluating the underlying business strategies, comparing to expected market trends and
considering anticipated balance sheet growth.
We obtained an understanding of the strategic review of the Group and we considered
its expected impact on the forecasts and the extent to which decisions had been
factored into the forecasts, where appropriate, in accordance with the relevant
accounting standards. This included the assessment of any accounting impact for the
2019 reporting period (e.g. impairment of assets, hedge accounting and provisions) and
evaluation of the adequacy of the disclosure of events occurred after the reporting
period. We also inspected the findings from the review performed by management
including their own sensitivity analysis of the forecasts.
We evaluated how the discount rates and long-term growth rates used by management
compared to our ranges which were determined using 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 evaluating the
details of the underlying initiatives and how 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 assumptions such as discount rate and
long-term growth rate.
With the support of our taxation specialists, we assessed the recoverability of deferred
tax assets recognised considering management’s estimate of future taxable profits,
including an assessment of the time horizon used for the recoverability of losses and
other temporary differences.
Key observations communicated to the Group Audit Committee
We are satisfied that management methodologies, judgements and assumptions supporting the carrying value of goodwill, deferred tax
assets and, in the parent company accounts, investments in subsidiaries, were reasonable and in accordance with IFRS. We highlighted the
following matters to the Group Audit Committee:
The macroeconomic assumptions were materially consistent with independent base case forecasts;
While the long-term growth rate decreased in the year and the discount rate remained constant, both these assumptions were within our
reasonable range;
There is inherent uncertainty in predicting revenue and costs over the five-year forecast period, particularly with respect to the impact of a
continuing low interest rate environment, the outcome of Brexit and new trade agreements, the ability to achieve new strategic objectives
and planned cost reduction, the impact of regulatory and climate change developments, and the impact of competition and disruption in
banking business models over an extended period. These uncertainties also present challenges in achieving certain key performance
metrics and ratios such as net interest margin, the cost-to-income ratio and cost reduction targets;
The director`s assessment resulted in no impairment of RBSG`s investment in NWH, with no further headroom available, and an
impairment of RBSG’s investment in NWM which was consequently written down to its recoverable amount. The sensitivity analysis and
stress testing we inspected, and our independent procedures supported these assessments; and
We are satisfied that the disclosures appropriately reflect the sensitivity of the carrying value of investments in subsidiaries and goodwill
to certain reasonable alternative outcomes. As there are a number of other possible outcomes and it would be impracticable to estimate
the effect of all of them, the directors have disclosed the uncertainty that other possible outcomes within the next financial year could
require an adjustment to the carrying amount of investments in subsidiaries and goodwill.
Relevant references in the Annual Report and Accounts
Accounting policies
Note 7 and Note 16 on the Group financial statements and Note 6 on the Parent company financial statements.
RBS – Annual Report and Accounts 2019
192
Independent auditors’ report to the members of The Royal Bank of Scotland Group plc
Our response to the risk
Risk
Provisions for conduct, litigation and regulatory matters, customer remediation and claims
At 31 December 2019, the Group has reported
£2.7 billion (2018: £3.0 billion) of provisions for
liabilities and charges, including £1.9 billion
(2018: £2.0 billion) for conduct and litigation
claims, including Payment Protection Insurance
(PPI) as detailed in Note 26 of the financial
statements.
We evaluated the design and operating effectiveness of controls over the identification,
estimation, monitoring and disclosure of provisions related to legal and conduct matters
considering the potential for management override of controls. The controls tested,
among others, included those designed and operated by management to identify and
monitor claims, and to ensure the completeness and accuracy of data used to estimate
provisions.
The continued litigious environment and
heightened regulatory scrutiny give rise to a high
level of management judgement in determining
appropriate provisions and disclosures.
Management judgement is needed to determine
whether a present obligation exists, and a
provision should be recorded at 31 December
2019 in accordance with the accounting criteria
set out under IAS 37.
The most significant areas of judgement are:
Auditing provisions for Payment Protection
Insurance (PPI) is complex considering the
large number of complaints that remain
unprocessed following the significant number
of complaints received in the run up to the 29
August 2019 FCA deadline and considering
the judgement required by management to
estimate the portion of Information Requests
(“IR”s) and complaints that will ultimately
require PPI redress payments along with the
costs associated with doing so;
Auditing the adequacy of these provisions is
complex because judgement is involved in the
selection and use of assumptions in the
estimation of material provisions and there is
a risk of management bias in the
determination of whether an outflow in respect
of identified material conduct or legal matters
is probable and can be estimated reliably; and
Judgement is required to assess the
adequacy of disclosures of provision for
contingent liabilities given the underlying
estimation uncertainty in the provisions.
Among other procedures, we examined the relevant regulatory and legal
correspondence to assess developments in certain cases. For the cases which were
settled during the period, we compared the actual outflows with the provision that had
been recorded, considered whether further risk existed, and evaluated the level of
disclosures provided.
For the significant provisions made we assessed the provisioning methodology. For
example, 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 by comparing the actual settlement to the provision.
We also developed our own range of reasonable alternative estimates and compared
them to management’s provision.
Among other procedures, we assessed the appropriateness of the PPI provision
assumptions, which included the complaint conversion, uphold and average redress
rates assumed for unprocessed complaints. In assessing these assumptions, we
considered the Group’s recent experience, our own expectations, sensitivities, our
industry knowledge, the Group’s historical forecasting accuracy in this area and
correspondence during the year with regulators. We also tested the clerical accuracy of
the provision calculation. We also independently determined a range of future PPI
claims and compared it to management’s estimate.
For significant legal matters, we received confirmations from the Group’s external legal
counsel for significant matters to evaluate the existence of the obligation and
management’s estimate of the outflow at year-end. We assessed management’s
conclusion by evaluating the underlying information used in estimating the provisions
including consideration of alternate sources. We also conducted inquiries with internal
legal counsel over the existence of the legal obligations and related provision.
In evaluating the adequacy of these provisions, we considered regulatory
developments and, for significant 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 to assist us in evaluating the provision. We also analysed
historical relevant data and whether it supported current estimates. We performed a
test for unrecorded provisions to determine if there were cases not considered in the
provision estimate by assessing against external legal confirmations and discussing
with internal counsel.
We evaluated the disclosures provided on conduct, litigation, regulatory, customer
remediation and claims provisions to assess whether they complied with accounting
standards.
Key observations communicated to the Group Audit Committee
We are satisfied that provisions for conduct, litigation and regulatory matters, customer remediation and claims are reasonable and
recognised in accordance with IFRS. We highlighted the following matters to the Group Audit Committee:
The PPI provision remains sensitive to variations in key assumptions, the most significant of which are the conversion, uphold and
average redress rates assumed for complaints not yet examined. The director’s estimate was within our independent range of
reasonable outcomes based on reasonably possible alternative assumptions. We were satisfied with the PPI disclosures; and
We concurred with the recognition, measurement and level of disclosures of other conduct and litigation provisions. We did not identify
any material unrecorded provisions.
Relevant references in the Annual Report and Accounts
Report of the Group Audit Committee
Accounting policies
Note 20 on the financial statements
RBS – Annual Report and Accounts 2019
193
Independent auditors’ report to the members of The Royal Bank of Scotland Group plc
Risk
Impairment of loans
At 31 December 2019 the Group reported total
gross loans of £340.0 billion (2018: £320.3
billion) and £3.8 billion of expected credit loss
provisions (2018: £3.9 billion), which includes an
overlay of £170 million for economic uncertainty.
Management’s judgements and estimates which
are especially subjective to audit due to
significant uncertainty associated with the
assumptions used in the estimation 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, modelling
assumptions and data used to build and run
the models that calculate the ECL;
Inputs and assumptions used to estimate the
impact of multiple economic scenarios;
Completeness and valuation of post model
adjustments considering the risk of
management override; and
Measurement of individual provisions
including the assessment of multiple
scenarios.
We also considered the complexity of
management’s process to design and create
financial statement disclosures given their
granularity and complexity.
Our response to the risk
We evaluated the design and operating effectiveness of controls across the processes
relevant to ECL, including the judgements and estimates noted involving specialists to
assist us in performing our procedures where appropriate. These controls, among
others, included controls over the allocation of assets into stages including
management’s monitoring of stage effectiveness, model monitoring including the need
for post model adjustments, model validation, data accuracy and completeness, credit
monitoring, multiple economic scenarios, individual provisions and production of journal
entries and disclosures.
Among other procedures, we observed the executive finance and risk committee
meetings 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 by considering the overall credit quality of
the Group’s portfolios, risk profile, credit risk management practices and the
macroeconomic environment by considering trends in the economy and industries to
which the Group is exposed.
We evaluated the criteria used to allocate a financial asset to stage 1, 2 or 3 in
accordance with IFRS 9; this included peer benchmarking to assess staging levels. We
recalculated the assets in stage 1, 2 and 3 to assess if they were allocated to the
appropriate stage and performed sensitivity analysis to assess the impact of different
criteria on the ECL.
We involved modelling specialists to assist us to test the assumptions, inputs and
formulae used in a sample of ECL models. This included assessing the
appropriateness of model design and formulae used, alternative modelling techniques,
refinements made to models in the second year of IFRS 9, and recalculating the
Probability of Default, Loss Given Default and Exposure at Default, and model
implementation for a sample of models. To evaluate data quality, we agreed ECL
calculation data points to source systems. To test credit monitoring, we recalculated the
risk ratings for a sample of performing loans.
We involved economic specialists to assist us to evaluate the base case and alternative
economic scenarios, including evaluating probability weights and comparing to other
scenarios from a variety of external sources, as well as EY internally developed
forecasts. This included assessing whether forecasted macroeconomic variables were
appropriate, such as GDP, unemployment rate, interest rates and the House Price
Index. With the support of our modelling specialists we assessed the correlation and
the overall impact of the macroeconomic factors to the ECL.
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 scenarios used and calculation of the overlay in response to economic
uncertainty.
We involved valuation specialists to recalculate a sample of individual provisions
including the alternative scenarios and evaluating probability weights assigned. The
sample was based on a number of factors, including higher risk sectors and materiality.
We assessed the adequacy of disclosures for compliance with the accounting
standards and regulatory considerations.
Key observations communicated to the Group Audit Committee
We are satisfied that provisions for the impairment of loans were reasonable and recognised in accordance with IFRS 9. We highlighted the
following matters to the Group Audit Committee:
Overall provision levels were reasonable which also considered available peer information and our understanding of the credit
environment;
The economic uncertainty overlay was within our independently established reasonable range;
Our testing of models and model assumptions identified some instances of over and under estimation. We aggregated these differences
and were satisfied that the overall estimate recorded was reasonable;
We recalculated the staging of all retail and wholesale exposures in material portfolios and noted no material differences. We also
performed sensitivity analysis on the staging criteria and noted that substantial changes would be needed to the criteria to result in a
material difference; and
Considerable improvements were made to the control environment throughout the year, with previously identified control deficiencies
remediated by year-end. We also performed additional testing in response to those deficiencies.
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
RBS – Annual Report and Accounts 2019
194
Independent auditors’ report to the members of The Royal Bank of Scotland Group plc
Risk
Valuation of financial instruments with higher risk characteristics including related income from trading activities
At 31 December 2019 the Group reported level 3
assets of £2.6 billion (2018: £3.3 billion) and level
3 liabilities of £1.3 billion (2018: £2.0 billion).
Our response to the risk
We evaluated the design and operating effectiveness of controls relating to financial
instrument valuation and related measurement including independent price verification,
model review and approval, collateral management, and income statement analysis and
reporting.
Among other procedures, we involved our financial instrument valuation and modelling
specialists to assist us in performing procedures including the following:
Testing complex model-dependent valuations by performing independent
calculations to assess the appropriateness of models and the adequacy of
assumptions and inputs used by the Group;
Independently re-pricing instruments that had been valued using illiquid pricing
inputs, using alternative pricing sources to evaluate management’s valuation; and
Comparing the methodology used for fair value adjustments to current market
practice. We re-valued a sample of counterparty level FVA and CVAs, compared
funding spreads to third party data and independently challenged illiquid CVA inputs.
Where differences between our independent valuation and management’s valuation
were outside our thresholds, we performed additional testing over each variance to
assess the valuation of financial instruments with higher risk characteristics including
related income from trading activities.
We also performed back-testing analysis of recent trade activity to evaluate the drivers
of significant differences between book value and trade value and to assess the impact
on the fair value of similar instruments within the portfolio. We considered the
implications of changes to the business on the valuation of financial instruments in
accordance with the relevant accounting standards.
The valuation of financial instruments with higher
risk characteristics involves both significant
judgement and the risk of inappropriate revenue
recognition through incorrect pricing as outlined
below. 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.
Management’s estimates which required
significant auditor judgement include:
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 and
variable notional amounts;
Pricing inputs and calibrations for illiquid
instruments, including rarely traded debt
securities. Additionally, derivative instruments
whose valuation is dependent upon discount
rates associated with complex collateral
arrangements are complex; and
Certain 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.
Key observations communicated to the Group Audit Committee
We are satisfied that the assumptions used by management to reflect 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 Group Audit
Committee:
Complex-model dependent valuations were appropriate based on the output of our independent re-valuations, analysis of trade activity
and peer benchmarking;
The fair value estimates of hard-to-price portfolios appropriately reflected pricing information available at 31 December 2019; 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, analysis of market data and peer benchmarking.
Relevant references in the Annual Report and Accounts
Report of the Group Audit Committee
Accounting policies
Note 12 on the financial statements
RBS – Annual Report and Accounts 2019
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Independent auditors’ report to the members of The Royal Bank of Scotland Group plc
Risk
Our response to the risk
We evaluated the design and operating effectiveness of controls over the recognition of
FX reserves including management’s determination that the transaction met the
applicable criteria for disposals and the calculations of the amounts reclassified into
profit and loss and analytical review performed by management.
Among other procedures, we assessed the Group accounting policy on foreign currency
translation differences against IAS 21 and assessed management’s accounting basis
for the reclassification of FX reserves from equity to profit and loss. More specifically,
our assessment focused on the basis for the 2019 transactions being a trigger for
reclassification under IAS21 and conversely why historical transactions would not have
been trigger events.
In addition, we assessed the determination of the amount of FX reserve being recycled
for these transactions by independently recalculating the historical reserves based on all
information available.
Recycling of foreign exchange reserve
Under IAS21, disposals or partial disposals of
interests in foreign operations may trigger the
reclassification of foreign currency translation
differences that have been accumulated in equity
reserves (“FX reserves”) to profit and loss. In the
year ended 31 December 2019, the Group
reclassified £1,480m from FX reserves to profit
and loss.
In 2019, a merger between Alawwal and SABB
and the liquidation of RFS Holdings BV both
triggered reclassification of FX reserves. The
recycling amounts were calculated based on the
proportion of Group FX reserves which were
attributable to those investments. Auditing these
judgements was involved complex auditor
judgement because of the judgements involved in
assessing the timing and amount of recognition.
The accounting judgements were:
Whether these 2019 transactions met the
concept of disposal or partial disposals under
IAS 21 and were therefore appropriate trigger
events for reclassifying FX reserves to profit
and loss;
Whether the Group’s accounting approach
has been consistently applied over the years,
by comparison to historical distributions made
by RFS Holdings BV; and
Whether the overall FX reserves recorded
against the relevant investments were
supportable.
Key observations communicated to the Group Audit Committee
We are satisfied that the accounting treatment of foreign currency translation differences and the recycling of FX reserves in connection with
the above transactions is reasonable and in accordance with IFRS. We reported the following to the Group Audit Committee:
There is significant judgement in the interpretation of the requirements of IAS21 for the recycling of FX reserves; and
Considerable improvements were made to the control environment throughout the year, with previously identified control deficiencies
remediated by year-end. We also performed additional testing over FX reserves in response to those deficiencies.
Relevant references in the Annual Report and Accounts
Report of the Group Audit Committee
Accounting policies
RBS – Annual Report and Accounts 2019
196
Independent auditors’ report to the members of The Royal Bank of Scotland Group plc
Risk
Pension valuation and net pension balance
The Group operates a number of defined benefit
schemes which in aggregate are significant in the
context of the overall balance sheet. At 31
December 2019, the Group reported a net
pension asset of £495 million (2018: £355 million)
comprising £614 million of schemes in surplus
and £119 million of schemes in deficit (2018:
£520 million and £165 million respectively). The
net pension asset is sensitive to changes in the
key judgements and estimates, which include:
Actuarial assumptions and inputs including
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 due to the court
ruling in respect of Guaranteed Minimum
Pensions (GMP).
Our response to the risk
We evaluated the design and operating effectiveness of 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.
We involved actuarial specialists to evaluate the actuarial assumptions by comparing
them to third party sources obtained independently by us and market practice. We
assessed 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.
We involved valuation specialists to assess 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 and debt instruments, derivative financial
instruments and illiquid assets.
We involved actuarial specialists to test 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 assumptions and sensitivities disclosed.
Key observations communicated to the Group Audit Committee
We are satisfied that the valuation and disclosure of the net pension balance 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, longevity and pension payments concluded that
assumptions tested were within a reasonable range;
No material issues were identified through our independent valuation testing for a sample of pension assets; and
Management’s estimate of the impact of the GMP liability and Augmentation Cap was materially consistent with our independent estimate
using our own model.
Relevant references in the Annual Report and Accounts
Accounting policies
Note 5 on the financial statements
RBS – Annual Report and Accounts 2019
197
Independent auditors’ report to the members of The Royal Bank of Scotland Group plc
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.
This risk is also impacted by the greater
dependency on third-parties, increasing use of
cloud platforms, decommissioning of legacy
systems, and migration to new systems. Such
controls contribute to mitigating the risk of
potential fraud or errors as a result of changes
to applications and data.
Our response to the risk
We evaluated the design and operating effectiveness of IT controls over the
applications, operating systems and databases that are relevant to financial reporting.
We assessed automated controls within business processes and the reliability of
relevant reports used as part of a manual control. This included assessing the integrity
of system interfaces, the completeness and accuracy of data feeds, automated
calculations and specific input controls.
We tested system migrations and related technology changes (including where relevant
new systems) resulting from transformation programmes that were material to financial
statement reporting. This included verifying the completeness of information transferred
to new systems as well as testing the controls in place for both the migration and the
new system.
We tested user access by assessing the controls in place for in-scope applications and
verifying the addition and removal of users.
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
including the general ledger and human
resource system migrations;
IT operational controls;
IT application or IT dependent controls; and
Evaluation of IT control environment at third
party service providers.
We identified an increasing number of systems outsourced to third party service
providers. For these systems, we tested IT general controls through evaluating the
relevant Service Organisation Controls reports produced by third parties by assessing
the timing of the reporting and the controls tested. We also tested required
complementary controls performed by management.
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.
Key observations communicated to the Group Audit Committee
We are satisfied that IT controls impacting financial reporting are designed and operating effectively. The following matters were reported to
the Group Audit Committee:
We have seen a reduction in the number of IT control deficiencies identified compared to prior year;
Improvements were made to user access management controls, where we noted the consolidation of access processes. Control
deficiencies previously identified around access management, were remediated by year end or mitigated by compensating controls. We
also performed additional testing in response to deficiencies identified, where required;
Where IT transformation or change occurred within the year, particularly around outsourcing and the use of third parties, we updated our
audit approach accordingly and tested relevant controls. Where we identified control deficiencies these were remediated by year end or
mitigated by compensating controls; and
As the Bank continues to increase the use of third, and 4th parties, (including cloud service providers), focus on the identification of and
accountability for, internal controls over financial reporting, will be essential.
In the prior year, our auditor’s report included key audit matters in relation to the financial impact of structural reform as it was the year of
implementation. We did not consider this to be a key audit matter in the current year.
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 consolidated 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.
In the current year, we have updated our scoping strategy to align with the new legal entity structure of the Group following implementation of
the ICB ring-fencing rules. Consequently, we have performed our scoping based on legal entities as opposed to franchises and functions as
done in prior year.
In assessing the risk of material misstatement to the Group financial statements, and to ensure we had adequate quantitative coverage of
significant accounts in the financial statements, of the five reporting components of the Group, we selected three components, which represent
the principal reporting legal entities within the Group.
The scoping for the current year is as follows:
Component
NatWest Holdings
NatWest Markets
RBS International
Scope
Key locations
Full
Full
Specific Channel Islands
United Kingdom
United Kingdom, United States, and Singapore
RBS – Annual Report and Accounts 2019
198
Independent auditors’ report to the members of The Royal Bank of Scotland Group plc
The table below illustrates the coverage obtained from the work performed by our audit teams. We considered total assets, total equity and total
income to verify we had appropriate overall coverage on the income statement.
Total assets
Total equity
Total income
Full scope (1)
Specific scope (2)
Other procedures (3)
Total
95%
91%
93%
5%
8%
6%
-
1%
1%
100%
100%
100%
Notes:
(1) Full scope: audit procedures on all significant accounts
(2) Specific scope: audit procedures on selected accounts
(3) Other procedures: considered in analytical procedures
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.
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.
Materiality
The magnitude of an 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 £160 million (2018 materiality: £210 million), which is 5% of adjusted profit
before tax of the Group, which removes the disproportionate effect of certain matters, and 0.3% of equity of the parent company. The basis used
for Group materiality is consistent with the basis from the prior year, 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 undetected misstatements exceeds 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 £80 million (2018: £100 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 £30 million and £80 million.
Reporting threshold
An amount below which identified misstatements are considered as being clearly trivial.
We agreed with the Group Audit Committee that we would report to them all uncorrected audit misstatements in excess of £8 million (2018: £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 measures of materiality discussed above and in light of other relevant
qualitative considerations in forming our opinion.
RBS – Annual Report and Accounts 2019
199
Independent auditors’ report to the members of The Royal Bank of Scotland Group plc
Other information
The other information comprises the information included in the Annual Report and Accounts including the Strategic Report, Business Review,
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,
Report of the Directors, Capital and Risk Management, Non-IFRS financial measures, Risk Factors, Material Contracts, Shareholder
Information, and Forward Looking Statements, 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.
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.
RBS – Annual Report and Accounts 2019
200
Independent auditors’ report to the members of The Royal Bank of Scotland Group plc
Explanation as to what extent the audit was considered capable of detecting irregularities, including fraud
The objectives of our audit, in respect to fraud, are; to identify and assess the risks of material misstatement of the financial statements due to
fraud; to obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement due to fraud, through designing and
implementing appropriate responses; and to respond appropriately to fraud or suspected fraud identified during the audit. However, the primary
responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity and management.
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 4 years, covering periods from our appointment through 31
December 2019.
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, United Kingdom
13 February 2020
Notes:
(1)
(2)
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.
RBS – Annual Report and Accounts 2019
201
Consolidated income statement for the year ended 31 December 2019
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
Impairment of other intangible assets
Operating expenses
Profit before impairment losses
Impairment losses
Operating profit before tax
Tax charge
Profit for the year
Attributable to:
Ordinary shareholders
Preference shareholders
Paid-in equity holders
Non-controlling interests
Earnings per ordinary share
Earnings per ordinary share - fully diluted
Note
1
2
3
14
7
8
8
2019
£m
11,375
(3,328)
8,047
3,359
(848)
932
—
2,763
6,206
14,253
(4,018)
(1,259)
(2,828)
(1,176)
(44)
(9,325)
4,928
(696)
4,232
(432)
3,800
3,133
39
367
261
3,800
26.0p
25.9p
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
(1,208)
2,151
1,622
182
355
(8)
2,151
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
(731)
1,508
752
234
487
35
1,508
6.3p
6.3p
*Restated for IAS12 ‘income taxes’ refer to accounting policy 1, Other amendments to IFRS, for further details.
The accompanying notes on pages 213 to 263, the accounting policies on pages 208 to 212 and the audited sections of the Business review:
Capital and risk management on pages 112 to 189 form an integral part of these financial statements.
RBS – Annual Report and Accounts 2019
202
Consolidated statement of comprehensive income for the year ended 31 December 2019
Profit for the year
Items that do not qualify for reclassification
Remeasurement of retirement benefit schemes
- contributions in preparation for ring-fencing (1)
- other movements
(Loss)/profit on fair value of credit in financial liabilities designated at fair value
through profit or loss due to own credit risk
FVOCI financial assets
Tax
Note
5
Items that do qualify for reclassification
FVOCI financial assets
Cash flow hedges
Currency translation
Tax
Other comprehensive loss after tax
Total comprehensive income for the year
Attributable to:
Ordinary shareholders
Preference shareholders
Paid-in equity holders
Non-controlling interests
2019
£m
3,800
—
(142)
(189)
(71)
28
(374)
(14)
294
(1,836)
(170)
(1,726)
(2,100)
1,700
1,044
39
367
250
1,700
2018*
£m
2,151
(2,053)
86
200
48
502
(1,217)
7
(581)
310
189
(75)
(1,292)
859
305
182
355
17
859
2017*
£m
1,508
—
90
(126)
—
(10)
(46)
26
(1,069)
100
256
(687)
(733)
775
2
234
487
52
775
*Restated for IAS12 ‘income taxes’ refer to accounting policy 1, Other amendments to IFRS, for further details.
Note:
(1) On 17 April 2018 RBS Group agreed a Memorandum of Understanding (MoU) with the Trustees of the RBS Group Pension Fund in connection with the
requirements of ring-fencing. NWM Plc could not continue to be a participant in the Main section and separate arrangements were required for its
employees. Under the MoU, NWB Plc made a contribution of £2 billion on 9 October 2018 to strengthen funding of the Main section in recognition of the
changes in covenant. Also under the MoU, NWM Plc made a £53 million contribution to the NWM section in Q1 2019.
The accompanying notes on pages 213 to 263, the accounting policies on pages 208 to 212 and the audited sections of the Business review:
Capital and risk management on pages 112 to 189 form an integral part of these financial statements
RBS – Annual Report and Accounts 2019
203
Consolidated balance sheet as at 31 December 2019
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
2019
£m
2018
£m
11
9
10
11
11
15
16
17
11
11
9
10
18
19
20
21
77,858
76,745
150,029
4,387
10,689
326,947
4,269
57,183
61,452
6,622
8,310
723,039
20,493
369,247
4,069
73,949
146,879
45,220
9,979
9,647
679,483
38,993
4,554
43,547
9
43,556
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
723,039
694,235
The accompanying notes on pages 213 to 263, the accounting policies on pages 208 to 212 and the audited sections of the Business review:
Capital and risk management on pages 112 to 189 form an integral part of these financial statements
The accounts were approved by the Board of directors on 13 February 2020 and signed on its behalf by:
Howard Davies
Chairman
Alison Rose-Slade
Group Chief Executive Officer
Katie Murray
Group Chief Financial Officer Registered No. SC45551
The Royal Bank of Scotland Group plc
RBS – Annual Report and Accounts 2019
204
Consolidated statement of changes in equity for the year ended 31 December 2019
Called-up share capital - at 1 January
Ordinary shares issued
At 31 December
Paid-in equity - at 1 January
Redeemed/reclassified (1)
At 31 December
Share premium account - at 1 January
Ordinary shares issued
Redemption of debt preference shares (2)
Capital reduction (3)
At 31 December
2019
£m
12,049
45
12,094
4,058
—
4,058
1,027
67
—
—
1,094
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
10,881
FVOCI reserve - at 1 January (4)
Implementation of IFRS 9 on 1 January 2018
Unrealised (losses)/gains
Realised gains
Tax
At 31 December
Cash flow hedging reserve - at 1 January
Amount recognised in equity (5)
Amount transferred from equity to earnings (6)
Tax
At 31 December (7)
Foreign exchange reserve - at 1 January
Retranslation of net assets
Foreign currency gains/(losses) on hedges of net assets
Tax
Recycled to profit or loss on disposal of businesses (8)
At 31 December (7)
Capital redemption reserve - at 1 January
Capital reduction (3)
At 31 December
Retained earnings - at 1 January
Implementation of IFRS 9 on 1 January 2018 (4)
Implementation of IFRS 16 on 1 January 2019 (9)
Profit attributable to ordinary shareholders and other equity owners
Equity preference dividends paid
Paid-in equity dividends paid
Ordinary dividends paid
Capital reduction (3)
Redemption of debt preference shares (2)
Redemption of equity preference shares (10)
Redemption/reclassification of paid-in equity
Realised gains in period on FVOCI equity shares
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
*Restated for IAS12 ‘income taxes’ refer to accounting policy 1, Other amendments to IFRS, for further details.
SOCIE
343
—
(107)
(90)
(8)
138
(191)
573
(279)
(68)
35
3,278
(428)
83
(110)
(1,480)
1,343
—
—
—
14,312
—
(187)
3,539
(39)
(367)
(3,018)
—
—
—
—
112
—
(142)
24
(189)
20
(6)
(113)
13,946
255
34
97
(42)
(1)
343
227
(63)
(518)
163
(191)
2,970
195
(33)
23
123
3,278
—
—
—
17,130
(105)
—
2,159
(182)
(355)
(241)
—
—
(2,805)
—
6
(2,053)
86
539
200
(33)
(2)
(32)
14,312
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)
—
—
1,473
(234)
(487)
—
30,331
(748)
—
(196)
—
—
90
(28)
(126)
18
(5)
(22)
17,130
RBS – Annual Report and Accounts 2019
205
Consolidated statement of changes in equity for the year ended 31 December 2019
Own shares held - at 1 January
Shares issued under employee share schemes
Own shares acquired
At 31 December
Owners’ equity at 31 December
Non-controlling interests - at 1 January
Currency translation adjustments and other movements
Profit/(loss) attributable to non-controlling interests
Dividends paid
Equity raised (12)
Equity withdrawn and disposals (13)
At 31 December
Total equity at 31 December
Total equity is attributable to:
Ordinary shareholders
Preference shareholders
Paid-in equity holders
Non-controlling interests
2019
£m
(21)
39
(60)
(42)
43,547
754
(11)
261
(5)
45
(1,035)
9
2018*
£m
(43)
87
(65)
(21)
45,736
763
25
(8)
(5)
—
(21)
754
2017*
£m
(132)
161
(72)
(43)
48,330
795
17
35
(25)
—
(59)
763
43,556
46,490
49,093
38,993
496
4,058
9
43,556
41,182
496
4,058
754
46,490
41,707
2,565
4,058
763
49,093
*Restated for IAS12 ‘income taxes’ refer to accounting policy 1, Other amendments to IFRS, for further details.
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) and
the call of RBS Capital Trust D in March 2017 (redeemed in June 2017).
(2) 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.
(3) On 15 June 2017, the Court of Session approved a reduction of RBSG plc’s capital so that the amounts which stood to the credit of share premium account and
capital redemption reserve were transferred to retained earnings.
(4) Years ended 31 December 2019 and 31 December 2018 prepared under IFRS 9. Year ended 31 December 2017 prepared under IAS 39.
(5) The amount credited to the cash flow hedging reserve comprised £585 million (2018 - £166 million debit) in relation to interest rate hedges lesser debit of £12
million (2018 - £103 million credit) in relation to foreign exchange hedges.
(6) The cash flow hedging reserve was reduced by £243 million in relation to interest rate hedges (2018 - £493 million) credited net interest income and reduced by
£36 million (2018 - £25 million) in relation to foreign exchange hedging which was credited to net interest income.
(7) The hedging element of the cash flow hedging reserve and foreign exchange reserve relates mainly to de-designated hedges.
(8)
Includes £290 million recycled on completion of the Alawwal bank merger in June 2019 (with a further £48m shown in Tax), £1,102 million recycled on the
subsequent liquidation of RFS Holdings B.V. (with a further £65m shown in Tax), and £67m attributable to the capital repayment by UBI DAC. The Alawwal
bank merger resulted in the derecognition of the associate investment in Alawwal bank and recognition of a new investment in SABB held at FVOCI. The
recycling gains arising from the liquidation of RFS Holdings B.V. and capital repayment by UBIDAC, have been calculated using the step-by-step method in
IFRIC 16 ‘Hedges of a Net Investment in a Foreign Operation’ and by reference to the absolute reduction in ownership interest respectively. Amount recycled
also includes £2,661 million related with historical hedge relationship taken to non interest income.
(9) Year ended 31 December 2019 prepared under IFRS 16 Leases. Years ended 31 December 2018 and 31 December 2017 prepared under IAS 17 Leases.
Refer to Note 22 for further information on the impact of IFRS 16 implementation.
(10) During 2018, non-cumulative US dollar, Euro and Sterling preference shares were redeemed.
(11) On 17 April 2018 RBS Group agreed a Memorandum of Understanding (MoU) with the Trustees of the RBS Group Pension Fund in connection with the
requirements of ring-fencing. NWM Plc could not continue to be a participant in the Main section and separate arrangements were required for its employees.
Under the MoU, NWB Plc made a contribution of £2 billion on 9 October 2018 to strengthen funding of the Main section in recognition of the changes in
covenant Also under the MoU, NWM Plc made a £53 million contribution to the NWM section in Q1 2019.
(12) Capital injection from RFS Holdings B.V. consortium members.
(13) Distribution to RFS Holdings B.V. consortium members on completion of the Alawwal bank merger.
The accompanying notes on pages 213 to 263, the accounting policies on pages 208 to 212 and the audited sections of the Business review:
Capital and risk management on pages 112 to 189 form an integral part of these financial statements
RBS – Annual Report and Accounts 2019
206
Consolidated cash flow statement for the year ended 31 December 2019
Note
2019
£m
2018
£m
2017
£m
Cash flows from operating activities
Operating profit before tax
Interest on subordinated liabilities
Interest on treasury bills and debt securities
Impairment losses /(releases) on loans to customers
Profit on sale of subsidiaries and associates
Loss/(gain) on sale of other financial assets
(Gain)/loss on sale of property, plant and equipment
Defined benefit pension schemes
Charges and releases on provisions
Depreciation, amortisation and impairment of assets
Change in fair value taken to profit or loss of subordinated liabilities
Change in fair value taken to profit or loss of MRELs
Interest on MRELs
Loss on redemption of own debt
Change in fair value taken to profit or loss of other financial assets
Elimination of foreign exchange differences
Other non-cash items
Net cash flows from trading activities
Decrease/(increase) in net loans to banks
(Increase)/decrease in net loans to customers
(Increase)/decrease in trading assets
(Increase)/decrease in derivative assets
(Increase)/decrease in settlement balance assets
Decrease/(increase) in other financial assets
Decrease/(increase) in other assets
(Decrease)/increase in banks deposits
Increase/(decrease) in customer deposits
Increase/(decrease) in trading liabilities
Increase/(decrease) in derivative liabilities
Increase/(decrease) in settlement balance liabilities
Increase/(decrease) in other financial liabilities
(Decrease)/increase 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 other financial assets
Purchase of other financial assets
Interest on other financial assets
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
Redemption of other equity instruments
Own shares disposed/(acquired)
Issue of subordinated liabilities
Redemption of subordinated liabilities
Redemption of debt preference shares
Service cost of other equity instruments
Interest on subordinated liabilities
Issuance of MRELs
Redemption and maturity of MRELs
Interest on MRELs
Net cash flows from financing activities (2)
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
4,232
483
(854)
366
(2,224)
22
(58)
188
1,243
1,489
317
539
645
—
(280)
949
(272)
6,785
3,563
(22,312)
(659)
(16,680)
(1,459)
924
707
(2,804)
8,333
1,599
17,982
1,003
2,871
(2,677)
(9,609)
(278)
(3,102)
19,990
(21,345)
854
428
(559)
(84)
(716)
17
—
(21)
577
(1,108)
—
(3,429)
(510)
3,640
(1,285)
(428)
(2,547)
(1,983)
3,359
461
(534)
(496)
—
(34)
(50)
308
1,333
768
(243)
(59)
415
—
585
415
1,872
8,100
(1,923)
4,675
7,543
27,494
(411)
518
541
(7,099)
(1,064)
(9,630)
(25,609)
222
2,366
(12,080)
(14,457)
(466)
(6,823)
11,832
(19,516)
534
264
(619)
(489)
(7,994)
144
(2,826)
22
—
(2,258)
—
(803)
(566)
6,996
—
(237)
472
676
2,239
572
(330)
(647)
(155)
(226)
(75)
375
1,930
837
(144)
(167)
244
7
—
(832)
(9)
3,619
(206)
2,672
—
86,138
3,009
(1,319)
(31)
8,341
17,108
—
(81,969)
5,649
956
(7,735)
32,613
(520)
35,712
11,656
(17,212)
330
405
(1,132)
(199)
(6,152)
306
(779)
89
—
(5,747)
(748)
(612)
(717)
3,612
(774)
(139)
(5,509)
(16)
27
(8,348)
108,936
100,588
(13,669)
122,605
108,936
24,035
98,570
122,605
29
Notes:
(1)
Includes interest received of £11,245 million (2018 - £10,927 million, 2017 - £10,946 million) and interest paid of £3,318 million (2018 - £2,511 million,
2017 - £2,300 million).
(2) 2018 has been re-presented to align the balance sheet classification. MREL was previously presented in Operating activities and is now presented in
Financing activities.
The accompanying notes on pages 213 to 263, the accounting policies on pages 208 to 212 and the audited sections of the Business review:
Capital and risk management on pages 112 to 189 form an integral part of these financial statements
RBS – Annual Report and Accounts 2019
207
Accounting policies
1. Presentation of accounts
The accounts, set out on pages 202 to 276,
including these accounting policies on pages
208 to 212, and the audited sections of the
Financial review: Capital and risk
management on pages 112 to 189, are
prepared on a going concern basis (see the
Report of the directors, page 108) 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 significant accounting
policies and related judgments are set out
below.
The Royal Bank of Scotland Group plc (RBSG
plc) is incorporated in the UK and registered
in Scotland. Its accounts are presented in
accordance with the Companies Act 2006.
The accounts are presented in the functional
currency, pounds sterling.
With the exception of certain financial
instruments as described in Accounting
policies 12 and 20 and investment property,
the accounts are presented on a historical
cost basis.
Accounting policy changes effective 1
January 2019
Adoption of IFRS 16
Refer to Accounting policy 9 and Note 22 for
details of the adoption of IFRS 16.
Other amendments to IFRS
IAS 12 ‘Income taxes’ was revised with effect
from 1 January 2019. The income statement
now includes any tax relief on the servicing
cost of instruments classified as equity. Relief
of £67 million was recognised in the statement
of changes in equity for the year ended 31
December 2018; this and prior years have
been restated.
IAS 19 ‘Employee Benefits’ was amended by
the IASB in February 2018 to clarify the need
to update assumptions whenever there is a
plan amendment, curtailment or settlement.
This amendment has not affected the
accounts.
Presentation of interest in suspense
recoveries - In March 2019 the
IFRS Interpretations Committee (IFRIC)
issued an agenda decision on the
presentation of unrecognised interest when a
credit-impaired financial asset (commonly
referred to as a ‘Stage 3’ financial asset) is
subsequently paid in full or is no longer credit-
impaired. This concluded that the difference
arising from the additional interest recovered
must be recognised as a reversal of
impairment rather than within interest
revenue. This affects both recognition and the
reversal of the expected credit loss (ECL)
allowance.
RBS Group changed its accounting policy in
line with the IFRIC decision. Hence, the gross
carrying amount of the financial assets within
the scope of the provisions of the decision, as
well as the associated ECL allowance on the
balance sheet have been adjusted by £460
million and the comparative period restated by
£455 million with no effect on equity. The
coverage ratio for the current and comparative
periods have been adjusted and restated
accordingly.
In addition, until 1 January 2019, interest in
suspense recoveries were presented as a
component of interest receivable within Net
interest income. From 1 January 2019 interest
in suspense recoveries are presented within
Impairment losses and amounted to £64
million for the year ended 31 December 2019.
Comparatives have not been restated on the
grounds of materiality.
IAS 39 ‘Financial Instruments: Recognition
and Measurement’, IFRS 9 ‘Financial
Instruments’ and IFRS 7 ‘Financial
Instruments: Disclosures’ - In September
2019, the IASB published amendments to
address the issues arising from the
replacement of existing IBOR based interest
rate benchmarks with alternative nearly risk-
free interest rates (RFRs) in the context of
hedge accounting. These amendments allow
hedging relationships affected by the IBOR
reform to be accounted for as continuing
hedges. RBS has early adopted these
amendments for the annual reporting period
ending on 31 December 2019.
The amendments provide relief on key areas
of hedge accounting most notably the hedge
effectiveness assessment and the ability to
identify LIBOR-based cash flows for the
purpose of designation (re-designation) during
the period of the Reform. Additional
disclosures are shown in Note 10.
IFRIC decision - Disclosure of change in
liabilities arising from financing activities (IAS
7 statement of cash flows) – Following the
IFRIC decision on how changes in liabilities
should be presented in the cash flow
statement, RBS has revised its presentation
of financing activities and applied this to the
cash flow statement.
2. Basis of consolidation
The consolidated accounts incorporate the
financial statements of RBSG plc and entities
(including certain structured entities) that give
access to variable returns and that are
controlled by RBS Group. Control is assessed
by reference to our ability to enforce our will
on the other entity, typically through voting
rights.
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 relates to financial
instruments measured at amortised cost and
debt instruments classified as fair value
through OCI using the effective interest rate
method, the effective part of any related
accounting hedging instruments, and finance
lease income recognised at a constant
periodic rate of return before tax on the net
investment on the lease. Negative effective
interest accruing to financial assets is
presented in interest payable.
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 the service
is rendered. The price is usually fixed and
always determinable.
4. Assets held for sale
A non-current asset (or disposal group) is
classified as held for sale if RBS Group will
recover its carrying amount principally through
a sale transaction rather than through
continuing use and is measured at the lower
of its carrying amount or fair value less cost 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 RBS Group or by
RBSG plc shares. RBS Group operates a
number of share-based compensation
schemes under which it awards RBSG plc
shares and share options to its employees.
Such awards are generally subject to vesting
conditions.
Variable compensation that is settled in cash
or debt instruments is charged to profit or loss
on a straight-line basis over the vesting
period, taking account of forfeiture and
clawback criteria.
Contributions to defined contribution pension
schemes are recognised in profit or loss as
employee service costs accrue.
For defined benefit pension schemes, the net
of the recognisable scheme assets and
obligations is reported in the balance sheet.
The defined benefit obligation is measured on
an actuarial basis. The charge to profit or loss
for pension costs (mainly the service cost and
the net interest on the net defined benefit
asset or liability) is recognised in operating
expenses.
Actuarial gains and losses (i.e. gains and/or
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. The difference
between scheme assets and scheme
liabilities, the net defined benefit asset or
liability, is recognised in the balance sheet
subject to the asset celling test which requires
the net defined benefit surplus to be limited to
the present value of any economic benefits
RBS – Annual Report and Accounts 2019
208
Accounting policies
available to RBS Group in the form of refunds
from the plan or reduced contributions to it.
6. Intangible assets and goodwill
Intangible assets acquired by RBS Group are
stated at cost less accumulated amortisation
and impairment losses. Amortisation is
charged to profit or loss over the assets'
estimated useful 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
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.
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 the net fair
value of the subsidiary’s identifiable assets,
liabilities and contingent liabilities.
Goodwill is measured at initial cost less any
subsequent impairment losses. The gain or
loss on the disposal of a subsidiary includes
the carrying value of any related goodwill.
7. Impairment of intangible assets, rights
of use and property, plant and equipment
At each balance sheet date, RBS Group
assesses whether there is any indication that
its intangible assets, rights of use or property,
plant and equipment are impaired. If any such
indication exists, RBS 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.
The recoverable amount of an asset that does
not generate cash flows that are independent
from those of other assets or groups of
assets, is determined as part of the 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 RBS
Group’s cash-generating units or groups of
cash-generating units expected to benefit
from the combination. The recoverable
amount of an asset or cash-generating unit is
the higher of its fair value less cost to sell or
its value in use. Value in use is the present
value of future cash flows from the asset or
cash-generating unit discounted at a rate that
reflects market interest rates adjusted for risks
specific to the asset or cash-generating unit
that have not been taken into account in
estimating future cash flows.
An impairment loss is recognised if the
recoverable amount of an intangible or
tangible asset is less than its carrying value.
The carrying value of the asset is reduced by
the amount of the loss and a charge
recognised in profit or 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. Foreign currencies
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 20).
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 fair
value through OCI, 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.
9. Leases
RBS Group has adopted IFRS 16 ‘Leases’
with effect from 1 January 2019, replacing IAS
17 ‘Leases’. RBS Group has applied IFRS 16
on a modified retrospective basis without
restating prior years. The effect is set out in
Note 22.
As lessor
Finance lease contracts are those which
transfer substantially all the risks and rewards
of ownership of an asset to a customer. All
other contracts with customers to lease assets
are classified as operating leases.
Loans to customers include finance lease
receivables measured at the net investment in
the lease, comprising the minimum lease
payments and any unguaranteed residual
value discounted at the interest rate implicit in
the lease. Interest receivable includes finance
lease income recognised at a constant
periodic rate of return before tax on the net
investment. 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 other operating 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.
As lessee
On entering a new lease contract, RBS Group
recognises a right of use asset and a lease
liability to pay future rentals. The liability is
measured at the present value of future lease
payments discounted at the applicable
incremental borrowing rate. The right of use
asset is depreciated over the shorter of the
term of the lease and the useful economic life,
subject to review for impairment.
Short term and low value leased assets are
expensed on a systematic basis.
10. Provisions and contingent liabilities
RBS 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 RBS
Group has a constructive obligation to
restructure. An obligation exists when RBS
Group has a detailed formal plan for the
restructuring and has raised a valid
expectation in those affected by starting to
RBS – Annual Report and Accounts 2019
209
Accounting policies
implement the plan or by announcing its main
features.
current tax liabilities and assets on a net basis
or on a gross basis simultaneously.
RBS Group recognises any onerous cost of
the present obligation under a contract as a
provision. An onerous cost is the unavoidable
cost of meeting RBS Group’s contractual
obligations that exceed the expected
economic benefits. When RBS Group vacates
a leasehold property, the right of use asset
would be tested for impairment and a
provision may be recognised for the ancillary
occupancy costs, such as rates.
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.
11. 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. The tax consequences of servicing
equity instruments are recognised in the
income statement.
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 their recovery is
probable.
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.
Accounting for taxes is judgmental and carries
a degree of uncertainty because tax law is
subject to interpretation, which might be
questioned by the relevant tax authority. RBS
Group recognises the most likely current and
deferred tax liability or asset, assessed for
uncertainty using consistent judgments and
estimates. Current and deferred tax assets
are only recognised where their recovery is
deemed probable, and current and deferred
tax liabilities are recognised at the amount
that represents the best estimate of the
probable outcome having regard to their
acceptance by the tax authorities.
12. Financial instruments
Financial instruments are classified either by
product, by business model or by reference to
the IFRS default classification.
Classification by product relies on specific
designation criteria which are applicable to
certain classes of financial assets or
circumstances where accounting mismatches
would otherwise arise. Classification by
business model reflects how RBS Group
manages its financial assets to generate cash
flows. A business model assessment
determines if cash flows result from holding
financial assets to collect the contractual cash
flows, from selling those financial assets, or
both.
The product classifications apply to financial
assets that are either designated at fair value
through profit or loss (DFV), or to equity
investments designated as at fair value
through other comprehensive income
(FVOCI). Financial assets may also be
irrevocably designated at fair value through
profit or loss upon initial recognition if such
designation eliminates, or significantly
reduces, accounting mismatch. In all other
instances, fair value through profit or loss
(MFVTPL) is the default classification and
measurement category for financial assets.
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.
Business model assessment of assets is
made at portfolio level, being the level at
which they are managed to achieve a
predefined business objective. 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.
Deferred tax assets and liabilities are offset
where RBS 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 RBS Group company
or on RBS Group companies in the same tax
group that intend, in future periods, to settle
Most financial assets are within ‘held to
collect’ business models, and have
contractual cash flows that comprise solely
payments of principal and interest and
therefore measured at amortised cost. Certain
financial assets are managed under a
business model of both ‘held to collect and
RBS – Annual Report and Accounts 2019
210
sell’ and have contractual cash flows
comprising solely of payments of principal and
interest, and are measured at fair value
through other comprehensive income
(‘FVOCI’).
The contractual terms of a facility; any
leverage features; prepayment and extension
terms; and triggers that might reset the
effective rate of interest; are considered in
determining whether cash flows comprise
solely payments of principal and interest.
All financial instruments are measured at fair
value on initial recognition.
All liabilities not subsequently measured at fair
value are measured at amortised cost.
13. Impairment: expected credit losses
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 and presented as impairments
in the income statement. Loss allowances are
forward-looking, based on 12 month expected
credit losses where there has not been a
significant increase in credit risk rating,
otherwise allowances are based on lifetime
expected losses.
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 a
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 change also;
and expected credit losses are adjusted from
12 month to lifetime expectations.
Judgement is exercised as follows:
Models – in certain low default portfolios,
Basel parameter estimates are also
applied for IFRS 9.
Non-modelled portfolios, mainly in Private
Banking, RBSI and Lombard, use a
standardised capital requirement under
Basel II. Under IFRS 9, they have bespoke
treatments for the identification of
significant increase in credit risk.
Benchmark PDs, EADs and LGDs are
reviewed annually for appropriateness.
The ECL calculation is based on expected
future cash flows, which is typically applied
at a portfolio level.
Multiple economic scenarios (MES) – the
central, or base, scenario is most critical to
the ECL calculation, independent of the
method used to generate a range of
alternative outcomes and their
probabilities.
Accounting policies
Significant increase in credit risk - 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.
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 RBS Group’s interest in equity shares
following the exchange is such that RBS
Group controls an entity, that entity is
consolidated.
Impaired loans are written off and therefore
derecognised from the balance sheet when
RBS 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 the
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 RBS 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
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.
14. Financial guarantee contracts
Under a financial guarantee contract, RBS
Group, in return for a fee, undertakes to meet
a customer’s obligations under the terms of a
debt instrument if the customer fails to do so.
A financial guarantee is recognised as a
liability; initially at fair value and, if not
designated as at fair value through profit or
loss, subsequently at the higher of its initial
value less cumulative amortisation and any
provision under the contract measured in
accordance with Accounting policy 13.
RBS – Annual Report and Accounts 2019
Amortisation is calculated so as to recognise
fees receivable in profit or loss over the period
of the guarantee.
15. 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 RBS Group are classified as held-for-
trading and measured at fair value through
profit or loss.
16. 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. Conversely, an asset is not
derecognised by a contract under which RBS
Group retains substantially all the risks and
rewards of ownership. If substantially all the
risks and rewards have been neither retained
nor transferred, RBS Group does not
derecognise an asset over which it has
retained control but limits its recognition to the
extent of its continuing involvement.
A financial liability is removed from the
balance sheet when the obligation is
discharged, or is cancelled, or expires.
17. 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 RBS 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 RBS 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. Sale and
repurchase transactions that are not
accounted for at fair value through profit or
loss are measured at amortised cost. The
difference between the consideration paid or
received and the repurchase or resale price is
treated as interest and recognised in interest
income or interest expense over the life of the
transaction.
18. Netting
Financial assets and financial liabilities are
offset and the net amount presented in the
balance sheet when, and only when, RBS
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. RBS 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.
19. Capital instruments
RBS Group classifies a financial instrument
that it issues as a liability if it is a contractual
211
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 RBS Group after the
deduction of liabilities. The components of a
compound financial instrument issued by RBS
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
RBSG plc purchased by RBS 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 2006.
On the sale or re-issue of treasury shares the
consideration received and related tax are
credited to equity, net of any directly
attributable incremental costs.
20. Derivatives and hedging
Derivative financial instruments are initially
recognised, and subsequently measured, at
fair value. RBS Group’s approach to
determining the fair value of financial
instruments is set out in the Critical
accounting policies section and key sources
of estimation uncertainty entitled Fair value -
financial instruments; further details are given
in Notes 10 and 12 on the accounts.
A derivative embedded in a financial liability
contract is accounted for as a stand-alone
derivative if its economic characteristics are
not closely related to the economic
characteristics of the host contract; unless the
entire contract is measured at fair value with
changes in fair value recognised in profit or
loss.
Gains and losses arising from changes in the
fair value of derivatives that are not the
hedging instrument in a qualifying hedge are
recognised as they arise in profit or loss.
Gains and losses are recorded in Income from
trading activities except for gains and losses
on those derivatives that are managed
together with financial instruments designated
at fair value; these gains and losses are
included in Other operating income. RBS
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 (net
investment hedges).
Hedge relationships are formally designated
and documented at inception in line with the
requirements of IAS 39 Financial instruments
– Recognition and measurement. The
documentation identifies the hedged item, the
Accounting policies
hedging instrument and details of 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 RBS Group
revokes the designation of a hedge
relationship.
Fair value hedge - in a fair value hedge, the
gain or loss on the hedging instrument is
recognised in profit or loss. The gain or loss
on the hedged item attributable to the hedged
risk is recognised in profit or loss and, where
the hedged item is measured at amortised
cost, adjusts the carrying amount of the
hedged item. Hedge accounting is
discontinued if the hedge no longer meets the
criteria for hedge accounting; or if the hedging
instrument expires or is sold, terminated or
exercised; or if hedge designation is revoked.
If the hedged item is one for which the
effective interest rate method is used, any
cumulative adjustment is amortised to profit or
loss over the life of the hedged item using a
recalculated effective interest rate.
Cash flow hedge - in a cash flow hedge, the
effective portion of the gain or loss on the
hedging instrument is recognised in other
comprehensive income and the ineffective
portion in profit or loss. When the forecast
transaction results in the recognition of a
financial asset or financial liability, the
cumulative gain or loss is reclassified from
equity to profit or loss in the same periods in
which the hedged forecast cash flows affect
profit or loss. Otherwise the cumulative gain
or loss is removed from equity and recognised
in profit or loss at the same time as the
hedged transaction. Hedge accounting is
discontinued if the hedge no longer meets the
criteria for hedge accounting; if the hedging
instrument expires or is sold, terminated or
exercised; if the forecast transaction is no
longer expected to occur; or if hedge
designation is revoked. On the discontinuation
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.
21. Associates and joint ventures
An associate is an entity over which RBS
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 RBS Group’s share of
net assets.
22. 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.
23. Shares in Group entities
RBSG plc’s investments in its subsidiaries are
stated at cost less any impairment.
Critical accounting policies and key
sources of estimation uncertainty
The reported results of RBS 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 RBS 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 RBS 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 RBS 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
Future accounting developments
International Financial Reporting
Standards
A number of IFRSs and amendments to IFRS
were in issue at 31 December 2019 that
would affect RBS Group from 1 January 2020
or later:
The amendments to IAS 1 ‘Presentation of
Financial Statements’ and IAS 8
‘Accounting Policy, Changes in Accounting
Estimates and Errors’ on the definition of
material were issued in October 2018 and
are effective for annual periods beginning
on or after 1 January 2020 with earlier
application permitted. The amendments
are aimed at improving the understanding
of the existing requirements rather than to
significantly impact current materiality
judgements. They provide a new definition
of material which shall be used to assess
whether information, either individually or
in combination with other information, is
material in the context of the financial
statements.
The amendments to IFRS 3 ‘Business
Combinations’ which clarify the definition
of a Business were issued in October
2018, are effective for annual reporting
periods beginning on or after 1 January
2020 and apply prospectively with earlier
application permitted. They clarify the
minimum requirements for a business;
remove the assessment of whether market
participants are capable of replacing any
missing elements; add guidance to help
entities assess whether an acquired
process is substantive; narrow the
definitions of a business and of outputs;
and introduce an optional fair value
concentration test.
Effective in 2022 - 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.
RBS Group is assessing the effect of adopting
these standards on its financial statements
RBS – Annual Report and Accounts 2019
212
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
2019
£m
726
9,795
854
11,375
319
282
771
203
1,102
483
168
3,328
8,047
2018
£m
522
9,993
534
11,049
250
223
510
116
791
461
42
2,393
8,656
2017
£m
277
10,409
348
11,034
175
99
445
179
554
572
23
2,047
8,987
Note:
(1) Negative interest on loans is classed as interest payable and on customer deposits is classed as interest receivable.
Interest income on financial instruments measured at amortised cost and debt instruments classified as FVOCI is measured using the effective
interest rate which 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.
Included in interest receivable is finance lease income which is recognised at a constant periodic rate of return before tax on the net investment.
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 risk
- 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 fair value of other financial assets at fair value through profit or loss
Hedge ineffectiveness
Profit/(loss) on disposal of amortised cost assets
(Loss)/profit on disposal of fair value through other comprehensive income assets
Profit on sale of property, plant and equipment
Share of (losses)/profits of associated entities
Profit/(loss) on disposal of subsidiaries and associates (1)
Other income (2)
2019
£m
2,511
—
448
532
32
(60)
(20)
—
932
250
(17)
58
48
42
(22)
58
(14)
2,224
136
2,763
6,206
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
2,455
(7)
525
(50)
197
12
(81)
31
634
276
60
—
39
(35)
226
75
104
245
74
1,064
4,146
Notes:
(1) Includes a gain of £444 million (€523 million), a legacy liability release of £256 million and an FX recycling gain of £290 million on completion of the Alawwal
bank merger in June 2019; £1,102 million of FX recycling gains arising on the liquidation of RFS Holdings BV and £67 million in relation to the capital repayment
in UBI DAC. The recycling gains and capital repayment have been calculated using the step-by-step method in IFRIC 16 and by reference to the proportion of
equity applied to the FX translation reserve.
(2) Includes income from activities other than banking. 2018 includes insurance recoveries of £357 million.
RBS – Annual Report and Accounts 2019
213
Notes on the consolidated accounts
3 Operating expenses
Salaries
Bonus awards
Temporary and contract costs
Social security costs
Pension costs
Other
Staff costs
Premises and equipment (1)
UK bank levy (2)
Depreciation and amortisation (3)
Other administrative expenses (4)
Administrative expenses
Impairment of goodwill and other intangible assets
2019
£m
2,513
299
401
300
303
202
4,018
1,259
134
1,176
2,694
5,263
44
9,325
2018
£m
2,560
225
442
307
401
187
4,122
1,383
179
731
3,193
5,486
37
9,645
2017
£m
2,750
298
430
318
467
413
4,676
1,565
215
808
3,108
5,696
29
10,401
Notes:
(1) Includes a £161 million charge relating to the reduction in property portfolio.
(2) Includes a prior period rebate of £31 million.
(3) Includes a £292 million charge relating to the reduction in property portfolio.
(4) Includes litigation and conduct costs, net of amounts recovered. Refer to Notes 20 and 26 for further details.
The average number of persons employed, rounded to the nearest hundred, during the year, excluding temporary staff, was 64,200 (2018 -
67,600; 2017 - 73,400). The average number of temporary employees during 2019 was 4,100 (2018 - 4,000; 2017 - 5,000). The number of
persons employed at 31 December, excluding temporary staff, by reportable segment, was as follows:
UK Personal Banking
Ulster Bank RoI
Commercial Banking
Private Banking
RBS International
NatWest Markets
Central items & other
Total
UK
USA
Europe
Rest of the World
Total
2019
21,800
2,700
10,100
1,900
1,600
5,000
19,800
62,900
44,600
400
4,100
13,800
62,900
2018
23,400
2,900
10,200
1,900
1,600
4,500
20,900
65,400
46,600
500
4,100
14,200
65,400
2017
19,500
2,600
6,900
1,500
1,600
5,300
32,300
69,700
51,200
500
4,200
13,800
69,700
Effective from 1 January 2019, Business Banking was transferred from UK Personal & Business Banking (UK PBB) to Commercial Banking.
Concurrent with the transfer, UK PBB was renamed UK Personal Banking. Comparatives have been re-stated.
Share-based payments
As described in the Remuneration report, RBS 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
2020 to 2024
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
2020 to 2026
2020 to 2026
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.
RBS – Annual Report and Accounts 2019
214
Notes on the consolidated accounts
3 Operating expenses continued
The fair value of options granted in 2019 was determined using a pricing model that included: expected volatility of shares determined at the
grant date based on historical volatility over a period of up to five years; expected option lives that equal the vesting period; expected dividends
on equity shares; and risk-free interest rates determined from UK gilts with terms matching the expected lives of the options.
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
2019
2018
2017
At 1 January
Granted
Exercised
Cancelled
At 31 December
Average
Shares
Average
Shares
Average
Shares
exercise price
under option
exercise price
under option
exercise price
under option
£
2.18
1.78
2.83
2.25
2.01
(million)
75
25
(4)
(12)
84
£
2.38
1.89
2.44
2.46
2.18
(million)
60
28
(4)
(9)
75
£
2.46
2.27
2.46
2.49
2.38
(million)
56
21
(3)
(14)
60
Options are exercisable within six months of vesting; 3.2 million options were exercisable at 31 December 2019 (2018 – 4.9 million; 2017 – 3.7
million). The weighted average share price at the date of exercise of options was £2.49 (2018 - £2.13; 2017 - £2.77). At 31 December 2019,
exercise prices ranged from £1.68 to £2.91 (2018 - £1.68 to £3.43; 2017 - £1.68 to £4.34) and the remaining average contractual life was
2.7years (2018 - 2.9 years; 2017 – 2.9 years). The fair value of options granted in 2019 was £11 million (2018 - £21 million; 2017 - £21 million).
Deferred performance awards
At 1 January
Granted
Forfeited
Vested
At 31 December
2019
Value at
grant
£m
233
110
(10)
(137)
196
Shares
awarded
(million)
92
42
(4)
(54)
76
2018
Value at
grant
£m
264
156
(21)
(166)
233
Shares
awarded
(million)
101
59
(8)
(60)
92
2017
Value at
grant
£m
296
152
(11)
(173)
264
Shares
awarded
(million)
102
63
(4)
(60)
101
The awards granted in 2019 vest in equal tranches on their anniversaries, predominantly over three years.
Long-term incentives
2019
2018
2017
At 1 January
Granted
Vested/exercised
Lapsed
At 31 December
Value at
Shares
Options
Value at
Shares
Options
Value at
Shares
Options
grant
awarded over shares
grant
awarded over shares
grant
awarded over shares
£m
85
15
(12)
(25)
63
(million)
32
6
(4)
(9)
25
(million)
2
—
—
(2)
—
£m
102
12
(5)
(24)
85
(million)
37
5
(2)
(8)
32
(million)
2
—
—
—
2
£m
119
35
(22)
(30)
102
(million)
38
15
(7)
(9)
37
(million)
4
—
—
(2)
2
The market value of awards vested/exercised in 2019 was £10 million (2018 - £5 million; 2017 - £22 million). There are no vested options of
shares exercisable up to 2020 (2018 - 2 million; 2017 - 2 million).
Bonus awards
The following tables analyse RBS Group's bonus awards for 2019.
Non-deferred cash awards (1)
Total non-deferred bonus awards
Deferred bond awards
Deferred share awards
Total deferred bonus awards
Total bonus awards (2)
Bonus awards as a % of operating profit before tax (3)
Proportion of bonus awards that are deferred
of which
- deferred bond awards
- deferred share awards
Change
%
8
8
(4)
(22)
(10)
(8)
2019
£m
40
40
184
83
267
307
7%
87%
69%
31%
2018
£m
37
37
191
107
298
335
9%
89%
64%
36%
RBS – Annual Report and Accounts 2019
215
Notes on the consolidated accounts
3 Operating expenses continued
Reconciliation of bonus awards to income statement charge
Bonus 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 bonus awards (2)
Year in which income statement charge is expected to be
taken for deferred bonus awards
Bonus awards deferred from 2017 and earlier
Bonus awards deferred from 2018
Less: forfeiture of amounts deferred from prior years
Bonus awards for 2019 deferred
Notes:
(1) Cash awards are limited to £2,000 for all employees.
(2) Excludes other performance related compensation.
(3) Operating profit before tax and bonus expense.
2019
£m
307
(110)
197
127
(25)
102
299
2018
£m
335
(130)
205
86
(66)
20
225
2017
£m
342
(133)
209
96
(7)
89
298
Actual
Expected
2017
£m
96
—
(7)
—
89
2018
£m
86
—
(66)
—
20
2019
£m
31
96
(25)
—
102
2020
£m
14
16
—
78
108
2021
and beyond
£m
5
14
—
32
51
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).
Effective from 1 January 2019 Business Banking was transferred from
UK Personal & Business Banking (UK PBB) to Commercial Banking,
as the nature of the business, including distribution channels, products
and customers were more closely aligned to the Commercial Banking
business. Following the transfer, UK PBB was renamed UK Personal
Banking. Comparatives have been restated.
Reportable operating segments
The reportable operating segments are as follows:
UK Personal Banking serves individuals and mass affluent customers
in the UK and includes Ulster Bank customers in Northern Ireland.
Ulster Bank RoI serves individuals and businesses in the Republic of
Ireland (RoI).
Commercial Banking serves start-up, SME, commercial and corporate
customers in the UK.
Private Banking serves UK connected high net worth individuals and
their business interests.
RBS International (RBSI) serves retail, commercial, and corporate
customers in the Channel Islands, Isle of Man and Gibraltar, and
financial institution customers in those same locations in addition to
the UK and Luxembourg.
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.
Central items & other includes corporate functions, such as RBS
Treasury, finance, risk management, compliance, legal,
communications and human resources. Central functions manages
RBS capital resources and RBS-wide regulatory projects and provides
services to the reportable segments. Balances in relation to legacy
litigation issues and the international private banking business are
included in Central items in the relevant periods.
Allocation of central balance sheet items
RBS allocates all central costs relating to Services and Functions to
the business using appropriate drivers, these are reported as indirect
costs in the segmental income statements. Assets (and risk-weighted
assets) held centrally, mainly relating to RBS Treasury, are allocated
to the business using appropriate drivers.
2019
UK Personal Banking
Ulster Bank RoI
Commercial Banking
Private Banking
RBS International
NatWest Markets
Central items & other
Total
Net
interest
income
£m
4,130
400
2,842
521
478
(188)
(136)
8,047
Net fees
and
commissions
£m
696
109
1,312
226
106
85
(23)
2,511
Other
non-interest
income
£m
40
58
164
30
26
1,445
1,932
3,695
Total
income
£m
4,866
567
4,318
777
610
1,342
1,773
14,253
Operating
expenses
£m
(3,618)
(552)
(2,458)
(482)
(254)
(1,406)
621
(8,149)
Depreciation
and
amortisation
£m
—
—
(142)
(4)
(10)
(12)
(1,008)
(1,176)
Impairment
(losses)/
releases
£m
(393)
34
(391)
6
(2)
51
(1)
(696)
Operating
profit/(loss)
£m
855
49
1,327
297
344
(25)
1,385
4,232
RBS – Annual Report and Accounts 2019
216
Notes on the consolidated accounts
4 Segmental analysis continued
2018*
UK Personal Banking
Ulster Bank RoI
Commercial Banking
Private Banking
RBS International
NatWest Markets
Central items & other
Total
Net
interest
income
£m
4,283
444
2,855
518
466
112
(22)
8,656
Net fees
and
commissions
£m
692
91
1,283
228
101
(33)
(5)
2,357
Other
non-interest
income
£m
79
75
464
29
27
1,363
352
2,389
*2018 and 2017 data has been restated for the business re-segmentation.
2017*
UK Personal Banking
Ulster Bank RoI
Commercial Banking
Private Banking
RBS International
NatWest Markets
Central items & other
Total
4,342
421
3,074
464
325
203
158
8,987
724
94
1,405
179
42
24
(13)
2,455
216
89
200
35
22
823
306
1,691
*2018 and 2017 data has been restated for the business re-segmentation.
Total
income
£m
5,054
610
4,602
775
594
1,442
325
13,402
5,282
604
4,679
678
389
1,050
451
13,133
Total revenue
UK Personal Banking
Ulster Bank RoI
Commercial Banking
Private Banking
RBS International
NatWest Markets
Central items & other
Total
2019
Inter
segment
£m
62
6
139
241
19
558
(1,025)
—
External
£m
6,161
616
4,347
703
639
2,516
3,447
18,429
Total
£m
6,223
622
4,486
944
658
3,074
2,422
18,429
*2018 and 2017 data has been restated for the business re-segmentation.
Total income
UK Personal Banking
Ulster Bank RoI
Commercial Banking
Private Banking
RBS International
NatWest Markets
Central items & other
Total
2019
Inter
segment
£m
32
5
(496)
146
7
(322)
628
—
External
£m
4,834
562
4,814
631
603
1,664
1,145
14,253
Total
£m
4,866
567
4,318
777
610
1,342
1,773
14,253
*2018 and 2017 data has been restated for the business re-segmentation.
2018*
Inter
segment
£m
63
—
89
195
148
916
(1,411)
—
2018*
Inter
segment
£m
33
(3)
(477)
120
125
(68)
270
—
External
£m
6,188
668
4,576
681
506
1,882
2,155
16,656
External
£m
5,021
613
5,079
655
469
1,510
55
13,402
Operating
expenses
£m
(2,867)
(583)
(2,362)
(476)
(254)
(1,589)
(783)
(8,914)
Depreciation
and
amortisation
£m
—
—
(125)
(2)
(6)
(15)
(583)
(731)
Impairment
(losses)/
releases
£m
(339)
(15)
(147)
6
2
92
3
(398)
Operating
profit/(loss)
£m
1,848
12
1,968
303
336
(70)
(1,038)
3,359
(3,241)
(676)
(2,458)
(529)
(217)
(2,250)
(222)
(9,593)
Total
£m
6,251
668
4,665
876
654
2,798
744
16,656
Total
£m
5,054
610
4,602
775
594
1,442
325
13,402
—
—
(144)
—
(2)
49
(711)
(808)
External
£m
6,406
676
4,532
585
309
1,408
2,147
16,063
External
£m
5,265
609
5,051
594
281
1,077
256
13,133
(207)
(60)
(390)
(6)
(3)
174
(1)
(493)
2017*
Inter
segment
£m
39
(4)
79
143
119
809
(1,185)
—
2017*
Inter
segment
£m
17
(5)
(372)
84
108
(27)
195
—
1,834
(132)
1,687
143
167
(977)
(483)
2,239
Total
£m
6,445
672
4,611
728
428
2,217
962
16,063
Total
£m
5,282
604
4,679
678
389
1,050
451
13,133
RBS – Annual Report and Accounts 2019
217
Notes on the consolidated accounts
UK Personal
Ulster Commercial
Private
RBS
NatWest Central items
Banking
£m
Bank RoI
£m
Banking
£m
Banking
£m
International
£m
Markets
£m
& other
£m
Total
£m
4 Segmental analysis continued
Analysis of net fees and commissions
2019
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
2018*
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
292
427
356
55
44
—
—
2
1,176
(480)
696
227
402
408
62
49
—
13
2
1,163
(471)
692
*2018 and 2017 data has been restated for the business re-segmentation.
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
Total
Fees and commissions payable
Net fees and commissions
194
451
436
69
72
—
—
1
1,223
(499)
724
*2018 and 2017 data has been restated for the business re-segmentation.
UK Personal Banking
Ulster Bank RoI
Commercial Banking
Private Banking
RBS International
NatWest Markets
Central items & other
Total
*2018 and 2017 data has been restated for the business re-segmentation.
61
28
14
8
3
2
—
5
121
(12)
109
34
22
29
6
4
2
—
1
98
(7)
91
30
27
30
10
4
2
—
—
103
(9)
94
659
154
415
—
3
95
—
90
1,416
(104)
1,312
556
175
415
—
—
122
17
60
1,345
(62)
1,283
543
175
497
—
35
164
—
51
1,465
(60)
1,405
33
12
2
5
186
1
—
27
266
(40)
226
33
13
2
5
191
1
—
16
261
(33)
228
37
12
2
6
133
1
—
15
206
(27)
179
27
2
32
—
41
4
—
2
108
(2)
106
25
—
29
—
42
4
—
2
102
(1)
101
24
—
10
—
4
3
—
2
43
(1)
42
24
—
82
96
1
3
170
69
445
(360)
85
3
—
88
85
—
3
144
67
390
(423)
(33)
1
—
83
63
1
3
157
132
440
(416)
24
—
—
—
—
—
—
—
(172)
(172)
149
(23)
—
—
—
—
—
—
—
(141)
(141)
136
(5)
—
—
2
—
—
—
—
(144)
(142)
129
(13)
1,096
623
901
164
278
105
170
23
3,360
(849)
2,511
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
2019
2018*
2017*
Assets
£m
182,305
25,385
165,399
23,304
31,738
263,885
31,023
723,039
Liabilities
£m
153,999
21,012
140,863
28,610
30,330
246,907
57,762
679,483
Assets
£m
171,011
25,193
166,478
21,983
28,398
244,531
36,641
694,235
Liabilities
£m
148,792
21,189
139,804
28,554
27,663
227,399
54,344
647,745
Assets
£m
166,560
24,564
173,621
20,290
25,867
277,886
49,268
738,056
Liabilities
£m
145,104
19,853
143,450
27,049
29,077
248,553
75,877
688,963
RBS – Annual Report and Accounts 2019
218
Notes on the consolidated accounts
4 Segmental analysis continued
Segmental analysis of goodwill is as follows:
At 1 January 2018*
Acquisitions
Inter-segment transfers
At 31 December 2018*
At 31 December 2019
*2018 data has been restated for the business re-segmentation.
UK Personal Commercial
Banking
£m
2,606
—
—
2,606
2,606
Banking
£m
2,653
48
(9)
2,692
2,692
Private
Banking
£m
—
—
9
9
9
RBS
International
£m
300
—
—
300
300
Total
£m
5,559
48
—
5,607
5,607
Geographical segments
The geographical analysis in the tables below has been compiled on the basis of location of office where the transactions are recorded.
2019
Total revenue
Interest receivable
Interest payable
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
2018
Total revenue
Interest receivable
Interest payable
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
Interest receivable
Interest payable
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
UK
£m
16,925
10,923
(3,255)
2,191
727
2,305
12,891
3,543
648,056
613,151
34,905
114,422
15,351
10,589
(2,366)
2,183
1,308
467
12,181
3,805
624,228
588,185
36,043
121,267
15,011
10,556
(1,945)
2,192
570
806
12,179
3,230
662,314
626,103
36,211
128,127
USA
£m
228
—
—
37
148
13
198
186
33,121
31,715
1,406
—
300
—
—
12
124
119
255
Europe
£m
1,148
417
(70)
211
49
436
1,043
421
40,010
33,539
6,471
10,571
838
430
(26)
102
68
229
803
RoW
£m
128
35
(3)
72
8
9
121
Total
£m
18,429
11,375
(3,328)
2,511
932
2,763
14,253
82
1,852
1,078
774
2
4,232
723,039
679,483
43,556
124,995
167
30
(1)
60
7
67
163
16,656
11,049
(2,393)
2,357
1,507
882
13,402
(718)
32,573
31,329
1,244
—
150
34,441
27,183
7,258
5,408
122
2,993
1,048
1,945
208
3,359
694,235
647,745
46,490
126,883
192
7
(11)
97
83
22
198
655
435
(89)
113
(24)
121
556
205
36
(2)
53
5
108
200
16,063
11,034
(2,047)
2,455
634
1,057
13,133
(580)
38,485
36,564
1,921
78
(485)
34,280
25,171
9,109
7,823
74
2,977
1,125
1,852
22
2,239
738,056
688,963
49,093
136,050
RBS – Annual Report and Accounts 2019
219
Notes on the consolidated accounts
5 Pensions
Defined contribution schemes
RBS Group sponsors a number of defined contribution pension
schemes in different territories, which new employees are offered the
opportunity to join.
Defined benefit schemes
RBS 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 NWB 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 RBS
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 RBS 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 2019 (2018 -
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 RBS 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
Quoted
%
3.9
47.8
9.3
11.6
—
—
—
72.6
2019
Unquoted
%
4.8
—
—
5.0
4.8
7.8
5.0
27.4
Total
%
8.7
47.8
9.3
16.6
4.8
7.8
5.0
100.0
Quoted
%
3.7
40.1
12.9
12.2
—
—
—
68.9
2018
Unquoted
%
5.2
—
—
5.2
5.5
6.1
9.1
31.1
Total
%
8.9
40.1
12.9
17.4
5.5
6.1
9.1
100.0
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
16
57
9
1
5
3
2019
Fair value
Assets
£m
909
6,407
215
122
3
124
Liabilities
£m
1,094
2,992
42
—
1
13
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
Swaps have been executed at prevailing market rates and within
standard market bid/offer spreads with a number of counterparty
banks, including NWB Plc.
The schemes do not invest directly in RBS Group but can have
exposure to RBS Group. The trustees of the respective UK schemes
are responsible for ensuring that indirect investments in RBS Group do
not exceed the 5% regulatory limit.
At 31 December 2019, the gross notional value of the swaps was £75
billion (2018 - £72 billion) and had a net positive fair value of £3,340
million (2018 - £2,557 million) against which the banks had posted
approximately 110% collateral.
RBS – Annual Report and Accounts 2019
220
Notes on the consolidated accounts
5 Pensions continued
Changes in value of net pension (asset)/liability
At 1 January 2018
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
Transfer of pension assets and liabilities from Main section
Benefits paid
At 1 January 2019
Currency translation and other adjustments
Income statement
Net interest expense
Current service cost
Past service cost
Gain on curtailments or settlements
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
Fair
value of
plan assets
£m
44,652
—
1,123
(1,891)
2,218
7
—
(276)
(2,027)
43,806
—
1,245
—
—
—
1,245
3,021
—
—
—
—
3,021
Main section
Present value
of defined
benefit minimum
obligation funding (1)
£m
6,715
—
171
Asset
Net
Fair
ceiling/ pension
(asset)/
value of
liability plan assets
£m
49,746
20
1,242
(2,090)
2,363
12
(259)
—
(2,282)
48,752
(85)
£m
—
—
191
1,532 2,027
— (2,218)
—
—
—
—
—
(78)
—
—
—
8,340
—
—
All schemes
Present value
of defined
Asset
ceiling/
benefit minimum
obligation funding (1)
£m
7,105
(1)
179
Net
pension
(asset)/
liability
£m
(263)
(4)
308
1,507 1,967
— (2,363)
—
—
—
—
—
—
—
—
(355)
8,790
9
—
£m
42,378
17
1,371
(1,630)
—
12
(259)
—
(2,282)
39,607
(76)
£m
37,937
—
1,143
(1,396)
—
7
—
(198)
(2,027)
35,466
—
1,003
140
13
—
1,156
—
(275)
5,565
(465)
—
4,825
242
—
—
—
242
—
140
13
—
153
— (3,021)
—
(275)
— 5,565
(465)
—
(1,696) (1,696)
108
(1,696)
1,374
—
—
—
1,374
3,556
—
—
—
—
3,556
1,109
193
15
(10)
1,307
—
(279)
6,189
(482)
—
5,428
255
—
—
—
255
(10)
193
15
(10)
188
— (3,556)
—
(279)
— 6,189
(482)
—
(1,730) (1,730)
142
(1,730)
Contributions by employer
Contributions by plan participants and other scheme members
Liabilities extinguished upon settlement
Benefits paid
At 31 December 2019
261
10
—
(1,788)
46,555
—
10
—
(1,788)
39,669
—
—
—
—
6,886
(261)
—
—
—
—
473
15
(188)
(1,972)
51,925
—
15
(194)
(1,972)
44,115
—
—
—
—
7,315
(473)
—
(6)
—
(495)
Notes:
(1) RBS 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 RBS 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) RBS Group expects to make contributions to the Main section of £247 million in 2020. Additional contributions of up to £500 million will be paid to the Main
section, should RBS Group make distributions in 2020, in line with the ring-fencing agreement with the Trustee.
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)
All schemes
2019
£m
51,925
44,115
7,810
7,315
495
2018
£m
48,752
39,607
9,145
8,790
355
2019
£m
614
(119)
495
2018
£m
520
(165)
355
RBS – Annual Report and Accounts 2019
221
Notes on the consolidated accounts
5 Pensions continued
Funding and contributions by RBS 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
RBS 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 salary before administrative
expenses and contributions from those members.
In 2018, the Group recognised an updated estimate of the impact of
guaranteed minimum pension equalisation (£102m) following the
clarity provided by the October 2018 Court ruling and the impact of any
future conversion exercise. This has been revised in 2019 to reflect
changes in financial assumptions.
Assumptions
Placing a value on RBS Group’s defined benefit pension schemes’
liabilities requires RBS 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
2019
%
2.1
2018
%
2.9
2.9
1.8
3.0
2.8
20
3.2
1.8
3.1
2.9
20
years
years
26.9
28.7
28.2
30.2
27.2
29.0
28.4
30.5
Principal assumptions of 2017 triennial valuation
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 set 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 2019 is 21 years (2018 – 20 years).
Significant judgement is required when setting the criteria for bonds to
be included in the basket of bonds that is used to determine the
discount rate used in the IAS 19 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.
RBS – Annual Report and Accounts 2019
222
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 net pension asset of the Main section would change if the key assumptions used were changed independently.
In practice the variables have a degree of correlation and do not move completely in isolation.
2019
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)
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)
Note:
(1) Includes both quoted and private equity.
Increase in
(Decrease)/increase (Decrease)/increase net pension assets/
(obligations)
in value of liabilities
£m
£m
(357)
(1,973)
529
1,394
1,968
(1,973)
(1,706)
1,706
(1,326)
1,326
430
—
in value of assets
£m
(2,330)
1,923
(5)
—
—
430
(2,214)
1,487
(5)
—
—
419
(1,644)
1,199
(1,644)
1,414
1,215
—
(570)
288
1,639
(1,414)
(1,215)
419
The funded status is most sensitive to movements in credit spreads and longevity. The table below shows the combined change in the funded
status of the Main section as a result of larger movements in these assumptions, assuming no changes in other assumptions.
2019
Change in credit spreads
2018
Change in credit spreads
+50 bps
No change
-50 bps
+50 bps
No change
-50 bps
-2 years
£bn
6.9
3.6
(0.2)
5.8
3.0
(0.4)
Change in life expectancies
-1 years
£bn
5.4
1.7
(2.3)
4.5
1.4
(2.1)
No change
£bn
3.9
—
(4.4)
3.2
—
(3.8)
+ 1 year
£bn
2.3
(1.7)
(6.5)
1.9
(1.4)
(5.5)
+ 2 years
£bn
0.8
(3.6)
(8.7)
0.7
(3.0)
(7.3)
RBS – Annual Report and Accounts 2019
223
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 RBS Group schemes is shown below:
2019
%
13.6
49.7
36.7
100.0
2018
%
12.9
48.6
38.5
100.0
History of defined benefit schemes
Fair value of plan assets
Present value of plan obligations
Net surplus/(deficit)
Main section
2017
£m
2019
£m
2018
£m
2015
£m
46,555 43,806 44,652 43,824 30,703
39,669 35,466 37,937 38,851 30,966
(263)
6,886 8,340 6,715 4,973
2016
£m
All schemes
2017
£m
2019
£m
2018
£m
2015
£m
51,925 48,752 49,746 49,229 34,708
44,115 39,607 42,378 43,990 35,152
(444)
7,810 9,145 7,368 5,239
2016
£m
Experience gains/(losses) on plan liabilities
Experience gains/(losses) on plan assets
Actual return on plan assets
Actual return on plan assets
275
3,021
4,266
9.7%
(122)
(107)
658
(1,891) 1,580 8,562
(768) 2,735 9,872
6.2% 32.2%
(1.7%)
233
(415)
703
2.3%
279
3,556
4,930
10.1%
(93)
(81)
794
(2,090) 1,728 9,254
(848) 3,013 10,708
6.1% 30.9%
(1.7%)
258
(458)
749
2.2%
6 Auditor’s remuneration
Amounts paid to RBS 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, RBS Group selects the supplier best placed to meet its requirements. RBS 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 RBS Group's auditors for statutory audit and other services are set out below:
Fees payable for:
- the audit of RBS Group’s annual accounts (1)
- the audit of RBSG plc’s subsidiaries (1)
- audit-related assurance services (1,2)
Total audit and audit-related assurance services fees
Other assurance services
Corporate finance services (3)
Total other services
2019
£m
3.8
25.7
3.2
32.7
1.2
0.6
1.8
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
Notes:
(1) The 2019 audit fee was approved by the Group Audit Committee. At 31 December 2019, £16 million has been billed in and paid in respect of the 2019 RBS
Group audit fees.
(2) Comprises fees of £1.1 million (2018 - £1.1 million) in relation to reviews of interim financial information, £1.4 million (2018 - £1.1 million) in respect of reports to
RBS Group’s regulators in the UK and overseas, and £0.7 million (2018 - £0.7 million) in relation to non-statutory audit opinions.
(3) Comprises fees of £0.6 million (2018 - £0.2 million) in respect of work performed by the auditors as reporting accountants on debt and equity issuances
undertaken by RBS Group.
RBS – Annual Report and Accounts 2019
224
Notes on the consolidated accounts
7 Tax
Current tax
Charge for the year
Over provision in respect of prior years
Deferred tax
Credit/(charge) for the year
Increase/(reduction) in the carrying value of deferred tax assets
Over/(under) provision in respect of prior years
Tax charge for the year
2019
£m
(673)
122
(551)
38
62
19
(432)
2018*
£m
(1,025)
125
(900)
(280)
7
(35)
(1,208)
2017*
£m
(925)
227
(698)
108
(30)
(111)
(731)
*Restated for IAS12 ‘Income taxes’. Refer to Accounting policy 1, Other amendments to IFRS.
The actual tax charge differs from the expected tax charge computed by applying the standard rate of UK corporation tax of 19% (2018 – 19%;
2017 – 19.25%) as follows:
Expected tax charge
Losses and temporary differences in year where no deferred tax asset recognised
Foreign profits taxed at other rates
UK tax rate change impact
Items not allowed for tax:
- losses on disposals and write-downs
- UK bank levy
- regulatory and legal actions
- other disallowable items
Non-taxable items:
- Alawwal bank merger gain disposal
- FX recycling on the liquidation of RFS Holdings
- other non-taxable items
Taxable foreign exchange movements
Losses brought forward and utilised
Increase/(decrease) in the carrying value of deferred tax assets in respect of:
- UK losses
- Ireland losses
Banking surcharge
Tax on paid-in equity
Adjustments in respect of prior years (1)
Actual tax charge
*Restated for IAS12 ‘Income taxes’. Refer to Accounting policy 1, Other amendments to IFRS.
2019
£m
(804)
(4)
23
—
(71)
(26)
(165)
(62)
215
279
80
(1)
27
129
(67)
(199)
73
141
(432)
2018*
£m
(638)
(55)
(8)
—
(44)
(38)
(203)
(63)
—
—
47
(27)
14
7
—
(357)
67
90
(1,208)
2017 *
£m
(431)
(303)
104
(7)
(69)
(45)
(56)
(110)
—
—
134
27
11
(30)
—
(165)
93
116
(731)
Note:
(1) 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
RBS 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. RBS
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
2019
£m
(1,011)
266
(745)
2018
£m
(1,412)
454
(958)
RBS – Annual Report and Accounts 2019
225
Notes on the consolidated accounts
7 Tax continued
At 1 January 2018
Implementation of IFRS 9 on 1 January 2018
(Credit)/charge to income statement
(Credit)/charge to other comprehensive income
Currency translation and other adjustments
At 1 January 2019
Implementation of IFRS16 on 1 January 2019
Acquisitions and disposals of subsidiaries
Charge/(credit) to income statement
Charge/(credit) to other comprehensive income
Currency translation and other adjustments
At 31 December 2019
Accelerated
capital
allowances
£m
192
—
22
1
5
220
—
(1)
(43)
—
(4)
172
Pension
£m
(393)
—
(40)
(95)
—
(528)
—
(1)
28
362
—
(139)
Expense
provisions
£m
(266)
—
121
—
(14)
(159)
—
—
41
—
—
(118)
Financial
instruments
£m
198
16
154
(23)
4
349
—
18
(81)
30
(1)
315
Tax
losses
carried
forward
£m
(939)
—
5
—
(2)
(936)
—
—
(28)
—
13
(951)
Other
£m
51
—
46
33
(34)
96
(60)
—
(36)
(20)
(4)
(24)
Total
£m
(1,157)
16
308
(84)
(41)
(958)
(60)
16
(119)
372
4
(745)
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
- NWM Plc
- NWB Plc
- RBS Plc
- Ulster Bank Limited
Total
Overseas tax losses carried forward
Ulster Bank Ireland DAC
Critical accounting policy: Deferred Tax
RBS Group has recognised a deferred tax asset of £1,011 million (31
December 2018 - £1,412 million) principally comprises losses that
arose in the UK, temporary differences, and a deferred tax liability of
£266 million (31 December 2018 - £454 million). This includes
amounts recognised in respect of UK trading losses of £770 million (31
December 2018 - £675 million). Deferred tax assets are recognised to
the extent that it is probable that there will be future taxable profits to
recover them.
Judgment - RBS 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.
The deferred tax asset in NWM Group is supported by way of future
reversing temporary timing differences on which deferred tax liabilities
are recognised at 31 December 2019.
UK tax losses - Under UK tax rules, tax losses can be carried forward
indefinitely. As the recognised tax losses in RBS 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 2019 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.
2019
£m
75
530
150
15
770
181
951
2018
£m
151
505
—
19
675
261
936
NWM Plc – NWM Plc expects that the balance of recognised deferred
tax asset at 31 December 2019 of £75 million (2018 - £151 million) in
respect of tax losses amounting to approximately £400 million will be
recovered by the end of 2025. The movement in the current financial
year reflects a £76 million decrease in the carrying value of the
deferred tax asset, driven primarily by a decrease in forecast future
taxable profits as a result of the strategic review of the NWM franchise.
During the year, agreement was reached to transfer tax losses of
£5,438 million to NWB Plc and RBS plc, as a consequence of the ring
fencing regulations. Of the losses remaining, £5,109 million have not
been recognised in the deferred tax balance at 31 December 2019;
such losses will be available to offset 25% of future taxable profits in
excess of those forecast in the closing deferred tax asset.
NWB Plc – A deferred tax asset of £530 million has been recognised
in respect of total losses of £3,109 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. NWB Plc returned to tax profitability during 2015 and
expects the deferred tax asset to be consumed by future taxable
profits by the end of 2025. During the year, losses of £881 million were
transferred from NWM Plc as a consequence of the ring fencing
regulations. These losses have not been recognised in the deferred
tax balance at 31 December 2019.
RBS plc – A deferred tax asset of £206 million was recognised in
respect of losses transferred of £1,161 million from NatWest Markets
Plc as a consequence of the ring fencing regulations, with £56 million
of the deferred tax asset utilised to reduce current tax expense,
leaving a balance of recognised deferred tax asset at 31 December
2019 of £150 million recovered by the end of 2025. The remaining
losses transferred of £3,396 million have not been recognised in the
deferred tax balance at 31 December 2019; such losses will be
available to offset 25% of future taxable profits.
RBS – Annual Report and Accounts 2019
226
Unrecognised deferred tax
Deferred tax assets of £4,653 million (2018 - £5,118 million; 2017 -
£6,356, million) have not been recognised in respect of tax losses and
other temporary differences carried forward of £23,555 million (2018 -
£25,597 million; 2017 - £30,049 million) in jurisdictions where doubt
exists over the availability of future taxable profits. Of these losses and
other temporary differences, £839 million expire within five years and
£4,798 million thereafter. The balance of tax losses and other
temporary differences carried forward has no expiry date.
Deferred tax liabilities of £262 million (2018 - £257 million; 2017 - £255
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.
2019
£m
2018
£m
3,133
1,622
2017
£m
752
12,067
35
12,102
12,009
52
12,061
11,867
69
11,936
2019
£m
24,095
20,579
1,947
46,621
4,897
5,458
14,902
4,867
30,124
76,745
27,885
21,509
1,606
51,000
1,762
21,187
73,949
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
Notes on the consolidated accounts
7 Tax continued
Overseas tax losses
UBI DAC – A deferred tax asset of £181 million has been recognised
in respect of losses of £1,447 million of total losses of £8,334 million
carried forward at 31 December 2019. The losses arose principally as
a result of significant impairment charges between 2008 and 2013
during challenging economic conditions in the Republic of Ireland. The
movement in the current financial year reflects a £67m reduction in the
carrying value of the deferred tax asset and £:€ 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 2028.
NatWest Market N.V. (NWM N.V.) – NWM N.V. Group management
has considered that there are significant changes to NWM N.V.
Group’s activities compared to prior years as NWM N.V. has re-
purposed its banking licence and new business was transferred to
NWM N.V. during 2019. NWM N.V. Group management did not
recognise deferred tax asset in respect of losses carried forward at 31
December 2019 due to the implications from the wider strategic review
of the NWM franchise and the uncertainty in respect of Brexit.
8 Earnings per share
Earnings
Profit 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.
Assets
Loans
Reverse repos
Collateral given
Other loans
Total loans
Securities
Central and local government
- UK
- US
- other
Financial institutions and Corporate
Total securities
Total
Liabilities
Deposits
Repos
Collateral received
Other deposits
Total deposits
Debt securities in issue
Short positions
Total
RBS – Annual Report and Accounts 2019
227
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
£bn
3,750
11,293
17
3
2019
Assets
£m
44,792
104,957
280
—
150,029
Liabilities
£m
47,141
99,331
359
48
146,879
Notional
£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
RBS applies hedge accounting to manage the following risks; interest
rate, foreign exchange and net investment in foreign operations.
RBS’s interest rate hedging relate to the management of RBS’s non-
trading structural interest rate risk, caused by the mismatch between
fixed interest rates and floating interest rates. 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.
Cash flow hedges of interest rate risk relate to exposures to the
variability in future interest payments and receipts due to the
movement of benchmark interest rates on forecast transactions and on
recognised financial assets and financial liabilities. This variability in
cash flows is hedged by interest rate swaps, fixing the hedged cash
flows. For these cash flow hedge relationships, 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, SONIA, the Bank of
England Official Bank Rate or the European Central Bank Refinance
Rate. 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.
Fair value hedges of interest rate risk involve interest rate swaps
transforming the fixed interest rate risk in recognised financial assets
and financial liabilities to floating. The hedged risk is the risk of
changes in the hedged item’s fair value attributable to changes in the
benchmark interest rate embedded in the hedged item. The significant
embedded benchmarks are LIBOR, EURIBOR and SONIA. 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.
RBS hedges the exchange rate 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. Hedge accounting relationships will be designated where
required.
Exchange rate risk also arises in RBS where payments are
denominated in different currencies than the functional currency.
Residual risk positions are hedged with forward foreign exchange
contracts. Exposure to the variability in future payments due to the
movement of foreign exchange rates is hedged, fixing the exchange
rate the payments will be settled in. The derivatives are documented
as cash flow hedges.
For all cash flow hedging and fair value hedge relationships RBS
determines that there is an adequate level of offsetting between the
hedged item and hedging instrument by assessing the initial and
ongoing effectiveness by comparing movements in the fair value of the
expected highly probable forecast interest cash flows/ 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.
A number of the current cash flow and fair value hedges of interest
rate risk will be directly affected by interest rate benchmark reform;
RBS Group currently considers all of these relationships that mature
post 31 December 2021 to be directly affected. As at 31 December
2019 the exact transition date of affected hedge accounting
relationships is not known. The disclosures are prepared on these
assumptions where the amendments made to IAS39 paragraphs
102D-102N and 108G are applied. The disclosures made for the
notional of hedging instruments and risk exposures affected by interest
rate benchmark reform contain information for both the hedging
instrument and hedged risks even if only one of these will be directly
impacted by the reform.
RBS is managing the process to transition to alternative benchmark
rates in the following ways:
reviewed or is in the process of reviewing the fall-back language for
IBOR linked instruments
continues to liaise with regulators, standard setters, industry groups
and customers on other relevant matters as the transition to risk
free rates progresses
is in the process of adjusting its products, processes and
information systems to deal with the expected effects of the
discontinuation of IBOR most notably the transition and calculation
rules.
Further details on the transition from IBOR based rates to risk free
rates are in the Capital and risk management section on page 183.
RBS – Annual Report and Accounts 2019
228
Notes on the consolidated accounts
10 Derivatives continued
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 contracts
Net investment hedging
Exchange rate contracts
IFRS netting
2019
2018
Notional
£bn
Assets
£m
Liabilities
£m
Changes in fair
value used for
hedge
ineffectiveness (1)
£m
Notional
£bn
Assets
£m
Liabilities
£m
Changes in fair
value used for
hedge
ineffectiveness (1)
£m
65.1
1,186
2,641
(585)
60.0
965
2,061
(7)
148.4
12.3
0.4
226.2
1,450
66
—
2,702
(2,500)
202
833
8
4
3,486
(3,464)
22
366
(59)
8
(270)
149.7
12.5
2.0
224.2
1,148
106
32
2,251
(1,893)
358
872
—
10
2,943
(2,922)
21
Note:
(1) The change in fair value used for hedge ineffectiveness includes instruments that were decrecognised in the year.
The notional of hedging instruments affected by interest rate benchmark reform is as follows:
Fair value hedging
- LIBOR
- EURIBOR
Cash flow hedging
- LIBOR
- EURIBOR
- SONIA
The following table shows the period in which the hedging contract ends:
2019
Fair value hedging
Hedging assets - Interest rate risk
Hedging liabilities - Interest rate risk
Cash flow hedging
Hedging assets
Interest rate risk
Average fixed interest rate (%)
Hedging liabilities
Interest rate risk
Average fixed interest rate (%)
Exchange rate risk
Average USD - £ rate
Average INR - £ rate
Net investment hedging
Exchange rate risk
Principal currency hedges
Average SEK - £ rate
Average DKK - £ rate
Average NOK - £ rate
2018
Fair value hedging
Hedging assets - Interest rate risk
Hedging liabilities - Interest rate risk
Cash flow hedging
Hedging assets
Interest rate risk
Average fixed interest rate (%)
Hedging liabilities
Interest rate risk
Average fixed interest rate (%)
Exchange rate risk
Average USD - £ rate
Net investment hedging
Exchange rate risk
0-3 months
£bn
3-12 months
£bn
1-3 years
£bn
3-5 years
£bn
5-10 years
£bn
10-20 years
£bn
20+ years
£bn
0.6
—
4.8
1.10
1.9
0.83
—
—
—
0.1
12.27
8.78
12.36
1.0
—
3.9
1.87
8.6
0.54
—
—
1.2
1.6
0.5
8.1
6.3
11.4
0.97
22.0
1.01
1.9
1.56
88.64
0.3
12.10
—
—
1.8
2.0
10.9
1.44
18.9
0.56
—
—
0.6
31.7
1.20
45.2
0.87
6.2
1.30
94.01
—
—
—
—
11.0
7.5
47.8
1.13
34.1
1.07
5.8
1.32
0.2
5.5
12.7
10.7
1.78
5.3
1.32
3.1
1.30
—
—
—
—
—
4.9
10.0
8.7
2.00
5.1
1.34
4.7
1.37
—
12.5
6.6
12.2
1.44
2.4
1.12
1.1
1.44
—
—
—
—
—
7.8
4.6
10.5
1.43
0.4
3.96
2.0
1.50
—
4.4
2.0
—
3.12
0.8
4.31
—
—
—
—
—
—
—
3.7
1.9
—
—
0.8
4.31
—
—
—
4.3
—
—
—
—
—
—
—
—
—
—
—
—
3.8
—
—
—
—
—
—
—
—
RBS – Annual Report and Accounts 2019
229
(770)
—
—
(777)
2019
£bn
40.2
11.1
44.2
3.4
0.0
Total
£bn
37.0
28.1
70.8
1.11
77.6
0.98
12.3
1.35
93.11
0.4
12.21
8.78
12.36
34.0
26.0
81.8
1.33
67.9
0.94
12.5
1.37
2.0
Notes on the consolidated accounts
10 Derivatives continued
The table below analyses assets and liabilities subject to hedging derivatives.
Impact on Changes in fair value
used as a basis to
Impact on hedged
items ceased to be
determine adjusted for hedging
gains or losses
£m
ineffectiveness (1)
£m
hedged items
included in
carrying value
£m
2019
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
Cash flow hedging - interest rate
Loans to banks and customers - amortised cost
Other financial assets - securities
Total
Cash flow hedging - interest rate (2)
Bank and customer deposits
Other financial liabilities - debt securities in issue
Cash flow hedging - exchange rate
Other financial liabilities - debt securities in issue
Subordinated liabilities
Total
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
Subordinated liabilities
Total
Carrying value
of hedged
assets and liabilities
£m
6,716
35,796
42,512
26,811
5,398
32,209
69,254
2,275
71,529
75,837
1,009
12,264
—
89,110
6,197
31,879
38,076
23,289
2,359
25,648
1,023
1,274
2,297
830
(275)
555
875
362
1,237
(19)
22
3
3
—
81,880
67,854
5,590
6,902
162,226
86
—
86
30
24
54
91
10
101
—
—
—
—
165
1,474
1,639
(807)
(222)
(1,029)
(566)
(16)
(582)
225
14
59
—
298
(62)
108
46
(7)
15
8
—
686
(28)
—
—
658
Notional
£bn
Hedged
adjustment
£m
42.0
12.7
9.6
3.3
34.7
0.1
0.1
908
93
(115)
(46)
(172)
0
0
Notes:
(1) The change in fair value used for hedge ineffectiveness instruments derecognised in the year.
(2) Comparative period balances are nil.
The following risk exposures will be affected by interest rate benchmark reform (notional, hedged adjustment):
Fair value hedging
- LIBOR
- EURIBOR
Cash flow hedging
- LIBOR
- EURIBOR
- BOE Base rate
- ECB REFI rate
- SONIA
RBS – Annual Report and Accounts 2019
230
Notes on the consolidated accounts
10 Derivatives continued
Hedge ineffectiveness recognised in other operating income comprises:
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
- Interest rate risk
Cash flow hedging ineffectiveness
Total
2019
£m
610
(585)
25
23
23
48
2018
£m
54
(7)
47
(112)
(112)
(65)
2017
£m
(48)
78
30
9
9
39
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.
RBS – Annual Report and Accounts 2019
231
Notes on the consolidated accounts
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. Assets
and liabilities outside the scope of IFRS 9 are shown within other assets and other liabilities.
Assets
Cash and balances at central banks
Trading assets
Derivatives (3)
Settlement balances
Loans to banks - amortised cost (4)
Loans to customers - amortised cost
Other financial assets
Intangible assets
Other assets
31 December 2019
Cash and balances at central banks
Trading assets
Derivatives (3)
Settlement balances
Loans to banks - amortised cost (4)
Loans to customers - amortised cost
Other financial assets
Intangible assets
Other assets
31 December 2018
Liabilities
Bank deposits (6)
Customer deposits
Settlement balances
Trading liabilities
Derivatives (7)
Other financial liabilities (8)
Subordinated liabilities
Other liabilities (9)
31 December 2019
Bank deposits (6)
Customer deposits
Settlement balances
Trading liabilities
Derivatives (7)
Other financial liabilities (8)
Subordinated liabilities
Other liabilities
31 December 2018
MFVTPL (1)
£m
FVOCI (2)
£m
76,745
150,029
715
49,283
Amortised
cost
£m
77,858
4,387
10,689
326,947
11,454
227,489
49,283
431,335
75,119
133,349
1,638
46,077
88,897
2,928
12,947
305,089
11,770
210,106
46,077
421,631
Held-for-
trading
£m
DFV (5)
£m
73,949
146,879
2,258
724
220,828
2,982
72,350
128,897
2,840
867
201,247
3,707
Amortised
cost
£m
20,493
369,247
4,069
42,962
9,255
2,206
448,232
23,297
360,914
3,066
36,892
9,668
2,218
436,055
Other
assets
£m
6,622
8,310
14,932
6,616
9,805
16,421
Other
liabilities
£m
7,441
7,441
6,736
6,736
Total
£m
77,858
76,745
150,029
4,387
10,689
326,947
61,452
6,622
8,310
723,039
88,897
75,119
133,349
2,928
12,947
305,089
59,485
6,616
9,805
694,235
Total
£m
20,493
369,247
4,069
73,949
146,879
45,220
9,979
9,647
679,483
23,297
360,914
3,066
72,350
128,897
39,732
10,535
8,954
647,745
Notes:
(1) Mandatory fair value through profit or loss.
(2) Fair value through other comprehensive income
(3) Includes net hedging derivatives of £202 million (2018 - 358 million).
(4) Includes items in the course of collection from other banks of £50 million (2018 - £484 million).
(5) Designated as at fair value through profit or loss.
(6) Includes items in the course of transmission to other banks of £2 million (2018 - £125 million).
(7) Includes net hedging derivatives of £22 million (2018 - £22 million).
(8) The carrying amount of other customer accounts designated as at fair value through profit or loss is nil (2018 - £26 million) higher than the principal amount.
(9) Includes lease liabilities.
RBS – Annual Report and Accounts 2019
232
Notes on the consolidated accounts
11 Financial instruments - classification continued
RBS Group's financial assets and liabilities include:
Reverse repos
Trading assets
Loans to banks - amortised cost
Loans to customers - amortised cost
Repos
Bank deposits
Customer deposits
Trading liabilities
2019
£m
2018
£m
24,095
165
10,649
24,759
3,539
9
2,597
1,765
27,885
941
3,774
25,645
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
2019
Derivative assets
Derivative liabilities
Net position (1)
Trading reverse repos
Trading repos
Net position
2018
Derivative assets
Derivative liabilities
Net position (1)
Trading reverse repos
Trading repos
Net position
Gross
£m
158,850
154,396
4,454
52,007
54,131
(2,124)
IFRS
offset
£m
(10,913)
(11,724)
811
(28,720)
(28,720)
—
Balance
sheet
£m
147,937
142,672
5,265
23,287
25,411
(2,124)
Effect of
master netting
and similar
agreements
£m
Cash
collateral
£m
(122,697) (18,685)
(122,697) (17,296)
(1,389)
—
Other
financial
collateral
£m
(4,292)
(1,276)
(3,016)
Net amount after
the effect of netting
agreements and
related collateral
£m
2,263
1,403
860
Instruments
outside
netting
agreements
£m
Balance
sheet total
£m
2,092 150,029
4,207 146,879
3,150
(2,115)
(562)
(562)
—
— (22,262)
— (24,808)
2,546
—
463
41
422
808
2,474
(1,666)
24,095
27,885
(3,790)
136,329
133,965
2,364
(5,041)
(6,776)
1,735
131,288
127,189
4,099
(106,762) (17,937)
(106,762) (15,227)
(2,710)
—
(4,469)
(3,466)
(1,003)
2,120
1,734
386
2,061 133,349
1,708 128,897
4,452
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
—
10
—
10
2,987 24,759
1,157 25,645
(886)
1,830
Note:
(1) The net IFRS offset balance of £811 million (2018 - £1,735 million) relates to variation margin netting reflected on other balance sheet lines.
RBS – Annual Report and Accounts 2019
233
Notes on the consolidated accounts
12 Financial instruments - valuation
Critical accounting policy: Fair value - financial instruments
In accordance with Accounting policies 12 and 20, 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, RBS 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.
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
Total financial liabilities held at fair value
Where RBS 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 RBS 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.
2019
2018
Level 1
Level 2
Level 3
Level 1
Level 2
Level 3
£m
£m
£m
£m
£m
£m
—
20,865
—
—
41,044
61,909
—
—
15,565
—
—
—
—
15,565
46,172
8,704
148,800
307
8,326
212,309
50,944
1,703
5,622
145,818
2,117
—
724
206,928
449
555
1,229
58
263
2,554
56
59
—
1,061
141
—
—
1,317
—
22,003
—
44,983
7,312
131,513
—
40,132
62,135
768
6,172
190,748
—
—
18,941
—
—
—
—
18,941
47,243
791
4,886
127,709
2,348
212
867
184,056
120
701
1,836
136
507
3,300
377
112
—
1,188
280
—
—
1,957
Notes:
(1) Transfers between levels are deemed to have occurred at the beginning of the quarter in which the instrument was transferred. There were no significant
transfers between level 1 and level 2.
(2) For an analysis of debt securities held at mandatorily fair value through profit or loss by issuer as well as ratings and derivatives, by type and contract, refer to
Capital and Risk management – Credit risk.
(3) The determination of an instrument’s level cannot be made at a global product level as a single product type can be in more than one level. For example, a
single name corporate credit default swap could be in level 2 or level 3 depending on whether the reference counterparty’s obligations are liquid or illiquid.
RBS – Annual Report and Accounts 2019
234
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, certain money market securities, 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.
RBS – Annual Report and Accounts 2019
235
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
2019
£m
244
386
165
238
1,033
2018
£m
250
419
238
327
1,234
The reduction in valuation reserves was primarily driven by a
combination of market moves, trade close-out activity and risk
reduction together with a reallocation of product and deal specific
reserves that are now included within modelled trade valuations.
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 and can result in either a funding charge or funding benefit.
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.
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 2019, net gains of £88
million (2018 - £59 million) were carried forward. During the year, net
gains of £183 million (2018 - £151 million) were deferred and £154
million (2018 - £148 million) were recognised in the income statement.
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.
RBS – Annual Report and Accounts 2019
236
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
Credit Spreads
Price
Credit spread
Debt securities
Price-based
Price
Equity Shares
Price-based
Valuation
Price
Price
Discount factor
Fund NAV
Trading liabilities and Other financial liabilities
Deposits
DCF based on recoveries Correlation
Interest rate
Price
Day count
Price-based
Yield analysis
Debt securities in issue Price-based
Valuation
Price
Fund NAV
Derivative assets and liabilities
Credit derivatives
DCF based on recoveries Credit spreads
Option pricing
Interest rate & FX
derivatives
Price-based
Option pricing
Equity derivatives
Option pricing
Correlation
Volatility
Upfront points
Recovery rate
Price
Correlation
Volatility
Constant Prepayment
Rate
Mean Reversion
Correlation
Forward
Volatility
High
101
101
246
25,914
80
9
120
2019
Low
—
53
—
—
—
6
80
—
—
—
65
2018
Low
High
—
—
—
—
—
8
80
132
—
154
24,181
—
11
120
99
1.74
—
—
—
—
98
95
(45)
(0.36)
—
—
44 JPY
—
146 EUR
—
21 JPY
—
136 EUR
622
6
(50)
27
—
10
—
(50)
19
2
—
(53)
—
—
500
80
80
99
40
—
99
70
15
92
87
—
—
18
(50)
47
—
10
90
(45)
1
—
—
(57)
864
11
500
80
80
100
40
110
99
76
—
—
92
7,106
23
%
bps
%
GBP
%
%
%
%
%
%
Number
CCY
GBP
bps
%
%
%
%
%
%
%
%
%
%
Points
%
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) Mean reversion: a measure of how much a rate reverts to its mean level.
(11) Constant prepayment rate: the rate is used to reflect how fast a pool of assets pay down.
(12) Day count: yield analysis on deposits are calculated using day count as an input, referring to the maturity of the deposit.
(13) RBS does not have any material liabilities measured at fair value that are issued with an inseparable third party credit enhancement.
RBS – Annual Report and Accounts 2019
237
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.
Assets
Trading assets
Loans
Securities
Derivatives
Interest rate
Foreign exchange
Other
Other financial assets
Loans
Securities
Liabilities
Trading liabilities
Deposits
Debt securities in issue
Derivatives
Interest rate
Foreign exchange
Other
Other financial liabilities - debt securities in issue
The decision to classify a modelled instrument as level 2 or 3 will be
dependent upon the product/model combination, 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.
2019
2018
Level 3
Favourable Unfavourable
Level 3
Favourable Unfavourable
£m
£m
£m
£m
£m
£m
449
555
1,015
98
116
58
263
2,554
56
59
630
222
209
141
1,317
10
—
160
10
10
—
80
270
—
—
70
10
20
10
110
(10)
—
(160)
(10)
(10)
—
(20)
(210)
—
—
(70)
(10)
(10)
(10)
(100)
120
701
1,487
130
219
136
507
3,300
377
112
808
279
101
280
1,957
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)
RBS – Annual Report and Accounts 2019
238
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.
2019
2018
Trading Other financial
Total
Total
Trading Other financial
Total
Total
assets (2)
assets (3)
assets
liabilities
assets (2)
assets (3)
assets
liabilities
At 1 January
Amounts recorded in the income statement (1)
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
2,657
(418)
—
492
(857)
—
1,121
(218)
(541)
(3)
2,233
£m
643
(1)
86
2
(59)
—
15
(38)
(326)
(1)
321
£m
£m
3,300 1,957
162
(419)
—
86
104
494
(588)
(916)
46
—
532
1,136
(429)
(256)
(466)
(867)
(1)
(4)
2,554 1,317
£m
2,692
(147)
—
1,307
(624)
—
871
(512)
(930)
—
2,657
£m
£m
£m
530 3,222 2,187
(344)
31
178
—
23
23
419
19 1,326
(231)
(625)
(1)
47
—
—
401
887
16
(204)
(515)
(3)
(316)
(125) (1,055)
(2)
6
643 3,300 1,957
6
(421)
—
8
—
(413)
—
110
—
(134)
(2)
158
6
24
4
(330)
—
Notes:
(1) There were £596 million net losses on trading assets and liabilities (2018 – £185 million gains) recorded in income from trading activities. Net gains on other
instruments of £15 million (2018 – £190 million) were recorded in other operating income and interest income as appropriate.
(2) Trading assets comprise assets held at fair value in trading portfolios.
(3) Other financial assets comprise fair value through other comprehensive income, designated as at fair value through profit or loss and other fair value through
profit or loss.
RBS – Annual Report and Accounts 2019
239
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.
2019
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
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
Items where fair value
approximates
Carrying
Fair value hierarchy level
carrying value
£bn
77.9
4.4
4.1
312.4
4.1
2.2
88.9
2.9
0.5
4.2
307.1
3.1
2.2
value
£bn
Fair value
£bn
Level 1
£bn
Level 2
£bn
Level 3
£bn
10.7
326.9
11.5
10.7
324.0
11.6
16.4
56.8
43.0
9.3
16.5
56.9
43.7
10.0
12.4
305.1
11.8
12.4
301.7
11.8
19.1
53.8
36.9
9.7
18.5
54.6
38.6
10.0
—
—
5.9
—
—
—
—
—
—
7.3
—
—
—
—
6.2
11.0
2.8
12.2
7.5
38.5
9.9
4.5
313.0
2.9
4.3
49.4
5.2
0.1
9.2
0.5
3.0
3.2
301.2
1.5
13.9
10.4
36.9
9.9
4.6
44.2
1.7
0.1
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 – amortised cost
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 Personal Banking,
Ulster Bank RoI, Commercial Banking (SME loans) and Private
Banking in order to reflect the homogeneous nature of these
portfolios.
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.
RBS – Annual Report and Accounts 2019
240
Notes on the consolidated accounts
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
Lease liabilities
Less than
12 months
£m
77,858
51,825
40,798
4,387
10,676
77,742
10,187
9,286
367,098
4,069
53,047
41,276
11,915
160
194
2019
More than
12 months
£m
—
24,920
109,231
—
13
249,205
51,265
11,207
2,149
—
20,902
105,603
33,305
9,819
1,629
Total
£m
Less than
12 months
£m
77,858
76,745
150,029
4,387
10,689
326,947
61,452
20,493
369,247
4,069
73,949
146,879
45,220
9,979
1,823
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
Assets and liabilities by contractual cash flow maturity
The tables show on the following page, 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.
The maturity of guarantees and commitments is based on the earliest
possible date they would be drawn in order to evaluate RBS Group's
liquidity position.
MFVTPL assets of £227.3 billion (2018 - £209.7 billion) and HFT
liabilities of £220.8 billion (2018 - £201.2 billion) have been excluded
from the following tables.
RBS – Annual Report and Accounts 2019
241
Notes on the consolidated accounts
13 Financial instruments – maturity analysis continued
2019
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
Finance lease
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
Lease liabilities
Derivatives held for hedging
Guarantees and commitments notional amount
Guarantees (3)
Commitments (4)
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
Finance lease
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
3-12 months
1-3 years
3-5 years
5-10 years
10-20 years
£m
£m
£m
£m
£m
£m
77,858
4,387
9,659
4,619
96,523
48,793
72
33
145,421
7,269
4,069
4,810
21
2,109
18,278
358,359
54
9
376,700
2,757
117,228
119,985
88,897
2,928
11,920
4,451
108,196
42,953
143
40
151,332
7,417
3,066
1,736
131
2,152
14,502
351,054
15
365,571
3,952
116,843
120,795
—
—
1,032
6,644
7,676
36,108
289
7
44,080
2,017
—
7,602
541
—
10,160
8,773
140
22
19,095
—
—
5
16,287
16,292
70,957
920
63
88,232
11,297
—
11,849
3,295
—
26,441
2,105
313
50
28,909
—
—
—
9,857
9,857
51,667
646
103
62,273
38
—
13,935
5,270
—
19,243
22
249
40
19,554
—
—
—
15,766
15,766
66,453
802
56
83,077
—
—
9,426
327
—
9,753
23
457
59
10,292
—
—
—
—
—
—
—
—
—
—
—
—
—
—
925
7,397
8,322
31,719
368
98
40,507
21
—
7,226
637
—
7,884
8,114
30
16,028
—
—
106
14,138
14,244
65,486
955
184
80,869
13,785
—
10,724
1,476
—
25,985
1,727
94
27,806
—
—
—
11,279
11,279
51,319
520
95
63,213
2,003
—
11,658
7,532
—
21,193
14
35
21,242
—
—
—
11,826
11,826
66,149
829
49
78,853
—
—
9,316
1,737
—
11,053
6
53
11,112
—
—
—
5,081
5,081
79,174
653
42
84,950
—
—
328
1,700
—
2,028
17
571
46
2,662
—
—
—
—
—
—
2,744
2,744
78,902
641
34
82,321
59
—
2,029
1,422
—
3,510
26
45
3,581
—
—
—
—
—
—
—
—
—
—
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.
RBS – Annual Report and Accounts 2019
242
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.
Loans - amortised cost
Stage 1
Stage 2
Stage 3
Of which: individual
Of which: collective
ECL provisions (1)
- Stage 1
- Stage 2
- Stage 3
Of which: individual
Of which: collective
ECL provision coverage (2,3)
- Stage 1 (%)
- Stage 2 (%)
- Stage 3 (%)
Impairment losses
ECL charge (4)
Stage 1
Stage 2
Stage 3
Of which: individual
Of which: collective
ECL loss rate - annualised (basis points) (3)
Amounts written off
Of which: individual
Of which: collective
2019
£m
2018*
£m
305,502
27,868
6,598
2,051
4,547
339,968
285,985
26,097
8,174
2,860
5,314
320,256
322
752
2,718
796
1,922
3,792
0.11
2.70
41.19
1.12
696
(212)
318
590
303
287
20.47
792
372
420
297
772
2,782
850
1,932
3,851
0.10
2.96
34.03
1.20
398
(143)
292
249
94
155
12.43
1,494
272
1,222
*2018 data has been restated for a change to presentation of unrecognised interest. Refer to Accounting policy 1, Other amendments to IFRS, for further details.
Includes £4 million (2018 – £5 million) related to assets classified as FVOCI.
Notes:
(1)
(2) ECL provisions coverage is calculated as ECL provisions divided by loans - amortised cost.
(3) ECL provisions coverage and ECL loss rates are calculated on third party loans and related ECL provisions and charge respectively.
(4)
Includes a £2 million charge (2018 – £3 million charge) related to other financial assets, of which at a £1 million release (2018 – £1 million charge) related
to assets classified as FVOCI; and nil (2018 – £31 million release) related to contingent liabilities.
The table above shows gross loans only and excludes amounts that are outside the scope of the ECL framework. Refer to page 142 for Financial
instruments within the scope of the IFRS 9 ECL framework for further details. Other financial assets within the scope of the IFRS 9 ECL framework were
cash and balances at central banks totalling £76.1 billion and debt securities of £59.4 billion (2018 – £87.2 billion and £57.0 billion respectively).
(5)
RBS – Annual Report and Accounts 2019
243
Notes on the consolidated accounts
14 Loan impairment provisions continued
Credit risk enhancement and mitigation
For information on Credit risk enhancement and mitigation held as
security, refer to Capital and risk management – credit risk.
Critical accounting policy: Loan impairment provisions
The loan impairment provisions have been established in accordance
with IFRS 9. Accounting policy 13 sets out how the expected loss
approach is applied. At 31 December 2019, customer loan impairment
provisions amounted to £3,792 million (2018 - £3,851 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 140.
IFRS 9 ECL model design principles
To meet IFRS 9 requirements, PD, LGD and EAD used in ECL
calculations must be:
Unbiased – material regulatory conservatism has been removed to
produce unbiased model estimates.
15 Other financial assets
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 PD, LGD and EAD models produce
term structures 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 probability of default
over the remaining lifetime at the reporting date) with the equivalent
lifetime PD as determined at the date of initial recognition.
The general approach for the IFRS 9 LGD models is to leverage
corresponding Basel LGD models with bespoke adjustments to ensure
estimates are unbiased and where relevant forward-looking.
For wholesale, while conversion ratios in the historical data show
temporal variations, these cannot be sufficiently explained by the CCI
measure (unlike in the case of PD and some LGD models) 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.
2019
Mandatory fair value through profit or loss
Fair value through other comprehensive income
Amortised cost
Total
2018
Mandatory fair value through profit or loss
Fair value through other comprehensive income
Amortised cost
Total
Central and local government
Debt securities
UK
£m
—
18,437
5,411
23,848
US
£m
—
13,981
242
14,223
Other
£m
—
8,786
120
8,906
Other
debt
£m
305
7,130
5,681
13,116
Total
£m
305
48,334
11,454
60,093
—
17,192
6,928
24,120
—
11,767
264
12,031
—
11,329
120
11,449
669
5,306
4,458
10,433
669
45,594
11,770
58,033
Equity
shares
£m
45
949
—
994
65
483
—
548
Other
loans
£m
365
—
—
365
904
—
—
904
Total
£m
715
49,283
11,454
61,452
1,638
46,077
11,770
59,485
On 16 June 2019, Alawwal bank and SABB were legally combined as part of a statutory merger. Alawwal bank’s assets and liabilities were
absorbed by SABB. The transaction was executed through a share swap, with Alawwal bank’s shareholders receiving SABB shares for each
Alawwal bank share. £595 million of the 2019 balance pertains to the transfer of ownership from Alawwal bank to SABB.
Dividends on FVOCI equity shares during the year included approximately £15 million in relation to the equity holding in SABB and certain other
dividends which were not individually significant. There were no material dividends received in relation to equity shares disposed during the
year.
RBS – Annual Report and Accounts 2019
244
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 (2)
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
Impairment of goodwill and other intangible assets
At 31 December
Goodwill
£m
18,164
(180)
1
—
(8,005)
9,980
12,558
(180)
(8,005)
—
—
4,373
2019
Other (1)
£m
2,024
2
—
380
(113)
2,293
1,014
1
(72)
291
44
1,278
Total
£m
20,188
(178)
1
380
(8,118)
12,273
13,572
(179)
(8,077)
291
44
5,651
Goodwill
£m
18,039
77
48
—
—
18,164
12,481
77
—
—
—
12,558
2018
Other (1)
£m
2,259
9
2
364
(610)
2,024
1,274
5
(573)
271
37
1,014
Total
£m
20,298
86
50
364
(610)
20,188
13,755
82
(573)
271
37
13,572
Net book value at 31 December
5,607
1,015
6,622
5,606
1,010
6,616
Notes:
(1) Principally internally generated software.
(2) Goodwill that arose on the acquisition of ABN AMRO Holding N.V..
Intangible assets other than goodwill are reviewed for indicators of
impairment. In 2019 £44 million (2018 - £37 million) of previously
capitalised software was impaired primarily as a result of software
which is no longer expected to yield future economic benefit.
RBS Group’s goodwill acquired in business combinations analysed by
reportable segment is in Note 4, Segmental analysis. It is reviewed
annually at 31 December for impairment. No impairment was indicated
at 31 December 2019 or 2018.
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 RBS Group’s capital targets. In
2018, the methodology was enhanced to reflect legal entity changes in
RBS 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 2019 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.
The table below has not been restated for the re-segmentation which
transferred Business Banking from UK Personal & Business Banking
to Commercial Banking. The impact was a transfer of £0.7 billion
goodwill from UK Personal & Business Banking (now UK Personal
Banking) to Commercial Banking. This re-segmentation has improved
the headroom of Commercial Banking (including Business Banking) by
approximatively £4.2 billion and reduced the headroom of UK Personal
Banking by the equivalent amount without generating any impairment
of the goodwill in the CGUs impacted.
31 December 2019
UK Personal Banking
Commercial Banking
RBS International
31 December 2018
UK Personal & Business Banking
Commercial & Private Banking
RBS International
Assumptions
Terminal
Goodwill growth rate discount rate
%
13.3
13.4
12.0
Recoverable
Pre-tax amount exceeded
carrying value
£bn
8.7
4.1
2.1
£bn
2.7
2.6
0.3
%
1.6
1.6
1.6
Consequential impact of
1% adverse movement
Consequential impact of
5% adverse movement
Discount
Terminal
rate growth rate
£bn
£bn
(1.0)
(2.2)
(0.7)
(1.8)
(0.3)
(0.5)
Forecast
Income
£bn
(2.1)
(2.1)
(0.4)
Forecast
cost
£bn
(0.9)
(1.1)
(1.2)
Break
even
discount
rate
%
16.3
12.7
16.8
3.4
1.9
0.3
1.8
1.8
1.8
13.1
13.0
12.9
14.4
4.5
0.7
(2.2)
(1.2)
(0.2)
(1.4)
(0.8)
(0.2)
(4.0)
(2.3)
(0.4)
(1.7)
(1.0)
(0.1)
27.7
17.6
18.5
RBS – Annual Report and Accounts 2019
245
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
Other assets
Notes:
(1) Includes interest in Alawwal bank of nil (2018 - £1,179 million).
(2) Includes interest in Business Growth Fund £424 million (2018 - £387 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
2019
£m
4,928
1,011
66
380
275
436
614
46
554
8,310
2019
£m
—
2,258
42,962
45,220
2019
£m
7,775
2,058
146
9,979
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
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.
New issue
The Royal Bank of Scotland Group plc
US$750 million 3.754% dated notes 2029
Redemptions
The Royal Bank of Scotland Group plc
US$350 million 4.70% dated notes 2018
€1,000 million 3.63% dated notes 2024 (callable March 2019)
NatWest Markets Plc
€2,000 million 6.934% dated notes 2018
£103 million 9.5% undated subordinated bonds 2018 (callable August 2018)
£35 million 5.5% fixed rate undated subordinated notes (callable December 2019)
NatWest Plc
SEK 90 million floating rate notes 2019
NWM N.V. and subsidiaries
US$500 million 4.65% dated notes 2018
US$16 million floating rate notes 2019
US$71.8 million floating rate notes 2019
€250 million 4.70% notes 2019 (partial redemption)
Capital
treatment
Tier 2
Ineligible
Tier 2
Tier 2
Ineligible
Ineligible
Tier 1
Tier 2
Tier 2
Tier 2
Tier 2
2019
£m
577
577
—
855
855
—
—
35
35
8
8
—
10
56
145
211
2018
£m
—
—
267
—
267
1,743
103
—
1,846
—
—
141
2
—
—
143
RBS – Annual Report and Accounts 2019
246
Notes on the consolidated accounts
20 Other liabilities
Retirement benefit liabilities (Note 5)
Deferred tax (Note 7)
Notes in circulation
Current tax
Accruals
Deferred income
Lease liabilities (Note 22) (3)
Other liabilities
Provisions for liabilities and charges
Provisions for liabilities and charges
At 1 January 2019
Implementation of IFRS 16 on 1 January 2019 (3)
ECL impairment charge
Transfer (to)/from accruals and other liabilities
Currency translation and other movements
Transfer
Charge to income statement
Releases to income statement
Provisions utilised
At 31 December 2019
2019
£m
119
266
2,109
132
1,125
362
1,823
1,034
2,677
9,647
Other (2)
£m
990
(170)
29
15
(19)
—
434
(161)
(337)
781
2018
£m
165
454
2,152
100
1,047
451
—
1,581
3,004
8,954
Total
£m
3,004
(170)
29
12
(40)
—
1,563
(320)
(1,401)
2,677
Payment
protection
insurance (1)
£m
695
—
—
—
—
—
900
—
(439)
1,156
Other
customer
redress
£m
536
—
—
(3)
(15)
35
141
(48)
(332)
314
Litigation
and other
regulatory
£m
783
—
—
—
(6)
(35)
88
(111)
(293)
426
Notes:
(1) The balance at 31 December 2019 includes provisions held in relation to offers made in 2018 and earlier years of £97 million.
(2) Materially comprises provisions relating to property closures and restructuring costs.
(3) Refer to Note 22 for further information on the impact of IFRS 16 implementation.
There are uncertainties as to the eventual cost of redress in relation to certain of the provisions contained in the table above. Assumptions
relating to these are inherently uncertain and the ultimate financial impact may be different from the amount provided.
Payment protection insurance
An additional provision of £0.9 billion was taken during 2019, reflecting greater than predicted complaints volumes in the lead up to the 29
August 2019 deadline for making new PPI complaints. RBS Group has made provisions totalling £6.2 billion to date for PPI claims, of which
£5.0 billion had been utilised by 31 December 2019.
The table below shows the sensitivity of the provision to reasonable changes in the principle assumptions in relation to claims which are still
being processed, all other assumptions remaining the same. RBS Group has received 4.9 million claims at the 29 August 2019 deadline.
Assumption
Average redress (1)
No PPI % (2)
Uphold rate (3)
Sensitivity
Claims
processed as at
Claims still
31 December 2019
£1,631
28%
85%
to process
£1,552
60%
94%
Change in
assumption
+/- £150
+/- 3%
+/- 2%
Consequential
change in
provision
£m
+/- 74
+/- 13
+/- 16
Notes:
(1) Average redress for PPI (mis-sale) and Plevin (commission) pay-outs.
(2) No PPI % relates to those cases where no PPI policy exists.
(3) Average uphold rate per customer initiated claims received directly by RBS Group, including those received via claims management companies, to end of
timebar for both PPI (mis-sale) and Plevin (commission), excluding those for which no PPI policy exists.
Background information for all material provisions is given in Note 26.
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
RBS 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.
RBS – Annual Report and Accounts 2019
247
Notes on the consolidated accounts
21 Share capital and other equity
Allotted, called up and fully paid
Ordinary shares of £1
Non-cumulative preference shares of US$0.01 (1)
Cumulative preference shares of £1
2019
£m
12,094
—
1
2018
£m
12,049
—
1
Number of shares
2019
000s
12,093,909
10
900
2018
000s
12,048,605
10
900
Note:
(1) No shares were redeemed in 2019. (2018 – 26 million shares with a total nominal value of £0.2 million were redeemed).
Movement in allotted, called up and fully paid ordinary shares
At 1 January 2018
Shares issued
At 1 January 2019
Shares issued
At 31 December 2019
£m
11,965
84
12,049
45
12,094
Number of
shares - 000s
11,964,565
84,040
12,048,605
45,304
12,093,909
Ordinary shares
There is no authorised share capital under the company’s constitution.
At 31 December 2019, the directors had authority granted at the 2019
Annual General Meeting to issue up to £605 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. This authority was renewed at the Annual
General Meeting in 2019 and shareholders will be asked to renew this
authorisation at the Annual General Meeting in 2020.
In the three years to 31 December 2019, the percentage increase in
issued share capital due to non pre-emptive issuance (excluding
employee share schemes) for cash was 1.42%. In addition, the
company issued 45 million ordinary shares of £1 each in connection
with employee share plans.
In 2019 RBS paid an interim dividend of £241 million, or 2.0p per
ordinary share (2018 - £241 million, or 2.0p per ordinary share) and a
special dividend of £1,449 million, or 12.0p per ordinary share (2018 –
nil). In addition, the company announced that the directors have
recommended a final dividend of £364 million, or 3.0p per ordinary
share (2018 – £422 million, or 3.5p per ordinary share), and a further
special dividend of £606 million, or 5.0p per ordinary share (2018 –
£904 million, or 7.5p per ordinary share), which are both subject to
shareholders’ approval at the Annual General Meeting on 29 April
2020.
If approved, payment will be made on 4 May 2020 to shareholders on
the register at the close of business on 27 March 2020. The ex-
dividend date will be 26 March 2020.
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.
RBS – Annual Report and Accounts 2019
248
Notes on the consolidated accounts
21 Share capital and other equity continued
Non-cumulative preference shares classified as equity
Shares of US$0.01 - Series U
Note:
(1) Preference shares where distributions are discretionary are classified as equity.
Number of shares
in issue
10,130
Interest rate
Redemption
price per share
floating 29 September 2017 US$100,000
Redemption
date on or after
Merger reserve - the merger reserve comprises the premium on
shares issued to acquire NatWest, less goodwill amortisation charged
under previous GAAP.
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 2019, 15 million ordinary shares of
£1 each of the company (2018 - 8 million) were held by employee
share trusts in respect of share awards and options granted to
employees. During the year, the employee share trusts purchased 24
million ordinary shares and delivered 17 million ordinary shares in
satisfaction of the exercise of options and the vesting of share awards
under the employee share plans. In future, the company is intending to
use shares purchased by the RBS Group Employee Share Ownership
Trust and any available treasury shares to satisfy obligations under its
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.
On a winding-up or liquidation of the company, the holders of the non-
cumulative preference shares are entitled to receive, out of any
surplus assets available for distribution to the company's shareholders
(after payment of arrears of dividends on the cumulative preference
shares up to the date of repayment) pari passu with the cumulative
preference shares and all other shares of the company ranking pari
passu with the non-cumulative preference shares as regards
participation in the surplus assets of the company, a liquidation
distribution per share equal to the applicable redemption price detailed
in the table above, together with an amount equal to dividends for the
then current dividend period accrued to the date of payment, before
any distribution or payment may be made to holders of the ordinary
shares as regards participation in the surplus assets of the company.
Except as described above, the holders of the non-cumulative
preference shares have no right to participate in the surplus assets of
the company.
Holders of the non-cumulative preference shares are not entitled to
receive notice of or attend general meetings of the company except if
any resolution is proposed for adoption by the shareholders of the
company to vary or abrogate any of the rights attaching to the non-
cumulative preference shares or proposing the winding-up or
liquidation of the company. In any such case, they are entitled to
receive notice of and to attend the general meeting of shareholders at
which such resolution is to be proposed and are entitled to speak and
vote on such resolution (but not on any other resolution). In addition, in
the event that, prior to any general meeting of shareholders, the
company has failed to pay in full the 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.
Paid-in equity - comprises equity instruments issued by the company
other than those legally constituted as shares.
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)
2019
£m
2018
£m
2017
£m
1,278
734
2,046
1,278
734
2,046
1,278
734
2,046
4,058
4,058 4,058
Notes:
(1) The coupons on these notes are non-cumulative and payable at the
company’s discretion. In the event RBS 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.
RBS – Annual Report and Accounts 2019
249
Notes on the consolidated accounts
22 Leases
RBS Group has adopted IFRS 16 Leases retrospectively from 1 January 2019 on a modified retrospective basis without restating prior periods.
The impact on RBS Group’s balance sheet and retained earnings is shown below:
Retained earnings at 1 January 2019
Loans to customers - Finance leases
Other assets - Net right of use assets
- Recognition of lease liabilities
- Provision for onerous leases
Other liabilities
Net impact on retained earnings
Retained earnings at 1 January 2019
2019
£bn
14.3
0.2
1.3
(1.9)
0.2
(1.7)
(0.2)
14.1
On adoption of IFRS 16, RBS Group recognised right of use assets and lease liabilities in relation to leases which has been previously classified
as operating leases under IAS17 Leases subject to certain practical expedients as allowed by the standard (see below).
The following practical expedients permitted by the standard were used:
A single discount rate has been applied to a portfolio of lease with reasonably similar characteristics.
The accounting for operating leases with a remaining lease term of 12 months at 1 January 2019 for non property leases.
Exclusion of initial direct costs from the measurement of the right of use asset at the date of initial application.
Reliance on assessment of onerous provisions under IAS 37 Provisions, Contingent Liabilities and Contingent Assets for the purposes of
impairment.
The use of hindsight where contracts contain options to extend or terminate the lease in determining the lease term.
The lease liabilities were measured at the present value of the remaining lease payments, discounted using the lessee’s incremental borrowing
rate as of 1 January 2019. The weighted average of lessee’s incremental borrowing rate applied to the lease liabilities on 1 January 2019 was
2.3%.
2019
£m
2,689
(134)
(684)
5
1,876
2019
£m
(44)
(224)
(4)
9
2019
£m
1,162
135
(1,823)
Operating lease commitments at 31 December 2018
Adjustments as a result of different treatment of extension and termination options
Discounted using the incremental borrowing rate
Other
Lease liabilities recognised as at 1 January 2019 on adoption of IFRS 16
Lessees
Amounts recognised in consolidated income statement
Interest payable
Depreciation (1)
Rental expense on short term leases
Income from subleasing right of use assets
Rental expense in respect of operating leases in 2018 was £233 million.
Amounts recognised on balance sheet
Right of use assets included in property, plant and equipment (2)
Additions to right of use assets
Lease liabilities (3)
The total cash outflow for leases is £222 million.
Notes:
(1) Includes impairment of right of use assets of £86 million.
(2) Includes right of use asset for plant and equipment of £23 million and depreciation of £5 million.
(3) Contractual cashflows of lease liabilities is shown in Note 13.
RBS – Annual Report and Accounts 2019
250
Notes on the consolidated accounts
22 Leases continued
Operating leases
Minimum rentals payable under non-cancellable leases (1)
- within 1 year
- after 1 year but within 5 years
- after 5 years
Note:
(1) Predominantly property leases.
2018
£m
232
736
1,721
2,689
Lessor
Acting as a lessor, RBS Group 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.
Amounts included in consolidated income statement
Finance leases
Finance income on the net investment in leases
Operating leases
Lease income
Amount receivable under finance leases
Within 1 year
1 to 2 years
2 to 3 years
3 to 4 years
4 to 5 years
After 5 years
Lease payments total
Unguaranteed residual values
Future drawdowns
Unearned income
Present value of lease payments
Impairments
Net investment in finance leases
Within 1 year
1 to 5 years
After 5 years
Total
2019
£m
314
27
2019
£m
3,388
2,229
1,733
758
682
1,758
10,548
(215)
(30)
(1,196)
9,107
(110)
8,997
2018
Finance lease contracts and hire purchase agreements
Gross Present value
Other
Future
Present
amounts
adjustments
movements
Drawdowns
£m
3,237
4,566
1,935
9,738
£m
(208)
(370)
(710)
(1,288)
£m
(123)
(100)
(38)
(261)
£m
(70)
—
—
(70)
value
£m
2,836
4,096
1,187
8,119
The total present value of finance lease contracts and hire purchase agreements excludes £62m of impairment allowance.
RBS – Annual Report and Accounts 2019
251
Notes on the consolidated accounts
22 Leases continued
The following tables show undiscounted lease receivables from operating leases:
Amounts receivable under operating leases
Within 1 year
1 to 2 years
2 to 3 years
3 to 4 years
4 to 5 years
After 5 years
Total
Within 1 year
1 to 5 years
After 5 years
Total
Nature of operating lease assets on the balance sheet
Transportation
Cars and light commercial vehicles
Other
2019
£m
154
123
83
48
17
12
437
2018
£m
139
325
49
513
2018
£m
313
11
285
609
2019
£m
334
24
295
653
Residual value exposures
The table below gives details of the unguaranteed residual value 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
After 1 year
After 2 years
Within 1
but within
but within
year
£m
25
1
26
68
55
175
2 years
£m
5 years
£m
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
RBS – Annual Report and Accounts 2019
252
Notes on the consolidated accounts
23 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 Group balance sheet.
Asset type
Mortgages - RoI
Cash deposits
2019
Debt securities in issue
Held by third
parties
£m
468
—
Held by
RBS (1)
£m
1,917
—
Assets
£m
2,221
156
2,377
Total
£m
2,385
—
Assets
£m
2,817
221
3,038
2018
Debt securities in issue
Held by third
parties
£m
778
Held by
RBS (1)
£m
2,239
Total
£m
3,017
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 2019, debt securities in issue by such SEs (and
held by third parties) were £673 million (2018 - £596 million). The
associated loans and mortgages at 31 December 2019 were £9,001
million (2018 - £8,402 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 2019,
£9,630 million (2018 - £9,446) of loans to customers and £280 million
(2018 - £478 million) of debt investments provided security for debt
securities in issue and other borrowing of £7,241 million (2018 -
£6,627 million).
Lending of own issued securities
RBS Group has issued, retained, and lent debt securities under
securities lending arrangements. 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 maturity of the
transaction. RBS Group retains all of the risks and rewards of own
issued liabilities lent under such arrangements and does not recognise
them. At 31 December 2019, £1,704 million secured and £424 million
unsecured (2018 - £526 million secured, £424 million unsecured) of
own issued liabilities have been retained and lent under securities
lending arrangements. At 31 December 2019,£1,745 million (2018 -
£551 million) of loans and other debt instruments provided security for
secured own issued liabilities that have been retained and lent under
securities lending arrangements.
Unconsolidated structured entities
RBS’s interests in unconsolidated structured entities are analysed below.
Asset backed
securitisation
vehicles
£m
2019
Investment
funds
and other
£m
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
Maximum exposure
760
196
(154)
802
1,544
5,373
6,917
1,619
—
9,338
RBS – Annual Report and Accounts 2019
253
Total
£m
812
220
(158)
874
2,180
5,480
7,660
1,916
—
Asset backed
securitisation
vehicles
£m
2018
Investment
funds
and other
£m
621
200
(156)
665
1,972
4,521
6,493
2,138
3
9,299
148
47
(49)
146
536
—
536
213
10
905
Total
£m
769
247
(205)
811
2,508
4,521
7,029
2,351
13
10,204
52
24
(4)
72
636
107
743
297
—
1,112
10,450
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.
Notes on the consolidated accounts
24 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.
The following assets have failed derecognition (1)
Trading assets
Other financial assets
Note:
(1) Associated liabilities were £27,342 million (2018 – £23,222 million).
2019
£m
23,247
4,269
27,516
2018
£m
14,020
9,890
23,910
2019
£m
27,918
39
17,920
4,688
50,565
2018
£m
35,571
1,050
25,930
713
63,264
Assets pledged as collateral
RBS Group pledges collateral with its counterparties in respect of derivative liabilities and bank and stock borrowings.
Assets pledged against liabilities
Trading assets
Loans to banks - amortised cost
Loans to customers - amortised cost
Other financial assets (1)
Note:
(1) Includes assets pledged for pension derivatives and stock borrowings.
25 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 RBSG plc 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
Foreseeable charges
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
PRA transitional basis
2019
£m
2018
£m
43,547
(496)
(4,058)
38,993
(118)
(474)
(35)
(757)
(431)
(6,622)
(167)
(968)
(365)
(2)
(9,939)
29,054
4,051
1,366
140
5,557
34,611
4,867
1,345
6,212
40,823
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
36,223
6,386
1,565
7,951
44,174
It is RBS Group 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 Group 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 Group has complied with the
PRA’s capital requirements throughout the year.
A number of subsidiaries and sub-groups within RBS Group,
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 Group 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.
RBS – Annual Report and Accounts 2019
254
Notes on the consolidated accounts
26 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 2019.
Although RBS Group 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 Group's expectation of future losses.
Guarantees
Other contingent liabilities
Standby facilities, credit lines and other commitments
Contingent liabilities and commitments
Less than
1 year
£m
1,015
1,134
59,878
62,027
More than
1 year but
less than
3 years
£m
427
600
21,054
22,081
More than
3 years but
less than
5 years
£m
218
161
31,664
32,043
Over
5 years
£m
1,097
583
7,164
8,844
2019
£m
2,757
2,478
119,760
124,995
2018
£m
3,952
3,052
119,879
126,883
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 Group'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 Group's
normal credit approval processes.
Guarantees – RBS Group gives guarantees on behalf of customers. A
financial guarantee represents an irrevocable undertaking that RBS
Group will meet a customer's specified obligations to third party if the
customer fails to do so. The maximum amount that RBS Group could
be required to pay under a guarantee is its principal amount as
disclosed in the table above. RBS Group expects most guarantees it
provides 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.
Standby facilities and credit lines - under a loan commitment, RBS
Group 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 Group 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.
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.
Capital expenditure on property, plant and equipment
Contracts to purchase goods or services (1)
Note:
(1) Of which due within 1 year: £285 million (2018 – £253 million).
2019
£m
20
614
634
2018
£m
17
541
558
RBS – Annual Report and Accounts 2019
255
Notes on the consolidated accounts
26 Memorandum items continued
Trustee and other fiduciary activities
In its capacity as trustee or other fiduciary role, RBS 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
RBS Group's financial statements. RBS Group earned fee income of
£250 million (2018 - £257 million; 2017- £244 million) from these
activities.
The Financial Services Compensation Scheme
The Financial Services Compensation Scheme (FSCS), the UK's
statutory fund of last resort for customers of authorised financial
services firms, pays compensation if a firm is unable to meet its
obligations. The FSCS funds compensation for customers by raising
management expenses levies and compensation levies on the
industry. In relation to protected deposits, each deposit-taking
institution contributes towards these levies in proportion to their share
of total protected deposits on 31 December of the year preceding the
scheme year (which runs from 1 April to 31 March), subject to annual
maxima set by the Prudential Regulation Authority. In addition, the
FSCS has the power to raise levies on a firm that has ceased to
participate in the scheme and is in the process of ceasing to be
authorised for the costs that it would have been liable to pay had the
FSCS made a levy in the financial year it ceased to be a participant in
the scheme.
The FSCS 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
RBSG plc and certain members of RBS 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 Group 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
Group’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
Group 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 Group 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 Group 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 Group has recognised. Where (and as far as)
liability cannot be reasonably estimated, no provision has been
recognised. RBS Group 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 RBS Group’s
litigation, investigations and reviews, see the Risk Factor relating to
legal, regulatory and governmental actions and investigations set out
on page 293.
Litigation
Residential mortgage-backed securities (RMBS) litigation in the US
RBS Group 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 Group companies consist of cases filed by the Federal
Home Loan Bank of Seattle and the Federal Deposit Insurance
Corporation that together involve the issuance of less than US$1billion
of RMBS issued primarily from 2005 to 2007. A case filed by the
Federal Home Loan Bank of Boston was settled during 2019. In
addition, NatWest Markets Securities Inc. (‘NWMSI’) 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. This was paid into escrow pending court approval of the
settlement, which was granted on 11 March 2019, but which is now the
subject of an appeal by a class member who does not want to
participate in the settlement.
London Interbank Offered Rate (LIBOR) and other rates litigation
NWM Plc and certain other members of RBS Group, including RBSG
plc, are defendants in a number of class actions and individual claims
pending 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 RBS 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 co-
ordinated proceeding in the SDNY. In December 2016, the SDNY held
that it lacks personal jurisdiction over NWM Plc with respect to certain
claims. As a result of that decision, all RBS Group companies have
been dismissed from each of the USD LIBOR-related class actions
(including class actions on behalf of over-the-counter plaintiffs,
exchange-based purchaser plaintiffs, bondholder plaintiffs, and lender
plaintiffs), but seven non-class cases in the co-ordinated proceeding
remain pending against RBS Group defendants. The dismissal of RBS
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. In September 2019, RBS Group companies reached a
settlement in principle to resolve the class action on behalf of
bondholder plaintiffs (those who held bonds issued by non-defendants
on which interest was paid from 2007 to 2010 at a rate expressly tied
to USD LIBOR). The settlement is subject to documentation and court
approval. The amount of the settlement is covered by an existing
provision.
RBS – Annual Report and Accounts 2019
256
Notes on the consolidated accounts
26 Memorandum items continued
Litigation, investigations and reviews
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. In July 2017,
the FDIC, on behalf of 39 failed US banks, commenced substantially
similar claims against RBS Group companies and others in the High
Court of Justice of England and Wales. The action alleges that the
defendants breached 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. The Commodity Exchange Act
claims are now the subject of a further motion to dismiss on the ground
that they are impermissibly extraterritorial. The second class action
relates to other derivatives allegedly tied to JPY LIBOR and Euroyen
TIBOR. The court dismissed that case in March 2017 on the ground
that the plaintiffs lack standing. The plaintiffs have commenced an
appeal of that decision.
In addition to the above, five other class action complaints were filed
against RBS Group companies in the SDNY, each relating to a
different reference rate. The SDNY dismissed all claims against NWM
Plc in the case relating to Euribor for lack of personal jurisdiction in
February 2017. The SDNY dismissed, for various reasons, the case
relating to the Singapore Interbank Offered Rate and Singapore Swap
Offer Rate on 26 July 2019, the case relating to Pound Sterling LIBOR
on 16 August 2019, and the case relating to Swiss Franc LIBOR on 16
September 2019. Plaintiffs are appealing each of these four dismissals
to the United States Court of Appeals for the Second Circuit. In the fifth
class action, which relates to the Australian Bank Bill Swap Reference
Rate, the SDNY dismissed all claims against RBS Group companies
for lack of personal jurisdiction on 26 November 2018, but plaintiffs
have filed an amended complaint, which is the subject of a further
motion to dismiss.
NWM 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.
NWM Plc has filed a motion for cancellation of service. If the motion is
successful then the current action will be brought to an end, although
the claimants may seek to re-raise the claim in the future. If the motion
is unsuccessful, or the claimants seek to re-raise the claims at a later
date, NWM Plc may seek to file other potentially dispositive motions.
In 2015, NWM Plc 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 NWM Plc, NWMSI and
other banks. On 31 December 2018, some of the same claimants, as
well as others, filed proceedings in the High Court of Justice of
England and Wales, asserting competition claims against NWM Plc
and several other banks. The claim was served on 25 April 2019.
Two other FX-related class actions remain pending in the SDNY. First,
there is a class action on behalf of ‘consumers and end-user
businesses,’ which is proceeding against NWM Plc 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). In January
2020, the parties in this case reached a settlement subject to
agreement on non-monetary terms, documentation, and court
approval. A provision has been established to cover the amount that
NWM Plc would pay pursuant to the settlement.
On 27 May 2019, a class action was filed in the Federal Court of
Australia against NWM Plc and other banks on behalf of persons who
bought or sold currency through FX spots or forwards between 1
January 2008 and 15 October 2013 with a total transaction value
exceeding AUS $0.5 million. RBSG plc has been named in the action
as a ‘cartel party’, but is not a defendant. The claim was served on 28
June 2019.
On 29 July and 11 December 2019, two separate applications seeking
opt-out collective proceedings orders were filed in the UK Competition
Appeal Tribunal (‘the CAT’) against RBSG plc, NWM Plc and other
banks. Both applications have been brought on behalf of persons who,
between 18 December 2007 and 31 January 2013, entered into a
relevant FX spot or outright forward transaction in the EEA with a
relevant financial institution or on an electronic communications
network. It is anticipated that the CAT will determine which of the two
opt-out applications should be permitted to represent the class.
Two motions to certify FX-related class actions have been filed in the
Tel Aviv District Court in Israel. RBSG plc and NWMSI have been
named as defendants in the first motion. RBS plc has been named in
the second. These motions have been consolidated but not yet served
on the named RBS Group companies.
NWM Plc was defending a claim for £446.7 million in the High Court of
Justice of England and Wales brought by London Bridge Holdings Ltd
and others, which was settled on confidential terms in November 2019
without admission of liability.
Certain other foreign exchange transaction related claims have been
or may be threatened. RBS Group cannot predict whether any of these
claims will be pursued, but expects that some may.
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 and
similar litigation’ on page 258.
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 Group defendants are RBSG plc, NWM Plc,
NWMSI, and NWB Plc. A motion to dismiss was filed by the
defendants in August 2019, and remains pending before the court.
FX antitrust litigation
NWM Plc, NWMSI and / or RBSG plc, are defendants in several cases
relating to NWM Plc’s foreign exchange (FX) business, each of which
is pending before the same federal judge in the SDNY.
Government securities antitrust litigation
NWMSI and certain other US broker-dealers are defendants 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.
Class action antitrust claims commenced in March 2019 are pending in
the SDNY against NWM Plc, NWMSI and other banks in respect of
Euro-denominated bonds issued by European central banks (EGBs).
The complaints allege a conspiracy among dealers of EGBs to widen
the bid-ask spreads they quoted to customers, thereby increasing the
prices customers paid for the EGBs or decreasing the prices at which
RBS – Annual Report and Accounts 2019
257
Notes on the consolidated accounts
26 Memorandum items continued
Litigation, investigations and reviews
customers sold the bonds. The class consists of those who purchased
or sold EGBs in the US between 2007 and 2012. The defendants have
filed a motion to dismiss this matter, which remains pending.
Swaps antitrust litigation
NWM Plc and other members of RBS Group, including RBSG plc, 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. Fact
discovery in these cases is complete, and the class plaintiffs have filed
a motion for class certification, which as of January 2020 is fully
briefed.
In addition, in June 2017, TeraExchange filed a complaint against RBS
Group companies, including RBSG plc, 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 Group companies.
Madoff
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 NWM
N.V. amounted to fraudulent conveyances that should be clawed back
for the benefit of the Madoff estate.
In the primary action, filed in December 2010, the trustee is asking the
bankruptcy court for leave to file an amended complaint, seeking to
clawback a total of US$276.3 million in redemptions that NWM N.V.
allegedly received from certain Madoff feeder funds and certain swap
counterparties. NWM N.V. is opposing the motion for leave to file an
amended complaint and otherwise will seek dismissal of the claims. In
the second action, filed in October 2011, the trustee seeks to recover
an additional US$21.8 million. In November 2016, the bankruptcy court
dismissed this case on international comity grounds, and that decision
was appealed. On 25 February 2019, the United States Court of
Appeals for the Second Circuit reversed the bankruptcy court’s
decision. If the U.S. Supreme Court declines to review the matter, the
case will return to the bankruptcy court for further proceedings.
Interest rate hedging products and similar litigation
RBS Group 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 in March 2015. RBS Group remains exposed to
potential claims from customers who were either ineligible to be
considered for redress or who are dissatisfied with their redress offers.
Separately, NWM Plc is defending claims filed in France by three
French local authorities relating to structured interest rate swaps.
NWM N.V. was named as a co-defendant in two of the three claims.
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 three claims is being
appealed to the Supreme Court, one is being remitted from the
Supreme Court to the Court of Appeal for reconsideration of one
aspect, and one remains to be heard before the lower court.
Tax dispute
HMRC issued a tax assessment in 2012 against RBSG plc for
approximately £86 million regarding a value-added-tax (‘VAT’) matter
in relation to the trading of European Union Allowances (‘EUAs’) by a
joint venture subsidiary in 2009. RBSG plc 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, NWM Plc is a named defendant in civil proceedings
before the High Court of Justice of England and Wales 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
NWM 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
NWB 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 NWB Plc is liable for damages
arising from those attacks pursuant to the US Anti-Terrorism Act
because NWB 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 NWB Plc with
respect to two of the 18 terrorist attacks at issue. In March 2018, the
trial court granted a request by NWB Plc for leave to file a renewed
summary judgment motion in respect of the remaining claims, and in
March 2019, the court granted summary judgment in favour of NWB
Plc. The plaintiffs have commenced an appeal of the judgment to the
United States Court of Appeals for the Second Circuit.
NWM 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. NWM 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 16
September 2019, the district court dismissed the case, finding that the
claims were deficient for several reasons, including lack of sufficient
RBS – Annual Report and Accounts 2019
258
Notes on the consolidated accounts
26 Memorandum items continued
Litigation, investigations and reviews
allegations as to the alleged conspiracy and causation. The plaintiffs
are appealing the decision to the United States Court of Appeals for
the Second Circuit. Another action, filed in the SDNY in 2017, was
dismissed on 28 March 2019 on similar grounds. The dismissal is
subject to re-pleading by the plaintiffs or appeal. Other follow-on
actions that are substantially similar to the two that have now been
dismissed are pending in the same courts.
Securities underwriting litigation
NWMSI 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 NWMSI), are liable to purchasers for misrepresentations
and omissions made in connection with the offering of such securities.
Investigations and reviews
RBS Group’s businesses and financial condition can be affected by
the actions of various governmental and regulatory authorities in the
UK, the US, the EU and elsewhere. RBS Group 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 Group, remediation
of systems and controls, public or private censure, restriction of RBS
Group’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 Group, its business, authorisations
and licences, reputation, results of operations or the price of securities
issued by it.
RBS Group is co-operating fully with the investigations and reviews
described below.
US investigations relating to fixed-income securities
In the US, RBS Group 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 several state attorneys
general relating to the issuance and underwriting of RMBS were
previously resolved. Certain other state attorneys general have sought
information regarding similar issues, and RBS Group is aware that at
least one such investigation is ongoing.
In October 2017, NWMSI 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. In the NPA, the USAO agreed not to file criminal
charges relating to certain conduct and information described in the
NPA, conditioned on NWMSI and affiliated companies complying with
the NPA’s reporting and conduct requirements during its term,
including by not engaging in conduct during the NPA that the USAO
determines was a felony under federal or state law or a violation of the
anti-fraud provisions of the United States securities law.
The RBS Group’s NatWest Markets business is currently responding
to a separate criminal investigation by the USAO concerning unrelated
securities trading in 2018 by certain former traders of NWM Plc,
involving alleged spoofing, which was reported in connection with the
NPA. In January 2020, the NPA was extended for a fourth time (for
three additional months) to accommodate advanced discussions with
the USAO and the DoJ concerning potential resolution of the criminal
investigation into alleged spoofing as well as the impact of that
conduct and any such resolution on the status of the NPA and the
potential consequences thereof. The duration and outcome of these
matters remain uncertain, including in respect of whether settlement
may be reached. Material adverse collateral consequences, in addition
to further substantial costs and the recognition of further provisions
may occur depending on the outcome of the investigation, as further
described in the Risk Factor relating to legal, regulatory and
governmental actions and investigations set out on page 293.
Foreign exchange related investigations
In May and June 2019, RBSG plc and NWM Plc reached settlements
totalling approximately EUR 275 million in connection with the EC and
certain other related competition law investigations into FX trading.
The aggregate amount was fully covered by existing provisions in
NWM Plc. NWM Plc continues to co-operate with ongoing
investigations from competition authorities on similar issues relating to
past FX trading. The exact timing and amount of future financial
penalties, related risks and collateral consequences remain uncertain
and may be material.
In 2014 and 2015, NWM 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, NWM Plc pled
guilty to a one-count information charging an antitrust conspiracy
occurring between as early as December 2007 to at least April 2010.
NWM 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 NWM Plc consisting of a US$395 million fine and a three-year
probation, which ended in January 2020.
As part of the settlement with the Federal Reserve, NWM Plc and
NWMSI 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, NWM Plc and NWMSI 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 programme, an
improved compliance risk management programme, and an enhanced
internal audit programme. NWM Plc and NWMSI are obligated to
implement and comply with these programmes as approved by the
Federal Reserve, and are also required to conduct, on an annual
basis, a review of applicable compliance policies and procedures and
a risk-focused sampling of key controls.
FCA review of RBS Group’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 Group’s treatment of SME customers whose relationship was
managed by RBS Group’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 Group 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
RBS – Annual Report and Accounts 2019
259
Notes on the consolidated accounts
26 Memorandum items continued
Litigation, investigations and reviews
an independent third party. The complaints process has since closed
to new complaints.
RBS Group’s remaining provisions in relation to these matters at 31
December 2019 were £106 million.
In July 2018, the FCA confirmed that it had concluded its investigation
and that it did not intend to take disciplinary or prohibitory action
against any person in relation to these matters. On 13 June 2019, the
FCA published a full report explaining how it had reached that
conclusion.
Investment advice review
As a result of an FSA review in 2013, the FCA required RBS Group 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 to
December 2012. The review was conducted under section 166 of the
Financial Services and Markets Act 2000. Redress was paid to certain
customers in that sample group.
RBS Group 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 now complete. Phase 2 (covering sales in 2010) started in April
2018 and, with the exception of a small cohort of former customers for
whom there is an extended completion date, was materially completed
by the end of 2019, with full completion and formal closure expected
by the end of June 2020.
In addition, RBS Group 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. This remediation activity was
completed in December 2019.
RBS Group’s remaining provisions in relation to these matters at 31
December 2019 were less than £10 million. During October 2019, the
FCA notified RBS Group of its intention to appoint a Skilled Person
under section 166 of the Financial Services and Markets Act 2000 to
conduct a review of whether RBS Group’s past business review of
investment advice provided during 2010 to 2015 was subject to
appropriate governance and accountability and led to appropriate
customer outcomes. RBS Group is co-operating with the Skilled
Person’s review, which is expected to conclude during Q1 2020.
Packaged accounts
RBS Group has had dedicated resources in place since 2013 to
investigate and resolve packaged account complaints on an individual
basis 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 Group made
amendments to its sales process and complaints procedures to
address the findings from that review.
RBS Group’s remaining provisions in relation to these matters at 31
December 2019 were £23 million.
FCA investigation into RBS’s compliance with the Money Laundering
Regulations 2007
In July 2017, the FCA notified RBS Group that it was undertaking an
investigation into RBS Group’s compliance with the Money Laundering
Regulations 2007 in relation to certain customers. 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 Group is cooperating
with the investigations, including responding to 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 Group. The FCA provided
its written findings to RBS Group on 28 June 2019, and RBS Group
responded on 8 August 2019. On 28 August 2019, the FCA instructed
RBS Group to appoint a Skilled Person to provide assurance on
financial crime governance arrangements in relation to two financial
crime change programmes. RBS Group is cooperating with the Skilled
Person’s review, which is expected to conclude during Q1 2020. It is
not yet possible to assess the likely impact of these matters.
Payment Protection Insurance (PPI)
Since 2011, RBS Group 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 for making new PPI complaints,
which expired on 29 August 2019.
RBS Group has made provisions totalling £6.2 billion to date for PPI
claims, including an additional provision of £900 million taken at 30
September 2019, reflecting greater than predicted complaints volumes
in the lead up to the 29 August 2019 deadline. £5.0 billion of these
provisions had been utilised by 31 December 2019.
FCA mortgages market study
In December 2016, the FCA launched a market study into the
provision of mortgages. On 26 March 2019 the final 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. A period of consultation is underway and
the FCA has indicated that it intends to provide updates on the
remedies in due course.
US/Swiss tax programme
In December 2015, Coutts & Co Ltd, a member of RBS Group,
incorporated in Switzerland, entered into a four-year non-prosecution
agreement (the NPA) with the DoJ that required it to pay a penalty of
US$78.5 million. 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). On 20 December 2019, Coutts & Co
Ltd agreed to pay an additional $US27.9 million penalty relating to
additional US related accounts that is had not identified and disclosed
to DOJ at the time the NPA was executed in 2015. The additional
penalty amount has been paid. The four-year term of the NPA has now
expired, though certain document preservation and cooperation
obligations continue.
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. With
the exception of one administrative criminal proceeding against a
former employee of Coutts & Co Ltd, there are no administrative or
regulatory proceedings pending against current or former employees.
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.
RBS – Annual Report and Accounts 2019
260
Notes on the consolidated accounts
26 Memorandum items continued
Litigation, investigations and reviews
Response to reports concerning certain historic Russian and
Lithuanian transactions
Media coverage in March 2019 highlighted an alleged money
laundering scheme involving Russian and Lithuanian entities between
2006 and 2013. The media reports alleged that certain European
banks, including ABN AMRO and at least one US bank, were involved
in processing certain transactions associated with this scheme. RBS
Group has responded to regulatory requests for information.
Review and investigation of treatment of tracker mortgage customers
in Ulster Bank Ireland DAC
In December 2015, the Central Bank of Ireland (CBI) announced that it
had written to a number of lenders requiring them to put in place a
robust plan and framework to review the treatment of customers who
had been sold mortgages with a tracker interest rate, or with a tracker
interest rate entitlement. The CBI stated that the intended purpose of
the review was to identify any cases where customers’ contractual
rights under the terms of their mortgage agreements were not fully
honoured, or where lenders did not fully comply with various regulatory
requirements and standards regarding disclosure and transparency for
customers. The CBI required Ulster Bank Ireland DAC (UBI DAC), a
member of RBS Group incorporated in the Republic of Ireland, to
participate in this review. UBI DAC submitted its phase 2 report to the
CBI in March 2017, identifying impacted customers. The redress and
compensation phase (phase 3) has now concluded although an
appeals process is currently anticipated to run until at least the end of
2020.
RBS Group has made provisions totalling €312 million (£266 million) to
date for this matter, of which €269 million (£229 million) had been
utilised by 31 December 2019.
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 remains 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 remains ongoing to identify and remediate impacted
customers. RBS Group has made provisions totalling €167 million
(£142 million), of which €111 million (£94 million) had been utilised by
31 December 2019.
27 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) 2019 includes the purchase of Free agent.
28 Analysis of changes in financing during the year
Share capital, share premium,
paid-in equity and merger reserve
2019
£m
(55)
(55)
351
—
—
—
351
—
(380)
(84)
2018
£m
(113)
(9)
(122)
—
—
—
—
—
5
(364)
(481)
2017
£m
(131)
—
(131)
177
(15)
155
—
317
(1)
(384)
(199)
At 1 January
Issue of ordinary shares
Redemption of paid-in equity
Issue of subordinated liabilities
Redemption of subordinated liabilities
Interest on subordinated liabilities
Issue of MRELs
Maturity/redemption of MRELs
Interest on MRELs
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
2019
£m
2017
£m
28,015 27,791 52,979
2018
£m
Subordinated liabilities
2019
£m
2017
£m
10,535 12,722 19,419
2018
£m
17
—
144
—
306
(720)
577
(1,108)
(510)
—
(2,258)
(566)
—
(5,747)
(717)
17
—
144
(414)
(1,041)
(2,824)
(6,464)
— (25,789)
—
95
—
—
71
748
196
28,127 28,015 27,791
80
—
—
—
—
485
(233)
637
9,979 10,535 12,722
2019
£m
16,821
MRELs
2018
£m
9,202
2017
£m
6,832
3,640
(1,285)
(428)
1,927
—
—
—
501
19,249
6,996
—
(237)
6,759
3,612
(774)
(139)
2,699
860
16,821
(329)
9,202
RBS – Annual Report and Accounts 2019
261
Notes on the consolidated accounts
29 Analysis of cash and cash equivalents
At 1 January
- cash
- cash equivalents
Net cash outflow
At 31 December
Comprising:
Cash and balances at central banks
Treasury bills and debt securities
Net loans to banks
Cash and cash equivalents
2019
£m
2018
£m
2017
£m
88,897
20,039
108,936
(8,348)
100,588
77,858
1,064
21,666
100,588
98,337
24,268
122,605
(13,669)
108,936
88,897
83
19,956
108,936
88,414
10,156
98,570
24,035
122,605
98,337
427
23,841
122,605
Note:
(1) Includes cash collateral posted with bank counterparties in respect of derivative liabilities of £7,570 million (2018 - £7,302 million; 2017 - £6,683 million).
Certain members of RBS Group 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
30 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
2019
£1.0bn
€0.1bn
2018
£0.9bn
€0.1bn
2017
£0.6bn
€0.1bn
2019
£000
1,881
4,783
6,664
741
7,405
2018
£000
2,001
4,657
6,658
—
6,658
No directors accrued benefits under defined benefit schemes or money purchase schemes during 2019 and 2018.
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
2019
£000
22,067
401
2,435
24,903
2018
£000
20,316
82
—
20,398
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 plc and NWH Ltd Boards, members of the RBSG plc and NWH Ltd
Executive Committees, and the Chief Executives of NatWest Markets Plc and RBS International (Holdings) Limited. This is on the basis that
these individuals have been identified as Persons Discharging Managerial Responsibilities of RBSG plc under the new governance structure.
31 Transactions with directors and key management
At 31 December 2019, amounts outstanding in relation to transactions, arrangements and agreements entered into by authorised institutions in
RBS Group, as defined in UK legislation, were £741,550 in respect of loans to seven 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 plc under the new governance structure. The captions in the RBS Group's primary financial
statements include the following amounts attributable, in aggregate, to key management:
Loans to customers
Customer deposits
2019
£000
1,662
37,727
2018
£000
1,544
31,361
Key management have banking relationships with RBS 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.
RBS – Annual Report and Accounts 2019
262
Notes on the consolidated accounts
32 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 RBS Group.
In 2015, HM Treasury sold 630 million of RBSG plc’s ordinary shares
and a further 925 million in June 2018. At 31 December 2019, HM
Treasury’s holding in the company’s ordinary shares was 62.1%.
RBS 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 26)
together with banking transactions such as loans and deposits
undertaken in the normal course of banker-customer relationships.
Bank of England facilities
RBS Group may participate in a number of schemes operated by the
Bank of England in the normal course of business.
Members of RBS Group that are UK authorised institutions are
required to maintain non-interest bearing (cash ratio) deposits with the
Bank of England amounting to 0.324% 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.
RBS Group provides guarantees for certain subsidiary liabilities to the
Bank of England.
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. 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 RBS 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.
33 Post balance sheet events
RBS Group intends to refocus the NatWest Markets business and estimates it will incur exit, restructuring and disposal costs of around £0.6
billion in 2020. This estimate may be revised as plans to refocus the business are finalised.
RBS – Annual Report and Accounts 2019
263
Parent company financial statements and notes
Balance sheet as at 31 December 2019
Assets
Derivatives with subsidiaries
- designated hedges
- economic hedges
Amounts due from subsidiaries - amortised cost
Amounts due from subsidiaries - MFVTPL
Amounts due from subsidiaries - other assets
Investments in Group undertakings
Other financial assets
Other assets
Total assets
Liabilities
Amounts due to subsidiaries - amortised cost
Amounts due to subsidiaries - held for trading
Amounts due to subsidiaries - other liabilities
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
2019
£m
2018
£m
3
6
3
7
976
3
10,984
14,029
5
55,808
277
1
82,083
116
307
16
243
468
16,654
2,677
7,647
168
28,296
53,787
82,083
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
Owners’ equity includes a total comprehensive profit for the year, dealt with in the accounts of the parent company, of £2,712 million (2018 -
£2,554 million profit; 2017 - £1,211 million profit). Comprehensive profit for 2018 and 2017 has been restated for IAS12 ‘income taxes’. Refer to
Accounting policy 1, Other amendments to IFRS, for further details.
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 267 to 276 form an integral part of these financial statements.
The accounts were approved by the Board of directors on 13 February 2020 and signed on its behalf by:
Howard Davies
Chairman
Alison Rose-Slade
Group Chief Executive Officer
Katie Murray
Group Chief Financial Officer Registered No. SC45551
The Royal Bank of Scotland Group plc
RBS – Annual Report and Accounts 2019
264
Parent company financial statements and notes
Statement of changes in equity for the year ended 31 December 2019
Called-up share capital (1)
At 1 January
Ordinary shares issued
At 31 December
Paid-in equity
At 1 January
Redeemed/reclassified (2)
At 31 December
Share premium account
At 1 January
Ordinary shares issued
Capital reduction (3)
Redemption of debt preference shares (4)
At 31 December
Cash flow hedging reserve
At 1 January
Amount recognised in equity (5)
Amount transferred from equity to earnings (6)
Tax
At 31 December (7)
Capital redemption reserve
At 1 January
Capital reduction (3)
At 31 December
Retained earnings
At 1 January
Implementation of IFRS 9 on 1 January 2018
Profit attributable to ordinary shareholders and other equity owners
Equity preference dividends paid
Ordinary dividend paid
Paid-in equity dividends paid
Capital reduction (3)
Redemption of debt preference shares (4)
Redemption of equity preference shares (8)
Reclassification of paid-in equity
At 31 December
2019
£m
2018*
£m
2017*
£m
12,049
45
12,094
11,965
84
12,049
11,823
142
11,965
4,047
—
4,047
1,027
67
—
—
1,094
83
18
(39)
5
67
—
—
—
37,181
—
2,728
(39)
(3,018)
(367)
—
—
—
—
36,485
4,047
—
4,047
887
140
—
—
1,027
20
103
(25)
(15)
83
—
—
—
38,042
231
2,491
(182)
(241)
(355)
—
—
(2,805)
—
37,181
4,478
(431)
4,047
25,693
235
(25,789)
748
887
186
(157)
(47)
38
20
4,542
(4,542)
—
7,995
—
1,377
(234)
—
(483)
30,331
(748)
—
(196)
38,042
Owners’ equity at 31 December
53,787
54,387
54,961
*Restated for IAS12 ‘income taxes’. Refer to Accounting policy 1, Other amendments to IFRS, for further details.
Notes:
(1) Details of the company’s share capital are set out in Note 21 on the consolidated accounts.
(2) 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) On 15 June 2017, the Court of Session approved a reduction of RBSG plc’s capital so that the amounts which stood to the credit of share premium account and
capital redemption reserve were transferred to retained earnings.
(4) 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.
(5) Relates to foreign exchange hedges.
(6) Relates to foreign exchange hedges transferred to net interest income.
(7) Relates mainly to de-designated hedges.
(8) During 2018, non-cumulative US dollar, Euro and Sterling preference shares were redeemed.
The accompanying notes on pages 267 to 276 form an integral part of these financial statements.
RBS – Annual Report and Accounts 2019
265
Parent company financial statements and notes
Cash flow statement for the year ended 31 December 2019
Operating profit before tax
Write-back/(write-down) of investment in subsidiaries
Interest on subordinated liabilities
Elimination of foreign exchange differences
Profit on disposal of investments in subsidiaries
Charges and releases on provisions
Gain on redemption of own debt
Change in fair value taken to profit or loss of subordinated liabilities
Change in fair value taken to profit or loss of MRELs
Dividends received from subsidiary undertakings
Other non-cash items
Net cash flows from trading activities
Increase in amounts due from subsidiaries
(Increase)/decrease in derivative assets
Increase in other financial assets
Decrease/(increase) in other assets
(Increase)/decrease in amounts due to subsidiaries
Increase in derivative liabilities
Decrease in other liabilities
Decrease in other financial liabilities
Change in operating assets and liabilities
Income taxes received
Net cash flows from operating activities (1)
Dividends received from subsidiaries
Sale and maturity of other financial assets
Net investment in business interests and intangible assets
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
Issue of subordinated liabilities
Redemption of other equity instruments
Redemption of debt preference shares
Redemption of subordinated liabilities
Service cost of other equity instruments
Interest on subordinated liabilities
Issue of MRELs
Redemption and maturity of MRELs
Interest on MRELs
Net cash flows from financing activities (2)
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 (3)
2019
£m
2,799
1,489
419
(526)
1,739
(25)
—
268
(47)
(2,308)
(23)
3,785
863
(436)
(36)
113
(193)
266
—
(1)
576
15
4,376
463
—
(676)
234
21
17
—
577
—
—
(855)
(3,424)
(441)
1,178
(1,285)
69
(4,164)
(1)
232
307
539
2018
£m
2,341
293
438
986
—
—
—
—
(95)
—
429
4,392
12,290
(380)
(131)
(16)
466
161
(211)
—
12,179
49
16,620
—
—
(9,481)
—
(9,481)
144
—
—
(2,805)
—
(267)
(798)
(443)
(2,997)
(83)
171
(7,078)
1
62
245
307
2017
£m
1,471
(562)
497
(1,119)
(47)
25
(239)
—
(167)
—
562
421
2,087
210
—
(64)
—
24
(712)
—
1,545
64
2,030
—
264
(2,461)
119
(2,078)
306
—
—
(627)
(748)
(1,665)
(583)
(514)
3,612
(774)
105
(888)
(14)
(950)
1,195
245
Notes:
(1) Includes interest received of £371 million (2018 - £508 million, 2017 - £999 million) and interest paid of £988 million (2018 - £819 million, 2017 - £777 million).
(2) 2018 has been re-presented to align the balance sheet classification. MREL was previously presented in Operating activities and is now presented in Financing
activities.
(3) Comprises loans to banks.
RBS – Annual Report and Accounts 2019
266
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 108) 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) 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 RBSG plc are included in RBS’s accounting policies which are set out on pages 208 to 212 of the
consolidated financial statements, except that it has no policy regarding ‘Basis of consolidation’.
The income statement now includes any tax relief on the servicing cost of instruments classified as equity. Relief of £67 million was recognised
in the statement of changes in equity for the year ended 31 December 2018; this and prior years have been restated.
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.
Future accounting developments
International Financial Reporting Standards
A number of IFRSs and amendments to IFRS were in issue at 31 December 2019. RBSG plc is assessing the effect of adopting these
standards on its financial statements.
3 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.
Financial assets
Amounts due from subsidiaries (1)
Financial liabilities
Amounts due to subsidiaries (2)
Other financial liabilities - debt securities in issue (3)
Subordinated liabilities (3)
Notes:
(1) Fair value hierarchy level 2 - £6.1 billion (2018 - £5.0 billion) and level 3 - £5.2 billion (2018 - £7.0 billion).
(2) Fair value hierarchy level 3.
(3) Fair value hierarchy level 2.
2019
Carrying
2018
Carrying
value
Fair value
value
Fair value
£bn
£bn
£bn
£bn
11.0
11.3
12.0
12.0
0.1
16.7
7.6
0.1
17.3
8.4
0.6
16.8
7.9
0.5
16.7
8.3
RBS – Annual Report and Accounts 2019
267
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
Amounts due to subsidiaries - held for trading
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
2019
2018
Less than
More than
12 months
12 months
£m
£m
Total
£m
Less than
More than
12 months
12 months
£m
£m
Total
£m
104
(95)
5,169
145
—
872
98
5,815
13,884
277
976
3
10,984
14,029
277
(20)
40
6,959
14
—
545
(22)
5,077
10,741
241
525
18
12,036
10,755
241
2
307
52
(14)
177
26
33
114
—
191
482
116
307
243
468
479
—
58
3
117
—
252
132
596
—
310
135
16,477
2,651
7,614
16,654
2,677
7,647
1,322
2
55
15,495
2
7,886
16,817
4
7,941
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.
0-3 months
3-12 months
1-3 years
3-5 years
5-10 years
10-20 years
2019
Liabilities by contractual maturity
Amount due to subsidiaries - amortised cost
Other financial liabilities
- amortised cost
- designated at fair value through profit or loss
Subordinated liabilities
Total maturing liabilities
Derivatives held for hedging
2018
Liabilities by contractual 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 liabilities
Derivatives held for hedging
£m
£m
£m
18
4,601
213
2,558
7,390
117
7,507
£m
18
6,748
1,696
4,987
13,449
66
13,515
£m
45
7,161
1,136
387
8,729
7
8,736
£m
91
—
—
1,301
1,392
—
1,392
7
346
74
405
832
56
888
5
19
19
46
211
1,744
—
340
2,089
27
2,116
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
3
196
35
21
255
1
256
482
158
2
113
755
38
793
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
2019
2018
Notional
Assets
Liabilities
Notional
Assets
Liabilities
£bn
25.2
8.4
£m
953
23
976
£m
243
—
243
£bn
25.5
12.5
£m
419
106
525
£m
310
—
310
RBS – Annual Report and Accounts 2019
268
Parent company financial statements and notes
6 Investments in Group undertakings
Investments in Group undertakings are carried at cost less impairment. Movements during the year were as follows:
At 1 January
Currency translation and other adjustments
Additional investments in Group undertakings
Additions
Disposals
Impairment of investments
At 31 December
2019
£m
56,747
(38)
2,523
—
(1,973)
(1,451)
55,808
2018
£m
47,559
—
9,574
33,807
(33,900)
(293)
56,747
In 2019 the company invested additional capital in its subsidiaries of £1.8 billion of equity (NWM Plc) and AT1 issuances of £0.7 billion (NWM
Plc £0.2 billion, RFS Holdings B.V. £0.2 billion and The Royal Bank of Scotland International (Holdings) Limited £0.3 billion). On 29 November
2019 RBSG plc sold its investment in RBS Holdings N.V. (the parent company of NWM N.V.) to NWM Plc. This is reflected in the disposals and
additional investments in Group undertakings respectively.
The 2019 and 2018 impairments mainly related to the company’s investment in NWM Plc, mainly due to the decline in net realisable value as a
result of challenging market conditions. In 2018 the addition relates to the acquisition of NatWest Holdings Limited from NatWest Markets Plc.
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. Additional investments in Group undertakings in 2018
primarily relate to NatWest Holdings Limited.
The value in use review as at 31 December 2019 did not indicate the need for an impairment in the investment in NatWest Holdings Limited.
The directors considered the lack of headroom and the uncertainty relating to the estimate of the value in use, but concluded that there was a
sufficient basis to conclude that no impairment was required. Future value in use is primarily affected by changes in profitability, and changes in
discount rate. Adverse changes would lead to value in use falling below carrying value, and the need to recognise an impairment. The most
likely cause for this would be a failure to meet budgeted targets, including cost targets, or external downgrades in the UK economy.
The value in use model shows the following sensitivities:
1% adverse movement in discount rate
1% adverse movement in terminal growth rate
£250m adverse movement in operating profit before tax
Potential VIU movement
2019
£bn
(5.0)
(2.0)
(2.2)
2018
£bn
(5.3)
(2.3)
(2.2)
The principal subsidiary undertakings of the company are shown below. Their capital consists of ordinary and preference shares which are
unlisted with the exception of certain preference shares listed by NWB Plc. All of these subsidiaries are included in RBS Group’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)
NatWest Markets N.V. (4)
The Royal Bank of Scotland International Limited (5)
Nature of business
Banking
Banking
Banking
Banking
Banking
Banking
Broker dealer
Banking
Financial Institution
Country of incorporation and
principal area of operation
Great Britain
Great Britain
Great Britain
Republic of Ireland
Northern Ireland
Great Britain
US
Netherlands
Jersey
Group interest
100%
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.
7 Subordinated liabilities
Dated loan capital
Undated loan capital
Preference shares
Note:
(1) Table excludes amounts due to fellow subsidiaries of £116 million (2018 - £119 million).
Redemptions in the period are disclosed on Note 19 in the consolidated accounts.
2019
£m
6,980
666
1
7,647
2018
£m
7,253
687
1
7,941
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.
RBS – Annual Report and Accounts 2019
269
Parent company financial statements and notes
7 Subordinated liabilities continued
Dated loan capital
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
US$750 million 3.754% dated notes 2029
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
Tier 2
Ineligible
Tier 2
Tier 2
Tier 2
Tier 2
Tier 2
Capital
treatment
Ineligible
Ineligible
2019
£m
1,737
554
1,578
773
—
1,769
569
6,980
2019
£m
81
585
666
2018
£m
1,739
501
1,572
770
918
1,753
—
7,253
2018
£m
83
604
687
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 19 on the consolidated accounts.
The following table analyses intercompany subordinated liabilities:
Undated loan capital
US$150 million 8.00% undated notes 2012
8 Analysis of changes in financing during the year
At 1 January
Issue of ordinary shares
Issue of Additional Tier 1 capital notes
Issue of subordinated liabilities
Redemption of paid-in equity
Redemption of subordinated liabilities
Interest on subordinated liabilities
Issue of MRELs
Interest on MRELs
Net cash inflow/(outflow) 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,
and paid-in equity
2018
£m
16,899
2019
£m
17,123
2017
£m
41,994
17
—
—
—
—
—
144
—
—
—
—
—
306
—
—
(627)
—
—
17
144
(321)
—
95
—
—
17,235
—
80
—
—
17,123
(25,789)
71
748
196
16,899
Capital
treatment
Ineligible
Capital
treatment
Tier 2
2019
£m
1
2019
£m
116
Subordinated liabilities
2018
£m
1
2018
£m
119
2019
£m
8,059
—
—
577
—
(855)
(441)
(719)
—
—
—
423
7,763
2018
£m
7,977
—
—
—
—
(267)
—
2017
£m
10,668
—
—
—
—
(1,665)
—
(267)
(1,665)
—
—
—
349
8,059
—
—
—
(1,026)
7,977
9 Directors’ and key management remuneration
Directors’ remuneration is disclosed in Note 30 on the consolidated accounts. The directors had no other reportable related party transactions or
balances with the company.
RBS – Annual Report and Accounts 2019
270
Parent company financial statements and notes
10 Related undertakings
Legal entities and activities at 31 December 2019
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. RBS 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 RBS Group and fully consolidated for
accounting purposes
Entity name
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 Limited
G L Trains Ltd
Gatehouse Way Developments Ltd
Helena Productions Ltd
ITB1 Ltd
ITB2 Ltd
KUC Properties Ltd
Land Options (West) Ltd
Lombard & Ulster Ltd
Lombard Business Finance Ltd
Lombard Business Leasing Ltd
Lombard Corporate Finance (June 2) Ltd
Lombard Corporate Finance (December 1) Ltd
Lombard Corporate Finance (December 3) Ltd
Lombard Corporate Finance (6) Ltd
Lombard Corporate Finance (7) Ltd
Lombard Corporate Finance (11) Ltd
Lombard Corporate Finance (13) Ltd
Lombard Corporate Finance (15) 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
NatWest Capital Finance Ltd
NatWest Corporate Investments
NatWest Holdings Ltd
NatWest Invoice Finance Ltd
NatWest Markets Plc
NatWest Markets Secretarial Services Ltd
NatWest Markets Secured Funding LLP
Activity
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
CI
BF
SC
BF
BF
INV
OTH
CI
SC
BF
Regulatory
treatment Notes
(1)
(5)
(14)
(1)
(1)
(1)
(1)
(14)
(17)
(17)
(1)
(1)
(1)
(1)
(1)
(27)
(27)
(14)
(14)
(1)
(5)
(5)
(5)
(5)
(35)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(14)
(1)
(1)
(1)
(1)
(14)
(1)
(1)
(1)
(1)
(1)
(14)
(1)
(1)
(1)
(45)
(1)
(11)
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
DE
FC
FC
FC
FC
FC
FC
FC
Entity name
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 V Productions Ltd
Patalex 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 (September) Ltd
R.B. Leasing (December) Ltd
R.B. Leasing Company Ltd
R.B. Quadrangle Leasing Ltd
R.B.S. Special Investments Ltd
RB Investments 3 Ltd
RBOS (UK) Ltd
RBS AA Holdings (UK) Ltd
RBS Asset Finance Europe Ltd
RBS Asset Management (ACD) Ltd
RBS Asset Management Holdings
RBS Collective Investment Funds 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 (2) Ltd
RBSSAF (6) Ltd
RBSSAF (7) Ltd
RBSSAF (8) Ltd
RBSSAF (12) Ltd
RBSSAF (25) 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 Trust Plc
Safetosign Ltd
Sandford Leasing Ltd
SIG 1 Holdings Ltd
Activity
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
BF
BF
BF
BF
BF
BF
BF
BF
BF
SC
BF
INV
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
SC
BF
BF
Regulatory
treatment
DE
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
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
Notes
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(1)
(5)
(1)
(1)
(1)
(1)
(1)
(5)
(1)
(1)
(1)
(1)
(1)
(1)
(17)
(17)
(5)
(1)
(5)
(1)
(1)
(5)
(45)
(5)
(14)
(5)
(5)
(5)
(1)
(1)
(1)
(1)
(1)
(1)
(5)
(5)
(1)
(5)
(5)
(5)
(5)
(1)
(1)
(1)
(5)
RBS – Annual Report and Accounts 2019
271
Parent company financial statements and notes
10 Related undertakings continued
Entity name
SIG Number 2 Ltd
The One Account Ltd
The Royal Bank of Scotland Group
Independent Financial Services Ltd
The Royal Bank of Scotland Invoice
Discounting Ltd
The Royal Bank of Scotland Plc
Theobald Film Productions LLP
Activity
BF
BF
Regulatory
treatment Notes
(5)
(1)
FC
FC
BF
BF
CI
BF
FC
(5)
FC
FC
FC
(1)
(45)
(1)
Entity name
Ulster Bank Ltd
Ulster Bank Pension Trustees Ltd
Voyager Leasing Ltd
Walton Lake Developments Ltd
West Register (Hotels Number 3) Ltd
West Register (Property Investments) Ltd
West Register (Realisations) Ltd
Winchcombe Finance Ltd
Regulatory
treatment Notes
(35)
(35)
(1)
(14)
(5)
(5)
(5)
(1)
FC
DE
FC
DE
DE
DE
DE
FC
Activity
CI
TR
BF
INV
INV
BF
INV
BF
The following table details active related undertakings incorporated outside the UK which are 100% owned by RBS Group and fully consolidated
for accounting purposes
Regulatory
Regulatory
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.
Alternative Investment Fund B.V.
Arkivborgen KB
Artul Kiinteistöt Oy
Backsmedjan KB
BD Lagerhus AS
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
Fab Ekenäs Formanshagen 4
Fastighets AB Flöjten I Norrköping
Fastighets AB Stockmakaren
Fastighets Aktiebolaget Sambiblioteket
Fastighetsbolaget Holma I Höör AB
Financial Asset Securities Corp.
First Active Ltd
Forskningshöjden KB
Förvaltningsbolaget Dalkyrkan KB
Fyrsate Fastighets AB
Gredelinen KB
Grinnhagen KB
Hatros 1 AS
Horrsta 4:38 KB
IR Fastighets AB
IR IndustriRenting AB
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 Forssan Kutomonkuja 1
Kiinteistö Oy Järvenpään Helsingintie 41
Kiinteistö Oy Kemin K-CM
Kiinteistö Oy Kokkolan Teollisuuskatu 10
Kiinteistö Oy Lohjan Ojamonharjuntie 61
Activity
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
BF
BF
BF
BF
BF
BF
BF
BF
BF
treatment Notes
(2)
(4)
(6)
(7)
(7)
(8)
(2)
(6)
(12)
(6)
(13)
(6)
(6)
(6)
(15)
(19)
(22)
(23)
(24)
(25)
(18)
(13)
(6)
(12)
(6)
(72)
(6)
(6)
(19)
(26)
(6)
(6)
(6)
(6)
(6)
(13)
(6)
(6)
(6)
(6)
(7)
(7)
(7)
(6)
(6)
(6)
(6)
(36)
(37)
(12)
(12)
(12)
(12)
(12)
FC
FC
FC
FC
FC
DE
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
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
Entity name
Kiinteistö Oy Pennalan Johtotie 2
Kiinteistö Oy Pieksämäen Kukkaroniementie 5
Kiinteistö Oy Vantaan Rasti IV
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 Manx Leasing Ltd
Lombard Manx Ltd
Lothbury Insurance Company Ltd
Minster Corporate Services Ltd
Morar ICC Insurance Ltd
Narmovegen 455 AS
National Westminster International Holdings B.V.
NatWest Germany GmbH
NatWest Innovation Services Inc.
NatWest Markets Group Holdings Corporation
NatWest Markets N.V.
NatWest Markets Securities Inc.
NatWest Markets Securities Japan Ltd
Nightingale CRE 2018-1 Ltd
Nightingale Project Finance 2019 1 Ltd
Nightingale Securities 2017-1 Securities 2017-1 Ltd
Nordisk Renting AB
Nordisk Renting AS
Nordisk Renting Facilities Management AB
Nordisk Renting OY
Nordisk Specialinvest AB
Nordiska Strategifastigheter Holding AB
NWM Services India Private Ltd
Nybergflata 5 AS
R.B. Leasing BDA One Ltd
Random Properties Acquisition Corp. III
Activity
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
OTH
BF
CI
INV
INV
BF
BF
BF
BF
BF
BF
BF
BF
BF
SC
BF
BF
INV
treatment Notes
(12)
(12)
(12)
(12)
(12)
(12)
(12)
(12)
(12)
(12)
(12)
(12)
(12)
(12)
(12)
(12)
(12)
(12)
(38)
(12)
(12)
(12)
(12)
(12)
(6)
(6)
(6)
(15)
(40)
(40)
(41)
(4)
(43)
(89)
(88)
(59)
(19)
(19)
(2)
(19)
(46)
(48)
(48)
(48)
(6)
(13)
(72)
(12)
(6)
(6)
(44)
(13)
(52)
(19)
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
DE
FC
DE
FC
FC
FC
FC
FC
FC
FC
FC
DE
DE
DE
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
RBS – Annual Report and Accounts 2019
272
Parent company financial statements and notes
10 Related undertakings continued
Entity name
RBS (Gibraltar) Ltd
RBS AA Holdings (Netherlands) B.V.
RBS Acceptance Inc.
RBS Americas Property Corp.
RBS Asia Financial Services Ltd
RBS Asia Futures Ltd
RBS Asia Holdings B.V.
RBS Assessoria Ltd
RBS Asset Management (Dublin) Ltd
RBS Commercial Funding Inc.
RBS Deutschland Holdings GmbH
RBS Employment (Guernsey) Ltd
RBS Equity Corporation
RBS European Investments SARL
RBS Financial Products Inc.
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 (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
Activity
BF
BF
BF
SC
BF
BF
BF
SC
BF
BF
BF
SC
BF
BF
BF
BF
BF
BF
CI
BF
BF
BF
BF
BF
BF
SC
Regulatory
treatment Notes
(53)
(2)
(19)
(19)
(46)
(46)
(2)
(55)
(56)
(19)
(59)
(60)
(61)
(62)
(19)
(64)
(19)
(64)
(65)
(26)
(2)
(26)
(2)
(54)
(67)
(23)
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
Entity name
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 Energikapital AB
Svenskt Fastighetskapital AB
Svenskt Fastighetskapital Holding AB
The RBS Group Ireland Retirement Savings
Trustee Ltd
The Royal Bank of Scotland International
(Holdings) Ltd
The Royal Bank of Scotland International Ltd
Tilba Ltd
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
Activity
BF
OTH
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
Regulatory
treatment Notes
(57)
(22)
(22)
(71)
(22)
(6)
(6)
(6)
(6)
(72)
(6)
(6)
(6)
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
TR
DE
(26)
BF
CI
BF
BF
INV
TR
BF
CI
TR
FC
FC
FC
FC
FC
FC
FC
FC
DE
(15)
(15)
(40)
(6)
(26)
(26)
(26)
(26)
(26)
The following table details related undertakings which are 100% owned by RBS Group ownership but are not consolidated for accounting
purposes
Entity name
RBS Capital LP II
RBS Capital Trust II
Regulatory
Activity
BF
BF
treatment Notes
(57)
(58)
DE
DE
Entity name
RBS Retirement and Death Provision Company Ltd
RBSG Capital Corp.
RBS International Employees' Pension
Trustees Ltd
BF
DE
(66)
West Granite Homes Inc.
Activity
BF
BF
INV
Regulatory
treatment Notes
(68)
(19)
DE
DE
DE
(80)
The following table details active related undertakings incorporated in the UK where RBS Group ownership is less than 100%
Entity name
Belfast Bankers’ Clearing
Company Ltd
BGF Group Plc
GWNW City Developments Ltd
Higher Broughton (GP) Ltd
Higher Broughton Partnership LP
Isobel AssetCo Ltd
Isobel EquityCo Ltd
Isobel HoldCo Ltd
Isobel Intermediate HoldCo Ltd
Isobel Loan Capital Ltd
Isobel Mezzanine Borrower Ltd
Jaguar Cars Finance Ltd
Activity
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
BF
Accounting Regulatory Group
%
treatment
treatment
IA
EAA
EAJV
EAA
EAA
FC
FC
FC
FC
FC
FC
FC
PC
PC
DE
PC
DE
FC
FC
FC
FC
FC
FC
FC
25
25
50
41
41
75
75
75
75
75
75
50
Accounting Regulatory Group
Notes
(83)
(84)
(30)
(31)
(32)
(33)
(33)
(33)
(33)
(33)
(33)
(1)
Entity name
JCB Finance (Leasing) Ltd
JCB Finance Ltd
Land Options (East) Ltd
Landpower Leasing Ltd
London Rail Leasing Ltd
Natwest Covered Bonds (LM) Ltd
Natwest Covered Bonds LLP
Natwest Markets Secured
Funding (LM) Ltd
Pollinate International Ltd
RBS Sempra Commodities LLP
Silvermere Holdings Ltd
Vizolution Ltd
Activity
BF
BF
BF
BF
BF
BF
BF
BF
OTH
BF
BF
OTH
treatment
FC
FC
EAJV
FC
EAA
IA
FC
treatment
FC
FC
DE
FC
PC
PC
FC
FC
EAA
FC
FC
EAA
PC
DE
FC
FC
DE
% Notes
(34)
75
(34)
75
(5)
50
(34)
75
(39)
50
(11)
20
(14)
73
20
35
51
95
5
(69)
(87)
(5)
(5)
(86)
RBS – Annual Report and Accounts 2019
273
Parent company financial statements and notes
10 Related undertakings continued
The following table details related undertakings incorporated outside the UK where RBS Group ownership is less than 100%
Entity name
Ardmore Securities No.1 DAC
Ardmore Securities No.2 DAC
Celtic Issuer Holdings Limited
Celtic Residential Irish Mortgage
Securitisation No 14 DAC
Celtic Residential Irish Mortgage
Securitisation No 15 DAC
Cesium Structured Funding Ltd
CITIC Capital China Mezzanine
Ltd
Dunmore Securities No.1 DAC
Eris Finance S.R.L.
Förvaltningsbolaget
Klöverbacken Skola KB
Foundation Commercial
Property Ltd
Accounting Regulatory Group
Activity
BF
BF
BF
treatment
FC
FC
FC
treatment
DE
DE
DE
% Notes
(81)
0
(82)
0
(90)
0
BF
BF
BF
BF
BF
BF
BF
FC
FC
FC
IA
FC
IA
FC
DE
0
(21)
DE
FC
PC
DE
PC
0
0
(21)
(21)
33
0
45
(16)
(81)
(42)
FC
51
(6)
OTH
EAJV
PC
50
(15)
Entity name
Galaxy Futures Company Ltd
German Public Sector
Finance B.V.
Lunar Funding VIII Ltd
Optimus KB
Pharos Estates Ltd
Sempra Energy Trading LLC
Solar Energy Capital Europe
SARL
Spring Allies Jersey Ltd
Thames Asset Global
Securitization No.1 Inc.
The Drive4Growth Company Ltd
Tulip Asset Purchase
Company B.V.
Wiöniowy Management sp. Z.o.o.
Accounting Regulatory Group
Activity
BF
treatment
EAA
treatment
PC
% Notes
(28)
17
BF
BF
BF
OTH
BF
BF
BF
BF
OTH
BF
SC
EAJV
FC
FC
EAA
FC
EAJV
IA
FC
IA
FC
EAA
PC
DE
FC
DE
FC
PC
DE
FC
DE
FC
DE
50
0
51
49
51
33
49
0
20
0
25
(29)
(16)
(6)
(50)
(19)
(62)
(48)
(74)
(73)
(76)
(79)
The following table details related undertakings that are not active (actively being dissolved)
Entity name
Adam & Company Group Ltd
Adam & Company Second General
Partner Ltd
Alsecure Life Insurance PCC Ltd
Alsecure US PCC Ltd
Arran Cards Funding Plc
Arran Residential Mortgages Funding
2010-1 Plc
Arran Residential Mortgages Funding
2011-1 Plc
Arran Residential Mortgages Funding
2011-2 Plc
Celtic Residential Irish Mortgage
Securitisation No 09 Plc
Celtic Residential Irish Mortgage
Securitisation No 10 Plc
Celtic Residential Irish Mortgage
Securitisation No 11 Plc
Celtic Residential Irish Mortgage
Securitisation No 12 DAC
Celtic Residential Irish Mortgage
Securitisation No 16 DAC
First Active Holdings Ltd
First Active Insurances Services Ltd
First Active Investments No. 4 Ltd
First Active Treasury Ltd
Greenock Funding No 5 Plc
Heartlands (Central) Ltd
Hume Street Nominees Ltd
KUC (Public Houses) Ltd
Lombard Ireland Group Holdings
Unlimited Company
Lombard Ireland Ltd
Accounting Regulatory Group
treatment
FC
treatment
FC
% Notes
(5)
100
IA
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
DE
DE
DE
FC
50
100
100
0
(3)
(9)
(10)
(11)
FC
0
(11)
FC
0
(11)
FC
0
(11)
DE
0
(20)
DE
0
(21)
DE
0
(21)
DE
0
(21)
DE
FC
FC
FC
FC
FC
DE
FC
DE
0
100
100
100
100
0
100
100
100
(21)
(26)
(26)
(26)
(26)
(11)
(5)
(26)
(14)
FC
FC
100
100
(26)
(26)
Entity name
Maja Finance S.R.L.
Mulcaster Street Nominees Ltd
NatWest Nominees Ltd
Nevis Derivatives No. 3 LLP
Norgay Property Ltd
Qulpic Ltd
RB Investments 2 Ltd
RB Investments 5 Ltd
RBDC Administrator Ltd
RBS Asset Management Ltd
RBS Bank (Polska) S.A.
RBS Group (Australia) Pty Ltd
RBS Holdings III (Australia) Pty Ltd
RBS Investments Holdings (UK) Ltd
RBS Invoice Finance (Holdings) Ltd
Riossi Ltd
RoboScot Ventures Ltd
RoyScot Financial Services Ltd
Style Financial Services Ltd
The Royal Bank of Scotland Berhad
The Royal Bank of Scotland Finance
(Ireland)
Total Capital Finance Ltd
UB SIG (ROI) Ltd
Ulster Bank Group Treasury Ltd
Ulster Bank Wealth Unlimited Company
Walter Property Ltd
West Register (Hotels Number 1) Ltd
West Register (Land) Ltd
West Register (Project Developments) Ltd
West Register Hotels (Holdings) Ltd
Zrko Ltd
Accounting Regulatory Group
treatment
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
treatment
FC
FC
FC
FC
FC
DE
FC
FC
FC
FC
FC
FC
FC
FC
FC
DE
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
DE
DE
DE
FC
DE
% Notes
(42)
98
(15)
100
(14)
100
(11)
100
(26)
100
(51)
67
(1)
100
(1)
100
(5)
100
(1)
100
(54)
100
(63)
100
(63)
100
(1)
100
(1)
100
(1)
100
(5)
100
(1)
100
(5)
100
(85)
100
100
100
100
100
100
100
100
100
100
100
67
(26)
(14)
(26)
(78)
(26)
(26)
(5)
(5)
(5)
(5)
(51)
RBS – Annual Report and Accounts 2019
274
Parent company financial statements and notes
10 Related undertakings continued
The following table details related undertakings that are dormant
Accounting Regulatory Group
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
Glyns Nominees Ltd
HPUT A Ltd
HPUT B Ltd
JCB Finance Pension Ltd
Marigold Nominees Ltd
N.C. Head Office Nominees Ltd
National Westminster Bank Nominees
(Jersey) Ltd
National Westminster Ltd
NatWest FIS Nominees Ltd
NatWest PEP Nominees Ltd
treatment
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
NC
NC
FC
FC
FC
FC
FC
FC
FC
treatment
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
FC
DE
DE
DE
FC
FC
% Notes
(5)
(46)
(1)
(1)
(14)
(14)
(14)
(1)
(1)
(1)
(1)
(1)
(1)
(35)
(14)
(5)
100
100
100
100
100
100
100
100
100
100
100
100
100
88
100
100
FC
FC
FC
FC
100
100
100
100
(47)
(14)
(1)
(14)
Entity name
Nextlinks Ltd
Nordisk Renting A/S
Nordisk Renting HB
Project & Export Finance (Nominees) Ltd
R.B. Leasing (March) Ltd
RBOS Nominees Ltd
RBS Cards Securitisation Funding Ltd
RBS Investment Executive Ltd
RBS Nominees (Hong Kong) Ltd
RBS Pension Trustee Ltd
RBS Retirement Savings Trustee Ltd
RBS Secretarial Services Ltd
RBSG Collective Investments
Nominees 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 Regulatory Group
treatment
FC
FC
FC
FC
FC
FC
FC
NC
FC
NC
FC
FC
treatment
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
% Notes
(1)
(49)
(6)
(14)
(1)
(1)
(15)
(5)
(46)
(14)
(14)
(5)
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
(5)
(14)
(17)
(14)
(5)
(5)
(1)
(14)
The following table details related undertakings that are in administration
Entity name
Uniconn Ltd
Accounting Regulatory Group
Activity
OTH
treatment
IA
treatment
DE
% Notes
(77)
30
The following table details overseas branches of RBS Group
Subsidiary
Coutts & Co Ltd
National Westminster Bank Plc
Natwest Markets Plc
Geographic location
Hong Kong
Finland, France, Germany, Italy,
Netherlands, Norway, Spain, Sweden
Germany, Hong Kong, Japan,
Singapore, Turkey, United Arab Emirates
Subsidiary
Natwest Markets N.V.
The Royal Bank of Scotland
International Ltd
Geographic location
France, Germany, Hong Kong, Italy,
Republic of Ireland, Spain, Sweden,
United Kingdom
Gibraltar, Guernsey, Isle of Man,
Luxembourg, United Kingdom
Banking and financial institution
Credit institution
Investment (shares or property) holding company
Service company
Trustee
Key:
BF
CI
INV
SC
TR
OTH Other
DE
FC
PC
EAA
EAJV Equity accounting – Joint venture
Investment accounting
IA
Not consolidated
NC
Deconsolidated
Full consolidation
Pro-rata consolidation
Equity accounting – Associate
Notes Registered addresses
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(14)
(15)
(16)
250 Bishopsgate, London, EC2M 4AA, England
Claude Debussylaan 94, 1082 MD, Amsterdam,
FRP Advisory LLP, Apex 3, 95 Haymarket Terrace, Edinburgh, EH12 5HD, Scotland
Hudsun Chambers, PO Box 986, Road Town, Tortola
24/25 St Andrew Square, Edinburgh, EH2 1AF, Scotland
c/o Nordisk Renting AB, Jakobsbergsgatan 13, 8 storey, Box 14044, SE-111 44, Stockholm
c/o Visma Services Danmark A/S, Lyskaer 3C-3D, 2730 Herlev, Hjortespring
Tirolerweg 8, Zug, CH-6300
Level 5, Mill Court, La Charroterie, St Peter Port, GY1 1EJ
3rd Floor, Dixcart House, Sir William Place, St Peter Port, GY1 1GX
35 Great St Helen's, London, EC3A 6AP, England
c/o Epicenter, Mikonkatu 9, 6th Floor, 00100, Helsinki
Hieronymus Heyerdahlsgate 1, Postboks 2020 Vika, 0125, Oslo
1 Princes Street, London, EC2R 8BP, England
Royal Bank House, 71 Bath Street, St Helier, JE4 8PJ
Boundary Hall, Cricket Square, 171 Elgin Avenue, George Town, Grand Cayman, KY1-1104
Country of incorporation
UK
Netherlands
UK
British Virgin Islands
UK
Sweden
Denmark
Switzerland
Guernsey
Guernsey
UK
Finland
Norway
UK
Jersey
Cayman Islands
RBS – Annual Report and Accounts 2019
275
Parent company financial statements and notes
10 Related undertakings continued
440 Strand, London, WC2R OQS, England
Suite 200B, 2nd Floor, Centre of Commerce, One Bay Street, PO Box N-3944, Nassau
251, Little Falls Drive, Wilmington, Delaware, 19808
Riverside One, Sir John Rogersons Quay, Dublin 2, D02 X576
5 Harbourmaster Place, Dublin 1, D01 E7E8
c/o Estera Trust (Cayman) Ltd, Clifton House, 75 Fort Street, PO Box 1350, Grand Cayman, KY1-1108
Lerchenstrasse 18, Zurich, CH-8022
c/o Regus Rue du Rhone Sarl, Rue du Rhone 14, 1204, Geneva
c/o Maples Corporate Services Ltd, PO Box 309, 121 South Church Street, George Town, Grand Cayman, KY1-1104
Ulster Bank Group Centre, George's Quay, Dublin 2, D02 VR98
One Edinburgh Quay, 133 Fountainbridge, Edinburgh, EH3 9QG, Scotland
9th Floor, SOHO Century Plaza, 1501 Century Avenue, Pudong New Area, Shanghai
De entree 99 -197, 1101 HE Amsterdam Zuidoost
Gate House, Turnpike Road, High Wycombe, Buckinghamshire, HP12 3NR, England
3rd Floor, 1 St Ann Street, Manchester, M2 7LR, England
Cornwall Buildings, 45-51 Newhall Street, Birmingham, B3 3QR, England
40 Berkeley Square, London, W1J 5AL, England
The Mill, High Street, Rocester, Staffordshire, ST14 5JW, England
11-16 Donegall Square East, Belfast, Co Antrim, BT1 5UB, Northern Ireland
Clarendon House, Two Church Street, Suite 104, Reid Street, Hamilton, HM 11
66-72, Gaspé House, Esplanade, St Helier, JE2 3QT
c/o Nordisk Renting Oy, Mikonkatu 9, 00100 Helsinki
99 Queen Victoria Street, London, EC4V 4EH, England
2 Athol Street, Douglas, IM99 1AN
PO Box 230, Heritage Hall, Le Marchant Street, St Peter Port, GY1 4JH
Via Vittorio Alfieri 1, Conegliano TV, IT-TN 31015
PO Box 384, The Albany, South Esplanade, St Peter Port, GY1 4NF
c/o CE Serviced Offices Pvt Ltd, Level 1, Tower A, Building No 10, Phase III, DLF Cyber City, Gurgaon, Haryana, 122002
36 St Andrew Square, Edinburgh, EH2 2YB, Scotland
Level 54, Hopewell Centre, 183 Queen's Road East
16 Library Place, St Helier, JE4 8NH
44 Esplanade, St Helier, JE4 9WG
c/o Adv Jan-Erik Svensson, HC Andersens Boulevard 12, Kopenhaum V, 1553
24 Demostheni Severi, 1st Floor, Nicosia, 1080
70 Sir John Rogerson's Quay, Dublin 2, D02 R296
Victoria Place, 5th Floor, 31 Victoria Street, Hamilton, HM 10
Notes Registered addresses
(17)
(18)
(19)
(20)
(21)
(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) Madison Building, Midtown, Queensway
(54) Wiśniowy Business Park, ul. 1-go Sierpnia 8A, Warsaw, 02-134
254, 13th Floor, Rua Boa Vista, Sao Paulo, 01014-907
(55)
One Dockland Central, Guild Street, IFSC, Dublin 1, D01 E4X0
(56)
1209, Orange Street, Wilmington, Delaware, 19801
(57)
301, Bellevue Parkway, 3rd Floor, Wilmington, Delaware, 19809
(58)
Roßmarkt 10, Frankfurt am Main, 60311
(59)
Regency Court, Glategny Esplanade, St Peter Port, GY1 3AP
(60)
340, Madison Avenue, New York, 10173
(61)
46, Avenue John F. Kennedy, L-1855
(62)
Ashurst L26, 181 William Street, Melbourne, VIC, 3000
(63)
Gustav Mahlerlaan 350, 1082 ME, Amsterdam
(64)
40, Avenue John F. Kennedy, L -1855
(65)
23/25 Broad Street, St Helier, JE4 8ND
(66)
12/14, Veer Nariman Road, Brady House, 4th Floor, Fort, Mumbai 400 001
(67)
PO Box 236, First Island House, Peter Street, St Helier, JE4 8SG
(68)
c/o Intertrust Group, 35 Great St Helens, London, EC3A 6AP, England
(69)
6th Floor, Building 2, Tower A, GIL IT/ITES SEZ, Candor TechSpace, Sector 21, Dundahera, Gurugram, Haryana, 122016
(70)
c/o Nordisk Renting AS, 9 Etasje, Klingenberggata 7, NO-0161, Oslo
(71)
c/o Nordisk Renting AB, Box 14044, SE-104 40, Stockholm
(72)
c/o Denis Crowley & Co Chartered Accountants, Unit 6 Riverside Grove, Riverstick, Co. Cork, P43 W221
(73)
114 West 47th Street, New York, 10036
(74)
Level 7, Menara Milenium, Jalan Damanlela, Pusat Bandar Damansara, Damansara Heights, Kuala Lumpur, 50490
(75)
Claude Debussylaan 24, 1082 MD, Amsterdam
(76)
4 Atlantic Quay, 70 York Street, Glasgow, G2 8JX, Scotland
(77)
(78)
24/26 City Quay, Dublin 2, D02 NY19
(79) Wisniowy Business Park Ul Ilzecka 26, Building E, 02-135, Warsaw
(80)
(81)
(82)
(83)
(84)
(85)
(86)
(87)
(88)
(89)
(90)
200, Bellevue Parkway, Suite 210, Wilmington, Delaware 19809
28 Fitzwilliam Place, Dublin 2, D02 P283
3rd Floor, Fleming Court, Fleming's Place, Dublin 4, D04 N4X9
c/o Pinsent Masons LLP, The Soloist Building, 1 Lanyon Place, Belfast, BT1 3LP, Northern Ireland
13-15 York Buildings, London, WC2N 6JU, England
Level 9, Menara Maxis, Kuala Lumpur City Centre, Kuala Lumpur, 50088
Office Block A, Bay Studios Business Park, Fabian Way, Swansea, SA1 8QB, Wales
The Chestnuts Brewers End, Takeley, Bishop's Stortford, CM22 6QJ, England
Kokermolen 16, 3994 Dh Houten
c/o Advokatfirmaet Wirsholm AS, Dokkveien 1, NO-0250, Oslo
Pinnacle 2, Eastpoint Business Park, Clontarf, Dublin 3, 662844
Country of incorporation
UK
Bahamas
USA
RoI
RoI
Cayman Islands
Switzerland
Switzerland
Cayman Islands
RoI
UK
China
Netherlands
UK
UK
UK
UK
UK
UK
Bermuda
Jersey
Finland
UK
Isle Of Man
Guernsey
Italy
Guernsey
India
UK
Hong Kong
Jersey
Jersey
Denmark
Cyprus
RoI
Bermuda
Gibraltar
Poland
Brazil
RoI
USA
USA
Germany
Guernsey
USA
Luxembourg
Australia
Netherlands
Luxembourg
Jersey
India
Jersey
UK
India
Norway
Sweden
RoI
USA
Malaysia
Netherlands
UK
RoI
Poland
USA
RoI
RoI
UK
UK
Malaysia
UK
UK
Netherlands
Norway
RoI
RBS – Annual Report and Accounts 2019
276
Non-IFRS financial measures
As described in the Accounting policies, RBS prepares its financial statements in accordance with IFRS as issued by the IASB 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 or non-IFRS performance measures. These measures are adjusted for certain items which management
believe are not representative of the underlying performance of the business and which distort period-on-period comparison. These non-IFRS
measures are not measures within the scope of IFRS and are not a substitute for IFRS measures. These measures include:
Measure
RBS return on
tangible equity
RBS return on
tangible equity
excluding FX
recycling gains
Segmental return
on tangible equity
Operating
expenses analysis
– management
view
Cost:income ratio
Commentary –
adjusted
periodically for
specific items
Bank net interest
margin (NIM)
Basis of preparation
Profit for the period attributable to ordinary shareholders divided by average tangible
equity. Average tangible equity is total equity less intangible assets and other owners’
equity.
Profit for the period attributable to ordinary shareholders, adjusted for FX recycling gains,
for the period divided by average tangible equity. Average tangible equity is total equity
less intangible assets and other owners’ equity.
Segmental operating profit adjusted for tax and for preference share dividends divided by
average notional equity, allocated at an operating segment specific rate, of the period
average segmental risk-weighted assets incorporating the effect of capital deductions
(RWAes).
The management analysis of strategic disposals in other income and operating expenses
shows strategic costs and litigation and conduct costs in separate lines. These amounts
are included in staff, premises and equipment and other administrative expenses in the
statutory analysis.
Total operating expenses less operating lease depreciation, divided by total income less
operating lease depreciation.
RBS and segmental business performance commentary have been adjusted for the impact
of specific items such as the Alawwal bank merger, FX recycling gains, push payments
fraud costs, strategic, litigation and conduct costs (detailed on pages 53 to 54).
Net interest income of the banking business less the NatWest Markets (NWM) element as
a percentage of interest-earning assets of the banking business less the NWM element.
Additional analysis or
reconciliation
Table I
Table I
Table I
Table II
Table III
Notable items within
income – page 53,
Notable items within
expenses – page 54
Table IV
Performance metrics not defined under IFRS(1)
Measure
Loan:deposit ratio
Tangible net asset
value (TNAV)
NIM
Funded assets
Basis of preparation
Net customer loans held at amortised cost divided by total customer deposits.
Tangible equity divided by the number of ordinary shares in issue. Tangible equity is
ordinary shareholders’ interest less intangible assets.
Net interest income of the banking business as a percentage of interest-earning assets of
the banking business.
Total assets less derivatives.
ECL loss rate
The annualised loan impairment charge divided by gross customer loans.
Additional analysis or
reconciliation
Table V
Page 55
Pages 56 to 60
Pages 57 and 61
Page 54
Note:
(1) Metric based on GAAP measures, included as not defined under IFRS and reported for compliance with ESMA adjusted performance measure rules.
In Q1 2019, RBS introduced a new adjusted performance metric, Bank NIM, which is calculated as RBS net interest income and interest-
earning assets less NWM net interest income and interest-earning assets. Bank NIM is believed by management to more accurately reflect the
performance of the business as net interest income is not considered a main income stream for the NWM segment.
RBS – Annual Report and Accounts 2019
277
Non-IFRS financial measures
I. Return on tangible equity
RBS return on tangible equity
Profit attributable to ordinary shareholders (£m)
Adjustment for FX recycling gain (£m)
Adjusted profit attributable to ordinary shareholders (£m)
Average total equity (£m)
Adjustment for other owners equity and intangibles (£m)
Adjusted total tangible equity (£m)
Return on tangible equity (%)
Return on tangible equity adjusting for impact of:
- Adjustment for FX recycling gain (%)
Year ended 31 December 2019
Operating profit (£m)
Adjustment for tax (£m)
Preference share cost allocation (£m)
Adjustment for Alawwal bank merger gain (£m)
Adjusted attributable profit (£m)
Average RWAe (£bn)
Equity factor
RWAe applying equity factor (£bn)
Return on equity
Year ended 31 December 2018*
Operating profit (£m)
Adjustment for tax (£m)
Preference share cost allocation (£m)
Adjusted attributable profit (£m)
Average RWAe (£bn)
Equity factor
RWAe applying equity factor (£bn)
Return on equity
Year ended 31 December 2017*
Operating profit (£m)
Adjustment for tax (£m)
Preference share cost allocation (£m)
Adjusted attributable profit (£m)
Average RWAe (£bn)
Equity factor
RWAe applying equity factor (£bn)
Return on equity
Year ended or as at
31 December
2019
3,133
(1,572)
1,561
45,160
(11,960)
33,200
9.4%
4.7%
RBS
International
344
(48)
(11)
—
285
6.9
16.0%
1.1
25.7%
336
(47)
(18)
271
7.0
16.0%
1.1
24.4%
167
(17)
(24)
126
9.3
12.0%
1.1
11.2%
31 December
2018
1,622
1,622
48,483
(14,997)
33,486
4.8%
—
NatWest
Markets
(25)
7
(64)
(150)
(232)
48.0
15.0%
7.2
(3.2%)
(70)
20
(108)
(158)
53.8
15.0%
8.1
(2.0%)
(977)
274
(171)
(874)
64.5
15.0%
9.7
(9.0%)
UK
Personal
Banking
855
(236)
(74)
—
545
37.7
15.0%
5.7
9.6%
1,848
(510)
(80)
1,258
34.0
15.0%
5.1
24.7%
1,834
(510)
(83)
1,241
40.5
15.0%
6.1
20.4%
Ulster
Bank
RoI
49
—
—
—
49
14.0
15.0%
2.1
2.3%
12
—
—
12
17.0
14.0%
2.4
0.5%
(132)
—
—
(132)
19.0
14.0%
2.7
(5.0%)
Commercial
Banking
1,327
(372)
(163)
—
792
78.2
12.0%
9.4
8.4%
1,968
(549)
(188)
1,231
85.0
12.0%
10.2
12.1%
1,687
(472)
(230)
985
85.8
12.0%
10.3
9.6%
Private
Banking
297
(83)
(18)
—
196
9.8
13.0%
1.3
15.4%
303
(85)
(23)
195
9.4
13.5%
1.3
15.4%
143
(40)
(22)
81
9.0
14.0%
1.3
6.4%
*2018 and 2017 data has been restated for the business re-segmentation completed in the first quarter of 2019. Refer to Note 4 for further details.
RBS – Annual Report and Accounts 2019
278
Non-IFRS financial measures
II. Operating expenses analysis
Statutory analysis (1,2)
Operating expenses
Staff expenses
Premises and equipment
Other administrative expenses
Administrative expenses
Depreciation and amortisation
Impairment of other intangible assets
Total operating expenses
Non-statutory analysis
Operating expenses
Staff expenses
Premises and equipment
Other administrative expenses
Strategic costs (1)
Litigation and conduct costs (2)
Administrative expenses
Depreciation and amortisation
Impairment of other intangible assets
Total
31 December
2019
£m
(4,018)
(1,259)
(2,828)
(8,105)
(1,176)
(44)
(9,325)
31 December
2019
£m
(3,567)
(1,020)
(1,638)
(1,381)
(895)
(8,501)
(824)
—
(9,325)
Year ended
31 December
2018
£m
(4,122)
(1,383)
(3,372)
(8,877)
(731)
(37)
(9,645)
Year ended
31 December
2018
£m
(3,649)
(1,241)
(1,787)
(1,004)
(1,282)
(8,963)
(645)
(37)
(9,645)
31 December
2017
£m
(4,676)
(1,565)
(3,323)
(9,564)
(808)
(29)
(10,401)
31 December
2017
£m
(3,923)
(1,218)
(1,710)
(1,565)
(1,285)
(9,701)
(684)
(16)
(10,401)
Notes:
(1) On a statutory, or GAAP, basis, strategic costs are included within staff, premises and equipment, depreciation and amortisation, impairment of other intangible
assets and other administrative expenses. Strategic costs relate to restructuring provisions, related costs and projects that are transformational in nature.
(2) On a statutory, or GAAP, basis, litigation and conduct costs are included within other administrative expenses.
III. Cost:income ratio
Year ended 31 December 2019
Operating expenses
Operating lease depreciation
Adjusted operating expenses
Total income
Operating lease depreciation
Adjusted total income
Cost:income ratio
Year ended 31 December 2018*
Operating expenses
Operating lease depreciation
Adjusted operating expenses
Total income
Operating lease depreciation
Adjusted total income
Cost:income ratio
Year ended 31 December 2017*
Operating expenses
Operating lease depreciation
Adjusted operating expenses
Total income
Operating lease depreciation
Adjusted total income
Cost:income ratio
UK
Personal
Banking
£m
(3,618)
—
(3,618)
4,866
—
4,866
74.4%
(2,867)
—
(2,867)
5,054
—
5,054
56.7%
(3,241)
—
(3,241)
5,282
—
5,282
61.4%
Ulster
Bank
RoI
£m
(552)
—
(552)
567
—
567
97.4%
(583)
—
(583)
610
—
610
95.6%
(676)
—
(676)
604
—
604
111.9%
Commercial
Banking
£m
(2,600)
138
(2,462)
4,318
(138)
4,180
58.9%
(2,487)
121
(2,366)
4,602
(121)
4,481
52.8%
(2,602)
142
(2,460)
4,679
(142)
4,537
54.2%
Private
Banking
£m
(486)
—
(486)
777
—
777
62.5%
(478)
—
(478)
775
—
775
61.7%
(529)
—
(529)
678
—
678
78.0%
RBS
Group
£m
(9,325)
138
(9,187)
14,253
(138)
14,115
65.1%
(9,645)
121
(9,524)
13,402
(121)
13,281
71.7%
RBS
International
£m
(264)
—
(264)
610
—
610
43.3%
NatWest Central items
& other
Markets
£m
£m
(387)
(1,418)
—
—
(387)
(1,418)
1,773
1,342
—
—
1,773
1,342
nm
105.7%
(260)
—
(260)
594
—
594
43.8%
(219)
—
(219)
389
—
389
56.3%
(1,604)
—
(1,604)
1,442
—
1,442
111.2%
(2,201)
—
(2,201)
1,050
—
1,050
209.6%
(1,366)
—
(1,366)
325
—
325
nm
(933)
—
(933)
451
—
451
nm
(10,401)
142
(10,259)
13,133
(142)
12,991
79.0%
*2018 and 2017 data has been restated for the business re-segmentation completed in the first quarter of 2019. Refer to Note 4 for further details.
RBS – Annual Report and Accounts 2019
279
Non-IFRS financial measures
IV. Net interest margin
RBS net interest income
NWM net interest income
Net interest income excluding NWM
Average interest earning assets (IEA)
NWM average IEA
Bank average IEA excluding NWM
Net interest margin
Bank net interest margin (RBS NIM excluding NWM)
V. Loan:deposit ratio
Loans to customers - amortised cost
Customer deposits
Loan:deposit ratio (%)
Year ended
31 December
31 December
31 December
2019
£m
8,047
188
8,235
448,556
35,444
413,112
1.79%
1.99%
2018
£m
8,656
(112)
8,544
436,957
27,851
409,106
1.98%
2.09%
As at
2017
£m
8,987
(203)
8,784
422,337
31,231
391,106
2.13%
2.25%
31 December
31 December
31 December
2019
£bn
326,947
369,247
89%
2018
£bn
305,089
360,914
85%
2017
£bn
310,116
361,316
86%
RBS – Annual Report and Accounts 2019
280
Risk Factors
Principal Risks and Uncertainties
Set out below are certain risk factors that
could adversely affect the RBS Group’s future
results, its financial condition and prospects
and cause them to be materially different from
what is forecast or expected and directly or
indirectly impact the value of its securities in
issue. These risk factors are broadly
categorised and should be read in conjunction
with other sections of this annual report,
including the forward looking statements
section, the strategic report and the capital
and risk management section, and should not
be regarded as a complete and
comprehensive statement of all potential risks
and uncertainties facing the RBS Group.
Strategic risk
The RBS Group has announced a new
Purpose-led Strategy which will entail a
period of transformation and require an
internal cultural shift across the RBS
Group. It carries significant execution and
operational risks and it may not achieve its
stated aims and targeted outcomes.
On 14 February 2020 the RBS Group
announced a new strategy, focused on
becoming a Purpose-led business, designed
to champion potential and to help individuals,
families and businesses to thrive. This
strategy is intended to reflect the rapidly
shifting environment and backdrop of
unprecedented disruption in society driven by
technology and changing customer
expectations. The strategy has three areas of
focus – climate change, enterprise and
learning – where RBS Group believes it can
have the greatest positive impact. Together,
these strategic initiatives are referred to as the
RBS Group’s ‘Purpose-led Strategy’. As a
Purpose-led Strategy, it is intended to balance
the interests and changing needs of all RBS
Group stakeholders and to focus on building
relationships that create mutual value across
customers’ lives. It will require an internal
cultural shift across the RBS Group as to how
performance is perceived and how the RBS
Group conducts its business. The changes
required are substantial and will take many
years to fully embed and may not result in the
expected outcome within the timeline and in
the manner currently contemplated.
To deliver against this purpose and deliver
sustainable returns, the RBS Group intends
to: focus on the lifecycles of its customers
using insights about customers to evolve
product and service offerings; re-engineer and
simplify the RBS Group by updating
operational and technological capabilities and
strengthening governance and control
frameworks to reduce costs and improve
customer journeys; focus on innovation and
partnership to drive change and achieve
growth in new product areas and customer
segments; and have a sharper focus on
capital allocation and deploying it more
effectively for customers, in particular by re-
focusing its NatWest Markets franchise
(‘NWM franchise’).
As part of its new Purpose-led Strategy, the
RBS Group has set a number of financial,
capital and operational targets and
expectations, both for the short term and
throughout the implementation period. Over
the medium to long term, the RBS Group
intends to achieve a 9-11% return on tangible
equity and a CET1 ratio of 13–14%, with a
sustained pay-out ratio of around 40% of
attributable profit. In addition to making
significant reductions in RWAs, achieving
these targets will require further significant
reductions to the RBS Group’s cost base, with
c. £250 million of reductions targeted in 2020.
Realising these cost reductions will result in
material strategic costs, which may be more
than currently expected. The continued focus
on meeting cost reduction targets may also
mean limited investment in other areas which
could affect the RBS Group’s long-term
prospects, product offering or competitive
position and its ability to meet its other
targets, including those related to customer
satisfaction and its capacity to respond to
climate change in line with its ambition. RBS
Group’s commitment to align its lending and
financing to the objectives of the Paris
Agreement, drive significant reductions in its
climate impact and develop sustainable
finance products could materially affect the
RBS Group’s business and operations. See
also ‘The RBS Group’s new Purpose-led
Strategy includes one area of focus on climate
change which entails significant execution risk
and is likely to require material changes to the
business model of the RBS Group over the
next ten years’. This impact, and any of the
other factors above, could jeopardise the RBS
Group’s ability to achieve its associated
financial targets and generate sustainable
returns.
The implementation of the new Purpose-led
Strategy is highly complex and will take many
years to fully embed. The RBS Group may not
be able to successfully implement all aspects
of this strategy or reach any or all of the
related targets or expectations in the time
frames contemplated or at all. In addition, the
RBS Group’s ability to serve its target
customers, scale certain ventures, deliver
growth in new markets and restructure the
NWM franchise may be impacted or lower
than expected and previously anticipated
revenue, profitability and cost reduction levels
may not be achieved in the timescale
envisaged or at any time. In particular, the
Purpose-led Strategy entails a group-wide
strategic cultural shift which involves a large
number of concurrent and interdependent
actions and initiatives, including a re-
focussing of the NWM franchise, any of which
could fail to be implemented in the manner
and to the extent currently contemplated, due
to operational, legal, execution or other
issues. In addition, the successful
implementation of the Purpose-led Strategy in
part depends on initiatives and growth in
ventures that are new to the RBS Group or to
the market and therefore there is a risk that
some or all such initiatives will not succeed, or
may be limited in scope or scale, including
due to its current ownership structure.
The scale and scope of the intended changes
present material business, operational, IT
system, internal culture, conduct and people
risks to the RBS Group as the planning and
implementation of the transformation
programme are resource-intensive and
disruptive, and will divert management
resources. In addition, the changes being
concurrently implemented will require the
implementation and application of robust
governance and controls frameworks, in
particular with respect to any strategic
partnerships and acquisitions, and further
consolidation of IT systems and there is no
guarantee that the RBS Group will be
successful in doing so. The implementation of
the Purpose-led Strategy could result in
materially higher costs than currently
contemplated, (including due to material
uncertainties and factors outside of the RBS
Group’s control) or could be phased in a
manner other than currently expected. These
risks will be present throughout the period of
implementation which is expected to last
during the medium term, and in some cases,
materially beyond.
Changes in the economic, political and
regulatory environment in which the RBS
Group operates or regulatory uncertainty and
changes, strong market competition and
industry disruption or economic volatility,
including as a result of the continued
uncertainty surrounding the terms of the UK’s
exit from the EU, or changes in the scale and
timing of policy responses on climate change,
may require the RBS Group to adjust aspects
of its Purpose-led Strategy or the timeframe
for its implementation. In particular, because
some initiatives depend on achieving growth
in new ventures and markets for the RBS
Group, the Purpose-led Strategy is vulnerable
to an economic downturn. Furthermore, any
new strategy requires ongoing confidence
from customers and the wider market, without
which customer activity and related income
levels may fall or the RBS Group’s reputation
may be adversely affected.
Each of these risks, and others identified in
these Risk Factors, individually or collectively
could jeopardise the implementation and
delivery of the Purpose-led Strategy, result in
higher than expected restructuring costs,
impact the RBS Group’s products and
services offering, reputation with customers or
business model and adversely impact the
RBS Group’s ability to deliver its strategy and
meet its targets and guidance, each of which
could in turn have a material adverse impact
on the RBS Group’s results of operations,
financial condition and prospects.
RBS – Annual Report and Accounts 2019
281
Risk factors
Over the next three years, the RBS Group
intends to re-focus its NatWest Markets
franchise to the RBS Group’s corporate
and institutional customer offering and
realise significant reductions in risk
weighted assets, cost base and
complexity. This entails significant
commercial, operational and execution
risks and the intended benefits for RBS
Group may not be realised within the
timeline and in the manner currently
contemplated.
As part of the new Purpose-led Strategy
announced on 14 February 2020, the RBS
Group intends to implement a more
strategically congruent and economically
sustainable model for its NWM franchise.
Over the medium term, it intends to re-focus
the NWM franchise on principally serving the
RBS Group’s corporate and institutional
customer base. This will require NWM Group
to simplify its operating model and technology
platform, as well as reduce its cost base and
capital requirements. A focus of the NWM
franchise realignment is the intended
reduction in its level of RWAs, to reduce it to
c. 10% of the RBS Group’s RWAs in the
medium term. This is intended to be achieved
by exiting certain exposures and optimising
inefficient capital across the NWM Group,
especially in relation to its Rates products. It is
anticipated that the re-focusing of the NWM
franchise is expected to be capital ratio
accretive in year one and over the course of
the transition plan period.
The realignment of the NatWest Markets
franchise entails significant execution risks
and is based on management plans,
projections and models and are subject to
certain material assumptions and judgments
which may prove to be incorrect such that the
go-forward strategy is re-assessed for
example: if revenues reduce relatively faster
than costs; material execution issues arise or
market distress occurs; if RWAs take longer to
exit or are more costly to reduce than
anticipated; or if the key franchise legal
entities, NWM Plc and NWM N.V., have
difficulties accessing the funding market on
acceptable terms or at all.
Implementing these changes to the NWM
franchise entails significant commercial and
operational and risks. These include risks
around how it is perceived by its customers
and stakeholders and the ability for NWM to
retain employees required to deliver the
transition and whom are key for its go-forward
strategic priorities. Revenues and costs may
be negatively impacted (revenues, for
example, may decrease significantly more
quickly than associated costs) and the
implementation may be more difficult or
expensive than expected, including as a result
of the UK’s exit from the EU and regulatory
requirements. The orderly run-down of certain
of its portfolios and the reduction of its risk-
weighted assets may be accompanied by the
recognition of disposal losses which may be
higher than anticipated, including due to a
degraded economic environment, and may
not lead to a concurrent and proportionate
reduction in required capital. The NWM Plc
and NWM N.V. boards support the strategy
and the associated plans and budgets, but
successful implementation of the strategy
within the NWM franchise will need their
continued support, as well as that of the
NWM .N.V. boards and NWM management.
The RBS Group’s new Purpose-led
Strategy includes one area of focus on
climate change which entails significant
execution risk and is likely to require
material changes to the business model of
the RBS Group over the next ten years.
The RBS Group’s new strategy on climate
change, together with its commitments under
the UN Principles on Responsible Banking to
align its strategy to the 2015 Paris Agreement,
will require significant resource to develop the
capacity and methodology to understand, and
measure the climate impact of the emissions
from its financing activity. There is currently
no standard approach or methodology to
measure such emissions and provide a
scenario-based model for alignment to the
2015 Paris Agreement (‘Paris Alignment’).
The RBS Group must identify its approach to
this on a short time scale to meet its target of
setting and publishing sector-specific targets
by 2021 and its goal of setting comprehensive
climate impact scenario-based reduction
targets and plans for Paris Alignment by 2022,
and be able to adequately define and
benchmark its current climate impact to
demonstrate its progress against its ambition
to reduce this by half over the next 10 years.
Any delay to establishing such targets and
developing its plan for Paris Alignment may
entail reputational and market risk, and
increase the risks the RBS Group faces as a
result of climate change.
It is expected that the targets and measures
that the RBS Group will need to adopt in line
with its new strategy on climate change will
require significant reductions to the RBS
Group’s financed emissions to be realised
which, together with the impact of embedding
climate into its risk framework and other
regulatory, policy and market changes, is
likely to necessitate far reaching changes to
the RBS Group’s business model and existing
exposures, and potentially on timescales
outside of risk appetite. Whilst the risks
presented by climate change are
unprecedented in magnitude and scale, how
the RBS Group implements its strategy to
respond to climate change may also have a
material adverse effect on the RBS Group’s
business growth, its competitiveness, and
profitability over the short, medium and long
term. Once established, there is no certainty
that the RBS Group will be able to meet its
climate change targets and ambitions or that
seeking to do so will not have an adverse
impact on the RBS Group, including its
competition position. See also ‘The RBS
Group expects to face significant risks in
connection with climate change and the
transition to a low carbon economy, which
may adversely impact the RBS Group’.
Operational and IT resilience risk
The RBS Group is subject to increasingly
sophisticated and frequent cyberattacks.
The RBS Group is experiencing an increase
in cyberattacks across both the entire RBS
Group and against the RBS Group’s supply
chain, re-enforcing the importance of due
diligence and close working with the third
parties on which the RBS Group relies. The
RBS Group is reliant on technology, against
which there is a constantly evolving series of
attacks that are increasing in terms of
frequency, sophistication, impact and
severity. As cyberattacks evolve and become
more sophisticated, the RBS Group is
required to continue to invest in additional
capability designed to defend against the
emerging threats. In 2019, the RBS Group
was subjected to a small number of
Distributed Denial of Service (‘DDOS’)
attacks, which are a pervasive and significant
threat to the global financial services industry.
The focus is to mitigate the impact of the
attacks and sustain availability of services for
RBS Group’s customers. The RBS Group
continues to invest significant resources in the
development and evolution of cyber security
controls that are designed to minimise the
potential effect of such attacks.
Hostile attempts are made by third parties to
gain access to and introduce malware
(including ransomware) into the RBS Group’s
IT systems, and to exploit vulnerabilities. The
RBS Group has information and cyber
security controls in place, which are subject to
review on a continuing basis but given the
nature of the threat, there can be no
assurance that such measures will prevent all
attacks in the future. See also, ‘The RBS
Group’s operations are highly dependent on
its complex IT systems, and any IT failure
could adversely affect the RBS Group’.
Any failure in the RBS 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
RBS Group’s ability to retain and attract
customers. Regulators in the UK, US, Europe
and Asia 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
RBS – Annual Report and Accounts 2019
282
Risk factors
(particularly of critical services) to
cyberattacks, and to provide timely notification
of them, as appropriate.
Additionally, third parties may also
fraudulently attempt to induce employees,
customers, third party providers or other users
who have access to the RBS Group’s systems
to disclose sensitive information in order to
gain access to the RBS Group’s data or that
of the RBS Group’s customers or employees.
Cyber security and information security events
can derive from groups or factors such as:
internal or external threat actors, human error,
fraud or malice on the part of the RBS
Group’s employees or third parties, including
third party providers, or may result from
accidental technological failure.
The RBS 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.
Such increased regulatory engagement,
supervision and enforcement is uncertain in
relation to scope, consequence and pace of
change, which could negatively impact the
RBS Group. Due to the RBS Group’s reliance
on technology and the increasing
sophistication, frequency and impact of
cyberattacks, it is likely that such attacks
could have a material adverse impact on the
RBS Group.
In accordance with the EU General Data
Protection Regulation (‘GDPR’), the RBS
Group is required to ensure it implements
timely, appropriate and effective
organisational and technological safeguards
against unauthorised or unlawful access to
the data of the RBS Group, its customers and
its employees. In order to meet this
requirement, the RBS 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 RBS
Group interacts. A failure to monitor and
manage data in accordance with the GDPR
requirements of the applicable legislation may
result in financial losses, regulatory fines and
investigations and associated reputational
damage. In addition, whilst the RBS Group
takes measures to prevent, detect and
minimise attacks, the RBS Group’s systems,
and those of third party providers, are subject
to frequent cyberattacks.
The RBS Group operations and strategy
are highly dependent on the effective use
and accuracy of data.
The RBS Group relies on the effective use of
accurate data to support and improve its
operations and deliver its strategy. Failure to
produce underlying high quality data and/or
the ineffective use of such data could result in
a failure to satisfy its customers’ expectations
including by delivering innovative products
and services. This could place RBS Group at
a competitive disadvantage, inhibit its efforts
to reduce costs and improve its systems,
controls and processes, and result in a failure
to deliver the RBS Group’s strategy. The use
of unethical or inappropriate data and/or non-
compliance with customer data and privacy
protection could give rise to conduct and
litigation risks and could also increase the risk
of an operational event or losses or other
adverse consequences due to inappropriate
models, systems, processes, decisions or
other actions.
Operational risks are inherent in the RBS
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
RBS Group operates in many countries,
offering a diverse range of products and
services supported by 62,900 employees as
at 31 December 2019; it therefore has
complex and diverse operations. As a result,
operational risks or losses can arise from a
number of internal or external factors
(including financial crime). These risks are
also present when the RBS Group relies on
third-party suppliers or vendors to provide
services to it or its customers, as is
increasingly the case as the RBS Group
outsources certain functions, including with
respect to the implementation of new
technologies, innovation and responding to
regulatory and market changes.
Operational risks continue to be heightened
as a result of the implementation of the RBS
Group’s Purpose-led Strategy, including the
refocusing of its NatWest Markets franchise,
the RBS 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 RBS Group’s ability to
maintain effective internal controls and
governance frameworks. The effective
management of operational risks is critical to
meeting customer service expectations and
retaining and attracting customer business.
Although the RBS Group has implemented
risk controls and mitigation actions, with
resources and planning having been devoted
to mitigate operational risk, such measures
may not be effective in controlling each of the
operational risks faced by the RBS Group.
Ineffective management of such risks could
adversely affect the RBS Group. See also,
‘The RBS Group has announced a new
Purpose-led Strategy which will entail a period
of transformation and require an internal
cultural shift across the RBS Group. It carries
significant execution and operational risks and
it may not achieve its stated aims and
targeted outcomes’.
The RBS Group’s operations are highly
dependent on its complex IT systems, and
any IT failure could adversely affect the
RBS Group.
The RBS 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 RBS Group’s payment systems,
financial crime 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, is critical to the RBS
Group’s operations.
Individually or collectively, any critical system
failure, material loss of service availability or
material breach of data security could cause
serious damage to the RBS Group’s ability to
provide services to its customers, which could
result in reputational damage, significant
compensation costs or regulatory sanctions
(including fines resulting from regulatory
investigations) or a breach of applicable
regulations. In particular, such issues could
cause long-term damage to the RBS 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 RBS Group outsources
certain functions and continues to innovate
and offer new digital solutions to its customers
as a result of the trend towards online and
mobile banking.
In 2019, the RBS Group continued to make
considerable investments to further simplify,
upgrade and improve its IT and technology
capabilities (including migration of certain
services to cloud platforms). The RBS Group
continues to develop and enhance digital
services for its customers and seeks to
improve its competitive position through
enhancing controls and procedures and
strengthening the resilience of services
including cyber security. 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
RBS Group’s operations, its reputation and
ability to retain or grow its customer business
or adversely impact its competitive position,
thereby negatively impacting the RBS Group’s
financial position.
The RBS Group relies on attracting,
retaining and developing senior
management and skilled personnel, and is
required to maintain good employee
relations.
The RBS Group’s current and future success
depends on its ability to attract, retain and
develop highly skilled and qualified personnel,
RBS – Annual Report and Accounts 2019
283
Risk factors
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 the implementation of the RBS Group’s
Purpose-led Strategy and refocusing of its
NatWest Markets franchise, 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 RBS Group, all of which
may have an adverse effect on the RBS
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 RBS Group’s employees in the
UK, the Republic of Ireland (‘ROI’) and
continental Europe are represented by
employee representative bodies, including
trade unions. Engagement with its employees
and such bodies is important to the RBS
Group in maintaining good employee
relations. Any failure to do so could impact the
RBS Group’s ability to operate its business
effectively.
A failure in the RBS Group’s risk
management framework could adversely
affect the RBS Group, including its ability
to achieve its strategic objectives.
Risk management is an integral part of all of
the RBS Group’s activities and includes the
definition and monitoring of the RBS Group’s
risk appetite and reporting on the RBS
Group’s risk exposure and the potential
impact thereof on the RBS Group’s financial
condition. Financial risk management is highly
dependent on the use and effectiveness of
internal stress tests and models and
ineffective risk management may arise from a
wide variety of factors, including lack of
transparency or incomplete risk reporting,
unidentified conflicts or misaligned incentives,
lack of accountability control and governance,
lack of consistency in risk monitoring and
management or insufficient challenges or
assurance processes. Failure to manage risks
effectively could adversely impact the RBS
Group’s reputation or its relationship with its
regulators, customers, shareholders or other
stakeholders.
The RBS Group’s operations are inherently
exposed to conduct risks. These include
business decisions, actions or reward
mechanisms that are not responsive to or
aligned with the RBS Group’s regulatory
obligations, customers’ needs or do not reflect
the RBS Group’s customer-focussed strategy,
ineffective product management, unethical or
inappropriate use of data, implementation and
utilisation of new technologies, outsourcing of
customer service and product delivery, the
possibility of 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 RBS 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 RBS Group.
The RBS Group has been 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 RBS Group from
future instances of misconduct and no
assurance can be given that the RBS Group’s
strategy and control framework will be
effective. Any failure in the RBS Group’s risk
management framework could negatively
affect the RBS 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 RBS Group’s operations are subject to
inherent reputational risk.
Reputational risk relates to stakeholder and
public perceptions of the RBS Group arising
from an actual or perceived failure to meet
stakeholder expectations, including with
respect to the RBS Group’s Purpose-led
Strategy and related targets, due to any
events, behaviour, action or inaction by the
RBS Group, its employees or those with
whom the RBS Group is associated. This
includes brand damage, which may be
detrimental to the RBS 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 RBS Group’s ability to attract and
retain customers. In particular, the RBS
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 RBS Group conducts or modifies
its business activities and operations, media
coverage (whether accurate or otherwise),
employee misconduct, the RBS Group’s
financial performance, IT systems failures or
cyberattacks, data breaches, financial crime,
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. See also,
‘The RBS Group has announced a new
Purpose-led Strategy which will entail a period
of transformation and require an internal
cultural shift across the RBS Group. It carries
significant execution and operational risks and
it may not achieve its stated aims and
targeted outcomes’.
Modern technologies, in particular online
social networks and other broadcast tools
which facilitate communication with large
audiences in short time frames and with
minimal costs, may also significantly increase
and accelerate the impact of damaging
information and allegations.
Although the RBS 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
RBS Group cannot be certain that it will be
successful in avoiding damage to its business
from reputational risk.
Economic and political risk
Prevailing uncertainty regarding the terms
of the UK’s withdrawal from the European
Union has adversely affected and will
continue to affect the RBS 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 and the ratification of the
withdrawal agreement by the UK government
and the EU (through the Council of Ministers),
the UK ceased to be a member of the EU and
the European Economic Area (‘EEA’) on 31
January 2020 (‘Brexit’) and entered a
transition period, currently due to expire on 31
December 2020. During this transition period,
the UK retains the benefits of membership of
the EU’s internal market and the customs
union, but loses its representation in the EU’s
institutions and its role in EU decision-making.
The UK and EU are currently seeking to
determine the terms of their future relationship
by the end of the 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. If the UK
and EU do not agree a new comprehensive
trade agreement by the end of the transition
period and the transition period is not
extended, then, subject to separate
agreements being made with third countries,
the UK would be expected to operate on basic
RBS – Annual Report and Accounts 2019
284
Risk factors
World Trade Organization terms, the outcome
of which for RBS Group would be similar in
certain respects to a ‘no-deal’ Brexit, and
which may result in, amongst others, loss of
access to the EU single market for goods and
services, the imposition of import duties and
controls on trade between the UK and the EU
and related trade disruption.
The direct and indirect effects of the UK’s exit
from the EU and the EEA are expected to
affect many aspects of the RBS 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 RBS Group faces increased political and
economic risks and uncertainty in the UK and
global markets’. As a result of such
anticipated effects, the RBS Group has
engaged in significant and costly Brexit
planning and contingency planning and
expects to continue to do so. The direct and
indirect effects of the UK’s exit from the EU
and the EEA may also impede the RBS
Group’s ability to deliver its Purpose-led
Strategy and refocusing of its NatWest
Markets franchise. See also, ‘The RBS Group
has announced a new Purpose-led Strategy
which will entail a period of transformation and
require an internal cultural shift across the
RBS Group. It carries significant execution
and operational risks and it may not achieve
its stated aims and targeted outcomes’ and
‘Over the next three years, the RBS Group
intends to re-focus its NatWest Markets
franchise to the RBS Group’s CIB customer
offering and realise significant reductions in
risk weighted assets, cost base and
complexity. This entails significant
commercial, operational and execution risks
and the intended benefits for RBS Group may
not be realised within the timeline and in the
manner currently contemplated’.
The longer term effects of Brexit on the RBS
Group’s operating environment depend
significantly on the terms of the ongoing
relationship between the UK and EU and are
difficult to predict. They are subject to wider
global macro-economic trends and events, but
may significantly impact the RBS Group and
its customers and counterparties who are
themselves dependent on trading with the EU
or personnel from the EU. They may result in,
or be exacerbated by, periodic financial
volatility and slower economic growth, in the
UK in particular, but also in the ROI, the rest
of Europe and potentially the global economy.
Significant uncertainty exists as to the
respective legal and regulatory arrangements
under which the RBS Group and its
subsidiaries will operate once the transition
period has ended. 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
RBS Group’s non-UK operations and/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 RBS Group’s
profitability, competitive position,, business
model and product offering.
The RBS Group has obtained the requisite
regulatory permissions (including third country
licence branch approvals and access to
TARGET2 clearing and settlement
mechanisms) it currently considers are
required for continuity of business as a result
of the UK’s departure from the EU. These are
required in order to maintain the ability to
clear euro payments and to serve non-UK
EEA customers if there is a loss of access to
the European Single Market. These changes
to the RBS Group’s operating model have
been costly and may require further changes
to its business operations, product offering
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 RBS Group’s access to the euro payment
infrastructure will be fundamental to its
business going forward and further changes
to the RBS Group’s business operations may
be required.
The RBS Group faces increased political
and economic risks and uncertainty in the
UK and global markets.
In the UK, significant economic and political
uncertainty continues to surround the terms of
Brexit and now also the future relationship
between the UK and the EU. See also,
‘Prevailing uncertainty regarding the terms of
the UK’s withdrawal from the European Union
has adversely affected and will continue to
affect the RBS Group’.
The RBS Group faces additional political
uncertainty as to how the Scottish
parliamentary process (including, as a result
of any further Scottish independence
referendum or the next Scottish Parliament
elections in May 2021) may adversely impact
the RBS Group. RBSG plc and a number of
other RBS Group entities (including NWM Plc)
are headquartered and/or 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
RBS Group and its subsidiaries operate, and
may require further changes to the RBS
Group’s structure, independently or in
conjunction with other mandatory or strategic
structural and organisational changes which
could adversely impact the RBS Group.
Actual or perceived difficult global economic
conditions can create challenging economic
and market conditions and a difficult operating
environment for the RBS 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, the conflicts or
tensions the Middle East or Asia, 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 RBS
Group serves, or rapid change to the
economic environment due to the adoption of
technology and artificial intelligence. Any of
the above developments could adversely
impact the RBS Group directly (for example,
as a result of credit losses) or indirectly (for
example, by impacting global economic
growth and financial markets and the RBS
Group’s customers and their banking needs).
In addition, the RBS 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 (including the recent coronavirus
outbreak, the impact of which will depend on
future developments, which are highly
uncertain and cannot be predicted), 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
RBS Group, including as a result of the
indirect effect on regional or global trade
and/or the RBS Group’s customers.
The value of the RBS 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 RBS Group’s financial
instruments, particularly during periods of
market displacement which could cause a
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285
Risk factors
decline in the value of the RBS Group’s
financial instruments, which may have an
adverse effect on the RBS Group’s results of
operations in future periods, or inaccurate
carrying values for certain financial
instruments.
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 RBS Group’s
counterparty risk. The RBS Group’s risk
management and monitoring processes seek
to quantify and mitigate the RBS Group’s
exposure to more extreme market moves.
However, severe market events have
historically been difficult to predict and the
RBS Group could realise significant losses if
extreme market events were to occur.
The RBS Group expects to face significant
risks in connection with climate change
and the transition to a low carbon
economy which may adversely impact the
RBS Group.
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 RBS Group’s risk framework, and
adapting the RBS Group’s operations and
business strategy to address the physical
risks of climate change and the risk
associated with a transition to a low carbon
economy in line with its Purpose-led Strategy
and ambition to reduce the climate impact of
its financing activities and evolving regulatory
requirements and market expectations is
expected to have a significant impact on the
RBS Group.
Multilateral agreements, in particular the 2015
Paris Agreement, and subsequent UK and
Scottish Government commitments to
achieving net zero carbon emissions by 2050
and 2045, respectively, will require
widespread levels of adjustment across all
sectors of the UK economy and markets in
which the RBS Group operates. Some sectors
such as property, energy, infrastructure
(including transport) and agriculture are
expected to be particularly impacted. The
nature and timing of the far-reaching
commercial, technological, policy and
regulatory changes that this transition will
entail remain uncertain. The UK Government
and UK regulators, including the PRA, the
RBSG plc’s UK prudential regulator, have
indicated it is a priority issue. The impact of
such regulatory, policy, commercial and
technological changes is expected to be
highly significant and 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. Recent data
indicates that global carbon emissions are
continuing to increase. 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. See also, ‘The RBS Group’s
new Purpose-led Strategy includes one area
of focus on climate change which entails
significant execution risk and is likely to
require material changes to the business
model of the RBS Group over the next ten
years’, ‘The RBS Group’s businesses are
subject to substantial regulation and
oversight, which are constantly evolving and
may adversely affect the RBS Group’ and
‘Any reduction in the credit rating assigned to
RBSG plc, any of its subsidiaries or any of
their respective debt securities could
adversely affect the availability of funding for
the RBS Group, reduce the RBS Group’s
liquidity position and increase the cost of
funding’.
If the RBS Group does not adequately embed
climate risk into its risk framework to
appropriately measure, manage and disclose
the various financial, transition and physical
risks it faces associated with climate change,
or fails to implement its new strategy on
climate change and adapt its business model
to the changing regulatory requirements and
market expectations on a timely basis, it may
have a material and adverse impact on the
RBS Group’s level of business growth, its
competitiveness, profitability, prudential
capital requirements, ESG ratings, credit
ratings, cost of funding, reputation, results of
operation and financial condition.
HM Treasury (or UKGI on its behalf) could
exercise a significant degree of influence
over the RBS Group and further offers or
sales of the RBS Group’s shares held by
HM Treasury may affect the price of
securities issued by the RBS Group.
In its November 2018 Autumn Budget, the UK
Government announced its intention to
continue the process of privatisation of RBSG
plc and to carry out a programme of sales of
RBSG plc ordinary shares with the objective
of selling all of its remaining shares in RBSG
plc by 2023-2024. On 6 February 2019,
RBSG plc obtained shareholder approval to
participate in certain directed share buyback
activities. As at 31 December 2019, the UK
Government held 62.1% of the issued
ordinary share capital of RBSG plc. 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
prolonged period of increased price volatility
on the RBS Group’s ordinary shares.
Any offers or sale, or expectations relating to
the timing thereof, of a substantial number of
ordinary shares by HM Treasury, or any
associated directed buyback activity by the
RBS Group, could affect the prevailing market
price for the outstanding ordinary shares of
RBSG plc.
In addition, UK Government Investments
Limited (‘UKGI’) manages HM Treasury’s
shareholder relationship with RBSG plc and,
although HM Treasury has indicated that it
intends to respect the commercial decisions of
the RBS Group and that the RBS 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 RBS Group’s capital
strategy, dividend policy, remuneration policy
or the conduct of the RBS Group’s operations,
and HM Treasury or UKGI’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.
Changes in interest rates have
significantly affected and will continue to
affect the RBS Group’s business and
results.
Interest rate risk is significant for the RBS
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) as well as the general UK political
climate. Further decreases in interest rates
and/or continued sustained low or negative
interest rates could put pressure on the RBS
Group’s interest margins and adversely affect
the RBS 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 RBS Group’s
interest rate margin realised between lending
and borrowing costs.
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286
Risk factors
Conversely, while increases in interest rates
may support RBS 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 RBS Group operates.
Changes in foreign currency exchange
rates may affect the RBS Group’s results
and financial position.
Although the RBS Group is now principally a
UK and ROI-focussed banking group, it is
subject to foreign exchange risk from capital
deployed in the RBS 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 RBS Group also
relies on issuing securities in foreign
currencies that assist in meeting the RBS
Group’s minimum requirements for own funds
and eligible liabilities (‘MREL’). The RBS
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 regulatory
capital and MREL eligible instruments),
income, RWAs, capital base and expenses
and the reported earnings of the RBS Group’s
UK and non-UK subsidiaries and may affect
the RBS 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 European Central
Bank and the US Federal Reserve) and
political or market events (including Brexit and
the general UK political climate), which are
outside of the RBS Group’s control, may lead
to sharp and sudden variations in foreign
exchange rates.
Financial resilience risk
The RBS Group may not meet targets and
be in a position to continue to make
discretionary capital distributions
(including dividends to shareholders).
As part of the RBS Group’s strategy, the RBS
Group has become a principally UK and ROI-
focussed banking group and as part of its
Purpose-led Strategy has set a number of
financial, capital and operational targets for
the RBS Group including in respect of: CET1
ratio targets, return on tangible equity
(‘ROTE’), 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 (including dividends to
shareholders). See also, ‘The RBS Group has
announced a new Purpose-led Strategy which
will entail a period of transformation and
require an internal cultural shift across the
RBS Group. It carries significant execution
and operational risks and it may not achieve
its stated aims and targeted outcomes’.
The RBS 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 RBS Group’s business
model and strategy (including risks associated
with ESG and climate issues) and litigation,
governmental actions, investigations and
regulatory matters.
A number of factors may impact the RBS
Group’s ability to maintain its CET1 ratio
target of 13-14% (over the medium to long
term) and make discretionary capital
distributions. See also, ‘The RBS Group may
not meet the prudential regulatory
requirements for capital and MREL, or
manage its capital effectively, which could
trigger the execution of certain management
actions or recovery options’.
The RBS Group’s ability to meet its 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 RBS 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 RBS Group’s
Purpose-led Strategy will be successfully
executed, that the RBS Group will meet its
targets and expectations or be in a position to
continue to distribute capital, or that the RBS
Group will be a viable, competitive or
profitable banking business.
The RBS 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 RBS Group
operates, are highly competitive. The RBS
Group expects such competition to continue
or intensify in response to evolving customer
behaviour, technological changes (including
the growth of digital banking, including from
fintech entrants), competitor behaviour, new
entrants to the market (including non-
traditional financial services providers such as
large retail or technology conglomerates, who
may have competitive advantages in scale,
technology and customer engagement),
competitive foreign-exchange offerings,
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 RBS
Group’s ability to grow or retain its market
share and impact its revenues and
profitability, particularly in its key UK retail
banking segment. Moreover, innovations such
as biometrics, artificial intelligence, the cloud,
blockchain, and quantum computing may
rapidly facilitate industry transformation.
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 RBS 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 RBS Group are, and
will become, technology intensive, for
example Bό, Mettle, Esme, FreeAgent, Tyl,
APtimise and Path, some of the RBS Group’s
recent fintech ventures. The RBS Group’s
ability to develop digital solutions that comply
with related regulatory changes has become
increasingly important to retaining and
growing the RBS Group’s customer business
in the UK. There can be no certainty that the
RBS 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 RBS Group
to continue to grow such services in the
future. Certain of the RBS Group’s current or
future competitors may be more successful in
implementing innovative technologies for
delivering products or services to their
customers. The RBS Group may also fail to
identify future opportunities or derive benefits
from disruptive technologies in the context of
rapid technological innovation, changing
customer behaviour and growing regulatory
demands, including the UK initiative on Open
Banking (PSD2) and Open Finance (for which
the FCA announced a call for input in
December 2019), 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.
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287
Risk factors
Furthermore, the RBS 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 RBS Group. Although the RBS
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
RBS Group’s focus on its cost savings
targets. This may limit additional investment in
areas such as financial innovation and
therefore could affect the RBS 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 RBS Group’s ability
to produce underlying high quality data, failing
which its ability to offer innovative products
may be compromised.
If the RBS Group is unable to offer
competitive, attractive and innovative products
that are also profitable, it will lose market
share, incur losses on some or all of its
activities and lose opportunities for growth. In
this context, the RBS Group is investing in the
automation of certain solutions and
interactions within its customer-facing
businesses, including through artificial
intelligence. Such initiatives may result in
operational, reputational and conduct risks if
the technology used is defective, or is not fully
integrated into the RBS Group’s current
solutions or does not deliver expected cost
savings. The investment in automated
processes will likely also result in increased
short-term costs for the RBS Group.
In addition, recent and future disposals and
restructurings by the RBS Group, the
implementation of its Purpose-led Strategy,
including the refocusing of its NatWest
Markets franchise and delivery on its climate
ambition, cost-reduction 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 RBS Group’s core markets could affect
the RBS Group’s ability to maintain
satisfactory returns. See also, ‘The RBS
Group has announced a new Purpose-led
Strategy which will entail a period of
transformation and require an internal cultural
shift across the RBS Group. It carries
significant execution and operational risks and
it may not achieve its stated aims and
targeted outcomes’. Moreover, activist
investors have increasingly become engaged
and interventionist in recent years, which may
pose a threat to the RBS Group’s strategic
initiatives. Furthermore, continued
consolidation in certain sectors of the financial
services industry could result in the RBS
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 RBS Group has significant exposure
to counterparty and borrower risk.
The RBS Group has exposure to many
different industries, customers and
counterparties, and risks arising from actual or
perceived changes in credit quality and the
recoverability of monies due from borrowers
and other counterparties are inherent in a
wide range of the RBS Group’s businesses.
The RBS 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 such
that, under SICR (‘significant increases in
credit risk’) rules, it moves to Stage 2 for
impairment calculation purposes. The RBS
Group’s lending strategy and associated
processes may fail to identify or anticipate
weaknesses or risks in a particular sector,
market or borrower, or fail to adequately value
physical or financial collateral. This may result
in increased default rates or a higher loss
given default for loans, which may, in turn,
impact the RBS Group’s profitability. See also,
‘Capital and risk management — Credit Risk’.
The credit quality of the RBS 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 RBS Group’s ability
to enforce contractual security rights. See
also, ‘The RBS 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. See also, ‘Prevailing uncertainty
regarding the terms of the UK’s withdrawal
from the European Union has adversely
affected and will continue to affect the RBS
Group’.
Within the UK, the level of household
indebtedness remains high although the pace
of consumer credit growth has slowed during
2019. 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 RBS Group
may be affected by volatility in property prices
(including as a result of Brexit and the general
UK political climate) given that the RBS
Group’s mortgage loan and wholesale
property portfolios as at 31 December 2019,
amounted to £210.3 billion, representing
61.9% of the RBS Group’s total customer loan
exposure. If property prices were to weaken
this could lead to higher impairment charges,
particularly if default rates also increase. In
addition, the RBS 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 RBS 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. Any
perceived lack of creditworthiness of a
counterparty may lead to market-wide liquidity
problems and losses for the RBS Group. This
systemic risk may also adversely affect
financial intermediaries, such as clearing
agencies, clearing houses, banks, securities
firms and exchanges with which the RBS
Group interacts on a daily basis. See also,
‘The RBS 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 RBS Group and an inability
to engage in routine funding transactions.
The RBS Group is exposed to the financial
institutions industry, including sovereign debt
securities, banks, financial intermediation
providers (including providing facilities to
financial sponsors and funds, backed by
assets or investor commitments) and
securitised products (typically senior lending
to special purpose vehicles backed by pools
of financial assets). Due to the RBS Group’s
exposure to the financial industry, it also has
exposure to shadow banking entities (ie,
entities which carry out banking activities
outside a regulated framework). Recently,
there has been increasing regulatory focus on
shadow banking. In particular, the European
Banking Authority Guidelines
(EBA/GL/2015/20) require the RBS Group to
identify and monitor its exposure to shadow
banking entities, implement and maintain an
internal framework for the identification,
management, control and mitigation of the
risks associated with exposure to shadow
banking entities, and ensure effective
reporting and governance in respect such
exposure. If the RBS Group is unable to
properly identify and monitor its shadow
banking exposure, maintain an adequate
framework, or ensure effective reporting and
governance in respect of shadow banking
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288
Risk factors
exposure, this may adversely affect the
financial condition and prospects of the RBS
Group.
The RBS Group may not meet the
prudential regulatory requirements for
capital and MREL, or manage its capital
effectively, which could trigger the
execution of certain management actions
or recovery options.
The RBS 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 RBS 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 RBS Group
to make discretionary capital distributions
(including dividends to shareholders).
As at 31 December 2019, the RBS Group’s
CET1 ratio was 16.2% and the RBS Group
currently targets to maintain its CET1 ratio at
13 -14% over the medium to long term. The
RBS 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 RBS Group’s current capital strategy is
based on the expected accumulation of
additional capital through the accrual of profits
over time, planned capital actions (including
issuances, redemptions, and discretionary
capital distributions), RWA growth in the form
of regulatory uplifts and lending growth and
other capital management initiatives which
focus on improving capital efficiency.
A number of factors may impact the RBS
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 cyberattack, 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
RBS Group’s capital plan;
an increase in the quantum of RWAs in
excess of that expected, including due to
regulatory changes;
changes in prudential regulatory
requirements including the RBS Group’s
Total Capital Requirement set by the
PRA, including Pillar 2 requirements and
regulatory buffers (including the increased
2% countercyclical capital buffer for UK
banks with effect from 16 December
2020), as well as any applicable scalars;
and
reduced dividends from the RBS Group’s
subsidiaries because of changes in their
financial performance and/or the extent to
which local capital requirements exceed
RBS Group’s target ratio; and
limitations on the use of double leverage,
i.e. RBSG plc’s use of borrowed money to
invest in the equity of its subsidiaries, as a
result of the Bank of England’s and/or the
RBS Group’s evolving views on
distribution of capital within groups.
A shortage of capital could in turn affect the
RBS Group’s capital ratio, and/or ability to
make capital distributions.
In accordance with the provisions of CRD IV,
a minimum level of capital adequacy is
required to be met by RBS Group in order for
it to be entitled to make certain discretionary
payments, and institutions which fail to meet
the combined buffer requirement are subject
to restricted discretionary payments. The
resulting restrictions are scaled according to
the extent of the breach of the combined
buffer requirement and calculated as a
percentage of the profits of the institution
since the last distribution of profits or
discretionary payment which gives rise to a
maximum distributable amount (MDA) (if any)
that the financial institution can distribute
through discretionary payments. In the event
of a breach of the combined buffer
requirement, the RBS Group will be required
to calculate its MDA, and as a consequence it
may be necessary for the RBS Group to
reduce or cease discretionary payments
(including payments of dividends to
shareholders) to the extent of the breach.
In addition to regulatory capital, RBSG plc 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 RBS
Group. As a result, RBSG plc is the only RBS
Group entity that can externally issue
securities that count towards the RBS 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.
If the RBS Group is unable to raise the
requisite amount of regulatory capital or
MREL, downstream the proceeds of MREL to
subsidiaries, as required, in the form of
internal MREL, or to otherwise meet its
regulatory capital, MREL and leverage
requirements, it may be exposed to increased
regulatory supervision or sanctions, loss of
investor confidence and constrained or more
expensive funding and be unable to make
dividend payments on its ordinary shares or
maintain discretionary payments on capital
instruments.
If, under a stress scenario, the level of capital
or MREL falls outside of risk appetite, there
are a range of recovery management actions
(focused on risk reduction and mitigation) that
the RBS 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 Directive
(‘BRRD’), as implemented in the UK, the
RBSG Group must maintain a recovery plan
acceptable to its regulator, such that a breach
of the RBS Group’s applicable capital or
leverage requirements may trigger the
application of the RBS Group’s recovery plan
to remediate a deficient capital position. The
RBS Group’s regulator may request that the
RBS Group carry out certain capital
management actions or, if the RBS Group’s
CET1 ratio falls below 7%, certain regulatory
capital instruments issued by the RBS Group
will be written-down or converted into equity
and there may be an issue of additional equity
by the RBS Group, which could result in the
dilution of the RBS Group’s existing
shareholders. The success of such issuances
will also be dependent on favourable market
conditions and the RBS Group may not be
able to raise the amount of capital required on
acceptable terms or at all. Separately, the
RBS 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 RBS 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 RBS
Group and future growth potential. See also,
‘The RBS Group may become subject to the
application of UK statutory stabilisation or
resolution powers which may result in, among
other actions, the cancellation, transfer or
dilution of ordinary shares, or the write-down
or conversion of certain of the RBS Group’s
securities’.
The RBS Group is subject to Bank of
England oversight in respect of resolution,
and the RBS Group could be adversely
affected should the Bank of England deem
the RBS Group’s preparations to be
inadequate.
The RBS Group is subject to regulatory
oversight by the Bank of England, and is
required (under the PRA rulebook) to carry
out an assessment of its preparations for
resolution, submit a report of the assessment
to the PRA, and disclose a summary of this
report. The initial report is due to be submitted
to the PRA on 2 October 2020 and the Bank
of England’s assessment of RBS Group’s
preparations is scheduled to be released on
11 June 2021.
The RBS Group has dedicated significant
resources towards the preparation of the RBS
Group for a potential resolution scenario.
However, if the assessment reveals that the
RBS Group is not adequately prepared to be
resolved, or does not have adequate plans in
place to meet resolvability requirements by 1
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289
Risk factors
January 2022, the RBS Group may be
required to take action to enhance its
preparations to be resolvable, resulting in
additional cost and the dedication of additional
resources. Such actions may adversely affect
the RBS Group, resulting in restrictions on
maximum individual and aggregate
exposures, a requirement to dispose of
specified assets, a requirement to cease
carrying out certain activities and/or
maintaining a specified amount of MREL. This
may also result in reputational damage and/or
loss of investor confidence.
The RBS Group may not be able to
adequately access sources of liquidity and
funding.
The RBS 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
2019, the RBS Group held £389.7 billion in
deposits. The level of deposits may fluctuate
due to factors outside the RBS Group’s
control, such as a loss of confidence
(including in individual RBS 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. An inability to grow, or any material
decrease in, the RBS Group’s deposits could,
particularly if accompanied by one of the other
factors described above, materially affect the
RBS Group’s ability to satisfy its liquidity or
funding needs.
As at 31 December 2019, the RBS Group’s
liquidity coverage ratio was 152%. If its
liquidity position were to come under stress,
and if the RBS Group were 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 RBS 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 RBS 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 RBS Group’s
results.
Any reduction in the credit rating assigned
to RBSG plc, any of its subsidiaries or any
of their respective debt securities could
adversely affect the availability of funding
for the RBS Group, reduce the RBS
Group’s liquidity position and increase the
cost of funding.
Rating agencies regularly review RBSG plc
and other RBS Group entity credit ratings,
which could be negatively affected by a
number of factors that can change over time,
including the credit rating agency’s
assessment of the RBS Group’s strategy and
management’s capability; its financial
condition including in respect of profitability,
asset quality, capital, funding and liquidity; the
level of political support for the industries in
which the RBS Group operates; the
implementation of structural reform; the legal
and regulatory frameworks applicable to the
RBS Group’s legal structure; business
activities and the rights of its creditors;
changes in rating methodologies; changes in
the relative size of the loss-absorbing buffers
protecting bondholders and depositors; the
competitive environment, political and
economic conditions in the RBS Group’s key
markets (including the impact of Brexit and
any further Scottish independence
referendum); any reduction of the UK’s
sovereign credit rating and market
uncertainty. See also, ‘The RBS Group has
announced a new Purpose-led Strategy which
will entail a period of transformation and
require an internal cultural shift across the
RBS Group. It carries significant execution
and operational risks and it may not achieve
its stated aims and targeted outcomes’.
In addition, 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.
Any reductions in the credit ratings of RBSG
plc or of certain other RBS Group entities,
including, in particular, downgrades below
investment grade, or a deterioration in the
capital markets’ perception of the RBS
Group’s financial resilience could significantly
affect the RBS 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 RBS Group’s (and,
in particular, RBSG plc’s) cost of funding and
its access to capital markets and could limit
the range of counterparties willing to enter into
transactions with the RBS Group (and, in
particular, RBSG plc). This could in turn
adversely impact its competitive position and
threaten the prospects of the RBS Group in
the short to medium-term.
The RBS Group may be adversely affected
if it fails to meet the requirements of
regulatory stress tests.
The RBS 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 plc, 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 RBS Group to meet the
quantitative and qualitative requirements of
the stress tests as set forth by its UK regulator
or those elsewhere may result in: the RBS
Group’s regulators requiring the RBS Group
to generate additional capital, reputational
damage, increased supervision and/or
regulatory sanctions, restrictions on capital
distributions and loss of investor confidence.
The RBS 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 RBS Group’s
business, strategy and capital requirements,
the RBS 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 the RBS Group’s
mandated stress testing). In addition, the RBS
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 RBS 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 RBS Group operates, to capture
risks and exposures at the subsidiary level, to
be updated in line with the RBS Group’s
current business model or operations, or
findings of deficiencies by the RBS Group’s
regulators (including as part of the RBS
Group’s mandated stress testing) may result
in increased capital requirements or require
management action. The RBS Group may
also face adverse consequences as a result
of actions 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 RBS Group’s financial statements are
sensitive to the underlying accounting
policies, judgments, estimates and
assumptions.
The preparation of financial statements
requires management to make judgments,
estimates and assumptions that affect the
RBS – Annual Report and Accounts 2019
290
Risk factors
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, judgments,
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
RBS Group’s results and financial position,
based upon materiality and significant
judgments and estimates, which include loan
impairment provisions, are set out in ‘Critical
accounting policies and key sources of
estimation uncertainty’ on page 212. New
accounting standards and interpretations that
have been issued by the International
Accounting Standards Board but which have
not yet been adopted by the RBS Group are
discussed in ‘Accounting developments’ on
page 212.
Changes in accounting standards may
materially impact the RBS 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 RBS Group
having to recognise additional liabilities on its
balance sheet, or in further write-downs or
impairments to its assets and could also
significantly impact the financial results,
condition and prospects of the RBS Group.
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 RBS 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 RBS Group’s internal
valuation models require the RBS Group to
make assumptions, judgments and estimates
to establish fair value, which are complex and
often relate to matters that are inherently
uncertain.
With effect form 1 January 2019, the RBS
Group adopted IFRS 16 Leases, as disclosed
in the Accounting Policies. This increased
Other assets by £1.3 billion and Other
liabilities by £1.7 billion. While adoption of this
standard has had no effect on the RBS
Group’s cash flows, it has impacted financial
ratios, which may influence investors’
perception of the financial condition of the
RBS Group.
The value or effectiveness of any credit
protection that the RBS Group has
purchased depends on the value of the
underlying assets and the financial
condition of the insurers and
counterparties.
The RBS 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 RBS
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 RBS Group may record
further credit valuation adjustments on the
credit protection bought from these
counterparties under the CDSs. The RBS
Group also recognises any fluctuations in the
fair value of other credit derivatives. Any such
adjustments or fair value changes may have a
negative impact on the RBS Group’s results.
The RBS Group’s results could be
adversely affected if an event triggers the
recognition of a goodwill impairment.
The RBS 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
RBS 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 2019, the RBS Group carried
goodwill of £5.6 billion on its balance sheet.
The value in use and fair value of the RBS
Group’s cash-generating units are affected by
market conditions and the economies in which
the RBS Group operates.
Where the RBS Group is required to
recognise a goodwill impairment, it is
recorded in the RBS Group’s income
statement, but it has no effect on the RBS
Group’s regulatory capital position.
The RBS Group may become subject to
the application of UK statutory
stabilisation or resolution powers which
may result in, among other actions, the
cancellation, transfer or dilution of
ordinary shares, or the write-down or
conversion of certain other of the RBS
Group’s securities.
The Banking Act 2009, as amended (‘Banking
Act’), implemented the BRRD in the UK and
created 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 plc 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
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.
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291
Risk factors
Uncertainty exists as to how the Authorities
may exercise the powers granted to them
under the Banking Act including the
determination of actions undertaken in relation
to the ordinary shares and other securities of
the RBS Group and may depend on factors
outside of the RBS Group’s control. Moreover,
the relevant provisions of the Banking Act
remain untested in practice.
If the RBS 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 plc’s
ordinary shares or other RBS Group securities
that fall within the scope of the resolution
regime powers. This may result in various
actions being undertaken in relation to the
RBS Group and any securities of the RBS
Group, including cancellation, transfer,
dilution, write-down or conversion (as
applicable). There may also be a
corresponding adverse effect on the market
price of such securities.
Legal, regulatory and conduct risk
The RBS Group’s businesses are subject
to substantial regulation and oversight,
which are constantly evolving and may
adversely affect the RBS Group.
The RBS 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 RBS 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
financial services is conducted. Amongst
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 RBS 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, the
EU 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 RBS Group is required to continue 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 RBS
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 RBS
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 RBS Group’s authorisations and licences,
the products and services that the RBS Group
may offer, its reputation and the value of its
assets, the RBS Group’s operations or legal
entity structure, and the manner in which the
RBS 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 RBS 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 RBS Group
operates;
amendments to the framework or
requirements relating to the quality and
quantity of regulatory capital to be held by
the RBS 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 or MREL;
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 RBS 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
retail banking developments relating to
the UK initiative on Open Banking, Open
Finance 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 RBS
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
other requirements or policies affecting
the RBS 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.
To support the UK’s goal of Net Zero by 2050,
the UK and Scottish governments and UK and
international regulators, such as the PRA and
European Commission, are actively seeking
to develop new and existing regulations
directly and indirectly focussed on climate
change and the associated financial risks.
Regulatory and policy developments, such as
the minimum energy efficient requirements for
residential and commercial real estate, may
RBS – Annual Report and Accounts 2019
292
Risk factors
have a significant impact on the markets in
which the RBS Group operates, especially
mortgage lending, and its associated credit,
market and financial risk profile.
In a Joint Declaration on Climate Change
published in July 2019, the PRA, FCA,
Financial Reporting Council and The
Pensions Regulator set out their commitment
to working collaboratively to address the risks
of climate change. In October 2019, the RBS
Group submitted its initial plan to meet the
PRA’s supervisory expectations in its
supervisory statement (SS 3/19) 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).
In addition, The Bank of England announced
in December 2019 that it will use the 2021
biennial exploratory scenario (BES) to stress
banks on certain climate scenarios to test the
resilience of the current business models of
the largest banks, insurers and the financial
system to the physical and transition risks
from climate change. The prudential
regulation of climate risk will be an important
driver in how the RBS Group otherwise
decides how it allocates capital and further
develop its risk appetite for financing certain
types of activity or engaging with
counterparties that do not align to a transition
to a net zero economy.
The FCA have also announced that climate
change and green finance will be priorities
with a focus on disclosure, integrating climate
change into decision-making and consumers’
access to green financial services. The RBS
Group also recognises various legislative
actions and proposals by, among others, the
European Commission’s Action Plan on
Sustainable Finance which include a
taxonomy on sustainable finance. Many of
these legislative and regulatory initiatives, and
especially the EU taxonomy, are focused on
developing standardised definitions for the
green and sustainable criteria of assets and
liabilities, which could change over time and
impact the RBS Group’s recognition of its
climate financing activity and lead to
reputational and conduct risk on its own
sustainable financing activity.
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 RBS Group to
comply with such laws, rules and regulations,
may adversely affect the RBS Group’s
business, financial condition and results. In
addition, uncertainty and insufficient
international regulatory coordination as
enhanced supervisory standards are
developed and implemented may adversely
affect the RBS Group’s ability to engage in
effective business, capital and risk
management planning.
greater than predicted complaints volumes in
the lead up to the 29 August 2019 deadline for
making new PPI complaints.
The RBS Group is subject to a number of
legal, regulatory and governmental actions
and investigations as well as associated
remedial undertakings, the outcomes of
which are inherently difficult to predict,
and which could have an adverse effect on
the RBS Group.
The RBS 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 RBS 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 RBS Group’s
view, the most significant legal and regulatory
actions to which the RBS Group is currently
exposed. However, the RBS 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 RBS Group’s
expectation for resolution may change.
In particular, the RBS Group 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
RBS Group (GRG), management of claims
arising from historical sales of payment
protection insurance, and a review of tracker
mortgage products in the Republic of Ireland.
In relation to the GRG review, the RBS Group
established a complaints process in
November 2016, overseen by an independent
third party. The complaints process is now
closed to new complaints, although the RBS
Group continues to handle certain complaints
that were made before the deadline for new
complaints passed. In addition, the RBS
Group continues to handle claims in relation
to historical sales of payment protection
insurance and took an additional provision of
£900 million in third quarter of 2019, reflecting
In the ROI, Ulster Bank Ireland 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 has now concluded
although an appeals process is currently
anticipated to run until at least the end of
2020. See also, ‘Litigation, investigations and
reviews’ of Note 26 on the consolidated
accounts for details of these matters. The
RBS 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 RBS Group’s operations,
additional supervision by the RBS Group’s
regulators, and loss of investor confidence.
RBS Group companies are currently
responding to a criminal investigation by the
United States Attorney for the District of
Connecticut (USAO) and the United States
Department of Justice (DoJ), concerning
securities trading in 2018 by certain former
traders of NWM Plc ,involving alleged
spoofing. The trading activity occurred during
the term of the non prosecution agreement
(NPA) that NWMSI entered into with the
USAO in October 2017 in connection with
alleged misrepresentations to counterparties
relating to secondary trading in various forms
of asset-backed securities. Under the NPA,
non-prosecution was conditioned on NWMSI
and affiliated companies not engaging in
conduct during the NPA that the USAO
determines was a felony under federal or
state law or a violation of the antifraud
provisions of the United States securities law.
See also, ‘Litigation, investigations and
reviews’ of Note 26 to the consolidated
accounts for details of these matters.
The duration and outcome of the criminal
investigation into alleged spoofing, which may
include the extension, modification, or
deemed violation of the NPA, remain
uncertain. No settlement may be reached and
further substantial additional provisions and
costs may be recognised. Any finding of
criminal liability by US authorities as to NWM
Plc, NWMSI, or an affiliate (including as a
result of pleading guilty), as to either the
alleged spoofing or the conduct underlying the
NPA, could have material collateral
consequences for RBS Group’s business.
These may include consequences resulting
from the need to reapply for various important
licenses or obtain waivers to conduct certain
existing activities of the RBS Group,
particularly but not solely in the US, which
may take a significant period of time and the
RBS – Annual Report and Accounts 2019
293
Risk factors
results of which are uncertain. Failure to
obtain such licenses or waivers could
adversely impact the RBS Group’s business,
in particular in the US, including if it results in
the RBS Group being precluded from carrying
out certain activities.
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
RBS Group’s operations, and could adversely
impact the RBS Group’s capital position or its
ability to meet regulatory capital adequacy
requirements. Failure to comply with
undertakings made by the RBS Group to its
regulators may result in additional measures
or penalties being taken against the RBS
Group.
The RBS 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
(IBORs), 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 US. The RBS Group
has a significant exposure to IBORs, and
continues to reference it in certain products,
primarily its derivatives, commercial lending
and legacy securities. Although the RBS
Group is actively engaged with customers and
industry working groups to manage the risks
relating to such exposure, and is exploring
ways to utilise RFRs to the extent possible,
the legal mechanisms to effect transition
cannot be confirmed, and the impact cannot
be determined nor any associated costs
accounted for, until such time that RFRs are
utilised exclusively, and there is market
acceptance on the form of alternative RFRs
for different products, and certain IBOR
obligations may not be able to be changed.
The transition and uncertainties around the
timing and manner of transition to RFRs
represent a number of risks for the RBS
Group, its customers and the financial
services industry more widely. Following an
analysis of the RBS Group’s IBOR-linked
financial products and instruments, the RBS
Group has identified the following risks: legal
risks (as changes will be required to
documentation for new and the majority of
existing transactions); financial risks (which
may arise from any changes in valuation of
financial instruments linked to benchmarks
rates and may impact the RBS 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 requirement to
adapt IT systems, trade reporting
infrastructure and operational processes); and
conduct risks (which include 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 RBS
Group, or the costs of implementing any
relevant remedial action. Uncertainty as to the
nature and extent of such potential changes,
alternative reference rates or other reforms
including the potential continuation of the
publication of LIBOR may adversely affect
financial instruments using LIBOR 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 certain financial instruments
and on the RBS Group’s profitability. There is
also the risk of an adverse effect to reported
performance arising from the transition rules
established by accounting bodies, as certain
rules (as proposed by the IASB) are still to be
finalised.
The RBS 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 RBS
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.
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 RBS Group and could, in aggregate,
adversely impact the RBS 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 RBS 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 RBS
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
RBS Group and may also divert resources
from the RBS 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 RBS Group to modify certain
aspects of the RBS 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 RBS
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 RBS Group’s business.
As a direct consequence of the incentivised
switching scheme (which comprises part of
the Alternative Remedies Package), the RBS
Group will lose existing customers and
deposits, which in turn will have adverse
impacts on the RBS 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 RBS Group’s competitive position.
To support the incentivised switching initiative,
upon request by an eligible bank, the RBS
Group has agreed to grant those customers
which have switched to eligible banks under
the incentivised switching scheme access to
its branch network for cash and cheque
RBS – Annual Report and Accounts 2019
294
Risk factors
handling services, which may impact
customer service quality for the RBS 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 RBS
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 RBS Group’s operations,
additional supervision by the RBS 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 RBS Group.
In accordance with IFRS (as adopted by the
European Union), the RBS 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 billion as
at 31 December 2019. Changes to the
treatment of certain deferred tax assets may
impact the RBS Group’s capital position. In
addition, the RBS 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.
RBS – Annual Report and Accounts 2019
295
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.
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.
Memorandum of Understanding Relating to The
Royal Bank of Scotland Group Pension Fund
On 16 April 2018 the company entered into a
Memorandum of Understanding (the ”MoU”) with
the trustee of The Royal Bank of Scotland Group
Pension Fund (the ”Group Fund”), which aimed
to facilitate both the necessary changes to the
Main Section of the Group Fund to align the
employing entity structure with the requirements
RBS – Annual Report and Accounts 2019
296
Material contracts
of the UK ring-fencing legislation and
acceleration of the settlement framework for the
31 December 2017 triennial valuation of the Main
Section of the Group Fund (brought forward from
31 December 2018).
In addition, the MoU also provided clarity on the
additional related funding contributions required
to be made by the company to the Main
Section of the Group Fund as follows: (i) a pre-
tax payment of £2 billion that was made in the
second half of 2018 and (ii) from 1 January 2020,
further pre-tax contributions of up to £1.5 billion
in aggregate linked to the making of future
distributions to RBS shareholders including
ordinary and special dividends and/or share buy
backs (subject to an annual cap on contributions
of £500 million before tax).
On 28 September 2018, the implementation of
the MoU was documented through a Framework
Agreement entered into between the company
and the trustee of the Group Fund.
RBS – Annual Report and Accounts 2019
297
Shareholder information
Financial calendar
Shareholder enquiries
Analysis of ordinary shareholders
Important addresses
Principal offices
Forward-looking statements
Page
298
298
299
299
299
300
Ex-dividend date
Cumulative preference shares 30 April and 3 December 2020
Ordinary shares (2019 final)
26 March 2020
Record date
Cumulative preference shares
1 May and 4 December 2020
Financial calendar
Dividends
Payment dates
Cumulative preference shares 31 May and 31 December 2020
Non-cumulative preference
shares
31 March, 30 June
30 September and
31 December 2020
Ordinary shares (2019 final)
4 May 2020
(2020 interim) (1) September 2020
Ordinary shares (2019 final)
27 March 2020
Annual General Meeting
29 April 2020
RBS Conference Centre
RBS Gogarburn
Edinburgh, EH12 1HQ
Interim results
31 July 2020
Note:
(1) This date is provisional and subject to change.
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.
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.
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.
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.
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.
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
RBS – Annual Report and Accounts 2019
298
Shareholder information
Analysis of ordinary shareholders
At 31 December 2019
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
176,739
4,821
43
2
458
20
71
182,154
157,364
23,055
969
464
230
72
182,154
Number
of shares
- millions
98.7
11,883.7
0.1
0.3
58.9
—
52.2
12,093.9
38.2
52.6
28.5
163.1
772.2
11,039.3
12,093.9
%
0.8
98.3
—
—
0.5
—
0.4
100.0
0.3
0.4
0.2
1.4
6.4
91.3
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
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
250 Bishopsgate, London
EC2M 4AA, England
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
www.rbs.com
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, England
The Royal Bank of Scotland plc
PO Box 1000, Gogarburn
Edinburgh, EH12 1HQ
250 Bishopsgate, London
EC2M 4AA, England
National Westminster Bank Plc
250 Bishopsgate, London
EC2M 4AA, England
Ulster Bank Limited
11-16 Donegall Square East, Belfast,
Co Antrim, BT1 5UB
Northern Ireland
Ulster Bank Ireland DAC
Ulster Bank Group Centre, George's Quay,
Dublin 2, D02 VR98
NatWest Markets Group Holdings Corp.
251, Little Falls Drive, Wilmington
Delaware, 19808
Coutts & Company
440 Strand, London
WC2R 0QS, England
The Royal Bank of Scotland International Limited
Royal Bank House, 71 Bath Street
St Helier, JE4 8PJ
RBS – Annual Report and Accounts 2019
299
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;
implementation of the RBS Group’s strategy; 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 RBS 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 RBS
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 RBS Group’s strategy or operations,
which may result in the RBS 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 RBS 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 RBS Group’s 2019
Annual Report and Accounts and other risk factors and uncertainties discussed
in this document. These include the significant risks for the RBS Group
presented by: strategic risk (including in respect of: the implementation and
execution of the RBS Group’s Purpose-led Strategy, including as it relates to the
re-alignment of the NWM franchise and the RBS Group’s climate ambition and
the risk that the RBS Group may not achieve its targets); operational and IT
resilience risk (including in respect of: the RBS Group being subject to
cyberattacks; operational risks inherent in the RBS Group’s business; exposure
to third party risks including as a result of outsourcing and its use of new
technologies and innovation, as well as related regulatory and market changes;
the RBS Group’s operations being highly dependent on its IT systems; the RBS
Group relying on attracting, retaining and developing senior management and
skilled personnel and maintaining good employee relations; the RBS Group’s
risk management framework; and reputational risk), economic and political risk
(including in respect of: prevailing uncertainty regarding the terms of 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 plc and the possibility
that it may exert a significant degree of influence over the RBS Group; changes
in interest rates and changes in foreign currency exchange rates), financial
resilience risk (including in respect of: the RBS Group’s ability to meet targets
and make discretionary capital distributions; the highly competitive markets in
which the RBS Group operates; deterioration in borrower and counterparty credit
quality; the ability of the RBS Group to meet prudential regulatory requirements
for capital and MREL, or to manage its capital effectively; the ability of the RBS
Group to access adequate sources of liquidity and funding; changes in the credit
ratings of RBSG plc, any of its subsidiaries or any of its respective debt
securities; the RBS 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 RBS Group’s
financial statements to underlying accounting policies, judgments, assumptions
and estimates; changes in applicable accounting policies; the value or
effectiveness of any credit protection purchased by the RBS 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 RBS Group’s businesses
being subject to substantial regulation and oversight; the RBS Group complying
with regulatory requirements; legal, regulatory and governmental actions and
investigations (including the final number of PPI claim and their amounts); the
replacement of LIBOR, EURIBOR and other IBOR rates to alternative risk free
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 RBS 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.
RBS – Annual Report and Accounts 2019
300