20-F 1 dp65114_20f.htm FORM 20-F UNITED STATES

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________________________________

 

FORM 20-F

(Mark One)

¨             REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

x            ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
                                        For the fiscal year ended December 31, 2015

OR

¨             TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

¨             SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 001-09266

NATIONAL WESTMINSTER BANK Plc

 (Exact name of Registrant as specified in its charter)

United Kingdom

(Jurisdiction of incorporation or organization)

135 Bishopsgate, London, EC2M 3UR, United Kingdom

(Address of principal executive offices)

 

Aileen Taylor, Chief Governance Officer and Board Counsel, Tel: +44 (0) 131 626 4099, Fax: +44 (0) 131 626 3081

PO Box 1000, Gogarburn, Edinburgh EH12 1HQ
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of each class

Name of each exchange on which registered

Non-Cumulative Dollar Preference Shares of $25 each, Series C

New York Stock Exchange

American Depositary Shares, each representing one Non-Cumulative Dollar Preference Share of $25 each, Series C

New York Stock Exchange

______________________________________

Securities registered or to be registered pursuant to Section 12(g) of the Act:
None 

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None 

 

 

 


 

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of December 31, 2015, the close of the period covered by the annual report:

 

£1 Ordinary shares

1,678,177,493

Non-Cumulative Dollar Preference Shares of $25 each, Series C

9,829,195

9% Non-Cumulative Preference Shares of £1 each, Series A

140,000,000

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

¨  Yes      x  No 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

¨  Yes      x  No 

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x  Yes      ¨  No 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

¨  Yes      ¨  No 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  ¨                Accelerated filer  ¨            Non-Accelerated filer  

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:  

¨  U.S. GAAP

x  International Financial Reporting Standards as issued by the International Accounting Standards Board

¨  Other 

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.  

¨  Item 17       ¨  Item 18

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

¨  Yes      x  No 

 

As a wholly-owned subsidiary of The Royal Bank of Scotland plc, which in turn is a wholly-owned direct subsidiary of The Royal Bank of Scotland Group plc, a public company with limited liability incorporated in the United Kingdom and which has its registered office in Scotland, National Westminster Bank Plc meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K, as applied to reports on Form 20-F, and is therefore filing its Form 20-F with a reduced disclosure format.

 

 


 

 

SEC Form 20-F cross reference guide

 

Item

Item Caption

Pages

 

1

Identity of Directors, Senior Management and Advisers

Not applicable to annual reports

2

Offer Statistics and Expected Timetable

Not applicable to annual reports

3

Key Information

Selected financial data

Capitalisation and indebtedness

Reasons for the offer and use of proceeds

Risk factors

8-12, 201-202, 215

Omitted on the basis of Instruction I(2) of Form 10-K

Not applicable to annual reports

Not applicable to annual reports

5-7, 216-241

4

Information on the Company

 

History and development of the Company

Business overview

 

Organisational structure

Property, plant and equipment

3, 8-12, 14-22, 135-140, 152-154, 201-211

241, 260

3, 4-7, 97-100, 111, 155-156, 171-172

4-7, 10, 14-25, 26-33, 34-40, 41-55, 85-96

97-100, 187-193, 206-211

4-7, 97, 152-154, 190-195

115, 157-158, 214

4a

Unresolved Staff Comments

Not applicable

5

Operating and Financial Review and Prospects

 

Operating results

 

Liquidity and capital resources

 

Research and development, patents, licences etc

 

Trend information

Off-balance sheet arrangements

Contractual obligations *

 

 

8-12, 14-25, 44-46, 85-96, 126, 187-193, 201-211

 

26-33, 34-40, 135-149, 152-154, 164-167, 170

171-173, 187-188

Not applicable

 

Omitted on the basis of Instruction I(2) of Form 10-K

Omitted on the basis of Instruction I(2) of Form 10-K

Omitted on the basis of Instruction I(2) of Form 10-K

6

Directors, Senior Management and Employees

Directors and senior management

Compensation

Board practices

Employees

Share ownership   

Omitted on the basis of Instruction I(2) of Form 10-K

Omitted on the basis of Instruction I(2) of Form 10-K

3, 99-100

97-99, 126

99-101, 193

7

Major Shareholders and Related Party Transactions *

Major shareholders *

 

Related party transactions *

Interests of experts and counsel *

 

 

Omitted on the basis of Instruction I(2) of Form 10-K

 

Omitted on the basis of Instruction I(2) of Form 10-K

Not applicable to annual reports

8

Financial Information

Consolidated statements and other financial information

Significant changes

 

 

97, 107-200, 201-211, 241-242

4-7, 134, 193, 244-245

 

 

9

The Offer and Listing

Offer and listing details

Plan of distribution

Markets

Selling shareholders

Selling shareholders *

Dilution * 

Expenses of the issue

 

 

212-213

Not applicable to annual reports

212

Not applicable to annual reports

Not applicable to annual reports

 

Not applicable to annual reports

 

 

 

 

 

 

 

 

 


 

 

 

Item

Item Caption

Pages

 

10

Additional Information

Share capital

Memorandum and articles of association

Material contracts

Exchange controls 

Taxation 

Dividends and paying agents

Statement by experts

Documents on display

Subsidiary information

 

Not applicable to annual reports

242-246

246,

246

247-248

Not applicable to annual reports

Not applicable to annual reports

248

Not applicable

11

Quantitative and Qualitative Disclosures

about Market Risk

13-96, 135-154, 201-211

 

12

Description of Securities other than Equity Securities

 

12A

Debt securities

Not applicable to annual reports

12B

Warrants and rights

Not applicable to annual reports

12C

Other securities

Not applicable to annual reports

12D

American Depositary shares

212-214

13

Defaults, Dividend Arrearages and Delinquencies

Not applicable

14

Material Modifications to the Rights of Security

Holders and Use of Proceeds

Not applicable

15

Controls and Procedures

99-100, 102, Exhibits 12.1, 12.2 and 13

16

[Reserved]

 

 

16A

Audit Committee financial expert

Omitted on the basis of Instruction I(2) of Form 10-K

16B

Code of ethics

Omitted on the basis of Instruction I(2) of Form 10-K

16C

Principal Accountant Fees and services

101, 134

 

16D

Exemptions from the Listing Standards for

Audit Committees

Omitted on the basis of Instruction I(2) of Form 10- K

 

16E

Purchases of Equity Securities by the

Issuer and Affiliated Purchasers

Not applicable

 

16F

Change in Registrant’s Certifying Accountant

101, 215, Exhibit 15.1

16G

Corporate Governance

99-103

16H

Mine Safety Disclosure

Not applicable

 

17

Financial Statements

Not applicable

18

Financial Statements

105-200

19

Exhibits

261

 

* Not required because: (i) this Form 20-F is filed as an Annual Report, (ii) the Item is not applicable to National Westminster Bank Plc’s business, operations or circumstances during the applicable period or (iii) National Westminster Bank Plc meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore omitting the Item on the basis of General Instruction I(2) of Form 10-K’s reduced disclosure format.

 


 

 

 

 

Page

 

 

Forward-looking statements

2

 

 

Board of directors and secretary

3

 

 

Strategic report

 

 

 

  Presentation of information

4

 

 

  Top and emerging risks

6

 

 

  Financial review

8

 

 

  Capital and risk management

13

 

 

Report of the directors

97

 

 

Statement of directors’ responsibilities

104

 

 

Report of Independent Registered Public Accounting Firm to the members of National Westminster Bank Plc

106

 

 

Consolidated income statement

107

 

 

Consolidated statement of comprehensive income

107

 

 

Balance sheet

108

 

 

Statement of changes in equity

109

 

 

Cash flow statement

110

 

 

Accounting policies

111

 

 

Notes on the accounts

126

 

 

Additional information

201

 

 

Abbreviations and acronyms

249

 

 

Glossary of terms

251

 

 

Principal offices

260

 

1 

 


 

 

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’, ‘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: RBSG and the Group’s restructuring, which includes the separation and divestment of Williams & Glyn, the proposed restructuring of RBSG’s CIB business, the implementation of the UK ring-fencing regime, the implementation of a major development program to update RBSG and the Group’s IT infrastructure and the continuation of its balance sheet reduction programme, as well as capital and strategic plans, divestments, capitalisation, portfolios, net interest margin, capital and leverage ratios and requirements liquidity, risk-weighted assets (RWAs), RWA equivalents (RWAe), Pillar 2A, return on equity (ROE), profitability, cost:income ratios, loan:deposit ratios, AT1 and other funding plans, funding and credit risk profile; litigation, government and regulatory investigations; RBSG and the Group’s future financial performance; the level and extent of future impairments and write-downs; including with respect to Goodwill; future pension contributions and RBSG and the Group’s exposure to political risks, operational risk, conduct risk and credit rating risk and to various types of market risks, such as interest rate risk, foreign exchange rate risk and commodity and equity price risk. These statements are based on current plans, estimates, targets and projections, and are subject to inherent risks, uncertainties and other factors which could cause actual results to differ materially from the future results expressed or implied by such forward-looking statements. For example, certain market risk disclosures are dependent on choices relying on key model characteristics and assumptions and are subject to various limitations. By their nature, certain of the market risk disclosures are only estimates and, as a result, actual future gains and losses could differ materially from those that have been estimated.

 

Other factors that could adversely affect our results and the accuracy of forward-looking statements in this document include the risk factors and other uncertainties discussed in this document. These include the significant risks for RBSG and the Group presented by the uncertainty relating to the referendum on the UK’s membership of the European Union and the consequences of  it; the separation and divestment of Williams & Glyn; RBSG and the Group’s ability to successfully implement the various initiatives that are comprised in its restructuring plan, particularly the proposed restructuring of its CIB business and the balance sheet reduction programme  as well as the significant restructuring required to be undertaken by RBSG and the Group in order to implement the UK ring fencing regime; the significant changes, complexity and costs relating to the implementation of its restructuring, the separation and divestment of Williams & Glyn and the UK ring-fencing regime; whether the Group will emerge from its restructuring and the UK ring-fencing regime as a viable, competitive, customer focused and profitable bank; the outcomes of the legal, regulatory and governmental actions and investigations that RBSG is subject to (including active civil and criminal investigations) and any resulting material adverse effect on RBSG of unfavourable outcomes (including where resolved by settlement); RBSG’s ability to achieve its capital and leverage requirements or targets which will depend on RBSG and the Group’s success in reducing the size of its business and future profitability; ineffective management of capital or changes to regulatory requirements relating to capital adequacy and liquidity or failure to pass mandatory stress tests; the ability to access sufficient sources of capital, liquidity and funding when required; changes in the credit ratings of RBSG, the Bank or the UK government; declining revenues resulting from lower customer retention and revenue generation in light of RBSG and the Group ’s strategic refocus on the UK the impact of global economic and financial market conditions (including low or negative interest rates) as well as increasing competition.

 

In addition, there are other risks and uncertainties. These include operational risks that are inherent to the Group’s business and will increase as a result of the Group’s significant restructuring;  the potential negative impact on the Group’s business of actual or perceived global economic and financial market conditions and other global risks; the impact of unanticipated turbulence in interest rates, yield curves, foreign currency exchange rates, credit spreads, bond prices, commodity prices, equity prices; basis, volatility and correlation risks; heightened regulatory and governmental scrutiny and the increasingly regulated environment in which RBSG and The Group operate; the risk of failure to realise the benefit of the Group’s substantial investments in its information technology and systems, the risk of failing to prevent a failure of RBSG or the Group’s IT systems or to protect itself and its customers against cyber threats, reputational risks; risks relating to the failure to embed and maintain a robust conduct and risk culture across the organisation or if its risk management framework is ineffective; risks relating to increased pension liabilities and the impact of pension risk on RBSG and the Group’s capital position; increased competitive pressures resulting from new incumbents and disruptive technologies; the Group’s ability to attract and retain qualified personnel; HM Treasury exercising influence over the operations of RBSG; limitations on, or additional requirements imposed on, the Group’s activities as a result of HM Treasury’s investment in RBSG; the extent of future write-downs and impairment charges caused by depressed asset valuations; deteriorations in borrower and counterparty credit quality; the value and effectiveness of any credit protection purchased by the Group; risks relating to the reliance on valuation, capital and stress test models and any inaccuracies resulting therefrom or failure to accurately reflect changes in the micro and macroeconomic environment in which the Group operates, risks relating to changes in applicable accounting policies or rules which may impact the preparation of the Group’s financial statements; the impact of the recovery and resolution framework and other prudential rules to which the Group is subject, the recoverability of deferred tax assets by the Group; and the success of RBSG and the Group in managing the risks involved in the foregoing.

 

The forward-looking statements contained in this document speak only as at the date hereof, and the Group does not assume or undertake any obligation or responsibility to update any forward-looking statement to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

 

The information, statements and opinions contained in this document do not constitute a public offer under any applicable legislation or an offer to sell or solicit of any offer to buy any securities or financial instruments or any advice or recommendation with respect to such securities or other financial instruments.

 

2 

 


 

 

 

 

Board of directors and secretary

 

Chairman

Howard Davies

Nominations (Chairman)

 

Executive directors

Ross McEwan

Ewen Stevenson

 

Independent non-executive directors

 

Sandy Crombie

Senior Independent Director

Remuneration (Chairman), Audit, Nominations

 

Alison Davis

Nominations, Remuneration, Sustainability

 

Morten Friis

Audit, Risk

 

Robert Gillespie

Nominations, Remuneration, Risk, Sustainability

 

Penny Hughes

Sustainability (Chairman), Risk

 

Brendan Nelson

Audit (Chairman), Nominations, Risk

 

Baroness Noakes

Risk (Chairman), Audit

 

Mike Rogers

Sustainability

 

Chief Governance Officer and Board Counsel

Aileen Taylor

Auditors

Deloitte LLP

Chartered Accountants and Statutory Auditor

Hill House

1 Little New Street
London EC4A 3TR

 

Registered office

135 Bishopsgate
London EC2M 3UR
Telephone: +44 (0)20 7085 5000

 

Head office

135 Bishopsgate
London EC2M 3UR

Telephone: +44 (0)20 7085 5000

 

National Westminster Bank Plc

Registered in England No. 929027

 

Audit

member of the Group Audit Committee

Nominations

member of the Group Nominations and Governance Committee

Remuneration

member of the Group Performance and Remuneration Committee

Risk

member of the Board Risk Committee

Sustainability

member of the Sustainable Banking Committee

3 

 


 

 

Presentation of information

 

In the Report, and unless specified otherwise, the term ‘Bank’ or ‘NatWest’ means National Westminster Bank Plc, the ‘Group’ or ‘NatWest Group’ means the Bank and its subsidiaries, ‘the Royal Bank’, ‘RBS plc’ or ‘the holding company’ means The Royal Bank of Scotland plc, ‘RBSG’ or ‘the ultimate holding company’ means The Royal Bank of Scotland Group plc and ‘RBS Group’ means the ultimate holding company and its subsidiaries.

 

Business structure

The Group continues to deliver on its plan to build a strong, simple and fair bank for both customers and shareholders. To support this and reflect the progress made the previously reported operating segments have been realigned as follows:

 

Personal & Business Banking (PBB) comprises two reportable segments, UK Personal & Business  Banking (UK PBB) and Ulster Bank RoI. UK PBB serves individuals and mass affluent customers in the UK together with small businesses (generally up to £2 million turnover). UK PBB includes Ulster Bank customers in Northern Ireland. Ulster Bank RoI serves individuals and businesses in the Republic of Ireland (RoI).

 

Commercial & Private Banking (CPB) comprises two reportable segments, Commercial Banking and Private Banking. Commercial Banking serves commercial and corporate customers in the UK and Western Europe. Private Banking serves UK connected high net worth individuals.

 

Corporate & Institutional Banking (CIB) serves UK and Western European corporate customers, and global financial institutions, supported by trading and distribution platforms in the UK, US and Singapore.

 

Capital Resolution includes CIB Capital Resolution and the remainder of RBS Capital Resolution (RCR).

 

Central items & other includes corporate functions, such as treasury, finance, risk management, compliance, legal, communications and human resources. Central functions manages the Group’s capital resources and Group-wide regulatory projects and provides services to the reportable segments.

 

Reporting changes

In line with RBS Group’s strategy to be a simpler bank, reporting changes have been implemented in relation to the presentation of NatWest Group’s results. Gain/(loss) on redemption of own debt and write down of goodwill previously reported as separate items after operating profit/(loss) are now being reported within operating profit/(loss). Comparatives have been restated accordingly.

 

Pensions accounting policy

As set out in ‘Accounting policies’ on page 111, the Group has revised its accounting policy for determining whether or not it has an unconditional right to a refund of surpluses in its employee pension funds. The change has been applied retrospectively and comparatives restated.

 

Non-GAAP financial information

A body of generally accepted accounting principles such as IFRS is commonly referred to as ‘GAAP’. A non-GAAP financial measure is defined as one that measures historical or future financial performance, financial position or cash flows but which excludes or includes amounts that would not be so adjusted in the most comparable GAAP measure. Discussion of the Group’s performance in this report presents the Group’s results on a non-statutory basis as management believes that such measures allow a more meaningful analysis of the Groups financial condition and the results of its operations. These non-GAAP financial measures are not a substitute for GAAP measures. The financial performance of Personal & Business Banking (“PBB”) which combines the reportable segments of UK Personal & Business Banking and Ulster Bank and the presentation of the financial performance of Commercial & Private Banking (“CPB”) which combines the reportable segments of Commercial Banking and Private Banking are non GAAP financial measures. In addition the presentation of operating profit, operating expenses and other performance measures excluding the impact of restructuring costs and litigation and conduct costs is a non-GAAP financial measure and is not a substitute for the equivalent GAAP measure.

 

Recent developments

Litigation, investigations and reviews

Interest rate swaps antitrust litigation

On 18 April 2016, an antitrust complaint was filed in the United States District Court for the Southern District of New York against RBS plc and other members of the Group, as well as a number of other interest rate swap dealers.   The plaintiff, TeraExchange, alleges that it would have successfully established exchange-like trading of interest rate swaps if the defendant dealers had not unlawfully conspired to prevent that from happening through boycotts and other means, in violation of the U.S. antitrust laws.   The complaint contains allegations of collusion between the dealers similar to those contained in the interest rate swap antitrust class actions that RBS has previously disclosed. RBS anticipates moving to dismiss the claims asserted in these matters.  

4 

 


 

 

Presentation of information

 

 

Weiss v. National Westminster Bank Plc (NatWest)

As previously disclosed, NatWest is defending a lawsuit filed by a number of US nationals (or their estates, survivors, or heirs) who were victims of terrorist attacks in Israel. On 31 March 2016, the trial court denied a motion by NatWest to dismiss the case in which NatWest had argued that the court lacked personal jurisdiction over NatWest. The schedule for the remainder of the matter, including trial, has not been set, but NatWest intends to assert other grounds for summary judgment that the trial court has not previously ruled upon.

 

Loan securitisation business investigations

As previously disclosed, ongoing matters include, among others, an active investigation by the attorney general of Connecticut, on behalf of the Connecticut Department of Banking, relating primarily to due diligence on and disclosure related to loans purchased for, or otherwise included in, securitisations and related disclosures. On 31 August 2015, the Connecticut Department of Banking issued two letters to RBS Securities Inc., indicating that it is has concluded that RBS Securities Inc. may have violated the Connecticut Uniform Securities Act when underwriting MBS, noting RBS plc’s May 2015 FX-related guilty plea. Discussions relating to a possible resolution are ongoing.

 

FCA review of RBS’s treatment of SMEs

As previously disclosed, in January 2014, the FCA appointed a Skilled Person to review RBS’s treatment of UK small and medium sized business customers with credit exposures of up to £20 million whose relationship was managed within RBS’s Global Restructuring Group or within similar units within RBS’s Corporate Banking Division that were focussed on customers in financial difficulties. RBS is cooperating fully with the FCA in its review.

 

On 13 April 2016 the FCA announced that it had received the Skilled Person’s draft final report, is carefully considering the contents and will discuss the findings with the Skilled Person. RBS will have an opportunity to respond to the Skilled Person’s findings before any substantive announcement by the FCA, the timing of which has not been determined.

 

FCA Wholesale Sector Competition Review

As previously disclosed, on 9 July 2014, the FCA launched a review of competition in the wholesale sector to identify any areas which may merit further investigation through an in-depth market study. On 13 April 2016, the FCA published its interim report on the investment and corporate banking market study which sets out various proposed remedies, including the following: measures designed to improve clients’ ability to appoint banks that best suit their needs; measures to ensure that conflicts are properly managed; and improvements to the Initial Public Offering (IPO) process. The FCA has indicated that it will publish its final report in Summer 2016.

 

FCA request concerning Mossack Fonseca

On 4 April 2016, RBS, in common with other banks, received a letter from the FCA  requesting information about any relationship RBS has with the Panama-based law firm Mossack Fonseca or any individuals named in recent media coverage in connection with the same. RBS has responded to the FCA setting out details of the limited services provided to Mossack Fonseca and its clients, and is continuing its internal review, as well as monitoring all new information published.

 

Notice of enforcement by FINMA against Coutts & Co Ltd

The Swiss Financial Market Supervisory Authority (FINMA) has opened enforcement proceedings against Coutts & Co Ltd (Coutts), a member of the RBS Group incorporated in Switzerland, with regard to certain client accounts held with Coutts. Coutts is also cooperating with authorities in other jurisdictions in relation to connected accounts.

 

Review and investigation of treatment of tracker mortgage customers in Ulster Bank Ireland Limited

On 22 December 2015, the Central Bank of Ireland (CBI) announced that it had written to a number of lenders requiring them to put in place a robust plan and framework to review the treatment of customers who have been sold mortgages with a tracker interest rate or with a tracker interest rate entitlement. The CBI stated that the intended purpose of the review was to identify any cases where customers’ contractual rights under the terms of their mortgage agreements were not fully honoured, or where lenders did not fully comply with various regulatory requirements and standards regarding disclosure and transparency for customers. The CBI has required Ulster Bank Ireland Limited (UBIL), a member of the RBS Group, incorporated in the Republic of Ireland, to participate in this review and UBIL is co-operating with the CBI in this regard. Separately, on 15 April, the CBI notified UBIL 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.

5 

 


 

 

Top and emerging risks

 

Top and emerging risks

RBS Group employs a robust process for identifying and managing its top and emerging risks. Top risks are defined as scenarios that, while unlikely, may materialise, and which, if they did, would have a significant negative impact, such that RBS Group as a whole, or a particular business, could potentially fail to meet one or more of its strategic objectives. A number of scenarios attracted particular attention in 2015:

 

Macro-economic and other external risks

Risks related to the wider economy:

Like most other businesses, RBS Group remains vulnerable to changes in the external economic environment. Among potential scenarios considered, the following could have a material negative impact: a UK recession including large house price falls; vulnerabilities in emerging market economies, including China, resulting in contagion in RBS Group’s core markets; global deflation; volatility in international markets linked to advanced economy interest rate increases or decreases; a resumption of the eurozone crisis, including a worsening of the situation in Greece; and major geopolitical instability. To mitigate these risks, RBS Group has strengthened its capital, liquidity and leverage positions. A number of higher-risk portfolios have been exited or reduced. Stress testing is used extensively to inform strategic planning and risk mitigation relating to these risks.

 

Risks related to the UK referendum on EU membership:

The referendum on the UK’s membership of the EU during this parliament increases economic and operational uncertainty. The result may also give rise to further political uncertainty regarding Scottish independence. RBS Group actively monitors, and considers responses to, varying EU referendum outcomes to ensure that it is well prepared for all eventualities.

 

Risks related to the competitive environment:

RBS Group’s target markets are highly competitive, which poses challenges in terms of achieving some strategic objectives. Moreover, changes in technology, customer behaviour and business models in these markets have accelerated. RBS Group monitors the competitive environment and associated technological and customer developments as part of its strategy development and makes adjustments as appropriate.

 

An increase in obligations to support pension schemes:

If economic growth stagnates, and interest rates remain low, the value of pension scheme assets may not be adequate to fund pension scheme liabilities. The deficit in RBS Group pension schemes as determined by the most recent triennial valuations has increased, requiring RBS Group to increase its current and future cash contributions to the schemes. An acceleration of certain previously committed pension contributions in Q1 2016 will reduce this risk. Depending on the economic and monetary conditions and longevity of scheme members prevailing at that time, the deficit may increase at subsequent valuations.

 

Regulatory and legal risks

The impacts of past business conduct:

Future conduct and litigation charges could be substantial. RBS Group is involved in ongoing class action litigation, securitisation and mortgage-backed securities related litigation, investigations into foreign exchange trading and rate-setting activities, continuing LIBOR-related litigation and investigations, investigations into the treatment of small and medium-sized business customers in financial difficulty, anti-money laundering, sanctions, mis-selling (including mis-selling of payment protection insurance products), and other investigations. Settlements may result in additional financial penalties, non-monetary penalties or other consequences, which may be material. More detail on these issues can be found in the Litigation, Investigations and Reviews and Risk Factors sections. To prevent future conduct from resulting in similar impacts, RBS Group has embarked on a programme to embed a strong and comprehensive risk and compliance culture.

 

Risks to income, costs and business models arising from regulatory requirements:

RBS Group is exposed to the risk of further increases in regulatory capital requirements as well as risks related to new regulations that could affect its business models. RBS Group considers the implications of proposed or potential regulatory activities in its strategic and financial plans.

 

6 

 


 

 

Top and emerging risks

 

Operational and execution risks

Increased losses arising from a failure to execute major projects successfully:

The successful execution of major projects, including the transformation plan, the restructuring of CIB, the divestment of Williams & Glyn and the embedding of a strong and pervasive organisational and risk culture, are essential to meet RBS Group’s strategic objectives. The separation and eventual divestment of Williams & Glyn is a complex process and as such entails significant costs as well as operational and execution risk. These projects cover organisational structure, business strategy, information technology systems, operational processes and product offerings. RBS Group is working to implement change in line with its project plans while assessing the risks to implementation and taking steps to mitigate those risks where possible.

 

Impact of cyber attacks

Cyber attacks are increasing in frequency and severity across the industry. RBS Group has participated in industry-wide cyber attack simulations in order to help test and develop defence planning. To mitigate the risks, a large-scale programme to improve user access controls is in progress, along with a number of other actions, including a reduction in the number of external websites, enhancement of anti-virus protections, and the implementation of a staff education programme on information protection.

 

Inability to recruit or retain suitable staff:

RBS Group is undergoing significant organisational change, the result of a need to implement new business strategies and respond to a changing external environment. The pace of change, coupled with the associated uncertainty, may cause experienced staff to leave and prospective staff not to join. Although these risks concern all customer businesses, they particularly affect CIB. RBS Group has communicated expected changes in its organisational structure to members of staff, implementing plans aimed at minimising unexpected staff losses. It is also working to implement an enhanced recruitment strategy.

 

Failure of information technology systems:

RBS Group’s information technology systems may be subject to failure. As such systems are complex, recovering from failure

is challenging. To mitigate these risks, a major investment programme has significantly improved the resilience of the systems and more benefits are expected. Back-up system sustainability has improved, and a ‘shadow bank’ system, to provide basic services, if needed, has been created.

 

Full risk factors are discussed on pages 216 to 240.

7 

 


 

 

Financial review

 

Financial summary

Summary consolidated income statement for the year ended 31 December 2015

  

2015 

2014 

2013 

  

£m 

£m 

£m 

Net interest income

4,896 

4,577 

4,021 

Fees and commissions receivable

2,133 

2,439 

2,600 

Fees and commissions payable

(517)

(498)

(490)

Income from trading activities

14 

77 

726 

Gain on redemption of own debt

— 

— 

239 

Other operating income

10 

682 

268 

Non-interest income

1,640 

2,700 

3,343 

Total income

6,536 

7,277 

7,364 

Operating expenses

(8,178)

(5,949)

(8,762)

(Loss)/profit before impairment releases/(losses)

(1,642)

1,328 

(1,398)

Impairment releases/(losses)

728 

1,249 

(5,407)

Operating (loss)/profit before tax

(914)

2,577 

(6,805)

Tax (charge)/credit

(292)

(844)

842 

(Loss)/ profit for the year

(1,206)

1,733 

(5,963)

Non-controlling interest

— 

— 

(Loss)/profit attributable to ordinary shareholders

(1,205)

1,733 

(5,963)

 

2015 compared with 2014

Operating (loss)/profit before tax

Operating loss before tax was £914 million compared with a profit of £2,577 million in 2014. This decrease reflects higher charges for litigation and conduct costs of £2,812 million compared with £1,007 million in 2014, lower net impairment releases of £728 million compared with £1,249 million in 2014 and a significant decrease in other non-interest income; this was partially offset by an increase in net interest income.

 

Net interest income

Net interest income increased by £319 million, 7% to £4,896 million compared with £4,577 million in 2014. The increase was principally due to improvements in UK PBB reflecting improvements in deposit margins and growth in the mortgage book.

 

Non-interest income

Non-interest income decreased by £1,060 million, 39% to £1,640 million, compared with £2,700 million in 2014, primarily due to a significant decrease in other operating income of £672 million to £10 million primarily reflecting losses on strategic disposals and a reduction in dividend income. Income from trading activities decreased by £63 million to £14 million principally from the reduced scale of activity in CIB. Net fees and commissions decreased by £325 million to £1,616 million reflecting reduced activity in CIB, reductions in Private Banking and lower card interchange fees in UK PBB.

 

Operating expenses

Operating expenses increased by £2,229 million, or 37%, to £8,178 million from £5,949 million in 2014. Operating expenses excluding restructuring costs of £728 million (2014 - £26 million) and litigation and conduct costs of £2,812 million (2014 - £1,007 million) declined by £278 million, or 6%, to £4,638 million (2014 - £4,916 million) mainly reflecting the benefits of cost savings initiatives.

 

Litigation and conduct costs were £2,812 million compared with £1,007 million in 2014, primarily relating to mortgage-backed securities litigation in the US of £2.1 billion. Other charges in 2015 include: provisions in relation to PPI costs of £359 million and Interest Rate Hedging Products redress of £85 million and other litigation and conduct provisions of £268 million.

 

Restructuring costs increased by £702 million to £728 million, compared with £26 million in 2014, primarily reflecting property and software write-downs in CIB.

 

Impairment releases/(losses)

Net impairment releases were £728 million in 2015 compared with £1,249 million in 2014. Net impairment releases were principally in Capital Resolution (£622 million) with disposal activity continuing and in Ulster Bank RoI (£141 million) as economic conditions in Ireland continue to improve.

 

Capital ratios

NatWest capital ratios at 31 December 2015 were 11.6% (Common Equity Tier 1), 11.6% (Tier 1) and 19.6% (Total). Ulster Bank Ireland Limited (UBIL) capital ratios at 31 December 2015 were 29.6% (Common Equity Tier 1), 29.6% (Tier 1) and 32.1% (Total).

 

8 

 


 

 

Financial review

 

2014 compared with 2013

Operating (loss)/profit before tax

Operating profit before tax was £2,577 million compared with a loss of £6,805 million in 2013. This significant improvement reflects net impairment releases of £1,249 million compared with net losses of £5,407 million in 2013 and lower charges for litigation, conduct and redress costs, down £2,403 million to £1,007 million. This was partially offset by a decrease in non-interest income, reflecting lower income from trading activities.

 

Net interest income

Net interest income increased by £556 million, 14% to £4,577 million compared with £4,021 million in 2013. The increase was principally due to improvements in deposit margins in Personal & Business Banking (PBB) and Commercial & Private Banking (CPB).

 

Non-interest income

Non-interest income decreased by £643 million, 19% to £2,700 million compared with £3,343 million in 2013, primarily due to lower income from trading activities, down £649 million to £77 million in line with Corporate & Institutional Banking’s (CIB’s) smaller balance sheet and reduced risk profile, and the non-repeat of a gain on redemption of own debt of £239 million in 2013. This was partially offset by an increase in other operating income of £414 million to £682 million, which included dividend income of £234 million compared with £18 million in 2013.

 

Operating expenses

Operating expenses decreased by £2,813 million, or 32%, to £5,949 million from £8,762 million in 2013. Operating expenses excluding restructuring costs of £26 million (2013 - £43 million) and litigation, conduct and redress costs £1,007 million (2013 - £3,410 million) declined £393 million, or 7% to £4,916 million (2013 - £5,309 million) mainly reflecting the benefits of cost savings initiatives.

 

Litigation, conduct and redress charges were £1,007 million compared with £3,410 million in 2013 which included a charge relating to regulatory and legal actions of £2,536 million primarily relating to mortgage-backed securities and securities related litigation. Charges in 2014 include: provisions relating to investment advice in retail and private banking (£156 million) and to packaged accounts (£112 million), and additional provisions in relation to PPI costs (£440 million) and Interest Rate Hedging Products redress (£166 million).

 

Impairment releases/(losses)

Net impairment releases were £1,249 million in 2014 compared with a net impairment charge of £5,407 million in the prior year, which included £3,249 million provisions relating to the creation of RCR. Net impairment releases were principally in Capital Resolution (£1,145 million) and in Ulster Bank RoI (£306 million) and reflected the improving Irish economic and property market conditions and proactive debt management.

 

Capital ratios

NatWest capital ratios at 31 December 2014 were 13.9% (Common Equity Tier 1), 14.0% (Tier 1) and 21.7% (Total). UBIL capital ratios at 31 December 2014 were 17.3% (Common Equity Tier 1), 17.3% (Tier 1) and 19.5% (Total).

 

 

 

 

 

 

 

 

 

 

 

 

9 

 


 

 

Financial review

 

 

Analysis of results

  

  

  

Net interest income

  

  

  

  

2015 

2014 

2013 

  

£m

£m

£m

Interest receivable (1) 

6,280 

6,499 

7,483 

Interest payable

(1,384)

(1,922)

(3,462)

Net interest income

4,896 

4,577 

4,021 

  

  

  

  

Yields, spreads and margins of the banking business

%

%

%

Gross yield on interest-earning assets of the banking business (2) 

2.37 

2.37 

2.72 

Cost of interest-bearing liabilities of the banking business

(0.78)

(1.06)

(1.75)

Interest spread of the banking business (3) 

1.59 

1.31 

0.97 

Benefit from interest-free funds

0.26 

0.36 

0.49 

Net interest margin of the banking business (4) 

1.85 

1.67 

1.46 

  

  

  

  

Gross yield (2) 

  

  

  

  - Group

2.37 

2.37 

2.72 

  - UK

2.54 

2.59 

2.89 

  - Overseas

1.45 

1.33 

1.95 

Interest spread (3) 

  

  

  

  - Group

1.59 

1.31 

0.97 

  - UK

1.75 

1.50 

1.09 

  - Overseas

0.75 

0.50 

0.51 

Net interest margin (4)

  

  

  

  - Group

1.85 

1.67 

1.46 

  - UK

1.97 

1.82 

1.53 

  - Overseas

1.15 

0.97 

1.16 

  

  

  

  

National Westminster Bank Plc base rate (average)

0.50 

0.50 

0.50 

London inter-bank three month offered rates (average)

  

  

  

  - Sterling

0.57 

0.54 

0.52 

  - Eurodollar

0.32 

0.23 

0.24 

  - Euro

(0.02)

0.21 

0.27 

 

 

 

Notes:

(1)    Interest income includes £196 million (2014 - £149 million; 2013 - £210 million) in respect of loan fees forming part of the effective interest rate of loans and receivables.

(2)    Gross yield is the interest rate earned on average interest-earning assets of the banking business.

(3)    Interest spread is the difference between the gross yield and the interest rate paid on average interest-bearing liabilities of the banking business.

(4)    Net interest margin is net interest income of the banking business as a percentage of average interest-earning assets of the banking business.

(5)    The analysis into UK and Overseas has been compiled on the basis of location of office.

(6)    Interest receivable and interest payable on trading assets and liabilities are included in income from trading activities.

(7)    Interest income includes amounts (unwind of discount) recognised on impaired loans and receivables. The average balances of such loans are included in average loans and advances to banks and loans and advances to customers.

 

10 

 


 

 

Financial review

 

 

Consolidated balance sheet at 31 December 2015

  

  

  

2015 

2014*

  

£m 

£m 

Assets

  

  

Cash and balances at central banks

1,690 

2,709 

Amounts due from holding company and fellow subsidiaries

99,403 

103,272 

Other loans and advances to banks

3,875 

7,640 

Loans and advances to banks

103,278 

110,912 

Amounts due from fellow subsidiaries

569 

1,028 

Other loans and advances to customers

176,263 

168,138 

Loans and advances to customers

176,832 

169,166 

Debt securities subject to repurchase agreements

3,740 

8,583 

Other debt securities

3,464 

5,246 

Debt securities

7,204 

13,829 

Equity shares

717 

779 

Settlement balances

2,138 

2,050 

Amounts due from holding company and fellow subsidiaries

1,724 

2,672 

Other derivatives

889 

1,226 

Derivatives

2,613 

3,898 

Intangible assets

517 

848 

Property, plant and equipment

1,031 

1,591 

Deferred tax

1,802 

1,732 

Prepayments, accrued income and other assets

1,297 

1,686 

Assets of disposal groups

3,311 

— 

Total assets

302,430 

309,200 

  

  

  

Liabilities

  

  

Amounts due to holding company and fellow subsidiaries

17,609 

20,128 

Other deposits by banks

6,982 

6,104 

Deposits by banks

24,591 

26,232 

Amounts due to fellow subsidiaries

7,752 

13,112 

Other customer accounts

223,909 

221,215 

Customer accounts

231,661 

234,327 

Debt securities in issue

1,473 

1,707 

Settlement balances

2,461 

2,143 

Short positions

3,577 

6,827 

Amounts due to holding company

2,291 

3,971 

Other derivatives

379 

487 

Derivatives

2,670 

4,458 

Provisions, accruals and other liabilities

7,543 

6,315 

Retirement benefit liabilities

3,547 

3,987 

Amounts due to holding company  

5,621 

5,656 

Other subordinated liabilities

1,395 

1,780 

Subordinated liabilities

7,016 

7,436 

Liabilities of disposal groups

2,724 

— 

Total liabilities

287,263 

293,432 

  

  

  

Non-controlling interests

346 

394 

Owners’ equity

14,821 

15,374 

Total equity

15,167 

15,768 

  

  

  

Total liabilities and equity

302,430 

309,200 

  

  

  

* Restated - refer to page 111 for further details

  

  

11 

 


 

 

Financial review

 

Commentary on consolidated balance sheet

2015 compared with 2014

Total assets decreased by £6.8 billion, 2%, to £302.4 billion, primarily driven by a reduction in the scale of CIB’s US trading business, partially offset by loan growth in UK PBB.

 

Loans and advances to banks decreased by £7.6 billion, 7%, to £103.3 billion. Other bank placings decreased by £3.8 billion, 49%, to £3.9 billion and amounts due from the holding company and fellow subsidiaries decreased by £3.9 billion, 4%, to £99.4 billion.

 

Loans and advances to customers increased by £7.7 billion, 5%, to £176.8 billion. Within this, amounts due from fellow subsidiaries were down £0.5 billion, 45%, to £0.6 billion. Customer lending increased by £8.1 billion, 5%, to £176.3 billion, primarily reflecting £11.7 billion net growth in mortgages lending in UK PBB, partially offset by a £1.4 billion reduction in Ulster Bank RoI’s tracker mortgage portfolio and RCR loan disposals.

 

Debt securities decreased by £6.6 billion, 48%, to £7.2 billion as a result of reductions in held-for-trading government and financial institution securities in CIB.

 

Movements in the fair value of derivative assets, down £1.3 billion, 33%, to £2.6 billion, and liabilities, down £1.8 billion, 40% to £2.6 billion, were driven by a reduction in interest rate swap notionals as well as yield curve movements.

 

 

The increase in assets and liabilities of disposal groups from nil, up to £3.3 billion and £2.7 billion respectively, reflects the transfer of the international private banking business to disposal groups.

 

Deposits by banks decreased by £1.6 billion, 6%, to £24.6 billion, with decreases in amounts due to the holding company and fellow subsidiaries, down £2.5 billion, 13%, to £17.6 billion, offset by increases in other bank deposits, up £0.9 billion, 14%, to £7.0 billion.

 

Customer accounts decreased £2.7 billion, 1%, to £231.7 billion. Within this, amounts due to fellow subsidiaries decreased by £5.4 billion, 41%, to £7.8 billion. Other customer deposits were up £2.7 billion, 1%, at £223.9 billion, with the increase mainly in UK PBB and Commercial Banking.

 

Owner’s equity decreased by £0.6 billion, 4%, to £14.8 billion, driven by the £1.2 billion attributable loss for the year, offset by capital contributions from the holding company of £0.8 billion.

12 

 


 

 

 

 

Financial review Capital and risk management

 

 

 

Capital and risk management

Page

 

 

Risk overview

 

 

 

Presentation of information

14

 

 

Governance, assurance and risk models

14

 

 

Risk culture and appetite

18

 

 

Risk coverage

23

 

 

Capital management

 

 

 

Definition, overview and key developments

26

 

 

Risk appetite and strategy

26

 

 

Framework and governance

28

 

 

Regulatory developments and the impact on RBS Group and its subsidiaries’

 

 

 

  current and future capital position

30

 

 

Measurement: Capital, RWAs and leverage ratios

32

 

 

Liquidity and funding risk

 

 

 

Definition, overview and key developments

34

 

 

Policy, framework and governance

34

 

 

Liquidity risk

36

 

 

Funding risk

37

 

 

Business risk

41

 

 

Reputational risk

43

 

 

Conduct and regulatory risk

44

 

 

Operational risk

46

 

 

Pension risk

50

 

 

Credit risk: management basis  

 

 

 

Definition and sources

53

 

 

Overview and key developments

53

 

 

Governance

53

 

 

Risk appetite and risk measurement and models

55

 

 

Risk mitigation and risk assessment and monitoring

56

 

 

Portfolio overview

58

 

 

Wholesale credit risk

60

 

 

·          Problem debt management

61

 

 

·          Forbearance

62

 

 

Personal credit risk

64

 

 

·          Problem debt management and forbearance

64

 

 

·          Personal portfolio overview

67

 

 

·          Key credit portfolios

69

 

 

Credit risk: balance sheet analysis

 

 

 

Financial assets

72

 

 

Loans, REIL and impairment provisions

79

 

 

Debt securities

83

 

 

Derivatives

84

 

 

Market risk

 

 

 

Definition and sources

85

 

 

Governance

86

 

 

Traded market risk

86

 

 

Non-traded market risk

94

 

 

13 

 


 

 

 

 

Financial review Capital and risk management

 

Risk overview*

Presentation of information

Except as otherwise indicated by an asterisk (*), information in the Capital and risk management section (pages 13 to 96) is within the scope of the Report of Independent Registered Public Accounting Firm. Unless otherwise indicated, disclosures in this section include disposal groups businesses in relevant exposures. Disposal groups comprise International private banking business; the first tranche of the sale has been completed and the final tranche is due to complete in the first half of 2016.

 

Capital and risk management are conducted on an overall basis within the RBS Group such that common policies, procedures, frameworks and models apply across the RBS Group. Therefore, for the most part, discussions on these aspects reflect those in the RBS Group as relevant for the businesses and operations in the Group.

 

Risk governance

Governance structure

The risk governance structure of RBS Group and the main purposes of each of the committees are illustrated below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*unaudited

14 

 


 

 

 

 

Financial review Capital and risk management

 

Risk overview* continued

Three lines of defence

The three lines of defence model is used industry-wide for the management of risk. It provides a clear set of principles by which to implement a cohesive operating model, one that provides a framework for the articulation of accountabilities and responsibilities for managing risk across the organisation.

 

First line of defence - Management and supervision

The first line of defence includes customer franchises, Technology and Operations and support functions such as HR, Communications and Financial MI. Responsibilities include:

 

·         Owning, managing and supervising, within a defined risk appetite, the risks which exist in business areas and support functions.

·         Ensuring appropriate controls are in place to mitigate risk: balancing control, customer service and competitive advantage.

·         Ensuring that the culture of the business supports balanced risk decisions and compliance with policy, laws and regulations.

·         Ensuring that the business has effective mechanisms for identifying, reporting and managing risk and controls.

 

Second line of defence - Oversight and control

The second line of defence includes RBS Group Risk Management and Conduct & Regulatory Affairs (see below for further information), Legal, and the financial control aspects of Finance. Responsibilities include:

 

·         Working with the businesses and functions to develop the risk and control policies, limits and tools for the business to use to discharge its responsibilities.

·         Overseeing and challenging the management of risks and controls.

·         Leading the articulation, design and development of risk culture and appetite.

·         Analysing the aggregate risk profile and ensuring that risks are being managed to the desired level (risk appetite).

·         Providing expert advice to the business on risk management.

·         Providing senior executives with relevant management information and reports and escalating concerns where appropriate.

·         Undertaking risk assurance (see below for more information).

 

Third line of defence - Internal Audit

Responsibilities include:

 

·         Designing and delivering a risk-based audit plan to provide assurance on material risks and report on whether RBS is managing its material risks effectively.

·         Monitoring, evaluating and reporting on the remediation of material risks across the RBS Group.

·         Engaging with management and participating in key governance fora to provide perspectives, insights and challenge so as to influence the building of a sustainable bank.

·         Advising the Group Audit Committee and executive management with respect to the Group’s material risks and their associated controls.

·         Reporting any matters which warrant escalation to the RBS Group Board, the Board Risk Committee, Group Audit Committee and the Executive Committee as appropriate.

·         Providing independent assurance to the FCA, PRA, CBI and other key jurisdictional regulators on both specific risks and control themes.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*unaudited

15 

 


 

 

 

 

Financial review Capital and risk management

 

Risk overview* continued

Management structure

RBS Group’s management structure and the main elements of each role are set out below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes:

(1)    RBS Group Risk Management

The RBS Group Chief Risk Officer (CRO) leads RBS Group Risk Management. The CRO reports directly to the Chief Executive and has an indirect reporting line to the Chairman of the Board Risk Committee and a right of access to the committee’s chairman.

 

RBS Group Risk Management is a function independent of the franchises, structured by risk discipline to facilitate the effective management of risk.

 

RBS Group Risk Management is organised into six functional areas: Credit Risk; Enterprise-Wide Risk; Risk Infrastructure; Operational Risk, Support Functions and Divested Businesses; Risk Assurance; and Market Risk. Directors of Risk are appointed for each of the franchises and for Services. This streamlined structure consolidates risk information, allowing for more efficient decision-making.

 

The directors of risk functions are responsible for RBS Group-wide risk appetite and standards within their respective disciplines and report to the CRO.

 

CROs are in place for certain jurisdictions and legal entities to meet local regulatory and governance requirements. They lead the risk management teams locally in support of functional risk heads where teams follow a functional operating model. The key CRO roles report directly to the RBS Group CRO.

 

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 they are adequately monitored and controlled.

 

  (2)  Conduct & Regulatory Affairs

Conduct & Regulatory Affairs (C&RA) is led by the RBS Group’s Chief Conduct & Regulatory Affairs Officer, who reports directly to the RBS Group Chief Executive and has an indirect reporting line to the Board Risk Committee and a right of access to the committee’s chairman. It is responsible for providing oversight of conduct risk and regulatory risk at RBS Group, and does so by setting RBS Group-wide policy and standards, providing advice to each customer business, and ensuring that the mitigating controls are suitable. C&RA also provides leadership of the RBS Group’s relationships with its regulators.

 

The functional heads (the Directors of Financial Crime, Advisory, Remediation, Compliance Services and Regulatory Affairs), report to the Chief Conduct & Regulatory Affairs Officer. Each is responsible, where appropriate, for the RBS Group-wide risk appetite and standards of their respective areas.

 

 

 

 

 

 

*unaudited

16 

 


 

 

 

 

Financial review Capital and risk management

 

Risk overview* continued

Risk assurance

Risk assurance is a second line of defence function in which most of the RBS Group’s risk assurance activities are centralised. These primarily comprise credit risk and market risk quality assurance, controls assurance and Model Risk Management, each of which is described below.

 

Credit risk and market risk quality assurance: These teams provide assurance to both internal and external stakeholders including the Board, senior management, risk functions, franchises, Internal Audit and the regulators.

 

Credit risk and market risk quality assurance undertake reviews which assess various aspects of risk as appropriate: including: the quality of risk portfolios; the completeness, suitability, accuracy and timeliness of risk measurements; the quality of risk management practices; policy compliance; and adherence to risk appetite. This includes monitoring the Group’s credit portfolios and market risk exposures to assist in early identification of emerging risks, as well as undertaking targeted reviews to examine specific concerns raised either by these teams or by their stakeholders.

 

The Risk Assurance Committee (RAC) provides governance to ensure a consistent and fair approach to all aspects of the review activities of credit and market risk assurance. Additionally, RAC monitors and validates the ongoing programme of reviews and tracks the remediation of review actions. The credit and market risk assurance teams also attend relevant committees run by the customer franchises and other risk functions to ensure strong communication channels are maintained. 

 

Controls assurance: This team tests the adequacy and effectiveness of key controls relating to credit and market risk, including those within the scope of Section 404 of the US Sarbanes-Oxley Act of 2002. Since the team’s creation in late 2014, testing has primarily covered key controls within CIB and CPB.

 

Model risk management

Model governance

Model governance follows a three lines of defence approach, with model developers having primary accountability and Model Risk Management (MRM) acting in a second-line-of-defence capacity.

 

MRM is responsible for setting policy, providing governance and insight for all of the Group’s statistical, economic, financial or mathematical models and performing independent model validation where necessary. It works with individual businesses to set appropriate model standards, and monitor adherence to these, to ensure that models are developed and implemented appropriately and that their operational environment is fit for purpose.

 

Going forward, MRM will be responsible for defining and monitoring model risk appetite in conjunction with model developers, monitoring the model risk profile and reporting on the model population and escalating issues to senior management.

 

The general approach to MRM’s independent model validation for risk and pricing models is detailed below. For more specific information relating to market risk models and pricing models, refer to page 94.

 

Models used within Risk

The Group uses a variety of models as part of its risk management process and activities. Key examples include the use of model outputs to support risk assessments in the credit approval process, ongoing credit risk management, monitoring and reporting, as well as the calculation of risk-weighted assets. Other examples include the use of models to measure market risk exposures and calculate associated capital requirements, as well as for the valuation of positions. The models used for stress testing purposes also play a key role in ensuring the Group holds sufficient capital, even in stressed market scenarios.

 

For more information on the use of models in the management of particular types of risk, notably credit and market risk, refer to the relevant section.

 

Independent model validation

MRM performs reviews of relevant risk and pricing models in two instances: (i) for new models or amendments to existing models and (ii) as part of its ongoing programme to assess the performance of these models.

 

A new model is typically introduced when an existing model is deemed no longer fit for purpose or when exposure to a new product requires a new approach to ensure that risks are appropriately quantified. Amendments are usually made when a weakness is identified during use of a model or following analysis either by the model developers or by MRM.

 

MRM’s independent review comprises some or all of the following steps, as appropriate:

 

°          Testing and challenging the logical and conceptual soundness of the methodology;

°          Testing the assumptions underlying the model, where feasible, against actual behaviour. In its validation report, MRM will opine on the reasonableness and stability of the assumptions and specify which assumptions, if any, should be routinely monitored in production;

°          Testing whether all key appropriate risks have been sufficiently captured;

°          Checking the accuracy of calculations;

°          Comparing outputs with results from alternative methods;

°          Testing parameter selection and calibration;

°          Ensuring model outputs are sufficiently conservative in areas where there is significant model uncertainty;

°          Confirming the applicability of tests for accuracy and stability; recalculating and ensuring that results are robust; and

°          Ensuring appropriate sensitivity analysis has been performed and documented.

*unaudited

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Financial review Capital and risk management

 

Risk overview* continued

Based on the review and findings from MRM, the RBS Group’s model or risk committees with appropriate delegated authority consider whether a model can be approved for use and whether any conditions need to be imposed, including those relating to the remediation of material issues raised through the review process. Once approved through internal governance, the new or amended model is implemented. Models used for regulatory reporting may additionally require regulatory approval before implementation.

 

MRM reassesses the appropriateness of approved risk models on a periodic basis according to the approved Periodic Review Policy. Each periodic review begins with an initial assessment. A decision is then made by an internal model governance committee with appropriate delegated authority. Based on the initial assessment, the committee will decide to re-ratify a model based on the initial assessment or to carry out additional work prior to making a decision. In the initial assessment, MRM assesses changes since the last approval along the following dimensions, as appropriate: change in size/composition of the portfolio, market changes, model performance, model changes, status of any outstanding issues, scheduled activities including work carried over from previous reviews.

 

MRM also monitors the performance of RBS Group’s portfolio of models. By engaging with the business and model users, MRM assesses whether models still capture underlying business rationale appropriately.

 

Risk culture and appetite

Risk culture

A strong risk culture, as part of a healthy organisational culture, is essential to the realisation of the RBS Group’s ambition to build a truly customer-centric bank.

 

It seeks to create a strong risk culture that becomes part of the way people work and think. Such a culture should be supported by robust practices on risk identification, measurement and management, and on associated controls and governance. Risk competencies, mindsets and behaviours needed to support risk culture should be embedded across the organisation and made integral to performance reviews.

 

In 2015, significant steps were taken in measuring and benchmarking risk culture across all areas of the RBS Group. This has resulted in agreement on its target risk culture and initiatives needed to achieve it. While changing organisational culture will take time, risk culture objectives form a key part of individual performance objectives at all levels of the RBS Group.

 

The target risk culture is clearly aligned to the RBS Group’s core values of “serving customers”, “working together”, “doing the right thing” and “thinking long term”. They act as a clear starting point for a strong and effective risk culture.

 

Aligned to these values is the Code of Conduct. The Code provides guidance on expected behaviour and sets out the standards of conduct that support the values. It explains the effect of decisions that are taken and describes the principles that must be followed.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*unaudited


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Financial review Capital and risk management

 

Risk overview* continued

These principles cover conduct-related issues as well as wider business activities. They focus on desired outcomes, with practical guidelines to align the values with commercial strategy and actions. The embedding of these principles facilitates sound decision making and a clear focus on good customer outcomes. They are aligned with the people management and remuneration processes to support a positive and strong risk culture through appropriate incentive structures.

 

A simple decision-making guide (called the “YES check”) has been included in the Code of Conduct. It is a simple, intuitive set of five questions, designed to ensure the values guide day-to-day decisions:

 

°          Does what I am doing keep our customers and the Group safe and secure?

°          Would customers and colleagues say I am acting with integrity?

°          Am I happy with how this would be perceived on the outside?

°          Is what I am doing meeting the standards of conduct required?

°          In five years’ time would others see this as a good way to work?

 

Each question is a prompt to think about the situation and how it fits with the Group’s values. It ensures that employees can think through decisions that do not have a clear answer, guiding the judgements behind their decisions and actions.

 

If conduct falls short of the RBS Group’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 Group Performance and Remuneration Committee also consider risk performance and conduct when determining overall bonus pools. The Committee’s decisions on pay aim to reinforce the need for good behaviours by all employees.

 

The RBS Group’s policies require that risk behaviour assessment is incorporated into performance assessment and compensation processes for enhanced governance staff. 

 

Risk-based key performance indicators

The RBS Group-wide remuneration policy requires remuneration to be aligned with, and to support, effective risk management. The policy ensures that the remuneration arrangements for all employees reflect the principles and standards prescribed by the UK Remuneration Code.

 

Training

Enabling employees to have the capabilities and confidence to manage risk is core to the Group’s learning strategy.

 

The RBS Group offers a wide range of risk learning across the risk disciplines: Market Risk; Credit Risk; Operational Risk; Enterprise Risk; and Conduct and Regulatory Risk. This training can be mandatory, role specific or for personal development and includes technical and behavioural content.   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*unaudited

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Financial review Capital and risk management

 

Risk overview* continued

There is mandatory learning that has to be completed by everyone and is focused on keeping employees, customers and the Group safe. This learning is accessed via the online learning system and is dependent on their role and business area. This makes it easy for employees to access and complete and allows monitoring at all levels to ensure completion. 

 

Risk appetite

Risk appetite is the way in which the RBS Group expresses the level of risk it is willing to accept in order to achieve its strategic, business and financial objectives.

 

It is key to ensuring overall safety and soundness and in embedding a strong risk culture throughout the Group.

 

The RBS Group Board reviews and approves the risk appetite framework annually, establishing the level and types of risks the Group is able and willing to take in order to meet its:

 

·         Strategic objectives - The strategic plan is built on the core foundations of serving customers well, building a sustainable risk profile and creating long-term value for its shareholders; and

·         Wider obligations to stakeholders - If the Group is safe and sound and puts serving customers at the heart of its thinking, it will also perform well for its owners, employees, regulators and communities.

 

Risk appetite is set for material risks and is cascaded and embedded across the Group. It clearly informs, guides and empowers the businesses to execute their strategies within risk appetite.

 

Strategic risk appetite

The RBS Group’s risk appetite framework is designed to ensure the Group remains safe and serves customers as well as its wider stakeholders. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*unaudited

20 

 


 

 

 

 

Financial review Capital and risk management

 

Risk overview* continued

The RBS Group Board has set out four key strategic risk appetite objectives, aligned with the strategic plan, which provide the boundaries within which the risk appetite for all material risks is set. The strategic risk appetite objectives are:

 

·         Maintain capital adequacy. To ensure there is sufficient capital resources to meet regulatory requirements and to cover the potential for unexpected losses.

·         Deliver stable earnings growth. To ensure that strategic growth is based around a longer-term risk-versus reward consideration, risk appetite is set at a level where the Group would remain profitable under severe stress.

·         Designed to ensure stable and efficient access to funding and liquidity. To ensure that there is sufficient funding to meet its obligations, taking account of the constraint that some forms of funding may not be available when they are most needed.

·         Maintain stakeholder confidence. To ensure that the Group is respected, valued and trusted by stakeholders (customers, employees, debt and equity investors, regulators and the wider community) to attain its strategic objectives, and establish and maintain an appropriate business culture and operational controls.

 

The strategic risk objectives are the bridge between the RBS  Group-wide business strategy and the frameworks, limits and tolerances that are used to set risk appetite and manage risk in the business franchises on a day-to-day basis.

 

Risk appetite measures

Risk appetite starts with the strategic goals set by the RBS Board and is cascaded through key limits and risk tolerances that influence decision-making at all levels.

 

Risk appetite is set in a manner that:

 

·         Is aligned to business and financial goals. The risk appetite framework ensures that risk is managed in a manner that aligns to and supports the attainment of business and financial objectives. 

·         Is meaningful to the business. Where possible risk appetite is expressed quantitatively and in a manner that can be cascaded meaningfully and unambiguously to the business. Risk control frameworks and limits set detailed tolerances and limits for managing risk (such as credit risk and market risk) on a day-to-day basis. These limits support, and are required to be consistent with, the strategic risk appetite.

·         Considers performance under stress. The establishment and monitoring of risk appetite considers potential risk exposures and vulnerabilities under plausible stress conditions.

 

Effective processes exist for frequent reporting of the RBS Group’s risks against agreed risk appetite to the RBS Group Board and senior management. 

 

Risk appetite statements

Risk appetite is set at RBS Group-wide level then cascaded and embedded across all businesses and support functions.

 

Each franchise, RBS Group-wide material risk owner, function and material legal entity is required to develop, own and manage a risk appetite statement that:

 

·         Is aligned to strategic objectives and financial plans.

·         Articulates the level of acceptable risk for all material risks.

·         Sets out the escalation path to be followed in the event of a breach of risk appetite. The communication of risk appetite helps embed appropriate risk taking into the RBS Group’s culture.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*unaudited

 

21 

 


 

 

 

 

Financial review Capital and risk management

 

Risk overview* continued

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The communication of risk appetite helps embed appropriate risk taking into the RBS Group’s culture.

 

Risk control frameworks and limits

Risk control frameworks and their associated limits are an integral part of the risk appetite framework and a key part of embedding risk appetite in day-to-day risk management decisions. The risk control frameworks manage risk by expressing a clear tolerance for material risk types that is aligned to business activities.

 

The RBS Group Policy Framework directly supports the qualitative aspects of risk appetite, helping to rebuild and maintain stakeholder confidence the Group’s risk control and governance. Its integrated approach is designed to ensure that appropriate controls, aligned to risk appetite, are set for each of the material risks it faces, with an effective assurance process put in place to monitor and report on performance. Risk appetite has its own policy within the RBS Group Policy Framework. This policy sets out clear roles and responsibilities to set, measure, cascade and report performance against risk appetite, and provides assurances that business is being conducted within approved risk limits and tolerances.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*unaudited

 

22 

 


 

 

 

 

Financial review Capital and risk management

 

Risk overview* continued

Risk coverage

The main risk types faced by the Group are presented below. For further information, refer to pages 26 to 96.

 

Risk type

How the risk arises

 

 2015 overview (1)

Capital adequacy risk

Capital adequacy risk arises from inefficient management of capital resources.

 

The PRA monitors capital and leverage on a legal entity basis; the commentary below relates to NatWest, the most significant legal entity within the Group:

·         The PRA transitional CET1 ratio decreased from 13.9% to 11.6%, reflecting the current year loss of £1.4 billion, including PPI provisions of £0.4 billion and the impairment of investments in US related subsidiaries of £1.6 billion. The loss on remeasurement of the retirement benefit schemes resulted in a CET1 capital reduction of £1.4 billion, which was partially offset by a capital injection of £800 million from RBS plc.

·         Modelled credit risk RWAs decreased by £1.5 billion, primarily Retail as a result of risk parameter improvements in PBB.

·         Standardised RWAs decreased by £6 billion, primarily reflecting a move from risk-weighting to capital deduction of significant investments in financial institutions, as part of phased in implementation of end-point CRR.

·         Leverage ratio was 4.7% at 31 December 2015.

Liquidity and funding risk

Liquidity and funding risk arise through the maturity transformation role that the Group performs and arises from day-to-day operations.

 

·         The Group’s liquidity portfolio, largely secondary liquidity comprising loans, was £48 billion (£45 billion within the UK group and £5 billion in UBIL) at 31 December 2015, an increase of £10 billion from 2014. The increase was due to higher mortgage loans available for discounting reflecting growth in UK PBB.

·         Third party customer loan:deposit ratio was broadly unchanged at 76% (2014 - 75%) as reductions in Capital Resolution were broadly offset by mortgage growth in UK PBB. Third party customer loans, increased by £5 billion to £167 billion, reflecting UK PBB lending growth, and third party customer deposits increased by £2 billion mainly within UK PBB and Commercial Banking.

Business risk

Business risk arises from exposure to, and the ability to assess the impact of, changes in the macro-environment, competition, business operations and technology.

 

·         The Group reduced its business risk profile by implementing its strategic plan to shift the business mix towards the UK and the retail and commercial banking segments, with riskier activities in CIB and Capital Resolution curtailed via disposals and run-down.

·         The Group continued with its simplification agenda and cost reduction programme.

 

 

 

Note:

(1)       Refer to page 249 for abbreviations and acronyms.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*unaudited

 

23 

 


 

 

 

 

Financial review Capital and risk management

 

 

Risk overview* continued

 

Risk type

How the risk arises

 

 2015 overview

Reputational risk

Reputational risk can arise from the conduct of employees; activities of customers and the countries in which they operate; provision of products and transactions; as well as operations and infrastructure.

 

·         The importance of reputational risk was reinforced with the implementation of a Reputational Risk Policy across business franchises and functions to improve the identification, assessment and management of customers and issues that present a reputational risk.

·         The most material threats to the Group’s reputation continued to originate from historical and more recent conduct issues. As a result, the Group has been the subject of investigations and reviews by a number of its regulators, some of which have resulted in fines and public censure.

Conduct and regulatory risk

 

Conduct risk arises if customers are not treated in line with their and other stakeholders’ expectations. Conduct risk also arises if the Group does not take effective action to prevent fraud, bribery and money laundering.

 

Regulatory risk arises from the Group’s regulatory, business or operating environments and the Group’s response to them

 

·         Conduct and litigation costs were £2.8 billion in 2015 compared with £1.0 billion in 2014 and included additional provisions of £2.1 billion for historical investment banking activity in the US and £0.4 billion for PPI. The Group continued to remediate historical conduct issues, while also focusing its customer-facing businesses and support functions around the needs of its customers.

·         A new Conduct Risk Appetite Framework was established.

·         The RBS Group implemented programmes to prepare for ring-fencing and the UK’s new individual accountability regime, as well as other future regulatory requirements; there was significant investment in anti-money laundering controls, governance and training.

Operational risk

Operational risk arises from a failure to manage operations, transactions and assets appropriately. It may arise from human error, an inability to deliver change on time or adequately, or the unavailability of technology services or the loss of customer data. Fraud and theft are sources of operational risk, as is the impact of natural and man-made disasters. It may also arise from a failure to take appropriate measures to protect assets or take account of changes in law.

 

 

·         The functional operating model for operational risk was embedded, with the aim of ensuring this is managed consistently across the Group. This supplemented work by the customer businesses to improve understanding of the operational risk profile and the actions required to mitigate risks outside of appetite.

·         Following the major IT incident of 2012, there was further significant investment in upgrading  core banking technology infrastructure and in improving a broad range of processes and tools.

·         The threat to the security of the Group’s information from cyber attacks continued to be closely monitored. During 2015 the RBS Group participated in industry-wide cyber attack simulations in order to help test and develop defence planning. Actions taken to mitigate the risk included a large-scale programme to improve user access controls, a reduction in the number of external websites, and enhanced protection against malware.

·         RBS Group operational risk continued to oversee the execution of major projects, including the transformation plan, the restructuring of CIB and the divestment of Williams & Glyn. This ensured the associated risks were assessed and understood with mitigating activity in place wherever possible.

 

 

 

 

 

 

 

 

 

*unaudited

24 

 


 

 

 

 

Financial review Capital and risk management

 

Risk overview* continued

 

Risk type

How the risk arises

 

 2015 overview

Pension risk

The Group is exposed to pension risk through its defined benefit schemes and the variations in their value.

 

·         Following developments in pension accounting and reporting during 2015, the Group revised its policy for determining whether or not it has an unconditional right to a refund of any surpluses in its employee pension funds and also revised prior periods. The incremental impact of this, combined with the accelerated payment made in March 2016, is anticipated to improve the Group’s risk profile, capital planning, and resilience through the period to 2019. The accelerated payment is also expected to provide the main scheme trustee with more flexibility over investment strategy.

·         Subject to PRA approval, the adverse CET1 capital impact resulting from the accounting policy change and the accelerated payment is expected to be partially offset by a reduction in CET1 capital requirements. Any such core capital offsets are likely to occur at the earliest from 1 January 2017, but they will depend on the PRA’s assessment of the Group’s CET1 capital position at that time.

Credit risk

Credit risk arises from lending and AFS debt securities. Counterparty credit risk results from derivatives and securities financing transaction activities.

 

·         The growth in UK PBB gross mortgage lending reflected the strategy to refocus the Group’s business on the UK market, as well as improving economic conditions and increasing house prices in a continuing low interest environment.

·         Asset quality improved due to continued focus on reducing risk concentrations and the reduction in exit portfolios driven by the RCR disposal strategy as well as improving economic and market conditions in the UK and Ireland.

·         Credit quality remained stable, with risk elements in lending decreasing to £8.4 billion (4.8% of gross customer loans) at 31 December 2015, from £19.8 billion (11.2%) at 31 December 2014 and were covered by impairment provision by 64% or £5.4 billion (2014 - 70% or £13.9 billion). Credit metrics principally reflected Capital Resolution disposals and the impact of supportive economic conditions.

Market risk

The majority of the Group’s market risk relates to non-traded market risk exposure from retail and commercial banking activities from assets and liabilities that are not classified as held for trading.

 

Traded market risk exposure arises in CIB and Capital Resolution through transactions in financial instruments primarily in debt securities, securities financing and derivatives.

 

·         The Group’s average  internal non-trading interest rate VaR, largely sterling related,  was broadly unchanged at £96 million (2014 - £104 million), albeit period end VaR was slightly higher at £90 million (2014 - £87 million), reflecting increased exposure to medium-term interest rates. Market risk is higher than at RBS Group because some structural interest rate risk exposures are hedged at a consolidated level.  

·         NatWest’s average and period end internal trading VaR was broadly unchanged in 2015 compared to 2014. RBSSI’s average internal trading VaR decreased to £1.3 million (2014 - £7.4 million), primarily reflecting strategic exits including from US asset-backed products trading in the first half of 2015.

 

 

 

 

 

 

 

 

 

 

*unaudited

25 

 


 

 

 

 

Financial review Capital and risk management

 

Capital management*

Definition

Capital management lies at the core of the RBS Group’s strength and sustainability goals. The Group defines capital as that part of the liability side of its balance sheet that has the capacity to absorb losses. The construction of capital starts with Common Equity Tier 1 (CET1) and other classes of capital such as Additional Tier 1 (AT1) and Tier 2. The Group will build up sufficient minimum requirements for eligible liabilities (MREL) over the coming years in line with regulatory requirements. Capital management involves the optimisation and efficient use of capital required by businesses, the outcomes of stress testing, the requirements of the market and the regulators and the supply of adequate forms of capital at acceptable prices.

 

The Prudential Regulatory Authority (PRA) monitors capital and leverage on a legal entity basis. Consequently, quantitative capital, leverage and RWA disclosures for significant legal entities within the Group, primarily NatWest and to a lesser extent Ulster Bank Ireland Limited (UBIL), are included in this section; capital is based on a CRR transitional basis and leverage on CRR Delegated Act.

 

Overview and key developments

·         NatWest:   

o         CET1 ratio decreased from 13.9% to 11.6%, reflecting the current year loss of £1.4 billion, including PPI provisions of £0.4 billion and the impairment of investments in US related subsidiaries of £1.6 billion following additional provisions relating to US RMBS litigation. The loss on remeasurement of the retirement benefit schemes resulted in a CET1 capital reduction of £1.4 billion, which was partially offset by a capital injection of £800 million from RBS plc.

o         Modelled credit risk RWAs decreased by £1.5 billion, primarily Retail as a result of risk parameter improvements in PBB.

o         Standardised RWAs decreased by £6 billion primarily reflecting a move from risk-weighting to capital deduction of significant investments in financial institutions, as part of phased in implementation of end-point CRR.

o         Leverage ratio was 4.7% at 31 December 2015.

·         UBIL: 

o         CET1 ratio improved from 17.3% to 29.6%. 2015 CET1 ratio benefited from the inclusion of £0.9 billion of 2014 profit.

o         RWAs were £5.0 billion lower with the contributors being the reduction in the tracker mortgage portfolio, lower Central Bank of Ireland add-on for corporate exposures and exchange rate measurements.

o         Leverage ratio was 24.0 % at 31 December 2015, reflecting the strong capital position.

 

Risk appetite and strategy

Risk appetite

The RBS Group’s risk appetite framework establishes appetite targets on quantitative and qualitative measures which are set by the Board, aligned with its key strategic risk objectives. Capital risk appetite is set at the holding company level and cascaded to material subsidiaries to help inform capital targets alongside other quantitative measures such as Individual Capital Guidance set annually by the PRA.

 

The RBS Group has a capital management framework including policies and procedures that are designed to measure actual and projected capital performance against risk appetite, ensures that it continues to comply with regulatory requirements and is positioned to meet anticipated future changes to its capital requirements.

 

The RBS Group’s capital risk appetite at the holding company level, which informs its capital targets at subsidiary levels, is reviewed and set annually by the Board. Capital risk appetite sets target ratios for CET1 and leverage under stress scenarios and reverse stress tests. These then inform capital targets. The RBS Group also looks at other factors that may impact capital targets such as double leverage, distributable reserves, capital headroom to Maximum Distributable Amount (MDA) and intra group limits and exposures. Risk appetites are also set at legal entity level and may encompass additional specific risk measures such as intra group exposures and limits and double leverage.

 

Strategy

The Group maintains a sufficient level of capital that allows it to operate over its strategic horizon with an agreed risk appetite in pursuit of its business strategy, taking into account regulatory requirements, support for customers and to provide confidence to stakeholders.

 

The RBS Group is able to accumulate additional capital through the reduction in RWAs (either through disposals or natural attrition) accumulation of profits over time, by raising new equity via, for example, a rights issue or debt exchange and by raising AT1 and Tier 2 capital by issuing subordinated liabilities at the holding company level and downstreaming to subsidiaries such as NatWest. The cost and availability of additional capital is dependent upon market conditions and perceptions at the time. The RBS Group is also able to manage the demand for capital through management actions including adjusting its lending strategy, risk hedging strategies and through business disposals.

 

The level of CET1 at the consolidated level and within specific legal entities is the cornerstone of capital strategy. Complementing CET1, the RBS Group issues externally and will allocate internally AT1 capital, Tier 2 capital and looking forward, MREL instruments in accordance with internal needs, regulatory requirements and strategic plans. The amount of additional capital is determined as part of the annual budgeting cycle, by market conditions and through ongoing dialogue with regulators. It is under constant review and evaluation to ensure that it provides efficient and optimally valued benefits at all times.

*unaudited  

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Financial review Capital and risk management

 

Capital management* continued  

The capital raising strategy is driven by two factors: the optimal blend to satisfy regulatory requirements, and the most cost effective means of financing. The RBS Group has a range of instruments available to it both internally and externally. It also has legacy capital instruments that may still have some transitional benefits under the changing regulatory framework. The RBS Group constantly looks at the value and efficiency provided by those instruments and will take such market related actions to the extent that circumstances and conditions merit such action. The RBS Group’s policy is to manage its externally issued portfolio of debt securities at holding company and subsidiary level for value.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*unaudited

 

27 

 


 

 

 

 

Financial review Capital and risk management

 

Capital management* continued

Framework and governance

The framework for capital management within the RBS Group first looks at the sources and drivers of risk based capital requirements. Through the internal budget and planning cycle, and increasingly through stress testing, each franchise balances the blend of products that is offered to customers, having regard to the impact of each on capital and leverage against the backdrop of the overall business strategy. Capital and risk management, including capital planning (refer page 29), stress testing and ICAAP,  are conducted on an overall basis within the RBS Group such that common frameworks and models apply across the RBS Group. Therefore, for the most part, discussions on these aspects reflect those in the RBS Group as relevant for the businesses and operations in the Group.

 

A number of tools and processes taken together contribute to an integrated view of capital management. The diagram below presents this view:

 

Governance

The RBS Group Board sets the strategic direction and ensures that the RBS Group manages risk effectively by approving and monitoring its strategic risk appetite, considering RBS Group-wide stress scenarios and agreed mitigants, as well as identifying longer-term strategic threats to the business operations. The Board also approves the ICAAP.

 

Capital planning

·        The RBS Group uses the budgeting cycle to forecast future capital requirements at CET1, Tier 1, Tier 2 and total capital levels including MREL at both holding company level and major operating entity level. Forecasts are measured against minimum regulatory requirements and specific regulatory guidance such as the Individual Capital Guidance.

·        Strategic considerations in the medium-term capital plan will be driven by key impacts such as a more restrictive approach to the capital base, higher capital ratio targets and enhanced risk coverage.

 

Stress testing (and use of)

·        This is an integral part of capital planning. Stress testing results are produced through the same capital planning and stress testing models used for the budgeting and monthly review.

·        In addition to informing the ICAAP, stress testing in the RBS Group is a key risk management tool used to support strategic financial planning, risk appetite, risk identification and risk mitigation.

·        Stress testing results are presented to senior management (and BRC/Board) periodically, and used to assess capital impacts of business decisions.

 

Recovery and resolution planning

The RBS Group prepares an annual recovery plan, which include a framework of indicators identifying the points at which appropriate actions may be taken in the event of unexpected weaknesses in its capital or liquidity resulting from either idiosyncratic or systemic stress, as well as a menu of options for addressing such weaknesses. The RBS Groups 2015 Recovery Plan was prepared in line with the PRAs requirement that banks prepare, maintain and review recovery plans.

 

 

 

 

 

 

 

 

 

 

 

 

 

Internal Capital Adequacy Assessment Process (ICAAP)

The ICAAP assesses the RBS Groups material risks determining how much capital is required to cover these risks. The ICAAP consists of two types of internal capital assessment:

·           a Point-in-time capital assessment as at the financial year end, and

·           a Forward-looking stress capital assessment.

The final ICAAP is approved by the RBS Group Board prior to submission to the PRA.

 

Assessing, monitoring and maintaining adequate capital. It is the RBS Groups policy to build and sustain a strong capital base and to use it efficiently throughout its activities to support strategic objectives and optimise shareholder returns while maintaining a prudent relationship between its capital base and the underlying risks of the business, including the risk of excessive leverage.

 

Board Risk Committee (BRC)

With sight of various risk types the RBS Group Board Risk Committee (BRC) is responsible for providing oversight and advice to the Board in relation to current and potential future risk exposures of the RBS Group and future risk strategy, including determination of risk appetite and tolerance.

 

 

Capital Risk Assessment (CRA)

CRAs are annual top down’  processes to help identify, understand and assess material risks. Consideration is given to whether and how much capital should be set aside against each risk type forming a key input to the ICAAP. For effective risk management CRAs are marked against financial or non-financial thresholds.

 

*unaudited

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Financial review Capital and risk management

 

Capital management* continued  

Capital planning  

Capital and leverage is actively managed and regulatory ratios are a key factor in the RBS Group’s planning processes and stress analyses. Capital planning is an activity undertaken within Treasury to determine the appropriate amount of capital needed over the budget horizon under both base and stress projections using both risk and leverage based assessment tools and given a specific risk appetite.

 

Capital plans are derived for the RBS Group overall and its major operating, regulated entities. Capital plans are prepared in compliance with specific regulatory rules (for example CRD IV) and in accordance with system wide and local, specific regulatory guidance. Capital plans for UK regulated entities are drawn up centrally whereas capital plans for non-UK regulated entities are drawn up locally and subject to central review and challenge to ensure consistency of approach and adherence to capital management policies. Capital plans take into account any funding arrangements between the holding company entity and operating entities. The RBS Group is transitioning to a single point of entry (SPE) structure under the Independent Commission on Banking’s (ICB’s) ringfencing requirements. This creates a need to actively manage any legacy securities issued externally by the operating entities and any internal funding arrangements between entities, particularly the holding company.

 

The starting point for any capital plan will be with the annual budget cycle which forecasts the Group’s balance sheet trajectory over a 5 year forward looking horizon. The budget cycle will incorporate assumptions about the future shape and direction of the balance sheet of the RBS Group and its operating entities. It will include assumptions around the future path of RWAs, profitability and tax. Idiosyncratic factors such as conduct and litigation costs and disposals are also considered. Finally known or expected system or firm specific regulatory guidance (for example phasing in of CRD IV assumptions or leverage requirements) are also considered. 

 

The capital plans are tested for capital adequacy and measured against the RBS Group’s risk appetite framework using a range of stress scenarios covering adverse economic conditions as well as other adverse factors that could impact the bank. In addition the RBS Group maintains a recovery plan, including for designated significant legal entities within the Group,  which sets out a range of potential mitigating actions that could be taken in response to an extreme stress. Known and expected assumptions around the future direction of regulation is also taken into account. Furthermore specific idiosyncratic risks such as conduct risk are factored into capital plans.

 

From these inputs a forecast will be derived on how much capital is required to support these assumptions using both risk and leverage based approaches. This will estimate the required amount of CET1 through to non-capital minimum requirement eligible liabilities (MREL) in each period over the forecast.

 

Once the capital plan is approved it is then subject to ongoing review and assessment to reflect changes to the underlying components such as forecasts or new regulatory guidance or assumptions. Shorter term forecasts are more frequently undertaken to understand and respond to variations of actual performance against the plan.

 

Capital policies and procedures are subject to independent oversight. Regular reporting of actual and projected capital and leverage ratios, including those in stressed scenarios, is undertaken, including submissions to the RBS Group’s ALCo, ERF, EXCo, Board Risk Committee and the Board.

 

The regulatory framework within which the RBS Group operates continues to be developed at a global level through the FSB and Basel Committee, at a European level mainly through the issuance of CRD IV technical standards and guidelines and within the UK by the PRA and through directions from the FPC.

 

The RBS Group continues to monitor regulatory developments very closely, analysing the potential capital impacts to ensure it continues to maintain a strong capital position that exceeds the minimum regulatory requirements and risk appetite and is consistent with market expectations.

 

Capital requirements: Pillar 1 and 2

Capital demand is normally the aggregation of Pillar 1, Pillar 2A, the greater of the CRD IV or Pillar 2B buffers, and any management buffer (for example over and above MDA). Pillar 2 is becoming an increasingly important component of our capital requirements.

 

Pillar 2A is determined through the ICAAP process mentioned herein and reflects RBS Group specific risks. Factors driving Pillar 2 requirements include operational risk, interest rate risk in the banking book, credit concentration risk and pension risk amongst others.

 

The Pillar 2B requirement and recently introduced PRA buffer reflects the impact of stress through the analysis undertaken in annual ICAAP. The amount of stress capital may well also be informed by performance under the new regulatory stress testing process. The amount of stress based capital requirement is the higher of Pillar 2B or the CRD IV risk buffers plus any management buffer. 

 

A management buffer may be overlaid on top of that to reflect additional risks that the RBS Group Board believe are prudent to cover (such as headroom over and above any MDA threshold).

 

Capital supply

Capital supply consists of the amount of CET1, AT1, Tier 2 and, going forward, non-capital MREL securities in existence at any one time.

 

*unaudited

 

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Financial review Capital and risk management

 

Capital management* continued

Regulatory developments and the impact on RBS Group and its subsidiaries’ current and future capital position

Regulatory proposals and rules issued or set by the following regulators are the most relevant for the RBS Group:

·         Basel - recommendations for all major international institutions - usually through Basel Committee of Banking Supervision (BCBS);

·         EU - issue consistent rules for all EU banks and investment firms, commonly through the European Banking Authority (EBA); and

·         PRA - additional local rules for UK banks and investment firms.

 

Capital

Following the implementation of the Basel III proposals through the Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD), collectively known as CRR/CRD IV, which came into effect on 1 January 2014, the regulatory drive towards improved capital standards for banks continues and is centred on three broad themes:

·         Robust definitions of capital for CET1 and leverage purposes that are not dependent on one or more economic cycles;

·         Improved strength of banks, with strategic plans and business models capable of undergoing one or more significant stress events; and

·         Valid and viable recovery plans in place for banks to return to normality after a period of stress or, easy application of the resolution frameworks.

 

Many of these aspects still require analysis and debate and therefore any implementation is likely to take many years.   

 

CRR/CRD IV introduced the following minimum requirements to be met by 2019:

·         Pillar 1 requirement of: CET1 of 4.5% of RWAs; Tier 1 of 6%; and total capital of 8%; and

·         CRD IV Combined buffers: capital conservation buffer of 2.5% of RWAs; countercyclical capital buffer of up to 2.5%; GSIB surcharge of 1.0% for the RBS Group based on the most recent determination from the FSB.

 

The PRA policy statement PS7/13 outlined changes to the minimum level of CET1 capital for large UK banks as follows:

·         The PRA required UK banks to meet the CRD IV end point Pillar 1 requirement from 1 January 2015;

·         All Pillar 2A risks must be met with at least 56% CET1 capital. This matches the proportion of CET1 capital required for Pillar 1. The remaining (44%) allocation of Pillar 2A is restricted to 19% Tier 1 and 25% Tier 2; and

·         All regulatory deductions from capital align CET1 with the end-point CRR definition, effectively making fully loaded Basel III the regulatory definition.

  

The PRA issued Policy Statement 17/15 in July 2015 setting out the Pillar 2 capital requirements for UK banks. The changes are intended to support a more risk sensitive and consistent approach to setting Pillar 2A (P2A) capital and to provide greater transparency of the PRA capital setting process by allowing firms to manage present and future regulatory capital demands. Implementation is from 1 January 2016 in line with the CRD IV capital conservation and systemic buffers and the European Banking Authority’s Supervisory Review and Evaluation Process guidelines. The changes are as follows:

 

·         The variable element of P2A is now expressed as a percentage of RWAs plus fixed add-ons instead of the current method where P2A is a formula comprising both a variable and a fixed element;

·         The PRA buffer replaces the current Capital Planning Buffer (CPB). Use of the buffer will not be a breach in capital requirements and will not result in capital distribution restrictions however, failure to meet Pillar 2B (P2B) buffer may result in enhanced supervisory action;

·         The P2B buffer, presently applicable only for RBS Group, is now calculated as a percentage of RWAs rather than absolute terms and is to be met with CET1;

·         Firms already subject to a CPB are required to meet P2B with CET1 in full immediately;

·         Where the PRA considers that firms have weak risk management or governance, PRA may require firms to hold additional PRA buffer on a scalar ranging from 10-40% of a firm’s CET1 Pillar 1 plus P2A capital requirements; and

·         Firms have the discretion to publicly disclose their aggregate P2A charge from 1 January 2016. Component parts of P2A and the PRA buffer remain confidential.

 

Leverage

The RBS Group’s leverage ratio requirements are also subject to the following key aspects (consistent with proposals outlined in PS27/15 - ‘Implementing a UK leverage ratio framework’):

 

·         Minimum Tier 1 leverage ratio of 3%. To be met 75% by CET1 and a maximum 25% fully CRD IV compliant AT1;

·         A supplementary leverage buffer applying to GSIBs equal to 35% of the corresponding risk-weighted systemic risk buffer rates to be met with CET1; and

·         A countercyclical leverage ratio buffer equal to 35% of the risk-weighted countercyclical capital buffer rate to be met from CET1. The countercyclical buffer is currently set at 0%.

 

*unaudited

 

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Financial review Capital and risk management

 

Capital management* continued

Stress testing

In October 2015, the BoE published its approach to stress testing of the UK banking system out to 2018. The publication outlines the following key features of the BoE approach:

·         A cyclical scenario to assess the risks to the banking system based on the financial cycle.

·         The severity of the scenario to be counter-cyclical in nature.

·         Every second year, the BoE will complement the annual testing with an additional exploratory scenario to probe the resilience of the system to risks not easily linked to the financial cycle.

·         The BoE intends to include an integrated framework for decision-making around the setting of capital buffers, as well as a clear and transparent process for determining  whether banks need to strengthen their capital positions.

·         A hurdle rate framework is to be enhanced, and will align to the overall capital framework. Within the hurdle rate, a bank will be expected to meet all of its minimum risk-based CET1 capital requirements (Pillar 1) in the scenario, as well as Pillar 2A CET1 requirements. Additionally, GSIB buffers will be included in the hurdle rate.

 

As a major UK bank, the RBS Group will be included in the annual cyclical scenarios and may also be required to participate in the biennial exploratory scenario stress tests to the extent that the risks being probed are relevant to it.

 

MREL and TLAC

The banking resolution and recovery directive introduces requirements for banks to maintain at all times a sufficient aggregate amount of own funds and eligible liabilities (that may be bailed in using the bail-in tool), known as the minimum requirements for eligible liabilities (MREL). The aim is that the minimum amount should be proportionate and adapted for each category of bank on the basis of their risk or the composition of their sources of funding.

 

The EBA noted that the technical standards would be compatible with the proposed term sheet published by the FSB on TLAC requirements for GSIBs, but there remains a degree of uncertainty as to the extent to which MREL and TLAC requirements may differ. 

 

Following the FSB finalising its TLAC proposals in November 2015, the PRA published its proposed requirements for MREL which will be the way in which the UK implements the TLAC standard. MREL will apply to GSIBs from 2019 and to other relevant UK firms from 2020. The purpose of MREL is to ensure that, in the event of failure, a bank has sufficient loss-absorbing and recapitalisation capacity to allow for an orderly resolution that minimises any adverse impact on financial stability whilst preventing public funds being exposed to loss. The requirements will be firm-specific but the PRA’s consultation paper proposes that MREL will be required:

 

·         At a consolidated and individual bank level, including for the holding entity of a banking group.

·         At an amount at least equal to two times the current minimum Pillar 1 and Pillar  2A capital requirements, or, if higher, any applicable leverage ratio requirement, or the minimum capital requirements under Basel plus any applicable CRD IV capital buffers: once for loss absorbency, once for recapitalisation

 

Regulatory proposals relating to Domestically Systemically Important Banks (DSIBs) and Other Systemically Important Institutions (OSII) continue to be progressed and could impact the level of CET1 that is required to be held by the RBS Group and specific legal entities including NatWest and the Royal Bank. The EBA published in December 2014 a quantitative methodology as to how European regulators could quantify which firms would qualify as DSIBs. The PRA published CP39/15 on this in October 2015, and published its list of the sixteen firms designated as OSII; the RBS Group is included within this list.

 

Systemic risk buffer (SRB)

In January 2015, HM Treasury issued an explanatory memorandum on the SRB for banks, building societies and investment firms. The regulation implements Articles 133 and 134 of Directive 2013/36/EU and addresses the outstanding capital buffer element of the ring-fencing policy recommended by the ICB and agreed by the UK Government.

 

The purpose of the SRB is to prevent and mitigate long term non-cyclical systemic or macro prudential risks not covered by existing regulation where there is potential for serious negative consequences for the financial system and real economy

 

The SRB will apply to large banks with core (ring fenced entity) deposits of more than £25 billion and large building societies with deposits of more than £25 billion. Implementation will occur from 1 January 2019 and capital buffers will range from 0-3% of a firm’s RWAs.

 

On 29 January 2016, the FPC proposed that those banks and building societies with total assets above £175 billion will be set progressively higher SRB rates as total assets increase through defined buckets. HM Government required the FPC to produce a framework for the SRB at rates between 0% and 3% of RWAs. Under the FPC’s proposals, ring-fenced bank sub-groups and large building societies in scope with total assets below £175 billion will be subject to a 0% SRB. Based on current information, under these proposals the FPC expects the largest ring-fenced bank in 2019 to have a 2.5% SRB. In line with the FPC’s previous announcement on the leverage ratio framework, those institutions subject to the SRB will also be set a 3% minimum leverage ratio requirement, together with an additional leverage ratio buffer calculated at 35% of the applicable SRB rate. For example, an institution with an SRB rate of 1% would have an additional leverage ratio buffer of 0.35%. The proposed calibration is expected to add around an aggregate 0.5 percentage points of risk-weighted assets to equity requirements of the system in aggregate.

 

The PRA will be responsible for applying the framework and will have ultimate discretion over which firms must hold the buffer and its specific size. This framework will apply to NatWest given its size.

 

*unaudited

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Financial review Capital and risk management

 

Capital management* continued 

Ring-fencing

·         The UK Financial Services (Banking Reform) Act passed into UK law in December 2013 implementing recommendations of the ICB. The PRA is in the process of finalising its rules with respect to ring-fencing.

·         The PRA is consulting on the need for firms to hold capital resources equivalent to at least 25% of annual fixed overheads in respect of critical services to facilitate operational continuity in resolution.

 

Measurement

Capital, RWAs and leverage ratios

Under Capital Requirements Regulation (CRR), regulators within the European Union monitor capital and leverage on a legal entity basis, with local transitional arrangements on the phasing in of end-point CRR. The capital resources, leverage and RWAs based on the relevant transitional basis for the significant legal entities within the Group are set out below.

 

  

2015 

  

2014 (1)

Capital (2)

NatWest

UBIL

  

NatWest

UBIL

£bn

£bn

  

£bn

£bn

CET1

7.2 

5.7 

  

9.5 

4.2 

Tier 1

7.2 

5.7 

  

9.6 

4.2 

Total

12.1 

6.2 

  

14.8 

4.7 

  

  

  

  

  

  

RWAs

  

  

  

  

  

Credit risk

  

  

  

  

  

  - non-counterparty

54.4 

17.8 

  

61.7 

22.5 

  - counterparty

0.4 

0.3 

  

0.6 

0.4 

Market risk

0.6 

— 

  

0.5 

— 

Operational risk

6.4 

1.1 

  

5.5 

1.3 

  

61.8 

19.2 

  

68.3 

24.2 

  

  

  

  

  

  

Risk asset ratios

  

CET1

11.6 

29.6 

  

13.9 

17.3 

Tier 1

11.6 

29.6 

  

14.0 

17.3 

Total

19.6 

32.1 

  

21.7 

19.5 

  

  

  

  

  

  

Leverage

  

  

  

  

  

Tier 1 capital (£bn)

7.2 

5.7 

  

  

  

Exposure (£bn)

153.1 

23.7 

  

  

  

Leverage ratio (%)

4.7 

24.0 

  

  

  

 

Notes:

(1)    Capital and leverage ratios have not been impacted by the pension accounting policy change.

(2)    Capital Requirements Regulation (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 with the exception of unrealised gains on available-for-sale (AFS) securities which has been included from 2015 under the PRA transitional basis.

(3)    UBIL 2014 profit (unverified for regulatory reporting purposes in 2014) is excluded from 2014 but included in 2015.

 

General:

In accordance with the PRA’s Policy Statement PS7/2013 issued in December 2013 on the implementation of CRD IV, all regulatory adjustments and deduction to CET1 have been applied in full (end-point CRR) with the exception of unrealised gains on AFS securities which will be included from 2015 (PRA transitional basis).

 

From 1 January 2015, RBS must meet at least 56% of its Pillar 2A capital requirement with CET1 capital and the balance with Additional Tier 1 and/or Tier 2 capital. The Pillar 2A capital requirement is the additional capital that RBS must hold, in addition to meeting its Pillar 1 requirements in order to comply with the PRA’s overall financial adequacy rule.

 

Measures in relation to end-point CRR basis, including RWAs, are based on the current interpretation, expectations, and understanding, of the CRR requirements, as well as further regulatory clarity and implementation guidance from the UK and EU authorities (end-point CRR basis). The actual end-point CRR impact may differ when the final technical standards are interpreted and adopted.

 

Capital base:

(1)    Own funds are based on shareholders’ equity.

(2)    The adjustment arising from the application of the prudent valuation requirements to all assets measured at fair value, has been included in full. The prudential valuation adjustment relating to assets under advanced internal ratings approach has been included in impairment provisions in the determination of the deduction from expected losses.

(3)    Where the deductions from AT1 capital exceed AT1 capital, the excess is deducted from CET1 capital. The excess of AT1 deductions over AT1 capital in year one of transition is due to the application of the current rules to the transitional amounts.

(4)    Insignificant investments in equities of other financial entities (net): long cash equity positions are considered to have matched maturity with synthetic short positions if the long position is held for hedging purposes and sufficient liquidity exists in the relevant market. All the trades are managed and monitored together within the equities business.

(5)    Based on our current interpretations of the Commission Delegated Regulation issued in December 2013 on credit risk adjustments, standardised latent provision has been reclassified to specific provision and is not included in Tier 2 capital.

 

Risk-weighted assets (RWAs):

(1)    Current securitisation positions are shown as risk-weighted at 1,250%.

(2)    RWA uplifts include the impact of credit valuation adjustments and asset valuation correlation on banks and central counterparties.

(3)    RWAs reflect implementation of the full internal model method suite, and include methodology changes that took effect immediately on CRR implementation.

(4)    Non-financial counterparties and sovereigns that meet the eligibility criteria under CRR are exempt from the credit valuation adjustments volatility charges.

(5)    The CRR final text includes a reduction in the risk-weight relating to small and medium-sized enterprises.

 

*unaudited

 

 

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Financial review Capital and risk management

 

 

Capital management* continued

  

  

  

  

  

Capital resources

  

  

  

  

  

  

2015 

  

2014 

  

NatWest

UBIL

  

NatWest

UBIL

  

£m

£m

  

£m

£m

Shareholders’ equity

11,282 

5,753 

  

13,312 

5,081 

  

  

  

  

  

  

Regulatory adjustments and deductions

  

  

  

  

  

 Defined benefit pension fund adjustment

— 

142 

  

— 

320 

 Cash flow hedging reserve

— 

  

— 

 Deferred tax assets

(622)

(210)

  

(742)

— 

 Prudential valuation adjustments

(1)

— 

  

(1)

— 

 Goodwill and other intangible assets

(498)

— 

  

(530)

— 

 Expected losses less impairments

(703)

(22)

  

(785)

(3)

 Instruments of financial sector entities where the institution has a significant investment

(2,413)

— 

  

(2,318)

— 

 Significant investments in excess of secondary capital

(424)

— 

  

— 

— 

 Other regulatory adjustments

532 

27 

  

529 

(1,217)

  

(4,128)

(63)

  

(3,844)

(900)

  

  

  

  

  

  

CET1 capital

7,154 

5,690 

  

9,468 

4,181 

  

  

  

  

  

  

Additional Tier 1 (AT1) capital

  

  

  

  

  

 Qualifying instruments and related share premium subject to phase out

204 

— 

  

234 

— 

  

  

  

  

  

  

Tier 1 deductions

  

  

  

  

  

 Instruments of financial sector entities where the institution has a significant investment

(187)

— 

  

(140)

— 

  

  

  

  

  

  

  

  

  

  

  

  

Tier 1 capital

7,171 

5,690 

  

9,562 

4,181 

 

Qualifying Tier 2 capital

  

  

  

  

  

 Qualifying instruments and related share premium

5,058 

492 

  

5,380 

528 

  

  

  

  

  

  

Tier 2 deductions

  

  

  

  

  

 Instruments of financial sector entities where the institution has a significant investment

(92)

— 

  

(102)

— 

 Other regulatory adjustments

— 

(7)

  

(8)

(5)

  

(92)

(7)

  

(110)

(5)

  

  

  

  

  

  

Tier 2 capital

4,966 

485 

  

5,270 

523 

  

  

  

  

  

  

Total regulatory capital

12,137 

6,175 

  

14,832 

4,704 

Note:

(1) Regulatory capital for 2014 has not been impacted by the change in accounting policy for pensions.

 

Leverage exposure

  

  

The leverage exposure is based on the CRR delegated act.

  

  

  

2015 

NatWest

UBIL

Leverage

£bn

£bn

Derivatives

2.1 

0.7 

Loans and advances

207.6 

19.9 

Other assets

10.7 

2.2 

  

  

  

Total assets

220.4 

22.8 

Derivatives

  

  

  - netting

(1.4)

(0.1) 

  - potential future exposures

0.2 

0.2 

Undrawn commitments

9.9 

1.0 

Regulatory deductions and other adjustments

(5.2)

(0.2)

Exclusion of intra-group exposures between Core UK group

(70.8)

— 

  

  

  

Leverage exposure

153.1 

23.7 

*unaudited

  

  

 

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Financial review Capital and risk management

 

Liquidity and funding risk

Definition

Liquidity risk is the risk that the Group is unable to meet its financial obligations, including financing wholesale maturities or customer deposit withdrawals, as and when they fall due.

 

All the quantitative disclosures in this section are audited.

 

Sources of funding and liquidity

The risk arises through the maturity transformation role that banks perform. It is dependent on Group specific factors such as maturity profile, composition of sources and uses of funding, the quality and size of the liquidity portfolio as well as broader market factors, such as wholesale market conditions alongside depositor and investor behaviour.

 

The Group’s primary funding source is its customer deposit base, primarily built through its retail and commercial franchises in the UK and Ireland. These deposits form a stable base which fully funds the Group’s customer lending activities. As one of the primary operating entities of the RBS Group, the Group’s liquidity risk is monitored and managed centrally, on a fully integrated basis as part of the PRA regulated UK Domestic Liquidity Subgroup (UK DoLSub).

 

Complementary to its deposit funding, the Group maintains access to various wholesale markets for funding, on both a public and private basis, across a range of currencies and maturities. The RBS Group has set policies for the prudent use of wholesale funding, as part of its wider liquidity policies.

 

The RBS Group accesses the wholesale funding markets directly or through its main operating subsidiaries via established funding programmes. The use of different entities to access the market from time to time allows the Group to further diversify its funding mix and in certain limited circumstances demonstrate to regulators that specific operating subsidiaries enjoy market access in their own right.

 

The Group may access various funding facilities offered by central banks from time to time. The use of such facilities can be both part of a wider strategic objective to support initiatives to help stimulate economic growth or as part of the broader liquidity management and funding strategy. Overall usage and repayment of available central bank facilities will fit within the overall liquidity risk appetite and concentration limits.

 

Overview and key developments

·         The Group’s liquidity portfolio at 31 December 2015 was £48.0 billion (carrying value - £74.5 billion), compared with £38.0 billion (carrying value - £62.1 billion) in 2014. The liquidity portfolio is largely secondary liquidity, being assets eligible for discounting at central banks. £64.0 billion by carrying value comprised UK mortgage lending, an increase from £51.9 billion at the end of 2014 reflecting the growth strategy in UK PBB.

·         The Group includes three of the UK DoLSub centrally managed liquidity portfolios, being National Westminster Bank Plc, Coutts and Co and Ulster Bank Limited. The UK DoLSub component of the Group’s liquidity portfolio represented £43.0 billion (2014 - £34.0 billion) with the remainder being Ulster Bank Ireland Limited.

·         The customer loan:deposit ratio was broadly unchanged at  76% (2014 - 75%) as reduction in Capital Resolution was broadly offset by mortgage growth in UK PBB. Third party customer loans, increased by £5 billion to £167 billion reflecting UK PBB lending growth and third party customer deposits increased by £2 billion to £220 billion mainly within UK PBB and Commercial Banking.

·         NatWest redeemed £387 million of Tier 2 subordinated debt during 2015.

 

Policy, framework and governance

Internal liquidity policies are designed to ensure that the Group:

 

·         Has a clearly stated liquidity risk tolerance: appetite for liquidity risk is set by the RBS Group Board as a percentage of the Individual Liquidity Adequacy Assessment (ILAA) stressed outflows, and liquidity position is monitored against this risk tolerance on a daily basis. In setting risk limits the Board considers the nature of the RBS Group’s activities, overall risk appetite, market best practice and regulatory compliance.

·         Has in place strategies, polices and practices to ensure that the RBS Group maintains sufficient liquidity: the risk management framework determines the sources of liquidity risk and the steps that can be taken when these risks exceed certain actively monitored limits. These actions include when and how to use the liquid asset portfolio, and what other adjustments to the balance sheet should be undertaken to manage these risks within the RBS Group’s risk appetite. 

·         Incorporates liquidity costs, benefits and risks in product pricing and performance management: The Group uses internal funds transfer pricing to ensure that these costs are reflected in the measurement of business performance, and to correctly incentivise businesses to source the most appropriate mix of funding.

 

The RBS Group Asset and Liability Management Committee (ALCo) sets and reviews the liquidity risk management framework and limits within the risk appetite set by the Board. ALCo, and by delegation the ALCo Technical Committee, oversees the implementation of liquidity management across the Group.

 

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Financial review Capital and risk management

 

Liquidity and funding risk  continued  

Regulatory oversight and liquidity framework*

The Group operates across multiple jurisdictions and is subject to a number of regulatory regimes.

 

The principal regulator, the Prudential Regulation Authority (PRA), has a comprehensive set of liquidity regulations which were revised in 2015 to replace the existing BIPRU 12 regime with the CRD IV liquidity regime in the UK. To comply with the PRA regulatory framework, the RBS Group undertakes the following:

 

·         An annual exercise to complete the Internal Liquidity Adequacy Assessment Process (ILAAP); and

·         An annual Liquidity Supervisory Review and Evaluation Process (L-SREP) with the PRA, that involves a comprehensive review of the RBS ILAAP, liquidity policies and risk management framework. This results in the settings of the Individual Liquidity Guidance, which influences the size and overall composition of the liquidity portfolio.

 

On 1 October 2015 the LCR became the PRA’s primary regulatory standard for liquidity, replacing the previous BIPRU 12 regime. LCR is being introduced on a phased basis and UK banks are initially required to maintain a minimum of 80% of LCR, rising to 100% by 1 January 2018.

 

The Basel Committee on Banking Supervision (BCBS) published its final recommendations for implementation of the NSFR in October 2014, proposing an implementation date of 1 January 2018, by which time banks are expected to meet an NSFR ratio of 100% from this point onwards. The EC has stated that it shall, if appropriate, submit a legislative proposal to the European Parliament by the end of 2016 for implementing the NSFR in the EU. In the meantime, RBS Group uses the definitions from the BCBS guidelines, and its own internal interpretations, to calculate the NSFR.

 

Measurement, monitoring and contingency planning

In implementing the liquidity risk management framework, a suite of tools are used to monitor, limit and stress test the risks within the balance sheet. The limits control the amount and composition of funding sources, asset and liability mismatches and funding concentrations, in addition to the level of liquidity risk.

 

Liquidity risks are reviewed at a significant legal entity level daily, and at a business level monthly, with performance reported to ALCos at least monthly. Any breach of internal metric limits will set in motion a series of actions and escalations that could lead to activation of the Contingency Funding Plan (CFP).

 

The RBS Group maintains a CFP, which forms the basis of analysis and management actions to be undertaken in a liquidity stress. The CFP is linked to stress test results and forms the foundation for liquidity risk limits. The CFP sets out the circumstances under which the plan would be invoked; this includes material worsening of liquidity condition indicators which are reported to senior management daily. It also prescribes a communications plan, roles and responsibilities, as well as potential management actions to take in response to various levels of liquidity stress. On invocation of the CFP, the Contingent Liquidity Team would be convened to identify the likely impact of the stress event and determine the appropriate management response.

 

Stress testing*

Under the liquidity risk management framework the RBS Group  maintains the ILAA, a component of which is an assessment of net stressed liquidity outflows. These liquidity stress tests apply scenario-based behavioural and contractual assumptions to cash inflows and outflows under the worst of three severe stress scenarios, as prescribed by the PRA. These are a market-wide stress, an idiosyncratic stress and a combination of both.

 

A stress event can occur when either firm-specific or market-wide factors lead to depositors and investors withdrawing or not renewing funding on maturity. This could be caused by many factors including fears over the viability of the firm. Additionally, liquidity stress can be brought on by customers choosing to draw down on loan agreements and facilities.

 

Simulated liquidity stress testing is performed at least monthly for each business as well as the major operating subsidiaries in order to evaluate the strength of the RBS Group’s liquidity position. The stressed outflows are measured over certain time periods which extend from two weeks to three months. The RBS Group is expected to be able to withstand stressed outflows through its own resources (primarily through the use of the liquidity portfolio) without having to resort to extraordinary central bank or governmental support.

 

 

 

*unaudited

35 

 


 

 

 

 

Financial review Capital and risk management

 

Liquidity and funding risk  continued  

Stress tests are designed to examine the impact of a variety of firm-specific and market-wide scenarios on the future adequacy of the liquidity reserves. Stress test scenarios are designed to take into account the RBS Group’s experience during the financial crisis, recent market conditions and events. These scenarios can be run at any time in response to the emergence of firm-specific or market-wide risks that could have a material impact on the RBS Group’s liquidity position. In the past these have included credit rating changes and political and economic conditions changing in particular countries.

 

The RBS Group’s liquidity risk appetite is measured by reference to the liquidity portfolio as a percentage of net stressed ILAA outflows.

 

Liquidity risk

Liquidity portfolio

Liquidity risks are mitigated by a centrally managed liquidity portfolio. The size of the portfolio is determined under the liquidity risk management framework with reference to the RBS Group’s liquidity risk appetite.

 

The majority of the portfolio is centrally managed by RBS Group Treasury, ring-fenced from the CIB trading book, and is the ultimate responsibility of the RBS Group Treasurer. This portfolio is held in the PRA regulated UK DoLSub comprising RBS Group’s five licensed deposit taking UK banks: The Royal Bank of Scotland plc, National Westminster Bank Plc, Ulster Bank Limited, Coutts & Co and Adam & Company.

 

Ulster Bank Ireland Limited, a significant operating subsidiary of the Group, holds locally managed portfolios that comply with local regulations that may differ from PRA rules. These portfolios are the responsibility of the local Treasurer who reports to the RBS Group Treasurer.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*unaudited

 

36 

 


 

 

 

 

Financial review Capital and risk management

 

Liquidity and funding risk  continued 

Funding risk

The composition of the Group’s balance sheet is a function of the broad array of product offerings and diverse markets served by its core businesses. The structural composition of the balance sheet is augmented as needed through active management of both asset and liability portfolios. The objective of these activities is to optimise the liquidity profile, while ensuring adequate coverage of all cash requirements under extreme stress conditions.

 

Funding sources

  

  

  

  

  

  

  

The table below shows the Group’s principal funding sources excluding repurchase agreements (repos).

  

  

  

  

  

  

  

  

  

2015

  

2014

  

  

Amounts due

  

  

  

Amounts due

  

  

  

to holding

  

  

  

to holding

  

  

  

company

  

  

  

company

  

  

Third

and fellow

  

  

Third

and fellow

  

  

Party

subsidiaries

Total

  

Party

subsidiaries

Total

  

£m

£m

£m

  

£m

£m

£m

Deposits by banks

  

  

  

  

  

  

  

  derivative cash collateral

33 

— 

33 

  

35 

— 

35 

  other deposits

3,473 

17,609 

21,082 

  

3,333 

20,128 

23,461 

  

3,506 

17,609 

21,115 

  

3,368 

20,128 

23,496 

Debt securities in issue

  

  

  

  

  

  

  

  certificates of deposit (CDs)

— 

  

10 

— 

10 

  securitisations

1,472 

— 

1,472 

  

1,697 

— 

1,697 

  

1,473 

— 

1,473 

  

1,707 

— 

1,707 

  

  

  

  

  

  

  

  

Subordinated liabilities

1,395 

5,621 

7,016 

  

1,780 

5,656 

7,436 

Notes issued

2,868 

5,621 

8,489 

  

3,487 

5,656 

9,143 

Wholesale funding

6,374 

23,230 

29,604 

  

6,855 

25,784 

32,639 

Customer deposits

  

  

  

  

  

  

  

  cash collateral

19 

— 

19 

  

12 

— 

12 

  other deposits

216,912 

7,752 

224,664 

  

217,544 

13,112 

230,656 

Total customer deposits

216,931 

7,752 

224,683 

  

217,556 

13,112 

230,668 

Total funding excluding disposal groups

223,305 

30,982 

254,287 

  

224,411 

38,896 

263,307 

Disposal group funding

2,623 

— 

2,623 

  

— 

— 

— 

Total funding  

225,928 

30,982 

256,910 

  

224,411 

38,896 

263,307 

 

Notes issued

  

  

  

  

  

  

  

  

The table below shows the Group’s debt securities in issue and subordinated liabilities by residual maturity.

  

  

  

  

  

  

  

  

  

  

  

Subordinated liabilities

  

Total

  

Debt securities

  

Amounts due to

  

  

  

Amounts due to

  

  

 in issue

Third party

holding company

Total

  

Third party

holding company

Total

2015 

£m

£m

£m

£m

  

£m

£m

£m

Less than 1 year

14 

14 

28 

  

15 

14 

29 

1-3 years

— 

— 

564 

564 

  

— 

564 

564 

3-5 years

— 

— 

1,232 

1,232 

  

— 

1,232 

1,232 

More than 5 years

1,472 

1,381 

3,811 

5,192 

  

2,853 

3,811 

6,664 

  

1,473 

1,395 

5,621 

7,016 

  

2,868 

5,621 

8,489 

  

  

  

  

  

  

  

  

  

2014 

  

  

  

  

  

  

  

  

Less than 1 year

10 

418 

14 

432 

  

428 

14 

442 

1-3 years

— 

— 

311 

311 

  

— 

311 

311 

3-5 years

— 

— 

1,356 

1,356 

  

— 

1,356 

1,356 

More than 5 years

1,697 

1,362 

3,975 

5,337 

  

3,059 

3,975 

7,034 

  

1,707 

1,780 

5,656 

7,436 

  

3,487 

5,656 

9,143 

 

37 

 


 

 

 

 

Financial review Capital and risk management

 

 

Liquidity and funding risk  continued 

  

  

  

  

  

  

  

  

Deposits and repos

  

  

  

  

  

  

  

  

  

The table below shows the composition of the Group’s deposits and repos.

  

  

  

  

  

  

  

  

  

  

  

  

Deposits

  

  

  

Deposits and repos

  

  

Amounts due

  

  

  

  

  

Amounts due

  

  

  

to holding

  

  

  

  

  

to holding

  

  

  

company

  

  

  

  

  

company

  

  

  

and fellow

  

  

Repos

  

  

and fellow

  

  

Third party

subsidiaries

Total

  

Third party

  

Third party

subsidiaries

Total

2015 

£m

£m

£m

  

£m

  

£m

£m

£m

Financial institutions

  

  

  

  

  

  

  

  

  

 - central and other banks

3,506 

17,609 

21,115 

  

3,476 

  

6,982 

17,609 

24,591 

 - other financial institutions

13,521 

7,402 

20,923 

  

5,124 

  

18,645 

7,402 

26,047 

Personal and corporate deposits

203,410 

350 

203,760 

  

1,854 

  

205,264 

350 

205,614 

Total excluding disposal groups

220,437 

25,361 

245,798 

  

10,454 

  

230,891 

25,361 

256,252 

Disposal groups

2,623 

— 

2,623 

  

— 

  

2,623 

— 

2,623 

  

223,060 

25,361 

248,421 

  

10,454 

  

233,514 

25,361 

258,875 

  

  

  

  

  

  

  

  

  

  

2014 

  

  

  

  

  

  

  

  

  

Financial institutions

  

  

  

  

  

  

  

  

  

 - central and other banks

3,368 

20,128 

23,496 

  

2,736 

  

6,104 

20,128 

26,232 

 - other financial institutions

13,566 

13,112 

26,678 

  

3,659 

  

17,225 

13,112 

30,337 

Personal and corporate deposits

203,990 

— 

203,990 

  

— 

  

203,990 

— 

203,990 

  

220,924 

33,240 

254,164 

  

6,395 

  

227,319 

33,240 

260,559 

  

  

  

  

  

  

  

  

  

  

 

Reverse repos at 31 December 2015 were £10.7 billion (2014 - £8.7 billion). Fair value of securities received as collateral for reverse repos was £10.6 billion (2014 - £8.6 billion), of which £10.6 billion (2014 - £7.0 billion) had been rehypothecated for the Group’s own transactions, in line with normal market practice.

 

  

  

  

  

  

Loan:deposit ratios and funding surplus

  

  

  

  

The table below shows third party customer loans, deposits, loan:deposit ratios (LDR) and funding surplus, excluding intra RBS Group balances.

  

  

  

  

  

  

Loans (1)