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Kevin W Vaughn
Accounting Branch Chief
Division of Corporation Finance
US Securities and Exchange Commission
100 F Street, N E
Washington DC 20549
United States
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Group Chief Accountant's
Level 12
280 Bishopsgate
London EC2M 4RB
Telephone: 020 7672 2660
Facsimile: 020 7672 1424
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1.
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We note your response to prior comment 1 in our letter dated September 10, 2013. Please tell us and expand your accounting policies and related disclosures beginning with your 2013 Form 20-F to include clarifying information that addresses the following items related to your retail loans in forbearance:
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Quantify the types of retail forbearance activities that have resulted in a reduction of contractually required cash flows, such as interest rate reductions or principal forgiveness. For example, consider expanding your tabular disclosure on page 136 to clearly indicate which categories, and the amount within each category, resulted in the borrower receiving a reduction in contractually required cash flows.
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1/5
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The Royal Bank of Scotland Group plc
Registered in Scotland No 45551
Registered Office: 36 St Andrew Square,
Edinburgh EH2 2YB
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Disclose your re-aging policies for each loan category. To the extent your policy varies between your loan portfolios (e.g., Ulster Bank, UK Retail, etc.) and/or based on loan status or classification (e.g., performing, non-performing, impaired, REIL, etc.) at the time of forbearance, please specifically state that fact and clearly describe your re-aging policy for each fact pattern.
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Clarify your policy for both including loans in the REIL categorization and for removing loans from the REIL categorization. To the extent your policy varies between your loan portfolios (e.g., Ulster Bank, UK Retail, etc.) and/or based on loan status or classification (e.g., performing, non-performing, impaired, etc.) at the time of forbearance, please specifically state that fact and clearly describe your policy for each fact pattern.
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When 90 days past due.
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If the forbearance arrangement is a payment concession that involves a reduction in contractually required cash flows ie the forgiveness of interest. Such loans are classified as impaired.
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When arrears are capitalised, a loan is transferred to the performing book once the borrower has met the revised payment terms for at least six months and is expected to continue to do so.
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A small portfolio of loans past due 90 days are managed by UK Retail’s collections function. Loans in this portfolio may also be transferred to the performing book if the customer makes payments that reduce arrears below 90 days.
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If a customer makes payments that reduce loan arrears below 90 days, the loan will be transferred to the performing book.
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Where a customer meets the original payment terms for six months and is expected to continue to do so, capitalisation may be agreed; in these cases the loan is transferred to the performing book.
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2/5
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The Royal Bank of Scotland Group plc
Registered in Scotland No 45551
Registered Office: 36 St Andrew Square,
Edinburgh EH2 2YB
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Clarify which loans in forbearance are evaluated under your latent loss provision methodology and which loans are evaluated under either a collective or individually assessed provision methodology. To the extent that this methodology further varies based on loan status or classification (e.g., performing, non-performing, impaired, REIL, reduction of contractual cash flows given, etc.), please specifically state that fact, and clearly describe your provision methodology for each fact pattern.
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Performing loans are subject to a latent loss methodology but in a separate risk pool for the duration of the forbearance treatment.
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Non-performing loans not past due 90 days where a reduction in contractually required cash flows i.e. the forgiveness of interest, has been agreed and no capitalisation of arrears has occurred, are subject to the latent loss methodology in a separate risk pool for the duration of the forbearance treatment .
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All other non-performing loans are subject to a collectively assessed provision methodology.
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In UK Retail: performing loans are subject to a latent loss provision but form a separate risk pool for 24 months. The higher of the observed default rates and probabilities of default (PDs) are used in the latent provisioning calculations for these loans to ensure that appropriate provision is held. Furthermore, for these portfolios the latent provision incorporates extended emergence periods. Once such loans are no longer separately identified, the use of account level PDs refreshed monthly in the latent provision methodology captures the underlying credit risk without a material time lag. Non-performing loans are subject to a collectively assessed provision methodology.
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In Ulster Bank: performing loans are subject to a latent loss provision but form a separate risk pool for the period of forbearance. The performance of forbearance arrangements is analysed and breakage (a single missed payment) rates computed. The higher of the breakage rate and the modelled PD for this separate risk pool is used when calculating the latent provision. Furthermore, for this portfolio the latent provision incorporates an extended emergence period. Non-performing loans are subject to a collectively assessed provision methodology. However, loans not 90 days past due which are subject to forbearance arrangements
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3/5
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The Royal Bank of Scotland Group plc
Registered in Scotland No 45551
Registered Office: 36 St Andrew Square,
Edinburgh EH2 2YB
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involving a reduction in contractually required cash flows ie the forgiveness of interest and whose arrears have not been capitalised are classified as non-performing. They form a separate risk pool for the period of forbearance and the related loan loss provision is computed using Ulster’s latent loss provision methodology.
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On a related note, specifically describe your provisioning methodology used for loans granted forbearance that resulted in a reduction of future contractual cash flows to a performing Ulster Bank loan customer, including whether you record both a collective / individual allowance for the reduction in future contractual cash flows granted as part of the forbearance (similar to a “charge-off”), as well as a latent loss provision.
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Confirm in your response that you are reviewing the accounting treatment for all of your forbearance arrangements in light of the European Banking Authority’s (EBA) guidance issued in October 2013, and confirm that you will provide disclosures clarifying any policy changes you make in response to your review.
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4/5
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The Royal Bank of Scotland Group plc
Registered in Scotland No 45551
Registered Office: 36 St Andrew Square,
Edinburgh EH2 2YB
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5/5
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The Royal Bank of Scotland Group plc
Registered in Scotland No 45551
Registered Office: 36 St Andrew Square,
Edinburgh EH2 2YB
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