SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
FORM
6-K
Report of Foreign
Private Issuer
Pursuant to Rule
13a-16 or 15d-16 of
the Securities
Exchange Act of 1934
September
30, 2009
The
Royal Bank of Scotland Group plc
Gogarburn
PO Box
1000
Edinburgh EH12
1HQ
Scotland
United
Kingdom
(Address of
principal executive offices)
Indicate by check
mark whether the registrant files or will file annual reports under cover of
Form 20-F or Form 40-F.
Form 20-F X Form
40-F
Indicate by check
mark if the registrant is submitting the Form 6-K in paper as permitted by
Regulation S-T Rule 101(b)(1):___
Indicate by check
mark if the registrant is submitting the Form 6-K in paper as permitted by
Regulation S-T Rule 101(b)(7):___
Indicate by check
mark whether the registrant by furnishing the information contained in this Form
is also thereby furnishing the information to the Commission pursuant to Rule
12g3-2(b) under the Securities Exchange Act of 1934.
Yes No
X
If "Yes" is marked,
indicate below the file number assigned to
the registrant in
connection with Rule 12g3-2(b): 82-
This report on Form
6-K shall be deemed incorporated by reference in each of The Royal Bank of
Scotland Group plc's Registration Statement on Form F-3 (File No. 333-123972)
and Registration Statement on Form F-4 (File No. 333-144752) and to be a part
thereof from the date on which this report is furnished, to the extent not
superseded by documents or reports subsequently filed or
furnished.
Business
Review
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2
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Presentation
of information
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3
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Forward-looking
statements
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4
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Description
of business
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6
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Recent developments |
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13
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Risk
factors
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21
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Key
financials
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21
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Summary
consolidated income statement
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24
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Analysis of
results
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34
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Divisional
performance
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53
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Consolidated
balance sheet
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55
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Cash
flow
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56
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Capital
resources
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57
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Risk, capital
and liquidity management
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In this
document, and unless specified otherwise, the term ‘company’ means The Royal
Bank of Scotland Group plc, ‘RBS’, 'RBS Group', or the ‘Group’ means
the company and its subsidiaries, ‘the Royal Bank’ means The Royal Bank
of Scotland plc and ‘NatWest’ means National Westminster Bank Plc.
The company
publishes its financial statements in pounds sterling (‘£’ or ‘sterling’). The
abbreviations ‘£m’ and ‘£bn’ represent millions and thousands of millions of
pounds sterling, respectively, and references to ‘pence’ represent pence in the
United Kingdom (‘UK’). Reference to ‘dollars’ or ‘$’ are to United States of
America (‘US’) dollars. The abbreviations ‘$m’ and ‘$bn’ represent millions and
thousands of millions of dollars, respectively, and references to ‘cents’
represent cents in the US. The abbreviation ‘€’ represents the ‘euro’, the
European single currency, and the abbreviations ‘€m’ and ‘€bn’ represent
millions and thousands of millions of euros, respectively.
Certain information
in this report is presented separately for domestic and foreign activities.
Domestic activities primarily consist of the UK domestic transactions of the
Group. Foreign activities comprise the Group’s transactions conducted through
those offices in the UK specifically organised to service international banking
transactions and transactions conducted through offices outside the
UK.
The geographic
analysis in the average balance sheet and interest rates, changes in net
interest income and average interest rates, yields, spreads and margins in this
report have been compiled on the basis of location of office – UK and overseas.
Management believes that this presentation provides more useful information on
the Group’s yields, spreads and margins of the Group’s activities than would be
provided by presentation on the basis of the domestic and foreign activities
analysis used elsewhere in this report as it more closely reflects the basis on
which the Group is managed. ‘UK’ in this context includes domestic transactions
and transactions conducted through the offices in the UK which service
international banking transactions.
The results, assets
and liabilities of individual business units are classified as trading or
non-trading based on their predominant activity. Although this method may result
in some non-trading activity being classified as trading, and vice versa, the
Group believes that any resulting misclassification is not
material.
International
Financial Reporting Standards
As
required by the Companies Act 1985 and Article 4 of the European Union IAS
Regulation, the consolidated financial statements of the Group are prepared in
accordance with International Financial Reporting Standards issued by the
International Accounting Standards Board (IASB) and interpretations issued by
the International Financial Reporting Interpretations Committee of the IASB
(together ‘IFRS’) as adopted by the European Union. It also complies with IFRS
as issued by the IASB. On implementation of IFRS on 1 January 2005, the Group
took advantage of the option in IFRS 1 ‘First-time Adoption of International
Financial Reporting Standards’ to implement IAS 39 ‘Financial Instruments:
Recognition and Measurement’, IAS 32 ‘Financial Instruments: Disclosure and
Presentation’ and IFRS 4 ‘Insurance Contracts’ from 1 January 2005 without
restating its 2004 income statement and balance sheet. The date of transition to
IFRS for the Group and the company and the date of their opening IFRS balance
sheets was 1 January 2004.
Acquisition
of ABN AMRO
On
17 October 2007, RFS Holdings B.V. (‘RFS Holdings’), a company jointly owned by
RBS, Fortis Bank Nederland (Holding) N.V. (‘Fortis’) and Banco Santander S.A.
(‘Santander’) (together the ‘consortium members’) and controlled by RBS,
completed the acquisition of ABN AMRO Holding N.V. (‘ABN AMRO’).
On
3 October 2008, the State of the Netherlands acquired Fortis Bank Nederland
(Holding) N.V. including the Fortis participation in RFS Holdings that
represents the acquired activities of ABN AMRO and their participation in Dutch
insurance activities.
RFS Holdings is
implementing an orderly separation of the business units of ABN AMRO with RBS
retaining the following ABN AMRO business units:
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·
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Continuing
businesses of Business Unit North
America;
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·
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Business Unit
Global Clients and wholesale clients in the Netherlands (including former
Dutch wholesale clients) and Latin America (excluding
Brazil);
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·
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Business Unit
Asia (excluding Saudi Hollandi);
and
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·
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Business Unit
Europe (excluding Antonveneta).
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Certain other
assets will continue to be shared by the consortium members.
Statutory
results
RFS Holdings is
jointly owned by the consortium members. It is controlled by the company and is
therefore fully consolidated in its financial statements. Consequently, the
statutory results of the Group for the year ended 31 December 2007 and 2008
include the results of ABN AMRO for 76 days and the full year respectively. The
interests of Fortis, and its successor the State of the Netherlands, and
Santander, in RFS Holdings are included in minority interests.
2
Business review
continued
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’,
‘believes’, ‘should’, ‘intend’, ‘plan’, ‘probability’, ‘risk’, ‘Value-at-Risk
(VaR)’, ‘target’, ‘goal’, ‘objective’, ‘will’, ‘endeavour’, ‘outlook’,
‘optimistic’, ‘prospects’ and similar expressions or variations on such
expressions.
In
particular, this document includes forward-looking statements relating, but not
limited, to the Group’s potential exposures to various types of market risks,
such as interest rate risk, foreign exchange rate risk and commodity and equity price risk. Such
statements are subject to risks and uncertainties. For example, certain of the
market risk disclosures are dependent on choices about 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 cause actual results to differ materially from those estimated by the
forward-looking statements contained in this document include, but are not
limited to: general economic conditions in the UK and in other countries in
which the Group has significant business activities or investments, including
the United States; the monetary and interest rate policies of the Bank of
England, the Board of Governors of the Federal Reserve System and other G7
central banks; inflation; deflation; unanticipated turbulence in interest rates,
foreign currency exchange rates, commodity prices and equity prices; changes in
UK and foreign laws, regulations and taxes; changes in competition and pricing
environments; natural and other disasters; the inability to hedge certain risks
economically; the adequacy of loss reserves; acquisitions or restructurings;
technological changes; changes in consumer spending and saving habits; and the
success of the Group in managing the risks involved in the
foregoing.
The forward-looking
statements contained in this document speak only as of the date of this report,
and the Group does not undertake to update any forward-looking statement to
reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
For a further
discussion of certain risks faced by the Group, see Risk factors on
pages 13 to 20.
Explanatory
note
The company is
filing this Form 6-K to restate certain segmental disclosures that were made in
the company’s annual report on Form 20-F for the year ended 31 December 2008,
filed with the Securities and Exchange Commission on 29 April 2009 (the “2008
Form 20-F”) to ensure consistency and comparability with the Group's new
organisational structure, to reflect the retrospective restatement of the
results for 2008 as a result of the adoption of certain amendments in IFRS 2 and
to include guarantor information under rule 3-10 of Regulation S-X.
The Group presented
segmental disclosures that reflect the new organisational structure in its
interim results for 2009, which were filed with the Securities and Exchange
Commission on a separate Form 6-K on 30 September 2009. To facilitate comparison
with these interim results, the segmental disclosures included in the 2008 Form
20-F have been restated in this Form 6-K.
Accordingly, the
following pages that correspond to the 2008 Form 20-F have been restated to
reflect the new organisational structure, the retrospective restatement relating
to IFRS 2 and to include guarantor information.
Item 3: Key
Information
Pages 254 to 255
(Financial summary)
Item 4: Information
on the Company
Pages 4 – 5
(Business review)
Page 127
(Directors' report)
Pages 245 – 248
(Note 38 - Segmental analysis)
Item 5: Operating
and Financial Review and Prospects
Pages 21, 22, 28,
30, 32, 33 to 52, 54 and 55 (Business review)
Item 6: Directors,
Senior Management and Employees
Pages 174 and 175
(Note 3 - Operating expenses and headcount)
Item 8: Financial
Information and Item 18: Financial Statements
Pages 156 to 157
(Auditors report)
Page 158
(Consolidated income statement)
Page 160
(SORIE)
Page 161 (Cash flow
statement)
Pages 162, 169 and
172 (Accounting policies - Share based payment)
Pages 174 – 175
(Note 2 - Operating expenses)
Page 180 Page (Note
6 – Taxation)
Page 181 (Note 10 –
EPS)
Page 231 (Note 28 -
Owners' equity)
Page 240 (Note 33 -
Cash flow)
Pages 245 – 248
(Note 38 - Segmental analysis)
Page 252 (Note 43 -
Consolidating financial information)
Item 11:
Quantitative and Qualitative Disclosure about Market Risk
Pages 61, 78 , 80
and 81 (Business review)
Item 15: Controls
and Procedures
Page 138
(Management's report on internal control)
Page 139 (Report of
independent registered public accounting firm)
3
Business
review
Introduction
The Royal Bank of
Scotland Group plc is the
holding company of a large global banking and financial services group.
Headquartered in Edinburgh, the Group operates in the United Kingdom, the United
States and internationally through its two principal subsidiaries, the Royal
Bank and NatWest. Both the Royal Bank and NatWest are major UK clearing banks
whose origins go back over 275 years. In the United States, the Group’s
subsidiary Citizens is a large commercial banking organisation. The Group has a
large and diversified customer base and provides a wide range of products and
services to personal, commercial and large corporate and institutional
customers.
Following a placing
and open offer in December 2008, referred to
herein as the First Placing and Open Offer, Her Majesty's Treasury in the United
Kingdom (HM Treasury) owned approximately 58% of the enlarged ordinary share
capital of the company and £5 billion of non-cumulative sterling preference
shares. In April 2009, the company issued new ordinary shares by way
of a second placing and open offer, referred to herein as the Second
Placing and Open Offer, the proceeds from which were used in full to fund the
redemption of the preference shares held by HM Treasury at 101% of their issue
price together with the accrued dividend and the commissions payable to HM
Treasury under the Second Placing and Open Offer Agreement. The Second Placing
and Open Offer was underwritten by HM Treasury and as a result, HM Treasury
currently owns approximately 70% of the enlarged ordinary share capital of
the company.
The Group had total
assets of £2,401.7 billion and owners’ equity of £58.9 billion at 31 December
2008. The Group’s capital ratios, which include the equity minority interest of
The State of the Netherlands and Santander in ABN AMRO, were a total capital
ratio of 14.1 per cent., a core Tier 1 capital ratio of 6.8 per cent. and a Tier
1 capital ratio of 10.0 per cent., as at 31 December 2008.
Organisational
structure and business overview
Changes
have been made to the Group’s operating segments in the first half of
2009. A Non-Core division has been created comprising those
lines of business, portfolios and individual assets that the Group intends to
run off or sell. Furthermore, Group Manufacturing is no longer
reported as a separate division whose costs are now allocated to the
customer-facing divisions along with certain central costs. UK Retail
& Commercial Banking has been split into three segments (UK Retail, UK
Corporate and Wealth). Ulster Bank has become a specific segment. The
remaining elements of Europe & Middle East Retail & Commercial Banking,
Asia Retail & Commercial Banking and Share of shared assets form part
of Non-Core.
UK Retail offers a
comprehensive range of banking products and related financial services to the
personal market. It serves customers through the RBS and NatWest networks of
branches and ATMs in the United Kingdom, and also through telephone and internet
channels.
UK Corporate is
a provider of banking, finance, and risk management services to the
corporate and SME sector in the United Kingdom. It offers a full range of
banking products and related financial services through a nationwide network of
relationship managers, and also through telephone and internet channels. The
product range includes asset finance through the Lombard brand.
Wealth provides private
banking and investment services in the UK through Coutts & Co and Adam &
Company, offshore banking through RBS International, NatWest Offshore and Isle
of Man Bank, and international private banking through RBS Coutts.
Global Banking & Markets
is a leading banking partner to major corporations and financial institutions
around the world, providing an extensive range of debt and equity financing,
risk management and investment services to its customers. The division is
organised along seven principal business lines: money markets; rates flow
trading; currencies; commodities (including RBS Sempra Commodities LLP, the
commodities-marketing joint venture between RBS and Sempra Energy); equities;
credit markets and portfolio management & origination.
Global Transaction Services
ranks among the top five global transaction services providers, offering global
payments, cash and liquidity management, and trade finance, United Kingdom and
international merchant acquiring and commercial card products and services. It
includes the Group’s corporate money transmission activities in the United
Kingdom and the United States.
Ulster Bank is the leading
retail and commercial bank in Northern Ireland and the third largest banking
group on the island of Ireland. It provides a comprehensive range of
financial services through both its Retail Markets division which has a network
of branches and operates in the personal and bancassurance sectors, while its
Corporate Markets division provides services to SME business customers,
corporates and institutional markets.
US Retail & Commercial
provides financial services primarily through the Citizens and Charter
One brands. US Retail is engaged in retail and corporate banking
activities through its branch network in 12 states in the United States and
through non-branch offices in other states. It ranks among the top five banks in
New England and the Mid Atlantic regions.
RBS Insurance sells and
underwrites retail and SME insurance over the telephone and internet, as well as
through brokers and partnerships. Its brands include Direct Line, Churchill and
Privilege, which sell general insurance products direct to the customer, as well
as Green Flag and NIG. Through its international division, RBS Insurance sells
general insurance, mainly motor, in Germany and Italy. The Intermediary and
Broker division sells general insurance products through independent
brokers.
4
Business review
continued
Group
Manufacturing comprises the Group’s worldwide manufacturing
operations. It supports the customer-facing businesses and provides
operational technology, customer support in telephony, account management,
lending and money transmission, global purchasing, property and other services.
Manufacturing drives efficiencies and supports income growth across multiple
brands and channels by using a single, scalable platform and common processes
wherever possible. It also leverages the Group’s purchasing power and is the
Group’s centre of excellence for managing large-scale and complex
change.
Central items
comprises group and corporate functions, such as treasury, funding and
finance, risk management, legal, communications and human resources. The Centre
manages the Group’s capital resources and Group-wide regulatory projects and
provides services to the operating divisions.
Non-Core Division
manages separately assets that the Group intends to run off or dispose
of. The division contains a range of businesses and asset portfolios primarily
from the GBM division, linked to proprietary trading, higher risk profile asset
portfolios including excess risk concentrations, and other illiquid portfolios.
It also includes a number of other portfolios and businesses including regional
markets businesses that the Group has concluded are no longer
strategic.
HM
Treasury Asset Protection Scheme and additional capital raising
On
26 February 2009, RBS confirmed its intended participation in the Asset
Protection Scheme (“APS”). The arrangements between RBS and HM Treasury will, if
completed, allow RBS to secure asset protection in respect of some of its
riskiest assets that enhances its financial strength and provides improved
stability for customers and depositors, and also enhances RBS’s ability to lend
into the UK market.
Issuance
of capital
On
or after the proposed implementation of the APS, HM Treasury will subscribe for
£13 billion of B Shares. The arrangements for the subscription of these B Shares
are to be determined and the proceeds of such issue will, if such B Shares are
issued, be used to increase further the Group’s Core Tier 1 capital. A summary
of the expected terms of the B Shares is set out below. HM Treasury will also
commit to subscribe for an additional £6 billion of B Shares at RBS’s option.
The detailed terms of such option remain to be agreed between RBS and HM
Treasury.
Scheme
amount
RBS intends to
participate in the APS in respect of assets with a par value of approximately
£325 billion and a carrying value net of impairments and write downs of
approximately £302 billion as at 1 January 2009.
First
loss
The agreement would
see RBS bear the first loss amount relating to the assets in the APS up to £19.5
billion (after taking into account historic impairments and write downs). Losses
arising in respect of the assets after the first loss amount would be borne 90
per cent. by HM Treasury and 10 per cent. by RBS. The APS will, if entered into,
apply to losses incurred on the protected assets on or after 1 January
2009.
Fee
and issuance of capital
If
it enters into the APS, RBS will pay a participation fee of £6.5 billion to HM
Treasury. On 26 February 2009, RBS announced that it would issue £6.5 billion of
B Shares, and the participation fee may be funded through the proceeds of such
issuance. The £6.5 billion of B Shares, which will be issued if RBS enters into
the APS, will be in addition to, and on the same terms as, the B Shares referred
to above and will constitute Core Tier 1 capital. In addition, RBS has agreed in
principle that, if it enters into the APS, it would not claim certain UK tax
losses and allowances.
Assets
Specific assets to
be included in the APS will be subject to the approval of HM Treasury. The
assets would be drawn from RBS’s and certain of its affiliates’ portfolios of
corporate and leveraged loans, commercial and residential property loans,
structured credit assets and such other assets as HM Treasury and RBS agree are
to be included in the APS. It is also envisaged that the APS may include
structured synthetic assets and counterparty risk exposures associated with
certain derivatives transactions with monoline insurers and credit derivative
product companies. RBS expects that the APS will protect: £225 billion of third
party assets, £44 billion of undrawn commitments, and £33 billion in other
counterparty risk exposures.
Capital
ratios
The APS and
proceeds of the issue of B Shares are expected to improve the consolidated
capital ratios of RBS by (i) substituting risk weight applicable to the UK
Government for that of the protected assets; and (ii) the subscription for the B
Shares by HM Treasury (being both the £6.5 billion of B Shares, the proceeds of
which may be used to fund the fee for the APS and the additional £13 billion of
B Shares to be issued on or after the implementation of the APS). Based on total
covered assets of approximately £325 billion, risk weighted assets would reduce
by approximately £144 billion. As an illustration, if the Company had issued
£19.5 billion of B Shares on 31 December 2008 offset by the expected £6 billion
reduction of first loss exposure under the APS from Core Tier 1 capital in
accordance with the FSA Handbook, and with the redemption of the preference
shares issued to HM Treasury (“Preference Share Redemption”), RBS expects
there would have been a significant increase to the Core Tier 1
ratio.
In
addition, RBS will continue to look at various market based and/or internal
capital management opportunities to generate and further strengthen Core Tier 1
capital.
6
Business review
continued
Term
While it is
intended that the APS would apply to the protected assets until their maturity,
RBS’s participation in the APS would be capable of termination in whole or in
part by mutual agreement of RBS and HM Treasury.
Management
of the assets
RBS would be
required under the APS to manage the assets in accordance with certain asset
management requirements as referred to in the APS. These would include, amongst
others, (i) reporting requirements to provide financial, risk and performance
data in respect of the protected assets and to monitor compliance with the APS,
(ii) the adoption of oversight and control procedures with respect to the
management of the protected assets, (iii) requirements in relation to
organisational structure, staffing, resourcing, systems and controls required
for implementation, administration and monitoring compliance with the APS and
(iv) the monitoring and management of conflicts of interest and potential
conflicts of interest. As the APS is intended to apply to losses on protected
assets arising from 1 January 2009, RBS has agreed with HM Treasury certain
interim arrangements (in force with immediate effect) relating to the management
of those assets likely to be part of the APS.
Impact
on the capital structure of the Company
If
the additional £6 billion of B Shares are subscribed for by HM Treasury and
£25.5 billion of B Shares convert mandatorily, or are converted by HM Treasury,
into ordinary shares in the hands of HM Treasury, the percentage of HM
Treasury’s ownership of RBS’s ordinary shares will be 84.4 per cent., with
shareholders experiencing a corresponding dilution to their interests in the
company. However, without prejudice to rights arising on the mandatory
conversion into ordinary shares, HM Treasury shall not be entitled to exercise
its option to convert B Shares into ordinary shares for as long as it holds 75
per cent. or more of the ordinary shares or if the exercise of such option would
result in it holding 75 per cent. or more of the ordinary shares. Further
details regarding the effect of the B Shares on the dividends payable are set
out below.
Conditions
to accession to the Scheme
Implementation of
the APS for RBS will be subject to further due diligence by HM Treasury and its
advisers, documentation and satisfaction of applicable conditions (including the
application criteria and asset eligibility criteria of the APS), adoption of a
prescribed remuneration policy in respect of assets managed under the APS and
conditions precedent to accession in the APS, including state aid, regulatory
and shareholder approvals. RBS has agreed to provide certain information to HM
Treasury in the period prior to RBS’s proposed accession, including
(i) an
indicative list of the Proposed Assets, with a view to agreeing such list by 30
April 2009;
(ii) information
and data relating to the Proposed Assets for the purposes of HM Treasury’s due
diligence; and
(iii) access
to RBS’s premises, books, records, senior executives, relevant personnel and
professional advisers.
As
at the date of this document, the timing for the implementation of the APS is
still to be determined. The proposed entry by the Company into the APS and any
associated capitalisation would constitute a related party transaction for the
purposes of the Listing Rules requiring the approval of Independent
Shareholders. Therefore if the Company is to participate in the APS, it will
convene a further general meeting to seek Independent shareholder approval and a
circular explaining the proposals and containing the relevant general meeting
notice will be sent to Shareholders in due course, although no prospectus will
be required.
Terms
and conditions of the B Shares
At
the same time as it announced RBS plc’s intended participation in the APS, RBS
announced that it expected to issue to HM Treasury (i) £6.5 billion of B Shares
at the time of entering into the APS and (ii) a further £13 billion of B Shares
on or after implementation of the APS. RBS also announced that it had been
agreed with HM Treasury that, at RBS’s option, a further £6 billion of B Shares
could be issued to HM Treasury. The detailed terms of this option remain to be
agreed between RBS and HM Treasury. All of these B Shares are expected to
constitute Core Tier 1 capital and will be issued on the same terms. Key terms
of the B Shares are expected to include the following:
• Nominal
value and issue price: £0.50 per B Share.
• Ranking:
on a winding-up, holders of the B Shares will rank pari passu with the holders
of any other classes of Ordinary Shares and junior to preference shareholders.
For these purposes, on a winding-up each holder of a B Share will be deemed to
hold one Ordinary Share of RBS for every B Share held at the date of the
commencement of such winding-up (the “Winding Up Ratio”).
• Dividend
entitlement: non-cumulative dividends will be declared at the discretion of RBS,
which dividends shall be paid in priority to any dividend on any other class of
ordinary share capital. If declared, dividends on the B Shares will be paid
semi-annually in arrear. The first such semi-annual dividend in respect of any
financial year shall be payable on the date that is three business days after
the record date in respect of the interim dividend payable on the Ordinary
Shares in respect of such financial year, if such interim dividend on the
Ordinary Shares is to be paid. The second such semi-annual dividend in respect
of any financial year shall be payable on the date that is three business days
after the record date in respect of the final dividend payable on the Ordinary
Shares in respect of such financial year, if such final dividend on the Ordinary
Shares is to be paid. If no interim dividend on the Ordinary Shares is to be
paid in respect of any financial year, the first semi-annual dividend on the B
Shares in respect of such financial year, if to be paid, shall be payable on 31
October in such financial year, and if no final dividend on the Ordinary Shares
is to be paid in respect of any financial year the second semi-annual dividend
on the B Shares in respect of such financial year, if to be paid, shall be
payable on 31 May in the immediately following financial year.
• If
to be paid, the dividend per B Share will be equivalent to (i) 7 per cent. of
the issue price of each B Share multiplied by the number of days in the period
from (and including) the immediately preceding Relevant Date (as defined below)
or, in the case of the first semi annual dividend in 2009, the date of issue to
(but excluding) the current Relevant Date divided by 365 (or 366 in a leap year)
or (ii) in the case of any second semi-annual dividend in respect of any
financial year, if greater and if a dividend or dividends or other
distribution(s) is/are paid or made (whether interim or final) on the Ordinary
Shares in respect of the period from (but excluding) the Relevant Date falling
on (or nearest to) one year prior to the current Relevant
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7
Business review
continued
Date to (and
including) the current Relevant Date, 250 per cent. (the “Participation Rate”)
of the aggregate amount of such dividend(s) or distribution(s) per Ordinary
Share less the amount of the first semi-annual dividend (if any) paid in respect
of such financial year. “Relevant Date” means each date on which RBS pays a
semi-annual dividend or, if no such payment has been made, 31 October in respect
of the first semi-annual dividend in respect of any financial year and 31 May in
the immediately following financial year in respect of the second semi-annual
dividend in respect of any financial year.
• Scrip
dividends: if RBS decides to pay a dividend on the B Shares in respect of a
semi-annual period and either (i) no dividend has been paid on the Ordinary
Shares and/or distribution made thereon in respect of the same period or (ii) a
dividend has been paid and/or a distribution has been made thereon otherwise
than in cash in respect of the same period, RBS may in its discretion determine
that the dividend on the B Shares in respect of the corresponding period shall
be paid in whole or in part by RBS issuing further B Shares to the holders of B
Shares. The number of further B Shares to be issued to each holder shall be such
number of B Shares as shall be certified by an independent investment bank
(acting as expert) to equal the value in cash of the dividend otherwise payable
on the B Shares in respect of the relevant period.
• Restrictions
following non-payment of dividend: if RBS decides not to pay any semi-annual
dividend on the B Shares in cash or otherwise, then until such time as
semi-annual dividends on the B Shares have been resumed in full RBS will be
prohibited from paying dividends or other distributions (whether in cash or
otherwise) on, or redeeming, purchasing or otherwise acquiring, (i) its Ordinary
Shares or (ii) any other securities of RBS or any other member of the Group
ranking or expressed to rank pari passu with the Ordinary Shares and the B
Shares on a winding-up, either issued by RBS or, where issued by another member
of the Group, where the terms of the securities benefit from a guarantee or
support agreement entered into by RBS which ranks or is expressed to rank pari
passu with the Ordinary Shares and the B Shares on a winding-up.
• Redemption
rights: none, but RBS may purchase the B Shares subject to applicable laws and
FSA consent.
• Conversion
rights: at any time a holder of a B Share may deliver a notice to RBS requesting
conversion of B Shares into Ordinary Shares of RBS. All B Shares shall
automatically and mandatorily convert into Ordinary Shares if the volume
weighted average trading price of the Ordinary Shares for 20 complete trading
days in any 30 trading day period equals or exceeds £0.65 per Ordinary Share.
The number of Ordinary Shares to be issued upon conversion will be determined by
dividing the aggregate issue price (£0.50 per B Share) of the B Shares being
converted by the Conversion Price. The conversion price of the B Shares will be
£0.50 (the “Conversion Price”).
• Limitations
on optional conversion: without prejudice to the provisions above concerning the
mandatory conversion of the B Shares, HM Treasury shall not be entitled to
exercise its option to convert B Shares into Ordinary Shares to the extent that
it holds 75 per cent. or more of the Ordinary Shares or to the extent that the
exercise of such option would result in it holding 75 per cent. or more of the
Ordinary Shares.
• Voting
rights before conversion: holders of the B Shares will only have voting rights
in limited circumstances (resolutions varying/abrogating class rights and
resolutions to wind up, or in relation to the winding-up of, RBS). If entitled
to vote, on a poll holders of B Shares will have two votes for each B Share
held. HM Treasury shall not be so entitled to vote the B Shares to the extent
the votes cast on such B Shares, together with any other votes which HM Treasury
is entitled to cast in respect of any Ordinary Shares held by or on behalf of HM
Treasury, would exceed 75 per cent. of the total votes eligible to be cast on a
resolution proposed at a general meeting of RBS.
• Voting
rights after conversion: HM Treasury shall not be entitled to vote in respect of
Ordinary Shares acquired by it as a result of the conversion of B Shares into
Ordinary Shares to the extent that votes cast on such Ordinary Shares, together
with any other votes which HM Treasury is entitled to cast in respect of any
other Ordinary Shares held by or on behalf of HM Treasury, would exceed 75 per
cent. of the total votes eligible to be cast on a resolution proposed at a
general meeting of RBS.
• Pre-emption
rights: HM Treasury shall agree that it shall not exercise any pre-emption
rights it may be entitled to as a holder of B Shares in respect of future issues
of Ordinary Shares.
• Ordinary
Share buy-back: for as long as any B Shares remain outstanding, RBS may not
purchase any of its Ordinary Shares.
• Listing:
the B Shares will not initially be listed. HM Treasury is entitled to require
RBS to seek a listing of the B Shares.
• Adjustment
events: the Winding Up Ratio and Participation Rate shall be subject to
anti-dilution adjustments. The Conversion Price shall be adjusted in accordance
with standard Euro-market anti-dilution adjustments other than customary change
of control adjustments or extraordinary dividend adjustments (to the extent
compensated by dividends paid at the Participation Rate).
Second
Placing and Open Offer
Background
to the Second Placing and Open Offer
In
2008 the Board concluded that the Group needed to strengthen its capital base
and to accomplish this two capital raisings were carried out. A £12 billion
rights issue was completed in June 2008. Then, due to a severe deterioration in
financial markets and economic conditions, a further capital raising totalling
£20 billion was completed in December 2008. Of the £20 billion raised in
December, £15 billion was in the form of Ordinary Shares, and £5 billion was in
the form of Preference Shares purchased entirely by HM Treasury. As a result of
this capital raising, HM Treasury acquired approximately 57.9 per cent. of the
issued ordinary share capital of the Company. The intention of the Board was
that HM Treasury’s holding of Preference Shares would be redeemed as soon as
practicable.
In
the last few weeks of 2008 the continuing dislocation in financial markets and
significant uncertainties in credit conditions, together with the sharp
deterioration in economic conditions, negatively impacted the trading
performance of many financial institutions globally, including RBS. As a result,
RBS incurred significant credit impairment losses and credit market write
downs.
In
view of the above, the Board, in conjunction with HM Treasury, decided to take
steps to improve the quality of the Group’s capital base by carrying out the
Second Placing and Open Offer, and using the proceeds to redeem the Preference
Shares held by HM Treasury. Shareholders were able to apply to subscribe for
£5.37 billion of new ordinary shares pro rata to their existing shareholdings at
a fixed price of 31.75 pence per share by way of the open offer.
The capital
restructuring resulting from the Second Placing and Open Offer removed the £0.6
billion annual cost of the preference share dividend and created £5 billion of
additional Core Tier 1 capital, which provides a higher quality level of capital
support against the impact on the Group’s business of any further deterioration
in economic and financial market conditions. Following the Second Placing and
Open Offer, HM Treasury currently own approximately 70.3 per cent. of the
issued ordinary share capital of the company.
Various
initiatives, such as the Asset Protection Scheme (“APS”) and the Credit
Guarantee Scheme, are being progressed by the UK Government to stabilise the UK
banking system further and enhance support for the economy. The stated aims of
the APS and the Credit Guarantee Scheme are to reinforce the stability of the
financial system, to increase confidence and capacity to lend, and in turn to
support the recovery of the UK economy. The other initiatives are expected to
focus on asset and funding risks which are central to freeing up additional
lending capacity whilst augmenting the impact of the capital measures described
above.
By
participating in the APS, the Group will be able to free up its lending
capacity. Consequently, the Group announced on 26 February 2009 that it would
increase its lending to UK homeowners and businesses subject to the Group’s
ordinary course credit and pricing criteria on the Group’s normal contractual
terms by £25 billion over the next 12 months. The increased lending will be
split £9 billion to mortgage lending and the remaining £16 billion to business
lending. Similar levels of lending have been committed to in 2010. This latest
commitment supersedes the lending commitments the Group announced in October
2008 and in January 2009 and builds on NatWest’s and RBS plc’s recently
announced pledge to continue to provide committed overdrafts and no increased
pricing for small business customers until at least the end of 2009. These
lending commitments will cease if RBS does not participate in the APS and Credit
Guarantee Scheme by 1 June 2009 or will reduce if it participates in only one of
the APS or Credit Guarantee Scheme prior to 1 June 2009.
While redemption of
the Preference Shares allows the resumption of a sustainable and progressive
dividend policy for the Ordinary Shares (it was a term of the Preference Shares
that no such dividends may be paid while the Preference Shares were in issue),
it is not the Board’s intention to pay a dividend on the Ordinary Shares in
2009. If the B Shares are issued as announced on 26 February 2009, no cash
dividend may be paid on the Ordinary Shares unless the cash dividend payable in
respect of the same period on the B Shares is paid in full, and no scrip
dividend may be paid on the Ordinary Shares unless the cash or scrip dividend
payable in respect of the same period on the B Shares is paid in
full.
Impact
of the Second Placing and Open Offer and the Preference Share Redemption on
RBS
The effect of the
Second Placing and Open Offer and the Preference Share Redemption was to improve
the quality of RBS’s regulatory capital by increasing RBS’s Core Tier 1 ratio;
the Tier 1 ratio was not affected. The Second Placing and Open Offer and the
Preference Share Redemption had no other impact on RBS’s balance sheet. The
Preference Shares carried a coupon of 12 per cent. at the discretion of the
Board while the new shares issued in connection with the Second Placing and Open
Offer rank pari passu
with the existing shares of the company for any dividend payments. Accordingly,
other than the elimination of the annual distribution at the discretion of the
Board in respect of the preference share coupon, and the inclusion of the new
shares in the payment of any future dividends on RBS’s ordinary shares, the
Placing and Open Offer and Preference Share Redemption had no impact on the
Group’s income statement.
Sale of Bank of
China Investment
On 14 January 2009,
the Group (through RBS China Investment Sarl.) sold its entire 4.26 per cent
stake in Bank of China for HKD18.4 billion.
Debt
Tender and Exchange Offer
On 26 March 2009,
RBS Financing Limited ("RBSF"), a subsidiary of the Group, launched a cash
tender offer in the United States (the “RBSF US Tender Offer”) for any and all
of the outstanding securities of ten different series previously issued by the
Group and certain of its affiliates. Concurrently therewith, RBSF
also launched a cash tender offer outside of the United States (the “RBSF Non-US
Tender Offer”) for five different series of securities previously issued by The
Royal Bank and certain of its affiliates and an offer outside of the United
States to exchange (the “RBSF Exchange Offer”) any or all of the outstanding
securities of fourteen different series previously issued by The Royal Bank and
certain of its affiliates for new senior unsecured notes of The Royal
Bank.
The RBSF Tender
Offers and the RBSF Exchange Offer expired on 22 April 2009. In the RBSF US
Tender Offer, an aggregate of approximately US $4.1 billion principal amount of
securities were validly tendered, resulting in an aggregate purchase
consideration paid for the tendered securities of approximately US $1.7
billion.
In the RBSF Non-US
Tender Offer, an aggregate of approximately €2.3 billion principal amount of
Euro-denominated securities and approximately US $264 million principal amount
of Dollar-denominated securities were validly tendered, resulting in aggregate
purchase consideration paid for the tendered securities of approximately €1.1
billion and US $100 million, respectively.
In the RBSF
Exchange Offer, an aggregate of approximately £3.5 billion principal amount of
securities were validly offered for exchange and exchanged for new senior
unsecured notes of The Royal Bank in an aggregate principal amount of
approximately £1.8 billion.
Litigation
Update
Note 32 of the
Notes on the Accounts provides disclosure regarding, among other things,
litigation claims in the United Kingdom. With respect to the claims
regarding unarranged overdraft charges, the Group and other banks appealed
against the orders of the High Court. On 26 February 2009, the Court
of Appeal delivered its judgment and rejected the appeals. The House
of Lords has granted the Group and other banks leave to appeal the
Court of Appeal’s decision. That
further appeal is scheduled to take place on 23 June 2009. With respect to class
action complaints filed in the United States District Court for the Southern
District of New York, complaints relating to public filings in connection with
the broad class of RBS publicly traded securities between 26 June 2007 and 19
January 2009 are included in the description of class action complaints
in Note 32.
Strategic
review
RBS has embarked on
a sweeping restructuring of the Group that will fit its activities to the
goals outlined above. While the details of the strategic plan will be refined
over the coming weeks to take account of the final agreements reached with HM
Treasury in respect of RBS’s participation in the APS, the plan is expected to
include the following:
• RBS
will create a “Non-Core” division of RBS during the second quarter of 2009,
separately managed, but within the existing legal structures of the Group and
matrix managed to donating divisions where necessary. RBS currently intends that
this division will have approximately £240 billion of third party assets, £145
billion of derivative balances and £155 billion of risk-weighted assets,
comprising individual assets, portfolios and businesses of the Group
that RBS intends to run off or dispose of during the next three to five
years. The specific timetable will vary in each case but will be as fast
as RBS judges consistent with optimising shareholder value and risk.
Approximately 90 per cent. of the Non-Core division will consist of GBM assets,
primarily linked to proprietary portfolios, excess risk concentrations and
illiquid ‘originate and hold’ asset portfolios. The rest of the Non-Core
division will be risk concentrations, ‘out of footprint’ assets and smaller,
less advantaged businesses within our Regional Markets activities across the
world. As part of this effort it is intended that RBS’s
representation in approximately 36 of the 54 countries it operates in
around the world will be significantly
9
Business review
continued
reduced or
sold. RBS will remain strong in all its major existing global hubs,
however. Given the commercial and human sensitivity of these issues, detail on
this will not be given until the interim results. The income, expenses,
impairments and credit market and other trading asset write downs associated
with the Non-Core Division in 2008 were approximately £3.9 billion, £1.1
billion, £3.2 billion and £9.2 billion respectively.
• In
addition to eliminating expenses associated with the Non-Core division, RBS
has launched a restructuring plan to make efficiency savings across the
Group, aimed at achieving run-rate reductions by 2011 of greater than £2.5
billion (16 per cent. of 2008 cost base) at constant exchange rates. This will
involve a wide range of re-engineering and other measures and, regrettably,
reductions in employment. This target excludes any impact of inflation,
incentive pay movements or cost reductions arising from business exits or the
impact of new projects (if any). It includes the £0.5 billion of ABN AMRO
integration benefits previously announced but not reflected in 2008 expenses. We
will book one-off charges against these actions over the next three years, with
run-rate cost savings expected to provide ‘payback’ in 1.5 to 1.75
years.
• RBS
plans to retain each of its major business divisions since it
believes, with intensive restructuring, they can meet the attractive business
characteristics outlined as targets above. In many cases the restructuring of
these businesses to achieve RBS’s goals
will be far-reaching, nevertheless. The greatest element of restructuring will
be in GBM as signalled above. A substantial shrinkage of size, product and
geographic scope will take place. This should leave GBM positioned profitably
around those of its existing core strengths that rest on profitable customer
franchise business with significantly less illiquid risk overall.
• At
all times RBS will responsibly compare the value to RBS of each of its
businesses with realistic alternatives and take different action if they prove
compelling. However, the distressed and pessimistic state of markets for
financial assets and businesses offers little immediate encouragement in that
regard.
• Alongside
our business restructuring activities will be substantive changes to management
and internal processes. There will continue to be changes of personnel as
RBS promotes and reassigns internal talent and add to its ranks
externally. The Manufacturing division will re-align with the customer
facing businesses. Businesses will have clear bottom-line returns, allocated
equity and balance sheet and funding goals. While RBS drives for profit,
there will be a concentration on earnings quality and sustainability, driven by
strategic plans, to ensure alignment of our businesses to their markets and
their risk targets. People evaluation and incentivisation will meet best
practice levels to support the revised mission of the Company. This will be
underpinned by a full suite of risk and funding constraints, including
concentration limits.
RBS has
already begun this major change programme. To carry it through in parallel with
running its continuing business in difficult markets will
test management capacity. RBS expects to be successful overall,
though it will inevitably have setbacks and make mistakes along the way.
But there is no alternative. RBS must change in a far-reaching way. If it
does that, the strength, quality and power that are already present in RBS
business across the world will have the chance to shine through once
again.
10
Relationship
with major shareholder
The UK Government
currently owns 70.3 per cent. of the issued ordinary share capital of RBS.
The UK Government’s shareholding in RBS is currently held by the Solicitor for
the Affairs of HM Treasury as nominee for HM Treasury and managed by UK
Financial Investments Limited (“UKFI”), a company wholly owned by HM Treasury.
No formal relationship agreement has been concluded between RBS and the UK
Government, although the relationship falls within the scope of the framework
document between HM Treasury and UKFI published on 2 March 2009. This document
states that UKFI will manage the UK financial institutions in which HM Treasury
holds an interest “on a commercial basis and will not intervene in day-to-day
management decisions of the Investee Companies (including with respect to
individual lending or remuneration decisions)”, which is designed to ensure that
control of the relationship is not abused. This document also makes it clear
that such UK financial institutions will continue to be separate economic units
with independent powers of decision and “will continue to have their own
independent boards and management teams, determining their own strategies and
commercial policies (including business plans and budgets).”
These goals are
consistent with the stated public policy aims of the UK Government, as
articulated in a variety of public announcements.
In
the framework document between UKFI and HM Treasury, UKFI stated that its goal
was to “develop and execute an investment strategy for disposing of the
investments [in the banks] in an orderly and active way through sale,
redemption, buy-back
or other means within the context of an overarching objective of
protecting and creating value for the taxpayer as shareholder, paying due regard
to the maintenance of financial stability and to acting in a way that promotes
competition.”
It
was also stated that UKFI intended to “engage robustly with banks’ boards and
management, holding both strategy and financial performance to account,
and taking a strong interest in getting the incentives structures right on the
board and beyond—accounting properly for risk and avoiding inefficient rewards
for failure.”
In
this connection, RBS announced on 17 February 2009 that it had reached an
agreement with UKFI in respect of certain changes to its remuneration policy.
RBS has also undertaken to conduct a review of its strategy and UKFI has been
actively engaged in reviewing the output of this review.
In
connection with its proposed access to the APS (further details of which are set
out above), RBS has undertaken to provide lending to creditworthy UK homeowners
and businesses in a commercial manner. RBS’s compliance with this commitment
will be subject to a monthly reporting process to the UK Government. The lending
commitment does not require RBS to lend in excess of its single name or sectoral
risk concentration limits or otherwise to engage in uncommercial
practices.
RBS, in common with
other financial institutions, also works closely with a number of UK Government
departments and agencies on various industry-wide initiatives that are intended
to support the UK Government’s objective of supporting stability in the wider
financial system.
Other than in
relation to these areas, however, the UK Government has confirmed publicly that
its intention is to allow the financial institutions in which it holds an
interest to operate their business independently.
Following
consultation with UKFI and other major institutional shareholders the
Nominations Committee recommended the appointment of Philip Hampton to the Board
of Directors, which approved the appointment.
As
a result of the UK Government’s holding, the UK Government and UK Government
controlled bodies became related parties of the Group. The Group enters
into transactions with many of these bodies on an arms' length
basis.
The Group is not a
party to any transaction with the UK Government or any UK Government controlled
body involving goods or services which is material to the Group, or any such
transaction that is unusual in its nature or conditions. To the Group's
knowledge, the Group does not believe it is a party to any transaction with the
UK Government or any UK Government controlled body involving goods or services
which is material to the UK Government or any UK Government controlled body,
however, given the nature and extent of the UK Government controlled bodies, the
Group may not know whether a transaction is material for such a
party.
Any outstanding
loans made by the Group to or for the benefit of the UK Government or any UK
Government controlled body, were made on an arm's length basis and (A) such
loans were made in the ordinary course of business, (B) were made on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons, and (C)
did not involve more than the normal risk of collectibility or present other
unfavorable features. The Group notes, however, that with respect to
outstanding loans made by the Group to or for the benefit of the UK Government
or any UK Government controlled body, there may not exist any comparable
transactions with other persons.
Trading and outlook
On 26 February 2009, RBS announced its
results for the year ended 31 December 2008. In that announcement, RBS made the following
statement about current trading and outlook for 2009.
‘‘To make any forecast is hazardous
beyond the expectation that 2009 will be a very tough year for the world
economy. RBS, in common with all banks, will see some erosion of underlying
income levels as a result of weaker business activity and low interest rates
squeezing savings margins whilst credit costs rise, probably sharply. We hope
that markets will be less disrupted than in 2008, with lower associated
write-downs, but time will tell. 2009 has, in fact, started positively for our
businesses. At the time of writing, RBS is in discussions with the UK Government
concerning participation in the proposed Asset Protection Scheme (‘‘APS’’). This
would be subject to shareholder vote in due course. The result of the APS
discussions will have a material impact on RBS’s outlook, positive or negative
depending on outcome. More information will be made
available as soon as practicable.
Notwithstanding the challenging outlook,
our businesses all around the world are inherently good and fully engaged in
sustaining as robust a performance as the environment permits. And the strategic
restructuring we have embarked on will see high levels of activity designed to
reposition RBS successfully.’’
Annual General Meeting held on 3 April
2009
On
3 April 2009, the Group held its Annual General Meeting. At the meeting,
shareholders voted to (i) elect Philip Hampton, Stephen Hester, John McFarlane
and Arthur 'Art' Ryan as directors of the Group, (ii) re-appoint Deloitte LLP as
the company’s auditor and (iii) authorise the Audit Committee to fix the
remuneration of the auditors. All other resolutions presented to shareholders at
the Annual General Meeting were also approved by shareholders.
General Meeting held on 3 April
2009
On
3 April 2009, the Group held a General Meeting in connection with the Second
Placing and Open Offer. At the meeting, all resolutions presented to
shareholders were approved by shareholders.
11
Competition
The Group faces
strong competition in all the markets it serves. However, the global banking
crisis has reduced the capacity of many institutions to lend and has resulted in
the withdrawal or disappearance of a number of market participants and
significant consolidation of competitors, particularly in the US and UK.
Competition for retail deposits has intensified significantly reflecting the
difficulties in the wholesale money markets.
Competition for
corporate and institutional customers in the UK is from UK banks and from large
foreign financial institutions who are also active and offer combined investment
and commercial banking capabilities. In asset finance, the Group competes with
banks and specialised asset finance providers, both captive and
non-captive. In European and Asian corporate and institutional banking markets
the Group competes with the large domestic banks active in these markets and
with the major international banks.
In
the small business banking market, the Group competes with other UK clearing
banks, specialist finance providers and building societies.
In
the personal banking segment the Group competes with UK banks and building
societies, major retailers and life assurance companies. In the mortgage market
the Group competes with UK banks and building societies. A number of competitors
have either left or scaled back their lending in the mortgage and unsecured
markets. The Group’s life assurance businesses compete with Independent
Financial Advisers and life assurance companies.
In
the UK credit card market large retailers and specialist card issuers, including
major US operators, are active in addition to the UK banks. In addition to
physical distribution channels, providers compete through direct marketing
activity and the internet.
In
Europe, Asia and the Middle East, the enlarged Group now competes in retail
banking with local and international banks. In a number of these markets there
are regulatory barriers to entry or expansion, and the state ownership of banks.
Competition is generally intensifying as more players enter markets that are
perceived to be de-regulating and offer significant growth
potential.
In
Wealth Management, The Royal Bank of Scotland International competes with other
UK and international banks to offer offshore banking services. Coutts and Adam
& Company compete as private banks with UK clearing and private banks, and
with international private banks. Competition in wealth management remains
strong as banks maintain their focus on competing for affluent and high net
worth customers.
RBS Insurance
competes in personal lines insurance and, to a limited extent, in commercial
insurance. There is strong competition from a range of insurance companies which
now operate telephone and internet direct sales businesses. Competition in the
UK motor market remains particularly intense, and price comparison internet
sites now play a major role in the marketplace. RBS Insurance also competes with
local insurance companies in the direct motor insurance markets in Spain, Italy
and Germany.
In
Ireland, Ulster Bank and First Active compete in retail and commercial banking
with the major Irish banks and building societies, and with other UK and
international banks and building societies active in the market.
In
the United States, Citizens competes in the New England, Mid-Atlantic and Mid
West retail and mid-corporate banking markets with local and regional banks and
other financial institutions. The Group also competes in the US in large
corporate lending and specialised finance markets, and in fixed-income trading
and sales. Competition is principally with the large US commercial and
investment banks and international banks active in the US.
12
Set out below are
certain risk factors which could affect the Group’s future results and cause
them to be materially different from expected results. The Group’s results are
also affected by competition and other factors. The factors discussed in this
report should not be regarded as a complete and comprehensive statement of all
potential risks and uncertainties.
The
company may face the risk of full nationalisation and under such circumstances
shareholders may lose the full value of their shares.
Under the
provisions of the Banking Act, substantial powers have been granted to HM
Treasury, the Bank of England and the Financial Services Authority (FSA) as part
of the Special Resolution Regime to stabilise banks that are in financial
difficulties. The Special Resolution Regime gives the authorities three
stabilisation options: private sector transfer, of all or part of the business of a
UK-incorporated institution with permission to accept deposits (a “relevant
entity”); transfer of all or part of the business of the relevant entity to a
“bridge bank” established by the Bank of England; and temporary public ownership
(nationalisation) of the relevant entity or its UK-incorporated holding
company.
The purpose of the stabilising options is to address the situation where all
or part of the business of the relevant entity has encountered, or is likely to
encounter, financial difficulties. Accordingly, the
stabilisation options may only be exercised if the FSA is
satisfied that a relevant entity such as the Group’s banking subsidiaries, including the Royal Bank and NatWest, (i) is failing, or
is likely to fail, to satisfy the threshold conditions set out in Schedule 6 to
the Financial Services and Markets Act 2000 (the “FSMA”)
and
(ii) having regard to
timing and other relevant circumstances it is not
reasonably likely that action will be taken that will enable the relevant entity
to satisfy those threshold conditions. The threshold conditions are conditions
which an FSA-authorised institution must satisfy in order to retain its FSA
authorisation. They are relatively wide-ranging and deal with most aspects of a
relevant entity’s business, including, but not limited to, minimum
capital resource requirements. It is therefore possible that the FSA
may
exercise one of the stabilisation options before a relevant entity is in
severe difficulties and
before an application for insolvency or an administration order could be
made.
The stabilisation
options may be exercised by means of powers to transfer property, rights or
liabilities of a relevant entity and shares and other securities issued by a
relevant entity. HM Treasury may also take the parent company of a relevant
entity (such as the Company) into temporary public ownership provided that
certain conditions set out in Section 82 of the Banking Act are met. Temporary
public ownership is effected by way of a share transfer
order.
If
HM Treasury makes the decision to take the holding company of a relevant entity
into temporary public ownership, it may take various actions in relation to
securities issued by the holding company, including:
|
·
|
to transfer
securities free from any contractual or legislative restrictions on
transfer;
|
|
·
|
to transfer
securities free from any trust, liability, or
encumbrance;
|
|
·
|
to extinguish
rights to acquire securities;
|
|
·
|
to delist
securities; or
|
|
·
|
to convert
securities into another form or
class.
|
Where HM Treasury
has made a share transfer order in respect of securities issued by the holding
company of a relevant entity, HM Treasury may make an order providing for the
property, rights or liabilities of the holding company or of any relevant
entity in the holding company group to be transferred.
Shareholders may
have a claim for compensation under one of the compensation schemes provided for
in the Banking Act. For the purposes of determining an amount of compensation,
an independent valuer must disregard actual or potential financial assistance
provided by the Bank of England or HM Treasury.
There
can be no assurance that Shareholders would thereby recover compensation
promptly and/or equal to any loss actually incurred.
If
the Group were made subject to the
Special Resolution Regime and
a partial transfer of the Group’s business was effected, the nature and mix of
the assets and liabilities not transferred may adversely affect its financial
condition and increase the risk that the Group may eventually become subject to
administration or insolvency proceedings.
Over the last six
months, the UK Government has taken action under the Banking (Special
Provisions) Act 2008 in respect of a number of UK financial institutions,
including in extreme circumstances, full and part nationalisation. There have
been concerns in the market in recent months regarding the risks of such
nationalisation in relation to RBS and other UK banks. If economic
conditions in the UK or globally continue to deteriorate, or the events
described in the following risk factors occur to such an extent that they have a
materially adverse impact on the financial condition, perceived or actual credit
quality, results of operations or business of any of the relevant entities in
the Group, the UK Government may decide to take similar action in relation to
RBS. Given the extent of HM Treasury’s and the Bank of England’s powers under
the Banking Act, it is difficult to predict what effect such actions might have
on RBS and any securities issued by it. However, potential impacts may
include full nationalisation of RBS and the total loss of value in RBS
shares.
If
RBS is unable to participate in the APS, or the operation of the APS fails to
have the desired effect on RBS’s financial and capital position, the Company may
face the increased risk of full nationalisation. If the costs of participation
outweigh the benefits, this could have a negative impact on RBS’s business,
earnings and financial prospects and its Share price may suffer.
On
26 February 2009, RBS announced its intention to participate in the APS.
However, its ability to participate in the APS is subject to the satisfaction of
a number of conditions which may not be satisfied, including, among others, the
completion of due diligence by (and to the satisfaction of) HM Treasury, the
receipt of certain regulatory approvals (including European Commission State Aid
clearance), the approval of a majority of RBS’s Independent Shareholders,
finalisation of the terms of the APS and RBS’s participation therein and the
satisfaction by RBS of certain specified application criteria. The failure to
satisfy these conditions could result in RBS being unable to participate in the
APS and therefore failing to obtain protection against stressed losses through
the economic cycle as well as failing to improve its capital ratios at the RBS
consolidated Group level. The result of this may mean intervention by the UK
Government, which could include full nationalisation, under which circumstances
any compensation payable to Shareholders would be subject to the provisions of
the Banking Act, and Shareholders may lose the full value of their
Shares.
Furthermore, even
if RBS is able to participate in the APS, there can be no assurance that such
participation will enable RBS to achieve all of the stated goals of the APS.
While the APS is expected to limit losses associated with assets to be covered
by the APS, RBS would remain fully exposed in respect of a specified “first
loss” amount and exposed to 10 per cent. of losses exceeding that “first loss”
amount. In addition, RBS would continue to be exposed to the risk of losses,
impairments and write-downs with respect to assets not covered by the APS.
Although RBS would have the option to obtain an additional £6 billion in capital
from HM Treasury (in the form of a subscription for further B Shares) there can
be no assurance that such additional capital, together with RBS’s strengthened
capital position as a result of the Placing and Open Offer, and the capital
resulting from the proposed issue of the £6.5 billion and £13 billion of B
Shares, will be sufficient to maintain the Group’s capital ratios in the event
of further losses, which could cause RBS’s business, results of operation and
financial condition to suffer, its credit rating to drop, its ability to lend
and access funding to be further limited, its cost of funding to increase and
its Share price to decline, any of which would increase the risk of the full
nationalisation of RBS.
In
addition, there can be no assurance that the costs to RBS of its participation
in the APS will not outweigh any benefits received. For example, RBS has agreed
in principle that if it accedes to the APS, it will give up the right to certain
tax losses and allowances which may affect the after-tax returns of the Group in
future years. As a result of RBS’s agreement to give up such UK tax losses and
allowances it is likely that RBS will pay UK corporation tax in earlier
accounting periods than it would otherwise have done.
The
Group’s businesses, earnings and financial condition have been and will continue
to be affected by the continued deterioration in the global economy, as well as
ongoing instability in the global financial markets.
The performance of
the Group has been and will continue to be influenced by the economic conditions
of the countries in which it operates, particularly the United Kingdom, the
United States and other countries throughout Europe and Asia. Recessionary
conditions are present in many of these countries, including the United Kingdom
and the United States, and such conditions are expected to continue or worsen
over the near to medium term. In addition, the global financial system is
continuing to experience the difficulties which first manifested themselves in
August 2007, and the financial markets have deteriorated significantly since the
bankruptcy filing by Lehman Brothers in September 2008. These conditions have
led to severe and continuing dislocation of financial markets around the world
and unprecedented levels of illiquidity, resulting in the development of
significant problems at a number of the world’s largest corporate institutions
operating across a wide range of industry sectors, many of whom are the Group’s
customers and counterparties in the ordinary course of its business. In response
to this economic instability and illiquidity in the market, a number of
governments, including the UK Government, the governments of the other EU member
states and the US Government, have intervened in order to inject liquidity and
capital into the financial
system, and, in some cases, to prevent the failure of these
institutions.
13
Business review
continued
Despite such
measures, the volatility and disruption of the capital and credit markets have
continued at unprecedented levels, and global recessionary conditions are
expected to continue. These conditions have produced and will continue to
produce downward pressure on stock prices and on availability and cost of credit
for financial institutions, including the Group, and will continue to impact on
the credit quality of the Group’s customers and counterparties. Such conditions,
alone or in combination with regulatory changes or actions of other market
participants, may cause the Group to experience further reductions in business
activity, increased funding costs and funding pressures, lower share prices,
decreased asset values, additional write downs and impairment charges and lower
profitability or to incur losses.
In
addition, the Group will continue to be exposed to the risk of loss if major
corporate borrowers or counterparty financial institutions fail or are otherwise
unable to meet their obligations. The Group’s performance may also be affected
by future recovery rates on assets and the historical assumptions underlying
asset recovery rates, which may no longer be accurate given the unprecedented
market disruption and general economic instability. The precise nature of all
the risks and uncertainties the Group faces as a result of current economic
conditions cannot be predicted and many of these risks are outside the Group’s
control.
Any
conversion of the B Shares would significantly increase HM Treasury’s ownership
interest in RBS, have a corresponding dilutive effect on other RBS Shareholders
and could result in the delisting of RBS’s securities.
At
the same time as RBS announced its proposed participation in the APS, RBS
announced that, if it participated in the APS, it would issue £6.5 billion of B
Shares to HM Treasury. RBS also announced that it would issue a further £13
billion of B Shares to HM Treasury on or after implementation of the APS, and HM
Treasury would grant RBS the option to require HM Treasury to purchase a further
£6 billion of B Shares from it. The B Shares, if issued, will rank pari passu
with the Ordinary Shares on a winding-up. The B Shares would be convertible, at
the option of the holder at any time, into Ordinary Shares at an initial
conversion price of £0.50 per Ordinary Share. HM Treasury would agree not to
convert any B Shares it holds if, as a result of such conversion, it would hold
75 per cent. or more of the Ordinary Shares, unless the price of the Ordinary
Shares is equal to or exceeds £0.65 for a specified period in which case
conversion is mandatory in any event. If all £25.5 billion of B Shares are
issued, such conversion of the B Shares would significantly increase HM
Treasury’s ownership interest in RBS up to approximately 84.4 per cent. of the
Company’s issued share capital, and have a corresponding dilutive effect on
other RBS Shareholders (as would the issue of the B Shares themselves in the
event of a winding-up) although any such conversion would have no impact on the
Group’s Tier 1 capital position. Furthermore, a mandatory conversion of the B
Shares by HM Treasury would put RBS in breach of the Listing Rules requirement
that 25 per cent. of its issued share capital must be in public hands. Although
RBS may apply to the UKLA for a waiver in such circumstances, there is no
guarantee that such a waiver would be granted, the result of which could be the
delisting of RBS from the Official List and potentially other exchanges where
its securities are currently listed and traded. In addition, HM Treasury will
not be entitled to vote in respect of Ordinary Shares acquired by it as a result
of the conversion of B Shares into Ordinary Shares to the extent, but only to
the extent, that votes cast on such Ordinary Shares, together with any other
votes which HM Treasury is entitled to cast in respect of any other Ordinary
Shares held by or on behalf of HM Treasury would exceed 75 per cent. of the
total votes eligible to be cast on a resolution presented at a general meeting
of the Company.
Lack
of liquidity is a risk to the Group’s business and its ability to access sources
of liquidity has been, and will continue to be, constrained.
Liquidity risk is
the risk that a bank will be unable to meet its obligations, including funding
commitments, as they fall due. This risk is inherent in banking operations and
can be heightened by a number of enterprise specific factors, including an
over-reliance on a particular source of funding (including, for example, short
term and overnight funding), changes in credit ratings or market-wide phenomena
such as market dislocation and major disasters. Credit markets worldwide have
experienced and continue to experience a severe reduction in liquidity and
term-funding in the aftermath of events in the US sub-prime residential mortgage
market and the current severe market dislocation. Perception of counterparty
risk between banks has also increased significantly following the bankruptcy
filing by Lehman Brothers. This increase in perceived counterparty risk has led
to further reductions in inter-bank lending, and hence, in common with many
other banks, the Group’s access to traditional sources of liquidity has been,
and may continue to be, restricted.
The Group’s
liquidity management focuses on maintaining a diverse and appropriate funding
strategy for its operations, controlling the mismatch of maturities and
carefully monitoring its undrawn commitments and contingent liabilities.
However, the Group’s ability to access sources of liquidity (for example,
through the issue or sale of financial and other instruments or through the use
of term loans) during the recent period of liquidity stress has been constrained
to the point where it, like other banks, has had to rely on shorter term and
overnight funding with a consequent reduction in overall liquidity, and to
increase its recourse to liquidity schemes provided by central
banks.
In
addition, there is also a risk that corporate and institutional counterparties
with credit exposures may look to reduce all credit exposures to banks, given
current risk aversion trends. It is possible that credit market dislocation
becomes so severe that overnight funding from non-government sources ceases to
be available.
Furthermore, like
many banks, the Group relies on customer deposits to meet a considerable portion
of its funding requirements and such deposits are subject to fluctuation due to
certain factors outside the Group’s control, such as a loss of confidence,
competitive pressures or the encouraged or mandated repatriation of deposits by
foreign wholesale or central bank depositors which could result in a significant
outflow of deposits within a short period of time. Any material decrease in the
Group’s deposits could, particularly if accompanied by one of the other factors
described above, have a negative impact on the Group’s liquidity unless
corresponding actions were taken to improve the liquidity profile of other
deposits or to reduce assets.
The governments of
some of the countries in which the Group operates have taken steps to guarantee
the liabilities of the banks and branches operating in their respective
jurisdiction. Whilst in some instances the operations of the Group are covered
by government guarantees alongside other local banks, in other countries this
may not necessarily always be the case. This may place subsidiaries operating in
those countries, such as Ulster Bank Ireland Ltd, which did not participate in
such government guarantee schemes, at a competitive disadvantage to the other
local banks and therefore may require the Group to provide additional funding
and liquidity support to these operations.
There can be no
assurance that these measures, alongside other available measures, will succeed
in improving the funding and liquidity in the markets in which the Group
operates, or that these measures, combined with any increased cost of any
funding currently available in the market, will not lead to a further increase
in the Group’s overall cost of funding, which could have an adverse impact on
the Group’s financial condition and results of operations or result in a loss of
value in RBS shares.
14
Business review
continued
Governmental
support schemes are subject to cancellation, change or withdrawal (on a general
or individual basis), which may have a negative impact on the availability of
funding in the markets in which the Group operates.
Governmental
support schemes are subject to cancellation, change or withdrawal (on a
general or individual basis), based on changing economic and political
conditions in the jurisdiction of the relevant scheme. Furthermore, certain
schemes which have been recently announced have in fact not been fully
implemented, or their terms have not yet been finalised. To the extent
government support schemes are cancelled, changed or withdrawn in a manner which
diminishes their effectiveness, or to the extent such schemes fail to generate
additional liquidity or other support in the relevant markets in which such
schemes operate, the Group, in common with other banks, may continue to face
limited access to, have insufficient access to, or incur higher costs associated
with, funding alternatives, which could have a material adverse impact on the
Group’s business, financial condition, results of operations and prospects and
result in a loss of value in RBS shares.
The
financial performance of the Group has been and will be affected by borrower
credit quality.
Risks arising from
changes in credit quality and the recoverability of loans and amounts due from
counterparties are inherent in a wide range of the Group’s businesses. The
outlook for the global economy over the near to medium term has continued to
deteriorate, particularly in the UK, the United States and other European
economies. For example, there is an expectation of further reductions in
residential and commercial property prices, higher unemployment rates and
reduced profitability of corporate borrowers. As a result, the Group has seen
and expects to continue to see adverse changes in the credit quality of
its
15
Business review
continued
borrowers and
counterparties, with increasing delinquencies, defaults and insolvencies across
a range of sectors. This trend has led and may lead to further impairment
charges, higher costs, additional write downs and losses for the Group or result
in a loss of value in RBS shares.
The actual or
perceived failure or worsening credit of the Group’s counterparties has
adversely affected and could continue
to adversely affect the Group.
The Group’s ability
to engage in routine funding transactions has been and will continue to be
adversely affected by the actual or perceived failure or worsening credit of its
counterparties, including other financial institutions and corporate borrowers.
The Group has exposure to many different industries and counterparties and
routinely executes transactions with counterparties in the financial industry,
including brokers and dealers, commercial banks, investment banks, mutual and
hedge funds and other institutional clients. As a result, defaults by, or even
the perceived creditworthiness of or concerns about, one or more corporate
borrowers, financial services institutions, or the financial services industry
generally, have led to market-wide liquidity problems and could lead to losses
or defaults by the Group or by other institutions. Many of these transactions
expose the Group to credit risk in the event of default of the Group’s
counterparty or client. In addition, the Group’s credit risk is exacerbated when
the collateral it holds cannot be realised or is liquidated at prices not
sufficient to recover the full amount of the loan or derivative exposure that is
due to the Group, which is most likely to occur during periods of illiquidity
and depressed asset valuations, such as those currently experienced. Any such
losses could have a material adverse effect on the Group’s results of operations
and financial condition or result in a loss of value in RBS
shares.
The
Group’s earnings and financial condition have been, and its future earnings and
financial condition are likely to continue to be, affected by depressed asset
valuations resulting from poor market conditions.
Financial markets
are currently subject to significant stress conditions, where steep falls in
perceived or actual asset values have been accompanied by a severe reduction in
market liquidity, as exemplified by recent events affecting asset backed
collateralised debt obligations (CDOs), the US sub-prime residential mortgage
market and the leveraged loan market. In dislocated markets, hedging and other
risk management strategies have proven not to be as effective as they are in
normal market conditions due in part to the decreasing credit quality of hedge
counterparties, including monoline and other insurance companies and credit
derivative product companies. Severe market events have resulted in the Group
recording large write-downs on its credit market exposures in 2007 and 2008. The
Group expects that the deterioration in economic and financial market conditions
will lead to further impairment charges and write-downs during the current
financial year. Moreover, recent market volatility and illiquidity has made it
difficult to value certain of the Group’s exposures. Valuations in future
periods, reflecting, among other things, then-prevailing market conditions and
changes in the credit ratings of certain of the Group’s assets, may result in
significant changes in the fair values of the Group’s exposures, even in respect
of exposures, such as credit market exposures, for which the Group has
previously recorded write-downs. In addition, the value ultimately realised by
the Group may be materially different from the current or estimated fair value.
Any of these factors could require the Group to recognise further significant
write-downs or realise increased impairment charges, any of which may adversely
affect its capital position, its financial condition and its results of
operations or result in a loss of value in RBS shares.
The
value or effectiveness of any credit protection that the Group has purchased
from monoline and other insurers and other market counterparties (including
credit derivative product companies) depends on the value of the underlying
assets and the financial condition of the insurers and such
counterparties.
The Group has
credit exposure arising from over-the-counter derivative contracts, mainly
credit default swaps (CDSs), which are carried at fair value. The fair value of
these CDSs, as well as the Group’s exposure to the risk of default by the
underlying counterparties, depends on the valuation and the perceived credit
risk of the instrument against which protection has been bought. Since 2007,
monoline and other insurers and other market counterparties (including credit
derivative product companies) have been adversely affected by their exposure to
residential mortgage linked and corporate credit products. As a result, their
actual and perceived credit worthiness deteriorated significantly in 2008 and
may continue to be so impacted in 2009. If the financial condition of these
counterparties or their actual and perceived credit worthiness deteriorates
further, the Group may record further credit valuation adjustments on the CDSs
bought from these counterparties in addition to those already
recorded.
Changes
in interest rates, foreign exchange rates, bond, equity and commodity prices,
and other market factors have significantly affected and will continue to affect
the Group’s business.
Some of the most
significant market risks the Group faces are interest rate, foreign exchange,
bond, equity and commodity price risks. Changes in interest rate levels, yield
curves and spreads may affect the interest rate margin realised between lending
and borrowing costs, the effect of which may be heightened during periods of
liquidity stress, such as those experienced in recent months. Changes in
currency rates, particularly in the sterling-US dollar and sterling-euro
exchange rates, affect the value of assets, liabilities, income and expenses
denominated in foreign currencies and the reported earnings of the Group’s
non-UK subsidiaries (principally ABN AMRO, Citizens and RBS Greenwich Capital)
and may affect income from foreign exchange dealing. The performance of
financial markets may affect bond, equity and commodity prices and, therefore,
cause changes in the value of the Group’s investment and trading portfolios.
This has been the case during the period since August 2007, with market
disruptions and volatility resulting in significant reductions in the value of
such portfolios. While the Group has implemented risk management methods to
mitigate and control these and other market risks to which it is exposed, it is
difficult, particularly in the current environment, to predict with accuracy
changes in economic or market conditions and to anticipate the effects that such
changes could have on the Group’s financial performance and business operations
or result in a loss of value in RBS shares.
The
Group’s borrowing costs and its access to the debt capital markets depend
significantly on its credit ratings.
On 19
January 2009, S&P affirmed the long-term and short-term counterparty credit
ratings for the Royal Bank at A+ and A-1 respectively. The outlook for all
entities of the Group was confirmed as stable, reflecting S&P’s view that
the Group is of systemic importance to the UK banking system and that S&P
now explicitly factor four notches of uplift into their long-term counterparty
credit rating on the Group. At the same time S&P lowered its ratings on the
Group’s hybrid capital issues to BB from BBB, additionally the BB rating was
placed under CreditWatch with negative implications. On
the same date, Fitch affirmed the Group and the Royal Bank’s Long-term and
Short-term Issuer Default Ratings at AA- and F1+ respectively and downgraded the
Group and the Royal Bank’s individual ratings to E from B/C. The outlook for the
Issuer Default Ratings remains stable reflecting Fitch’s expectation of
continued strong government support for the Group. The Group’s support rating
was upgraded from 1 to 5 and its support floor revised to AA- from No Floor.
Fitch also downgraded the Group and the Royal Bank’s Tier 1 preference shares to
BB- from A+, and upper tier 2 hybrid capital instruments issued by Group
companies to BB from A+ and placed all of these securities on Rating Watch
Negative. Moody’s
on 20 January 2009 downgraded the senior unsecured
rating of the Royal Bank to Aa3 from Aa1 with a negative outlook. The Group’s
senior debt rating was downgraded to A1 from Aa2 again with a negative outlook.
The Bank
Financial Strength Rating was
lowered to C- from B and remains under review for further possible downgrade.
The short term P-1 ratings of both the Group and the Royal Bank were
affirmed. The outlook for
all Group entities incorporates Moody’s view on the long-term credit profile of
the Group beyond the current government support-phase as well as their view of
the very high probability of on-going support from the Aaa-rated UK Government.
Any future
reductions in the long-term credit ratings of the Group or one of its principal
subsidiaries (particularly the Royal Bank) could further increase its borrowing
costs. Any further reductions may also limit the Group’s access to the capital
markets and trigger additional collateral requirements in derivative contracts
and other secured funding arrangements. Credit ratings of the Group and the
Royal Bank are also important to the Group when competing in certain markets,
such as over-the-counter derivatives. As a result, any further reductions in the
Group’s or the Royal Bank’s credit ratings could adversely affect its access to
liquidity and competitive position, increase its funding costs and have a
negative impact on the Group’s earnings and financial condition or result in a
loss of value in RBS shares.
The
Group’s business performance could be adversely affected if its capital is not
managed effectively.
Effective
management of the Group’s capital is critical to its ability to operate its
businesses, to grow organically and to pursue its strategy. The Group is
required by regulators in the United Kingdom, the United States, the Netherlands
and in other jurisdictions in which it undertakes regulated activities, to
maintain adequate capital. The maintenance of adequate capital is also necessary
to enhance the Group’s financial flexibility in the face of continuing
turbulence and uncertainty in the global economy. Accordingly, the purpose of
the First Placing and Open Offer and the issue of the Preference Shares was to
allow the company to strengthen its capital position. As at 31 December 2008 the
Group’s Tier 1 and Core Tier 1 capital ratios were 10.0 per cent. and 6.8
per cent. respectively, using the Basel II methodology. Although the net
proceeds of the First Placing and Open Offer and the Preference Share Issue
strengthened the Group’s capital base significantly, and the net proceeds of the
Second Placing and Open Offer were used to redeem the existing £5 billion
of Preference Shares and which thereby improved the quality of the Group’s
capital by increasing the Group’s Core Tier 1 capital ratio, any change that
limits the Group’s ability effectively to manage its balance sheet and capital
resources going forward (including, for example, reductions in profits and
retained earnings as a result of write-downs or otherwise,
16
Business review
continued
increases in
risk-weighted assets, delays in the disposal of certain assets or the inability
to syndicate loans as a result of market conditions or otherwise) or to access
funding sources, could have a material adverse impact on its financial condition
and regulatory capital position or result in a loss of value in RBS
shares.
The
value of certain financial instruments recorded at fair value is determined
using financial models incorporating assumptions, judgements and estimates that
may change over time or may ultimately not turn out to be accurate.
Under IFRS, the
Group recognises at fair value: (i) financial instruments classified as
‘held-for-trading’ or ‘designated as at fair value through profit or loss’; (ii)
financial assets classified as ‘available-for-sale’; and (iii) derivatives, each
as further described in ‘Accounting Policies’ on page 166 of the financial
statements. Generally, to establish the fair value of these instruments, the
Group relies on quoted market prices or, where the market for a financial
instrument is not sufficiently active, internal valuation models that utilise
observable market data. In certain circumstances, the data for individual
financial instruments or classes of financial instruments utilised by such
valuation models may not be available or may become unavailable due to changes
in market conditions, as has been the case during the current financial crisis.
In such circumstances, the Group’s internal valuation models require the Group
to make assumptions, judgements and estimates to establish fair value. In common
with other financial institutions, these internal valuation models are complex,
and the assumptions, judgements and estimates the Group is required to make
often relate to matters that are inherently uncertain, such as expected cash
flows, the ability of borrowers to service debt, residential and commercial
property price appreciation and depreciation, and relative levels of defaults
and deficiencies. Such assumptions, judgements and estimates may need to be
updated to reflect changing facts, trends and market conditions. The resulting
change in the fair values of the financial instruments has had and could
continue to have a material adverse effect on the Group’s earnings and financial
condition. Also, recent market volatility and illiquidity has challenged the
factual bases of certain underlying assumptions and has made it difficult to
value certain of the Group’s financial instruments. Valuations in future
periods, reflecting prevailing market conditions, may result in further
significant changes in the fair values of these instruments, which could have a
negative effect on the Group’s results of operations and financial condition or
result in a loss of value in RBS shares.
The
Group’s future earnings and financial condition in part depend on the success of
the Group’s strategic refocus on core strengths and its disposal
programme.
In light of the
recently changed global economic outlook, the Group has embarked on a
restructuring which focused on achieving appropriate risk-adjusted returns
under these changed circumstances, reducing reliance on wholesale funding and
lowering exposure to capital intensive businesses. The Group will also continue
with its disposal programme and continue to review its portfolio to identify
further disposals of certain non-core assets. For further details
of these re-structuring plans, please read “Business Review – Strategic Review”
on page 9 of this document.
Although
the proceeds of the Second Placing and Open Offer improved the quality
of the Group's capital by replacing the existing £5 billion of
Preference Shares with £5 billion of Core Tier 1 capital, the global credit
markets remain challenging and the Group’s execution of its current and future
strategic plans may not be successful. In connection with the implementation of
these plans, the Group may incur restructuring charges, which may be material.
Furthermore, if the Group’s plans, including any planned disposals, are not
successful or fail to achieve the results expected, the Group’s business,
capital position financial condition, results of operations and future prospects
may be negatively impacted or this could result in a loss of value in RBS
shares.
The
Group operates in markets that are highly competitive and consolidating. If the
Group is unable to perform effectively, its business and results of operations
will be adversely affected.
Recent
consolidation among banking institutions in the United Kingdom, the United
States and throughout Europe is changing the competitive landscape for banks and
other financial institutions. This consolidation, in combination with the
introduction of new entrants into the US and UK markets from other European and
Asian countries, could increase competitive pressures on the Group. Moreover, if
financial markets continue to be volatile, more banks may be forced to
consolidate.
In
addition to the effects of consolidation, increased government ownership of, and
involvement in, banks generally may have an impact on the competitive landscape
in the major markets in which the Group operates. Although, at present, it is
difficult to predict what the effects of this increased government ownership and
involvement will be or how it will differ from jurisdiction to jurisdiction,
such involvement may cause the Group to experience stronger competition for
corporate, institutional and retail clients and greater pressure on profit
margins. Since the markets in which the Group operates are expected to remain
highly competitive in all areas, these and other changes to the competitive
landscape could adversely affect the Group’s business, margins, profitability
and financial condition or result in a loss of value in RBS shares.
The
Group has agreed to certain undertakings in relation to the operation of its
business in the First Placing and Open Offer Agreement,
the Second Placing and Open Offer Agreement and
in connection with the proposed APS, which may serve to limit the Group’s
operations.
Under
the terms of the First Placing and Open Offer Agreement, the Group provided
certain undertakings aimed at ensuring that the subscription by HM Treasury for
the relevant Ordinary Shares and the Preference Shares and the Group’s potential
participation in the guarantee scheme promoted by HM Treasury as part of its
support for the UK banking industry are
compatible with the common market under EU law. These undertakings include (i)
supporting certain initiatives in relation to mortgage lending and lending to
SMEs until 2011, (ii) regulating management remuneration and (iii) regulating
the rate of growth of the Group’s balance sheet. Under
the terms
of the Second Placing and Open Offer Agreement, the Group’s
undertakings in relation to mortgage lending and lending to SMEs were extended
to larger commercial and industrial companies in the United Kingdom.
These undertakings
may serve to limit the Group’s operations. In addition, pursuant to the
Lending
Commitments Letter, the
Group is subject to further undertakings, which supersede
the lending commitments made to HM Treasury in October
2008 and January 2009 by agreeing to lend £16 billion above the amount the Group
had budgeted to lend to UK businesses and £9 billion above the amount the
Group had budgeted to lend to UK homeowners in the year commencing 1
March 2009, with a commitment to lend at similar levels in the year commencing 1
March 2010. For a description of these undertakings, please read “Material
Contracts” on page 267 of this document.
The
Group could fail to attract or retain senior management or other key
employees.
The Group’s ability
to implement its strategy depends on the ability and experience of its senior
management and other key employees. The loss of the services of certain key
employees, particularly to competitors, could have a negative impact on the
Group’s business. The Group’s future success will also depend on its ability to
attract, retain and remunerate highly skilled and qualified personnel
competitively with its peers. This cannot be guaranteed, particularly in
light of heightened regulatory oversight of banks and heightened scrutiny of,
and (in some cases) restrictions placed upon, management compensation
arrangements, in particular those in receipt of Government funding (such as the
Group). The Group recently announced changes to its compensation structure which
included significant reductions in bonuses to be paid in respect of 2008, and
limitations on pay rises in 2009. Details of these changes are outlined in the
letter from the Chairman of the Remuneration Committee on page 140. In addition
to the effects of such measures on the Group’s ability to retain senior
management and other key employees, the marketplace for skilled personnel is
becoming more competitive, which means the cost of hiring, training and
retaining skilled personnel may continue to increase. The failure to attract or
retain a sufficient number of appropriately skilled personnel could prevent the
Group from successfully implementing its strategy, which could have a material
adverse effect on the Group’s financial condition and results of, operations or
result in a loss of value in RBS shares.
Each
of the Group’s businesses is subject to substantial regulation and oversight.
Any significant regulatory developments could have an effect on how the Group
conducts its business and on its results of operations and financial
condition.
The Group is
subject to financial services laws, regulations, administrative actions and
policies in each location in which it operates. All of these are subject to
change, particularly in the current market environment, where there have been
unprecedented levels of government intervention and changes to the regulations
governing financial institutions, including recent nationalisations in the
United Kingdom, the United States and other European countries. As a result of
these and other ongoing and possible future changes in the financial services
regulatory landscape (including requirements imposed by virtue of the Group’s
participation in any government or regulator-led initiatives), the Group expects
to face greater regulation in the United Kingdom, the United States, the
Netherlands and other countries in which it operates, including throughout the
rest of Europe.
17
Business review
continued
Compliance with
such regulations may increase the Group’s capital requirements and costs and
have an adverse impact on its business, the products and services it offers and
the value of its assets or result in a loss of value in RBS shares.
Other areas where
governmental policies and regulatory changes could have an adverse impact
include, but are not limited to:
|
·
|
the monetary,
interest rate, capital adequacy and other policies of central banks and
regulatory authorities;
|
|
·
|
general
changes in government or regulatory policy or changes in regulatory
regimes that may significantly influence investor decisions in particular
markets in which the Group operates or may increase the costs of doing
business in those markets;
|
|
·
|
changes to
financial reporting standards;
|
|
·
|
other general
changes in the regulatory requirements, such as prudential rules relating
to the capital adequacy framework and the imposition of onerous compliance
obligations, restrictions on business growth or pricing and requirements
to operate in a way that prioritises objectives other than shareholder
value creation;
|
|
·
|
changes in
competition and pricing
environments;
|
|
·
|
further
developments in the financial reporting
environment;
|
|
·
|
differentiation
amongst financial institutions by governments with respect to the
extension of guarantees to bank customer deposits and the terms attaching
to such guarantees, including requirements for the entire Group to accept
exposure to the risk of any individual member of the Group, or even third
party participants in guarantee schemes,
failing;
|
|
·
|
implementation
of, or costs related to, local customer or depositor compensation or
reimbursement schemes;
|
|
·
|
transferability
and convertibility of currency
risk;
|
|
·
|
expropriation,
nationalisation and confiscation of
assets;
|
|
·
|
changes in
legislation relating to foreign ownership;
and
|
18
Business review
continued
|
·
|
other
unfavourable political, military or diplomatic developments producing
social instability or legal uncertainty which, in turn, may affect demand
for the Group’s products and
services.
|
The
Group’s results have been and could be further adversely affected in the event
of goodwill impairment.
The Group capitalises goodwill,
which is calculated as the excess of the cost of an acquisition over the net
fair value of the identifiable assets, liabilities and contingent liabilities
acquired. Acquired goodwill is recognised initially at cost and subsequently at
cost less any accumulated impairment losses. As required by IFRS, the Group
tests goodwill for impairment annually or more frequently, at external reporting
dates, when events or circumstances indicate that it might be impaired. An
impairment test involves comparing the recoverable amount (the higher of value
in use and fair value less cost to sell) of an individual cash generating unit
with its carrying value. The value in use and fair value of the Group’s cash
generating units are affected by market conditions and the performance of the
economies in which the Group operates. Where the Group is required to recognise
a goodwill impairment, it is recorded in the Group’s income statement, although
it has no effect on the Group’s regulatory capital position. For the year ended
31 December 2008, the Group recorded a £32.6 billion accounting write-down
of goodwill and other intangibles relating to prior year
acquisitions.
The
Group may be required to make further contributions to its pension schemes if
the value of pension fund assets is not sufficient to cover potential
obligations.
The Group maintains
a number of defined benefit pension schemes for past and current employees.
Pensions risk is the risk that the liabilities of the Group’s various defined
benefit pension schemes which are long term in nature will exceed the schemes’
assets, as a result of which the Group is required or chooses to make additional
contributions to the schemes. The schemes’ assets comprise investment portfolios
that are held to meet projected liabilities to the scheme members. Risk arises
from the schemes because the value of these asset portfolios and returns from
them may be less than expected and because there may be greater than expected
increases in the estimated value of the schemes’ liabilities. In these
circumstances, the Group could be obliged, or may choose, to make additional
contributions to the schemes, and during recent periods, the Group has
voluntarily made such contributions. Given the current economic and financial
market difficulties and the prospects for them to continue over the near and
medium term, the Group may be required or elect to make further contributions to
the pension schemes and such contributions could be significant and have a
negative impact on the Group’s capital position results of operations or
financial condition or result in a loss of value in RBS shares.
The
Group is and may be subject to litigation and regulatory investigations that may
impact its business.
The Group’s
operations are diverse and complex and it operates in legal and regulatory
environments that expose it to potentially significant litigation, regulatory
investigation and other regulatory risk. As a result, the Group is, and may in
the future be, involved in various disputes, legal proceedings and regulatory
investigations in the United Kingdom, the United States and other jurisdictions,
including class-action litigation. Furthermore, the Group, like many other
financial institutions, has come under greater regulatory scrutiny over the last
year and expects that environment to continue for the foreseeable future,
particularly as it relates to compliance with new and existing corporate
governance, employee compensation, conduct of business, anti-money laundering
and anti-terrorism laws and regulations, as well as the
provisions of applicable sanctions programmes. Disputes, legal
proceedings and regulatory investigations are subject to many uncertainties, and
their outcomes are often difficult to predict, particularly in the earlier
stages of a case or investigation. Adverse regulatory action or adverse
judgements in litigation could result in restrictions or limitations on the
Group’s operations or result in a material adverse effect on the Group’s
reputation or results of operations or result in a loss of value in RBS shares.
For details about certain litigation and regulatory investigations in which the
Group is involved, see Note 32 on the financial statements.
Operational
risks are inherent in the Group’s operations.
The Group’s
operations are dependent on the ability to process a very large number of
transactions efficiently and accurately while complying with applicable laws and
regulations where it does business. The Group has complex and geographically
diverse operations and operational risk and losses can result from internal or
external fraud, errors by employees or third-parties, failure to document
transactions properly or to obtain proper authorisation, failure to comply with
applicable regulatory requirements and conduct of business rules (including
those arising out of anti-money laundering and anti-terrorism
legislation, as well as the
provisions of applicable sanctions programmes), equipment
failures, natural disasters or the inadequacy or failure of systems and
controls, including those of the Group’s suppliers or counterparties. Although
the Group has implemented risk controls and loss mitigation actions, and
substantial resources are devoted to developing efficient procedures,
to identifying and rectifying weaknesses in existing procedures and to
training staff, it is not possible to be certain that such actions have been or
will be effective in controlling each of the operational risks faced by the
Group. Any weakness in these systems or controls, or any breaches or alleged
breaches of applicable laws or regulations could have a materially negative
impact on the Group’s business, reputation, results of operations and share
price. Notwithstanding anything contained in this risk factor, it should not be
taken as implying that either the company or the Group will be unable to comply
with its obligations as a company with securities admitted to the Official List
or as a supervised firm regulated by the FSA.
The
Group is exposed to the risk of changes in tax legislation and its
interpretation and to increases in the rate of corporate and other taxes in the
jurisdictions in which it operates.
The Group’s
activities are subject to tax at various rates around the world computed in
accordance with local legislation and practice. Action by governments to
increase tax rates or to impose additional taxes would reduce the Group’s
profitability. Revisions to tax legislation or to its interpretation might also
affect the Group’s results in the future.
The
acquisition of a majority shareholding in the Group by HM Treasury in December
2008 could lead to certain adverse tax consequences for the Group.
The
acquisition by HM Treasury of a majority shareholding in the Group in
consequence of the First Placing and Open Offer could, in certain circumstances,
have adverse tax consequences which could affect the post-tax profitability of
the Group. However,
if the
Group enters
into the APS it has agreed, in principle, to give up the right to certain UK tax
losses and allowances and this may limit the adverse tax consequences of the
acquisition by HM Treasury of a majority shareholding in the
Group.
19
Business review
continued
The
Group’s insurance businesses are subject to inherent risks involving
claims.
Future claims in
the Group’s general and life assurance business may be higher than expected as a
result of changing trends in claims experience resulting from catastrophic
weather conditions, demographic developments, changes in mortality and other
causes outside the Group’s control. These trends could affect the profitability
of current and future insurance products and services. The Group reinsures some
of the risks it has assumed and is accordingly exposed to the risk of loss
should its reinsurers become unable or unwilling to pay claims made by the Group
against them.
The
Group’s operations have inherent reputational risk.
Reputational risk,
meaning the risk to earnings and capital from negative public opinion, is
inherent in the Group’s business. Negative public opinion can result from the
actual or perceived manner in which the Group conducts its business activities
or from actual or perceived practices in the banking and financial industry.
Negative public opinion may adversely affect the Group’s ability to keep and
attract customers and, in particular, corporate and retail depositors. The Group
cannot ensure that it will be successful in avoiding damage to its business from
reputational risk.
In
the United Kingdom and in other jurisdictions, the Group is responsible for
contributing to compensation schemes in respect of banks and other authorised
financial services firms that are unable to meet their obligations to
customers.
In
the United Kingdom, the Financial Services Compensation Scheme (the “Scheme”)
was established under the FSMA and is the UK’s statutory fund of last resort for
customers of authorised financial services firms. The Scheme can pay
compensation to customers if a firm is unable, or likely to be unable, to pay
claims against it and, if the Banking Bill is enacted in its current form, may
be required to make payments either in connection with the exercise of a
stabilisation power or in exercise of the bank insolvency procedures under that
Bill. The Scheme is funded by levies on firms authorised by the FSA, including
the Group. In the event that the Scheme raises funds from the authorised firms,
raises those funds more frequently or significantly increases the levies to be
paid by such firms, the associated costs to the Group may have a material impact
on its results of operations and financial condition. During the financial year
ended 31 December 2008, the Group made a provision of £150 million related to a
levy by the Scheme.
In
addition, to the extent that other jurisdictions where the Group operates have
introduced or plan to introduce similar compensation, contributory or
reimbursement schemes (such as in the United States with the Federal Deposit
Insurance Corporation), the Group may make further provisions and may incur
additional costs and liabilities, which may negatively impact its financial
condition and results of operations or result in a loss of value in RBS
shares.
The
Group’s business and earnings may be affected by geopolitical
conditions.
The performance of
the Group is significantly influenced by the geopolitical and economic
conditions prevailing at any given time in the countries in which it operates,
particularly the United Kingdom, the United States and other countries in Europe
and Asia. For example, the Group has a presence in countries where businesses
could be exposed to the risk of business interruption and economic slowdown
following the outbreak of a pandemic, or the risk of sovereign default following
the assumption by governments of the obligations of private sector institutions.
Similarly the Group faces the heightened risk of trade barriers, exchange
controls and other measures taken by sovereign governments which may impact a
borrower’s ability to repay. Terrorist acts and threats and the response to them
of governments in any of these countries could also adversely affect levels of
economic activity and have an adverse effect upon the Group's
business.
The
restructuring proposals for ABN AMRO are complex and may not realise the
anticipated benefits for the Group.
The restructuring
plan in place for the integration and separation of ABN AMRO into and among the
businesses and operations of the consortium members is complex, involving
substantial reorganisation of ABN AMRO’s operations and legal structure. In
addition, the plan contemplates activities taking place simultaneously in a
number of businesses and jurisdictions. Although integration efforts are well
underway and are being advanced on a number of fronts, the implementation of the
reorganisation and the realisation of the forecast benefits within the planned
timescales, particularly given current market and economic conditions, remains
challenging, although the Group remains confident that such goals will be
achieved. Execution of the restructuring requires management resources
previously devoted to the Group businesses and the retention of appropriately
skilled ABN AMRO staff. The Group may not realise the benefits of the
acquisition or the restructuring when expected or to the extent projected.
The occurrence of
any of these events, including as a result of staff losses or performance
issues, may have a negative impact on the Group’s financial condition and
results of operations. It is not expected
that the Dutch State’s acquisition of Fortis Bank Nederland’s shares in RFS
Holdings, which was effected in December 2008, will materially affect the
integration benefits envisaged by the Group.
The
recoverability of certain deferred tax assets recognised by the Group depend on
the Group's ability to generate sufficient future taxable profits and there
being no adverse changes to tax legislation.
In
accordance with IFRS, the Group has recognised deferred tax assets on losses
available to relieve future profits from tax only to the extent that it is
probable that they will be recovered. The losses are quantified on the basis of
current tax legislation and are subject to change in respect of the rate of tax
or the rules for computing taxable profits and allowable losses. Failure to
generate sufficient future taxable profits or changes in tax legislation may
reduce the recoverable amount of the recognised deferred tax
assets.
RBS’s
ability to pay dividends on or make other distributions in respect of the
Ordinary Shares will depend on the availability of distributable reserves and
may be limited by the terms of the B Shares.
RBS’s ability to
pay dividends is limited under UK company law, which limits a company to only
paying cash dividends to the extent that it has distributable reserves and cash
available for this purpose. As a holding company, RBS’s ability to pay dividends
in the future is affected by a number of factors, principally its ability to
receive sufficient dividends from subsidiaries. The payment of dividends to RBS
by its subsidiaries is, in turn, subject to restrictions, including certain
regulatory requirements and the existence of sufficient distributable reserves
and cash in RBS’s subsidiaries. The ability of these subsidiaries to pay
dividends and RBS’s ability to receive distributions from its investments in
other entities are subject to applicable local laws and regulatory requirements
and other restrictions, including, but not limited to, applicable tax laws and
covenants in some of RBS’s debt facilities. These laws and restrictions could
limit the payment of future dividends and distributions to RBS by its
subsidiaries, which could restrict RBS’s ability to fund other operations or to
pay, in due course, a dividend to holders of the Existing Shares or the New
Shares.
In addition, if the B Shares are
issued, no cash dividend may be paid on the Ordinary Shares unless the cash
dividend payable in respect of the same period on the B Shares is paid in full,
and no scrip dividend may be paid on the Ordinary Shares unless the cash or
scrip dividend payable in respect of the same period on the B Shares is paid in
full.
20
|
2008
|
2007
|
2006
|
||||||||||
|
for
the year ended 31 December
|
£m | £m | £m | |||||||||
|
Total
income
|
25,868 | 30,366 | 28,002 | |||||||||
|
Operating
(loss)/profit before tax
|
(40,836 | ) | 9,832 | 9,186 | ||||||||
|
(Loss)/profit
attributable to ordinary shareholders
|
(24,306 | ) | 7,303 | 6,202 | ||||||||
|
Cost: income
ratio
|
209.5% | 45.9% | 44.6% | |||||||||
|
Basic
(loss)/earnings per share (pence) (1)
|
(146.7p | ) | 64.0p | 54.4p | ||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
at
31 December
|
£m | £m | £m | |||||||||
|
Total
assets
|
2,401,652 | 1,840,829 | 856,832 | |||||||||
|
Loans and
advances to customers
|
874,722 | 828,538 | 466,893 | |||||||||
|
Deposits
|
897,556 | 994,657 | 516,365 | |||||||||
|
Owners’
equity
|
58,879 | 53,038 | 40,227 | |||||||||
|
Risk asset
ratio – Tier 1 (2)
|
10.0% | 7.3% | 7.5% | |||||||||
|
–
total
|
14.1% | 11.2% | 11.7% | |||||||||
Notes:
|
(1)
|
Prior year per
share data have been restated to reflect the rights issue in June 2008 and
the capitalisation issue in September
2008.
|
|
(2)
|
2008 data are
on a Basel II basis; data for 2007 and 2006 are on a Basel I
basis.
|
Overview
of results
As
discussed on page 2, the results of ABN AMRO are fully consolidated in the
Group’s financial statements. Consequently, the statutory results of RBS for the
year ended 31 December 2007 and 2008 include the results of ABN AMRO for 76 days
and the full year respectively. The interests of the State of the Netherlands
and Santander in RFS Holdings are included in minority interests.
|
2008
|
2007
|
2006
|
||||||||||
| £m | £m | £m | ||||||||||
|
Net
interest income
|
18,675 | 12,069 | 10,596 | |||||||||
|
Fees and
commissions receivable
|
9,831 | 8,278 | 7,116 | |||||||||
|
Fees and
commissions payable
|
(2,386 | ) | (2,193 | ) | (1,922 | ) | ||||||
|
Other
non-interest income
|
(6,578 | ) | 6,125 | 6,239 | ||||||||
|
Insurance net
premium income
|
6,326 | 6,087 | 5,973 | |||||||||
|
Non-interest
income
|
7,193 | 18,297 | 17,406 | |||||||||
|
Total
income
|
25,868 | 30,366 | 28,002 | |||||||||
|
Operating
expenses
|
54,202 | 13,942 | 12,480 | |||||||||
|
(Loss)/profit
before other operating charges and impairment
|
(28,334 | ) | 16,424 | 15,522 | ||||||||
|
Insurance net
claims
|
4,430 | 4,624 | 4,458 | |||||||||
|
Impairment
losses
|
8,072 | 1,968 | 1,878 | |||||||||
|
Operating
(loss)/profit before tax
|
(40,836 | ) | 9,832 | 9,186 | ||||||||
|
Tax
|
(2,323 | ) | 2,044 | 2,689 | ||||||||
|
(Loss)/profit
after tax from continuing operations
|
(38,513 | ) | 7,788 | 6,497 | ||||||||
|
Profit/(loss)
from discontinued operations, net of tax
|
3,971 | (76 | ) | - | ||||||||
|
(Loss)/profit
for the year
|
(34,542 | ) | 7,712 | 6,497 | ||||||||
|
Minority
interests
|
(10,832 | ) | 163 | 104 | ||||||||
|
Other
owners
|
596 | 246 | 191 | |||||||||
|
(Loss)/profit
attributable to ordinary shareholders
|
(24,306 | ) | 7,303 | 6,202 | ||||||||
|
Basic earnings per ordinary
share (1)
|
(146.7p | ) | 64.0 | p | 54.4 | p | ||||||
| Diluted earnings per ordinary share | (146.7p | ) | 63.4 | p | 53.9 | p | ||||||
Note:
|
(1)
|
Prior year
data have been restated to reflect the rights issue in June 2008 and the
capitalisation issue in September
2008.
|
21
Business review
continued
2008
compared with 2007
Operating
loss
Operating loss
before tax was £40,836 million compared with an operating profit of £9,832
million in 2007. The results have been adversely affected by the write-down of
goodwill and other assets, a substantial decline in non-interest income, a
number of specific losses such as counterparty failures, and a marked increase
in the credit impairment charge, reflecting weakness in financial markets and a
deteriorating global economy.
Losses from credit
market exposures increased to £7,781 million, compared with £1,410 million in
2007, with the great majority incurred in the first half of the year. Write-down
of goodwill and other assets was £32,581 million. Other one-off items amounted
to a credit of £1,674 million, 25% higher than in 2007, principally
as a result of a £1,232 million increase in the carrying value of own
debt carried at fair value.
Loss attributable
to ordinary shareholders was £24,306 million, compared with an attributable
profit of £7,303 million in 2007.
Total
income
Total
income declined by 15% to £25,868 million, with a significant deterioration
experienced during the second half of the year principally as a result of £5.8
billion of trading asset write-downs, counterparty failure and incremental
reserving within GBM and Non-Core. While income increased in 2008 in Global
Transaction Services, UK Corporate, Ulster Bank and US Retail & Commercial,
a significant reduction occurred in UK Retail, and in Global Banking &
Markets and Non-Core, where a strong performance in rates, currencies and
commodities was offset by marked deterioration in credit markets and
equities.
Net
interest income
Net interest income
increased by 55% to £18,675 million, with average loans and advances to
customers up 61% and average customer deposits up 53%. Group net interest margin
fell from 2.32% to 2.12% largely reflecting tightened margins within UK Retail
as market interest rates fell, with deposit markets remaining competitive and
price adjustments on lending taking some time to feed through to the back
book.
Non-interest
income
Non-interest income
was severely affected by the weakness in financial markets experienced over the
course of the year, particularly in the fourth quarter. Non-interest
income decreased to £7,193 million principally due to the credit market
write-downs of £7,781 million offset by a movement in the fair value of own debt
of £1,232 million. While the decline was particularly marked in GBM and
Non-Core credit markets and equities businesses, with reduced business
volumes and mounting mark-to-market trading losses, UK Retail also saw
non-interest income fall in the latter part of the year as declining consumer
confidence led to lower demand for credit and other financial
products.
Operating
expenses
Total operating
expenses rose to £54,202 million, with cost growth in the Group’s core retail
and commercial banking franchises offset by efficiency programmes. Integration
and restructuring costs were £1,357 million compared with £108 million in 2007.
Write-down of goodwill and other assets was £32,581 million.
Net
insurance claims
Bancassurance and
general insurance claims, after reinsurance, decreased by 4% to £4,430 million,
reflecting improved risk selection, better claims management and the
non-recurrence of the severe floods experienced in 2007 and as a result of
movements in financial market values.
Impairment
losses
Impairment losses
increased to £8,072 million in 2008, compared with £1,968 million in 2007. The
Group experienced a pronounced deterioration in impairments in the second half
of the year, as financial stress spread to a broad range of customers. The
greatest increase in impairments occurred in GBM and Non-Core, where fourth
quarter impairments included a loss of approximately £900 million on the
Group’s exposure to LyondellBasell. However businesses in all
geographies also experienced a noticeable increase in impairments in
the second half, particularly in the UK and Irish corporate and US personal
segments.
Impairments
represented 0.44% of gross loans and advances, excluding reverse repos, in the
first half but reached 1.27% in the second half. For 2008 as a whole,
impairments amounted to 0.82% of loans and advances, excluding reverse repos,
compared with 0.28% in 2007. Risk elements in lending and potential problem
loans at 31 December 2008 represented 2.52% of gross loans and advances to
customers, excluding reverse repos, compared with 1.64% a year earlier.
Provision coverage was 51%, compared with 57% at 31 December 2007 reflecting the
higher proportion of secured loans included in risk elements in lending and
potential problem
loans.
Credit
market losses
Losses for 2008
relating to the Group’s previously identified credit market exposures totalled
£7,781 million, net of hedging gains of £1,642 million. This includes impairment
losses of £466 million incurred on credit market assets reclassified out of the
‘held-for-trading’ category in line with the amendments to IAS 39 ‘Financial
Instruments: Recognition and Measurement’ issued in October. While the majority
of these write-downs were incurred in the first half of 2008, the severity of
the financial market dislocation intensified in the fourth quarter,
resulting
in further losses
in particular on the Group’s structured credit portfolios.
Write-down
of goodwill and other intangible assets
After reviewing the
carrying value of goodwill and other purchased intangible assets, the Group has
recorded an impairment charge of £32,581 million. Of this charge, £23,348
million relates to part of the goodwill in respect of the acquisition of ABN
AMRO, while other significant impairments have been recorded on part of the
Citizens/Charter One goodwill of £4,382 million, part of the NatWest goodwill
(principally allocated to Global Banking & Markets) of £2,742 million and
other goodwill of £720 million. Other intangible asset impairments of £1,389
million principally relate to the write-down in the value of customer
relationships recognised on the acquisition of ABN AMRO.
These impairments
have no cash impact, and minimal impact on the Group’s capital
ratios.
Other
non-operating items
Integration and
restructuring costs totalled £1,357 million, primarily reflecting the
integration of ABN AMRO into the Group, while the amortisation of purchased
intangibles increased to £582 million from £124 million.
Taxation
The Group recorded
a tax credit of £2,323 million in 2008, compared with a tax charge of £2,044
million in 2007. The effective tax rate for 2008 was 5.7% compared with 20.8% in
2007.
Earnings
Basic earnings per
ordinary share decreased from 64.0p to (146.7p).
The number of
shares in issue increased to 39,456 million at 31 December 2008, compared with
10,006 million in issue at 31 December 2007, reflecting the Group’s capital
raisings in June and December and the capitalisation issue in lieu of the
interim dividend for 2008.
22
Business review
continued
2007
compared with 2006
Profit
Profit before tax
was up 7%, from £9,186 million to £9,832 million. The results of ABN AMRO are
included from the date of acquisition, 17 October 2007.
Total
income
The Group achieved
strong growth in income during 2007. Total income was up 8% or £2,364 million to
£30,366 million, notwithstanding the significant impact of the developments in
global credit markets in the second half of 2007.
Net interest income increased
by 14% to £12,069 million and represents 40% of total income (2006 – 38%).
Average loans and advances to customers grew by 23% and average customer
deposits grew by 25%.
Non-interest income increased
by £891 million to £18,297 million and represents 60% of total income (2006 –
62%).
Net
interest margin
The Group’s net
interest margin at 2.32% was down from 2.53% in 2006.
Operating
expenses
Operating expenses
increased by 12% to £13,942 million. Integration costs were £108 million
compared with £134 million in 2006.
Cost:income
ratio
The Group’s
cost:income ratio was 45.9% compared with 44.6% in 2006.
Net
insurance claims
Bancassurance and
general insurance claims, after reinsurance, increased by 4% to £4,624 million
reflecting adverse weather conditions in the summer of 2007.
Impairment
losses
Impairment losses
rose 5% to £1,968 million, compared with £1,878 million in 2006.
Risk elements in
lending and potential problem loans represented 1.64% of gross loans and
advances to customers excluding reverse repos at 31 December 2007 (2006 –
1.57%).
Provision coverage
of risk elements in lending and potential problem loans was 57% (2006 –
62%).
Taxation
The effective tax
rate for 2007 was 20.8% (2006 – 29.3%). The headline rate is lower than the
standard rate of UK corporation tax of 30% principally due to certain
non-taxable capital gains and changes to deferred tax balances following the
change in rate of corporation tax.
Earnings
and dividends
Basic earnings per
ordinary share increased by 18%, from 54.4p to 64.0p.
A
final dividend of 19.3p per ordinary share was recommended and paid, giving a
total dividend for the year of 27.8p, an increase of 10%.
Balance
sheet
Total assets were
£1,840.8 billion at 31 December 2007. The acquisition of ABN AMRO in October
2007 increased assets by £774.5
billion, with the balance accounted for largely by growth in our lending to
customers and in trading assets.
Lending to
customers, excluding repurchase agreements and stock borrowing (“reverse
repos”), increased in 2007 by 70% or £282.2 billion to £686.2 billion. Customer
deposits, excluding repurchase agreements and stock lending (“repos”), grew by
71% or £227.2 billion to £547.5 billion.
Capital ratios at
31 December 2007 were 7.3% (Tier 1) and 11.2% (Total).
Bonus
issue
In
May 2007, the Group capitalised £1,576 million of its share premium account by
way of a bonus issue of two new ordinary shares of 25p each for every one
held.
Profitability
The after-tax
return on ordinary shareholders’ equity, which is based on profit attributable
to ordinary shareholders and average ordinary shareholders’ equity, was 18.8%
compared with 18.5% in 2006.
23
Net
interest income
|
2008
|
2007
|
2006
|
||||||||||
| £m | £m | £m | ||||||||||
|
Interest
receivable
|
49,522 | 32,252 | 24,688 | |||||||||
|
Interest
payable
|
(30,847 | ) | (20,183 | ) | (14,092 | ) | ||||||
|
Net interest
income
|
18,675 | 12,069 | 10,596 | |||||||||
|
%
|
%
|
%
|
||||||||||
|
Gross yield
on interest-earning assets of the banking business
|
5.61 | 6.19 | 5.90 | |||||||||
|
Cost of
interest-bearing liabilities of the banking business
|
(3.79 | ) | (4.36 | ) | (3.85 | ) | ||||||
|
Interest
spread of the banking business
|
1.82 | 1.83 | 2.05 | |||||||||
|
Benefit from
interest-free funds
|
0.30 | 0.49 | 0.48 | |||||||||
|
Net interest
margin of the banking business
|
2.12 | 2.32 | 2.53 | |||||||||
|
Yields,
spreads and margins of the banking business
|
%
|
%
|
%
|
|||||||||
|
Gross yield
(1)
|
||||||||||||
|
Group
|
5.61 | 6.19 | 5.90 | |||||||||
|
UK
|
5.72 | 6.69 | 6.13 | |||||||||
|
Overseas
|
5.54 | 5.52 | 5.50 | |||||||||
|
Interest
spread (2)
|
||||||||||||
|
Group
|
1.82 | 1.83 | 2.05 | |||||||||
|
UK
|
1.92 | 2.30 | 2.37 | |||||||||
|
Overseas
|
1.76 | 1.20 | 1.47 | |||||||||
|
Net interest
margin (3)
|
||||||||||||
|
Group
|
2.12 | 2.32 | 2.53 | |||||||||
|
UK
|
2.39 | 2.55 | 2.68 | |||||||||
|
Overseas
|
1.91 | 1.99 | 2.26 | |||||||||
|
The Royal
Bank of Scotland plc base rate (average)
|
4.67 | 5.51 | 4.64 | |||||||||
|
London
inter-bank three month offered rates (average):
|
||||||||||||
|
Sterling
|
5.51 | 6.00 | 4.85 | |||||||||
|
Eurodollar
|
2.92 | 5.29 | 5.20 | |||||||||
|
Euro
|
4.63 | 4.28 | 3.08 | |||||||||
Notes:
|
(1)
|
Gross yield is
the interest rate earned on average interest-earning assets of the banking
business.
|
|
(2)
|
Interest
spread is the difference between the gross yield and the interest rate
paid on average interest-bearing liabilities of the banking
business.
|
|
(3)
|
Net interest
margin is net interest income of the banking business as a percentage of
average interest-earning assets of the banking
business.
|
24
Business review
continued
Average
balance sheet and related interest
|
2008
|
2007
- Restated
|
|||||||||||||||||||||||
|
Average
balance
|
Interest
|
Rate
|
Average
balance
|
Interest
|
Rate
|
|||||||||||||||||||
| £m | £m |
%
|
£m | £m |
%
|
|||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||
|
Loans and
advances to banks
|
||||||||||||||||||||||||
|
–
UK
|
19,039 | 939 | 4.93 | 21,133 | 1,024 | 4.85 | ||||||||||||||||||
|
–
Overseas
|
31,388 | 1,417 | 4.51 | 12,654 | 546 | 4.31 | ||||||||||||||||||
|
Loans and
advances to customers
|
||||||||||||||||||||||||
|
–
UK
|
319,696 | 19,046 | 5.96 | 268,911 | 18,506 | 6.88 | ||||||||||||||||||
|
–
Overseas
|
393,405 | 22,766 | 5.79 | 175,301 | 10,062 | 5.74 | ||||||||||||||||||
|
Debt
securities
|
||||||||||||||||||||||||
|
–
UK
|
33,206 | 1,276 | 3.84 | 10,883 | 600 | 5.51 | ||||||||||||||||||
|
–
Overseas
|
85,625 | 4,078 | 4.76 | 31,792 | 1,514 | 4.76 | ||||||||||||||||||
|
Total
interest-earning assets
|
||||||||||||||||||||||||
|
– banking
business (2,
3)
|
882,359 | 49,522 | 5.61 | 520,674 | 32,252 | 6.19 | ||||||||||||||||||
|
– trading
business (4)
|
425,454 | 313,110 | ||||||||||||||||||||||
|
Total
interest-earning assets
|
1,307,813 | 833,784 | ||||||||||||||||||||||
|
Non-interest-earning
assets (2,
3)
|
732,872 | 289,188 | ||||||||||||||||||||||
|
Total
assets
|
2,040,685 | 1,122,972 | ||||||||||||||||||||||
|
Percentage of
assets applicable to overseas operations
|
48.6% | 38.0% | ||||||||||||||||||||||
|
Liabilities
and owners’ equity
|
||||||||||||||||||||||||
|
Deposits by
banks
|
||||||||||||||||||||||||
|
–
UK
|
46,217 | 1,804 | 3.90 | 52,951 | 2,234 | 4.22 | ||||||||||||||||||
|
–
Overseas
|
113,592 | 4,772 | 4.20 | 31,073 | 1,172 | 3.77 | ||||||||||||||||||
|
Customer
accounts: demand deposits
|
||||||||||||||||||||||||
|
–
UK
|
99,852 | 2,829 | 2.83 | 93,764 | 3,296 | 3.52 | ||||||||||||||||||
|
–
Overseas
|
70,399 | 1,512 | 2.15 | 30,739 | 1,031 | 3.35 | ||||||||||||||||||
|
Customer
accounts: savings deposits
|
||||||||||||||||||||||||
|
–
UK
|
42,870 | 1,708 | 3.98 | 36,334 | 1,658 | 4.56 | ||||||||||||||||||
|
–
Overseas
|
72,473 | 2,203 | 3.04 | 27,645 | 902 | 3.26 | ||||||||||||||||||
|
Customer
accounts: other time deposits
|
||||||||||||||||||||||||
|
–
UK
|
94,365 | 4,011 | 4.25 | 88,089 | 4,201 | 4.77 | ||||||||||||||||||
|
–
Overseas
|
105,660 | 4,097 | 3.88 | 43,141 | 2,100 | 4.87 | ||||||||||||||||||
|
Debt
securities in issue
|
||||||||||||||||||||||||
|
–
UK
|
101,520 | 4,095 | 4.03 | 57,140 | 3,060 | 5.36 | ||||||||||||||||||
|
–
Overseas
|
132,699 | 5,846 | 4.41 | 49,848 | 2,627 | 5.27 | ||||||||||||||||||
|
Subordinated
liabilities
|
||||||||||||||||||||||||
|
–
UK
|
26,300 | 1,356 | 5.16 | 23,502 | 1,300 | 5.53 | ||||||||||||||||||
|
–
Overseas
|
12,385 | 788 | 6.36 | 4,509 | 230 | 5.10 | ||||||||||||||||||
|
Internal
funding of trading business
|
||||||||||||||||||||||||
|
–
UK
|
(85,664 | ) | (3,445 | ) | 4.02 | (68,395 | ) | (3,307 | ) | 4.84 | ||||||||||||||
|
–
Overseas
|
(18,090 | ) | (729 | ) | 4.03 | (7,454 | ) | (321 | ) | 4.31 | ||||||||||||||
|
Total
interest-bearing liabilities
|
||||||||||||||||||||||||
|
– banking
business (2,
3)
|
814,578 | 30,847 | 3.79 | 462,886 | 20,183 | 4.36 | ||||||||||||||||||
|
– trading
business (4)
|
466,610 | 316,453 | ||||||||||||||||||||||
|
Total
interest-bearing liabilities
|
1,281,188 | 779,339 | ||||||||||||||||||||||
|
Non-interest-bearing
liabilities:
|
||||||||||||||||||||||||
|
Demand
deposits
|
||||||||||||||||||||||||
|
–
UK
|
45,472 | 18,416 | ||||||||||||||||||||||
|
–
Overseas
|
9,721 | 14,455 | ||||||||||||||||||||||
|
Other
liabilities (3,
4)
|
645,760 | 267,403 | ||||||||||||||||||||||
|
Owners’
equity
|
58,544 | 43,359 | ||||||||||||||||||||||
|
Total
liabilities and owners’ equity
|
2,040,685 | 1,122,972 | ||||||||||||||||||||||
|
Percentage of
liabilities applicable to overseas operations
|
46.8% | 35.9% | ||||||||||||||||||||||
Notes:
|
(1)
|
The analysis
into UK and Overseas has been compiled on the basis of location of
office.
|
|
(2)
|
Interest-earning
assets and interest-bearing liabilities include the Retail bancassurance
assets and liabilities attributable to
policyholders.
|
|
(3)
|
Interest
income and interest expense do not include interest on financial assets
and liabilities designated as at fair value through profit or
loss.
|
|
(4)
|
Interest
receivable and interest payable on trading assets and liabilities are
included in income from trading
activities.
|
The 2007
comparative amounts have been restated for the netting of certain derivative
asset and derivative liability balances with the London Clearing House, the
finalisation of the ABN AMRO acquisition accounting and for the classification
of Banco Real as a discontinued operation.
25
Business review
continued
Average
balance sheet and related interest
|
2006
- Restated
|
||||||||||||
|
Average
balance
|
Interest
|
Rate
|
||||||||||
| £m | £m |
%
|
||||||||||
|
Assets
|
||||||||||||
|
Loans and
advances to banks
|
||||||||||||
|
–
UK
|
15,934 | 681 | 4.27 | |||||||||
|
–
Overseas
|
7,237 | 237 | 3.27 | |||||||||
|
Loans and
advances to customers
|
||||||||||||
|
–
UK
|
239,086 | 15,141 | 6.33 | |||||||||
|
–
Overseas
|
121,092 | 6,977 | 5.76 | |||||||||
|
Debt
securities
|
||||||||||||
|
–
UK
|
12,816 | 598 | 4.67 | |||||||||
|
–
Overseas
|
22,032 | 1,054 | 4.78 | |||||||||
|
Total
interest-earning assets
|
||||||||||||
|
– banking
business (2,
3)
|
418,197 | 24,688 | 5.90 | |||||||||
|
– trading
business (4)
|
202,408 | |||||||||||
|
Total
interest-earning assets
|
620,605 | |||||||||||
|
Non-interest-earning
assets (2,
3)
|
199,898 | |||||||||||
|
Total
assets
|
820,503 | |||||||||||
|
Percentage of
assets applicable to overseas operations
|
35.2% | |||||||||||
|
Liabilities
and owners’ equity
|
||||||||||||
|
Deposits by
banks
|
||||||||||||
|
–
UK
|
35,985 | 1,393 | 3.87 | |||||||||
|
–
Overseas
|
28,772 | 1,228 | 4.27 | |||||||||
|
Customer
accounts: demand deposits
|
||||||||||||
|
–
UK
|
86,207 | 2,428 | 2.82 | |||||||||
|
–
Overseas
|
13,113 | 441 | 3.36 | |||||||||
|
Customer
accounts: savings deposits
|
||||||||||||
|
–
UK
|
30,933 | 1,058 | 3.42 | |||||||||
|
–
Overseas
|
19,766 | 529 | 2.68 | |||||||||
|
Customer
accounts: other time deposits
|
||||||||||||
|
–
UK
|
67,126 | 2,807 | 4.18 | |||||||||
|
–
Overseas
|
36,177 | 1,636 | 4.52 | |||||||||
|
Debt
securities in issue
|
||||||||||||
|
–
UK
|
45,829 | 2,210 | 4.82 | |||||||||
|
–
Overseas
|
25,249 | 1,076 | 4.26 | |||||||||
|
Subordinated
liabilities
|
||||||||||||
|
–
UK
|
23,873 | 1,226 | 5.14 | |||||||||
|
–
Overseas
|
2,639 | 160 | 6.06 | |||||||||
|
Internal
funding of trading business
|
||||||||||||
|
–
UK
|
(44,475 | ) | (1,893 | ) | 4.26 | |||||||
|
–
Overseas
|
(4,930 | ) | (207 | ) | 4.20 | |||||||
|
Total
interest-bearing liabilities
|
||||||||||||
|
– banking
business (2,
3)
|
366,264 | 14,092 | 3.85 | |||||||||
|
– trading
business (4)
|
204,810 | |||||||||||
|
Total
interest-bearing liabilities
|
571,074 | |||||||||||
|
Non-interest-bearing
liabilities:
|
||||||||||||
|
Demand
deposits
|
||||||||||||
|
–
UK
|
17,909 | |||||||||||
|
–
Overseas
|
11,668 | |||||||||||
|
Other
liabilities (3,
4)
|
182,976 | |||||||||||
|
Owners’
equity
|
36,876 | |||||||||||
|
Total
liabilities and owners’ equity
|
820,503 | |||||||||||
|
Percentage of
liabilities applicable to overseas operations
|
32.3% | |||||||||||
Notes:
|
(1)
|
The analysis
into UK and Overseas has been compiled on the basis of location of
office.
|
|
(2)
|
Interest-earning
assets and interest-bearing liabilities include the Retail bancassurance
assets and liabilities attributable to
policyholders.
|
|
(3)
|
Interest
income and interest expense do not include interest on financial assets
and liabilities designated as at fair value through profit or
loss.
|
|
(4)
|
Interest
receivable and interest payable on trading assets and liabilities are
included in income from trading
activities.
|
The 2006 comparative
amounts have been restated for the netting of certain derivative asset and
derivative liability balances with the London Clearing House.
26
Business review
continued
Analysis
of change in net interest income – volume and rate analysis
Volume and rate
variances have been calculated based on movements in average balances over the
period and changes in interest rates on average interest-earning assets and
average interest-bearing liabilities. Changes due to a combination of volume and
rate are allocated pro rata to volume and rate movements.
|
2008
over 2007 (restated)
|
2007
(restated) over 2006 (restated)
|
|||||||||||||||||||||||
|
Increase/(decrease)
due to changes in:
|
Increase/(decrease)
due to changes in:
|
|||||||||||||||||||||||
|
Average
volume
|
Average
rate
|
Net
change
|
Average
volume
|
Average
rate
|
Net
change
|
|||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||
|
Interest-earning
assets
|
||||||||||||||||||||||||
|
Loans and
advances to banks
|
||||||||||||||||||||||||
|
UK
|
(103 | ) | 18 | (85 | ) | 243 | 100 | 343 | ||||||||||||||||
|
Overseas
|
845 | 26 | 871 | 217 | 92 | 309 | ||||||||||||||||||
|
Loans and
advances to customers
|
||||||||||||||||||||||||
|
UK
|
3,221 | (2,681 | ) | 540 | 1,985 | 1,380 | 3,365 | |||||||||||||||||
|
Overseas
|
12,621 | 83 | 12,704 | 3,112 | (27 | ) | 3,085 | |||||||||||||||||
|
Debt
securities
|
||||||||||||||||||||||||
|
UK
|
906 | (230 | ) | 676 | (98 | ) | 100 | 2 | ||||||||||||||||
|
Overseas
|
2,564 | - | 2,564 | 465 | (5 | ) | 460 | |||||||||||||||||
|
Total
interest receivable of the banking business
|
||||||||||||||||||||||||
|
UK
|
4,024 | (2,893 | ) | 1,131 | 2,130 | 1,580 | 3,710 | |||||||||||||||||
|
Overseas
|
16,030 | 109 | 16,139 | 3,794 | 60 | 3,854 | ||||||||||||||||||
| 20,054 | (2,784 | ) | 17,270 | 5,924 | 1,640 | 7,564 | ||||||||||||||||||
|
Interest-bearing
liabilities
|
||||||||||||||||||||||||
|
Deposits by
banks
|
||||||||||||||||||||||||
|
UK
|
271 | 159 | 430 | (706 | ) | (135 | ) | (841 | ) | |||||||||||||||
|
Overseas
|
(3,452 | ) | (148 | ) | (3,600 | ) | (94 | ) | 150 | 56 | ||||||||||||||
|
Customer
accounts: demand deposits
|
||||||||||||||||||||||||
|
UK
|
(204 | ) | 671 | 467 | (227 | ) | (641 | ) | (868 | ) | ||||||||||||||
|
Overseas
|
(956 | ) | 475 | (481 | ) | (591 | ) | 1 | (590 | ) | ||||||||||||||
|
Customer
accounts: savings deposits
|
||||||||||||||||||||||||
|
UK
|
(276 | ) | 226 | (50 | ) | (206 | ) | (394 | ) | (600 | ) | |||||||||||||
|
Overseas
|
(1,367 | ) | 66 | (1,301 | ) | (241 | ) | (132 | ) | (373 | ) | |||||||||||||
|
Customer
accounts: other time deposits
|
||||||||||||||||||||||||
|
UK
|
(286 | ) | 476 | 190 | (962 | ) | (432 | ) | (1,394 | ) | ||||||||||||||
|
Overseas
|
(2,500 | ) | 503 | (1,997 | ) | (332 | ) | (132 | ) | (464 | ) | |||||||||||||
|
Debt
securities in issue
|
||||||||||||||||||||||||
|
UK
|
(1,932 | ) | 897 | (1,035 | ) | (587 | ) | (263 | ) | (850 | ) | |||||||||||||
|
Overseas
|
(3,714 | ) | 495 | (3,219 | ) | (1,248 | ) | (303 | ) | (1,551 | ) | |||||||||||||
|
Subordinated
liabilities
|
||||||||||||||||||||||||
|
UK
|
(148 | ) | 92 | (56 | ) | 19 | (93 | ) | (74 | ) | ||||||||||||||
|
Overseas
|
(489 | ) | (69 | ) | (558 | ) | (99 | ) | 29 | (70 | ) | |||||||||||||
|
Internal
funding of trading business
|
||||||||||||||||||||||||
|
UK
|
751 | (613 | ) | 138 | 1,129 | 285 | 1,414 | |||||||||||||||||
|
Overseas
|
430 | (22 | ) | 408 | 109 | 5 | 114 | |||||||||||||||||
|
Total
interest payable of the banking business
|
||||||||||||||||||||||||
|
UK
|
(1,824 | ) | 1,908 | 84 | (1,540 | ) | (1,673 | ) | (3,213 | ) | ||||||||||||||
|
Overseas
|
(12,048 | ) | 1,300 | (10,748 | ) | (2,496 | ) | (382 | ) | (2,878 | ) | |||||||||||||
| (13,872 | ) | 3,208 | (10,664 | ) | (4,036 | ) | (2,055 | ) | (6,091 | ) | ||||||||||||||
|
Movement
in net interest income
|
||||||||||||||||||||||||
|
UK
|
2,200 | (985 | ) | 1,215 | 590 | (93 | ) | 497 | ||||||||||||||||
|
Overseas
|
3,982 | 1,409 | 5,391 | 1,298 | (322 | ) | 976 | |||||||||||||||||
| 6,182 | 424 | 6,606 | 1,888 | (415 | ) | 1,473 | ||||||||||||||||||
27
Business review
continued
Non-interest
income
|
2008
|
2007
|
2006
|
||||||||||
| £m | £m | £m | ||||||||||
|
Fees and
commissions receivable
|
9,831 | 8,278 | 7,116 | |||||||||
|
Fees and
commissions payable
|
(2,386 | ) | (2,193 | ) | (1,922 | ) | ||||||
|
(Loss)/income
from trading activities
|
(8,477 | ) | 1,292 | 2,675 | ||||||||
|
Other
operating income (excluding insurance net premium income)
|
1,899 | 4,833 | 3,564 | |||||||||
| 867 | 12,210 | 11,433 | ||||||||||
|
Insurance
premium income
|
6,626 | 6,376 | 6,243 | |||||||||
|
Reinsurers’
share
|
(300 | ) | (289 | ) | (270 | ) | ||||||
| 6,326 | 6,087 | 5,973 | ||||||||||
| 7,193 | 18,297 | 17,406 | ||||||||||
2008
compared with 2007
Non-interest
income, decreased by 61%, £11,104 million to £7,193 million. Non-interest income
was severely affected by the weakness in financial markets experienced over the
course of the year. While the decline was particularly marked in Global Banking
& Markets and Non-Core credit markets and equities businesses, with
reduced business volumes and mounting mark-to-market trading losses, UK Retail
also saw non-interest income fall in the latter part of the year as declining
consumer confidence led to lower demand for credit and other financial
products.
Excluding general
insurance premium income, non-interest income fell by £11,343 million to £867
million.
Within non-interest
income, fees and commissions receivable increased by 19% or £1,553 million, to
£9,831 million, while fees and commissions payable increased by 9%, £193 million
to £2,386 million.
Income from trading
activities was down from £1,292 million to a loss of £8,477 million. Currency
trading activities benefited from increased volatility in the markets. However,
this improvement was more than offset by substantial credit market write downs
during the year.
Other operating
income also decreased, falling by 61%, £2,934 million to £1,899 million. This
was principally due to a fall in the fair value of securities and other
financial assets and liabilities partially offset by profits from the sale of
subsidiaries and associates.
Insurance premium
income, after reinsurance, increased by 4% to £6,326 million primarily
reflecting a full year of ABN AMRO businesses in comparison with 76 days in
2007. This was partly offset by the discontinuation of less profitable
partnership contracts.
2007
compared with 2006
Non-interest income
increased by 5%, £891 million to £18,297 million, including £810 million from
the acquisition of ABN AMRO. Good organic growth was offset by write-downs
in Non-Core in respect of US mortgage-related and leveraged finance
exposures. Non-interest income represents 60% of total income (2006 – 62%).
Excluding general insurance premium income, non-interest income rose by 7%, £777
million to £12,210 million.
Within non-interest
income, fees and commissions receivable increased by 16% or £1,162 million, to
£8,278 million, while fees and commissions payable increased by 14%, £271
million to £2,193 million.
Income from trading
activities was down from £2,675 million to £1,292 million. Interest rate and
currency trading activities benefited from increased volatility and there was
good growth from a broadening product range. These improvements were, however,
more than offset by credit markets write downs.
Other operating
income increased by 36%, £1,269 million to £4,833 million. This was principally
due to growth in income from rental and asset-backed activities and principal
investments in Global Markets.
General insurance
premium income, after reinsurance, increased by 2% to £6,087 million with good
growth in policies in the core businesses, particularly in Continental
Europe.
28
Business review
continued
Credit
market exposures
|
2008
|
2007
|
|||||||||||||||||||
|
Net
exposure (1)
|
Write-downs
before tax
|
Average
price
|
Net
exposure(1)
|
Average
price
|
||||||||||||||||
| £m | £m |
%
|
£m |
%
|
||||||||||||||||
|
Asset-backed
CDOs
|
||||||||||||||||||||
|
High
grade
|
1,231 | 1,836 | 29 | 2,581 | 84 | |||||||||||||||
|
Mezzanine
|
144 | 1,140 | 6 | 1,253 | 70 | |||||||||||||||
| 1,375 | 2,976 | 3,834 | 79 | |||||||||||||||||
|
Monolines
|
4,804 | 3,557 | n/a | 2,547 | n/a | |||||||||||||||
|
US residential mortgages
(2)
|
||||||||||||||||||||
|
Sub-prime
|
— | 353 | n/a | 1,292 | 72 | |||||||||||||||
|
Alt-A
|
— | 1,071 | n/a | 2,233 | 83 | |||||||||||||||
|
Other
non-agency
|
— | 43 | n/a | 794 | 94 | |||||||||||||||
| — | 1,467 | 4,319 | 81 | |||||||||||||||||
|
US
commercial mortgages
(2)
|
437 | 95 | 87 | 1,809 | 97 | |||||||||||||||
|
Leveraged
finance
(2)
|
||||||||||||||||||||
|
Held-for-trading
|
103 | 1,088 | 64 | 11,992 | 96 | |||||||||||||||
|
Loans and
receivables
|
5,920 | — | n/a | 2,514 | n/a | |||||||||||||||
| 6,023 | 1,088 | 14,506 | ||||||||||||||||||
|
CLOs
|
520 | 240 | 81 | 1,386 | 93 | |||||||||||||||
| 9,423 | ||||||||||||||||||||
|
CDS
hedging
|
(1,642 | ) | ||||||||||||||||||
|
Total
net of CDS hedging
|
7,781 | |||||||||||||||||||
Note:
|
(1)
|
Net of hedges
and write-downs.
|
|
(2)
|
Figures
represent the Group’s remaining net exposure to its previously reported
credit market exposures.
|
|
(3)
|
Includes
commitments to lend.
|
Additional
disclosures on these and other related exposures can be found in the rest of
this document as follows:
|
Disclosure
|
Section
|
Sub-section
|
Page
|
|||
|
Further
analysis (1)
|
Risk
management
|
Credit market
and related disclosures
|
101 – 123 | |||
|
Valuation
aspects (1)
|
Financial
statements
|
Note 11
Financial instruments
|
186 – 191 | |||
|
Valuation of
financial instruments (1)
|
Financial
statements
|
Critical
accounting policies
|
170 – 171 | |||
|
(general and
level 3)
|
Note 11
Financial instruments
|
184 – 191 | ||||
|
Reclassification
of financial instruments
|
Financial
statements
|
Note 11
Financial instruments
|
193 | |||
|
Asset-backed
CDOs
|
Risk
management
|
Market
risk
|
88 |
Note:
|
(1)
|
In preparing
these disclosures, the Group took into consideration the leading practice
recommendations of the Financial Stability Forum issued in April 2008 and
the report of the IASB Advisory Panel ‘measuring and disclosing fair value
of financial instruments in markets that are no longer active’ issued in
October 2008.
|
29
Business review
continued
Operating
expenses
|
2008
|
2007
|
2006
|
||||||||||
| £m | £m | £m | ||||||||||
|
Administrative
expenses:
|
||||||||||||
|
Staff
costs
|
10,410 | 7,338 | 6,723 | |||||||||
|
Premises and
equipment
|
2,593 | 1,703 | 1,421 | |||||||||
|
Other
administrative expenses
|
5,464 | 2,969 | 2,658 | |||||||||
|
Total
administrative expenses
|
18,467 | 12,010 | 10,802 | |||||||||
|
Depreciation
and amortisation
|
3,154 | 1,932 | 1,678 | |||||||||
|
Write-down of
goodwill and other assets
|
32,581 | — | — | |||||||||
| 54,202 | 13,942 | 12,480 | ||||||||||
2008
compared with 2007
Operating expenses
increased by £40,260 million to £54,202 million, primarily reflecting the
write-down of goodwill and other assets of £32,581 million following a
review of the carrying value of goodwill and other assets. Cost growth in the
Group’s core retail and commercial banking franchises was offset by efficiency
programmes. The 2008 costs reflect a full year of the retained ABN AMRO
businesses in comparison with 76 days in 2007.
The Group’s ratio
of operating expenses to total income was 209.5% compared with 45.9% in 2007,
largely reflecting the impact on income of the year’s difficult market
conditions and the write-down of goodwill and other assets.
2007
compared with 2006
Operating expenses
increased by 12%, £1,462 million to £13,942 million including £1,387 million
relating to ABN AMRO. Adjusting for this, operating expenses increased by just
£75 million, 1%, reflecting tight cost management and the benefits of the
Group’s manufacturing platform. Further improvements in productivity have
supported growth in business volumes, and allowed the Group to maintain high
levels of customer satisfaction.
The Group’s ratio
of operating expenses to total income was 45.9% compared with 44.6% in
2006.
30
Business review
continued
Integration
costs
|
2008
|
2007
|
2006
|
||||||||||
| £m | £m | £m | ||||||||||
|
Staff
costs
|
503 | 18 | 76 | |||||||||
|
Premises and
equipment
|
25 | 4 | 10 | |||||||||
|
Other
administrative expenses
|
486 | 26 | 32 | |||||||||
|
Depreciation
and amortisation
|
36 | 60 | 16 | |||||||||
| 1,050 | 108 | 134 | ||||||||||
2008
compared with 2007
Integration costs
in 2008 were £1,050 million compared with £108 million in 2007. The significant
increase reflects a full year of integration costs being incurred in respect of
the ABN AMRO acquisition, compared to 76 days in 2007.
Accruals in
relation to integration costs are set out below.
|
At
31 December 2007
|
Currency
translation adjustments
|
Charge
to income statement
|
Utilised
during the year
|
At
31 December 2008
|
||||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
|
Staff
costs
|
4 | — | 503 | (502 | ) | 5 | ||||||||||||||
|
Premises and
equipment
|
2 | — | 25 | (26 | ) | 1 | ||||||||||||||
|
Other
|
1 | 1 | 522 | (521 | ) | 3 | ||||||||||||||
| 7 | 1 | 1,050 | (1,049 | ) | 9 | |||||||||||||||
2007
compared with 2006
Integration costs
in 2007 were £108 million compared with £134 million in 2006 comprising
amortisation of internally developed software and other expenditure. Software
costs were previously written-off as incurred under UK GAAP but under IFRS are
now amortised over the expected useful lives of up to five years. Software
amortisation included in integration costs principally relates to the
integration of Churchill, First Active and Citizens’ acquisitions, including
Charter One which was acquired in August 2004.
Restructuring
costs
|
2008
|
2007
|
2006
|
||||||||||
| £m | £m | £m | ||||||||||
|
Staff
costs
|
251 | — | — | |||||||||
|
Premises and
equipment
|
15 | — | — | |||||||||
|
Other
administrative expenses
|
41 | — | — | |||||||||
| 307 | — | — | ||||||||||
Accruals in
relation to restructuring costs are set out below.
|
At
31 December 2007
|
Currency
translation adjustments
|
Charge
to income statement
|
Utilised
during the year
|
At
31 December 2008
|
||||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
|
Staff
costs
|
— | 33 | 251 | — | 284 | |||||||||||||||
|
Premises and
equipment
|
— | — | 15 | — | 15 | |||||||||||||||
|
Other
|
— | 10 | 41 | — | 51 | |||||||||||||||
| — | 43 | 307 | — | 350 | ||||||||||||||||
31
Business review
continued
Impairment
|
2008
|
2007
|
2006
|
||||||||||
| £m | £m | £m | ||||||||||
|
New
impairment
|
8,391 | 2,310 | 2,093 | |||||||||
|
less:
recoveries of amounts previously written-off
|
(319 | ) | (342 | ) | (215 | ) | ||||||
|
Charge to
income statement
|
8,072 | 1,968 | 1,878 | |||||||||
|
Comprising:
|
||||||||||||
|
Loan
impairment
|
7,091 | 1,946 | 1,877 | |||||||||
|
Impairment of
available-for-sale securities
|
981 | 22 | 1 | |||||||||
|
Charge to
income statement
|
8,072 | 1,968 | 1,878 | |||||||||
2008
compared with 2007
Credit impairment
losses increased to £8,072 million in 2008, compared with £1,968 million in
2007. The Group experienced a pronounced deterioration in impairments during the
year, as financial stress spread to a broad range of customers. The greatest
increase in impairments occurred in Non-Core and Global Banking & Markets.
However, businesses in all geographies also experienced a noticeable increase in
impairments during the year, particularly in the UK SME and US personal
segments.
Total balance sheet
provisions for impairment amounted to £11,016 million compared with £6,452
million in 2007.
Total provision
coverage (the ratio of total balance sheet provisions for impairment to total
risk elements in lending) decreased from 60% to 52%. The ratio of total balance
sheet provisions for impairment to total risk elements in lending and potential
problem loans also decreased to 51% compared with 57% in 2007.
2007
compared with 2006
Impairment losses
were £1,968 million compared with £1,878 million. Impairment losses in ABN AMRO
in the period since acquisition were £103 million. Adjusting for this,
impairment losses fell by £13 million, 1%. This reflected improvement in
Non-Core and UK Retail partially offset by higher impairment in US Retail &
Commercial. New impairment losses were up 10%, £217 million to £2,310 million.
Recoveries of amounts previously written-off were up £127 million, 59% to £342
million. Consequently the net charge to the income statement was up £90 million,
5% to £1,968 million.
Total balance sheet
provisions for impairment, including ABN AMRO, amounted to £6,452 million
compared with £3,935 million in 2006.
Total provision
coverage (the ratio of total balance sheet provisions for impairment to total
risk elements in lending) decreased from 62% to 60%. The ratio of total balance
sheet provisions for impairment to total risk elements in lending and potential
problem loans decreased to 57% compared with 62% in 2006. This reflects amounts
written-off and the slightly lower risk profile of the portfolio.
32
Business review
continued
Taxation
|
2008
|
2007
|
2006
|
||||||||||
| £m | £m | £m | ||||||||||
|
Tax
|
(2,323 | ) | 2,044 | 2,689 | ||||||||
|
%
|
%
|
%
|
||||||||||
|
UK
corporation tax rate
|
28.5 | 30.0 | 30.0 | |||||||||
|
Effective tax
rate
|
5.7 | 20.8 | 29.3 | |||||||||
The actual tax
charge differs from the expected tax charge computed by applying the standard
rate of UK corporation tax as follows:
|
2008
|
2007
|
2006
|
||||||||||
| £m | £m | £m | ||||||||||
|
Expected tax
(credit)/charge
|
(11,638 | ) | 2,950 | 2,756 | ||||||||
|
Non-deductible
goodwill impairment
|
8,292 | 12 | — | |||||||||
|
Unrecognised
timing differences
|
274 | 29 | — | |||||||||
|
Other
non-deductible items
|
378 | 222 | 288 | |||||||||
|
Non-taxable
items
|
(491 | ) | (595 | ) | (251 | ) | ||||||
|
Taxable
foreign exchange movements
|
80 | 16 | 5 | |||||||||
|
Reduction in
deferred tax liability following change in the rate of UK corporation
tax
|
— | (189 | ) | — | ||||||||
|
Foreign
profits taxed at other rates
|
203 | (25 | ) | 63 | ||||||||
|
Losses in
year not recognised
|
942 | 2 | — | |||||||||
|
Losses
brought forward and utilised
|
(11 | ) | (11 | ) | 14 | |||||||
|
Adjustments
in respect of prior periods
|
(352 | ) | (367 | ) | (186 | ) | ||||||
|
Actual tax
(credit)/charge
|
(2,323 | ) | 2,044 | 2,689 | ||||||||
The effective tax
rate for the year was 5.7% (2007 – 20.8%; 2006 – 29.3%). The tax credit is lower
than that arising from applying the standard rate of UK corporation tax of 28.5%
to the loss for the period, principally due to non-deductible goodwill
impairment and certain carried forward losses on which no tax relief has been
recognised.
33
Business review
continued
The
divisional results are stated before amortisation of purchased intangible
assets, write-down of goodwill and other intangible assets, strategic
disposals and integration and restructuring costs. The Group manages costs
where they arise.
|
2008
|
2007
|
2006
|
||||||||||
| £m | £m | £m | ||||||||||
|
UK
Retail
|
753 | 1,265 | 988 | |||||||||
|
UK
Corporate
|
1,644 | 1,708 | 1,830 | |||||||||
|
Wealth
|
361 | 504 | 316 | |||||||||
|
Global
Banking & Markets
|
(1,315 | ) | 1,084 | 468 | ||||||||
|
Global
Transaction Services
|
1,055 | 895 | 756 | |||||||||
|
Ulster
Bank
|
218 | 317 | 298 | |||||||||
|
US Retail
& Commercial
|
528 | 743 | 1,020 | |||||||||
|
RBS
Insurance
|
584 | 542 | 631 | |||||||||
|
Central
Items
|
1,024 | 844 | (156 | ) | ||||||||
|
Core
|
4,852 | 7,902 | 6,151 | |||||||||
|
Non-Core
|
(11,790 | ) | 2,137 | 3,263 | ||||||||
| Group before RFS Holdings minority interest | (6,938 | ) | 10,039 | 9,414 | ||||||||
| RFS Holdings minority interest | (15,629 | ) | 163 | - | ||||||||
| Amortisation of purchased intangibles | (443 | ) | (262 | ) | (94 | ) | ||||||
| Integration and restructuring costs | (1,357 | ) | (108 | ) | (134 | ) | ||||||
| Strategic disposals |
442
|
- | - | |||||||||
| Write-down of goodwill and other intangible assets | (16,911 | ) | - | - | ||||||||
|
Operating
(loss)/profit before tax
|
(40,836 | ) | 9,832 | 9,186 | ||||||||
The performance of
each of the divisions is reviewed on pages 35 to 50.
Risk-weighted
assets of each division were as follows:
|
Basel
II
31
December
2008
£bn
|
Basel
II
1
January
2008
£bn
|
Basel
I
31
December
2007
£bn
|
||||||||||
|
UK
Retail
|
45.7 | 41.3 | 46.8 | |||||||||
|
UK
Corporate
|
81.5 | 103.1 | 118.4 | |||||||||
|
Wealth
|
11.0 | 9.9 | 7.1 | |||||||||
|
Global
Banking & Markets
|
166.5 | 110.5 | 111.3 | |||||||||
|
Global
Transaction Services
|
17.1 | 16.0 | 17.8 | |||||||||
|
Ulster
Bank
|
24.5 | 24.8 | 32.5 | |||||||||
|
US Retail
& Commercial
|
63.9 | 44.3 | 44.3 | |||||||||
|
Central
Items
|
7.0 | 15.9 | 11.1 | |||||||||
|
Core
|
417.2 | 365.8 | 389.3 | |||||||||
|
Non-Core
|
160.6 | 120.3 | 100.7 | |||||||||
| Group before RFS Holdings minority interest | 577.8 | 486.1 | 490.0 | |||||||||
| RFS Holdings minority interest | 118.0 | 147.4 | 119.0 | |||||||||
| 695.8 | 633.5 | 609.0 | ||||||||||
34
Business review
continued
UK
Retail
|
2008
|
2007
|
2006
|
||||||||||
| £m | £m | £m | ||||||||||
|
Net interest
income
|
3,229 | 3,269 | 3,132 | |||||||||
|
Net fees and
commissions – banking
|
1,524 | 1,754 | 1,712 | |||||||||
|
Other
non-interest income
|
411 | 754 | 694 | |||||||||
|
Non–interest
income
|
1,935 | 2,508 | 2,406 | |||||||||
|
Total
income
|
5,164 | 5,777 | 5,538 | |||||||||
|
Direct
expenses
|
||||||||||||
|
–
staff
|
(924 | ) | (936 | ) | (924 | ) | ||||||
|
–
other
|
(436 | ) | (429 | ) | (452 | ) | ||||||
|
Indirect
expenses
|
(1,848 | ) | (1,654 | ) | (1,648 | ) | ||||||
| (3,208 | ) | (3,019 | ) | (3,024 | ) | |||||||
|
Insurance net
claims
|
(184 | ) | (518 | ) | (488 | ) | ||||||
|
Impairment
losses
|
(1,019 | ) | (975 | ) | (1,038 | ) | ||||||
|
Operating
profit before tax
|
753 | 1,265 | 988 | |||||||||
|
£bn
|
£bn
|
£bn
|
||||||||||
|
Loans and
advances to customers – gross
|
93.8 | 86.6 | 84.9 | |||||||||
|
Customer
deposits (excluding bancassurance)
|
78.9 | 76.1 | 72.2 | |||||||||
|
Assets under
management – excluding deposits
|
5.7 | 7.0 | 6.7 | |||||||||
|
Non-performing
loans
|
3.8 | 3.3 | 3.3 | |||||||||
2008
compared with 2007
Due to an economic
environment which became markedly weaker in the second half of the year, UK
Retail Banking saw an 11% decrease in total income to £5,164 million, whilst
direct costs remained in line with 2007. However the deterioration in the
macroeconomic environment resulted in a 5% increase in impairment losses.
Consequently, operating profit decreased 40%, to £753 million. In the personal
segment, RBS retained top position and NatWest was again joint second for
customer satisfaction amongst main high street banks. UK Retail continues to
maintain availability of lending while managing risk exposure and focusing on
supporting customers through a difficult economic environment.
Net interest income
decreased 1% to £3,229 million. There was good volume growth coupled with
improving new lending margins. Spot loans and advances to customers increased 8%
and average deposits were up 4%. Despite increasing competitive pressure in a
slowing market, at year end deposit balances were £3 billion higher than in
2007. Net interest margin reduced from 3.80% to 3.63%, reflecting increased
funding and liquidity costs.
UK Retail mortgage
balances grew 12% despite more muted demand in the second half, and net mortgage
lending market share increased to 18% (2007 – 2%). Personal unsecured lending
slowed, however, particularly in the second half of the year.
Non-interest income
declined 23% to £1,935 million. Bancassurance sales grew 3% to £353 million
annual premium equivalent in the year, however the negative performance of debt
and equity markets reduced investment income by £48 million. Excluding BBU,
non-interest income declined 20% reflecting reduced demand for unsecured lending
and lower sales of payment protection insurance.
Direct expenses
remained in line with 2007. Direct staff costs reduced 1% reflecting increased
efficiency. Other direct costs rose by 2% as a result of increased investment in
selected business lines. During 2008 the division almost doubled the number of
branches open on a Saturday and introduced 1,000 MoneySense advisers into
branches to provide impartial advice to customers on managing their
money.
Impairment losses
increased 5% to £1,019 million, reflecting the changed economic environment,
particularly in the second half. The increase in impairments has been driven by
mortgage impairment charges of £33 million (2007 – £21 million) on a total book
of £72.3 billion, and a slight increase in unsecured personal lending
impairments to £986 million (2007 – £954 million). Higher Loan-to-Value ratio
mortgages have been restricted and affordability criteria tightened. The average
LTV for new business was 67% (2007 – 63%). Repossessions represented 0.06% of
outstanding mortgage balances at 31 December 2008, compared with a Council of
Mortgage Lenders’ average at December 2008 of 0.21%.
Risk weighted
assets totalled £45.7 billion at year end.
2007
compared with 2006
UK Retail achieved
strong results in 2007, increasing operating profit by 28% to £1,265 million as
a result of good income growth combined with tight cost control and a reduction
in impairment losses. Total income grew by 4% to £5,777 million, while income
net of insurance claims increased by 4% to £5,259 million.
We have accelerated
the expansion of our consumer banking franchise, opening more than 975,000 new
personal current accounts in 2007 and maintaining the Group’s joint number one
position in the current account market. RBS and NatWest continue to lead the
other major high street banks in Great Britain for customer satisfaction. We
continue to focus on sales through the branch channel, and by adding more
customer advisers in our branches have achieved a significant uplift in
volumes.
35
Business review
continued
Bancassurance
continued its excellent progress with sales growth of 28% to £342 million annual
premium equivalent, representing a doubling of 2005 sales. We invested further
in our sales force, ending the year with more than 1,000 financial planning
managers.
In our cards
business, we have maintained our focus on credit card sales through the branch
channel, where new business sales were up 47% on 2006, while continuing to take
a cautious view on direct sales.
Savings balance
growth was helped by good sales of new accounts to branch customers, with
NatWest opening more than 1 million new savings accounts.
Mortgage activity
focused on branch channels, where net lending was 14% higher than in the
previous year. We also took advantage of improved margins in the intermediary
segment in the latter part of the year to improve volumes. After a decline in
credit card balances in the first half of the year we improved recruitment and
retention in the second half.
Net interest income
increased by 4% to £3,269 million, with strong growth in deposits helping to
mitigate the impact of lower unsecured lending volumes and lower average card
balances. Net interest margin declined modestly, in line with previous guidance,
with savings margins consistent with 2006, despite increased competition for
deposits.
Non-interest income
was £2,508 million, 4% higher than 2006, with strong growth in investment income
offset by lower levels of direct lending and reduced instances of current
account fees.
Direct expenses
declined by 1% to £1,365 million, with increased investment in customer-facing
staff in branches and in our bancassurance and investment businesses offset by a
reduction in other costs of 5% to £429 million.
Impairment losses
decreased by 6% to £975 million, reflecting the improvement in arrears trends on
both credit cards and unsecured personal loans. Mortgage arrears remained very
low, and we have maintained conservative lending criteria – the average
loan-to-value ratio of UK Retail’s mortgages was 46% overall and 63% on new
mortgages written in 2007, and this improved as the year
progressed.
36
Business review
continued
UK
Corporate
|
2008
|
2007
|
2006
|
||||||||||
| £m | £m | £m | ||||||||||
|
Net interest
income
|
2,344 | 2,193 | 2,268 | |||||||||
|
Net fees and
commissions
|
791 | 492 | 463 | |||||||||
|
Other
non-interest income
|
388 | 660 | 596 | |||||||||
|
Non-interest
income
|
1,179 | 1,152 | 1,059 | |||||||||
|
Total
income
|
3,523 | 3,345 | 3,327 | |||||||||
|
Direct
expenses
|
||||||||||||
|
–
staff
|
(752 | ) | (697 | ) | (596 | ) | ||||||
|
–
other
|
(288 | ) | (280 | ) | (260 | ) | ||||||
|
Indirect
expenses
|
(518 | ) | (482 | ) | (460 | ) | ||||||
| (1,558 | ) | (1,459 | ) | (1,316 | ) | |||||||
|
Impairment
losses
|
(321 | ) | (178 | ) | (181 | ) | ||||||
|
Operating
profit before tax
|
1,644 | 1,708 | 1,830 | |||||||||
|
£bn
|
£bn
|
£bn
|
||||||||||
|
Loans and
advances to customers – gross
|
105.8 | 99.7 | 89.9 | |||||||||
|
Customer
deposits
|
79.9 | 83.0 | 83.0 | |||||||||
|
Non-performing
loans
|
1.3 | 1.2 | 0.7 | |||||||||
2008 compared with
2007
UK
Corporate & Commercial Banking experienced a solid performance in the first
half of 2008, with the second half of 2008 being impacted by the marked
deterioration in economic conditions. Total income increased by 5% to £3,523
million. However, growth in impairments, especially in the second half of the
year, resulted in a 4% fall in operating profit to £1,644 million.
Net
interest income rose 7% to £2,344 million. Loans and advances were 6%
higher than 2007, reflecting the Group’s continuing support for the UK economy.
New business margins widened in the second half to reflect increasing risk
premia, however, higher funding costs on the back book impacted net
interest income.
Non
interest income increased 2% to £1,179 million. 2007 benefited from the profit
on disposal of the Securities Services Group business. Year on year growth
reflects increased sales of interest rate and currency risk management
products.
Direct
expenses increased by 6% to £1,040 million, reflecting the recruitment of
additional front line staff in the second half of 2008.
Impairment
losses totalled £321 million, a sharp increase from the low levels seen in 2007.
Losses were concentrated in the smaller end of the corporate sector, although a
number of specific exposures in the larger corporate sector have also impacted
the charge.
2007
compared with 2006
UK
Corporate & Commercial Banking built further on our market-leading position
and achieved significant improvements in customer satisfaction. Total
income rose by 1% to £3,345 million and operating profit fell by 7% to £1,708
million.
There
has been good growth in customer volumes, with loans and advances up
11%, although deposits were flat year on year. Net interest income fell by 3% to
£2,193 million as net interest margins narrowed slightly from the prior year. In
recent months we have seen firmer margins in some areas.
Non-interest
income rose by 9% to £1,152 million, as a result of growth in fees and continued
progress in the distribution of trade and invoice finance products as well as of
interest rate and foreign exchange products.
Direct
expenses increased by 14% at £977 million due to investment targeted towards
improving customer service. Around 600 new front line roles were created and
major new functionality was added to the Bankline electronic banking platform.
These initiatives have contributed to strongly favourable customer satisfaction
scores in 2007.
Impairment
losses totalled £178 million, 2% lower than in 2006, reflecting
the resilient quality of the portfolio. Corporate credit metrics remained
stable.
37
Business review
continued
Wealth
|
2008
|
2007
|
2006
|
||||||||||
| £m | £m | £m | ||||||||||
|
Net interest
income
|
588 | 664 | 516 | |||||||||
|
Net fees and
commissions
|
409 | 413 | 350 | |||||||||
|
Other
non-interest income
|
77 | 56 | 50 | |||||||||
|
Non-interest
income
|
486 | 469 | 400 | |||||||||
|
Total
income
|
1,074 | 1,133 | 916 | |||||||||
|
Direct
expenses
|
||||||||||||
|
–
staff
|
(379 | ) | (348 | ) | (300 | ) | ||||||
|
–
other
|
(156 | ) | (139 | ) | (123 | ) | ||||||
|
Indirect
expenses
|
(162 | ) | (139 | ) | (176 | ) | ||||||
| (697 | ) | (626 | ) | (599 | ) | |||||||
|
Impairment
losses
|
(16 | ) | (3 | ) | (1 | ) | ||||||
|
Operating
profit before tax
|
361 | 504 | 316 | |||||||||
|
£bn
|
£bn
|
£bn
|
||||||||||
|
Loans and
advances to customers – gross
|
12.6 | 10.4 | 8.8 | |||||||||
|
Customer
deposits
|
34.5 | 34.0 | 28.3 | |||||||||
|
Assets under
management – excluding deposits
|
34.7 | 35.0 | 15.7 | |||||||||
|
Non-performing
loans
|
0.1 | - | - | |||||||||
2008
compared with 2007
Total
income decreased by 5% to £1,074 million despite an increase in underlying
business which was more than offset by a movement in the Group's funds transfer
pricing mechanism. Operating profit decreased by 28% to £361
million.
Average
loans and advances to customers rose by 21% but average customer deposits by
only 1%. Deposit growth, which had been strong up to the end of Q4
2008 ceased and a deposit outflow occurred during the most volatile parts of Q4
2008. Deposit margins were also adversely affected by the deep falls
in base rates in Q4 2008.
Non
interest income grew by 4% to £486 million as higher fee income was offset by
lower investment income. Average assets under management were 1% lower than in
2007, as investor risk appetite dropped sharply in Q4 2008.
Direct
expenses rose by 10% to £535 million partly due to increased headcount and
higher deposit protection scheme contributions.
Impairments
rose from £3 million in 2007 to £16 million and represented approximately 0.1%
of the total Wealth lending book.
2007
compared with 2006
Wealth
Management’s offering of private banking and investment services continued to
deliver very strong growth in income, up 24% in 2007 to £1,133 million.
Operating profit grew by 59% to £504 million.
Wealth
has continued Coutts & Co’s UK regional expansion programme, and this has
helped it to grow customer numbers by 7% and income by 22%.
Growth
in banking volumes contributed to a 29% rise in net interest income to £664
million. Average loans and advances to customers rose by 18% and average
deposits by 20%.
Non-interest
income grew by 17% to £469 million, reflecting higher investment management fees
and new product sales, including new investment vehicles specialising in private
equity and natural resources, as well as continued growth in underlying new
business volumes. Assets under management rose by £19.3 billion at 31 December
2007.
Direct
expenses increased by 15% to £487 million, reflecting continued investment in
the UK.
38
Business review
continued
Global Banking
& Markets
|
2008
|
2007
|
2006
|
||||||||||
| £m | £m | £m | ||||||||||
|
Net interest
income
|
2,423 | 484 | 608 | |||||||||
| Funding costs of rental assets | (66 | ) | (49 | ) | (49 | ) | ||||||
| 2,357 | 435 | 559 | ||||||||||
|
Net fees and
commissions receivable
|
1,259 | 978 | 636 | |||||||||
|
Income from
trading activities
|
116 | 2,527 | 1,734 | |||||||||
|
Other
operating income
|
(54 | ) | (3 | ) | 1 | |||||||
|
Non-interest
income
|
1,321 | 3,502 | 2,371 | |||||||||
|
Total
income
|
3,678 | 3,937 | 2,930 | |||||||||
|
Direct
expenses
|
||||||||||||
|
–
staff
|
(2,433 | ) | (1,822 | ) | (1,707 | ) | ||||||
|
–
other
|
(1,356 | ) | (562 | ) | (365 | ) | ||||||
|
Indirect
expenses
|
(663 | ) | (403 | ) | (355 | ) | ||||||
| (4,452 | ) | (2,787 | ) | (2,427 | ) | |||||||
|
Impairment
losses
|
(541 | ) | (66 | ) | (35 | ) | ||||||
|
Operating
(loss)/profit before tax
|
(1,315 | ) | 1,084 | 468 | ||||||||
|
£bn
|
£bn
|
£bn
|
||||||||||
|
Loans and
advances (including banks)
|
236.4 | 190.6 | 97.8 | |||||||||
|
Reverse
repos
|
88.8 | 278.4 | 93.9 | |||||||||
|
Securities
|
127.5 | 205.7 | 89.4 | |||||||||
|
Cash and
eligible bills
|
20.2 | 22.7 | 6.1 | |||||||||
|
Other
|
42.9 | 38.7 | 20.4 | |||||||||
|
Total third
party assets (excluding derivatives mark to market)
|
515.8 | 736.1 | 307.6 | |||||||||
|
Net
derivative assets (after netting)
|
113.0 | 49.4 | 13.8 | |||||||||
|
Customer
deposits (excluding repos)
|
90.2 | 93.3 | 40.9 | |||||||||
|
Non-performing
loans
|
0.7 | 0.9 | 0.5 | |||||||||
2008
compared with 2007
Global Banking
& Markets (GBM) operating profit fell from £1,084 million in 2007 to a loss
of £1,315 million. This decline reflected the effect of the market turmoil which
adversely affected the division’s results in 2008. GBM incurred
losses from counterparty failures (notably Lehman), write-downs of our subprime
mortgage related positions and higher credit impairments as the effects of the
down-turn widened. These were only partly offset by good performances in a
number of businesses, most notably in rates and currencies, the inclusion of the
ABN AMRO businesses for a full twelve months and gains on the fair value of own
debt.
Costs were up by
60%, with the inclusion of the acquired businesses of ABN AMRO for a full year
outweighing reduced bonus payments. Credit impairments rose sharply from a very
low level, £66 million, to £541 million, resulting in a 2008 operating loss of
£1,315 million.
Net interest income
grew by £1,939 million to £2,423 million, with the rates business benefiting
from the declining interest rate environment. Non-interest income reduced by
£2,181 million to £1,321 million. Fees and commissions increased mainly as a
result of the inclusion of the ABN AMRO businesses for a full twelve months
partially offset by a decline in origination volumes. Income from trading
activities fell from £2,527 million to £116 million primarily as a result of
counterparty failures and mortgage trading asset write-downs. Other operating
income was a loss of £54 million, reflecting losses incurred on European
loan sales.
By business line,
the rates and currencies business achieved a particularly strong performance in
2008, with high volumes of customer activity and flow trading. The Sempra
Commodities joint venture performed ahead of expectations in the nine months
since its formation. Equities improved slightly primarily as a result of the
inclusion of a full year of ABN AMRO related businesses.
In a reduced market
for debt origination, credit markets improved its market positions in a number
of key areas such as international bond issuance. Results, however, were
severely affected by the continuing market weakness, particularly in the second
half of the year.
Portfolio
management income remained resilient, but some losses were incurred, including
on capital and credit exposure management.
39
Business review
continued
GBM’s total third
party assets including derivatives were reduced by £156.7 billion to £628.8
billion at 31 December 2008, a reduction of 20% from a year earlier. Within this
total, loans and advances were £236.4 billion, an increase of 24%. This
increase was more than offset by significant reductions in reverse repos and
securities holdings, both of which have been managed down over the course of the
year. Net derivative assets totalled £113.0 billion, compared with £49.4 billion
at the end of 2007.
2007
compared with 2006
GBM achieved strong
performances in many of its businesses in 2007, with particularly strong growth
in interest rate and currency trading activities, despite challenging credit
market conditions in the second half of the year. Operating profit was £1,084
million, 132% higher than 2006’s result.
Total income of
£3,937 million was 34% higher than in 2006, with the inclusion of 76 days of GBM
related ABN AMRO businesses. Whilst many parts of GBM grew strongly, this was
partly offset by write-downs of our subprime related positions and a reduction
in the carrying value of our own debt.
The strength of GBM
and the successful diversification of its product capabilities resulted in a
continuation of the strong growth we have achieved in Asia and continental
Europe in recent years. In Asia we have now established a solid platform, with
good product capabilities and client relationships. In 2007 this resulted in
strong Asian income growth, with outstanding growth in our activities in China
and Japan. In Europe, income grew considerably, with particularly good results
in the Nordic region and in the Iberian Peninsula, where GBM further expanded
its strong position in the provision of financing and risk management services
to corporates and financial institutions. Income in the UK grew strongly, while
results in North America were adversely impacted as a result of credit market
conditions affecting GBM’s mortgage asset-backed credit businesses.
Net interest income
fell by 20% to £484 million. Loans and advances, excluding reverse repos,
increased by £92.8 billion as a result of the continued expansion of our
customer base outside the UK and the inclusion of GBM related ABN AMRO
businesses. Customer deposits increased by £52.4 billion, with £38.0 billion
from GBM related ABN AMRO businesses.
Net fee income rose
by 54% to £978 million, reflecting our top tier position in arranging,
structuring and distributing large scale financings and the inclusion of GBM
related ABN AMRO businesses.
Income from trading
activities increased by £793 million, 46% to £2,527 million. Including the GBM
related ABN AMRO businesses results were underpinned by strong performances in
interest rate and currency trading activities were supplemented by good growth
in our broadening product range, including equity derivatives. However,
write-downs reflecting the weakening of the US housing market led to a sharp
fall in credit markets.
Expenses increased
by 15% to £2,787 million. We continued to invest in expanding our geographical
footprint, our infrastructure and our product range.
Portfolio credit
risk remained stable and impairment losses remained low at £66 million in 2007,
with no deterioration in overall corporate credit quality. The liquidity and
profitability of our corporate customers remains generally strong.
Total third party
assets including derivatives increased to £785.5 billion, reflecting the
inclusion of GBM related ABN AMRO businesses and growth in derivative assets
(mostly rates and currencies) accompanied by a corresponding increase in
derivative liabilities. The derivatives increase was a result of the strong
growth in client-driven interest rate and currency trading activities in a more
volatile market environment.
40
Business review
continued
Global Transaction
Services
|
2008
|
2007
|
2006
|
||||||||||
| £m | £m | £m | ||||||||||
|
Net interest
income
|
939 | 647 | 458 | |||||||||
|
Non-interest
income
|
1,491 | 1,150 | 1,059 | |||||||||
|
Total
income
|
2,430 | 1,797 | 1,517 | |||||||||
|
Direct
expenses
|
||||||||||||
|
–
staff
|
(363 | ) | (251 | ) | (223 | ) | ||||||
|
–
other
|
(100 | ) | (127 | ) | (92 | ) | ||||||
|
Indirect
expenses
|
(864 | ) | (510 | ) | (442 | ) | ||||||
| (1,327 | ) | (888 | ) | (757 | ) | |||||||
|
Impairment
losses
|
(48 | ) | (14 | ) | (4 | ) | ||||||
|
Operating
profit before tax
|
1,055 | 895 | 756 | |||||||||
|
£bn
|
£bn
|
£bn
|
||||||||||
|
Total third
party assets
|
22.5 | 21.8 | 7.3 | |||||||||
|
Loans and
advances
|
15.2 | 17.7 | 6.6 | |||||||||
|
Customer
deposits
|
62.0 | 55.7 | 34.2 | |||||||||
2008
compared with 2007
Global Transaction
Services (GTS) grew income by 35% to £2,430 million and operating profit by 18%
to £1,055 million for the full year 2008, reflecting the full year income of ABN
AMRO business and the strength and enhanced international capability of the
cash management, trade finance and merchant acquiring platforms. The income
growth rate was maintained in the second half of the year, despite difficult
market conditions.
Growth was driven
by a strong performance in cash management, in particular international cash
management in ABN AMRO. Steady growth was achieved in the RBS UK and US domestic
markets. Average customer deposits were higher mitigating the impact of lower
interest rates. International overdrafts have been re-priced, reflecting the
increased cost of funds and higher risk premia during the second half of the
year. Fee income from payment transactions increased strongly, particularly in
the US and internationally. The division was successful throughout the year in
winning new international cash management mandates from existing RBS Group
clients due to the strength of the international payments platform and
network.
Trade finance made
good progress, with income continuing to grow strongly as the ABN AMRO platform
enabled GTS to substantially improve its penetration into the Asia-Pacific
market, and has expanded its supply chain finance activities with an enhanced
product suite. Margins improved throughout the year reflecting the additional
risk premium in the market conditions.
Merchant services
and commercial cards delivered growth despite the worsening economic climate.
Acquiring transaction volumes were up in the year driven by good growth in
online volumes, but weaker consumer confidence in the latter part of the year
meant that average transaction values decreased, slowing income growth.
Commercial cards income saw strong growth for the full year, driven by higher
interchange income particularly in the small and middle markets.
Direct expenses
rose by 22% to £463 million, reflecting the full year costs of the ABN AMRO
business. The full year cost growth reflected investment in staffing and
infrastructure to support GTS’s development.
Impairment losses
were £48 million, up from £14 million in 2007, reflecting in particular the
downturn in the global economy and some growth in defaults amongst
mid-corporates and SMEs.
2007
compared with 2006
Global Transaction
Services grew income by 18% to £1,797 million and operating profit by 18% to
£895 million, driven by growth in the Merchant Services business, combined with
the enhanced international cash management and trade platforms introduced
through the ABN AMRO acquisition.
Revenue growth was
evident across all product lines. Cash management growth was the result of
increased deposit balances combined with payment fee growth initiatives.
Merchant services and commercial cards delivered an increase in
income with particularly good growth in the international businesses. This
growth was driven by increased volumes across both debit and credit card
transactions.
The Trade finance
business benefited materially from the product suite introduced through the ABN
AMRO acquisition through improved international capabilities and a global reach.
Margins in this business also began to see the benefit of improved pricing
reflecting country risk premiums.
Direct expenses
rose by 20% to £378 million in comparison with 2006, primarily reflecting
investment to expand the business. This includes the acquisition of ABN AMRO
which incorporated costs directly related to the GTS business.
Impairment losses
were £14 million compared with £4 million in 2006.
41
Business review
continued
Ulster
Bank
|
2008
|
2007
|
2006
|
||||||||||
| £m | £m | £m | ||||||||||
|
Net interest
income
|
708 | 659 | 582 | |||||||||
|
Net fees and
commissions
|
228 | 163 | 168 | |||||||||
|
Other
non-interest income
|
103 | 165 | 115 | |||||||||
|
Non-interest
income
|
331 | 328 | 283 | |||||||||
|
Total
income
|
1,039 | 987 | 865 | |||||||||
|
Direct
expenses
|
||||||||||||
|
–
staff
|
(330 | ) | (258 | ) | (211 | ) | ||||||
|
–
other
|
(93 | ) | (101 | ) | (61 | ) | ||||||
|
Indirect
expenses
|
(292 | ) | (265 | ) | (261 | ) | ||||||
| (715 | ) | (624 | ) | (533 | ) | |||||||
|
Impairment
losses
|
(106 | ) | (46 | ) | (34 | ) | ||||||
|
Operating
profit before tax
|
218 | 317 | 298 | |||||||||
|
£bn
|
£bn
|
£bn
|
||||||||||
|
Total
assets
|
49.1 | 42.5 | 35.8 | |||||||||
|
Loans and
advances to customers – gross
|
44.0 | 33.9 | 29.5 | |||||||||
|
Customer
deposits
|
24.3 | 21.8 | 18.1 | |||||||||
|
Non-performing
loans
|
1.2 | 0.4 | 0.3 | |||||||||
2008
compared with 2007
The significant
deterioration in global and local market conditions has impacted the main Ulster
Bank Group markets, with operating profit falling to £218 million, 31% lower
than in 2007. A significant driver of this reduction has been an increase of £60
million in impairments, albeit from a low base, reflecting deterioration in
credit quality as economic conditions have slowed.
Total income was up
5% at £1,039 million benefitting from movements in exchange rates. Direct
expenses were up 18% to £423 million. Impairment losses rose to £106 million
from £46 million reflecting the economic environment.
Total income
increased by 5% to £1,039 million; net interest income increased by 7%, with
average loans and advances to customers up 30% in the year. The
benefit from growth in lending, particularly in the first half of the year has
been offset by increased funding costs associated with the wholesale funding
market dislocation. Non-interest income rose 1%, reflecting a slowdown in
particular in the bancassurance and wealth businesses.
Mortgage balances
were 13% higher than 2007. New mortgage volumes in the second half of the year
were significantly lower than in the first six months, although levels of
redemptions have also fallen.
Average deposit
balances were largely flat year-on-year in constant currency terms reflecting
the highly competitive market for resources in Ireland in
2008. Deposit flows were strong in the latter part of the year and
into the early months of 2009. During 2008, we opened 119,000 new
current accounts driven by particularly successful current account switcher and
student campaigns.
Direct expenses
rose by 18% to £423 million, reflecting the impact of the movement in exchange
rates and the full year impact of the now completed investment programme in
Ulster Bank’s footprint and operations. Cost growth in the second half of 2008
was significantly lower, reflecting disciplined management of the cost
base.
Impairment losses
rose to £106 million, reflecting the impact on credit quality of the slowdown in
the Irish economy, with the final quarter showing the most notable decline in
both activity and sentiment. This was reflected in a significantly
increased flow of cases into the problem debt management process.
In January 2009,
Ulster Bank announced its intention to adopt a single brand strategy under the
Ulster Bank brand. This will see the merger of the operations of
Ulster Bank and First Active in the Republic of Ireland (“RI”) by the end of
2009. This action is being taken to strengthen the Ulster Bank Group
franchise by positioning it to deal with the prevailing local and global market
conditions. A number of cost management initiatives have also commenced across
the business.
Ulster Bank has
launched a series of initiatives to support its customers in this difficult
economic period. We announced in February 2009 that we will be making
significant funds available to the Northern Ireland (“NI”) SME
market. A similar announcement will be made in the coming weeks
regarding the RI SME market. Ulster Bank has also indicated that it
is adopting the RBS Group pledge regarding certainty of overdraft limits for
this sector.
The Momentum and
Secure Step mortgages have been launched in NI and RI respectively to support
First Time Buyers and the Bank has confirmed its pledge of a six-month
moratorium to mortgage customers facing potential repossession. In
support of our
42
Business review
continued
retail customers
across the island of Ireland the Group’s MoneySense programme is being rolled
out, with trained advisers being introduced to all Ulster Bank
branches.
2007
compared with 2006
Ulster Bank Group
maintained its success in building its personal and corporate banking business,
particularly in the island of Ireland, with total income rising by 14% to £987
million and operating profit by 6% to £317 million. These results reflect solid
sales growth across all activities, driven by an enhanced range of innovative
products and an expanded distribution network.
Net interest income
increased by 13% to £659 million reflecting good growth in both loans and
deposits. Loans and advances to customers increased by 15%, with particular
strength in business lending across a variety of industrial sectors. Our
mortgage book also saw very good growth in 2007, in spite of the slowdown in the
housing market, with balances up 15%. We achieved particular success in
attracting remortgagers with our Switcher package. We were also successful in
the current account switching market, winning 100,000 new current account
customers during the year. This, together with new product launches such as the
eSavings Account and Reward Reserve savings accounts, contributed to a 20%
increase in customer deposits. Net interest margin tightened, reflecting more
competitive market conditions and increased funding costs.
Non-interest income
rose by 16% to £328 million, driven by strong performances in Global Markets and
credit cards. We successfully launched our new wealth business in the course of
the year.
Direct expenses
increased by 32% to £359 million, as we continued our investment programme to
support the future growth of the business. We continued to expand our branch and
business centre footprint and recruited additional customer-facing staff,
particularly in our Global Markets business.
Impairment losses
have risen to £46 million, reflecting growth in lending as well as a slowdown in
economic conditions which has affected commercial credit
metrics.
43
Business review
continued
US
Retail & Commercial
|
2008
|
2007
|
2006
|
2008
|
2007
|
2006
|
|||||||||||||||||||
| £m | £m | £m | $m | $m | $m | |||||||||||||||||||
|
Net interest
income
|
1,726 | 1,613 | 1,773 | 3,200 | 3,227 | 3,272 | ||||||||||||||||||
|
Net fees and
commissions
|
664 | 648 | 729 | 1,231 | 1,296 | 1,341 | ||||||||||||||||||
|
Other
non-interest income
|
197 | 153 | 174 | 362 | 305 | 322 | ||||||||||||||||||
|
Non-interest
income
|
861 | 801 | 903 | 1,593 | 1,601 | 1,663 | ||||||||||||||||||
|
Total
income
|
2,587 | 2,414 | 2,676 | 4,793 | 4,828 | 4,935 | ||||||||||||||||||
|
Direct
expenses
|
||||||||||||||||||||||||
|
–
staff
|
(645 | ) | (563 | ) | (615 | ) | (1,194 | ) | (1,126 | ) | (1,136 | ) | ||||||||||||
|
–
other
|
(354 | ) | (291 | ) | (330 | ) | (654 | ) | (582 | ) | (601 | ) | ||||||||||||
|
Indirect
expenses
|
(623 | ) | (571 | ) | (562 | ) | (1,157 | ) | (1,142 | ) | (1,048 | ) | ||||||||||||
| (1,622 | ) | (1,425 | ) | (1,507 | ) | (3,005 | ) | (2,850 | ) | (2,785 | ) | |||||||||||||
|
Impairment
losses
|
(437 | ) | (246 | ) | (149 | ) | (811 | ) | (491 | ) | (274 | ) | ||||||||||||
|
Operating
profit before tax
|
528 | 743 | 1,020 | 977 | 1,487 | 1,876 | ||||||||||||||||||
|
£bn
|
£bn
|
£bn
|
US$bn
|
US$bn
|
US$bn
|
|||||||||||||||||||
|
Total
assets
|
88.7 | 67.1 | 70.7 | 129.5 | 134.1 | 138.7 | ||||||||||||||||||
|
Loans and
advances to customers – gross
|
61.7 | 44.8 | 44.7 | 90.1 | 89.9 | 87.5 | ||||||||||||||||||
|
Customer
deposits
|
64.4 | 52.6 | 51.2 | 94.0 | 105.4 | 100.5 | ||||||||||||||||||
|
Non-performing
loans
|
0.4 | 0.2 | - | 0.5 | 0.3 | 0.1 | ||||||||||||||||||
|
Average
exchange rate – US$/£
|
1.853 | 2.001 | 1.844 | |||||||||||||||||||||
|
Spot exchange
rate – US$/£
|
1.460 | 2.004 | 1.965 | |||||||||||||||||||||
2008 compared with
2007
US Retail &
Commercial Banking increased income by 7% to £2,587 million, primarily as a
result of movements in exchange rates, but experienced a sharp increase in
impairment losses as economic conditions progressively worsened over the course
of the year. As a result, operating profit declined to £528 million, down 29%.
In dollar terms, total income was down 1% at $4,793 million while operating
profit declined by 34% to $977 million.
Net interest income
grew by 7% to £1,726 million. Average loans and advances to retail customers
decreased as a result of the slowing economy and tighter underwriting standards,
but this decline was offset by continued strong growth in corporate and
commercial lending. Core customer deposits declined by 5% and the division
further reduced its reliance on brokered deposits by 80%, leading to an overall
decline of 11% in total customer deposits. Net interest margin was held steady
at 2.82%, reflecting widening asset margins and management of savings rates in a
competitive deposit market.
Direct expenses
increased by 17% to £999 million, reflecting increased costs from the expansion
of the commercial banking relationship management teams, write-downs on mortgage
servicing rights, and higher costs related to loan work-out and collection
activity together with movements in exchange rates. In dollar terms, direct
expenses increased by 8% to $1,848 million.
Credit conditions
worsened significantly over the course of the year as the housing market
continued to deteriorate and unemployment rose, exacerbating already challenging
conditions. Impairment losses totalled £437 million, up from £246 million in
2007 reflecting the deterioration in economic conditions. In dollar terms,
impairment losses totalled $811 million, up 65% from 2007. Stress has
emerged in all consumer segments during the second half of the year:
non-performing loans represented 0.36% of home equity balances, 0.35% of auto
balances and 1.04% of residential mortgage balances. Commercial
non-performing loans represented 0.41% of loans. US Retail &
Commercial does not originate negative amortization mortgages or option
adjustable rate mortgages. Closing provision balances for the portfolio were
£588 million ($859 million) compared with £275 million ($552 million) at the end
of 2007.
The US business has
continued to evaluate opportunities to optimise capital allocation by exiting or
reducing exposure to lower growth or sub-scale segments. In the fourth quarter,
18 rural branches in the Adirondacks region were sold to Community Bank System.
An agreement has also been announced to sell the Indiana retail branch banking
network, consisting of 65 branches, and the business banking and regional
banking activities, to Old National Bank.
2007 compared with 2006
Against the background of weaker housing
and credit market conditions, the US Retail & Commercial Banking division
demonstrated resilience in 2007, with a particularly good performance in
corporate and commercial banking. Despite modest growth in net interest margins
and strong fee growth in several products, total income fell by 10% to £2,414 million due mainly to the weak dollar
exchange rate but, in dollar terms, total income was down 2% to $4,828 million. Tight cost control helped
limit the fall in operating
profit. However, impairment
losses increased from 0.31% of loans and advances to 0.55%, resulting in a decrease in
operating
profit of 27% to £743 million, or 21% to $1,487 million in dollar
terms.
Net
interest income fell by 9%
to £1,613 million
due mainly to the unfavourable dollar exchange rate. In dollar terms, net
interest income fell by
1%
to $3,227 million.
Average loans and advances to customers were
flat,
with strong growth in corporate and commercial lending, up 9%,
with close attention being paid to our risk appetite in light of prevailing
market conditions. Average customer
deposits were flat and deposit margins narrowed as a result of deposit pricing
competition and continued migration from low-cost checking accounts and liquid
savings to higher-cost products. Notwithstanding this migration, US Retail &
Commercial Banking net interest margin increased slightly to 2.84%
in 2007, compared with 2.76%
in 2006, thanks in part to improved lending spreads in the latter part of the
year.
44
Business review
continued
Non-interest income fell by 11% to
£801 million. In dollar terms, non-interest
income fell by 4% to $1,601 million. Business and corporate fees
rose strongly, with good results especially in foreign exchange and interest
rate derivatives, driven by increasing cooperation with RBS Global
Markets.
In response to more difficult market
conditions the division intensified cost discipline, with a reduction in
headcount helping to reduce direct expenses by 10%. In dollar terms, the fall in direct
expenses was just 2%, despite enhancements to infrastructure and processes as
well as continued investment in growth opportunities including mid-corporate
banking, and contactless debit cards.
Rising losses and increased provisions
lifted impairment costs from £149 million in 2006 to £246 million in 2007. In dollar terms,
impairment losses rose from $274 million in 2006 to $491 million in 2007. Against a background
of weaker economic activity the US Retail & Commercial Banking division
portfolio is performing well, although we have experienced a reversion from the
very low levels of impairment seen in recent years, reflecting both the planned
expansion of our commercial loan book and the impact of a softer housing market.
There has also been an increase in reserving.
45
Business review
continued
RBS
Insurance
|
2008
|
2007
|
2006
|
||||||||||
| £m | £m | £m | ||||||||||
|
Earned
premiums
|
4,512 | 4,615 | 4,710 | |||||||||
|
Reinsurers’
share
|
(206 | ) | (190 | ) | (166 | ) | ||||||
|
Insurance net
premium income
|
4,306 | 4,425 | 4,544 | |||||||||
|
Net fees and
commissions
|
(396 | ) | (465 | ) | (486 | ) | ||||||
|
Investment
income
|
367 | 366 | 293 | |||||||||
|
Other
income
|
153 | 248 | 251 | |||||||||
|
Total
income
|
4,430 | 4,574 | 4,602 | |||||||||
|
Direct
expenses
|
||||||||||||
|
–
staff
|
(286 | ) | (282 | ) | (291 | ) | ||||||
|
–
other
|
(225 | ) | (228 | ) | (224 | ) | ||||||
|
Indirect
expenses
|
(261 | ) | (239 | ) | (235 | ) | ||||||
| (772 | ) | (749 | ) | (750 | ) | |||||||
|
Gross
claims
|
(3,136 | ) | (3,358 | ) | (3,255 | ) | ||||||
|
Reinsurers’
share
|
104 | 75 | 34 | |||||||||
|
Net
claims
|
(3,032 | ) | (3,283 | ) | (3,221 | ) | ||||||
|
Impairment
losses
|
(42 | ) | - | - | ||||||||
|
Operating
profit before tax
|
584 | 542 | 631 | |||||||||
|
In-force
policies (000’s)
|
||||||||||||
|
– Motor
own-brand
|
4,492 | 4,445 | 4,676 | |||||||||
|
– Own-brand
non-motor (home, rescue, pet, HR24)
|
5,560 | 3,752 | 3,759 | |||||||||
|
–
Partnerships & broker (motor, home, rescue, pet, HR24)
|
5,898 | 6,765 | 8,681 | |||||||||
|
– Other
(International, commercial and central)
|
1,206 | 1,068 | 1,006 | |||||||||
|
General
insurance reserves – total (£m)
|
6,672 | 6,707 | 6,603 | |||||||||
2008
compared with 2007
RBS Insurance made
good progress in 2008, with operating profit rising by £42 million, an increase
of 8%. Total income was £144 million lower at £4,430 million, reflecting a fall
in insurance premium income following the continuation of the strategic decision
to exit less profitable partnership contracts and the effect of financial market
conditions.
Own-brand
businesses increased income by 2% and contribution before impairments and
excluding indirect expenses by 12%. In the UK motor market the Group increased
premium rates to offset claims inflation and continued to target lower risk
drivers, with price increases concentrated in higher risk categories in order to
improve profitability. During 2008 selected brands were successfully deployed on
a limited number of aggregator web sites. Our international businesses in Italy
and Germany performed well, with income up 25% and contribution up 74%. Over the
last year own-brand motor policy numbers have again begun to increase, and rose
by 1% to 4.5 million.
In own-brand
non-motor insurance we have continued to achieve good sales through the RBS
Group, where home insurance policies in force have increased by 33%. In
addition, Privilege and Churchill have grown home policies by 90% and 13%
respectively compared with 2007, mainly due to an increase in online sales as a
result of successful marketing campaigns. A new commercial insurance offering,
Direct Line for Business, was launched, and has grown rapidly over the year with
particularly strong performances in Residential Property and Tradesman policies.
Overall own-brand non-motor policies in force have grown by 48% to 5.6 million,
benefiting from the addition of rescue cover to RBS and NatWest current account
package customers.
Results from
partnerships and broker business confirmed the Group’s strategy of refocusing on
the more profitable opportunities in this segment, where we provide underwriting
and processing services to third parties. The Group did not renew a number of
rescue contracts and pulled back from some less profitable segments of the
broker market. As a result partnership and broker in-force policies have fallen
by 13% over the last year with a corresponding 12% reduction in income, yet
contribution grew by 30%.
For RBS Insurance
as a whole, insurance premium income, net of fees and commissions, was broadly
maintained at £3,910 million, reflecting 6% growth in the Group’s own brands
offset by a 14% decline in the partnerships and broker segment. Investment
income was maintained at £367 million. Other income decreased by
38% to £153 million.
Direct expenses
increased by less than 1% to £511 million, despite accelerated marketing
development in own brands, including the launch of Direct Line for
Business.
Net claims fell by
8% to £3,032 million, benefiting from ongoing claims containment and more benign
weather conditions. Impairments of £42 million reflect impairments recognised in
corporate bond and equities investment portfolios.
The UK combined
operating ratio for 2008, including manufacturing costs, decreased to 96.5% from
101.1%.
46
Business review
continued
2007 compared with 2006
RBS Insurance has
made good progress in 2007 in competitive markets. Total income was maintained
at £4,574 million, in line with 2006 levels, with growth in our own-brand
businesses offset by a decline in partnerships.
Operating profit
fell by 14% to £542 million, reflecting the impact of the severe flooding
experienced in June and July. Excluding the £258 million impact of the floods,
contribution grew by 27%, supported by strong claims management and the benefits
of improved risk selection in this and prior years. We have continued to focus
on selective underwriting of more profitable business.
Our own-brand
businesses have performed well, maintaining income at 2006 levels and
contribution growing by 5%. Excluding the impact of the floods, own-brand
contribution grew by 27%. In the UK motor market we have pursued a strategy of
targeting lower risk drivers and have increased premium rates to offset claims
inflation, improving profitability by implementing heavier price increases in
higher risk categories. Our international businesses performed well, with our
German and Italian businesses achieving profitability in 2007. Home insurance
grew across all of our own brands in the second half, and we achieved particular
success in the distribution of home policies through our bank branches, with
sales up 40%.
In our partnerships
and broker business, providing underwriting and processing services to third
parties, we have concentrated on more profitable opportunities and have
consequently not renewed a number of large rescue contracts. We also pulled back
from some less profitable segments of the broker market. This resulted in a 22%
reduction in in-force policies, but income fell by only 1%. Contribution from
partnerships and brokers fell by 33% as a result of flood-related claims.
Excluding the impact of the floods, contribution from partnerships and brokers
increased by 10%.
Direct expenses
decreased by 1% to £510 million. Within this, staff costs reduced by 3%,
reflecting our continued focus on improving efficiency whilst maintaining
service standards. Non-staff costs increased by 2%.
Net claims rose by
2% to £3,283 million. Gross claims relating to the floods in June and July cost
more than £300 million, with a net impact, after allowing for profit sharing and
reinsurance, of £258 million. Excluding the impact of the floods, net claims
costs were reduced by 6%. In the motor book, while average claims costs have
continued to rise, this has been mitigated by improvements in risk selection and
management and by continuing efficiencies in claims handling.
47
Business review
continued
Central
items
|
2008
|
2007
|
2006
|
||||||||||
| £m | £m | £m | ||||||||||
|
Operating
profit/(loss) before tax
|
1,024 | 844 | (156 | ) | ||||||||
Funding and
operating costs have been allocated to operating divisions, based on direct
service usage, requirement for market funding and other appropriate drivers
where services span more than one division. Residual unallocated items relate to
volatile corporate items that do not naturally reside within a
division.
2008
compared with 2007
Operating
profit/(loss) before tax amounted to a net credit of £1,024 million
reflecting the benefit from a decrease in the carrying value of own debt,
profit on the sale of Tesco Personal Finance offset by a net debit on
economic hedges which do not qualify for IFRS hedge
accounting.
2007
compared with 2006
Operating
profit/(loss) before tax amounted to a net credit of £844 million
and in part comprised a decrease in the carrying value of own debt, gains
realised on a number of planned disposals that formed part of the Group’s
funding arrangements for the acquisition of ABN AMRO offset
by goodwill payments in respect of current account administration fees. In 2006,
there were no similar gains on disposal as in 2007, and the net debit
principally reflects the movement on economic hedges which do not qualify for
IFRS hedge accounting.
48
Business review
continued
Non-Core
|
2008
|
2007
|
2006
|
||||||||||
| £m | £m | £m | ||||||||||
|
Net interest
income from banking activities
|
1,665 | 1,032 | 1,069 | |||||||||
|
Net fees and
commissions receivable
|
923 | 834 | 801 | |||||||||
|
Loss from
trading activities
|
(8,529 | ) | (804 | ) | 607 | |||||||
|
Insurance net
premium income
|
986 | 962 | 957 | |||||||||
|
Other
operating income
|
1,117 | 2,993 | 2,697 | |||||||||
|
Non-interest
income
|
(5,503 | ) | 3,985 | 5,062 | ||||||||
|
Total
income
|
(3,838 | ) | 5,017 | 6,131 | ||||||||
|
Direct
expenses
|
||||||||||||
|
–
staff
|
(658 | ) | (508 | ) | (442 | ) | ||||||
|
–
other
|
(1,135 | ) | (1,004 | ) | (1,106 | ) | ||||||
|
Indirect
expenses
|
(539 | ) | (242 | ) | (144 | ) | ||||||
| (2,332 | ) | (1,754 | ) | (1,692 | ) | |||||||
|
Insurance net
claims
|
(700 | ) | (727 | ) | (749 | ) | ||||||
|
Impairment
losses
|
(4,920 | ) | (399 | ) | (427 | ) | ||||||
|
Operating
(loss)/profit before tax
|
(11,790 | ) | 2,137 | 3,263 | ||||||||
|
£bn
|
£bn
|
£bn
|
||||||||||
|
Total third
party assets (including derivatives)
|
324.7 | 255.4 | 125.0 | |||||||||
|
Loans and
advances to customers – gross
|
190.2 | 160.4 | 87.6 | |||||||||
|
Customer
deposits
|
26.5 | 27.2 | 6.7 | |||||||||
|
Non-performing
loans
|
11.2 | 1.6 | 0.4 | |||||||||
2008
compared with 2007
Overall results for
2008 deteriorated significantly due to the worsening of global economies and
credit markets resulting in large increases in impairment losses and credit and
other market write downs on trading activities. In addition 2008
included a full year of results from the acquisition of ABN AMRO compared with
76 days in the previous year.
Net interest income
increased to £1,665 million and net fees and commissions increased to £923
million principally due to the inclusion of a full year of income for ABN AMRO.
In 2008, losses from trading activities totalled £8,529 million compared with a
loss of £804 million in 2007 including £10,172 million of credit and other
market write downs, partially offset by £1,690 million gain on credit default
swaps, particularly in the fourth quarter of 2008.
Other operating
income reduced significantly due to the sale of a number of our private equity
portfolios including Southern Water in 2007 which was not repeated in
2008.
The increase in
operating expenses mainly reflects the inclusion of a full year of the ABN AMRO
cost base partially offset by a reduction in bonus related expenses in
2008.
Insurance premiums
and claims including Linea Directa were relatively stable.
Impairment losses
increased to £4,920 million from £399 million, of which £3,105 million related
to global corporate clients previously managed in our Global Banking &
Markets division.
Third party assets
had small increases in most areas. Loans and advances increased by £30 billion
or 18.5%. Global clients saw increases of £15 billion, with steady, but smaller
increases in the retail & commercial markets of UK, EME, Asia and the
US.
Customer deposits
remained largely unchanged.
2007
compared with 2006
Overall operating
profit fell from £3,263 million to £2,137 million mainly due to credit market
losses which occurred in the last quarter of 2007. Net interest
income decreased from 2006 to 2007 by £37 million.
Whilst net fees and
commissions remained relatively flat losses from trading activities totaled £804
million compared with a profit of £607 million in the previous year. This
reflects write downs in leveraged finance and subprime related positions in the
last quarter of 2007.
Other operating
income increased due to the sale of a number of our private equity portfolios
including Southern Water.
Operating expense
increased principally due to the ABN AMRO acquisition coupled with normal
inflationary pressures.
Linea Directa Spain
had strong performances and overall there were decreases in insurance
claims.
Impairments losses
were largely unchanged reflecting the relatively stable conditions for most of
2007 and 2006.
The acquisition of
ABN AMRO accounted for all of the increase in Customer Deposits, approximately
82% of the increase in third party assets and approximately 62% of the movement
in Loans and advances. Commercial property and retail mortgages were strong
drivers in increasing both third party assets and loans and advances within UK
corporate and EME. Other parts of the business saw smaller overall increases in
balance sheet assets.
49
Business review
continued
Employee numbers at
31 December (full time equivalents rounded to the nearest hundred)
| Group | ||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
UK
Retail
|
28,400 | 28,400 | 30,800 | |||||||||
|
UK
Corporate
|
13,200 | 12,500 | 11,300 | |||||||||
|
Wealth
|
5,200 | 5,100 | 4,300 | |||||||||
|
Global
Banking & Markets
|
17,800 | 22,000 | 7,800 | |||||||||
|
Global
Transaction Services
|
3,900 | 3,100 | 2,400 | |||||||||
|
Ulster
Bank
|
5,400 | 5,400 | 4,400 | |||||||||
|
US Retail
& Commercial
|
16,200 | 16,300 | 16,700 | |||||||||
|
RBS
Insurance
|
14,700 | 15,700 | 16,300 | |||||||||
|
Central
Items
|
4,300 | 4,300 | 2,800 | |||||||||
|
Core
|
109,100 | 112,800 | 96,800 | |||||||||
|
Non-Core
|
17,700 | 16,300 | 4,200 | |||||||||
|
|
126,800 | 129,100 | 101,000 | |||||||||
|
Group
Manufacturing
|
47,600 | 44,700 | 34,000 | |||||||||
|
Integration
|
900 | - | - | |||||||||
|
RFS Holdings
minority interest
|
24,500 | 21,600 | - | |||||||||
|
Group
total
|
199,800 | 195,400 | 135,000 | |||||||||
50
This
Page is Intentionally Left Blank
51
This
Page is Intentionally Left Blank
52
Business
review continued
|
2008
|
2007
|
|||||||
| £m | £m | |||||||
|
Assets
|
||||||||
|
Cash and
balances at central banks
|
12,400 | 17,866 | ||||||
|
Loans and
advances to banks
|
138,197 | 219,460 | ||||||
|
Loans and
advances to customers
|
874,722 | 828,538 | ||||||
|
Debt
securities
|
267,549 | 294,656 | ||||||
|
Equity
shares
|
26,330 | 53,026 | ||||||
|
Settlement
balances
|
17,832 | 16,589 | ||||||
|
Derivatives
|
992,559 | 277,402 | ||||||
|
Intangible
assets
|
20,049 | 49,916 | ||||||
|
Property,
plant and equipment
|
18,949 | 18,745 | ||||||
|
Deferred
tax
|
7,082 | 3,119 | ||||||
|
Prepayments,
accrued income and other assets
|
24,402 | 15,662 | ||||||
|
Assets of
disposal groups
|
1,581 | 45,850 | ||||||
|
Total
assets
|
2,401,652 | 1,840,829 | ||||||
|
Liabilities
|
||||||||
|
Deposits by
banks
|
258,044 | 312,294 | ||||||
|
Customer
accounts
|
639,512 | 682,363 | ||||||
|
Debt
securities in issue
|
300,289 | 274,172 | ||||||
|
Settlement
balances and short positions
|
54,277 | 91,021 | ||||||
|
Derivatives
|
971,364 | 272,052 | ||||||
|
Accruals,
deferred income and other liabilities
|
31,482 | 34,208 | ||||||
|
Retirement
benefit liabilities
|
2,032 | 460 | ||||||
|
Deferred
tax
|
4,165 | 5,400 | ||||||
|
Insurance
liabilities
|
9,976 | 10,162 | ||||||
|
Subordinated
liabilities
|
49,154 | 38,043 | ||||||
|
Liabilities
of disposal groups
|
859 | 29,228 | ||||||
|
Total
liabilities
|
2,321,154 | 1,749,403 | ||||||
|
Minority
interests
|
21,619 | 38,388 | ||||||
|
Equity
owners
|
58,879 | 53,038 | ||||||
|
Total
equity
|
80,498 | 91,426 | ||||||
|
Total
liabilities and equity
|
2,401,652 | 1,840,829 | ||||||
|
Analysis
of repurchase agreements included above
|
||||||||
|
Reverse
repurchase agreements and stock borrowing
|
||||||||
|
Loans and
advances to banks
|
58,771 | 175,941 | ||||||
|
Loans and
advances to customers
|
39,313 | 142,357 | ||||||
| 98,084 | 318,298 | |||||||
|
Repurchase
agreements and stock lending
|
||||||||
|
Deposits by
banks
|
83,666 | 163,038 | ||||||
|
Customer
accounts
|
58,143 | 134,916 | ||||||
| 141,809 | 297,954 | |||||||
Overview
of consolidated balance sheet
Total assets of
£2,401.7 billion at 31 December 2008 were up £560.8 billion, 30%, compared with
31 December 2007.
Loans and advances
to banks decreased by £81.3 billion, 37%, to £138.2 billion. Reverse repurchase
agreements and stock borrowing (‘reverse repos’) were down by £117.2 billion,
67% to £58.8 billion. Excluding reverse repos, bank placings increased by £35.9
billion, 83%, to £79.4 billion.
Loans and advances
to customers were up £46.2 billion, 6%, at £874.7 billion or £68.0 billion, 8%
following the disposal of the Banco Real and other businesses to Santander and
Tesco Personal Finance. Within this, reverse repos decreased by 72%, £103.0
billion to £39.3 billion. Excluding reverse repos, lending rose by £149.2
billion, 22% to £835.4 billion reflecting both organic growth and the effect of
exchange rate movements following the weakening of sterling during the second
half of 2008.
Debt securities
decreased by £27.1 billion, 9%, to £267.5 billion and equity shares decreased by
£26.7 billion, 50%, to £26.3 billion principally due to lower holdings in Global
Banking & Markets.
53
Business
review continued
Movements in the
value of derivatives, assets and liabilities, primarily reflect changes in
interest and exchange rates, together with growth in trading
volumes.
Intangible assets
declined by £29.9 billion, 60% to £20.0 billion, reflecting impairment of £32.6
billion and the disposals of the Asset Management business of ABN AMRO, Banca
Antonveneta and the Banco Real and other businesses of ABN AMRO acquired by
Santander, £7.2 billion. This was offset by exchange rate movements of £11.8
billion, goodwill of £0.2 billion arising on the Sempra joint venture and £0.3
billion on the buyout of the outstanding ABN AMRO shareholdings not previously
owned by the Group.
Deferred tax assets
increased £4.0 billion to £7.1 billion principally due to carried forward
trading losses.
Prepayments,
accrued income and other assets were up £8.7 billion, 56% to £24.4
billion.
Assets and
liabilities of disposal groups decreased following completion of the sales of
the Asset Management business of ABN AMRO to Fortis, Banca Antonveneta to Monte
dei Paschi di Sienna and the majority of ABN AMRO’s Private Equity business to
third parties.
Deposits by banks
declined by £54.3 billion, 17% to £258.0 billion. This reflected decreased
repurchase agreements and stock lending (‘repos’), down £79.4 billion, 49% to
£83.7 billion partly offset by increased inter-bank deposits, up £25.1 billion,
17% to £174.4 billion.
Customer accounts
were down £42.9 billion, 6% to £639.5 billion or £21.6 billion, 3% excluding
disposals of subsidiaries. Within this, repos decreased £76.8 billion, 57% to
£58.1 billion. Excluding repos, deposits rose by £33.9 billion, 6%, to £581.4
billion.
Debt securities in
issue were up £26.1 billion, 10% to £300.3 billion mainly resulting from the
effect of exchange rate movements.
Settlement balances
and short positions were down £36.7 billion, 40%, to £54.3 billion reflecting
reduced customer activity.
Accruals, deferred
income and other liabilities decreased £2.7 billion, 8%, to £31.5 billion
primarily as a result of disposals.
Retirement benefit
liabilities increased by £1.6 billion to £2.0 billion due to reduced asset
values only partly offset by the effect of increased discount
rates.
Deferred taxation
liabilities decreased by £1.2 billion, 23% to £4.2 billion due in part to the
sale of Angel Trains.
Subordinated
liabilities were up £11.1 billion, 29% to £49.2 billion. The issue of £2.4
billion dated loan capital and the effect of exchange rate and other
adjustments, £11.3 billion, were partially offset by the redemption of £1.6
billion of dated loan capital, £0.1 billion undated loan capital and £0.9
billion in respect of the disposal of the Banco Real and other businesses of ABN
AMRO to Santander.
Equity minority
interests decreased by £16.8 billion, 44% to £21.6 billion. Attributable losses
of £ 10.8 billion, including £15.7 billion of write downs of goodwill and other
intangible assets in respect of the State of the Netherlands investment in RFS
Holdings, equity withdrawals of £13.6 billion, including £12.3 billion by
Santander following the disposals of Banca Antonveneta and Banco Real,
reductions in the market value of available-for-sale securities of £1.4 billion,
mainly the investment in Bank of China attributable to minority shareholders,
movements in cash flow hedging reserves, £0.8 billion, actuarial losses on
defined benefit pension schemes net of tax of £0.5 billion and dividends paid of
£0.3 billion, were partially offset by effect of exchange rate movements of £9.1
billion of which £8.0 billion related to the State of the Netherlands and
Santander investments in RFS Holdings, the £0.8 billion equity raised as part of
the Sempra joint venture and £0.4 billion additional equity in respect of the
buy-out of the ABN AMRO minority shareholders.
Owners’ equity
increased by £5.8 billion, 11% to £58.9 billion. Proceeds of £12.0 billion from
the rights issue, net of £246 million expenses, and £19.7 billion from the
placing and open offer, net of expenses of £265 million, together with exchange
rate movements of £6.8 billion and other movements of £0.2 billion were
partially offset by the attributable loss for the period of £23.7 billion, a
£4.6 billion decrease in available-for-sale reserves, net of tax, reflecting
£1.0 billion in the Group’s share in the investment in Bank of China and £3.6
billion in other securities, the majority of which related to Global Banking
& Markets, actuarial losses net of tax of £1.3 billion, the payment of the
2007 final ordinary dividend of £2.3 billion and other dividends of £0.6
billion, and a reduction in the cash flow hedging reserve of £0.3 billion.
|
2008
|
2007
|
2006
|
||||||||||
| £m | £m | £m | ||||||||||
|
Net cash
flows from operating activities
|
(75,338 | ) | 25,604 | 17,441 | ||||||||
|
Net cash
flows from investing activities
|
16,997 | 15,999 | 6,645 | |||||||||
|
Net cash
flows from financing activities
|
15,102 | 29,691 | (1,516 | ) | ||||||||
|
Effects of
exchange rate changes on cash and cash equivalents
|
29,209 | 6,010 | (3,468 | ) | ||||||||
|
Net
(decrease)/increase in cash and cash equivalents
|
(14,030 | ) | 77,304 | 19,102 | ||||||||
2008
The major factors
contributing to the net cash outflow from operating activities of £75,338
million were the net operating loss before tax of £36,628 million from
continuing and discontinued operations, the decrease of £42,219 million in
operating liabilities less operating assets, and the elimination of foreign
exchange differences of £41,874 million, partly offset by the write down of
goodwill and other intangible assets, £32,581 million and other non-cash items,
£8,772 million.
Proceeds on
disposal of discontinued activities of £20,113 million was the largest element
giving rise to net cash flows of investing activities of £16,997 million.
Outflow from net purchases of securities of £1,839 million and net disposals of
property, plant and equipment, £3,529 million less the net cash inflow of £2,252
million in respect of other acquisitions and disposals represented the other
principle factors.
Net cash flows from
financing activities of £15,102 million primarily arose from the capital raised
from the placing and open offer of £19,741 million and the rights issue of
£12,000 million, the issue of subordinated liabilities of £2,413 million and
proceeds of minority interests, £1,427 million. This was offset in part by the
cash outflow on redemption of minority interests of £13,579 million, repayment
of subordinated liabilities of £1,727 million, dividends paid of £3,193 million
and interest paid on subordinated liabilities of £1,967 million.
2007
The major factors
contributing to the net cash inflow from operating activities of £25,604 million
were the increase of £28,261 million in operating liabilities less operating
assets and the profit before tax of £9,900 million, partly offset by the
elimination of foreign exchange differences of £10,282 million and income taxes
paid of £2,442 million.
The acquisition of
ABN AMRO, included within net investment in business interests and intangible
assets of £13,640 million, was the largest element giving rise to net cash flows
from investing activities of £15,999 million, with cash and cash equivalents
acquired of £60,093 million more than offsetting the cash consideration paid of
£45,856 million. Net sales and maturities of securities of £1,987 million and
net disposals of property, plant and equipment, £706 million less the net cash
outflow of £597 million in respect of other acquisitions and disposals
represented the other principle factors.
Net cash flows from
financing activities of £29,691 million primarily relate to the cash injection
of £31,019 million from the consortium partners in relation to the acquisition
of ABN AMRO, together with the issue of £4,829 million of equity securities and
£1,018 million of subordinated liabilities, offset in part by dividend payments
of £3,411 million, the repayment of £1,708 million subordinated liabilities,
interest on subordinated liabilities of £1,522 million and the redemption of
£545 million of minority interests.
2006
The major factors
contributing to the net cash inflow from operating activities of £17,441 million
were the profit before tax of £9,186 million adjusted for the elimination of
foreign exchange differences of £4,516 million and depreciation and amortisation
of £1,678 million, together with an increase of £3,980 million in
operating liabilities less operating assets.
Net sales and
maturities of securities of £8,000 million was partially offset by net purchases
of property, plant and equipment of £1,292 million, resulting in the net cash
inflow from investing activities of £6,645 million.
The issue of £671
million of equity preference shares, £3,027 million of subordinated liabilities
and proceeds of £1,354 million from minority interests issued were more than
offset by dividend payments of £2,727 million, purchase of ordinary shares
amounting to £991 million, repayment of £1,318 million of subordinated
liabilities and interest on subordinated liabilities of £1,409 million,
resulting in a net cash outflow from financing activities of £1,516 million.
The following table
analyses the Group’s regulatory capital resources on a fully consolidated basis
at 31 December:
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
|
Capital
base
|
||||||||||||||||||||
|
Tier 1
capital
|
69,847 | 44,364 | 30,041 | 28,218 | 22,694 | |||||||||||||||
|
Tier 2
capital
|
32,223 | 33,693 | 27,491 | 22,437 | 20,229 | |||||||||||||||
|
Tier 3
capital
|
260 | 200 | — | — | — | |||||||||||||||
| 102,330 | 78,257 | 57,532 | 50,655 | 42,923 | ||||||||||||||||
|
Less:
investments in insurance subsidiaries, associated undertakings and other
supervisory deductions
|
(4,155 | ) | (10,283 | ) | (10,583 | ) | (7,282 | ) | (5,165 | ) | ||||||||||
|
Total
capital
|
98,175 | 67,974 | 46,949 | 43,373 | 37,758 | |||||||||||||||
|
Risk-weighted
assets
|
||||||||||||||||||||
|
Credit
risk
|
551,400 | |||||||||||||||||||
|
Counterparty
risk
|
61,100 | |||||||||||||||||||
|
Market
risk
|
46,500 | |||||||||||||||||||
|
Operational
risk
|
36,800 | |||||||||||||||||||
| 695,800 | ||||||||||||||||||||
|
Banking
book:
|
||||||||||||||||||||
|
On-balance
sheet
|
480,200 | 318,600 | 303,300 | 261,800 | ||||||||||||||||
|
Off-balance
sheet
|
84,600 | 59,400 | 51,500 | 44,900 | ||||||||||||||||
|
Trading
book
|
44,200 | 22,300 | 16,200 | 17,100 | ||||||||||||||||
| 609,000 | 400,300 | 371,000 | 323,800 | |||||||||||||||||
|
Risk asset
ratios
|
%
|
%
|
%
|
%
|
|
%
|
||||||||||||||
|
Tier
1
|
10.0 | 7.3 | 7.5 | 7.6 | 7.0 | |||||||||||||||
|
Total
|
14.1 | 11.2 | 11.7 | 11.7 | 11.7 | |||||||||||||||
Notes:
|
(1)
|
The data for
2008 are on a Basel II basis; prior periods are on a Basel I
basis.
|
|
(2)
|
The data for
2004 are based on UK GAAP as previously published and regulated.
As from 1 January 2005, the Group is regulated on an IFRS
basis.
|
It
is the Group’s policy to maintain a strong capital base, to expand it as
appropriate and to utilise it efficiently throughout its activities to optimise
the return to shareholders while maintaining a prudent relationship between the
capital base and the underlying risks of the business. In carrying out this
policy, the Group has regard to the supervisory requirements of the Financial
Services Authority (FSA). The FSA uses Risk Asset Ratio (RAR) as a measure of
capital adequacy in the UK banking sector, comparing a bank’s capital resources
with its risk-weighted assets (the assets and off-balance sheet exposures are
‘weighted’ to reflect the inherent credit and other risks); by international
agreement, the RAR should be not less than 8% with a Tier 1 component of not
less than 4%. At 31 December 2008, the Group’s total RAR was 14.1% (2007 –
11.2%) and the Tier 1 RAR was 10.0% (2007 – 7.3%).
On
pages 57 to 123 of the Business review certain information has been audited and
is labelled as such.
2008 has been one
of the most challenging years for banks. The financial markets turmoil, which
started in the second half of 2007 following concerns over the US sub-prime
mortgage market, resulted in a global reduction in liquidity and the
availability of term-funding. Confidence in financial institutions was eroded
through 2008 as a result of an increased perception of counterparty risk
following notable banking and insurance failures.
During the recent
market turbulence, in common with other banks, the Group saw the availability of
long term funding from both the capital markets and money markets decline
significantly during the second half of 2008. As a result, reliance on shorter
term funding increased with a consequent deterioration in the Group’s liquidity
profile. In response to the market stress, central banks increased liquidity
through a number of facilities and schemes available to support their respective
banking systems. In addition, governments around the world have provided capital
to financial institutions and moved to offer guarantees and increase deposit
insurance to reassure investors and depositors. As a global bank, the Group has
access to a number of those facilities and schemes which, in common with many
other banks, it has used to support funding.
Whilst the
international stabilisation efforts led by various governments since September
2008 have helped, the knock-on economic impacts are now evident in markets
globally. 2009 will see further strains for financial institutions. Whilst the
liquidity crisis is likely to stabilise, the level of impairments will increase
as recession spreads worldwide.
The Board, in the
light of the severe and increasing deterioration in market conditions, the
worsening economic outlook and difficulties in the credit markets, concluded
that it was appropriate for the Group to strengthen its capital
position.
The Group has
responded to the changing business and economic conditions by reducing leverage,
building and improving liquidity, raising additional capital and through
augmenting its risk management resources to drive forward a number of strategic
initiatives. The overall risk operating model has been strengthened to ensure
its adequacy for changing market conditions and additional capital management
disciplines are being embedded across the Group. There is an increased emphasis
on the independence of the control functions, capital allocation, stress testing
and risk return throughout the Group.
Risk
governance (unaudited)
Risk and capital
management strategy is owned and set by the Group’s Board of Directors, and
implemented by executive management led by the Group Chief Executive. There are
a number of committees and executives that support the execution of the business
plan and strategy.
57
Business
review continued
The role and remit
of these committees is as follows:
|
Committee
|
Focus
|
Membership
|
||
|
Group Audit
Committee (GAC)
|
Financial
reporting and the application of accounting policies as part of the
internal control and risk assessment process. GAC monitors the
identification, evaluation and management of all significant risks
throughout the Group.
|
Independent
non-executive directors
|
||
|
Advances
Committee (AC)
|
Deals with
transactions that exceed the Group Credit Committee’s delegated authority
and large exposures.
|
Members of
GEMC
Group Chief
Credit Officer
|
||
| Group Executive Management Committee (GEMC) |
Ensures
implementation of strategy consistent with risk appetite.
|
Business and
function heads, as determined by the Group Chief
Executive/Board
|
||
|
Executive
Risk Forum (ERF)
|
Acts on all
strategic risk and control matters across the Group including, but not
limited to, credit risk, market risk, operational risk, compliance and
regulatory risk, enterprise risk, treasury and liquidity risk,
reputational risk, insurance risk and country risk.
|
Group Chief
Executive
Group Finance
Director
Group Chief
Risk Officer
Chairman,
Regional Markets
Chief
Executive, RBS UK
Chief
Executive, Global Banking & Markets
|
||
|
Group Risk
Committee (GRC)
|
Recommends
limits and approves processes and policies to ensure the effective
management of all material risks across the Group.
|
Group Chief
Risk Officer
Group head of
each risk type
Group
Treasurer
Chief
Executive and Chief Risk Officer from each division
Group General
Counsel and Group Secretary
Group Chief
Economist
|
||
|
Group Credit
Committee (GCC)
|
Approves
credit proposals under the authority delegated to the committee by the
Board and/or the Advances Committee.
|
Members as
determined by GEMC
|
||
|
Group Asset
and Liability Management Committee (GALCO)
|
Identifies,
manages and controls the Group balance sheet risks.
|
Group Finance
Director
Chairman/Chief
Executive from each division
Group
Treasurer
Group Chief
Risk Officer
Heads of
Group functions
|
||
|
Group Chief
Executive’s Advisory Group (GCEAG)
|
Acts as a
forum for the provision of information and advice to the Group Chief
Executive. Forms part of the control process of the Group.
|
Group Chief
Executive
Group Finance
Director
Chairman and
Chief Executives from each division
Group Chief
Risk Officer
Group General
Counsel and Group Secretary
Group
Directors, Strategy, Communications and Human
Resources
|
58
Business
review continued
Management
responsibilities (unaudited)
All staff have a
role to play in the day to day management of risk, in line with Group policy,
which is set and managed by specialist staff in:
|
●
|
Risk
Management: credit, market, operational, regulatory, enterprise and
insurance risk, together with risk
analytics.
|
|
●
|
Group
Treasury: balance sheet, capital management, intra-group exposure,
funding, liquidity and hedging
policies.
|
Independence
underpins the approach to risk management, which is reinforced throughout the
Group by appropriate reporting lines. Risk Management and Group Treasury
functions are independent of the revenue generating business. As part of the
move toward greater functional independence, the divisional Chief Risk Officers
now have a direct reporting line to the Group Chief Risk Officer.
Group Internal
Audit (GIA) supports the GAC in providing an independent assessment of the
design, adequacy and effectiveness of internal controls.
Risk
appetite (unaudited)
Risk and capital
management across the Group is based on the risk appetite set by the Board,
which is established through setting strategic direction, contributing to, and
ultimately approving annual plans for each division and regularly reviewing and
monitoring the Group’s performance in relation to risk through monthly Board
reports.
Risk appetite is
defined in both quantitative and qualitative terms as follows:
|
●
|
Quantitative:
encompassing stress testing, risk concentration, value- at-risk, liquidity
and credit related metrics.
|
|
●
|
Qualitative:
focusing on ensuring that the Group applies the correct principles,
policies and procedures.
|
Different
techniques are used to ensure that the Group’s risk appetite is
achieved.
The GEMC is
responsible for ensuring that the implementation of strategy and operations are
in line with the risk appetite determined by the Board. This is reinforced
through a policy framework ensuring that all staff within the Group make
appropriate risk and reward trade-offs within pre-agreed
boundaries.
|
How
we do business
|
Policy
|
|
Customers
|
Identifying
our customers.
Treating our
customers fairly.
Delivering
customer value.
Respecting
customer confidentiality.
|
|
Risks
|
Identifying
and managing our risks.
Understanding
our markets.
|
|
Security
|
Protecting
our assets, premises, systems and data.
Operating our
processes, systems and controls.
Dealing with
external suppliers.
|
|
People
|
Working in
the Group.
Promoting
diversity and inclusion.
|
|
Reputation
|
Working
within laws and regulation.
Investing in
the community.
Conducting
sustainable business.
Maintaining
key services and processes.
|
|
Finances
|
Managing our
capital and resources.
Accounting
and financial reporting.
|
The annual business
planning and performance management process and associated activities ensure the
expression of risk appetite remains appropriate. GRC and GALCO support this
work.
59
Business
review continued
Capital
(unaudited)
The Group aims to
maintain appropriate levels of capital, in excess of regulatory requirements, to
ensure its capital position remains appropriate given the economic and
competitive environment. Capital adequacy and risk management are closely
aligned. The Group undertakes a regular assessment of its internal capital
requirement based on a quantification of the material risks to which it is
exposed.
Composition
of capital
The Group’s
regulatory capital resources at 31 December 2008 on a fully consolidated
basis, and in accordance with Financial Services Authority (FSA) definitions
were as follows:
|
Basel
II
31
December
2008
£m
|
Basel
II
1
January
2008
£m
|
Basel
I
31
December
2007
£m
|
||||||||||
|
Capital
base:
|
||||||||||||
|
Core Tier 1
capital: ordinary shareholders’ funds and minority interests less
intangibles
|
47,623 | 27,324 | 27,324 | |||||||||
|
Preference
shares and tax deductible securities
|
24,038 | 17,040 | 17,040 | |||||||||
|
Less
deductions from Tier 1 capital
|
(1,814 | ) | (1,457 | ) | n/a | |||||||
|
Tier 1
capital
|
69,847 | 42,907 | 44,364 | |||||||||
|
Tier 2
capital
|
32,223 | 28,767 | 33,693 | |||||||||
|
Tier 3
capital
|
260 | 200 | 200 | |||||||||
| 102,330 | 71,874 | 78,257 | ||||||||||
|
Less:
supervisory deductions
|
(4,155 | ) | (5,078 | ) | (10,283 | ) | ||||||
|
Total
regulatory capital
|
98,175 | 66,796 | 67,974 | |||||||||
|
Risk-weighted
assets:
|
||||||||||||
|
Credit
risk
|
551,400 | 542,100 | ||||||||||
|
Counterparty
risk
|
61,100 | 37,500 | ||||||||||
|
Market
risk
|
46,500 | 17,900 | ||||||||||
|
Operational
risk
|
36,800 | 36,000 | ||||||||||
| 695,800 | 633,500 | |||||||||||
|
Banking
book
|
564,800 | |||||||||||
|
Trading
book
|
44,200 | |||||||||||
| 609,000 | ||||||||||||
|
Risk asset
ratio:
|
||||||||||||
|
Core Tier
1
|
6.8% | 4.3% | 4.5% | |||||||||
|
Tier
1
|
10.0% | 6.8% | 7.3% | |||||||||
|
Total
|
14.1% | 10.5% | 11.2% | |||||||||
The FSA uses Risk
Asset Ratio (RAR) as a measure of capital adequacy in the UK banking sector,
comparing a bank’s capital resources with its risk-weighted assets (the assets
and off-balance sheet exposures are ‘weighted’ to reflect the inherent credit
and other risks); by international agreement, the RAR should be not less than 8%
with a Tier 1 component of not less than 4%. The Group has complied with the
FSA’s capital requirements throughout the year. A number of subsidiaries and
sub-groups within the Group, principally banking and insurance entities are
subject to additional individual regulatory capital requirements in the UK and
overseas.
Capital
allocation
As
part of the annual planning and budgeting cycle, each division is allocated
capital based upon risk-weighted assets (RWAs) and their associated regulatory
deductions. The budgeting process considers risk appetite, available capital
resources, stress testing results and business strategy. The budget is agreed by
the Board and allocated to the divisions to manage their allocated
RWAs.
Group Treasury and
GALCO monitor actual utilisation by tracking capital available and the
utilisation of capital by divisions. GALCO makes the necessary decisions around
re-allocation of budget and changes in RWA allocations.
60
Business
review continued
Basel
II
The Group adopted
Basel II on 1 January 2008. Pillar 1 focuses on the
calculation of minimum capital required to support the credit, market and
operational risks in the business. For credit risk, the majority of the Group
uses the Advanced Internal Ratings Based Approach (AIRB) for calculating RWAs,
making the Group one of a small number of banks whose risk systems and
approaches have reached the regulatory standards.
For operational
risk, the Group uses The Standardised Approach (TSA), which calculates
operational risk-weighted assets based on gross income. In line with other
banks, the Group is considering adopting the Advanced Measurement Approach (AMA)
for all or part of the business.
Using these
approaches, the RWA requirements, by division, are as follows:
|
Basel
II
31
December
2008
£bn
|
Basel
II
1
January
2008
£bn
|
Basel
I
31
December
2007
£bn
|
||||||||||
|
UK
Retail
|
45.7 | 41.3 | 46.8 | |||||||||
|
UK
Corporate
|
81.5 | 103.1 | 118.4 | |||||||||
|
Wealth
|
11.0 | 9.9 | 7.1 | |||||||||
|
Global
Banking & Markets
|
166.5 | 110.5 | 111.3 | |||||||||
|
Global
Transaction Services
|
17.1 | 16.0 | 17.8 | |||||||||
|
Ulster
Bank
|
24.5 | 24.8 | 32.5 | |||||||||
|
US Retail
& Commercial
|
63.9 | 44.3 | 44.3 | |||||||||
|
Central
Items
|
7.0 | 15.9 | 11.1 | |||||||||
|
Core
|
417.2 | 365.8 | 389.3 | |||||||||
|
Non-Core
|
160.6 | 120.3 | 100.7 | |||||||||
| Group before RFS Holdings minority interest | 577.8 | 486.1 | 490.0 | |||||||||
| RFS Holdings minority interest | 118.0 | 147.4 | 119.0 | |||||||||
| Group | 695.8 | 633.5 | 609.0 | |||||||||
Basel II is
cyclical, unlike Basel I where RWAs are stable through the cycle. Changes in RWA
totals are driven by external economic factors and their impact on the risk
profile of the underlying portfolio of assets, rather than changes in the asset
mix. Whilst Basel II tries to reduce this variation by incorporating measures
correlated to downturn conditions, it remains sensitive to cyclical
variations.
The AIRB approach
to Basel II is based on the following metrics.
|
●
|
Probability
of default (PD) models estimate the likelihood that a customer will
fail to make full and timely repayment of credit obligations over a one
year time horizon. Customers are assigned an internal credit grade which
corresponds to PD. Every customer credit grade across all grading scales
in the Group can be mapped to a Group level credit
grade.
|
|
●
|
Exposure at
default (EAD) models estimate the expected level of utilisation of
a credit facility at the time of a borrower’s default. The EAD may be
assumed to be higher than the current utilisation (e.g. in the case where
further drawings may be made on a revolving credit facility prior to
default) but will not typically exceed the total facility
limit.
|
|
●
|
Loss given
default (LGD) models estimate the economic loss that may occur in
the event of default and represent the debt that cannot be recovered. The
Group’s LGD models take into account the type of borrower, facility and
any risk mitigation such as security or collateral
held.
|
In
addition to minimum capital calculated, for credit, market and operational risk,
banks are required to undertake an Individual Capital Adequacy Assessment
Process (ICAAP) for other risks. The Group’s ICAAP, in particular, focuses on
pension fund, interest rate risk in the banking book together with stress tests
to assess the adequacy of capital over one year and the economic
cycle.
The Group will
publish its Pillar 3 (Market disclosures) on the external website, providing a
range of additional information relating to Basel II and risk and capital
management across the Group. The disclosures focus on Group level capital
resources and adequacy, discuss a range of credit risk approaches and their
associated risk weighted assets (under various Basel II approaches) such as
credit risk mitigation, counterparty credit risk and provisions. Detailed
disclosures are also made on equity, securitisation, operational and market
risk, as well as providing Interest Rate Risk in the Banking Book
disclosures.
Stress
and scenario testing
Stress testing is
central to the Group’s risk and capital framework and integral to Basel II.
Stress testing is used at divisional and Group level to assess risk
concentrations, estimate the impact of earnings on capital, determine the
overall capital adequacy under stress conditions and identify mitigating
actions. The principal business benefits of the stress testing framework are:
understanding the impact of recessionary scenarios; assessing material risk
concentrations; and forecasting the impact of market stress scenarios on the
Group’s balance sheet liquidity.
61
Business
review continued
At
Group level, a series of stress events are monitored on a regular basis to
assess the potential impact of an extreme yet plausible event on the Group.
There are two core elements of scenario stress testing:
|
●
|
Recessionary
stress testing considers the impact on both earnings and capital of
a range of recessionary scenarios. These are multi-year systemic shocks to
assess the Group’s ability to meet its capital requirements and
liabilities as they fall due under a significant but plausible downturn in
the business cycle and/or macroeconomic environment. The summary results
are included within the monthly risk report to the Board and discussed in
separate papers on a half-yearly
basis.
|
|
●
|
Integrated
stress testing considers firm wide stress tests to measure the
Group’s exposure to exceptional but plausible economic and geopolitical
events. Stress testing supports the identification and quantification of
material risks that may arise under stress scenarios, and provides
information to support management decision-making around risk appetite and
control.
|
Cross divisional
stress testing, undertaken to support the Group’s framework for managing
industry and geographical sector concentrations, is performed through the
identification of scenarios which are likely to affect groups of inter-related
(correlated) sectors. These stress tests are discussed with senior divisional
management and are reported to GRC, GEMC, GALCO and GAC. The Group manages to a
trigger limit on the stressed impairment charge for an individual
scenario.
Portfolio analysis,
using historic performance and forward looking indicators of change, uses stress
testing to facilitate the measurement of potential exposure to events and seeks
to quantify the impact of an adverse change in factors which drive the
performance and profitability of a portfolio.
Risk
coverage
The main risks
facing the Group are shown below.
|
Risk
type
|
Definition
|
Features
|
|
Credit risk
(including country and political risks)
|
The risk
arising from the possibility that the Group will incur losses from the
failure of customers to meet their financial obligations to the
Group.
|
Loss
characteristics vary materially across portfolios.
Significant
correlation between losses and the macroeconomic environment.
Concentration
risk.
|
|
Funding and
liquidity risk
|
The risk of
losses through being unable to meet obligations as they fall
due.
|
Potential to
disrupt the business model and stop normal functions of the
Group.
Significantly
correlated with credit risk losses.
|
|
Market
risk
|
The risk that
the value of an asset or liability may change as a result of a change in
market rates.
|
Potential for
large material losses.
Significantly
correlated with equity risk and the macroeconomic
environment.
|
|
Insurance
risk
|
The risk of
financial loss through fluctuations in the timing, frequency and/or
severity of insured events, relative to the expectations at the time of
underwriting.
|
Frequent
small losses.
Infrequent
material losses.
|
|
Operational
risk
|
The risk of
financial loss or reputational impact resulting from fraud; human error;
ineffective or inadequately designed processes or systems; improper
behaviour; legal events; or from external events.
|
Generally
immaterial losses.
|
|
Regulatory
risk
|
The risks
arising from regulatory changes/enforcement.
|
Risk of
regulatory changes.
Compliance
with regulations.
Potential for
fines and/or restrictions in business activities.
|
|
Other
risk
|
The risks
arising from reputation and pension fund risk.
|
Additional
regulation can be introduced as a result of other risk
losses.
|
Credit
risk
Principles
for credit risk management (audited)
The key principles
for credit risk management in the Group are as follows:
|
●
|
A credit risk
assessment of the customer and credit facilities is undertaken prior to
approval of credit exposure. Typically, this includes both quantitative
and qualitative elements including, the purpose of the credit and sources
of repayment; compliance with affordability tests; repayment history;
ability to repay; sensitivity to economic and market developments; and
risk-adjusted return based on credit risk measures appropriate to the
customer and facility type.
|
|
●
|
Credit risk
authority is specifically granted in writing to individuals involved in
the granting of credit approval, whether this is individually or
collectively as part of a credit committee. In exercising credit
authority, individuals are required to act independently of business
considerations and must declare any conflicts of
interest.
|
|
●
|
Credit
exposures, once approved, are monitored, managed and reviewed periodically
against approved limits. Lower quality exposures are subject to more
frequent analysis and assessment.
|
|
●
|
Credit risk
management works with business functions on the ongoing management of the
credit portfolio, including decisions on mitigating actions taken against
individual exposures or broader
portfolios.
|
|
●
|
Customers
with emerging credit problems are identified early and classified
accordingly. Remedial actions are implemented promptly and are intended to
restore the customer to a satisfactory status and minimise any potential
loss to the Group.
|
|
●
|
Stress
testing of portfolios is undertaken to assess the potential credit impact
of non-systemic scenarios and wider macroeconomic events on the Group’s
income and capital.
|
Specialist credit
risk teams oversee the credit process independently, making credit decisions
within their discretion, or recommending decisions to the appropriate credit
committee.
Assessments of
corporate borrower and transaction risk are undertaken using fundamental credit
analysis and the application of general corporate and certain specialist
counterparty credit risk models. Financial markets counterparties are approved
by a dedicated credit function which specialises in traded market product risk.
Specialist credit grading models exist for certain bank and non-bank financial
institutions.
Different
approaches are used for the management of wholesale and retail
businesses:
|
●
|
Wholesale
businesses: exposures are aggregated to determine the appropriate level of
credit approval required and to facilitate consolidated credit risk
management. Credit applications for corporate customers are prepared by
relationship managers (RMs) in the units originating the credit exposures,
or by the RM team with lead responsibility for a counterparty where a
customer has relationships with different divisions and business units
across the Group. This includes the assignment of counterparty credit
grades and LGD estimates using approved models, which are also
independently checked by the credit
team.
|
|
●
|
Retail
businesses: the retail business makes a large volume of small value credit
decisions. Credit decisions will typically involve an application for a
new or additional product or a change in facilities on an existing
product. The majority of these decisions are based upon automated
strategies utilising industry standard credit and behaviour scoring
techniques.
|
Model
validation (audited)
The performance and accuracy of
credit models is critical, both in terms of effective risk management and also
the calculation of risk parameters (PD, LGD and EAD) used by the Group to
calculate RWAs. The models are subject to frequent validation internally and, if
used as part of the AIRB Basel II framework (see page 61), have been
reviewed and approved for use by the FSA.
Independent model
validation is performed by the Group. This includes an evaluation of the model
development and validation for the data set used, logic and assumptions, and
performance of the model analysis. Where required, the Group has engaged
external risk management consultants to undertake independent reviews and report
their findings to the Wholesale or Retail Credit Model Committee. This provides
a benchmark against industry practices.
The validation
results are a key factor in deciding whether a model is recommended for ongoing
use. The frequency, depth and extent of the validation are consistent with the
materiality and complexity of the risk being managed. The Group’s validation
processes include:
|
●
|
Developmental
evidence: to ensure that the credit risk model adequately
discriminates between different levels of risk and delivers accurate risk
estimates.
|
|
●
|
Process
verification: whether the methods used in the credit risk models
are being used, monitored and updated in the way intended in the design of
the model. Initial testing and validation is performed when the model is
developed with the performance of models being assessed on an ongoing
basis.
|
64
Business
review continued
Credit
risk mitigation (audited)
The Group takes a
number of steps to mitigate credit risk. The key risk mitigants are as
follows:
|
●
|
Real
estate: the most common form of security held is real estate within
the consumer and wholesale
businesses.
|
|
●
|
Financial
collateral: is taken to support credit exposures in the non-trading
book. Financial collateral is also taken in Global Markets and Regional
Markets to support trading book exposures and is incorporated in E*
(adjustment to the exposure value)
calculations.
|
|
●
|
Other
physical collateral: the Group takes a wide range of other physical
collateral including business assets (stock and inventory, plant and
machinery, equipment), project assets, intangible assets which provide a
future cashflow and real value, commodities, vehicles, rail stock,
aircraft, ships and receivables (not
purchased).
|
|
●
|
Guarantees:
third party guarantees are taken from banks, government entities, export
credit agencies, and corporate entities. The Group’s recovery value
estimation methodology is sensitive to the variations in the credit
quality of guarantors. Standby letters of credit are also given value in
LGD models. Conditional guarantees are accepted, in accordance with
internal requirements, and are included as appropriate in PD and LGD
estimates (e.g. small firms loan guarantee schemes, completion
guarantees). Personal guarantees are considered in the normal credit
process where there is a charge over specific assets. While personal
guarantees may be called for and are always accepted, no value is given to
unsupported personal guarantees in any credit
models.
|
|
●
|
Credit
derivatives: credit derivative activity is conducted through
designated units within GBM to ensure consistency and appropriate control.
Group policies are designed to ensure that the credit protection is
appropriate to support offset for an underlying trading book asset or
improvement to the LGD of a banking book asset. Within the banking book,
credit derivatives are used as risk and capital management tools. The
principal counterparties are banks, investment firms and other market
participants, with the majority subject to collateralisation under a
credit support annex. In accordance with internal policy, stress testing
is conducted on the counterparty credit risk created by the purchase of
credit protection.
|
|
●
|
Minimum
standards (for example loan to value, legal certainty) are ensured
through the policy framework.
|
Credit
risk assets (audited)
Credit risk assets
consist of loans and advances (including overdraft facilities), instalment
credit, finance lease receivables and other traded instruments across all
customer types. The Group uses a series of models to measure the size of its
exposure to credit risk and to calculate expected EAD in both its trading and
banking books. In so doing, the Group recognises the effects of credit risk
mitigation that reduces potential loss.
Credit risk assets
as at 31 December 2008 were £1,031.8 billion (2007 – £832.6 billion), an
increase of £199.2 billion during the year.
The discussion and
disclosures on pages 65 to 72 relate only to the Group before RFS
Holdings minority interest.
Facilities included
within RFS Holdings minority interests have not been migrated to RBS risk
systems, as they will not be part of the Group following separation of the ABN
AMRO business.
65
Business
review continued
Credit
concentration risk (including country risk) (audited)
The Group defines
three key areas of concentration in credit risk that are monitored, reported and
managed at Group and divisional levels. These are single name concentration,
industry/sector and country risk. The Group has a series of quantitative and
qualitative controls in place to limit the amount of concentration risk in
credit portfolios.
A
threshold is set on the aggregate LGD to a single customer group above which
approval is required from the Group’s most senior credit committee, the Advances
Committee.
During the year
work progressed on an enhancement of the frameworks for managing single name and
sector concentrations. These enhancements are planned to be fully implemented in
2009 to improve the identification and management of concentrations in the
portfolio through the introduction of additional parameters and increased
scrutiny of concentration limit excesses.
A
stress testing framework, Correlated Exposure Loss Testing, assesses the impact
on the Group’s impairment charge of non-systemic events that affect groups of
inter-related sectors in order to limit the impact of these scenarios to within
defined tolerances.
Country risk arises
from sovereign events (e.g. default or restructuring); economic events (e.g.
contagion of sovereign default to other parts of the economy, cyclical economic
shock); political events (e.g. convertibility restrictions and expropriation or
nationalisation) and natural disaster or conflict. Losses are broadly defined
and include credit, market, liquidity, operational and franchise risk related
losses. The acquisition of ABN AMRO materially increased the Group's country
risk profile, therefore significant enhancements to the Group’s country risk
framework have been implemented and continue to be developed.
It
is the Group’s policy to monitor and control country risk exposures and to avoid
excessive concentrations. The Group’s appetite is expressed by a matrix of
limits by country risk grade and is approved by GEMC. The Group’s exposure is
managed and measured within this appetite by the Group Country Risk Management
Committee (GCRMC), that has delegated authority from the GRC to manage country
risk and agree related policy. Membership of GCRMC comprises the Group Chief
Credit Officer, Heads of Credit and business representatives from those
divisions with material country risk exposures. GCRMC sets limits for each
country based on a risk assessment taking into account the Group’s franchise and
business mix in that country. Additional limitations – on product types with
higher loss potential and longer tenor transactions, for example – may be
established depending on the country outlook and business strategy. A country
watch list framework is in place to proactively monitor emerging issues and
facilitates the development of mitigation strategies.
The country risk
table below shows credit risk assets exceeding £1 billion by borrower domicile
and is stated gross of mitigating action which may have been taken to reduce or
eliminate exposure to country risk events.
|
Risk
countries (unaudited)
|
Consumer
£m
|
Sovereign
£m
|
Banks
and
financial
institutions
£m
|
Corporate
£m
|
Total
£m
|
|||||||||||||||
|
Russia
|
51.0 | — | 362.0 | 5,361.0 | 5,774.0 | |||||||||||||||
|
United Arab
Emirates
|
756.8 | 91.5 | 1,721.9 | 2,988.6 | 5,558.8 | |||||||||||||||
|
India
|
1,020.0 | 5.7 | 737.9 | 3,800.6 | 5,564.2 | |||||||||||||||
|
Turkey
|
24.8 | 363.6 | 603.2 | 3,035.5 | 4,027.1 | |||||||||||||||
|
China
|
24.6 | 61.1 | 1,146.3 | 2,027.2 | 3,259.2 | |||||||||||||||
|
South
Korea
|
1.5 | — | 1,743.0 | 1,104.1 | 2,848.6 | |||||||||||||||
|
Taiwan
|
1,019.3 | — | 1,393.2 | 825.0 | 3,237.5 | |||||||||||||||
|
Mexico
|
4.2 | 57.1 | 210.9 | 1,999.9 | 2,272.1 | |||||||||||||||
|
Czech
Republic
|
2.1 | 593.5 | 175.5 | 1,057.9 | 1,829.0 | |||||||||||||||
|
Kazakhstan
|
69.5 | 17.0 | 900.8 | 858.9 | 1,846.2 | |||||||||||||||
|
Poland
|
6.8 | 38.5 | 309.1 | 1,308.6 | 1,663.0 | |||||||||||||||
|
Chile
|
0.3 | 26.1 | 383.7 | 1,250.5 | 1,660.6 | |||||||||||||||
|
Brazil
|
3.6 | — | 1,012.3 | 641.7 | 1,657.6 | |||||||||||||||
|
Saudi
Arabia
|
23.2 | — | 534.9 | 679.4 | 1,237.5 | |||||||||||||||
|
Romania
|
583.6 | 145.3 | 160.4 | 916.8 | 1,806.1 | |||||||||||||||
|
Greece
|
15.1 | 135.3 | 210.3 | 702.7 | 1,063.4 | |||||||||||||||
|
Hungary
|
5.1 | 73.9 | 101.3 | 831.4 | 1,011.7 | |||||||||||||||
Note:
|
(1)
|
Risk countries
are defined as those with an internal rating of A+ and below. In addition,
United Arab Emirates is included which has a rating of
AA.
|
(unaudited)
The outlook for
developing markets in 2009 is very challenging, as developed economy demand is
weak, liquidity conditions are tight and risk appetite is yet to return. Asian
growth is slowing sharply as trade contracts, but generally, both sovereign and
private sector leverage is lower than during the 1998 crisis, providing scope
for recovery. The Middle East is more insulated from the effects of economic
disruption but certain high growth countries, such as UAE, will face challenges.
Eastern Europe faces a deep correction as large economic imbalances unwind.
Falling commodity prices and US weakness will also affect Latin America, but the
region is more resilient than during previous downturns due to reform progress
and policy orthodoxy in its largest economies.
66
Business
review continued
Asset
quality by industry and geography (unaudited)
Industry analysis
plays an important part in assessing potential concentration risk in the loan
portfolio. Particular attention is given to industry sectors where the Group
believes there is a high degree of risk or potential for volatility in the
future.
Credit
risk assets by industry sector (Group before RFS Holdings minority
interest)
Note:
(1)
Graph data are shown net of provisions, reverse repurchase agreements and issuer
risk for 2008 and 2007.
As
at 31 December 2008, 26% of credit risk assets (2007 – 27%) related to personal
and includes mortgage lending and other smaller loans that are intrinsically
well-diversified. Corporate industry exposure comprised 48% of credit risk
assets (2007 – 50%), which are well diversified across a range of sectors. Banks
and financial services account for 21% of credit risk assets (2007 – 19%) and
public sector and quasi government credit risk assets make up the remaining 5%
(2007 – 4%).
Credit
risk assets by geography (Group before RFS Holdings minority
interest)
Note:
(1)
Graph data are shown net of provisions, reverse repurchase agreements and issuer
risk for 2008 and 2007.
As
at 31 December 2008, 38% of credit risk assets (2007 – 46%) related to the
United Kingdom. Western Europe comprised 27% of credit risk assets (2007 – 23%).
North America comprised 21% of credit risk assets (2007 –
19%).
67
Business
review continued
Credit
risk asset quality (audited)
Internal reporting
and oversight of risk assets is principally differentiated by credit grades.
Customers are assigned credit grades, based on various credit grading models
that reflect the key drivers of default for the customer type. All credit grades
across the Group map to both a Group level asset quality scale, used for
external financial reporting, and a master grading scale for wholesale exposures
used for internal management reporting across disparate portfolios. Accordingly,
measurement of risk is easily aggregated and can be reported at increasing
levels of granularity depending on audience and business need.
The Group has
adopted, as part of the move to Basel II, a new master grading scale for
wholesale exposures which comprises 27 grades. These in turn map to ten asset
quality (AQ) bands used for both wholesale and retail exposures. This replaced
the less granular AQ1-5 bands used prior to 2008.
The relationship
between these measures is shown below. (unaudited)
|
PD
Range
|
||||||||
|
Master
grading scale
|
Lower
|
Upper
|
New
AQ1-
10
bands
|
Old
AQ1-5
bands
|
||||
|
1
|
0%
|
0.006%
|
||||||
|
2
|
0.006%
|
0.012%
|
||||||
|
3
|
0.012%
|
0.017%
|
AQ1
|
|||||
|
4
|
0.017%
|
0.024%
|
||||||
|
5
|
0.024%
|
0.034%
|
AQ1
|
|||||
|
6
|
0.034%
|
0.048%
|
AQ2
|
|||||
|
7
|
0.048%
|
0.067%
|
AQ3
|
|||||
|
8
|
0.067%
|
0.095%
|
||||||
|
9
|
0.095%
|
0.135%
|
||||||
|
10
|
0.135%
|
0.190%
|
||||||
|
11
|
0.190%
|
0.269%
|
AQ4
|
|||||
|
12
|
0.269%
|
0.381%
|
AQ2
|
|||||
|
13
|
0.381%
|
0.538%
|
||||||
|
14
|
0.538%
|
0.761%
|
AQ5
|
|||||
|
15
|
0.761%
|
1.076%
|
AQ3
|
|||||
|
16
|
1.076%
|
1.522%
|
AQ6
|
|||||
|
17
|
1.522%
|
2.153%
|
AQ4
|
|||||
|
18
|
2.153%
|
3.044%
|
||||||
|
19
|
3.044%
|
4.305%
|
AQ7
|
|||||
|
20
|
4.305%
|
6.089%
|
||||||
|
21
|
6.089%
|
8.611%
|
||||||
|
22
|
8.611%
|
12.177%
|
AQ8
|
|||||
|
23
|
12.177%
|
17.222%
|
AQ5
|
|||||
|
24
|
17.222%
|
24.355%
|
||||||
|
25
|
24.355%
|
34.443%
|
AQ9
|
|||||
|
26
|
34.443%
|
100%
|
||||||
|
27
|
100%
|
100%
|
AQ10
|
|||||
Credit
risk assets by new AQ1-10 bands (Group before RFS Holdings minority interest)
(unaudited)
TCRE
(%)
Note:
|
(1)
|
Graph data are
shown net of provisions, reverse repurchase agreements and issuer risk for
2008.
|
The following table
shows the movement between 2007 and 2008 based on the old AQ1-5 bands for the
Group before RFS minority interest. (unaudited)
Note:
(1)
Graph data are shown net of provisions, reverse repurchase agreements and issuer
risk for 2008 and 2007.
(unaudited)
As
at 31 December 2008, including ABN AMRO net of minority interest, exposure to
investment grade counterparties (AQ1) accounted for 47% (2007 – 37%) of credit
risk assets and 46% (2007 – 59%) of exposures were to counterparties between AQ2
and AQ4. The exposure to the lowest asset quality (AQ5) is 7% (2007 –
4%).
68
Business
review continued
Expressed as an
annual PD, the upper and lower boundaries and the midpoint for each of these
Group level asset quality grades are as follows:
|
Annual
probability of default
|
||||||||||||||
|
Asset
quality grade
|
Minimum
%
|
Midpoint
%
|
Maximum
%
|
S&P
equivalent
|
||||||||||
|
AQ1
|
0.00
|
0.10
|
0.20
|
AAA to
BBB-
|
||||||||||
|
AQ2
|
0.21
|
0.40
|
0.60
|
BB+ to
BB
|
||||||||||
|
AQ3
|
0.61
|
1.05
|
1.50
|
BB- to
B+
|
||||||||||
|
AQ4
|
1.51
|
3.25
|
5.00
|
B+ to
B
|
||||||||||
|
AQ5
|
5.01
|
52.50
|
100.00
|
B and
below
|
||||||||||
Key
credit portfolios (unaudited)
The following
discussion relates only to the Group before RFS Holdings minority interest and
refers to the divisional positions before internal transfer to Non-Core. All
exposures are monitored closely, but in the current environment the following
are under specific scrutiny:
Property
lending (unaudited)
Commercial
property
The commercial
property portfolio totals £97 billion. The bulk of this is concentrated in GBM
(£31 billion) and RBS UK (£42 billion) with the remainder in Ulster Bank (£17
billion) and CFG (£6 billion).
Lending falls into
different categories and is spread across Investment (72.6%), Development
(24.1%) and Other (3.3%). Speculative lending represents 1.6% of this portfolio.
58% of the lending is in the UK, 30% Western Europe, 8% North America and 4% RoW
but with the extent of the current global downturn all markets are coming under
considerable pressure.
Whilst the Group
expects to see an overall deterioration in LTV ratios, 72% of the portfolio
within GBM and UKCB continue to have an LTV less than 75% and an average
interest coverage ratio (ICR) for GBM of 164% and 151 % for RBS UK. The Group’s
lending approach has always been predominantly cash flow driven and areas of
stress in the portfolio will primarily be impacted by the wider corporate and
economic environment affecting tenant quality with the retail sector being an
area of focus at the present time.
The Group has
experienced a number of defaults in its Spanish portfolio with current limits of
£2 billion managed via the Global Restructuring Group. Total impaired limits
across the portfolio are £3.9 billion. Limits currently subject to a higher
level of monitoring (watch) total £18.9 billion and are actively risk
managed.
The outlook for
commercial property will remain challenging during 2009 with further falls in
capital values expected due to a lack of liquidity and weak demand for assets.
There is emerging evidence of falling rents and increasing vacancy rates
although downward pressure on rents and longer void periods can be expected due
to the weakening economic climate. The Group’s strategy throughout 2008 has been
to reduce its exposures wherever prudent, continuing the process of tightening
lending parameters begun in the second half of 2007.
Residential
mortgages
The Group
originates residential mortgages through retail channels in all four divisions
within Regional Markets however activity is primarily in the UK, the US and
Ireland.
69
Business
review continued
UK
residential mortgages
The UK mortgage
portfolio totalled £74.4 billion (as at 31 December 2008) an increase of 11%
during the year due to strong sales growth and lower redemption rates. The main
brands are the Royal Bank, NatWest, the One Account, First Active and Direct
Line. The assets comprise prime mortgage lending and include 7.0% (£5.2 billion)
of exposure to residential buy-to-let. There is a very small legacy
self-certification book (0.5% of total assets) which was withdrawn from sale in
2004.
The Group exited
the 100% LTV market in the first quarter of 2008, further restricted the
proportion of highest LTV loans and reviewed affordability criteria during the
year. The average LTV for new business increased from 62% to 67% in 2008 mainly
due to a reduction in the proportion of business within the lowest LTV bands.
The arrears rate
(three or more payments missed) on the combined Royal Bank and NatWest brands
was 1.5% (31 December 2008) up from 1.0% (31 December 2007). The mortgage
impairment charge was £33 million for 2008 (2007 – £19 million) and in current
economic conditions is expected to increase further. Anticipated losses from
impaired mortgages are covered by a combination of impairment provisions and
post default suspended interest. The combined provision cover is currently 0.18%
of balances.
Repossessions
totalled 1,141 in 2008 (compared with 758 in 2007) with similar volumes in each
half of the year.
US
real estate
Citizens Financial
Group’s (CFG) residential real estate portfolio totalled $50.1 billion at 31
December 2008 (2007 – $53.1 billion) comprising $13.8 billion of first mortgages
and $36.3 billion of Home Equity loans and lines. This reduction includes the
sale of $1.4 billion of real estate assets to the Federal National Mortgage
Association in December 2008.
CFG has
historically adopted conservative risk policies in comparison to the general
market. Small exposures to sub-prime (FICO <=620, approximately 0.6%) and
Alt-A / other non-conforming (4.5%) from past bank acquisitions are in run-off.
The average indexed LTV was 69% as at 31 December 2008 (2007 – 62%). Loan
acceptance criteria were further tightened during 2008 to address deteriorating
economic conditions.
The Serviced By
Others (SBO) portfolio consists of purchased pools of home equity loans and
lines whose LTV and geographic profiles have in the current economic conditions
resulted in a higher write-off rate of 4.8% in 2008 than core portfolios. SBO
was closed to new purchases in the third quarter of 2007 and is in run-off with
exposure down from $8.3 billion (31 December 2007) to $7.0 billion (31 December
2008).
Ireland
residential mortgages
The residential
mortgage portfolio in Ireland across the Ulster Bank and First Active brands
totalled £24.6 billion (as at 31 December 2008) with 92.8% in the Republic of
Ireland and 7.2% in Northern Ireland. This represents growth of 6% in the
Republic of Ireland (ignoring exchange rate movements) and 6% in Northern
Ireland. During the course of 2008, Ulster Bank exited the 100% LTV market and
tightened LTV and affordability criteria in other segments. The arrears rate
(three or more payments missed) increased to 1.6% at 31 December 2008 from 0.8%
at end 2007 driven by deteriorating economic conditions. Repossession remained
low and totalled 37 for 2008.
Financial
institutions
The confidence and
liquidity crisis affecting the banking sector saw the near collapse of some
major banks in Western countries along with the fall of Lehman Brothers and the
Icelandic banking system, which in turn threatened the stability of national and
global banking systems. Government actions to restore stability by providing
guarantees, liquidity facilities, capital injections and facilitating the
consolidation of weaker banks with stronger ones met with some success. There
remains a high level of risk in the banking sector in 2009, particularly due to
the deepening recession that many countries face and increasing corporate
defaults.
Financial
Institutions constitute the largest segment of the Group’s wholesale credit
portfolio with exposure of £181 billion. Due to difficulties faced by the
sector, the portfolio quality has weakened during 2008. 92% of exposure is to
counterparties in developed OECD countries while 90% of exposure is to
investment grade counterparties.
The Banks portfolio
is the biggest sub-sector with exposure of £86 billion. At the time of default,
the Group’s exposures to Lehman Brothers and the Icelandic banks totalled £802
million and £494 million respectively and represented less than 1% of the total
Banks portfolio.
2008 was a
difficult year for the hedge funds sector. More hedge funds collapsed during
2008 than in the previous ten years and the values of many declined
significantly. The spate of redemptions from investors forced major hedge fund
groups to halt withdrawals. The trends are set to continue in 2009 and the
contraction of this sector is expected.
The Group’s
exposure to leveraged funds (including hedge funds) totalled £10.3 billion. The
majority of hedge funds are domiciled in the UK and US but the portfolio is
diversified by fund strategy. The Group’s activities with hedge funds are
primarily collateralised derivatives trading. Exposures to funds encountering
problems were reduced, collateral margining was reviewed upwards to further
mitigate risk and the appropriateness of limits is regularly
reviewed.
During 2009, the
Group will continue to place emphasis on the pro-active management of financial
institutions at counterparty and portfolio levels, recognising that liquidity is
likely to remain tight and credit quality is likely to deteriorate further
across a range of portfolios.
70
Business
review continued
Corporate
sectors (unaudited)
This section
discusses the automotive, shipping, oil and gas sectors, given their
significance in the current market environment.
Automotive
The automotive
sector exposure totals £14.5 billion, the majority falling within GBM (£9.1
billion), RBS UK (£3.3 billion) and CFG (£1.3 billion). The exposure is spread
across the following segments and geographies:
|
Credit
book
|
||||||||
|
Segment
|
£bn
|
%
|
||||||
|
Original
equipment manufacturer/commercial vehicles
|
3.3
|
23
|
||||||
|
Captive
finance companies
|
1.1
|
|
8
|
|||||
|
Component
suppliers
|
2.4
|
16
|
||||||
|
Retailers/services
|
5.1
|
35
|
||||||
|
Rental
|
2.6
|
18
|
||||||
|
Total
|
14.5
|
100
|
||||||
|
Credit
book
|
|
|||||||
|
Domicile
|
£bn
|
%
|
||||||
|
Americas
|
4.0
|
28
|
||||||
|
Central
Eastern Europe Middle East and Africa
|
1.1
|
7
|
||||||
|
UK
|
4.2
|
29
|
||||||
|
Western
Europe
|
4.3
|
30
|
||||||
|
Asia
|
0.9
|
6
|
||||||
|
Total
|
14.5
|
100
|
||||||
The automotive
sector faces numerous challenges with a heavy reliance on discretionary consumer
spending, high leverage, volatile input prices and an ongoing pressure to reduce
fuel emissions resulting in a shift to smaller cars and overseas production. The
Group has maintained a cautious approach to this sector and focus on the
largest, most diversified and financially strong counterparties with a wide
product offering. Notwithstanding this approach, due to the scale of the
downturn in this sector the Group can expect further pressure to be seen across
the portfolio. Of particular concern are exposures to the captive finance
companies where credit impaired limits total £1.4 billion. The Group continues
to seek ongoing limit reductions and improved security.
Shipping
The shipping
exposure is £16.6 billion and is almost entirely within GBM. The portfolio is
divided across the following sectors:
|
Credit
book
|
||||||||
|
Sector
|
£bn
|
%
|
||||||
|
Dry
bulk
|
4.8
|
29
|
||||||
|
Tankers
|
6.3
|
38
|
||||||
|
Container
|
1.6
|
10
|
||||||
|
Gas/offshore
|
2.3
|
14
|
||||||
|
Other
|
1.6
|
9
|
||||||
|
Total
|
16.6
|
100
|
||||||
The majority of the
exposures are strong relationships with loans structured to capture direct
vessel cash flows, secured on the vessels themselves with the benefit of full
security over the asset and all related cash flows. The Group’s approach to the
sector recognises the cyclical nature of shipping with a focus on experienced
independent owners with strong liquidity; customer deposits across the portfolio
total £5 billion. Assets financed are non-specialist dry bulk, double hulled
tankers and containers.
Following an
unprecedented rise in ship values over recent years there has been a material
correction since mid 2008 with the dry bulk index falling by c.90% which may
affect owners’ ability to meet collateral calls. Combined with record ship
deliveries for 2009-10 the Group has seen a significant decline in asset values.
The Group’s exposure to new build assets is significant with commitments
relating to 236 vessels in the dry bulk and tanker segment.
The Group currently
has £0.5 billion of limits to clients on watch list, but the portfolio comprises
modern assets (86% of exposures are secured on vessels built since 2000), which
exhibit, for the most part, good cash flow and liquidity.
Oil
and gas
The Group’s
exposure to this sector totals £24.0 billion across the following sectors and
geographies:
|
Credit
book
|
||||||||
|
Sector
|
£bn
|
%
|
||||||
|
Vertically
integrate/exploration and production
|
9.5
|
40
|
||||||
|
Midstream
|
5.0
|
|
21
|
|
||||
|
Refining and
marketing
|
4.6
|
19
|
||||||
|
Oilfield
services
|
4.9
|
20
|
||||||
|
Total
|
24.0
|
100
|
||||||
|
Credit
book
|
||||||||
|
Domicile
|
£bn
|
%
|
||||||
|
Americas
|
10.6
|
44
|
||||||
|
Western
Europe
|
7.6
|
32
|
||||||
|
CEEMEA
|
4.6
|
19
|
||||||
|
Asia
Pacific
|
1.2
|
5
|
||||||
|
Total
|
24.0
|
100
|
||||||
71
Business
review continued
ABN AMRO and RBS
have a number of common clients in this sector, and the Group is working to
reduce exposures back within Group concentration limits, primarily in relation
to investment grade, vertically integrated counterparties and several of the
larger, global exploration and production companies. The Group’s exposures to
exploration and production companies are principally secured borrowing base
facilities referenced to conservative forward looking oil price assumptions that
are adjusted on a regular basis. Unsecured exposures are primarily to oil majors
and state owned entities.
72
Business
review continued
Global
Restructuring Group (GRG) (audited)
GRG was formed in
2008, tasked with managing the Group’s problem and potential problem exposures
to help rejuvenate and restore customers to profitable business. This may
include assisting with the restructuring of their businesses and/or
renegotiation.
GRG brings together
previously disparate functions across the Group. Its primary function is to work
closely with the Group’s customer facing businesses to support the proactive
management of any problem lending. This is based on a clear process (watch
listing) which requires the transfer of problem credits to GRG. GRG reports to
the Group Chief Risk Officer.
Given the current
economic outlook, it is particularly important that potential problems are
identified early and referred to GRG as the Group’s past experience has shown
that the sooner specialists in restructuring are engaged, the greater the
likelihood of a successful outcome. Early identification of potential problems
therefore has a benefit to the borrower as well as to the Group.
GRG is structured
with specialist teams focused on: large corporate cases (higher value, multiple
lenders); small/mid size business cases (lower value, bilateral relationships);
and recovery/litigations. Given the negative trends in the portfolio in 2008,
the size of GRG has grown substantially and further investment in staffing is
expected in 2009.
Originating
business units liaise with GRG upon the emergence of a potentially negative
event or trend that may impact a borrowers’ ability to service its debt. This
may be a significant deterioration in some aspect of the borrowers’ activity,
such as trading, where a breach of covenant is likely or where a borrower has
missed or is expected to miss a material contractual payment to the Group or
another creditor.
On
transfer of a relationship to GRG a strategy is devised to:
|
●
|
Work with the
borrower to facilitate changes that will maximise the potential for
turnaround of their situation and return them to
profitability.
|
|
●
|
Define the
Group’s role in the turnaround situation and assess the risk/return
dimension of the Group’s
participation.
|
|
●
|
Return
customers to the originating business unit in a sound and stable condition
or, if such recovery cannot be achieved, avoid additional losses and
maximise recoveries.
|
|
●
|
Ensure key
lessons learned are fed back into origination policies and
procedures.
|
At
the start of 2008, the volume and value of cases managed by GRG was low relative
to historic levels. During the year, the rate of transfer of cases to GRG
accelerated sharply. Cases originated from all divisions and across most sectors
although the rate of value growth was sharply higher due to the transfer of a
number of high value cases from GBM. Commercial property cases made up a
significant proportion of transfers from all divisions.
Retail
collections and recoveries (audited)
There are
collections and recoveries functions in each of the four regional markets. Their
role is to provide support and assistance to customers who are currently
experiencing difficulties meeting their financial obligations.
Where possible, the
aim of collections and recoveries teams is to return the customer to a
satisfactory position, by working with them to restructure their finances and/or
business. If this is not possible, the team has the objective of reducing the
loss to the Group.
There have been
material increases in staffing levels in all collections functions to manage the
increase in the number of customers in financial difficulty. In the UK and
Ireland, there is a common collection and recovery operational model managed by
Group Manufacturing. During 2008, there was significant investment in systems
development and staff training to make collections activity more efficient and
effective.
In
the UK there have been several initiatives to ensure fair and appropriate
treatment of customers experiencing difficulties. For mortgage customers the
Group will not initiate repossession proceedings for at least six months after
arrears are evident.
Preventative
measures have also been a key focus throughout 2008, and as a result, the Group
has announced the introduction of over 1,000 dedicated Money Sense advisers in
its branch network who will provide free financial counselling to both customers
and non-customers. The Group has also implemented a programme to proactively
contact customers who exhibit early signs of financial stress but are not yet in
Collections to offer them assistance in managing their finances more
effectively.
73
Business
review continued
Balance
sheet analysis (audited)
The following table
provides an analysis of the credit quality of financial assets by the Group’s
internal credit quality steps.
|
2008
|
AQ1
£m
|
AQ2
£m
|
AQ3
£m
|
AQ4
£m
|
AQ5
£m
|
Accruing
past
due
£m
|
Non-
accrual
£m
|
Impairment
provision
£m
|
Total
£m
|
|||||||||||||||||||||||||||
|
Cash and
balance at central banks
|
12,400 | — | — | — | — | — | — | — | 12,400 | |||||||||||||||||||||||||||
|
Loans and
advances to banks (2)
|
131,963 | 872 | 1,247 | 282 | 943 | — | 129 | (127 | ) | 135,309 | ||||||||||||||||||||||||||
|
Loans and
advances to customers
|
310,950 | 141,849 | 187,899 | 150,705 | 59,191 | 15,667 | 19,350 | (10,889 | ) | 874,722 | ||||||||||||||||||||||||||
|
Debt
securities
|
259,207 | 1,461 | 1,485 | 3,755 | 1,626 | — | 52 | (37 | ) | 267,549 | ||||||||||||||||||||||||||
|
Settlement
balances
|
12,612 | 516 | 290 | 129 | 256 | 4,029 | — | — | 17,832 | |||||||||||||||||||||||||||
|
Derivatives
|
912,728 | 36,528 | 30,079 | 5,181 | 8,032 | 11 | — | — | 992,559 | |||||||||||||||||||||||||||
|
Other
financial instruments
|
691 | — | 161 | — | — | — | — | — | 852 | |||||||||||||||||||||||||||
| 1,640,551 | 181,226 | 221,161 | 160,052 | 70,048 | 19,707 | 19,531 | (11,053 | ) | 2,301,223 | |||||||||||||||||||||||||||
|
Commitments
|
209,359 | 55,109 | 48,554 | 23,458 | 25,244 | — | — | — | 361,724 | |||||||||||||||||||||||||||
|
Contingent
liabilities
|
19,693 | 18,461 | 19,502 | 10,977 | 2,904 | — | — | — | 71,537 | |||||||||||||||||||||||||||
|
Total
off-balance sheet
|
229,052 | 73,570 | 68,056 | 34,435 | 28,148 | — | — | — | 433,261 | |||||||||||||||||||||||||||
|
2007
|
||||||||||||||||||||||||||||||||||||
|
Cash and
balance at central banks
|
17,866 | — | — | — | — | — | — | — | 17,866 | |||||||||||||||||||||||||||
|
Loans
and advances to banks (2)
|
204,083 | 5,797 | 4,937 | 407 | 1,119 | — | 25 | (3 | ) | 216,365 | ||||||||||||||||||||||||||
|
Loans
and advances to customers
|
275,715 | 174,074 | 221,561 | 84,791 | 55,273 | 13,236 | 10,337 | (6,449 | ) | 828,538 | ||||||||||||||||||||||||||
|
Debt
securities
|
258,895 | 15,688 | 2,339 | 1,372 | 16,361 | — | 5 | (4 | ) | 294,656 | ||||||||||||||||||||||||||
|
Settlement
balances
|
14,491 | 98 | 344 | 21 | 68 | 1,567 | — | — | 16,589 | |||||||||||||||||||||||||||
|
Derivatives
|
240,114 | 23,333 | 11,299 | 2,352 | 304 | — | — | — | 277,402 | |||||||||||||||||||||||||||
|
Other
financial instruments
|
669 | — | — | — | 143 | 65 | — | — | 877 | |||||||||||||||||||||||||||
| 1,011,833 | 218,990 | 240,480 | 88,943 | 73,268 | 14,868 | 10,367 | (6,456 | ) | 1,652,293 | |||||||||||||||||||||||||||
|
Commitments
|
131,750 | 89,682 | 74,126 | 25,320 | 17,301 | — | — | — | 338,179 | |||||||||||||||||||||||||||
|
Contingent
liabilities
|
26,120 | 16,314 | 11,740 | 4,032 | 3,714 | — | — | — | 61,920 | |||||||||||||||||||||||||||
|
Total
off-balance sheet
|
157,870 | 105,996 | 85,866 | 29,352 | 21,015 | — | — | — | 400,099 | |||||||||||||||||||||||||||
Notes:
|
(1)
|
Credit risk
assets as reported internally to senior management exclude certain
exposures and take account of netting agreements including master netting
arrangements that provide a right of legal set off but do not meet the
criteria for offset in IFRS. The analysis of credit risk assets on
page 68 uses the same risk bands as above and is a sub-set of the
full analysis given above.
|
|
(2)
|
Excluding
items in the course of collection of £2,888 million (2007 – £3,095
million).
|
The following loans
and advances to customers were past due at the balance sheet date but not
considered impaired:
|
Past
due
1-29
days
£m
|
Past
due
30-59
days
£m
|
Past
due
60-89
days
£m
|
Past
due
90
days
or
more
£m
|
Total
£m
|
||||||||||||||||
|
2008
|
9,517 | 2,941 | 1,427 | 1,782 | 15,667 | |||||||||||||||
|
2007
|
8,768 | 2,745 | 1,354 | 369 | 13,236 | |||||||||||||||
These balances
include loans and advances to customers that are past due through administrative
and other delays in recording payments or in finalising documentation and other
events unrelated to credit quality.
74
Business
review continued
Industry
risk – geographical analysis (audited)
The following table
analyses financial assets by location of office and by industry
type.
|
Group
|
||||||||||||||||||||||||
|
2008
|
Loans
and
advances
to
banks
and
customers
£m
|
Debt
securities
and
equity
shares
£m
|
Derivatives
£m
|
Other
(1)
£m
|
Total
£m
|
Netting
and
offset
(2)
£m
|
||||||||||||||||||
|
UK
|
||||||||||||||||||||||||
|
Central and
local government
|
6,106 | 36,466 | 5,798 | 14 | 48,384 | 1,987 | ||||||||||||||||||
|
Manufacturing
|
26,006 | 1,080 | 11,208 | 180 | 38,474 | 6,279 | ||||||||||||||||||
|
Construction
|
13,426 | 144 | 754 | 26 | 14,350 | 1,485 | ||||||||||||||||||
|
Finance
|
197,659 | 84,696 | 532,857 | 6,257 | 821,469 | 480,762 | ||||||||||||||||||
|
Service
industries and business activities
|
88,420 | 10,154 | 13,278 | 1,471 | 113,323 | 7,624 | ||||||||||||||||||
|
Agriculture,
forestry and fishing
|
3,118 | 93 | 34 | 15 | 3,260 | 87 | ||||||||||||||||||
|
Property
|
74,050 | 2,008 | 5,094 | 71 | 81,223 | 1,026 | ||||||||||||||||||
|
Individuals:
|
||||||||||||||||||||||||
|
Home
mortgages
|
80,967 | — | 14 | — | 80,981 | 52 | ||||||||||||||||||
|
Other
|
27,479 | 250 | 36 | 25 | 27,790 | 5 | ||||||||||||||||||
|
Finance
leases and instalment credit
|
17,363 | 3 | 25 | — | 17,391 | 119 | ||||||||||||||||||
|
Interest
accruals
|
4,323 | 774 | — | — | 5,097 | — | ||||||||||||||||||
|
Total
UK
|
538,917 | 135,668 | 569,098 | 8,059 | 1,251,742 | 499,426 | ||||||||||||||||||
|
US
|
||||||||||||||||||||||||
|
Central and
local government
|
482 | 24,996 | 45 | 33 | 25,556 | — | ||||||||||||||||||
|
Manufacturing
|
13,298 | 102 | 1,809 | 128 | 15,337 | 217 | ||||||||||||||||||
|
Construction
|
885 | 63 | 122 | 6 | 1,076 | — | ||||||||||||||||||
|
Finance
|
30,433 | 37,346 | 355,502 | 5,754 | 429,035 | 323,910 | ||||||||||||||||||
|
Service
industries and business activities
|
28,232 | 1,498 | 8,535 | 907 | 39,172 | 2,346 | ||||||||||||||||||
|
Agriculture,
forestry and fishing
|
30 | — | 3 | 1 | 34 | — | ||||||||||||||||||
|
Property
|
6,579 | 5 | 97 | — | 6,681 | — | ||||||||||||||||||
|
Individuals:
|
||||||||||||||||||||||||
|
Home
mortgages
|
34,235 | — | — | — | 34,235 | — | ||||||||||||||||||
|
Other
|
14,368 | — | — | — | 14,368 | — | ||||||||||||||||||
|
Finance
leases and instalment credit
|
3,066 | — | — | — | 3,066 | — | ||||||||||||||||||
|
Interest
accruals
|
499 | 466 | — | — | 965 | — | ||||||||||||||||||
|
Total
US
|
132,107 | 64,476 | 366,113 | 6,829 | 569,525 | 326,473 | ||||||||||||||||||
|
Europe
|
||||||||||||||||||||||||
|
Central and
local government
|
2,045 | 24,065 | 228 | 5 | 26,343 | — | ||||||||||||||||||
|
Manufacturing
|
29,348 | 776 | 371 | — | 30,495 | 2 | ||||||||||||||||||
|
Construction
|
5,838 | 1 | 91 | — | 5,930 | — | ||||||||||||||||||
|
Finance
|
35,989 | 34,533 | 8,174 | 3,621 | 82,317 | 61 | ||||||||||||||||||
|
Service
industries and business activities
|
60,179 | 11,754 | 2,823 | 92 | 74,848 | 780 | ||||||||||||||||||
|
Agriculture,
forestry and fishing
|
5,750 | 50 | 1 | — | 5,801 | — | ||||||||||||||||||
|
Property
|
23,072 | 19 | 299 | — | 23,390 | — | ||||||||||||||||||
|
Individuals:
|
||||||||||||||||||||||||
|
Home
mortgages
|
118,549 | 50 | 4 | — | 118,603 | — | ||||||||||||||||||
|
Other
|
9,024 | 29 | 218 | 9,271 | — | |||||||||||||||||||
|
Finance
leases and instalment credit
|
1,815 | 15 | — | — | 1,830 | — | ||||||||||||||||||
|
Interest
accruals
|
1,889 | 1 | — | — | 1,890 | — | ||||||||||||||||||
|
Total
Europe
|
293,498 | 71,293 | 12,209 | 3,718 | 380,718 | 843 | ||||||||||||||||||
|
Rest
of the World
|
||||||||||||||||||||||||
|
Central and
local government
|
7,079 | 16,766 | 311 | 145 | 24,301 | — | ||||||||||||||||||
|
Manufacturing
|
6,837 | 178 | 772 | — | 7,787 | — | ||||||||||||||||||
|
Construction
|
758 | 6 | 17 | — | 781 | 3 | ||||||||||||||||||
|
Finance
|
21,469 | 4,267 | 42,621 | 407 | 68,764 | 31,695 | ||||||||||||||||||
|
Service
industries and business activities
|
13,706 | 949 | 1,297 | — | 15,952 | 108 | ||||||||||||||||||
|
Agriculture,
forestry and fishing
|
157 | 1 | 7 | — | 165 | — | ||||||||||||||||||
|
Property
|
2,932 | 480 | 96 | — | 3,508 | 41 | ||||||||||||||||||
|
Individuals:
|
||||||||||||||||||||||||
|
Home
mortgages
|
847 | — | — | — | 847 | — | ||||||||||||||||||
|
Other
|
5,089 | — | 18 | — | 5,107 | 79 | ||||||||||||||||||
|
Finance
leases and instalment credit
|
111 | 5 | — | — | 116 | — | ||||||||||||||||||
|
Interest
accruals
|
428 | — | — | — | 428 | — | ||||||||||||||||||
|
Total
Rest of the World
|
59,413 | 22,652 | 45,139 | 552 | 127,756 | 31,926 | ||||||||||||||||||
75
Business
review continued
|
Group
|
||||||||||||||||||||||||
|
2008
|
Loans
and
advances
to
banks
and
customers
£m
|
Debt
securities
and
equity
shares
£m
|
Derivatives
£m
|
Other
(1)
£m
|
Total
£m
|
Netting
and
offset
(2)
£m
|
||||||||||||||||||
|
Total
|
||||||||||||||||||||||||
|
Central and
local government
|
15,712 | 102,293 | 6,382 | 197 | 124,584 | 1,987 | ||||||||||||||||||
|
Manufacturing
|
75,489 | 2,136 | 14,160 | 308 | 92,093 | 6,498 | ||||||||||||||||||
|
Construction
|
20,907 | 214 | 984 | 32 | 22,137 | 1,488 | ||||||||||||||||||
|
Finance
|
285,550 | 160,842 | 939,154 | 16,039 | 1,401,585 | 836,428 | ||||||||||||||||||
|
Service
industries and business activities
|
190,537 | 24,355 | 25,933 | 2,470 | 243,295 | 10,858 | ||||||||||||||||||
|
Agriculture,
forestry and fishing
|
9,055 | 144 | 45 | 16 | 9,260 | 87 | ||||||||||||||||||
|
Property
|
106,633 | 2,512 | 5,586 | 71 | 114,802 | 1,067 | ||||||||||||||||||
|
Individuals:
|
||||||||||||||||||||||||
|
Home
mortgages
|
234,598 | 50 | 18 | — | 234,666 | 52 | ||||||||||||||||||
|
Other
|
55,960 | 279 | 272 | 25 | 56,536 | 84 | ||||||||||||||||||
|
Finance
leases and instalment credit
|
22,355 | 23 | 25 | — | 22,403 | 119 | ||||||||||||||||||
|
Interest
accruals
|
7,139 | 1,241 | — | — | 8,380 | — | ||||||||||||||||||
| 1,023,935 | 294,089 | 992,559 | 19,158 | 2,329,741 | 858,668 | |||||||||||||||||||
Notes:
|
(1)
|
Includes
settlement balances of £17,832
million.
|
|
(2)
|
This column
shows the amount by which the Group’s credit risk exposure is reduced
through arrangements, such as master netting agreements, which give the
Group a legal right to set-off the financial asset against a financial
liability due to the same counterparty. In addition, the Group holds
collateral in respect of individual loans and advances to banks and to
customers. This collateral includes mortgages over property (both personal
and commercial); charges over business assets such as plant, inventories
and trade debtors; and guarantees of lending from parties other than the
borrower. The Group obtains collateral in the form of securities in
reverse repurchase agreements. Cash and securities are received as
collateral in respect of derivative
transactions.
|
|
Group
|
||||||||||||||||||||||||
|
2007
|
Loans
and
advances
to
banks
and
customers
£m
|
Debt
securities
and
equity
shares
£m
|
Derivatives
£m
|
Other
(1)
£m
|
Total
£m
|
Netting
and
offset
(2)
£m
|
||||||||||||||||||
|
UK
|
||||||||||||||||||||||||
|
Central and
local government
|
4,728 | 30,285 | 3,912 | — | 38,925 | 1,531 | ||||||||||||||||||
|
Manufacturing
|
21,083 | 2,751 | 4,800 | — | 28,634 | 4,032 | ||||||||||||||||||
|
Construction
|
12,363 | 456 | 741 | — | 13,560 | 1,684 | ||||||||||||||||||
|
Finance
|
294,682 | 106,201 | 239,858 | 12,716 | 653,457 | 186,420 | ||||||||||||||||||
|
Service
industries and business activities
|
74,399 | 16,801 | 4,412 | — | 95,612 | 6,687 | ||||||||||||||||||
|
Agriculture,
forestry and fishing
|
2,570 | 66 | 58 | — | 2,694 | 104 | ||||||||||||||||||
|
Property
|
63,715 | 640 | 969 | 7 | 65,331 | 2,033 | ||||||||||||||||||
|
Individuals:
|
||||||||||||||||||||||||
|
Home
mortgages
|
73,916 | 1,795 | 5 | — | 75,716 | — | ||||||||||||||||||
|
Other
|
28,747 | 1,140 | 15 | 23 | 29,925 | 7 | ||||||||||||||||||
|
Finance
leases and instalment credit
|
15,632 | 131 | 27 | — | 15,790 | 5 | ||||||||||||||||||
|
Interest
accruals
|
3,512 | 1,607 | — | — | 5,119 | — | ||||||||||||||||||
|
Total
UK
|
595,347 | 161,873 | 254,797 | 12,746 | 1,024,763 | 202,503 | ||||||||||||||||||
|
US
|
||||||||||||||||||||||||
|
Central
and local government
|
386 | 23,506 | 10 | 212 | 24,114 | — | ||||||||||||||||||
|
Manufacturing
|
7,399 | 608 | 111 | — | 8,118 | 13 | ||||||||||||||||||
|
Construction
|
793 | 96 | — | — | 889 | — | ||||||||||||||||||
|
Finance
|
69,867 | 39,049 | 9,354 | 3,095 | 121,365 | 23,026 | ||||||||||||||||||
|
Service
industries and business activities
|
16,474 | 2,190 | 233 | 1 | 18,898 | 18 | ||||||||||||||||||
|
Agriculture,
forestry and fishing
|
20 | 4 | — | — | 24 | — | ||||||||||||||||||
|
Property
|
6,456 | 4,089 | — | — | 10,545 | — | ||||||||||||||||||
|
Individuals:
|
||||||||||||||||||||||||
|
Home
mortgages
|
27,882 | — | — | — | 27,882 | — | ||||||||||||||||||
|
Other
|
10,879 | — | — | — | 10,879 | — | ||||||||||||||||||
|
Finance
leases and instalment credit
|
2,228 | — | — | — | 2,228 | — | ||||||||||||||||||
|
Interest
accruals
|
1,421 | 379 | — | — | 1,800 | 2 | ||||||||||||||||||
|
Total
US
|
143,805 | 69,921 | 9,708 | 3,308 | 226,742 | 23,059 | ||||||||||||||||||
76
Business
review continued
Industry
risk – geographical analysis (continued)
|
Group
|
||||||||||||||||||||||||
|
2007
|
Loans
and
advances
to
banks
and
customers
£m
|
Debt
securities
and
equity
shares
£m
|
Derivatives
£m
|
Other(
1)
£m
|
Total
£m
|
Netting
and
offset
(2)
£m
|
||||||||||||||||||
|
Europe
|
||||||||||||||||||||||||
|
Central and
local government
|
2,371 | 30,593 | 132 | — | 33,096 | 9 | ||||||||||||||||||
|
Manufacturing
|
15,159 | 13 | 361 | — | 15,533 | 214 | ||||||||||||||||||
|
Construction
|
4,779 | — | 13 | — | 4,792 | — | ||||||||||||||||||
|
Finance
|
40,481 | 42,418 | 6,285 | 157 | 89,341 | 84,200 | ||||||||||||||||||
|
Service
industries and business activities
|
46,500 | 540 | 481 | — | 47,521 | 24,648 | ||||||||||||||||||
|
Agriculture,
forestry and fishing
|
4,650 | 2 | 42 | — | 4,694 | — | ||||||||||||||||||
|
Property
|
15,768 | 67 | 8 | — | 15,843 | — | ||||||||||||||||||
|
Individuals:
|
||||||||||||||||||||||||
|
Home
mortgages
|
81,557 | 18 | — | — | 81,575 | — | ||||||||||||||||||
|
Other
|
16,292 | 3,292 | — | — | 19,584 | — | ||||||||||||||||||
|
Finance
leases and instalment credit
|
1,620 | — | — | — | 1,620 | — | ||||||||||||||||||
|
Interest
accruals
|
2,872 | 1,101 | — | — | 3,973 | — | ||||||||||||||||||
|
Total
Europe
|
232,049 | 78,044 | 7,322 | 157 | 317,572 | 109,071 | ||||||||||||||||||
|
Rest
of the World
|
||||||||||||||||||||||||
|
Central
and local government
|
2,592 | 18,821 | 94 | — | 21,507 | — | ||||||||||||||||||
|
Manufacturing
|
8,078 | 46 | 738 | — | 8,862 | — | ||||||||||||||||||
|
Construction
|
825 | 79 | 3 | — | 907 | 1 | ||||||||||||||||||
|
Finance
|
37,502 | 16,919 | 3,797 | 1,210 | 59,428 | 6,059 | ||||||||||||||||||
|
Service
industries and business activities
|
14,449 | 1,825 | 661 | — | 16,935 | 103 | ||||||||||||||||||
|
Agriculture,
forestry and fishing
|
1,941 | — | — | — | 1,941 | — | ||||||||||||||||||
|
Property
|
2,898 | 217 | 28 | — | 3,143 | — | ||||||||||||||||||
|
Individuals:
|
||||||||||||||||||||||||
|
Home
mortgages
|
1,740 | — | — | — | 1,740 | — | ||||||||||||||||||
|
Other
|
12,261 | — | — | — | 12,261 | 3 | ||||||||||||||||||
|
Finance
leases and instalment credit
|
18 | — | 254 | 45 | 317 | — | ||||||||||||||||||
|
Interest
accruals
|
945 | 11 | — | — | 956 | — | ||||||||||||||||||
|
Total
Rest of the World
|
83,249 | 37,918 | 5,575 | 1,255 | 127,997 | 6,166 | ||||||||||||||||||
|
Total
|
||||||||||||||||||||||||
|
Central
and local government
|
10,077 | 103,205 | 4,148 | 212 | 117,642 | 1,540 | ||||||||||||||||||
|
Manufacturing
|
51,719 | 3,418 | 6,010 | — | 61,147 | 4,259 | ||||||||||||||||||
|
Construction
|
18,760 | 631 | 757 | — | 20,148 | 1,685 | ||||||||||||||||||
|
Finance
|
442,532 | 204,587 | 259,294 | 17,178 | 923,591 | 299,705 | ||||||||||||||||||
|
Service
industries and business activities
|
151,822 | 21,356 | 5,787 | 1 | 178,966 | 31,456 | ||||||||||||||||||
|
Agriculture,
forestry and fishing
|
9,181 | 72 | 100 | — | 9,353 | 104 | ||||||||||||||||||
|
Property
|
88,837 | 5,013 | 1,005 | 7 | 94,862 | 2,033 | ||||||||||||||||||
|
Individuals:
|
||||||||||||||||||||||||
|
Home
mortgages
|
185,095 | 1,813 | 5 | — | 186,913 |
—
|
||||||||||||||||||
|
Other
|
68,179 | 4,432 | 15 | 23 | 72,649 | 10 | ||||||||||||||||||
|
Finance
leases and instalment credit
|
19,498 | 131 | 281 | 45 | 19,955 | 5 | ||||||||||||||||||
|
Interest
accruals
|
8,750 | 3,098 | — | — | 11,848 | 2 | ||||||||||||||||||
| 1,054,450 | 347,756 | 277,402 | 17,466 | 1,697,074 | 340,799 | |||||||||||||||||||
Notes:
| (1) | Includes settlement balances of £16,589 million. |
|
(2)
|
This column
shows the amount by which the Group’s credit risk exposure is reduced
through arrangements, such as master netting agreements, which give the
Group a legal right to set-off the financial asset against a financial
liability due to the same counterparty. In addition, the Group holds
collateral in respect of individual loans and advances to banks and to
customers. This collateral includes mortgages over property (both personal
and commercial); charges over business assets such as plant, inventories
and trade debtors; and guarantees of lending from parties other than the
borrower. The Group obtains collateral in the form of securities in
reverse repurchase agreements. Cash and securities are received as
collateral in respect of derivative
transactions.
|
77
Business
review continued
The Group
classifies impaired assets as either Risk Elements in Lending (REIL) or
Potential Problem Loans (PPL). REIL represents non-accrual loans, loans that are
accruing but are past due 90 days and restructured loans. PPL represents
impaired assets which are not included in REIL but where information about
possible credit problems cause management to have serious doubts about the
future ability of the borrower to comply with loan repayment terms.
Both REIL and PPL
are reported gross of the value of any security held, which could reduce the
eventual loss should it occur, and gross of any provision marked. Therefore
impaired assets which are highly collateralised, such as mortgages, will have a
low coverage ratio of provisions held against reported impaired
balance.
The analyses of
risk elements and impairment charges as discussed below form a key part of the
data provided to senior management on the credit performance of the Group’s
portfolios.
Risk
elements in lending and potential problem loans (audited)
|
2008
|
2007
|
|||||||||||||||||||||||||||||||||||||||||||||||
|
Division
|
REIL
£m
|
PPL
£m
|
REIL
& PPL
£m
|
Provision
£m
|
%
Provision of REIL
|
%
Provision of REIL & PPL
|
REIL
£m
|
PPL
£m
|
REIL
& PPL
£m
|
Provision
£m
|
%
Provision of REIL
|
%
Provision of REIL & PPL
|
||||||||||||||||||||||||||||||||||||
|
UK Retail
|
3,832 | — | 3,832 | 2,516 | 66 | % | 66 | % | 3,270 | — | 3,270 | 2,310 | 71 | % | 71 | % | ||||||||||||||||||||||||||||||||
|
UK
Corporate
|
1,254 | 74 | 1,328 | 980 | 78 | % | 74 | % | 1,187 | 16 | 1,203 | 737 | 62 | % | 61 | % | ||||||||||||||||||||||||||||||||
|
Wealth
|
107 | 24 | 131 | 34 | 32 | % | 26 | % | 45 | 11 | 56 | 26 | 58 | % | 46 | % | ||||||||||||||||||||||||||||||||
|
Global Banking
and Markets
|
741 | 18 | 759 | 543 | 73 | % | 72 | % | 830 | 67 | 897 | 493 | 59 | % | 55 | % | ||||||||||||||||||||||||||||||||
|
Global
Transaction Services
|
53 | — | 53 | 43 | 81 | % | 81 | % | 73 | — | 73 | 22 | 30 | % | 30 | % | ||||||||||||||||||||||||||||||||
|
Ulster
|
1,196 | 1 | 1,197 | 491 | 41 | % | 41 | % | 442 | 1 | 443 | 314 | 71 | % | 71 | % | ||||||||||||||||||||||||||||||||
|
US Retail
& Commercial
|
424 | — | 424 | 298 | 70 | % | 70 | % | 229 | — | 229 | 220 | 96 | % | 96 | % | ||||||||||||||||||||||||||||||||
|
Other
|
— | — | — | — | — | — | — | 30 | ||||||||||||||||||||||||||||||||||||||||
|
Core
|
7,607 | 117 | 7,724 | 4,905 | 64 | % | 64 | % | 6,076 | 95 | 6,171 | 4,152 | 68 | % | 67 | % | ||||||||||||||||||||||||||||||||
|
Non-Core
|
11,184 | 109 | 11,293 | 4,546 | 41 | % | 40 | % | 2,175 | 36 | 2,211 | 820 | 38 | % | 37 | % | ||||||||||||||||||||||||||||||||
|
Group before
RFS Holdings minority interest
|
18,791 | 226 | 19,017 | 9,451 | 50 | % | 50 | % | 8,251 | 131 | 8,382 | 4,972 | 60 | % | 59 | % | ||||||||||||||||||||||||||||||||
|
RFS Holdings
minority interest
|
2,470 | — | 2,470 | 1,565 | 63 | % | 63 | % | 2,480 | 540 | 3,020 | 1,480 | 60 | % | 49 | % | ||||||||||||||||||||||||||||||||
|
Group
|
21,261 | 226 | 21,487 | 11,016 | 52 | % | 51 | % | 10,731 | 671 | 11,402 | 6,452 | 60 | % | 57 | % | ||||||||||||||||||||||||||||||||
78
Business
review continued
The
table below sets out the Group’s loans that are classified as REIL and
PPL.
|
2008
|
2007
|
|||||||
|
Group
£m
|
Group
£m
|
|
||||||
|
Non-accrual
loans (1)
|
19,479 | 10,362 | ||||||
|
Accrual loans
past due 90 days (2)
|
1,782 | 369 | ||||||
|
Total
REIL
|
21,261 | 10,731 | ||||||
|
PPL
(3)
|
226 | 671 | ||||||
|
Total REIL
and PPL
|
21,487 | 11,402 | ||||||
|
REIL
and PPL as % of customer loans and advances – gross (4)
|
2.52 | % | 1.64 | % | ||||
The sub-categories
of REIL and PPL are calculated as described in notes 1 to 4 below.
Notes:
|
(1)
|
All loans
against which an impairment provision is held are reported in the
non-accrual category.
|
|
(2)
|
Loans where an
impairment event has taken place but no impairment recognised. This
category is used for fully collateralised non-revolving credit
facilities.
|
|
(3)
|
Loans for
which an impairment event has occurred but no impairment provision is
necessary. This category is used for fully collateralised advances and
revolving credit facilities where identification as 90 days overdue is not
feasible.
|
|
(4)
|
Gross of
provisions and excluding reverse repurchase
agreements.
|
REIL as at 31
December 2008 was £21,261 million (2007 – £10,731 million). As a percentage of
customer lending, REIL and PPL in aggregate was 2.52% of customer loans and
advances at 31 December 2008 (2007 – 1.64%).
Impairment
loss provision methodology (audited)
Provisions for
impairment losses are assessed under three categories:
|
●
|
Individually
assessed provisions: provisions required for individually
significant impaired assets which are assessed on a case by case basis,
taking into account the financial condition of the counterparty and any
guarantor and collateral held after being stressed for downside risk. This
incorporates an estimate of the discounted value of any recoveries and
realisation of security or collateral. The asset continues to be assessed
on an individual basis until it is repaid in full, transferred to the
performing portfolio or
written-off.
|
|
●
|
Collectively
assessed provisions: provisions on impaired credits below an agreed
threshold which are assessed on a portfolio basis, to reflect the
homogeneous nature of the assets, such as credit cards or personal loans.
The provision is determined from a quantitative review of the relevant
portfolio, taking account of the level of arrears, security and average
loss experience over the recovery
period.
|
|
●
|
Latent loss
provisions: provisions held against the estimated impairment in the
performing portfolio which have yet to be identified as at the balance
sheet date. To assess the latent loss within the portfolios, the Group has
developed methodologies to estimate the time that an asset can remain
impaired within a performing portfolio before it is identified and
reported as such.
|
Provision
analysis (audited)
The Group’s
consumer portfolios, which consist of high volume, small value credits, have
highly efficient largely automated processes for identifying problem credits and
very short timescales, typically three months, before resolution or adoption of
various recovery methods. Corporate portfolios consist of higher value, lower
volume credits, which tend to be structured to meet individual customer
requirements. Provisions are assessed on a case by case basis by experienced
specialists with input from professional valuers and accountants. The Group
operates a clear provisions governance framework which sets thresholds whereby
suitable oversight and challenge is undertaken and significant cases will be
presented to a committee chaired by the Group Chief Executive or the Group
Finance Director.
79
Business
review continued
Impairment
charge (audited)
The following table
shows total impairment losses charged to the income statement.
|
2008
£m
|
2007
£m
|
|||||||
|
New
impairment losses
|
8,391 | 2,310 | ||||||
|
less:
recoveries of amounts previously written-off
|
(319 | ) | (342 | ) | ||||
|
Charge
to income statement
|
8,072 | 1,968 | ||||||
|
Comprising:
|
||||||||
|
Loan
impairment losses
|
7,091 | 1,946 | ||||||
|
Impairment
losses on available-for-sale securities
|
981 | 22 | ||||||
|
Charge
to income statement
|
8,072 | 1,968 |
|
Impairment
losses by division:
|
|
|
||||||
|
UK
Retail
|
1,019 | 975 | ||||||
|
UK
Corporate
|
321 | 178 | ||||||
|
Wealth
|
16 | 3 | ||||||
|
Global Banking
& Markets
|
541 | 66 | ||||||
|
Global
Transaction Services
|
48 | 14 | ||||||
|
Ulster
Bank
|
106 | 46 | ||||||
|
US
Retail & Commercial
|
437 | 246 | ||||||
|
RBS
Insurance
|
42 | - | ||||||
|
Other
|
(18 | ) | 3 | |||||
|
Core
|
2,512 | 1,531 | ||||||
| Non-Core | 4,920 | 399 | ||||||
| Group before RFS Holdings minority interest | 7,432 | 1,930 | ||||||
| RFS Holdings minority interest | 640 | 38 | ||||||
| 8,072 | 1,968 |
Analysis
of loan impairment charge (audited)
|
2008
£m
|
|
2007
£m
|
||||||
|
Latent loss
impairment charge
|
822 | 88 | ||||||
|
Collectively
assessed impairment charge
|
2,606 | 1,584 | ||||||
|
Individually
assessed impairment charge (1)
|
3,545 | 274 | ||||||
|
Charge
to income statement
|
6,973 | 1,946 | ||||||
|
Charge
as a % of customer loans and advances – gross (2)
|
0.82 | % | 0.28 | % | ||||
Notes:
(1)
Excludes loan impairment charge against loans and advances to banks of £118
million (2007 – nil).
(2)
Gross of provisions and excluding reverse repurchase agreements.
Analysis
of loan impairment provisions (audited)
|
2008
£m
|
|
2007
£m
|
||||||
|
Latent loss
provisions
|
1,944 | 1,050 | ||||||
|
Collectively
assessed provisions
|
4,102 | 3,845 | ||||||
|
Individually
assessed provisions
|
4,843 | 1,554 | ||||||
|
Total
provisions (1)
|
10,889 | 6,449 | ||||||
|
Total
provision as a % of customer loans and advances – gross
(2)
|
1.3 | % | 0.9 | % | ||||
Notes:
(1)
Excludes provisions against loans and advances to banks of £127 million (2007 –
£3 million).
(2)
Gross of provisions and excluding reverse repurchase agreements.
80
Business
review continued
Provisions
coverage (audited)
The Group’s
provision coverage ratios are shown in the table below.
|
2008
|
2007
|
|||||||
|
£m
|
£m
|
|||||||
|
Total
provision expressed as a:
|
||||||||
|
% of
REIL
|
52% | 60% | ||||||
|
% of REIL and
PPL
|
51% | 57% | ||||||
The coverage ratio
of closing provisions to REIL and PPL decreased from 57% to 51% during 2008. The
lower coverage ratio reflects amounts written-off and the changing mix from
unsecured to secured exposures.
Movement
in loan impairment provisions (audited)
The following table
shows the movement in the provision for impairment losses for loans and
advances.
|
Individually
assessed
£m
|
Collectively
assessed
£m
|
Latent
£m
|
Total
2008
£m
|
2007
£m
|
||||||||||||||||
|
At 1
January
|
1,568 | 3,834 |
1,050
|
6,452 | 3,935 | |||||||||||||||
|
Transfer
to disposal groups
|
(222 | ) | (351 | ) | (194 | ) | (767 | ) | — | |||||||||||
|
Currency
translation and other adjustments
|
1,065 | 81 | 295 | 1,441 | 137 | |||||||||||||||
|
Acquisition
of subsidiaries
|
— | — | — | — | 2,221 | |||||||||||||||
|
Disposal
of subsidiaries
|
— | (149 | ) | (29 | ) | (178 | ) | — | ||||||||||||
|
Net
increase in provisions of discontinued operations
|
— | — | — | — | 46 | |||||||||||||||
|
Amounts
written-off
|
(1,165 | ) | (1,983 | ) | — | (3,148 | ) | (2,011 | ) | |||||||||||
|
Recoveries
of amounts previously written-off
|
113 | 206 | — | 319 | 342 | |||||||||||||||
|
Charged
to the income statement
|
3,663 | 2,606 | 822 | 7,091 | 1,946 | |||||||||||||||
|
Unwind
of discount
|
(52 | ) | (142 | ) | — | (194 | ) | (164 | ) | |||||||||||
|
At
31 December (1)
|
4,970 | 4,102 | 1,944 | 11,016 | 6,452 | |||||||||||||||
Note:
|
(1)
|
The provison
for impairment losses at 31 December 2008 include £127 million relating to
loans and advances to banks (2007 – £3
million).
|
Movement
in loan impairment provisions (audited)
The movement in
provisions balance by division is shown in the table below.
|
UK
Retail
2008
£m
|
UK
Corporate
2008
£m
|
Wealth
2008
£m
|
Global
Banking & Markets 2008
£m
|
Global
Trans-action Services
2008
£m
|
Ulster
2008
£m
|
US
Retail & Commer- cial
2008
£m
|
RBS
Insurance
2008
£m
|
Other
2008
£m
|
Non-
Core
2008
£m
|
RFS
Holdings minority interest
2008
£m
|
Total
2008
£m
|
2007 £m | ||||||||||||||||||||||||||||||||||||||||
|
Balance as of
1 January
|
2,310 | 737 | 26 | 493 | 22 | 314 | 220 | — | 30 | 820 | 1,480 | 6,452 | 3,935 | |||||||||||||||||||||||||||||||||||||||
|
Transfers to
disposal groups
|
— | — | — | — | — | — | — | — | — | — | (767 | ) | (767 | ) | — | |||||||||||||||||||||||||||||||||||||
|
Currency
translation and other adjustments
|
21 | 317 | 2 | 12 | (10 | ) | 104 | (91 | ) | — | — | 628 | 458 | 1,441 | 137 | |||||||||||||||||||||||||||||||||||||
|
Acquisition of
subsidiaries
|
— | — | — | — | — | — | — | — | — | — | — | — | 2,221 | |||||||||||||||||||||||||||||||||||||||
|
Disposal of
subsidiaries
|
— | — | — | — | — | — | — | — | — | (178 | ) | — | (178 | ) | — | |||||||||||||||||||||||||||||||||||||
|
Net increase
in provisions of discontinued operations
|
— | — | — | — | — | — | — | — | — | — | — | — | 46 | |||||||||||||||||||||||||||||||||||||||
|
Amounts
written-off
|
(823 | ) | (377 | ) | (8 | ) | (343 | ) | (15 | ) | (20 | ) | (312 | ) | — | (80 | ) | (894 | ) | (276 | ) | (3,148 | ) | (2,011 | ) | |||||||||||||||||||||||||||
|
Recoveries of
amounts previously written-off
|
87 | — | — | 79 | 1 | — | 44 | — | 50 | — | 58 | 319 | 342 | |||||||||||||||||||||||||||||||||||||||
|
Change to
income statement
|
1,019 | 321 | 15 | 311 | 48 | 106 | 437 | — | — | 4,221 | 613 | 7,091 | 1,946 | |||||||||||||||||||||||||||||||||||||||
|
Discount
unwind
|
(98 | ) | (18 | ) | (1 | ) | (9 | ) | (3 | ) | (13 | ) | — | — | — | (51 | ) | (1 | ) | (194 | ) | (164 | ) | |||||||||||||||||||||||||||||
|
Balance as at
31 December
|
2,516 | 980 | 34 | 543 | 43 | 491 | 298 | — | — | 4,546 | 1,565 | 11,016 | 6,452 | |||||||||||||||||||||||||||||||||||||||
Liquidity
risk (audited)
The Group’s
liquidity policy is designed to ensure that the Group can at all times meet its
obligations as they fall due.
Liquidity
management within the Group addresses the overall balance sheet structure and
the control, within prudent limits, of risk arising from the mismatch of
maturities across the balance sheet and from exposure to undrawn commitments and
other contingent obligations.
The management of
liquidity risk within the Group is undertaken within a formal governance
structure. The Group Board of Directors oversees the liquidity risk appetite and
strategy of the Group; the Group Executive Management Committee reviews the key
liquidity metrics and trends in the context of the Group’s overall risk profile;
the Group Asset and Liability Management Committee (GALCO), chaired by the Group
Finance Director and including the chief executives of the business divisions as
well as the Group Treasurer, Group Chief Risk Officer and heads of other
relevant Group functions, sets explicit metrics across a number of asset and
liability targets and these are cascaded to the business and monitored by the
Group Treasury and risk functions.
Group Treasury has
overall responsibility for the daily monitoring and control of the Group’s
liquidity and funding positions. The Liquidity Managers’ Forum is chaired and
directed by the Group Treasurer with membership including the Head of Short Term
Markets and Financing, GBM. The forum typically meets weekly with more frequent,
ad hoc, meetings as necessary. There are Regional and Country ALCOs that oversee
Group policy in businesses in Europe, Asia and the Americas. The Group is
divided into Liquidity Reporting Units each of which is required to have its own
liquidity limits and contingency funding plan. In addition, all subsidiaries and
branches outside the UK are required to comply with local regulatory liquidity
requirements and are subject to Group Treasury oversight.
Management
of term structure
The Group evaluates
on a regular basis its structural liquidity risk and applies a variety of
balance sheet management and term funding strategies to maintain this risk
within its normal policy parameters. The degree of maturity mismatch within the
overall long-term structure of the Group’s assets and liabilities is managed
within internal policy guidelines, aimed at ensuring term asset commitments may
be funded on an economic basis over their life. In managing its overall term
structure, the Group analyses and takes into account the effect of retail and
corporate customer behaviour on actual asset and liability maturities where they
differ materially from the underlying contractual maturities.
Daily
management
The primary focus
of the daily management activity is to ensure access to sufficient liquidity to
meet cash flow obligations within key time horizons, in particular out to one
month ahead. The short-term maturity structure of the Group’s liabilities and
assets is managed daily to ensure that all material or potential cash flow
obligations, arising from undrawn commitments and other contingent obligations
can be met.
Potential sources
include cash inflows from maturing assets, new borrowings or the sale of various
debt securities held (after allowing for appropriate haircuts). Short-term
liquidity risk is generally managed on a consolidated basis with liquidity
mismatch limits in place for subsidiaries and non-UK branches which have
material local treasury activities, thereby assuring that the daily maintenance
of the Group’s overall liquidity risk position is not compromised. ABN AMRO,
Citizens Financial Group and RBS Insurance manage liquidity locally, given
different regulatory regimes, subject to review by Group Treasury. As
integration of ABN AMRO’s businesses within the Group proceeds, the liquidity
risk policies, parameters and metrics used will be progressively aligned within
a single framework.
Stress
testing
The Group performs
stress tests to simulate how events may impact its funding and liquidity
capabilities. Such tests inform the overall balance sheet structure and help
define suitable limits for control of the risk arising from the mismatch of
maturities across the balance sheet and from undrawn commitments and other
contingent obligations. The form and content of stress tests are updated where
required as market conditions evolve.
Contingency
planning
Contingency funding
plans have been developed to anticipate and respond to approaching or actual
material deterioration in market conditions. The Group reviews its contingency
plans in the light of evolving market conditions. The contingency funding plan
covers: the available sources of contingent funding to supplement cash flow
shortages; the lead times to obtain such funding; the roles and responsibilities
of those involved in the contingency plans, including the communication lines
for escalation of events which give rise to liquidity stress; assumptions,
including the expected change impact of market conditions; and the ability and
circumstances within which the Group accesses central bank
liquidity.
Global
developments (unaudited)
The global
financial system has experienced its greatest crisis in the post war period and
the dislocation became most acute in the second half of 2008. This loss of
confidence in the world’s banking system led to massive dislocation in the
capital markets and resulted in the effective closure of the term debt and
securitisation markets and money markets. Government intervention in, and
support for, the international financial system has increased to unprecedented
levels taking the form of capital injections, guaranteed funding, asset
insurance schemes and expanded facilities from a number of central
banks:
|
●
|
In September
2007, the Bank of England announced that to alleviate strains in
longer-maturity money markets, it would conduct auctions to provide funds
at three month maturity against a wider range of collateral, including
mortgage collateral, than in its weekly open market
operations.
|
82
Business
review continued
|
●
|
In April
2008, the Bank of England launched a special liquidity scheme allowing
banks to swap temporarily illiquid mortgage and other assets for Treasury
Bills. The scheme closed to new issuances on 30 January 2009. However, it
will provide liquidity support for a further three
years.
|
|
●
|
In September
2008, the major central banks announced coordinated action to improve US$
liquidity. As part of this action, the Bank of England and ECB commenced
US dollar repo operations. Eligible collateral consists of securities
routinely eligible in the Bank of England’s and ECB’s short-term repo open
market operations together with conventional US Treasuries. The Bank of
England concluded a reciprocal swap agreement (swap line) with the US
Federal Reserve. On 3 February 2009, the Bank of England announced the
extension of this facility until 30 October
2009.
|
|
●
|
In October
2008, the pool of eligible collateral securities for its open market
operations was extended to include bank debt guaranteed under the
Government’s bank debt guarantee
scheme.
|
|
●
|
In October
2008, the Government announced a credit guarantee scheme. It will
guarantee new unsecured borrowing in return for a fee. Initially the
guarantee period ended on 9 April 2009 but on 19 January 2009 the
Government announced an extension to 31 December 2009. It also announced
new arrangements, expected to start in April 2009, to guarantee
asset-backed securities issued by
banks.
|
|
●
|
In October
2008 the European Central Bank expanded its list of eligible collateral to
include marketable debt instruments denominated in non-euro currencies
(and issued in the euro area) among others. This is to remain in force
until the end of 2009. Enhancements were also made to the provision of
longer-term refinancing operations including conducting them through a
fixed rate tender procedure with full allotment. This is to stay in place
for as long as needed and at least until 31 March
2009.
|
|
●
|
On 27 October
2008 the Federal Reserve Bank commenced the Commercial Paper Funding
Facility to provide a liquidity backstop to issuers of commercial paper. A
special purpose vehicle (SPV) funded by the Federal Reserve Bank of New
York will purchase eligible three- month unsecured and asset-backed
commercial paper from eligible issuers. In February 2009 the FED announced
an extension to this facility until 30 October
2009.
|
|
●
|
In October
2008 the UK Government announced recapitalisation plans for a number of UK
banks including RBS.
|
|
●
|
In January
2009, it was announced that the Bank of England will permit drawings from
the discount window facility with a term of 364 days, in addition to the
standard option to draw for 30
days.
|
|
●
|
In January
2009, the Government announced that the Bank of England had been
authorised to purchase up to £50 billion of high-quality private sector
assets under an asset purchase facility. The following sterling assets are
initially eligible for purchase: commercial paper, corporate bonds, paper
issued under the Credit Guarantee Scheme (CGS), syndicated loans and
asset-backed securities created in viable securitisation
structures.
|
|
●
|
In January
2009, the Government announced an asset protection scheme. The Government
will insure, for a commercial fee, certain bank assets against losses. It
is anticipated that the scheme will commence in April 2009. The UK banks,
including the Group, have been in discussions with the Tripartite
Authorities about the scheme’s
terms.
|
|
●
|
In January
2009, the FSA has announced that it will ensure that the application of
the current International Basel Accord does not create any unnecessary or
unintended pro-cyclical effects.
|
|
●
|
On 3 February
2009 the Federal Reserve Bank announced an extension to a number of its
liquidity facilities until 30 October 2009. These included the Term
Securities Lending Facility (TSLF), originally announced in March 2008.
Under the TSLF, the Federal Reserve Bank of New York auctions 28-day term
loans of Treasury securities to primary dealers in exchange for other
program eligible collateral.
|
Liquidity
management in 2008 (audited)
The exposure of the
Group to wholesale market funding increased markedly in 2008 following the
acquisition of the wholesale banking business of ABN AMRO in the latter half of
2007. The amount of unsecured wholesale funding represented by bank funding and
debt securities increased from £154 billion in June 2007 to £362 billion in
December 2007. The gap between customer loans and customer deposits increased
over this period from £86 billion to £121 billion.
The market
disruption during 2008 had a marked effect on the Group’s liquidity and funding
which was at its most acute in the autumn of 2008 following the collapse of
Lehman Brothers. During that period, the Group’s credit ratings were downgraded
constraining both access to and tenor of wholesale funding and there was an
outflow of customer deposits. The effective closure of the term funding markets
and sharp reduction in the quantity and maturity of short term bank funding had
profound consequences for the Group.
Whilst the Group’s
customer funding sources remain well diversified and its retail franchise proved
resilient, the availability of longer term funding diminished. The Group
therefore increased its shorter term wholesale funding exposure, increased its
access to central bank funding and issued government guaranteed debt to fund the
balance sheet. The government schemes have enabled the mitigation of the
financial crisis as the Group rebalances its asset and liability
structure.
An
analysis of the Group’s funding is set out below.
|
2008
|
2007
|
|||||||||||||||
|
Sources
of funding
|
£m
|
%
|
£m
|
%
|
||||||||||||
| Customer accounts (excluding repos) | ||||||||||||||||
|
Repayable on
demand
|
327,547 | 24 | 346,074 | 24 | ||||||||||||
|
Time
deposits
|
253,822 | 19 | 201,373 | 14 | ||||||||||||
|
Total
customer accounts (excluding repos)
|
581,369 | 43 | 547,447 | 38 | ||||||||||||
|
Debt
securities in issue over one year remaining
maturity
|
125,782 | 9 | 118,152 | 8 | ||||||||||||
|
Subordinated
liabilities
|
49,154 | 4 | 38,043 | 3 | ||||||||||||
|
Owners’
equity
|
58,879 | 4 | 53,038 | 4 | ||||||||||||
|
Total
customer accounts and long term funds
|
815,184 | 60 | 756,680 | 53 | ||||||||||||
|
Repo
agreements with customers
|
58,143 | 5 | 134,916 | 10 | ||||||||||||
|
Repo
agreements with banks
|
83,666 | 6 | 163,038 | 11 | ||||||||||||
|
Total
customer accounts, long term funds and collateralised
borrowing
|
956,993 | 71 | 1,054,634 | 74 | ||||||||||||
|
Debt
securities in issue up to one year remaining maturity
|
174,507 | 13 | 156,020 | 11 | ||||||||||||
|
Deposits by
banks (excluding repos)
|
174,378 | 13 | 149,256 | 10 | ||||||||||||
|
Short
positions
|
42,536 | 3 | 73,501 | 5 | ||||||||||||
|
Total
|
1,348,414 | 100 | 1,433,411 | 100 | ||||||||||||
Customer accounts
– the principal source of funds for the Group is its core customer
deposits gathered by its retail banking, private client, corporate and SME
franchises. The underlying strength of the franchise is demonstrated by the
performance of the Group in these markets as customer deposits increased from
£547 billion in December 2007 to £581 billion at the end of December 2008. There
was a fluctuation in balances at the height of the market disruption in October
2008 but this was recovered by the year end. The Group’s multi-brand offering
and strong client focus is a key part of the funding strategy and continues to
benefit the Group’s funding position.
Repo
agreements are borrowings collateralised by a range of debt securities
and other assets undertaken with a range of corporate and institutional
customers and banks. These reduced significantly in the course of 2008 as the
Group took strategic actions and wholesale markets retrenched.
Short
positions in various securities are held primarily by GBM including RBS
Greenwich Capital in the US.
Debt securities
in issue over one year, subordinated liabilities and equity – during
2008, the debt markets saw reduced activity, in both the term and the
securitisation markets; as a result the maturity profile of the Group’s
wholesale funding has become shorter in duration over the course of the year.
This was partly offset by issues of government guaranteed debt in the latter
part of 2008. The maturity profile of debt securities is predominantly
concentrated under one year and this is a source of refinancing risk in the
coming twelve months.
The Group raised
£27 billion of equity capital during the course of 2008 from a rights issue of
£12 billion in June 2008 and a placing and open offer in December 2008 which
provided a further £15 billion of equity capital. In December 2008 a further £5
billion was raised from a preference share issue which was repaid from the
proceeds of the Second Placing and Open Offer in April 2009.
Short term debt
and bank deposits – the Group saw considerable pressure and risk aversion
in the short term debt and bank deposit markets. In order to relieve funding
shortages in the market, central banks across the world allowed banks to pledge
assets to access funding. The Group has used central bank schemes to support its
funding and pledged assets into several of these schemes in a number of
countries in which it operates. The Group has set up a series of initiatives to
improve the liquidity value of its assets to assist in relieving funding
pressures.
Undrawn
commitments – the Group provides undrawn commitments to both its
corporate and personal customers in the form of products such as overdrafts and
credit card facilities. The commitments portfolio is well diversified in terms
of customers, geography and business type. The total amount of the Group’s
undrawn commitments at the end of 2008 was £352 billion.
84
Business
review continued
Conduits –
the Group’s most significant multi-seller conduits have thus far
continued to fund the vast majority of their assets solely through ABCP
issuance. There were significant disruptions to the liquidity of the financial
markets during the year following the bankruptcy filing of Lehman Brothers in
September 2008 and this required a small amount of the assets held in certain
conduits to be funded by the Group rather than through ABCP issuance. By the end
of 2008 there had been an improvement in market conditions, supported by central
bank initiatives, which enabled normal ABCP funding to replace this Group
funding of the conduits.
The average
maturity of ABCP issued by the Group’s conduits as at 31 December 2008 was 72.1
days (2007– 60.9 days).
The total assets
held by the Group’s sponsored conduits are £49.9 billion (2007– £48.1 billion).
Since these liquidity facilities are sanctioned on the basis of total conduit
purchase commitments, the liquidity facility commitments will exceed the level
of assets held, with the difference representing undrawn
commitments.
The Group values
the funding flexibility and liquidity provided by the ABCP market to fund client
and Group-originated assets. Whilst there are plans to decrease the multi-seller
conduit business in line with the Group’s balance sheet, the Group is reviewing
the potential for new own-asset conduit structures to add funding
diversity.
Outlook
for 2009 (unaudited)
The market outlook
for 2009 remains uncertain with the prospect of recession on a global scale. The
wholesale funding markets remain difficult with a high degree of risk aversion
towards the banking market and no restoration of the unguaranteed debt capital
markets for bank issuance yet visible. The continuation of these conditions
means that the use of central bank and other government facilities are likely to
be required for some time. Other deposit initiatives have commenced to widen
wholesale and other retail deposit gathering actions.
Group
balance sheet (audited)
The following
tables show the contractual undiscounted cash flows receivable and payable up to
a period of twenty years including future receipts and payments of
interest.
On
balance sheet assets by contractual maturity
|
Group
|
||||||||||||||||||||||||
|
2008
|
0-3
months
£m
|
3-12
months
£m
|
1-3
years
£m
|
3-5
years
£m
|
5-10
years
£m
|
10-20
years
£m
|
||||||||||||||||||
|
Cash and
balances at central banks
|
12,333 | 25 | — | — | 2 | 29 | ||||||||||||||||||
|
Loans and
advances to banks
|
61,630 | 19,369 | 2,673 | 921 | 111 | 70 | ||||||||||||||||||
|
Loans and
advances to customers
|
195,553 | 81,054 | 138,378 | 125,621 | 160,271 | 152,084 | ||||||||||||||||||
|
Debt
securities
|
26,006 | 12,895 | 24,629 | 23,927 | 57,846 | 24,535 | ||||||||||||||||||
|
Derivatives
held for hedging
|
266 | 1,796 | 2,281 | 1,359 | 1,517 | 649 | ||||||||||||||||||
|
Settlement
balances
|
17,830 | — | — | — | 2 | — | ||||||||||||||||||
|
Other
financial assets
|
621 | 193 | 58 | 111 | 343 | — | ||||||||||||||||||
| 314,239 | 115,332 | 168,019 | 151,939 | 220,092 | 177,367 | |||||||||||||||||||
On
balance sheet liabilities by contractual maturity
|
Group
|
||||||||||||||||||||||||
|
2008
|
0-3
months
£m
|
3-12
months
£m
|
1-3
years
£m
|
3-5
years
£m
|
5-10
years
£m
|
10-20
years
£m
|
||||||||||||||||||
|
Deposits by
banks
|
154,614 | 14,347 | 3,345 | 2,754 | 2,048 | 34 | ||||||||||||||||||
|
Customer
accounts
|
523,268 | 33,450 | 6,577 | 6,337 | 7,298 | 5,319 | ||||||||||||||||||
|
Debt
securities in issue
|
131,714 | 48,652 | 40,067 | 38,223 | 38,667 | 5,626 | ||||||||||||||||||
|
Derivatives
held for hedging
|
394 | 2,216 | 2,543 | 1,334 | 2,682 | 1,373 | ||||||||||||||||||
|
Subordinated
liabilities
|
1,753 | 4,271 | 6,824 | 5,793 | 24,503 | 13,030 | ||||||||||||||||||
|
Settlement
balances and other liabilities
|
13,351 | 5 | 12 | 6 | 10 | 6 | ||||||||||||||||||
| 825,094 | 102,941 | 59,368 | 54,447 | 75,208 | 25,388 | |||||||||||||||||||
85
Business
review continued
Other
contractual cash obligations
The table below
summarises the Group’s other contractual cash obligations by payment
date.
|
Group
|
||||||||||||||||||||||||
|
2008
|
0-3
months
£m
|
3-12
months
£m
|
1-3
years
£m
|
3-5
years
£m
|
5-10
years
£m
|
10-20
years
£m
|
||||||||||||||||||
|
Operating
leases
|
146 | 433 | 976 | 751 | 1,448 | 1,851 | ||||||||||||||||||
|
Contractual
obligations to purchase goods or services
|
237 | 892 | 486 | 208 | 303 | 1 | ||||||||||||||||||
| 383 | 1,325 | 1,462 | 959 | 1,751 | 1,852 | |||||||||||||||||||
|
2007
|
||||||||||||||||||||||||
|
Operating
leases
|
90 | 268 | 655 | 569 | 1,060 | 1,958 | ||||||||||||||||||
|
Contractual
obligations to purchase goods or services
|
441 | 1,007 | 748 | 199 | 5 | 2 | ||||||||||||||||||
| 531 | 1,275 | 1,403 | 768 | 1,065 | 1,960 | |||||||||||||||||||
The Group’s undrawn
formal facilities, credit lines and other commitments to lend were £352,398
million (2007 – £332,811 million). While the Group has given commitments to
provide these funds, some facilities may be subject to certain conditions being
met by the counterparty. The Group does not expect all facilities to be drawn,
and some may lapse before drawdown.
The tables above
show the timing of cash inflows and outflows to settle financial assets and
liabilities. They have been prepared on the following basis:
Financial assets
have been reflected in the time band of the latest date on which they could be
repaid unless earlier repayment can be demanded by the reporting entity;
financial liabilities are included at the earliest date on which the
counterparty can require repayment regardless of whether or not such early
repayment results in a penalty. If the repayment of a financial asset or
liability is triggered by, or is subject to, specific criteria such as market
price hurdles being reached, the asset is included in the latest date on which
it can repay regardless of early repayment whereas the liability is included at
the earliest possible date that the conditions could be fulfilled without
considering the probability of the conditions being met. For example, if a
structured note is automatically prepaid when an equity index exceeds a certain
level, the cash outflow will be included in the less than three months period
whatever the level of the index at the year end. The settlement date of debt
securities in issue issued by certain securitisation vehicles consolidated by
the Group depends on when cash flows are received from the securitised assets.
Where these assets are prepayable, the timing of the cash outflow relating to
securities assumes that each asset will be prepaid at the earliest possible
date. As the repayment of assets and liabilities are linked, the repayment of
assets in securitisations are shown on the earliest date that the asset can be
prepaid as this is the basis used for liabilities.
Assets and liabilities with a
contractual maturity of greater than 20 years – the principal amounts of
financial assets and liabilities that are repayable after 20 years or where the
counterparty has no right to repayment of the principal are excluded from the
table as are interest payments after 20 years.
Held-for-trading assets and
liabilities – held-for-trading assets and liabilities amounting to
£1,226.8 billion (assets) and £1,146.7 billion (liabilities) (2007 – £678.6
billion assets, £478.6 billion liabilities) have been excluded from the table in
view of their short term nature.
This contractual
analysis highlights the maturity transformation of the balance sheet that is
fundamental to the structure of banking. In practice, this is not a reflection
of the actual behaviour of assets or liabilities. In particular the customer
funding of the balance sheet exhibits much greater stability and maturity than
the tables indicate. This is because the funding franchise of the Group is
diversified across an extensive retail network.
Regulatory
environment (audited)
The Group is
subject to the FSA’s liquidity regime, whilst overseas subsidiaries and branches
are subject to local regimes.
Sterling
liquidity
The FSA requires
the Group, on a consolidated basis, to maintain daily a minimum ratio of 100%
between:
|
●
|
a stock of
qualifying high quality liquid assets (primarily UK and EU government
securities, treasury bills and cash held in branches);
and
|
|
●
|
the sum of:
sterling wholesale net outflows contractually due within five working days
(offset up to a limit of 50%, by 85% of sterling certificates of deposit
held which mature beyond five working days); and 5% of retail deposits
with a residual contractual maturity of five working days or less. The FSA
also sets an absolute minimum level for the stock of qualifying liquid
assets that the Group is required to maintain each
day.
|
Given the
developments in 2008 the FSA has published new proposals for liquidity
management (CP08/22) to replace the current regulatory framework. The FSA is
proposing a major overhaul of liquidity risk regulation that will
include:
|
●
|
Improved
systems and controls including governance standards, pricing, intra day
systems and collateral management.
|
|
●
|
Individual
liquid assessments that will include mandatory scenarios and an analysis
of principal liquidity exposure
factors.
|
|
●
|
Reporting
standards improved both in scope and frequency by enhanced mismatch
reporting.
|
Market
risk (audited)
Market risk arises
from changes in interest rates, foreign currency, credit spread, equity prices
and risk related factors such as market volatilities. Market risk is actively
managed and aligned with the Group’s risk appetite. Market conditions were
difficult throughout 2008 with significant volatility and write-downs across
markets and portfolios.
The Group manages
market risk in the trading and non-trading (treasury) portfolios using the
market risk management framework. The framework includes value-at-risk (VaR)
limits, backtesting, stress testing, scenario analysis, position/sensitivity
analysis and model validation.
The focus through
2008 has been on overhauling and reviewing the market risk limits for trading
book activities, reflecting market performance and events.
Measurement
(audited)
A
number of techniques are used to calculate the Group’s exposure to market risk,
including VaR, sensitivity analysis and stress testing.
VaR is a technique
that produces estimates of the potential change in the market value of a
portfolio over a specified time horizon at given confidence levels. For internal
risk management purposes, the Group’s VaR assumes a time horizon of one trading
day and a confidence level of 95%. The trading book market risk is calculated
using VaR at a confidence level of 99% and a time horizon of ten trading days.
From 2009, the Group is adopting 99% confidence limits, in line with industry
practice.
The Group
calculates VaR using historical simulation models but does not make any
assumption about the nature or type of underlying loss distribution. The
methodology uses the previous 500 trading days of market data and calculates
both general market risk (i.e. the risk due to movement in general market
benchmarks) and idiosyncratic market risk (i.e. the risk due to movements in the
value of securities by reference to specific issuers). All VaR models have
limitations, which include:
|
●
|
Historical
data may not provide the best estimate of the joint distribution of risk
factor changes in the future and may fail to capture the risk of possible
extreme adverse market movements which have not occurred in the historical
window used in the calculations.
|
|
●
|
VaR using a
one-day time horizon does not fully capture the market risk of positions
that cannot be liquidated or hedged within one
day.
|
|
●
|
VaR using a
95% confidence level does not reflect the extent of potential losses
beyond that percentile.
|
Traded
portfolios (audited)
The primary focus
of the Group’s trading activities is client facilitation. The Group also
undertakes:
|
●
|
Market making
– quoting firm bid (buy) and offer (sell) prices with the intention of
profiting from the spread between the
quotes.
|
|
●
|
Arbitrage –
entering into offsetting positions in different but closely related
markets in order to profit from market
imperfections.
|
|
●
|
Proprietary
activity – taking positions in financial instruments as principal in order
to take advantage of anticipated market
conditions.
|
Financial
instruments held in the Group’s trading portfolios include, but are not limited
to: debt securities, loans, deposits, equities, securities sale and repurchase
agreements and derivative financial instruments (futures, forwards, swaps and
options).
The Group
participates in exchange traded and over the counter (OTC) derivatives markets.
The Group buys and sells financial instruments that are traded or cleared on an
exchange, including interest rate swaps, futures and options. Holders of
exchange traded instruments provide margin daily with cash or other security at
the exchange, to which the holders look for ultimate settlement. The Group also
buys and sells financial instruments that are traded OTC, rather than on a
recognised exchange. These instruments range from commoditised transactions in
derivative markets, to trades where the specific terms are tailored to the
requirements of the Group’s customers. In many cases, industry standard
documentation is used, most commonly in the form of a master agreement, with
individual transaction confirmations.
The Group
calculates the VaR of trading portfolios at the close of business and positions
may change substantially during the course of a trading day. Further controls
are in place to limit the Group’s intra-day exposure, such as the calculation of
the VaR for selected portfolios. The Group cannot guarantee that losses will not
exceed the VaR amounts indicated due to the limitations and nature of VaR
measurements.
87
Business
review continued
Assets and
liabilities in the trading book are measured at their fair value. Fair value is
the amount at which the instrument could be exchanged in a current transaction
between willing parties. The fair values are determined following IAS 39
guidance which requires banks to use quoted market prices or valuation
techniques (models) that make the maximum use of observable inputs. When marking
to market using a model, the valuation methodologies are reviewed and approved
either by the market risk function in the business or at Group level. Group Risk
provides an independent evaluation of the model for transactions deemed by the
Model Product Review Committee (MPRC) to be large, complex and/or innovative.
Any profits or losses on the revaluation of positions are recognised in the
daily profit and loss.
The VaR for the
Group’s 2008 trading portfolios segregated by type of market risk exposure is
shown below.
£
million (unaudited)
Note:
(1)
The traded market risk VaR excludes super senior tranches of asset backed
CDOs.
The average total
VaR utilisation increased in 2008 compared with 2007 as a result of increased
market volatility. This increase was offset by a reduction in trading book
exposure throughout the period, due to a reduction in the size of the inventory
held on the balance sheet as a result of sales, reclassification of assets to
the non-trading book and write-downs. The average equity VaR increased in 2008
compared with 2007, due to the integration of ABN AMRO from 17 October
2007.
|
2008
|
2007
|
|||||||||||||||||||||||||||||||
|
Average
£m
|
Period
end
£m
|
Maximum
£m
|
Minimum
£m
|
Average
£m
|
Period
end
£m
|
Maximum
£m
|
Minimum
£m
|
|||||||||||||||||||||||||
|
Interest
rate
|
20.7 | 26.3 | 36.5 | 12.1 | 12.5 | 15.0 | 21.8 | 7.6 | ||||||||||||||||||||||||
|
Credit
spread
|
37.2 | 40.4 | 51.2 | 26.0 | 18.8 | 41.9 | 45.2 | 12.6 | ||||||||||||||||||||||||
|
Currency
|
4.5 | 8.7 | 10.5 | 1.2 | 2.6 | 3.0 | 6.9 | 1.1 | ||||||||||||||||||||||||
|
Equity
|
12.3 | 9.4 | 19.9 | 6.0 | 5.4 | 14.0 | 22.0 | 1.4 | ||||||||||||||||||||||||
|
Commodity
|
6.7 | 6.3 | 18.2 | — | 0.2 | 0.5 | 1.6 | — | ||||||||||||||||||||||||
|
Diversification
|
— | (43.3 | ) | — | — | — | (28.7 | ) | — | — | ||||||||||||||||||||||
|
Total
|
44.6 | 47.8 | 60.9 | 29.9 | 21.6 | 45.7 | 50.1 | 13.2 | ||||||||||||||||||||||||
The 2008 data in
the table above excludes exposures to super-senior tranches of asset backed
CDOs, as VaR no longer produces an appropriate measure of risk for these
exposures due to the illiquidity and opaqueness of the pricing of these
instruments over an extended period. For these exposures, the maximum potential
loss is equal to the aggregate net exposure, which was £1,398 million as at 31
December 2008. For more information, please refer to the discussion of Credit
market and related exposures – Super senior CDOs on page 111 and Financial
statements: Note 11, Financial instruments – Valuation – level 3 portfolios –
collateralised debt obligations on pages 189 and 190.
RBS Sempra
Commodities LLP, the commodities-marketing joint venture between RBS and Sempra
Energy, was formed on 1 April 2008, and its trading risks were included in the
disclosed VaR from that date.
88
Business
review continued
Backtesting,
stress testing and sensitivity analysis
(audited)
The Group
undertakes a programme of daily backtesting, which compares the actual profit or
loss realised in trading activity to the VaR estimation. The results of the
backtesting process are one of the methods by which the Group monitors the
ongoing suitability of its VaR model.
A
‘Risks not in VaR’ framework has been developed to address those market risks
not adequately captured by the market standard VaR methodology. Where risks are
not included in the model various non-VaR controls (e.g. position monitoring,
sensitivity limits, triggers or stress limits) are in place.
The Group
undertakes daily stress testing to identify the potential losses in excess of
VaR. Stress testing is used to calculate a range of trading book exposures which
result from exceptional but plausible market events. Stress testing measures the
impact of abnormal changes in market rates and prices on the fair value of the
Group’s trading portfolios. GEMC approves the high-level market stress test
limit for the Group. The Group calculates historical stress tests and
hypothetical stress tests.
Historical stress
tests calculate the loss that would be generated if the market movements that
occurred during historical market events were repeated. Hypothetical stress
tests calculate the loss that would be generated if a specific set of adverse
market movements were to occur.
Stress testing is
also undertaken at key trading strategy level, for those strategies where the
associated market risks are not adequately captured by VaR. Stress test
exposures are discussed with senior management and are reported to GRC, GEMC and
the Board. Breaches in the Group’s market risk stress testing limits are
monitored and reported.
In
addition to VaR and stress testing, the Group calculates a wide range of
sensitivity and position risk measures, for example interest rate ladders or
option revaluation matrices. These measures provide valuable additional
controls, often at individual desk or strategy level.
Model
validation governance (audited)
Pricing models are
developed and owned by the front office. Where pricing models are used as the
basis of books and records valuations, they are all subject to independent
review and sign-off. Models are assessed by MPRC as having either immaterial or
material model risk (valuation uncertainty arising from choice of modelling
assumptions), the assessment being made on the basis of expert judgement. Those
models assessed as having material model risk are prioritised for independent
quantitative review. Independent quantitative review aims to quantify model risk
by comparing model outputs against alternative independently developed models.
The results of independent quantitative review are used by Market Risk to inform
risk limits and by Finance to inform reserves. Governance over this process is
provided by MPRC, a forum which brings together front office quants, market
risk, finance and QuaRC (Quantitative Research Centre, Group Risk’s independent
quantitative model review function). Risk (market risk, incremental default
risk, counterparty credit risk) models are developed both within business units
and by Group functions. Risk models are also subject to independent review and
sign-off. Meetings are held with the FSA every quarter to discuss the traded
market risk, including changes in models, management, back testing results,
other risks not included in the VaR framework and other model performance
statistics.
Risk
control (audited)
All divisions that
are exposed to market risk in the course of their business are required to
comply with the requirements of the Group’s Market Risk Policy Standards (MRPS).
The main risk management tools are delegated authorities, specifically hard
limits and discussion triggers, independent model valuation, a robust and
efficient risk system and timely and accurate management
information.
Limits form part of
the dealing authorities and constitute one of the cornerstones of the market
risk management framework. Upon notification of a limit breach, the appropriate
body must take one of the following actions:
|
●
|
Instructions
can be given to reduce positions so as to bring the Group within the
agreed limits.
|
|
●
|
A temporary
increase in the limit (for instance, in order to allow orderly unwinding
of positions) can be granted.
|
|
●
|
A permanent
increase in the limit can be
granted.
|
Non-traded
portfolios (audited)
Risks in non-traded
portfolios mainly arise in retail and commercial banking assets and liabilities
and financial investments designated as available-for-sale and
held-to-maturity.
Group Treasury is
responsible for setting and monitoring the adequacy and effectiveness of
management, using a framework that identifies, measures, monitors and controls
the underlying risk. GALCO approves the Group’s non-traded market risk appetite,
expressed as statistical and non-statistical risk limits, which are delegated to
the businesses responsible.
Various banking
regulators review non-trading market risk as part of their regulatory oversight.
As home regulator, the FSA has responsibility for reviewing non-trading market
risk at a Group consolidated level.
89
Business
review continued
The Group is
exposed to the following non-traded risks:
Interest Rate Risk in the Banking
Book (IRRBB) represents exposures to instruments whose values vary with
the level or volatility of interest rates. These instruments include, but are
not limited to, loans, debt securities, equity shares, deposits, certificates of
deposits, and other debt securities issued, loan capital and derivatives.
Hedging instruments used to mitigate these risks include related derivatives
such as options, futures, forwards and swaps. Interest rate risk arises from the
Group’s non-trading activities in four principal forms:
|
●
|
Repricing
risk – arises from differences in the repricing terms of the Group’s
assets and liabilities.
|
|
●
|
Optionality –
arises where a customer has an option to exit a deal
early.
|
|
●
|
Basis risk –
arises, for example, where one month LIBOR is used to fund base rate
assets.
|
|
●
|
Yield curve
risk – arises as a result of non-parallel changes in the yield
curve.
|
From an economic
perspective, it is the Group’s policy to minimise the sensitivity to changes in
interest rates in its retail and commercial businesses and, where interest rate
risk is retained, to ensure that appropriate resources, measures and limits are
applied.
Non-trading
interest rate risk is calculated in each business on the basis of establishing
the repricing behaviour of each asset, liability and off-balance sheet product.
For many retail and commercial products, the actual interest rate repricing
characteristics differ from the contractual repricing. In most cases, the
repricing maturity is determined by the market interest rate that most closely
fits the historical behaviour of the product interest rate. For non-interest
bearing current accounts, the repricing maturity is determined by the stability
of the portfolio. The repricing maturities used are approved by Group Treasury
and divisional asset and liability committees at least annually. Key conventions
are reviewed annually by GALCO.
A
static maturity gap report is produced as at the month-end for each business, in
each functional currency based on the behavioural repricing for each product. It
is Group policy to include in the gap report, non-financial assets and
liabilities, mainly property, plant and equipment and the Group’s capital and
reserves, spread over medium and longer term maturities. The report includes
hedge transactions, principally derivatives.
Any residual
non-trading interest rate exposures are controlled by limiting repricing
mismatches in the individual business balance sheets. Potential exposures to
interest rate movements in the medium to long-term are measured and controlled
using a version of the same VaR methodology that is used for the Group’s trading
portfolios. Net accrual income exposures are measured and controlled in terms of
sensitivity over time to movements in interest rates.
Risk is managed
within VaR limits approved by GALCO, through the execution of cash and
derivative instruments (see Note 13 on the accounts, on page 199). Execution of
the hedging is carried out by the relevant division through the Group’s treasury
functions. The residual risk position is reported to divisional asset and
liability committees, GALCO and the Board.
Foreign Exchange Risk in the Banking
Book (FXRBB) represents exposures to changes in the values of current
holdings and future cashflows denominated in other currencies. Hedging
instruments used to mitigate these risks include foreign currency options,
currency swaps, futures, forwards and deposits. Foreign exchange risk results
from the Group’s investments in overseas subsidiaries, associates and branches
in three principal forms:
|
(i)
|
Structural
foreign currency exposures that arise from net investment in overseas
subsidiaries, associates and
branches;
|
|
(ii)
|
Transactional/commercial
foreign currency exposures that arise from mismatches in the currency
balance sheet; and
|
|
(iii)
|
Foreign
currency profit streams.
|
Equity Risk in the
Banking Book (ERBB) is defined as the potential variation
in the Group’s non-trading income and reserves arising from changes in equity
prices/income. This risk may crystallise during the course of normal business
activities or in stressed market conditions. Equity positions in the Group’s
banking book are retained to achieve strategic objectives, support venture
capital transactions or in respect of restructuring arrangements. From an
economic perspective, it is the Group’s policy to ensure that equity exposures
in the banking book are identified, monitored and controlled, with the aim of
maximising their potential strategic or business value.
The commercial
decision to invest in equity holdings is taken by GEMC, GCC or an appropriate
sub-committee within delegated authority. Investments of a strategic nature are
referred to GEMC for approval; those involving the purchase or sale by the Group
or subsidiary companies also require Board approval, after consideration by
GEMC.
Treasury
(audited)
The Group’s
treasury activities include its money market business and the management of
internal funds flow within the Group’s businesses. In addition, this includes
GBM trading portfolio assets that have been reclassified to available-for-sale.
Money market portfolios include cash instruments (principally debt securities,
loans and deposits) and related hedging derivatives. VaR for the Group’s
treasury portfolios, which relates mainly to interest rate risk including credit
spreads, was £52.0 million at 31 December 2008 (2007 – £5.5 million). During the
year the maximum VaR was £52.0 million (2007 – £6.4 million), the minimum £4.8
million (2007 – £1.3 million) and the average £8.3 million (2007 – £3.7
million).
90
Business
review continued
Non-trading
interest rate VaR (audited)
Non-trading
interest rate VaR for the Group’s treasury and retail and commercial banking
activities was £70.6 million at 31 December 2008 (2007 – £42.9 million) with the
major exposure being to changes in longer term US dollar interest rates. During
2008, the maximum VaR was £117.6 million (2007 – £53.6 million), the minimum was
£53.9 million (2007 – £32.9 million) and the average was £75.1 million (2007 –
£43.2 million).
A
breakdown of the Group’s non-trading VaR on a statutory basis by currency is
shown below.
|
2008
£m
|
2007
£m
|
|||||||
|
EUR
|
19.0 | 4.5 | ||||||
|
GBP
|
18.3 | 7.3 | ||||||
|
USD
|
64.8 | 52.8 | ||||||
|
Other
|
4.5 | 2.6 |
Citizens Financial
Group (CFG) was the main contributor to overall non- trading interest rate VaR.
CFG manages non-trading interest rate risk with the objective of minimising
accrual accounted earnings volatility. To do so it uses a variety of income
simulation and valuation risk measures that more effectively capture the risk to
earnings due to mortgage prepayment and competitive deposit pricing behaviour
than a VaR-based methodology would. This balance sheet management approach is
common for US retail banks. Interest rate risk in the banking book is managed by
a professional treasury function which optimises the yield, whilst staying
within approved limits on interest rate risk, liquidity and
capitalisation.
Mortgages, home
equity loans and mortgage-backed securities (MBS) comprise a large portion of
CFG’s assets. In the US, mortgage and home equity customers may prepay loans
without penalty. However, under the requirements of FAS 133, the risk that they
may do so cannot be hedged in a cost effective manner and must be born by the
lender. Prepayment risk is a primary component of interest rate risk in the
banking book at CFG.
|
2008
|
2007
|
|||||||||||||||
|
Principal(1)
US$m
|
Carrying
amount
US$m
|
Principal(1)
US$m
|
Carrying
amount
US$m
|
|||||||||||||
|
Total MBS and
mortgages
|
63,542 | 63,165 | 69,948 | 69,672 | ||||||||||||
|
MBS –
total
|
||||||||||||||||
|
– high grade
(AA or AAA rated)
|
26,268 | 25,893 | 26,848 | 26,572 | ||||||||||||
|
– rated C to
A
|
602 | 600 | — | — | ||||||||||||
|
MBS –
commercial
|
||||||||||||||||
|
– high grade
(AA or AAA rated)
|
2,253 | 2,089 | 2,205 | 2,211 | ||||||||||||
|
MBS –
retail
|
||||||||||||||||
|
– high grade
(AA or AAA rated)
|
24,015 | 23,804 | 24,643 | 24,631 | ||||||||||||
|
– rated C to
A
|
602 | 600 | — | — | ||||||||||||
|
Residential
Mortgage and Home Equity Loans (non-securitised, fixed rate and ARM,
prepayable)
|
36,672 | 36,672 | 43,100 | 43,100 | ||||||||||||
Note:
(1) The
principal on MBS is the redemption amount on maturity or, in the case of an
amortising instrument, the sum of future redemption amounts through the residual
life of the security.
91
Business
review continued
In
addition to VaR, the following measures are reported to CFG ALCO, Group
Treasury, GALCO and the Board:
|
●
|
The
sensitivity of net accrual earnings to a variety of parallel and
non-parallel movements in interest
rates.
|
|
●
|
Economic
value of equity (EVE) sensitivity to a series of parallel movements in
interest rates. EVE is only used within CFG and to meet the FSA prescribed
standard shock test of +/- 200bp parallel
shock.
|
|
Percent
increase/
decrease
in CFG EVE(1)
|
||||||||
|
(unaudited)
|
2%
parallel upward movement in US interest rates
|
2%
parallel downward movement in US interest rates (No negative rates
allowed)
|
||||||
|
Period
end
|
(0.7 | ) | (19.0 | ) | ||||
|
Maximum
|
(18.2 | ) | (20.8 | ) | ||||
|
Minimum
|
(0.7 | ) | (4.4 | ) | ||||
|
Average
|
(12.2 | ) | (12.6 | ) | ||||
Note:
(1)
Economic value of equity is the net present value of assets and liabilities
calculated by discounting expected cash flows of each instrument over its
expected life. Risk to EVE is quantified by calculating the impact of interest
rate changes on the net present value of equity and is expressed as a percentage
of CFG regulatory capital.
Sensitivity
of net interest income (unaudited)
There have been no
material changes to the Group’s measurement and management of the sensitivity of
net interest income to movement in interest rates.
The Group aims,
through its management of market risk in non-trading portfolios, to mitigate the
effect of prospective interest movements which could reduce future net interest
income, whilst balancing the cost of such hedging activities on the current net
revenue stream.
The table below
sets out the effect on future net interest income of a sustained +/-100bp
parallel rise/fall in all yield curves.
|
Year
1
£m
|
||||
|
+ 100bp shift
in yield curves
|
138.9 | |||
|
– 100bp shift
in yield curves
|
(234.1 | ) | ||
The interest rate
sensitivities in the table above are illustrative only and are based on
simplified scenarios.
The figures
represent the effect on pro forma net interest income of movements of the yield
curve based on the Group’s current non-trading interest rate risk profile. This
effect however does not incorporate actions that would be taken by the business
units to mitigate the effect of this interest rate risk. In reality the business
units proactively seek to change the interest rate risk profile to minimise
losses and optimise net revenues.
The projections
also assume that interest rates of all maturities move by the same amount and
therefore do not reflect the potential effect on net interest income of some
rates changing whilst others remain the same.
The projections do
not take into account the effect on net interest income of anticipated
differences in changes between interest rates and interest rates linked to other
bases (such as central bank rates or product rates for which the entity has
discretion over the timing and extent of rate changes). The projections make
other simplifying assumptions, including that all positions run to maturity and
that there are no negative interest rates.
Currency
risk (audited)
The Group does not
maintain material non-trading open currency positions other than the structural
foreign currency translation exposures arising from its investments in foreign
subsidiaries and associated undertakings and their related currency funding. The
Group’s policy in relation to structural positions is to match fund the
structural foreign currency exposure arising from net asset value, including
goodwill, in foreign subsidiaries, equity accounted investments and branches,
except where doing so would materially increase the sensitivity of either the
Group’s or the subsidiary’s regulatory capital ratios to currency movements. The
policy requires structural foreign exchange positions to be reviewed regularly
by GALCO. Foreign exchange differences arising on the translation of foreign
operations are recognised directly in equity together with the effective portion
of foreign exchange differences arising on hedging instruments.
Equity
classification of foreign currency denominated preference share issuances
requires that these shares be held on the balance sheet at historic cost.
Consequently, these share issuances have the effect of increasing the Group’s
structural foreign currency position.
The tables below
set out the Group’s structural foreign currency exposures:
|
2008
|
Net
assets of overseas operations
£m
|
Minority
interests
£m
|
Net
investments in foreign operations
£m
|
Net
investment hedges
£m
|
Structural
foreign currency exposures
£m
|
|||||||||||||||
|
US
dollar
|
17,480 | (19 | ) | 17,499 | (3,659 | ) | 13,840 | |||||||||||||
|
Euro
|
26,943 | 15,431 | 11,512 | (7,461 | ) | 4,051 | ||||||||||||||
|
Chinese
RMB
|
3,928 | 1,898 | 2,030 | (1,082 | ) | 948 | ||||||||||||||
|
Other
non-sterling
|
5,088 | 621 | 4,467 | (3,096 | ) | 1,371 | ||||||||||||||
| 53,439 | 17,931 | 35,508 | (15,298 | ) | 20,210 | |||||||||||||||
|
2007
|
||||||||||||||||||||
|
US
dollar
|
14,819 | 303 | 14,516 | (2,541 | ) | 11,975 | ||||||||||||||
|
Euro
|
46,629 | 28,647 | 17,982 | (8,818 | ) | 9,164 | ||||||||||||||
|
Chinese
RMB
|
2,600 | — | 2,600 | (1,939 | ) | 661 | ||||||||||||||
|
Brazilian
real
|
3,755 | 3,755 | — | — | — | |||||||||||||||
|
Other
non-sterling
|
3,905 | 519 | 3,386 | (1,219 | ) | 2,167 | ||||||||||||||
| 71,708 | 33,224 | 38,484 | (14,517 | ) | 23,967 | |||||||||||||||
Retranslation gains
and losses on the Group’s net investments in operations together with those on
instruments hedging these investments are recognised directly in equity. Changes
in foreign currency exchange rates will affect equity in proportion to the
structural foreign currency exposure. A five percent strengthening in foreign
currencies would result in a gain of £1,010 million (2007 – £1,200 million)
recognised in equity, while a five per cent weakening in foreign currencies
would result in a loss of £960 million (2007 - £1,140 million) recognised in
equity. These movements in equity would offset retranslation effects on the
Group's foreign currency denominated risk weighted assets, reducing the
sensitivity of the Group's Tier 1 capital ratio to movements in foreign currency
exchange rates.
Equity
risk (audited)
Equity positions
are measured at fair value. Fair value calculations are based on available
market prices wherever possible. In the event that market prices are not
available, fair value is based on appropriate valuation techniques or management
estimates.
The types, nature
and amounts of exchange-traded exposures, private equity exposures, and other
exposures vary significantly. Such exposures may take the form of listed and
unlisted equity shares, linked equity fund investments, private equity and
venture capital investments, preference shares classified as equity and Federal
Home Loan Stock.
The table below
sets out the balance sheet value of equity exposures at December
2008.
|
Listed
£m
|
Unlisted
£m
|
Total
£m
|
||||||||||
|
Equity
exposures*
|
4,267 | 3,018 | 7,285 | |||||||||
*
excludes equity exposures held-for-trading purposes and by insurance/assurance
entities
93
Business
review continued
Risk
control (unaudited)
The prime risk
control mechanism for non-traded market risk exposures is the completion of
monthly IRRBB and quarterly FXRBB returns by the Group’s business units,
collated as part of month-end reporting by Group Treasury to GALCO. In relation
to equity risk, risk is mitigated by proper controls in relation to
identification of risk prior to investing.
Financial control
functions are required to confirm to Group Treasury that returns materially
capture all balance sheet items and thus reconcile to core source
systems.
Monthly returns by
the Group’s business units, collated as part of month-end reporting by Group
Treasury to GALCO, are used to build a Group IRRBB VaR position and to ensure
businesses comply with materiality limits on a pre and post hedge basis for
interest rates, as stipulated by Group Treasury.
For FXRBB, the
Group policy states that any foreign currency exposure is managed to de minimis
limits. Group Treasury monitors adherence to this policy via a quarterly
return.
For both IRRBB and
FXRBB information is included in regulatory and statutory returns.
Group Market Risk
exercise independent oversight and governance of the interest rate and foreign
exchange exposures managed in Group Treasury by granting market risk limits in
addition to authorising Group Treasury to deal in specific instruments for the
purpose of managing the Group's non-trading interest rate and foreign exchange
exposures. All market risk methodologies that relate to limits specified under
this delegated authority are applied under the direction of Group Market
Risk.
Insurance
risk (unaudited)
The Group is
exposed to insurance risk directly through its general and life insurance
businesses.
Insurance risk
arises through fluctuations in the timing, frequency and/or severity of insured
events, relative to the expectations at the time of underwriting. Insurance risk
is managed in four distinct ways:
|
●
|
Underwriting
and pricing risk management: is managed through the use of
underwriting guidelines which detail the class, nature and type of
business that may be accepted, pricing policies by product line and brand
and centralised control of wordings and any subsequent
changes.
|
|
●
|
Claims risk
management: is handled using a range of automated controls and
manual processes.
|
|
●
|
Reserving
risk management: is the risk that the technical reserves are
assessed incorrectly such that insufficient funds have been retained to
handle and pay claims as the amounts fall due, both in relation to those
claims which have already occurred or will occur in future periods of
insurance. Claims development data provides information on the historical
pattern of reserving risk.
|
|
●
|
Reinsurance
risk management: is used to protect against adverse claims
experience on business within normal risk appetite (e.g. catastrophic
events, adverse frequency of large claims) and to provide protection on
business not within its risk appetite (e.g. quota share reinsurance on
certain classes of business).
|
The aggregate
amount of business by product and entity is determined through the business
plans.
Overall, insurance
risk is predictable over time, given the large volumes of data. Uncertainty does
exist, especially around predictions such as the variations in weather. Risk is
minimised through the application of documented risk policies, coupled with
governance frameworks.
General
insurance business
The Group’s focus
in its general insurance operation is on high volume, relatively straightforward
products. The key insurance risks are as follows:
|
●
|
Motor
insurance contracts (private and commercial): claims experience
varies due to a range of factors, including age, gender and driving
experience together with the type of vehicle and
location.
|
|
●
|
Property
insurance contracts (residential and commercial): the major causes
of claims for property insurance are weather (flood, storm), theft, fire,
subsidence and various types of accidental
damage.
|
|
●
|
Other
commercial insurance contracts: risk arises from business
interruption and loss arising from the negligence of the insured
(liability insurance). Business interruption claims arise from the losses
of income, revenue and/or profit as a result of property damage claims.
Liability insurance includes employer’s liability and public/products
liability.
|
Most general
insurance contracts are written on an annual basis, which means that the Group’s
liability extends for a 12 month period, after which the Group is entitled to
decline to renew or can impose renewal terms by amending the premium, terms and
conditions.
An
analysis of gross and net insurance claims can be found in Note 24 on the report
and accounts (see page 216).
94
Business
review continued
Life
insurance business
The Group’s three
regulated life companies, National Westminster Life Assurance Limited, Royal
Scottish Assurance plc (RSA) and Direct Line Life Insurance Company Limited, are
required to meet minimum capital requirements at all times under the FSA
Prudential Sourcebook.
The capital
resources covering the regulatory requirement are not transferable to other
areas of the Group. To ensure that the capital requirement is satisfied at all
times, each company holds a voluntary buffer above the regulatory minimum.
Reserving risk is managed for life businesses through detailed analysis of
historical and industry claims data and robust control procedures around
reserving models. The Group uses exclusively proportional reinsurance, quota
share and surplus, for its life insurance entities.
The Group is not
exposed to price, currency, credit, or interest risk on unit linked life
contracts but it is exposed to variation in management fees. In the UK, the
Group also writes insurance contracts with minimum guaranteed death benefits
that expose it to the risk that declines in the value of underlying investments
may increase the Group’s net exposure to mortality risk.
The Group’s
long-term assurance contracts include whole-life, term assurance, endowment
assurance, flexible whole life, pension and annuity contracts that are expected
to remain in force for an extended period of time. Contracts under which the
Group does not accept significant insurance risk are classified as investment
contracts. Long term business provisions are calculated in accordance with the
UK accounting standard FRS 27 ‘Life Assurance’.
Estimations
(assumptions) including future mortality, morbidity, persistency and levels of
expenses are made in calculating actuarial reserves. Key metrics
include:
|
Assumptions
|
2008
|
2007
|
2006
|
|||||||||
|
Valuation
interest rate
|
||||||||||||
|
Term
assurance
|
2.50% | 3.00% | 3.00% | |||||||||
|
Interest
|
2.50% | 3.00% | 3.00% | |||||||||
|
Unit
growth
|
3.70% | 3.50% | 3.50% | |||||||||
|
Expense
inflation
|
3.00% | 4.00% | 4.00% | |||||||||
Sample mortality
rates, expressed as deaths per million per annum, for term assurance products
(age 40).
|
Mortality
|
2008
per
annum
|
2007
per
annum
|
2006
per
annum
|
|||||||||
|
Male
non-smoker
|
723 | 810 | 517 | |||||||||
|
Male
smoker
|
1,590 | 1,830 | 983 | |||||||||
|
Female
non-smoker
|
568 | 460 | 278 | |||||||||
|
Female
smoker
|
1,277 | 1,310 | 618 | |||||||||
Expenses:
|
Pre-2000
products – RSA
|
2008
per
annum
|
2007
per
annum
|
2006
per
annum
|
|||||||||
|
Lifestyle
protection plan
|
£29.30 | £25.18 | £28.96 | |||||||||
|
Mortgage
savings plan
|
£65.92 | £56.67 | £65.15 | |||||||||
|
Pre-2000
products – NatWest Life
|
||||||||||||
|
Term assurances
|
£26.01 | £26.01 | £26.01 | |||||||||
|
Linked life
bonds
|
£26.01 | £26.01 | £26.01 | |||||||||
|
Post-2000
products
|
||||||||||||
|
Term
assurances
|
£23.17 | £23.16 | £23.16 | |||||||||
|
Guaranteed
bonds
|
£25.71 | £25.71 | £25.71 | |||||||||
95
Business
review continued
The key factors
that increase the frequency of claims include epidemics or widespread changes in
lifestyle.
The Group uses base
tables of standard mortality appropriate to the type of contract being written
and the territory in which the insured person resides. These are adjusted to
reflect the Group’s experience and expectations for future mortality
improvements as appropriate.
|
Sensitivity
factor
|
Description
of sensitivity factor applied
|
|
Interest rate
and investment return
|
Change in
market interest rates of ±1%
The test
allows consistently for similar changes to investment returns and
movements in the market value of backing fixed interest
securities
|
|
Expenses
|
Increase in
maintenance expenses of 10%
|
|
Assurance
mortality/morbidity
|
Increase in
mortality/morbidity rates for assurance contracts of 5%
|
|
Annuitant
mortality
|
Reduction in
mortality rates for annuity contracts of
5%
|
The above UK
sensitivity factors are applied through actuarial and statistical models, with
the following impact on the financial statements.
|
Impact
on profit and equity
|
||||||||||||
|
Risk
factor
|
Variability
|
2008
£m
|
2007
£m
|
|||||||||
|
Interest
rates
|
+1% | (11 | ) | (18 | ) | |||||||
|
Interest
rates
|
–1% | 11 | 15 | |||||||||
|
Expenses
|
+10% | (7 | ) | (5 | ) | |||||||
|
Assurance
mortality/morbidity
|
+5% | (9 | ) | (8 | ) | |||||||
|
Annuitant
mortality
|
–5% | — | — | |||||||||
Reinsurance
The Group uses
various types of reinsurance to transfer risk that is outside the Group’s risk
appetite, including:
|
●
|
Per
individual risk excess of loss
reinsurance.
|
|
●
|
Catastrophe
excess of loss reinsurance.
|
|
●
|
Quota share
and surplus reinsurance.
|
96
Business
review continued
Operational
risk (unaudited)
Operational risk is
the risk of financial loss or reputational impact resulting from fraud; human
error; ineffective or inadequately designed processes or systems; improper
behaviour; legal events; or from external events. Operational risk is an
integral and unavoidable part of the Group’s business as it is inherent in the
processes it operates to provide services to customers and generate profit for
shareholders.
An
objective of operational risk management is not to remove operational risk
altogether, but to manage the risk to an acceptable level, taking into account
the cost of minimising the risk with the resultant reduction in exposure.
Strategies to manage operational risk include avoidance, transfer, and
mitigation by controls or risk acceptance.
To
ensure appropriate responsibility is allocated for the management, reporting and
escalation of operational risk, the Group operates a three lines of defence
model which outlines principles for the roles, responsibilities and
accountabilities for operational risk management.
|
Operational
Risk – three lines of defence model
|
||||||
|
1st
Line of defence
|
2nd
Line of defence
|
3rd
Line of defence
|
||||
|
The
Business
Accountable
for the ownership and day-to-day management and control of operational
risk.
|
Operational
Risk
Responsible
for the implementation and maintenance of the operational risk framework,
tools and methodologies.
|
Group
Internal Audit
Responsible
for providing independent assurance on the design, adequacy and
effectiveness of the Group’s system of internal
controls.
|
||||
|
Responsible
for implementing processes in compliance with Group
policies.
|
Responsible
for oversight and challenge on the adequacy of the risk and control
processes operating in the business.
|
|||||
|
Responsible
for testing key controls and monitoring compliance with Group
policies.
|
|
|||||
The three lines of
defence model and the Operational Risk Policy and Principles (ORPP) apply
throughout the Group and are implemented taking into account the nature and
scale of the underlying business. The ORPP provides the direction for delivering
effective operational risk management. It comprises principles, minimum
standards and processes that enable the consistent identification, assessment,
management, monitoring and reporting of operational risk across the Group. The
objectives of the ORPP are to protect the Group from financial loss or damage to
its reputation, its customers or staff and to ensure that it meets all necessary
regulatory and legal requirements.
The Group-wide
processes defined in the ORPP are supported by the following key operational
risk management techniques:
|
●
|
Risk and
control assessments: business units identify and assess operational risks
to ensure that they are effectively managed, prioritised, documented and
aligned to risk appetite.
|
|
●
|
Scenario
analysis: scenarios for operational risk are used to assess the possible
impact of extreme but plausible operational risk loss events. Scenario
assessments provide a forward-looking basis for managing exposures that
are beyond the Group’s risk
appetite.
|
|
●
|
Loss data
management: each business unit’s internal loss data management process
captures all operational risk loss events above £10,000. This is used to
enhance the adequacy and effectiveness of controls, identify opportunities
to prevent or reduce the impact of re-occurrence, identify emerging
themes, enable formal loss event reporting and inform risk and control
assessments and scenario analysis. Escalation of individual events to
senior management is determined by the seriousness of the event.
Operational loss events are categorised under the following
headings:
|
|
|
–
|
Clients,
products and business practices;
|
|
|
–
|
Technology
and infrastructure failures;
|
|
|
–
|
Employment
practices and workplace safety;
|
|
|
–
|
Internal
fraud;
|
|
|
–
|
External
fraud;
|
|
|
–
|
Execution,
delivery and process management;
|
|
|
–
|
Malicious
damage; and
|
|
|
–
|
Disaster and
public safety.
|
|
●
|
Key risk
indicators: business units monitor key risk indicators against their
material risks. These indicators are used to monitor the operational risk
profile and exposure to losses against thresholds which trigger risk
management actions.
|
|
●
|
New product
approval process: ensures that all new products or significant variations
to existing products are subject to a comprehensive risk assessment.
Products are evaluated and approved by specialist areas and are subject to
executive approval prior to launch.
|
97
Business
review continued
In 2008, the Group
introduced a new self-certification process, which requires management to
regularly monitor and report on the internal control framework for which they
are responsible and regularly review and confirm its adequacy and effectiveness.
This includes certifying compliance with the requirements of Group
policies.
The ORPP
requires each business unit to determine appropriate mitigation techniques to
reduce its risk exposure to an acceptable level, and that the adequacy and
effectiveness of controls and other risk mitigants (e.g. insurance) are tested
regularly and the results documented. Where unacceptable control weaknesses are
identified, action plans must be produced and tracked to
completion.
The Group purchases
insurance to provide the business with financial protection against specific
losses and to comply with statutory or contractual requirements. Insurance is
primarily used as an additional risk mitigation tool in controlling the Group’s
exposures. However, as insurance only provides protection against financial loss
once a risk has crystallised, it is used as a complement to other
controls.
Operational
risk metrics
Reporting forms an
integral part of operational risk management. The Group’s risk management
processes are designed to ensure that operational risk issues are identified,
escalated and managed on a timely basis. Operational risk exposures for each
division are reported through monthly risk and control reports, which provide
detail on the risk exposures and action plans for each significant business
process.
Operational risk
events that have an actual or potential financial impact in excess of £1
million, or which have a material impact on the Group’s reputation or customers,
are escalated and reported to divisional and Group executive.
The graph below
shows the operational risk events by category and value for 2007 and
2008.
Operational
risk events by risk category – % of total risk events by count
The chart below
shows a similar distribution of loss event numbers across the risk categories in
2008 as those in 2007.
98
Business
review continued
Operational
risk events by category – % of total by value
The charts below
show that execution, delivery, and process management accounted for over 60% of
losses by value during 2008. This differs from 2007 where a single large value
event meant that clients, products and business practices was the largest
category.
Financial
crime
Financial crime
remains a big challenge for the Group, especially given the sophistication of
the criminal fraternity. However, the Group continues to respond to such
threats, by continuing to invest in people and processes for both detective and
preventative measures especially relating to card fraud and cyber crime. Key
initiatives include changes to authentication of payments, ATM security,
software enhancements and improvement in counterfeit detection.
Physical
security environment
The number of
physical attacks on our retail business was broadly static in 2008 compared with
2007. Business plans and controls have been enhanced to reflect the increase in
size of the global business during the year, for example changes to retail and
ATM security and sharing best practice with competitors and law enforcement
agencies.
Information
security
The Group is
committed to protecting customer and Group information. Under a Group-wide
policy framework, Group Information Security is developing, maintaining and
implementing policies and systems to secure such information. All employees and
agents of the Group are responsible for the protection of Group assets, systems
and information. All customer information is treated as confidential and
appropriate security is applied to protect the information. The Group
Information Security Policies are aligned to international standards and
regulatory requirements.
The Group
recognises information security, relating to the loss of confidentiality,
integrity or availability of our information and systems, as a specific risk,
which is managed through a Group Information Security Policy. This is reviewed
annually and includes processes for managing and ensuring compliance with the
policy. The same standards apply to information controlled by the Group or
managed by authorised third parties. The Group continues to invest in programmes
to enhance and maintain information security controls and systems. For example,
during 2008, security reviews on third party suppliers and vendors were
significantly increased.
Business
continuity
The management of
crisis situations and the need to ensure the continuity of business across the
Group is a key activity within the risk function. A consistent crisis and
incident management framework has been rolled out across the Group, to ensure
that any incident is identified, managed and resolved through skilled
divisional, country, regional and global teams. A six step methodology is in
place within the Group for managing incidents.
Key risks and
threats that the Group is consistently monitoring from the crisis and incident
management perspective include pandemics, terrorism, environmental impacts and
technology disruptions.
Business continuity
plans have been implemented to ensure that the Group can continue key services,
products and operations.
99
Business
review continued
Other
risks (unaudited)
Regulatory
risk
Regulatory risk is
managed by designing, maintaining and implementing policies and systems in order
to ensure effective compliance with all regulatory and legal requirements in the
jurisdictions in which the Group operates. The Group’s approach to regulatory
risk has three distinct elements:
|
·
|
The review of
potential changes in regulation to ensure that the Group addresses the
risks arising from such changes and responds
appropriately;
|
|
·
|
The
monitoring of compliance with existing rules and regulations and the
mitigation of the consequences of any inadvertent non compliance;
and
|
|
·
|
The
management of effective relationships with regulators to ensure
constructive engagement.
|
Under a Group-wide
framework of high-level policies, the Group and its subsidiaries engage
co-operatively with all regulatory authorities in all the relevant
jurisdictions, whether in response to regulatory change, on-going supervisory
requirements or regulatory investigations.
During the course
of 2008, responsibility for policy and oversight of anti-money laundering,
sanctions and counter-terrorist financing moved to the Group Head of Regulatory
Risk & Compliance.
Reputation
risk
Reputation is the
body of perceptions and opinions held by the stakeholders of an organisation;
customers, suppliers, employees, investors, interest groups, regulators and
government. Reputation determines how stakeholders are likely to behave towards
an organisation. Reputation risk arises from any activity that could have an
adverse impact on the reputation of the Group. There are several important
drivers of the reputation of a company (and reputation risk) including:
financial performance; corporate governance and quality of management; ethical,
social and environmental performance; marketing, innovation and customer
relationships; and regulatory compliance and litigation.
The Group protects
its reputation by understanding and managing reputation risks, including failure
to meet the expectations of stakeholders.
The Group will only
enter into a commercial transaction or customer relationship which is legal and
complies with regulatory requirements, has economic substance or business
purpose and is not designed or used for inappropriate accounting or tax
purposes. The Group takes care to understand the issues that matter most to
stakeholders, balance the views of all stakeholders and address them coherently.
Risks to the reputation of the Group are identified, assessed, managed,
monitored and reported. The Group pays particular attention to the reputation
risks associated with the introduction of new products or customer
relationships.
It
is the responsibility of the management of all Group companies, acting through
individual business units, to ensure that appropriate controls and procedures
are in place to identify and manage the risks to the reputation of the Group
arising from their activity.
The Board has
ultimate responsibility for managing any impact on the reputation of the Group
arising from its operations. However all parts of the Group take responsibility
for reputation management.
Pension
risk
The Group is
exposed to risk to its defined benefit pension schemes as assets comprise
investment portfolios which are held to meet projected liabilities to scheme
members. Risk arises because returns from these investments may be less than
expected or there may be greater than expected increases in the estimated value
of the schemes’ liabilities. In such circumstances, the Group could be obliged,
or may choose, to make additional contributions to the schemes.
The largest of the
schemes, and the main source of pension obligation risk, is the RBS Group
Pension Fund. In October 2006, this scheme was closed to new
employees.
Risk appetite and
investment policy are agreed by the Board of Trustees with quantitative and
qualitative input from the scheme actuaries and investment advisers. The Board
of Trustees also consults with the Group to obtain its view on the appropriate
level of risk within the pension fund.
The Group maintains
an independent review of risk within the Pension Funds.
GALCO monitors
pension obligation risk which is assessed by estimating the potential funding
deficit of the scheme with a twelve month risk horizon, and with a number of
different confidence levels. Monte Carlo simulations are used, based on
assumptions of statistical distribution of future equity returns, future real
and nominal interest rates, sensitivity of asset and liability values to changes
in equity returns and real and nominal interest rates, the impact of an adverse
change in longevity assumptions and mitigation available to the
Group.
The most recent
funding valuation was carried out as at 31 March 2007. This showed the fund to
be in surplus, and therefore there was no need in 2008 for additional payments
over and above the regular contributions. The next funding valuation is
scheduled to be carried out as at 31 March 2010.
100
Business
review continued
Credit
market and related exposures
Explanatory
note (unaudited)
These disclosures
provide information for certain of the Group’s business activities affected by
the unprecedented market events of 2008, the majority of which arose within
Global Banking and Markets (GBM). The disclosures are focused around GBM’s
credit markets activities, including the conduit business, which have been
particularly affected by the widespread market disruptions, as well as similar
exposures in US Retail & Commercial (‘Citizens’) and Group
Treasury.
In
preparing these disclosures, the Group took into consideration the leading
practice disclosure recommendations of the Financial Stability Forum issued in
April 2008.
Market
background (unaudited)
Overall, 2008 has
been characterised by rapid dislocation in financial markets. In many cases, the
dramatic liquidity squeeze and rise in funding costs for financial institutions
has resulted in reluctance or inability of market participants to transact, and
has adversely affected the performance of most financial institutions globally,
including the Group. Stock markets have experienced extraordinary falls, and
levels of volatility have been at record highs. Commodity prices have reduced
sharply in the second half of the year, and credit spreads continued to widen.
Market perception of counterparty risk increased and the failure of major credit
protection providers caused fair value losses for the Group and other market
participants and further increased the costs of mitigating credit exposure.
Sustained falls globally in both residential and commercial real estate prices,
fund valuations and worsening loan performance combined with a sustained lack of
liquidity in the market, resulted in a greater amount of assets being valued at
significantly lower prices.
An
indication of the continued decline in the price of asset backed securities
(ABS), in particular those collateralised with sub-prime assets, is shown in the
following graph. While not fully representative of the Group’s ABS exposures or
pricing basis, the ABX series of indices charted in the graph show, in bond
price terms, how differently rated ABS referencing US sub-prime mortgages
securitised in 2007 have performed during the year.
The graph below
provides an indication of the change in credit worthiness of corporate entities
to which the Group has significant exposure through its credit products in the
form of credit derivatives and bonds. The MarkiT iTraxx Europe graph
demonstrates the impact of the movement of credit spreads in price terms for a
basket of European corporate entities (prices rebased to 100 at the beginning of
the year).
101
Business
review continued
The first quarter
of 2008 saw a further credit and liquidity shortages experienced during 2007,
culminating in the collapse of Bear Stearns in March. The centre of the credit
issues remained the ABS market with worsening US economic data supporting higher
levels of default expectation in the property market. However, these default
expectations started to go beyond the sub-prime market with Alt A and other
non-conforming classes of loans particularly seeing significant price
deterioration. In addition, wider economic concerns led to heavy fair value
losses in the commercial mortgage backed securities (CMBS) market, in corporate
debt and in leveraged loan exposures. Following this tightening of conditions,
the Group incurred significant losses in March and took steps in April to
materially strengthen its capital base through a £12 billion rights issue which
was completed in June.
During the second
quarter ABS prices initially rallied and steadied, however towards the end of
the quarter a negative house price trend in the UK became clear, and in the US,
market reaction to sub-prime mortgages extended to prime and near prime lending.
Corporate credit spreads followed a similar pattern reacting to rising oil
prices, inflationary pressures and continuing high LIBOR despite base rate cuts
to 5% in April.
Credit spreads
continued to widen across the market through the third quarter and liquidity
levels reduced further, resulting in pressure on banks and economies worldwide.
This culminated in the demise of Lehman Brothers in September and further market
consolidation and global state intervention to provide support to the banking
sector.
During the fourth
quarter there was a continued lack of confidence in the inter-bank market, with
demand for stable investments resulting in US treasuries reaching negative
spreads. Corporate and ABS prices fell further particularly in the last two
months of the year increasing pressure on banks’ capital positions. The Group
moved to strengthen its capital position through an open offer to raise £15
billion, underwritten by the UK government. The year concluded with S&P
downgrading the credit ratings of eleven global banks, including the
Group.
Asset-backed
exposures
Significant
risk concentrations (audited)
The Group’s credit
markets activities gives rise to risk concentrations that have been particularly
affected by the market turmoil experienced since the second half of 2007. The
Group structures, originates, distributes and trades debt in the form of loan,
bond and derivative instruments in all major currencies and debt capital markets
in North America, Western Europe, Asia and major emerging markets.
During 2008,
certain assets identified as being high risk were also transferred to a
centrally managed asset unit, set up to provide specific management of this
portfolio of higher risk assets. Transferred assets are predominantly ABS and
associated protection purchased from monoline insurers and other
counterparties.
The tables below
summarise the net exposures and balance sheet carrying values of these
securities by measurement classification and references to sections with further
information on specific products.
|
Held-for-trading
|
Available-for-sale
|
Loans
and receivables
|
Designated
at fair value
|
All
ABS
|
||||||||||||||||||||||||||||||||||||
|
Net
exposure (1)
|
2008
£m |
2007 £m |
2008 £m |
2007 £m |
2008 £m |
2007 £m |
2008 £m |
2007 £m |
2008 £m |
2007 £m |
||||||||||||||||||||||||||||||
|
RMBS
|
24,462 | 35,105 | 44,450 | 27,875 | 2,578 | 5 | 182 | 90 | 71,672 | 63,075 | ||||||||||||||||||||||||||||||
|
CMBS
|
1,178 | 2,749 | 918 | 977 | 1,437 | 626 | 13 | 47 | 3,546 | 4,399 | ||||||||||||||||||||||||||||||
|
CDOs/CLOs
|
2,463 | 7,288 | 2,538 | 2,174 | 1,282 | — | — | 23 | 6,283 | 9,485 | ||||||||||||||||||||||||||||||
|
Other
ABS
|
195 | 3,479 | 6,572 | 5,579 | 3,621 | 72 | 40 | 186 | 10,428 | 9,316 | ||||||||||||||||||||||||||||||
|
Total
|
28,298 | 48,621 | 54,478 | 36,605 | 8,918 | 703 | 235 | 346 | 91,929 | 86,275 | ||||||||||||||||||||||||||||||
|
Carrying
value (2)
|
||||||||||||||||||||||||||||||||||||||||
|
RMBS
|
27,849 | 37,280 | 44,791 | 27,880 | 2,618 | 5 | 182 | 90 | 75,440 | 65,255 | ||||||||||||||||||||||||||||||
|
CMBS
|
2,751 | 3,916 | 1,126 | 976 | 1,437 | 626 | 13 | 37 | 5,327 | 5,555 | ||||||||||||||||||||||||||||||
|
CDOs/CLOs
|
7,774 | 15,477 | 9,579 | 2,173 | 1,284 | — | — | 26 | 18,637 | 17,676 | ||||||||||||||||||||||||||||||
|
Other
ABS
|
1,505 | 5,758 | 6,572 | 5,579 | 3,621 | 72 | 41 | 186 | 11,739 | 11,595 | ||||||||||||||||||||||||||||||
|
Total
|
39,879 | 62,431 | 62,068 | 36,608 | 8,960 | 703 | 236 | 339 | 111,143 | 100,081 | ||||||||||||||||||||||||||||||
Notes:
|
(1)
|
Net exposure
is carrying value after taking account of hedge protection purchased from
monolines and other counterparties but excludes the effect of counterparty
credit valuation adjustment. The protection provides credit protection
against the notional and interest cash flows due to the holders of debt
instruments in the event of default by the debt security counterparty. The
value of the protection is based on the underlying instrument being
protected.
|
|
(2)
|
Carrying value
is the amount recorded on the balance
sheet.
|
|
(3)
|
Certain
instruments have been reclassified from the held-for-trading category to
loans and receivables or available-for-sale categories, as permitted by
the amendment to IAS 39 issued in October 2008, therefore affecting
comparability by measurement
classification.
|
102
Business
review continued
Asset
backed securities (ABS) are securities that represent an interest in an
underlying pool of referenced assets. The referenced pool can comprise any
assets which attract a set of associated cash flows but are commonly pools of
residential or commercial mortgages and, in the case of Collateralised Debt
Obligations (CDOs), the referenced pool may be ABS or other classes of assets.
The process by which the risks and rewards of the pool are passed on to
investors via the issuance of securities with varying seniority is commonly
referred to as securitisation.
During 2008, as the
problems in the sub-prime sector spread to other asset classes on a global basis
and credit spreads widened due to concerns over creditworthiness of underlying
assets, securitisation volumes continued to be thin. Over the preceding years
GBM had established itself as an active arranger of third-party securitisations
and a secondary dealer in these securities, and GBM had therefore accumulated
assets that became difficult to sell given market conditions.
The Group has
exposures to ABS which are predominantly debt securities but can be held in
derivative form. These positions had been acquired primarily through the Group’s
activities in the US leveraged finance market which were expanded during 2007.
These include residential mortgage backed securities (‘RMBS’), commercial
mortgage backed securities (‘CMBS’), ABS CDOs and other ABS. In many cases the
risk on these assets is hedged via credit derivative protection purchased over
the specific asset or relevant ABS indices. The counterparty to some of these
hedge transactions are monoline insurers (see Monoline insurers on page
114).
The net exposure of
the Group’s holdings of ABS increased from £86.3 billion at 31 December 2007 to
£91.9 billion by 31 December 2008, where underlying reductions have been more
than offset by the effect of exchange rates. The net exposure incorporates hedge
protection but excludes counterparty credit valuation adjustments. All hedge
protection referred to in the credit market and related exposures section
relates to economic hedges that do not qualify for hedge
accounting.
Through a sustained
de-risking exercise the Group made reductions to the overall risk through a
combination of direct asset sales and switching to lower risk assets through
trading activities. As a large proportion of the ABS are denominated in US
dollars, these reductions in exposure were partially offset due to the movement
in the exchange rate against sterling.
The majority of the
Group’s RMBS portfolio at 31 December 2008, in terms of net exposure, was AAA
rated guaranteed or effectively guaranteed securities of £51.1 billion,
comprising:
|
·
|
£33.5 billion
of US agency securities
|
|
·
|
£7.6 billion
of Dutch government guaranteed RMBS
|
|
·
|
£10.0 billion
of European mortgage covered bonds issued by financial
institutions
|
103
Business
review continued
The tables below
analyse carrying values of these debt securities by measurement classification
and rating and fair value hierarchy level.
|
RMBS
|
||||||||||||||||||||||||||||||||
|
Non
|
Prime
|
|||||||||||||||||||||||||||||||
|
Sub-prime
|
conforming
|
Guaranteed
|
Other
|
CMBS
|
CDOs/CLOs
|
Other
ABS
|
Total
|
|||||||||||||||||||||||||
|
2008
|
£m | £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||||||||
|
AAA
rated (1)
|
||||||||||||||||||||||||||||||||
|
Held-for-trading
|
393 | 203 | 18,622 | 6,226 | 2,306 | 4,698 | 380 | 32,828 | ||||||||||||||||||||||||
|
Available-for-sale
|
522 | 1,914 | 22,546 | 18,764 | 982 | 6,459 | 4,826 | 56,013 | ||||||||||||||||||||||||
|
Loans and
receivables
|
431 | 1,415 | — | 476 | 405 | 652 | 1,443 | 4,822 | ||||||||||||||||||||||||
|
Designated at
fair value
|
16 | — | — | 166 | 9 | — | — | 191 | ||||||||||||||||||||||||
| 1,362 | 3,532 | 41,168 | 25,632 | 3,702 | 11,809 | 6,649 | 93,854 | |||||||||||||||||||||||||
|
BBB-
and above rated (1)
|
||||||||||||||||||||||||||||||||
|
Held-for-trading
|
564 | 79 | — | 985 | 407 | 1,439 | 890 | 4,364 | ||||||||||||||||||||||||
|
Available-for-sale
|
267 | 194 | — | 338 | 144 | 1,642 | 1,292 | 3,877 | ||||||||||||||||||||||||
|
Loans and
receivables
|
105 | 64 | — | 94 | 1,031 | 561 | 1,296 | 3,151 | ||||||||||||||||||||||||
|
Designated at
fair value
|
— | — | — | — | 4 | — | 41 | 45 | ||||||||||||||||||||||||
| 936 | 337 | — | 1,417 | 1,586 | 3,642 | 3,519 | 11,437 | |||||||||||||||||||||||||
|
Non-investment
grade (1)
|
||||||||||||||||||||||||||||||||
|
Held-for-trading
|
636 | 69 | — | 59 | 38 | 1,299 | 120 | 2,221 | ||||||||||||||||||||||||
|
Available-for-sale
|
124 | 74 | — | 47 | — | 1,057 | 50 | 1,352 | ||||||||||||||||||||||||
|
Loans and
receivables
|
30 | 3 | — | — | — | — | 72 | 105 | ||||||||||||||||||||||||
| 790 | 146 | — | 106 | 38 | 2,356 | 242 | 3,678 | |||||||||||||||||||||||||
|
Not
publicly rated (1)
|
||||||||||||||||||||||||||||||||
|
Held-for-trading
|
1 | 1 | 9 | 2 | — | 338 | 115 | 466 | ||||||||||||||||||||||||
|
Available-for-sale
|
— | 1 | — | — | — | 421 | 404 | 826 | ||||||||||||||||||||||||
|
Loans and
receivables
|
— | — | — | — | 1 | 71 | 810 | 882 | ||||||||||||||||||||||||
| 1 | 2 | 9 | 2 | 1 | 830 | 1,329 | 2,174 | |||||||||||||||||||||||||
|
Total
|
||||||||||||||||||||||||||||||||
|
Held-for-trading
|
1,594 | 352 | 18,631 | 7,272 | 2,751 | 7,774 | 1,505 | 39,879 | ||||||||||||||||||||||||
|
Available-for-sale
|
913 | 2,183 | 22,546 | 19,149 | 1,126 | 9,579 | 6,572 | 62,068 | ||||||||||||||||||||||||
|
Loans and
receivables
|
566 | 1,482 | — | 570 | 1,437 | 1,284 | 3,621 | 8,960 | ||||||||||||||||||||||||
|
Designated at
fair value
|
16 | — | — | 166 | 13 | — | 41 | 236 | ||||||||||||||||||||||||
|
Total
|
3,089 | 4,017 | 41,177 | 27,157 | 5,327 | 18,637 | 11,739 | 111,143 | ||||||||||||||||||||||||
|
Of
which carried at fair value:
|
||||||||||||||||||||||||||||||||
|
Level 2
(2)
|
2,459 | 2,485 | 40,942 | 26,442 | 3,316 | 14,643 | 6,677 | 96,964 | ||||||||||||||||||||||||
|
Level 3
(3)
|
64 | 50 | 235 | 145 | 574 | 2,710 | 1,441 | 5,219 | ||||||||||||||||||||||||
| 2,523 | 2,535 | 41,177 | 26,587 | 3,890 | 17,353 | 8,118 | 102,183 | |||||||||||||||||||||||||
Notes:
|
(1)
|
Credit ratings
are based on those from S&P, Fitch or Moody’s and have been mapped on
to S&P scale.
|
|
(2)
|
Valued using
techniques based significantly on observable market data. Instruments in
this level are valued using:
|
|
|
(a)
|
quoted prices
for similar instruments in markets which are not considered to be active;
or
|
|
|
(b)
|
valuation
techniques where all the inputs that have a significant effect on the
valuation are directly or indirectly based on observable market
data.
|
|
(3)
|
Instruments in
this category have been valued using a valuation technique where at least
one input which could have a significant effect on the instrument’s
valuation is not based on observable market
data.
|
104
Business
review continued
|
RMBS
|
||||||||||||||||||||||||||||||||
|
Prime
|
||||||||||||||||||||||||||||||||
|
2007(1)
|
Sub-prime
£m
|
Non
conforming
£m
|
Guaranteed
£m
|
Other
£m
|
CMBS
£m
|
CDOs/CLOs
£m
|
Other
ABS
£m
|
Total
£m
|
||||||||||||||||||||||||
|
Carrying
value: credit rating and classification
AAA
rated (2)
|
||||||||||||||||||||||||||||||||
|
Held-for-trading
|
1,790 | 2,093 | 15,502 | 12,952 | 3,285 | 12,067 | 3,495 | 51,184 | ||||||||||||||||||||||||
|
Available-for-sale
|
139 | 865 | 16,545 | 10,313 | 964 | 2,152 | 5,073 | 36,051 | ||||||||||||||||||||||||
|
Designated at
fair value
|
— | — | — | 72 | 37 | 7 | — | 116 | ||||||||||||||||||||||||
| 1,929 | 2,958 | 32,047 | 23,337 | 4,286 | 14,226 | 8,568 | 87,351 | |||||||||||||||||||||||||
|
BBB-
and above rated (2)
|
||||||||||||||||||||||||||||||||
|
Held-for-trading
|
2,476 | 530 | — | 557 | 574 | 1,509 | 1,077 | 6,723 | ||||||||||||||||||||||||
|
Available-for-sale
|
— | — | — | 18 | 12 | 1 | 208 | 239 | ||||||||||||||||||||||||
|
Loans and
receivables
|
— | — | — | — | 626 | — | — | 626 | ||||||||||||||||||||||||
|
Designated at
fair value
|
2 | — | — | — | — | 17 | — | 19 | ||||||||||||||||||||||||
| 2,478 | 530 | — | 575 | 1,212 | 1,527 | 1,285 | 7,607 | |||||||||||||||||||||||||
|
Non-investment
grade (2)
|
||||||||||||||||||||||||||||||||
|
Held-for-trading
|
616 | 146 | — | 27 | 35 | 1,082 | 91 | 1,997 | ||||||||||||||||||||||||
|
Available-for-sale
|
— | — | — | — | — | — | 14 | 14 | ||||||||||||||||||||||||
|
Loans and
receivables
|
5 | — | — | — | — | — | 72 | 77 | ||||||||||||||||||||||||
|
Designated at
fair value
|
16 | — | — | — | — | — | — | 16 | ||||||||||||||||||||||||
| 637 | 146 | — | 27 | 35 | 1,082 | 177 | 2,104 | |||||||||||||||||||||||||
|
Not
publicly rated
|
||||||||||||||||||||||||||||||||
|
Held-for-trading
|
191 | 144 | 125 | 131 | 22 | 819 | 1,095 | 2,527 | ||||||||||||||||||||||||
|
Available-for-sale
|
— | — | — | — | — | 20 | 284 | 304 | ||||||||||||||||||||||||
|
Designated at
fair value
|
— | — | — | — | — | 2 | 186 | 188 | ||||||||||||||||||||||||
| 191 | 144 | 125 | 131 | 22 | 841 | 1,565 | 3,019 | |||||||||||||||||||||||||
|
Total
|
||||||||||||||||||||||||||||||||
|
Held-for-trading
|
5,073 | 2,913 | 15,627 | 13,667 | 3,916 | 15,477 | 5,758 | 62,431 | ||||||||||||||||||||||||
|
Available-for-sale
|
139 | 865 | 16,545 | 10,331 | 976 | 2,173 | 5,579 | 36,608 | ||||||||||||||||||||||||
|
Loans and
receivables
|
5 | — | — | — | 626 | — | 72 | 703 | ||||||||||||||||||||||||
|
Designated at
fair value
|
18 | — | — | 72 | 37 | 26 | 186 | 339 | ||||||||||||||||||||||||
|
Total
|
5,235 | 3,778 | 32,172 | 24,070 | 5,555 | 17,676 | 11,595 | 100,081 | ||||||||||||||||||||||||
|
Of
which:
|
||||||||||||||||||||||||||||||||
|
Level 2
(3)
|
5,171 | 3,598 | 32,172 | 24,070 | 4,929 | 15,926 | 11,393 | 97,259 | ||||||||||||||||||||||||
|
Level 3
(4)
|
59 | 180 | — | — | — | 1,750 | 130 | 2,119 | ||||||||||||||||||||||||
| 5,230 | 3,778 | 32,172 | 24,070 | 4,929 | 17,676 | 11,523 | 99,378 | |||||||||||||||||||||||||
Notes:
|
(1)
|
Carrying
values at 31 December 2007 above include ABN AMRO’s liquidity portfolio of
£18.6 billion of ABS which were part of shared assets then; this portfolio
was transferred to RBS Group Treasury in the first half of
2008.
|
|
(2)
|
Credit ratings
are based on those from rating agencies Standard & Poor’s (S&P),
Moody’s and Fitch and have been mapped onto S&P
scale.
|
|
(3)
|
Valuation is
based significantly on observable market data. Instruments in this
category are valued using:
|
|
|
–
|
quoted prices
for similar instruments or identical instruments in markets which are not
considered to be active; or
|
|
|
–
|
valuation
techniques where all the inputs that have a significant effect on the
valuation are directly or indirectly based on observable market
data.
|
|
(4)
|
Instruments in
this category have been valued using a valuation technique where at least
one input which could have a significant effect on the instrument’s
valuation is not based on observable market
data.
|
105
Business
review continued
Residential
mortgage-backed securities (audited)
Residential
mortgage backed securities (RMBS) are securities that represent an interest in a
portfolio of residential mortgages. Repayments made on the underlying mortgages
are used to make payments to holders of the RMBS. The risk of the RMBS will vary
primarily depending on the quality and geographic region of the underlying
mortgage assets and the credit enhancement of the securitisation
structure.
Several tranches of
notes are issued, each secured against the same portfolio of mortgages, but
providing differing levels of seniority to match the risk appetite of investors.
The most junior (or equity) notes will suffer early capital and interest losses
experienced by the referenced mortgage collateral, with each more senior note
benefiting from the protection provided by the subordinated notes below.
Additional credit enhancements may be provided to the holder of senior RMBS
notes, including guarantees over the value of the exposures, often provided by
monoline insurers.
The main categories
of mortgages that serve as collateral to RMBS held by the Group are described
below. As can be seen from the table below, the Group’s RMBS portfolio covers a
range of geographic locations and different categories are used to classify the
exposures depending on the geographical region of the underlying mortgage. These
categories are described below. The US market has more established definitions
of differing underlying mortgage quality and these are used as the basis for the
Group’s RMBS categorisation.
Sub-prime
mortgages: are loans to sub-prime borrowers typically having weakened
credit histories that include payment delinquencies, and potentially more severe
problems such as court judgements and bankruptcies. They may also display
reduced repayment capacity as measured by credit scores, high debt-to-income
ratios, or other criteria indicating heightened risk of default.
Non-conforming
mortgages (or ‘Alt-A’ used for US exposure) have a higher credit quality
than sub-prime mortgages, but lower than those prime borrowers. Within the US
mortgage industry, non-conforming mortgages are those that do not meet the
lending criteria for US agency mortgages (described below). For non-US
mortgages, judgement is applied in identifying loans with similar
characteristics to US non-conforming loans and also include self-certified
loans. Alt-A describes a category of mortgages in which lenders consider the
risk to be greater than prime mortgages though less than sub-prime. The offered
interest rate is usually representative of the associated risk
level.
Guaranteed
mortgages are mortgages that form part of a mortgage backed security
issuance by a government agency, or in the US an entity that benefits from a
guarantee (direct or indirect) provided by the US government. For US RMBS, this
category includes, amongst others, RMBS issued by Ginnie Mae, Freddie Mac and
Fannie Mae. For European RMBS, this includes mortgages guaranteed by the Dutch
Government.
Other prime
mortgages are those of a higher credit quality than non-conforming and
sub-prime mortgages, and exclude guaranteed mortgages.
Covered mortgage
bonds are debt instruments that have recourse to a pool of mortgage
assets, where investors have a preferred claim if a default occurs. These
underlying assets are segregated from the other assets held by the issuing
entity. These underlying assets are segregated from other assets held by the
issuing entity.
The tables below
show the Group’s RMBS net exposures and carrying values by measurement
classification, underlying asset type, the main geographical locations of the
property that the mortgage is secured against, and the year in which the
underlying mortgage was originated.
|
2008
|
2007
|
|||||||||||||||||||||||||||||||||||||||
|
Prime
|
Prime
|
|||||||||||||||||||||||||||||||||||||||
|
Sub-prime
|
Non
conforming
|
Guaranteed
(2)
|
Other(3)
|
Total
|
Sub-prime
|
Non
conforming
|
Guaranteed
(2)
|
Other(3)
|
Total
|
|||||||||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||||||||||
|
Net
exposure: (1)
|
||||||||||||||||||||||||||||||||||||||||
|
Held-for-trading
|
345 | 346 | 18,631 | 5,140 | 24,462 | 3,497 | 2,913 | 15,627 | 13,068 | 35,105 | ||||||||||||||||||||||||||||||
|
Available-for-sale
|
572 | 2,184 | 22,546 | 19,148 | 44,450 | 139 | 865 | 16,539 | 10,332 | 27,875 | ||||||||||||||||||||||||||||||
|
Loans and
receivables
|
527 | 1,482 | — | 569 | 2,578 | 5 | — | — | — | 5 | ||||||||||||||||||||||||||||||
|
Designated at
fair value
|
16 | — | — | 166 | 182 | 18 | — | — | 72 | 90 | ||||||||||||||||||||||||||||||
| 1,460 | 4,012 | 41,177 | 25,023 | 71,672 | 3,659 | 3,778 | 32,166 | 23,472 | 63,075 | |||||||||||||||||||||||||||||||
|
Carrying
values: (2)
|
||||||||||||||||||||||||||||||||||||||||
|
Held-for-trading
|
1,594 | 352 | 18,631 | 7,272 | 27,849 | 5,073 | 2,913 | 15,627 | 13,667 | 37,280 | ||||||||||||||||||||||||||||||
|
Available-for-sale
|
913 | 2,183 | 22,546 | 19,149 | 44,791 | 139 | 865 | 16,545 | 10,331 | 27,880 | ||||||||||||||||||||||||||||||
|
Loans and
receivables
|
566 | 1,482 | — | 570 | 2,618 | 5 | — | — | — | 5 | ||||||||||||||||||||||||||||||
|
Designated at
fair value
|
16 | — | — | 166 | 182 | 18 | — | — | 72 | 90 | ||||||||||||||||||||||||||||||
| 3,089 | 4,017 | 41,177 | 27,157 | 75,440 | 5,235 | 3,778 | 32,172 | 24,070 | 65,255 | |||||||||||||||||||||||||||||||
Notes:
|
(1)
|
Net exposures
reflect the effect of hedge protection purchased from monolines and other
counterparties but excludes the effect of counterparty credit valuation
adjustment. Carrying value is the amount recorded on the balance
sheet.
|
|
(2)
|
Prime
guaranteed exposures and carrying values
include:
|
|
|
·
|
£7.6 billion
(2007 – £6.0 billion) available-for-sale exposures guaranteed by the Dutch
government
|
|
|
·
|
£5.7 billion
(2007 – £5.0 billion) guaranteed by US government via Ginnie Mae of which
£0.5 billion (2007 – £0.3 billion) are
held-for-trading
|
|
|
·
|
£27.8 billion
(2007 – £21.0 million) effectively guaranteed by the US government via its
support for Freddie Mac and Fannie Mae of which £18.1 billon (2007 – £15.2
billion) are held-for-trading
|
|
(3)
|
Other prime
mortgage exposures include £10.0 billion (2007 – £7.8 billion) covered
European mortgage bonds.
|
106
Business
review continued
|
2008
|
2007
|
|||||||||||||||||||||||||||||||||||||||
|
Prime
|
Prime
|
|||||||||||||||||||||||||||||||||||||||
|
United
States
|
Sub-prime
£m
|
Alt-A
£m
|
Guaranteed
£m
|
Other
£m
|
Total
£m
|
Sub-prime
£m
|
Alt-A
£m
|
Guaranteed
£m
|
Other
£m
|
Total
£m
|
||||||||||||||||||||||||||||||
|
Net
exposure
|
||||||||||||||||||||||||||||||||||||||||
|
Held-for-trading
|
302 | 346 | 18,577 | 968 | 20,193 | 2,953 | 2,189 | 15,502 | 1,419 | 22,063 | ||||||||||||||||||||||||||||||
|
Available-for-sale
|
53 | 760 | 14,887 | 4,409 | 20,109 | — | 640 | 10,504 | 1,359 | 12,503 | ||||||||||||||||||||||||||||||
|
Loans and
receivables
|
3 | — | — | 215 | 218 | — | — | — | — | — | ||||||||||||||||||||||||||||||
| 358 | 1,106 | 33,464 | 5,592 | 40,520 | 2,953 | 2,829 | 26,006 | 2,778 | 34,566 | |||||||||||||||||||||||||||||||
|
Carrying
values
|
||||||||||||||||||||||||||||||||||||||||
|
Held-for-trading
|
1,427 | 352 | 18,577 | 1,043 | 21,399 | 4,277 | 2,189 | 15,502 | 1,419 | 23,387 | ||||||||||||||||||||||||||||||
|
Available-for-sale
|
394 | 760 | 14,887 | 4,409 | 20,450 | — | 640 | 10,504 | 1,359 | 12,503 | ||||||||||||||||||||||||||||||
|
Loans and
receivables
|
3 | — | — | 215 | 218 | — | — | — | — | — | ||||||||||||||||||||||||||||||
| 1,824 | 1,112 | 33,464 | 5,667 | 42,067 | 4,277 | 2,829 | 26,006 | 2,778 | 35,890 | |||||||||||||||||||||||||||||||
|
Of which
originated in:
|
||||||||||||||||||||||||||||||||||||||||
|
– 2004 and
earlier
|
474 | 122 | 5,534 | 709 | 6,839 | 746 | 165 | 2,532 | 406 | 3,849 | ||||||||||||||||||||||||||||||
|
–
2005
|
259 | 718 | 6,014 | 2,675 | 9,666 | 1,065 | 437 | 3,209 | 275 | 4,986 | ||||||||||||||||||||||||||||||
|
–
2006
|
718 | 115 | 1,689 | 614 | 3,136 | 1,734 | 1,188 | 5,557 | 1,017 | 9,496 | ||||||||||||||||||||||||||||||
|
– 2007 and
later
|
373 | 157 | 20,227 | 1,669 | 22,426 | 732 | 1,039 | 14,708 | 1,080 | 17,559 | ||||||||||||||||||||||||||||||
| 1,824 | 1,112 | 33,464 | 5,667 | 42,067 | 4,277 | 2,829 | 26,006 | 2,778 | 35,890 | |||||||||||||||||||||||||||||||
|
2008
|
2007
|
|||||||||||||||||||||||||||||||
|
United
Kingdom
|
Sub-prime
£m
|
Non
conforming
£m
|
Prime
£m
|
Total
£m
|
Sub-prime
£m
|
Non
conforming £m
|
Prime
£m
|
Total
£m
|
||||||||||||||||||||||||
|
Net
exposure
|
||||||||||||||||||||||||||||||||
|
Held-for-trading
|
33 | — | 258 | 291 | 150 | 724 | 2,411 | 3,285 | ||||||||||||||||||||||||
|
Available-for-sale
|
154 | 1,423 | 3,446 | 5,023 | 7 | 157 | 931 | 1,095 | ||||||||||||||||||||||||
|
Loans and
receivables
|
205 | 1,482 | 118 | 1,805 | 5 | — | — | 5 | ||||||||||||||||||||||||
|
Designated at
fair value
|
16 | — | 166 | 182 | 18 | — | 72 | 90 | ||||||||||||||||||||||||
| 408 | 2,905 | 3,988 | 7,301 | 180 | 881 | 3,414 | 4,475 | |||||||||||||||||||||||||
|
Carrying
values:
|
||||||||||||||||||||||||||||||||
|
Held-for-trading
|
70 | — | 1,345 | 1,415 | 150 | 724 | 2,740 | 3,614 | ||||||||||||||||||||||||
|
Available-for-sale
|
154 | 1,423 | 3,446 | 5,023 | 7 | 157 | 935 | 1,099 | ||||||||||||||||||||||||
|
Loans and
receivables
|
205 | 1,482 | 118 | 1,805 | 5 | — | — | 5 | ||||||||||||||||||||||||
|
Designated at
fair value
|
16 | — | 166 | 182 | 18 | — | 72 | 90 | ||||||||||||||||||||||||
| 445 | 2,905 | 5,075 | 8,425 | 180 | 881 | 3,747 | 4,808 | |||||||||||||||||||||||||
|
Of which
originated in:
|
||||||||||||||||||||||||||||||||
|
– 2004 and
earlier
|
72 | — | 815 | 887 | 13 | 22 | 911 | 946 | ||||||||||||||||||||||||
|
–
2005
|
42 | 652 | 1,000 | 1,694 | 1 | 10 | 512 | 523 | ||||||||||||||||||||||||
|
–
2006
|
209 | 756 | 2,308 | 3,273 | 49 | 110 | 1,256 | 1,415 | ||||||||||||||||||||||||
|
– 2007 and
later
|
122 | 1,497 | 952 | 2,571 | 117 | 739 | 1,068 | 1,924 | ||||||||||||||||||||||||
| 445 | 2,905 | 5,075 | 8,425 | 180 | 881 | 3,747 | 4,808 | |||||||||||||||||||||||||
107
Business
review continued
|
2008
|
2007
|
|||||||||||||||||||||||||||||||||||||||
|
Prime
|
Prime
|
|||||||||||||||||||||||||||||||||||||||
|
Europe
|
Sub-prime
£m
|
Guaranteed
£m
|
Covered
£m
|
Other
£m
|
Total
£ml
|
Sub-prime
£m
|
Guaranteed
£m
|
Covered
£m
|
Other
£m
|
Total
£m
|
||||||||||||||||||||||||||||||
|
Net
exposure
|
||||||||||||||||||||||||||||||||||||||||
|
Held-for-trading
|
10 | — | — | 3,898 | 3,908 | 321 | — | — | 9,157 | 9,478 | ||||||||||||||||||||||||||||||
|
Available-for-sale
|
57 | 7,642 | 10,040 | 1,106 | 18,845 | — | 6,012 | 7,822 | 57 | 13,891 | ||||||||||||||||||||||||||||||
|
Loans and
securities
|
313 | — | — | 208 | 521 | — | — | — | — | — | ||||||||||||||||||||||||||||||
| 380 | 7,642 | 10,040 | 5,212 | 23,274 | 321 | 6,012 | 7,822 | 9,214 | 23,369 | |||||||||||||||||||||||||||||||
|
Carrying
values
|
||||||||||||||||||||||||||||||||||||||||
|
Held-for-trading
|
30 | — | — | 4,839 | 4,869 | 324 | — | — | 9,429 | 9,753 | ||||||||||||||||||||||||||||||
|
Available-for-sale
|
57 | 7,642 | 10,040 | 1,107 | 18,846 | — | 6,012 | 7,822 | 57 | 13,891 | ||||||||||||||||||||||||||||||
|
Loans and
securities
|
352 | — | — | 208 | 560 | — | — | — | — | — | ||||||||||||||||||||||||||||||
| 439 | 7,642 | 10,040 | 6,154 | 24,275 | 324 | 6,012 | 7,822 | 9,486 | 23,644 | |||||||||||||||||||||||||||||||
|
Of which
originated in:
|
||||||||||||||||||||||||||||||||||||||||
|
– 2004 and
earlier
|
48 | 418 | 702 | 954 | 2,122 | 81 | 367 | 577 | 1,395 | 2,420 | ||||||||||||||||||||||||||||||
|
–
2005
|
17 | 1,165 | 2,993 | 1,090 | 5,265 | 33 | 1,117 | 2,160 | 1,946 | 5,256 | ||||||||||||||||||||||||||||||
|
–
2006
|
148 | 2,059 | 4,466 | 2,466 | 9,139 | 63 | 1,780 | 3,801 | 3,897 | 9,541 | ||||||||||||||||||||||||||||||
|
– 2007 and
later
|
226 | 4,000 | 1,879 | 1,644 | 7,749 | 147 | 2,748 | 1,284 | 2,248 | 6,427 | ||||||||||||||||||||||||||||||
| 439 | 7,642 | 10,040 | 6,154 | 24,275 | 324 | 6,012 | 7,822 | 9,486 | 23,644 | |||||||||||||||||||||||||||||||
In other
geographical regions not covered above, RMBS portfolios included:
|
·
|
net RMBS
exposures of £314 million (2007 – £205 million) comprising:
held-for-trading nil (2007 – £73 million); available-for-sale £308 million
(2007 – £132 million) and loans and receivables £6 million (2007 –
nil).
|
|
·
|
RMBS carrying
values of £381 million (2007 – £454 million) comprising: held-for-trading
£67 million (2007 – £322 million); available-for-sale £308 million (2007 –
£132) and loans and receivables £6 million (2007 –
nil).
|
|
·
|
RMBS
non-conforming available-for-sale net exposures and carry values of nil
(2007 – £68 million).
|
108
Business
review continued
The Group’s largest
concentration of RMBS assets relate to a portfolio of US agency asset backed
securities comprising mainly current year vintage positions of £33.5 billion at
31 December 2008 (2007: £26.0 billion). Due to the US government backing
explicit or implicit in these securities, the counterparty credit risk exposure
is low. The losses arising from the movements in fair value recorded for these
assets were comparatively lower than other RMBS. Financial markets and economic
conditions have been extremely difficult in the US throughout 2008, particularly
in the last quarter. Credit conditions have deteriorated and financial markets
have experienced widespread illiquidity and elevated levels of volatility due to
forced de-leveraging. Transaction activity in the securities portfolio has been
reduced due to general market illiquidity. Residential mortgages have been
affected by the stress that consumers experienced from depreciating house
prices, rising unemployment and tighter credit conditions, resulting in higher
levels of delinquencies and foreclosures. In particular, the deteriorating
economy and financial markets have negatively impacted the valuation, liquidity,
and credit quality of private-label securities.
Citizens maintains
an available-for-sale investment securities portfolio to provide high-quality
collateral to provide a liquidity buffer and to enhance earnings. The size of
the portfolio has been relatively stable through 2008, but both the absolute and
relative size (% of earning assets) declined in 2006-2007. The portfolio
comprises high credit quality mortgage-backed securities, to ensure both
pledgeability and liquidity. The U.S. Government guarantees on MBS, whether
explicit or implicit, put most of the portfolio in a secure credit position. The
non-agency MBS holdings derive credit support in two ways. Firstly, there is
senior and subordinated structuring, and Citizens hold only the most senior
tranches. Secondly, there is high quality supporting loan collateral. The
collateral quality is evidenced (a) by the vintages, with 82% issued in 2005 and
earlier, (b) by the borrower’s weighted loan to value (LTV) ratio of 65%, and
(c) by the borrower’s weighted-average FICO score of 734.
£7.6 billion (2007
– £6.0 billion) of the RMBS exposure consists of available-for-sale portfolio of
European RMBS in Group Treasury, referencing primarily Dutch and Spanish
government-backed loans, and accordingly the quality of these assets has held up
relative to other RMBS types. A further £10.0 billion (2007 – £7.8 billion)
European RMBS comprised covered mortgage bonds.
The Group has other
portfolios of RMBS from secondary trading activities, warehoused positions
previously acquired with the intention of further securitisation and a portfolio
of assets from the unwinding of a securities arbitrage conduit. This conduit was
established to benefit from the margin between the assets purchased and the
notes issued. The majority of these held-for-trading RMBS have been grouped
together for management purposes.
Some of these
assets (£7.0 billion) were reclassified from held-for-trading category to the
loans and receivables (£1.8 billion) and available-for-sale categories during
the year (£5.2 billion).
Overall, the Group
has recognised significant fair value losses on RMBS assets during the year due
to reduced market liquidity and deteriorating credit ratings of these assets.
The Group has reduced its exposure to RMBS predominantly through fair value
hedges and asset sales during the year. These decreases were partially offset by
the weakening of sterling relative to the US dollar and euro.
Commercial
mortgage-backed securities (audited)
Commercial
mortgages backed securities (CMBS) are securities that are secured by mortgage
loans on commercial land and buildings. The securities are structured in the
same way as an RMBS but typically the underlying assets referenced will be of
greater individual value. The performance of the securities are highly dependent
upon the sector of commercial property referenced and the geographical
region.
The Group
accumulated CMBS for the purpose of securitisation and secondary trading. The
largest holding of CMBS arose as a result of the Group’s purchase of senior
tranches in mezzanine and high grade CMBS structures from third parties. These
securities are predominantly hedged with monoline insurers. As a result, the
Group’s risk is limited to the counterparty credit risk exposure to the hedge.
The Group also holds CMBS arising from securitisations of European commercial
mortgages originated by the Group.
The following table
shows the composition of the Group’s holdings of CMBS portfolios.
|
2008
|
2007
|
|||||||||||||||||||||||||||||||||||||||
|
US
£m
|
UK
£m
|
Europe
£m
|
ROW(1)
£m
|
Total
£m
|
US
£m
|
UK
£m
|
Europe
£m
|
ROW
£m
|
Total
£m
|
|||||||||||||||||||||||||||||||
|
Office
|
435 | 938 | 402 | — | 1,775 | 599 | 534 | — | — | 1,133 | ||||||||||||||||||||||||||||||
|
Mixed
use
|
32 | 106 | 1,048 | 45 | 1,231 | — | 73 | 192 | — | 265 | ||||||||||||||||||||||||||||||
|
Healthcare
|
805 | 143 | — | — | 948 | 1,210 | — | — | — | 1,210 | ||||||||||||||||||||||||||||||
|
Retail
|
295 | 43 | 17 | 48 | 403 | 398 | 13 | — | — | 411 | ||||||||||||||||||||||||||||||
|
Industry
|
24 | 13 | 81 | — | 118 | 61 | — | — | 100 | 161 | ||||||||||||||||||||||||||||||
|
Multi-family
|
40 | — | 49 | — | 89 | 48 | — | — | — | 48 | ||||||||||||||||||||||||||||||
|
Leisure
|
— | 76 | — | — | 76 | — | — | — | — | — | ||||||||||||||||||||||||||||||
|
Hotel
|
40 | 35 | — | — | 75 | 36 | — | — | — | 36 | ||||||||||||||||||||||||||||||
|
Other
|
474 | 41 | 49 | 48 | 612 | 932 | 530 | 765 | 64 | 2,291 | ||||||||||||||||||||||||||||||
| 2,145 | 1,395 | 1,646 | 141 | 5,327 | 3,284 | 1,150 | 957 | 164 | 5,555 | |||||||||||||||||||||||||||||||
Note:
|
(1)
|
Rest of the
World.
|
109
Business
review continued
Asset-backed
collateralised debt and loan obligations (audited)
Collateralised debt
obligations are securities whose performance is dependant on a portfolio of
referenced underlying securitised assets. The referenced assets generally
consist of ABS, but may also include other classes of assets. Collateralised
loan obligations represent securities in special purpose entities, the assets of
which are primarily cash flows from underlying leveraged loans.
The Group’s ABS CDO
and CLO net exposures comprised:
| 2008 £m |
2007 £m |
|||||||
|
Super senior
CDOs
|
1,375 | 3,834 | ||||||
|
Other
CDOs
|
1,465 | 1,569 | ||||||
|
CLOs
|
3,443 | 4,082 | ||||||
| 6,283 | 9,485 |
The Group’s CDO
exposures comprise CDOs structured by the Group from 2003 to 2007 that were
unable to be sold to third parties due to prevailing illiquid markets with net
exposures of £1.4 billion (2007 – £3.8 billion), as well as other CDO net
exposures of £1.5 billion (2007 – £1.6 billion) purchased from third parties
some of which are fully hedged through CDSs with other banks or monoline
insurers.
110
Business
review continued
Super
senior CDOs
Super
senior CDOs represent the most senior positions in a CDO, having subordination
instruments (usually represented by a combination of equity, mezzanine and
senior notes) which absorb losses before the super senior note is affected.
Losses will only be suffered by the super senior note holders after a certain
threshold of defaults of the underlying reference assets has been reached. The
threshold is usually referred to in percentage terms of defaults of the
remaining pool, and known as the ‘attachment point’. These super senior
instruments carry an AAA rating at point of origination, or are senior to other
AAA rated notes in the same structure. The level of defaults occurring on recent
vintage sub-prime mortgages and other asset classes has been higher than
originally expected. This has meant that the subordinate positions have
diminished significantly in value, credit quality and rating and, as a result,
the super senior tranches of the CDOs have a higher probability of suffering
losses than at origination. The ratings of the majority of the underlying
collateral are now below investment grade.
Depending on the
quality of the underlying reference assets at issuance, the super senior
tranches will be either classified as high grade or mezzanine. The majority of
the Group’s total exposure relates to high grade super senior tranches of ABS
CDOs. This is based upon the original classification of the deals derived from
the underlying reference asset rating quality. The table below summarises the
carrying amounts and net exposures after hedge protection of the Group’s super
senior CDOs as at 31 December 2008. The collateral rating is determined with
reference to S&P ratings where available. Where S&P ratings are not
available the lower of Moody’s and Fitch ratings have been used.
|
2008
|
2007
|
|||||||||||||||||||||||
|
High
grade
|
Mezzanine
|
Total
|
High
grade
|
Mezzanine
|
Total
|
|||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||
|
Gross
exposure
|
7,673 | 3,720 | 11,393 | 6,420 | 3,040 | 9,460 | ||||||||||||||||||
|
Fair value
adjustment
|
(3,423 | ) | (691 | ) | (4,114 | ) | (3,347 | ) | (1,250 | ) | (4,597 | ) | ||||||||||||
| 4,250 | 3,029 | 7,279 | 3,073 | 1,790 | 4,863 | |||||||||||||||||||
|
Write-downs
on net open position
|
(3,019 | ) | (2,885 | ) | (5,904 | ) | (492 | ) | (537 | ) | (1,029 | ) | ||||||||||||
|
Net exposure
after hedges
|
1,231 | 144 | 1,375 | 2,581 | 1,253 | 3,834 | ||||||||||||||||||
|
%
|
%
|
%
|
%
|
%
|
%
|
|||||||||||||||||||
|
Average
price
|
29 | 6 | 21 | 84 | 70 | 79 | ||||||||||||||||||
|
Underlying
RMBS sub-prime assets (origination)
|
69 | 91 | 79 | 69 | 91 | 79 | ||||||||||||||||||
|
Of
which originated in:
|
||||||||||||||||||||||||
|
2005 and
earlier
|
24 | 23 | 24 | 24 | 23 | 24 | ||||||||||||||||||
|
2006
|
28 | 69 | 46 | 28 | 69 | 46 | ||||||||||||||||||
|
2007
|
48 | 8 | 30 | 48 | 8 | 30 | ||||||||||||||||||
|
Collateral
by rating at reporting date: (2)
|
||||||||||||||||||||||||
|
AAA
|
14 | — | 9 | 36 | — | 23 | ||||||||||||||||||
|
BBB- and
above
|
35 | 5 | 24 | 62 | 31 | 51 | ||||||||||||||||||
|
Non-investment
grade
|
51 | 95 | 67 | 2 | 69 | 26 | ||||||||||||||||||
|
Attachment
point (3)
|
29 | 46 | 36 | 29 | 46 | 35 | ||||||||||||||||||
|
Attachment
point post write down
|
77 | 97 | 88 | 40 | 62 | 50 | ||||||||||||||||||
Notes:
|
(1)
|
The above
table includes data for two trades liquidated in the last quarter of 2008
to provide consistency with
comparatives.
|
|
(2)
|
Credit ratings
are based on those from rating agencies Standard & Poor’s (S&P),
Moody’s and Fitch and have been mapped onto S&P
scale.
|
|
(3)
|
Attachment
point is the minimum level of losses in a portfolio which a tranche is
exposed to, as a percentage of the total notional size of the portfolio.
For example, a 5 – 10% tranche has an attachment point of 5% and a
detachment point of 10%. When the accumulated loss of the reference pool
is less than 5% of the total initial notional of the pool, the tranche
will not be affected. However, when the loss has exceeded 5%, any further
losses will be deducted from the tranche’s notional principal until
detachment point, 10%, is reached.
|
The
change in net exposure during the year is analysed below.
|
High
grade
£m
|
Mezzanine
£m
|
Total
£m
|
||||||||||
|
Net exposure
at 1 January 2008
|
2,581 | 1,253 | 3,834 | |||||||||
|
Net income
statement effect
|
(1,836 | ) | (1,140 | ) | (2,976 | ) | ||||||
|
Foreign
exchange and other movements
|
486 | 31 | 517 | |||||||||
|
Net exposure
at 31 December 2008
|
1,231 | 144 | 1,375 | |||||||||
111
Business
review continued
High
grade super senior exposures
As shown
in the table below, the majority of the Group’s high grade super senior
exposures, represent securities retained in CDO structures originated by the
Group.
|
Gross
exposure
£m
|
||||
|
Group
originated deals
|
6,776 | |||
|
Third party
structures
|
897 | |||
| 7,673 | ||||
At
origination, the reference assets of the high grade structures predominantly
comprised investment grade tranches of sub-prime residential mortgage
securitisations along with other senior tranches of some combination of ABS
assets, including prime and Alt-A RMBS, CMBS, trust preferred ABS, student loan
backed ABS and CDO assets. The underlying assets referenced by these super
senior securities are primarily more recent vintages (the year the underlying
loan was originated), with 48% being 2007. Generally, loans with more recent
vintages carry greater discounts, reflecting the market perception of greater
default levels than on earlier loan vintages.
The fair value of
these assets has fallen significantly during the period, representing the
decline in performance in the underlying reference assets and the lack of an
active market for the securities. Some of the Group’s holdings (£3.4 billion)
have been hedged with monoline counterparties (see page 114).
Mezzanine
super senior CDOs
The tranches of
CDOs have suffered a greater level of price decline than high grade tranches due
to the relative credit quality of the underlying assets. As shown in the table
below, the majority of the Group’s mezzanine super senior net exposures
represent securities retained in CDO structures originated by the
Group.
|
Gross
exposure
£m
|
||||
|
Group
originated deals
|
3,565 | |||
|
Third party
structures
|
155 | |||
| 3,720 | ||||
112
Business
review continued
Other
CDOs
The net
exposure of the Group’s other senior CDOs was £1.5 billion after hedge
protection with bank or monoline counterparties. The unhedged exposures comprise
CDOs representing smaller positions with various types of underlying collateral,
rating and vintage characteristics. The positions hedged with derivative
protection from banks include a number of positions referencing early vintages
of RMBS and other ABS assets. The Group therefore has no net exposure to certain
CDOs before credit valuation adjustment. Due to the early vintage, the assets
underlying these structures have not deteriorated to the same degree as the more
recently issued securities. The protection purchased is from banks as opposed to
monoline insurers and the credit valuation adjustment on banks is less than on
monoline insurers.
Additionally, the
Group has one exposure that, while not structured as a super senior security,
incorporates similar risk characteristics. The exposure results from options
sold to a third-party conduit structure on a portfolio of ABS. The Group assumed
the risk of these securities only after the first loss protection of had been
eroded. The Group also has protection purchased against the remainder of this
exposure through a CDS purchased from a monoline insurer.
The Group holds
other subordinated note positions in CDO vehicles which have experienced
significant reductions in value since inception. The majority of these positions
are junior notes that have been fully written down by the Group with no ongoing
exposure remaining at the balance sheet date.
CLOs
Collateralised loan
obligations represent securities in special purpose entities (SPEs), the assets
of which are primarily cash flows from underlying leveraged loans.
The Group has CLO
exposures resulting from a number of trading activities. They consist of
exposures retained by the Group and from notes purchased from third-party
structures. The Group holds super senior securities in two CLO structures which
were originated by the Group in 2005 and 2007. The underlying collateral of
these structures predominantly references leveraged loans.
£2.3 billion of
these assets were reclassified from the held-for-trading category to the loans
and receivables (£0.8 billion) and available-for-sale (£1.5 billion) categories
during the year.
Other
asset backed securities (audited)
Other assets backed
securities are securities issued from securitisation vehicles, similar to those
in RMBS and CMBS structures, which reference cashflow generating assets other
than mortgages. The wide variety of referenced underlying assets result in
diverse asset performance levels.
The Group has
accumulated these assets from a range of trading and funding activities.
The
Group’s other asset-backed securities (carrying value) by underlying asset type
and geographical region are shown below.
|
2008
|
2007
|
|||||||||||||||||||||||||||||||||||||||
|
US
£m
|
UK
£m
|
Europe
£m
|
ROW
£m
|
Total
£m
|
US
£m
|
UK
£m
|
Europe
£m
|
ROW
£m
|
Total
£m
|
|||||||||||||||||||||||||||||||
|
Covered
bonds
|
— | — | 3,301 | — | 3,301 | — | — | 2,895 | — | 2,895 | ||||||||||||||||||||||||||||||
|
Auto
|
97 | 29 | 466 | 13 | 605 | 156 | 36 | 108 | 13 | 313 | ||||||||||||||||||||||||||||||
|
Equipment
|
15 | — | — | 16 | 31 | 60 | 20 | 20 | 7 | 107 | ||||||||||||||||||||||||||||||
|
Other
consumer
|
956 | 428 | 118 | 729 | 2,231 | 384 | 17 | 56 | 6 | 463 | ||||||||||||||||||||||||||||||
|
Utilities and
energy
|
47 | 19 | 48 | 143 | 257 | 99 | 35 | 34 | 13 | 181 | ||||||||||||||||||||||||||||||
|
Aircraft
leases
|
459 | 24 | — | 273 | 756 | 287 | 36 | 36 | 141 | 500 | ||||||||||||||||||||||||||||||
|
Other
leases
|
1 | 525 | 455 | — | 981 | 378 | 135 | 133 | 50 | 696 | ||||||||||||||||||||||||||||||
|
Trade
receivables
|
15 | 8 | — | — | 23 | 68 | 24 | 24 | 9 | 125 | ||||||||||||||||||||||||||||||
|
Film /
entertainment
|
134 | — | — | — | 134 | 84 | 30 | 29 | 11 | 154 | ||||||||||||||||||||||||||||||
|
Student
loans
|
953 | — | — | — | 953 | 629 | 32 | 32 | 12 | 705 | ||||||||||||||||||||||||||||||
|
Other
|
905 | 588 | 711 | 263 | 2,467 | 2,797 | 1,120 | 1,200 | 339 | 5,456 | ||||||||||||||||||||||||||||||
| 3,582 | 1,621 | 5,099 | 1,437 | 11,739 | 4,942 | 1,485 | 4,567 | 601 | 11,595 | |||||||||||||||||||||||||||||||
113
Business
review continued
The covered bonds
comprise asset-backed securities issued by several Spanish financial
institutions. These securities benefit from additional credit enhancement
provided by the issuing institutions. The other major asset types that increased
since 2007 include other consumer loans by £1.8 billion, leases by £0.5 billion
and student loans by £0.2 billion. These and other increases were driven by the
weakening of sterling against the US dollar and euro.
Other
mortgage-related exposures (unaudited)
The Group’s whole
loans and warehouse facilities collateralised by mortgages are analysed below.
These facilities primarily relate to UK and European mortgages with US mortgages
representing £260 million of whole loans, of which more than 75% comprised prime
mortgages.
|
2008
|
2007
|
|||||||||||||||
|
Whole
loans
£m
|
Warehouse
facilities
£m
|
Whole
loans
£m
|
Warehouse
facilities
£m
|
|||||||||||||
|
Prime
|
1,905 | 1,731 | 453 | 575 | ||||||||||||
|
Commercial
|
1,262 | 409 | 2,200 | 900 | ||||||||||||
|
Non-conforming
|
1,396 | 1,019 | 57 | 1,445 | ||||||||||||
|
Sub-prime
|
27 | — | 97 | — | ||||||||||||
| 4,590 | 3,159 | 2,807 | 2,920 | |||||||||||||
Counterparty
valuation adjustments (audited)
Credit
valuation adjustments
Credit valuation
adjustments (CVAs) represent an estimate of the adjustment to fair value that a
market participant would make to incorporate the credit risk inherent in
counterparty derivative exposures. During 2008, as credit spreads have widened,
there has been a significant increase in the CVA as set out in the table
below.
| 2008 £m |
2007 £m |
|||||||
|
Monoline
insurers
|
5,988 | 862 | ||||||
|
CDPCs
|
1,311 | 44 | ||||||
|
Other
counterparties
|
1,738 | 263 | ||||||
|
Total CVA
adjustments
|
9,037 | 1,169 |
The widening of
credit spreads of corporate and financial institution counterparties during the
year contributed to a significant increase in the level of CVA adjustments
recorded across all counterparties particularly monoline insurers and credit
derivative product companies.
The monoline
insurer CVA is calculated on a trade-by-trade basis, and is derived using market
observable monoline credit spreads. The majority of the
monoline CVA is taken against credit derivatives hedging exposures to ABS. The
CDPC CVA is calculated using a similar approach. However, in the absence of
market observable credit spreads, the cost of hedging the counterparty risk is
estimated by analysing the underlying trades and the cost of hedging expected
default losses in excess of the capital available in each vehicle.
The CVA for all
other counterparties, including those in respect of derivatives with banks, is
calculated either on a trade-by-trade basis, reflecting the estimated cost of
hedging the risk through credit derivatives, or on a portfolio basis reflecting
an estimate of the amount a third party would charge to assume the
risk.
Monoline
insurers
The
Group has purchased protection from monoline insurers, mainly against specific
ABS, CDOs and CLOs. Monoline insurers are entities which specialise in providing
credit protection against the notional and interest cash flows due to the
holders of debt instruments in the event of default by the debt security
counterparty. This protection is typically held in the form of derivatives such
as credit default swaps (CDS) referencing the underlying exposures held by the
Group.
During the year the
market value of securities protected by monoline insurers continued to decline
as markets deteriorated. As the fair value of the protected assets declined, the
fair value of the CDS protection from monoline insurers increased. As the
monoline insurers had concentrated their exposures to credit market risks, their
perceived credit quality has deteriorated as concerns increased regarding the
ability of these counterparties to meet their contractual obligations. This
resulted in increased levels of CVA being recorded on the protection
asset.
The change in
exposure during the year has been driven by the increased value of purchased
derivative protection and the strengthening of the US dollar against sterling as
significantly all of the exposures are US dollar denominated. The combination of
greater exposure and widening credit spreads has increased the level of CVA
required. Towards the end of the year the Group reached settlement on a group of
contracts with one monoline counterparty, thereby reducing the overall
exposure.
The tables below
analyse the Group’s holdings of CDS with monoline counterparties.
| 2008 £m |
2007 £m |
|||||||
|
Gross
exposure to monolines
|
11,581 | 3,409 | ||||||
|
Hedges with
bank counterparties
|
(789 | ) | — | |||||
|
Credit
valuation adjustment
|
(5,988 | ) | (862 | ) | ||||
|
Net exposure
to monolines
|
4,804 | 2,547 |
114
Business
review continued
The change in CVA
is analysed in the table below:
| £m | ||||
|
At 1 January
2008
|
862 | |||
|
CVA realised
in 2008
|
(1,737 | ) | ||
|
Net benefit
on counterparty hedges
|
304 | |||
|
Foreign
currency movements
|
1,086 | |||
|
Net benefit
on reclassified debt securities
|
1,916 | |||
|
Net income
statement effect
|
3,557 | |||
|
Balance at 31
December 2008
|
5,988 |
|
2008
|
2007
|
|||||||||||||||||||||||||||||||
|
Notional
amount
protected
assets
£m
|
Fair
value
protected
assets
£m
|
Gross
exposure
£m
|
Credit
valuation
adjustment
£m
|
Notional
amount
protected
assets
£m
|
Fair
value protected assets
£m
|
Gross
exposure
£m
|
Credit
valuation
adjustment
£m
|
|||||||||||||||||||||||||
|
AAA/AA
rated
|
||||||||||||||||||||||||||||||||
|
CDOs
|
— | — | — | — | 4,976 | 3,006 | 1,970 | 150 | ||||||||||||||||||||||||
|
RMBS
|
3 | 2 | 1 | — | 73 | 73 | — | — | ||||||||||||||||||||||||
|
CMBS
|
613 | 496 | 117 | 51 | 3,731 | 3,421 | 310 | 34 | ||||||||||||||||||||||||
|
CLOs
|
6,506 | 4,882 | 1,624 | 718 | 9,941 | 9,702 | 239 | 44 | ||||||||||||||||||||||||
|
Other
ABS
|
1,548 | 990 | 558 | 251 | 4,553 | 4,388 | 165 | 14 | ||||||||||||||||||||||||
|
Other
|
267 | 167 | 100 | 47 | 622 | 516 | 106 | 1 | ||||||||||||||||||||||||
| 8,937 | 6,537 | 2,400 | 1,067 | 23,896 | 21,106 | 2,790 | 243 | |||||||||||||||||||||||||
|
A/BBB
rated
|
||||||||||||||||||||||||||||||||
|
CDO of
RMBS
|
5,385 | 1,363 | 4,022 | 1,938 | — | — | — | — | ||||||||||||||||||||||||
|
RMBS
|
90 | 63 | 27 | 10 | — | — | — | — | ||||||||||||||||||||||||
|
CMBS
|
4,236 | 1,892 | 2,344 | 1,378 | — | — | — | — | ||||||||||||||||||||||||
|
CLOs
|
6,009 | 4,523 | 1,486 | 778 | — | — | — | — | ||||||||||||||||||||||||
|
Other
ABS
|
910 | 433 | 477 | 243 | — | — | — | — | ||||||||||||||||||||||||
|
Other
|
265 | 122 | 143 | 79 | — | — | — | — | ||||||||||||||||||||||||
| 16,895 | 8,396 | 8,499 | 4,426 | — | — | — | — | |||||||||||||||||||||||||
|
Sub-investment
grade
|
||||||||||||||||||||||||||||||||
|
CDO of
RMBS
|
394 | 32 | 362 | 263 | 918 | 453 | 465 | 465 | ||||||||||||||||||||||||
|
RMBS
|
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
|
CMBS
|
— | — | — | — | — | — | — | — | ||||||||||||||||||||||||
|
CLOs
|
350 | 268 | 82 | 60 | — | — | — | — | ||||||||||||||||||||||||
|
Other
ABS
|
1,208 | 1,037 | 171 | 123 | — | — | — | — | ||||||||||||||||||||||||
|
Other
|
237 | 169 | 68 | 49 | 154 | — | 154 | 154 | ||||||||||||||||||||||||
| 2,189 | 1,506 | 683 | 495 | 1,072 | 453 | 619 | 619 | |||||||||||||||||||||||||
|
Total
|
||||||||||||||||||||||||||||||||
|
CDO of
RMBS
|
5,779 | 1,395 | 4,384 | 2,201 | 5,894 | 3,459 | 2,435 | 615 | ||||||||||||||||||||||||
|
RMBS
|
93 | 65 | 28 | 10 | 73 | 73 | — | — | ||||||||||||||||||||||||
|
CMBS
|
4,849 | 2,388 | 2,461 | 1,429 | 3,731 | 3,421 | 310 | 34 | ||||||||||||||||||||||||
|
CLOs
|
12,865 | 9,673 | 3,192 | 1,556 | 9,941 | 9,702 | 239 | 44 | ||||||||||||||||||||||||
|
Other
ABS
|
3,666 | 2,460 | 1,206 | 617 | 4,553 | 4,388 | 165 | 14 | ||||||||||||||||||||||||
|
Other
|
769 | 458 | 311 | 175 | 776 | 516 | 260 | 155 | ||||||||||||||||||||||||
| 28,021 | 16,439 | 11,582 | 5,988 | 24,968 | 21,559 | 3,409 | 862 | |||||||||||||||||||||||||
The Group also has
indirect exposure through wrapped securities and assets which have an intrinsic
credit enhancement from a monoline insurer. These securities are traded with the
benefit of this credit enhancement and therefore any deterioration in the credit
rating of the monoline is reflected in the market prices for these
assets.
115
Business
review continued
Credit
derivative product companies
A
credit derivative product company (CDPC) is a company that sells protection on
credit derivatives. CDPCs are similar to monoline insurers. However, unlike
monoline insurers, they are not regulated as insurers.
The Group has £4.8
billion of exposures with CDPCs which predominatly relates to tranched credit
derivatives. Tranched credit derivatives have exposure to certain default losses
that arise in reference portfolio of assets. The Group has bought protection on
tranched credit derivatives from CDPCs. The reference portfolios of assets are
predominantly investment grade loans and bonds and on average, the trades have
exposure to total portfolio default losses that exceed 16% of the portfolio
notional up to a level of 50%. CDS spreads have widened and credit protection
has become more valuable and the gross exposure to CDPC counterparties has
increased. At the same time, the credit quality of CDPC counterparties has
declined, reflecting the negative impact of their concentrated credit risk in a
declining market. As a result CVA adjustments taken against exposures to these
counterparties have increased significantly as described above.
The tables below
present a comparison of the protected assets and the fair value and CVA of the
CDPC protection.
|
2008
|
2007
|
|||||||
| £m | £m | |||||||
|
Gross
exposure to CDPCs
|
4,776 | 863 | ||||||
|
Credit
valuation adjustment
|
(1,311 | ) | (44 | ) | ||||
|
Net exposure
to CDPCs
|
3,465 | 819 | ||||||
|
2008
|
2007
|
|||||||||||||||||||||||||||||||
|
Notional
amount
protected
assets
£m
|
Fair
value
protected
assets
£m
|
Gross
exposure
£m
|
Credit
valuation
adjustment
£m
|
Notional
amount
protected assets
£m
|
Fair
value protected
assets
£m
|
Gross
exposure
£m
|
Credit
valuation
adjustment
£m
|
|||||||||||||||||||||||||
|
AAA/AA
rated
|
19,092 | 15,466 | 3,626 | 908 | 20,605 | 19,742 | 863 | 44 | ||||||||||||||||||||||||
|
A/BBB
rated
|
6,147 | 4,997 | 1,150 | 403 | — | — | — | — | ||||||||||||||||||||||||
| 25,239 | 20,463 | 4,776 | 1,311 | 20,605 | 19,742 | 863 | 44 | |||||||||||||||||||||||||
The movement in the
year in CDPC CVA is analysed below:
| £m | ||||
|
At 1 January
2008
|
44 | |||
|
Net benefit
on CVA hedges
|
533 | |||
|
Net benefit
on FX hedges
|
119 | |||
|
Net income
statement effect
|
615 | |||
|
Balance at 31
December 2008
|
1,311 |
116
Business
review continued
Leverage finance (audited)
Leveraged finance
is commonly employed to facilitate corporate finance transactions, such as
acquisitions or buy-outs. A bank acting as a lead manager will typically
underwrite the loan, alone or with others, and then syndicate the loan to other
participants.
The Group’s
syndicated loan book represent amounts retained from underwriting positions
where the Group was lead manager or underwriter, in excess of the Group’s
intended long term participation.
Since the beginning
of the credit market dislocation in the second half of 2007, investor appetite
for leveraged loans and similar risky assets has fallen dramatically, with
secondary prices falling due to selling pressure and margins increasing, thus
also affecting the primary market. There were a small number of deals executed
in the first half of 2008 which were much less significant in overall quantum
and leverage and which were priced at less than mid-2007 levels. Concerted
efforts to sell positions during the first half of 2008 were only partially
successful due to the rapid change in market conditions since origination of the
loans. Most of the leveraged finance loans were reclassified from the
held-for-trading category to loans and receivables category in the second half
of 2008.
The table below
shows the carrying value of leveraged finance exposures by industry and
geography.
|
2008
|
2007(1) | |||||||||||||||||||||||||||||||||||||||
|
Americas
£m
|
UK
£m
|
Europe
£m
|
ROW
£m
|
Total
£m
|
Americas
£m
|
UK
£m
|
Europe
£m
|
ROW
£m
|
Total
£m
|
|||||||||||||||||||||||||||||||
|
TMT
|
1,681 | 628 | 402 | 45 | 2,756 | 6,924 | 424 | 482 | 25 | 7,855 | ||||||||||||||||||||||||||||||
|
Retail
|
166 | 550 | 707 | 21 | 1,444 | 542 | 1,318 | 800 | 49 | 2,709 | ||||||||||||||||||||||||||||||
|
Industrial
|
280 | 391 | 413 | — | 1,084 | 249 | 2,003 | 1,074 | 44 | 3,370 | ||||||||||||||||||||||||||||||
|
Other
|
11 | 552 | 141 | 35 | 739 | 25 | 339 | 271 | 13 | 648 | ||||||||||||||||||||||||||||||
| 2,138 | 2,121 | 1,663 | 101 | 6,023 | 7,740 | 4,084 | 2,627 | 131 | 14,582 | |||||||||||||||||||||||||||||||
|
Of
which:
|
||||||||||||||||||||||||||||||||||||||||
|
Held-for-trading
|
31 | 31 | 41 | — | 103 | 7,607 | 3,694 | 689 | 51 | 12,041 | ||||||||||||||||||||||||||||||
|
Loan and
receivables
|
2,107 | 2,090 | 1,622 | 101 | 5,920 | 133 | 390 | 1,938 | 80 | 2,541 | ||||||||||||||||||||||||||||||
| 2,138 | 2,121 | 1,663 | 101 | 6,023 | 7,740 | 4,084 | 2,627 | 131 | 14,582 | |||||||||||||||||||||||||||||||
|
Of
which:
|
||||||||||||||||||||||||||||||||||||||||
|
Drawn
|
2,081 | 2,090 | 1,453 | 94 | 5,718 | 2,249 | 4,025 | 2,478 | 122 | 8,874 | ||||||||||||||||||||||||||||||
|
Undrawn
|
57 | 31 | 210 | 7 | 305 | 5,491 | 59 | 149 | 9 | 5,708 | ||||||||||||||||||||||||||||||
| 2,138 | 2,121 | 1,663 | 101 | 6,023 | 7,740 | 4,084 | 2,627 | 131 | 14,582 | |||||||||||||||||||||||||||||||
Note:
|
(1)
|
Leveraged
finance as disclosed above for 31 December 2007 has been aligned with
definitions used in 2008 and is consequently £76 million higher than
previously published.
|
The table below
analyses the movement in the amounts reported above.
|
Held-for-trading
|
Loans
and receivables
|
|||||||||||||||||||||||
|
Drawn
£m
|
Undrawn
£m
|
Total
£m
|
Drawn
£m
|
Undrawn
£m
|
Total
£m
|
|||||||||||||||||||
|
At 1 January
2008
|
6,516 | 5,525 | 12,041 | 2,358 | 183 | 2,541 | ||||||||||||||||||
|
Reclassifications
|
(3,602 | ) | — | (3,602 | ) | 3,602 | — | 3,602 | ||||||||||||||||
|
Reclassifications
– income effect
|
216 | — | 216 | 19 | — | 19 | ||||||||||||||||||
|
Additions
|
1,171 | 682 | 1,853 | 235 | — | 235 | ||||||||||||||||||
|
Sales
|
(3,826 | ) | (1,882 | ) | (5,708 | ) | (473 | ) | (81 | ) | (554 | ) | ||||||||||||
|
Realised
losses on sales
|
(298 | ) | — | (298 | ) | (197 | ) | — | (197 | ) | ||||||||||||||
|
Funded
deals
|
1,298 | (1,298 | ) | — | — | — | — | |||||||||||||||||
|
Lapsed/collapsed
deals
|
(415 | ) | (3,738 | ) | (4,153 | ) | (173 | ) | — | (173 | ) | |||||||||||||
|
Change in
fair value
|
(462 | ) | (156 | ) | (618 | ) | n/a | n/a | n/a | |||||||||||||||
|
Impairment
provisions
|
n/a | n/a | n/a | (1,191 | ) | — | (1,191 | ) | ||||||||||||||||
|
Exchange and
other movements
|
211 | 161 | 372 | 1,603 | 35 | 1,638 | ||||||||||||||||||
|
Presentation
changes
|
(778 | ) | 778 | — | (96 | ) | 96 | — | ||||||||||||||||
|
At 31
December 2008
|
31 | 72 | 103 | 5,687 | 233 | 5,920 | ||||||||||||||||||
In
addition to the leveraged finance syndicated portfolio discussed above, the
Group has £7 billion of portfolio positions, mostly to European companies, that
have been classified as loans and receivables since origination.
117
SPEs
and conduits
SPEs
(audited)
The
Group arranges securitisations to facilitate client transactions and undertakes
securitisations to sell financial assets or to fund specific portfolios of
assets. The Group also acts as an underwriter and depositor in securitisation
transactions involving both client and proprietary transactions. In a
securitisation, assets, or interests in a pool of assets, are transferred
generally to a special purpose entity (SPE) which then issues liabilities to
third party investors. SPEs are vehicles established for a specific, limited
purpose, usually do not carry out a business or trade and typically have no
employees. They take a variety of legal forms – trusts, partnerships and
companies – and fulfil many different functions. As well as being a key element
of securitisations, SPEs are also used in fund management activities to
segregate custodial duties from the fund management advice provided by the
Group.
It
is primarily the extent of risks and rewards assumed that determines whether
these entities are consolidated in the Group’s financial statements. The
following section aims to address the significant exposures which arise from the
Group’s activities through specific types of SPEs.
The Group sponsors
and arranges own-asset securitisations, whereby the sale of assets or interests
in a pool of assets into an SPE is financed by the issuance of securities to
investors. The pool of assets held by the SPE may be originated by the Group, or
(in the case of whole loan programmes) purchased from third parties, and may be
of varying credit quality. Investors in the debt securities issued by the SPE
are rewarded through credit-linked returns, according to the credit rating of
their securities. The majority of securitisations are supported through
liquidity facilities, other credit enhancements and derivative hedges extended
by financial institutions, some of which offer protection against initial
defaults in the pool of assets. Thereafter, losses are absorbed by investors in
the lowest ranking notes in the priority of payments. Investors in the most
senior ranking debt securities are typically shielded from loss, since any
subsequent losses may trigger repayment of their initial principal.
The Group also
employs synthetic structures, where assets are not sold to the SPE, but credit
derivatives are used to transfer the credit risk of the assets to an SPE.
Securities may then be issued by the SPE to investors, on the back of the credit
protection sold to the Group by the SPE.
In
general residential and commercial mortgages and credit card receivables form
the types of assets generally included in cash securitisations, while corporate
loans and commercial mortgages typically serve as reference obligations in
synthetic securitisations.
The Group sponsors
own-asset securitisations as a way of diversifying funding sources, managing
specific risk concentrations, and achieving capital efficiency. The Group
purchases the securities issued in own-asset securitisations set up for funding
purposes. During 2008, the Group was able to pledge AAA-rated asset-backed
securities as collateral for repurchase agreements with major central banks
under schemes such as the Bank of England’s Special Liquidity Scheme, launched
in April 2008, which allowed banks to temporarily swap high-quality
mortgage-backed and other securities for liquid UK Treasury Bills. This practice
has contributed to the Group’s sources of funding during 2008 in the face of the
contraction in the UK market for inter-bank lending and the investor base for
securitisations.
The Group typically
does not retain the majority of risks and rewards of own-asset securitisations
set up for the purposes of risk diversification and capital efficiency, where
the majority of investors tend to be third parties. Therefore, the Group is
typically not required to consolidate the related SPEs.
The Group has also
established whole loan securitisation programmes in the US and UK where assets
originated by third parties are warehoused by the Group for securitisation. The
majority of these vehicles are not consolidated by the Group, as it is not
exposed to the risks and rewards of ownership.
Conduits
(audited)
The Group sponsors
and administers a number of asset-backed commercial paper (ABCP) conduits. A
conduit is an SPE that issues commercial paper and uses the proceeds to purchase
or fund a pool of assets. The commercial paper is secured on the assets and is
redeemed either by further commercial paper issuance, repayment of assets or
liquidity drawings. Commercial paper is typically short-dated – the length of
time from issuance to maturity of the paper is typically up to three
months.
The
Group’s conduits can be divided into multi-seller conduits and own- asset
conduits. In line with market practice, the Group consolidates both types of
conduit where it is exposed to the majority of risks and rewards of ownership of
these entities. The Group also extends liquidity commitments to multi-seller
conduits sponsored by other banks, but typically does not consolidate these
entities as it is not exposed the majority of the risks and
rewards.
Funding
and liquidity
The Group’s most
significant multi-seller conduits have thus far continued to fund the vast
majority of their assets solely through ABCP issuance. There were significant
disruptions to the liquidity of the financial markets during the year following
the bankruptcy filing of Lehman Brothers in September 2008 and this required a
small amount of the assets held in certain conduits to be funded by the Group
rather than through ABCP issuance. By the end of 2008 there had been an
improvement in market conditions, supported by central bank initiatives, which
enabled normal ABCP funding to replace this Group funding of the
conduits.
The average
maturity of ABCP issued by the Group’s conduits as at 31 December 2008 was 72.1
days (2007 – 60.9 days).
The total assets
held by the Group’s sponsored conduits are £49.9 billion (2007 – £48.1 billion).
Since these liquidity facilities are sanctioned on the basis of total conduit
purchase commitments, the liquidity facility commitments will exceed the level
of assets held, with the difference representing undrawn
commitments.
118
Business
review continued
The Group values
the funding flexibility and liquidity provided by the ABCP market to fund
client- and Group-originated assets. Whereas there are plans to decrease the
multi-seller conduit business in line with the Group’s balance sheet, the Group
is reviewing the potential for new own-asset conduit structures to add funding
diversity.
Multi-seller
conduits
The multi-seller
conduits were established by the Group for the purpose of providing its clients
with access to diversified and flexible funding sources. A multi-seller conduit
typically purchases or funds assets originated by the banks’ clients. The
multi-seller conduits form the vast majority of the Group’s conduit business
(69.4% of the total liquidity and credit enhancements committed by the Group).
The Group sponsors six multi-seller conduits which finance assets from Europe,
North America and Asia-Pacific.
Assets purchased or
financed by the multi-seller conduits include auto loans, residential mortgages,
credit card receivables, consumer loans and trade receivables. All assets held
by the conduits are recorded on the Group’s balance sheet either as loans and
receivables or debt securities.
The third-party
assets financed by the conduits are structured with a significant degree of
first-loss credit enhancement provided by the originators of the assets. This
credit enhancement, which is specific to each transaction, can take the form of
over-collateralisation, excess spread or subordinated loan, and typically
ensures the conduit asset has a rating equivalent to at least a single-A credit.
In addition, and in line with general market practice, the Group provides a
small second-loss layer of programme-wide protection to the multi-seller
conduits. Given the nature and investment grade equivalent quality of the first
loss enhancement provided to the structures, the Group has only a minimal risk
of loss on its program wide exposure. The issued ABCP is rated P-1/A1 by Moody’s
and Standard & Poor’s.
The Group provides
liquidity back-up facilities to the conduits it sponsors. These facilities can
be drawn upon by the conduits in the event of a disruption in the ABCP market,
or when certain trigger events occur such that ABCP cannot be issued. For a very
small number of transactions within two of the multi-seller conduits sponsored
by the Group these liquidity facilities have been provided by third-party banks.
This typically occurs on transactions where the third-party bank does not use,
or have, its own conduit vehicles. Conduit commercial paper issuance is managed
such that the spread of maturity dates of the issued ABCP mitigates the
short-term contingent liquidity risk of providing back-up facilities. Limits
sanctioned for such facilities as at 31 December 2008 totalled approximately
£42.9 billion (2007 – £49.2 billion).
The Group’s maximum
exposure to loss on its multi-seller conduits is £43.2 billion (2007 – £49.4
billion), being the total amount of the Group’s liquidity commitments plus the
extent of programme-wide credit enhancements which relate to conduit assets for
whom liquidity facilities were provided by third parties.
Own-asset
conduits
The Group also
holds three own-asset conduits which fund assets which have been funded at one
time by the Group. These vehicles represent 25% of the Group’s conduit business
(as a percentage of the total liquidity and credit enhancements committed by the
Group), with £14.8 billion of ABCP outstanding at 31 December 2008 (2007 – £10.4
billion). The Group’s maximum exposure to loss on its own-asset conduits is
£15.9 billion (2007 – £13.5 billion), being the total drawn and undrawn amount
of the Group’s liquidity commitments to these conduits.
Securitisation
arbitrage conduits
The Group no longer
sponsors any securitisation arbitrage conduits. As part of the integration of
ABN AMRO and a strategic review of the conduit business, the sole securitisation
arbitrage conduit was dissolved in 2008. All of its assets were transferred to a
centrally managed asset unit for run-off or sale.
The Group’s
exposure from both its consolidated conduits, including those to which the Group
is economically exposed and those which are shared with the other consortium
members, and its involvement with third-party conduits are set out in the
following table.
119
Business
review continued
|
2008
|
2007
(1)
|
|||||||||||||||||||||||
|
Consolidated
conduits
£m
|
Third
party
£m
|
Total
£m
|
Consolidated
conduits
£m
|
Third
party
£m
|
Total
£m
|
|||||||||||||||||||
|
Total assets
held by the conduits
|
49,857 | 48,070 | ||||||||||||||||||||||
|
Commercial
paper issued
|
48,684 | 46,532 | ||||||||||||||||||||||
|
Liquidity and
credit enhancements:
|
||||||||||||||||||||||||
|
deal specific
drawn liquidity
|
||||||||||||||||||||||||
|
–
drawn
|
1,172 | 3,078 | 4,250 | 1,537 | 2,280 | 3,817 | ||||||||||||||||||
|
–
undrawn
|
57,929 | 198 | 58,127 | 61,347 | 490 | 61,837 | ||||||||||||||||||
|
programme-wide
liquidity
|
||||||||||||||||||||||||
|
–
drawn
|
— | 102 | 102 | — | 250 | 250 | ||||||||||||||||||
|
–
undrawn
|
— | 504 | 504 | 75 | 899 | 974 | ||||||||||||||||||
|
Programme-wide
credit enhancements (2)
|
2,391 | — | 2,391 | 3,096 | — | 3,096 | ||||||||||||||||||
| 61,492 | 3,882 | 65,374 | 66,055 | 3,919 | 69,974 | |||||||||||||||||||
|
Maximum
exposure to loss (3)
|
59,101 | 3,882 | 62,983 | 62,959 | 3,919 | 68,878 | ||||||||||||||||||
Notes:
|
(1)
|
Total assets
held by the conduits and commercial paper issued at 31 December 2007
included:
|
|
|
·
|
£5.2 billion
assets and commercial paper issued relating to and by the Group’s
securitisation arbitrage conduit which was dissolved in
2008
|
|
|
·
|
£10.7 billion
assets (corporate loans) and £10.5 billion commercial paper issued
relating to a shared conduit – see
below.
|
|
|
·
|
£1.3 billion
assets relating to reactivated conduits which started to issue commercial
paper in the second half of 2008.
|
|
(2)
|
Programme-wide
credit enhancement.
|
|
(3)
|
Maximum
exposure to loss is determined as the maximum loss being the maximum
amount by borrowers may drawn on their conduits facility for which the
Group has provided committed liquidity and credit backstop
facilities.
|
120
Business
review continued
The Group’s
exposure from the conduit shared with the other consortium members is set out
below:
|
2008
£m
|
2007
£m
|
|||||||
|
Total assets
held by the conduits
|
13,286 | 10,650 | ||||||
|
Commercial
paper issued
|
13,028 | 10,452 | ||||||
|
Liquidity and
credit enhancements: deal specific drawn liquidity
|
||||||||
|
–
drawn
|
258 | 198 | ||||||
|
–
undrawn
|
13,566 | 11,868 | ||||||
| 13,824 | 12,066 | |||||||
|
Maximum
exposure to loss
|
13,824 | 12,066 |
Collateral
analysis, geographic, profile, credit ratings and weighted average lives of the
assets in the assets relating to the Group’s consolidated conduits and related
undrawn commitments are set out in the tables below.
|
2008
|
2007
|
|||||||||||||||||||||||||||||||||||||||||||||||
|
Funded
assets
|
Liquidity
from third
|
Total
|
Funded
assets
|
Liquidity
from third
|
Total
|
|||||||||||||||||||||||||||||||||||||||||||
|
Loans
£m
|
Securities
£m |
Total
£m
|
Undrawn
£m
|
parties
£m
|
exposure
£m
|
Loans
£m
|
Securities
£m
|
Total
£m
|
Undrawn
£m
|
parties
£m
|
exposure
£m
|
|||||||||||||||||||||||||||||||||||||
|
Auto
loans
|
9,924 | 383 | 10,307 | 1,871 | — | 12,178 | 8,066 | 578 | 8,644 | 3,701 | (102 | ) | 12,243 | |||||||||||||||||||||||||||||||||||
|
Corporate
loans
|
430 | 11,042 | 11,472 | 534 | — | 12,006 | 36 | 8,927 | 8,963 | 1,390 | — | 10,353 | ||||||||||||||||||||||||||||||||||||
|
Credit card
receivables
|
5,844 | — | 5,844 | 922 | — | 6,766 | 5,104 | 90 | 5,194 | 1,206 | — | 6,400 | ||||||||||||||||||||||||||||||||||||
|
Trade
receivables
|
2,745 | — | 2,745 | 1,432 | (71 | ) | 4,106 | 3,068 | 320 | 3,388 | 2,386 | — | 5,774 | |||||||||||||||||||||||||||||||||||
|
Student
loans
|
2,555 | — | 2,555 | 478 | (132 | ) | 2,901 | 335 | 262 | 597 | 1,082 | (132 | ) | 1,547 | ||||||||||||||||||||||||||||||||||
|
Consumer
loans
|
2,371 | — | 2,371 | 409 | — | 2,780 | 1,886 | — | 1,886 | 403 | — | 2,289 | ||||||||||||||||||||||||||||||||||||
|
Mortgages
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Prime
|
4,416 | 2,250 | 6,666 | 1,188 | — | 7,854 | 4,424 | 2,263 | 6,687 | 664 | — | 7,351 | ||||||||||||||||||||||||||||||||||||
|
Non-conforming
|
2,181 | — | 2,181 | 727 | — | 2,908 | 2,343 | 234 | 2,577 | 740 | — | 3,317 | ||||||||||||||||||||||||||||||||||||
|
Sub-prime
|
— | — | — | — | — | — | 9 | 117 | 126 | 363 | — | 489 | ||||||||||||||||||||||||||||||||||||
|
Commercial
|
1,228 | 507 | 1,735 | 66 | (23 | ) | 1,778 | 799 | 1,094 | 1,893 | 168 | (23 | ) | 2,038 | ||||||||||||||||||||||||||||||||||
|
Buy-to-let
|
— | — | — | — | — | — | — | 61 | 61 | 8 | — | 69 | ||||||||||||||||||||||||||||||||||||
|
CDOs
|
— | — | — | — | — | — | — | 2,129 | 2,129 | 268 | — | 2,397 | ||||||||||||||||||||||||||||||||||||
|
Other
|
1,851 | 2,130 | 3,981 | 1,615 | — | 5,596 | 2,976 | 2,947 | 5,923 | 2,433 | — | 8,356 | ||||||||||||||||||||||||||||||||||||
| 33,545 | 16,312 | 49,857 | 9,242 | (226 | ) | 58,873 | 29,046 | 19,022 | 48,068 | 14,812 | (257 | ) | 62,623 | |||||||||||||||||||||||||||||||||||
|
CP
funded assets
|
||||||||||||||||||||||||||||||||||||||||||||
|
Geographic
Distribution
|
Weighted
Average
life
|
Credt
ratings (S&P equivalent)
|
||||||||||||||||||||||||||||||||||||||||||
|
2008
|
UK
£m
|
Europe
£m
|
US
£m
|
ROW
£m
|
Total
£m
|
AAA
£m
|
AA
£m
|
A
£m
|
BBB
£m
|
Below
BBB
£m
|
||||||||||||||||||||||||||||||||||
|
Auto
loans
|
801 | 1,706 | 7,402 | 398 | 10,307 | 1.7 | 6,075 | 883 | 3,349 | — | — | |||||||||||||||||||||||||||||||||
|
Corporate
loans
|
1,714 | 4,347 | 3,289 | 2,122 | 11,472 | 4.9 | 10,767 | 132 | 573 | — | — | |||||||||||||||||||||||||||||||||
|
Credit card
receivables
|
633 | — | 4,999 | 212 | 5,844 | 0.7 | 3,465 | 62 | 2,171 | 146 | — | |||||||||||||||||||||||||||||||||
|
Trade
receivables
|
68 | 922 | 1,371 | 384 | 2,745 | 0.7 | 120 | 1,025 | 1,600 | — | — | |||||||||||||||||||||||||||||||||
|
Student
loans
|
144 | — | 2,411 | — | 2,555 | 0.3 | 2,296 | 144 | 115 | — | — | |||||||||||||||||||||||||||||||||
|
Consumer
loans
|
708 | 1,195 | 468 | — | 2,371 | 1.7 | 387 | 993 | 923 | 68 | — | |||||||||||||||||||||||||||||||||
|
Mortgages
|
||||||||||||||||||||||||||||||||||||||||||||
|
Prime
|
— | 2,244 | — | 4,422 | 6,666 | 2.8 | 2,675 | 3,876 | 115 | — | — | |||||||||||||||||||||||||||||||||
|
Non-conforming
|
960 | 1,221 | — | — | 2,181 | 4.6 | 351 | 368 | 475 | 987 | — | |||||||||||||||||||||||||||||||||
|
Sub-prime
|
— | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
|
Commercial
|
713 | 453 | 74 | 495 | 1,735 | 11.0 | 274 | 518 | 474 | 469 | — | |||||||||||||||||||||||||||||||||
|
Buy-to-let
|
— | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
|
CDOs
|
— | — | — | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||
|
Other
|
166 | 1,198 | 684 | 1,933 | 3,981 | 3.5 | 3 | 958 | 2,786 | 234 | — | |||||||||||||||||||||||||||||||||
| 5,907 | 13,286 | 20,698 | 9,966 | 49,857 | 2.8 | 26,413 | 8,959 | 12,581 | 1,904 | — | ||||||||||||||||||||||||||||||||||
121
Business
review continued
|
CP
funded assets
|
||||||||||||||||||||||||||||||||||||||||||||
|
Geographic
Distribution
|
Weighted
average
life
£m
|
Credt
ratings (S&P equivalent)
|
||||||||||||||||||||||||||||||||||||||||||
|
UK
£m
|
Europe
£m
|
US
£m
|
ROW
£m
|
Total
£m
|
AAA
£m
|
AA
£m
|
A
£m
|
BBB
£m
|
Below
BBB
£m
|
|||||||||||||||||||||||||||||||||||
|
2007
|
||||||||||||||||||||||||||||||||||||||||||||
|
Auto
loans
|
2,250 | 1,259 | 4,793 | 341 | 8,643 | 1.9 | 1,457 | 3,184 | 3,940 | 62 | — | |||||||||||||||||||||||||||||||||
|
Corporate
Loans
|
1,127 | 1,551 | 4,658 | 1,627 | 8,963 | 6.5 | 8,838 | 15 | 110 | — | — | |||||||||||||||||||||||||||||||||
|
Credit card
receivables
|
654 | — | 4,402 | 138 | 5,194 | 1.0 | 1,286 | 913 | 2,848 | 147 | — | |||||||||||||||||||||||||||||||||
|
Trade
receivables
|
299 | 816 | 1,965 | 309 | 3,389 | 0.9 | 187 | 732 | 2,183 | 236 | 51 | |||||||||||||||||||||||||||||||||
|
Student
loans
|
140 | — | 457 | — | 597 | 1.6 | 270 | 311 | 16 | — | — | |||||||||||||||||||||||||||||||||
|
Consumer
loans
|
648 | 724 | 514 | — | 1,886 | 1.2 | 1,018 | 473 | 395 | — | — | |||||||||||||||||||||||||||||||||
|
Mortgages
|
— | — | ||||||||||||||||||||||||||||||||||||||||||
|
Prime
|
276 | 565 | 983 | 4,863 | 6,687 | 3.3 | 1,896 | 2,181 | 2,610 | — | — | |||||||||||||||||||||||||||||||||
|
Non-conforming
|
1,675 | 833 | — | 69 | 2,577 | 5.1 | 268 | 1,596 | 713 | — | — | |||||||||||||||||||||||||||||||||
|
Sub-prime
|
— | — | 9 | 117 | 126 | 0.2 | 117 | — | 9 | — | — | |||||||||||||||||||||||||||||||||
|
Commercial
|
1,023 | 233 | 198 | 439 | 1,893 | 9.6 | 746 | 630 | 401 | 116 | — | |||||||||||||||||||||||||||||||||
|
Buy-to-let
|
61 | — | — | — | 61 | — | 37 | 24 | — | — | ||||||||||||||||||||||||||||||||||
|
CDOs
|
137 | 520 | 1,473 | — | 2,130 | 2.7 | 2,115 | 15 | — | — | — | |||||||||||||||||||||||||||||||||
|
Other
|
579 | 1,071 | 1,950 | 2,323 | 5,923 | 2.8 | 2,362 | 784 | 2,652 | 125 | — | |||||||||||||||||||||||||||||||||
| 8,869 | 7,572 | 21,402 | 10,226 | 48,069 | 3.3 | 20,597 | 10,858 | 15,877 | 686 | 51 | ||||||||||||||||||||||||||||||||||
Structured
investment vehicles (unaudited)
The Group does not
sponsor any structured investment vehicles.
122
Business
review continued
Investment
funds set up and managed by the Group (unaudited)
The Group’s
investment funds are managed by RBS Asset Management (RBSAM), which is an
integrated asset management business, which manages investments on behalf of
third-party institutional and high net worth investors, as well as for the
Group. RBSAM is active in most traditional asset classes and employs both fund
of funds structures and multi-manager strategies. Its offering includes money
market funds, long only funds and alternative investment funds.
Money
market funds
The Group has
established and manages a number of money market funds for its customers. When a
new fund is launched, RBSAM as fund manager typically provides a limited amount
of seed capital to the funds. RBSAM does not have investments in these funds
greater than £25 million. As RBSAM does not have holdings in these funds of
significant size and as the risks and rewards of ownership are not with the
Group, these funds are not consolidated by the Group.
The funds have been
authorised by the Irish Financial Services Regulatory Authority as UCITS
pursuant to the UCITS Regulations (UCITS Regulations refer to the European
Communities’ Undertakings for Collective Investment in Transferable Securities
Regulations) and are therefore restricted in the types of investments and
borrowings they can make. The structure of the assets within the funds is
designed to meet the liabilities of the funds to their investors who have no
recourse other than to the assets of the funds. The risks to the Group as a
result are restricted to reputational damage if the funds were unable to meet
withdrawals when requested on a timely basis or in full.
Money market funds
had total assets of £13.6 billion at 31 December 2008 (2007 – £11.2 billion).
The sub categories of money market funds are:
|
·
|
£8.0 billion
(2007 – £5.1 billion) in Money Funds denominated in sterling, US dollars
and euro, which invest in short-dated, highly rated money market
securities with the objective of providing security, performance and
liquidity.
|
|
·
|
£4.9 billion
(2007 – £5.5 billion) in multi-manager money market funds denominated in
sterling, US dollars and euro, which invest in short dated, highly rated
securities.
|
|
·
|
£0.7 billion
(2007 – £0.6 billion) in Money Funds Plus denominated in sterling, US
dollars and euro, which invest in longer-dated, highly rated securities
with the objective of providing security, enhanced performance and
liquidity.
|
Non-money
market funds
RBSAM has also
established a number of non-money market funds to enable investors to invest in
a range of assets including bonds, equities, hedge funds, private equity and
real estate. The Group does not have investments in these funds greater than
£200 million. As RBSAM does not have holdings in these funds of significant size
and as the risks and rewards of ownership are not with the Group, these funds
are not consolidated by the Group.
The non-money
market funds had total assets of £18.7 billion at 31 December 2008 (31 December
2007 – £19.4 billion). The sub categories of non-money market funds
are:
|
·
|
£16.0 billion
(2007 – £17.0 billion) in multi-manager funds, which offer fund of funds
products across bond, equity, hedge fund, private equity and real estate
asset classes.
|
|
·
|
£1.6 billion
(2007 – £1.3 billion) in committed capital to private equity investments,
which invests primarily in equity and debt securities of private
companies.
|
|
·
|
£1.1 billion
(2007 – £1.1 billion) in credit investments, which invests in various
financial instruments.
|
The structure of
the assets within the funds is designed to meet the liabilities of the funds to
their investors who have no recourse other than to the assets of the funds. The
risks to the Group as a result are restricted to reputational damage if the
funds were unable to meet withdrawals when requested on a timely basis or in
full, and the Group’s own investment in the funds.
The Group’s maximum
exposure to non-money market funds is represented by the investment in the
shares of each fund and was £200 million at 31 December 2008 (2007 – £171
million).
123
Governance
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125
|
|
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127
|
|
|
133
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|
|
140
|
|
|
141
|
|
|
153
|
|
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154
|
Executive
directors
Appointed to the
Board on 1 October 2008 and as Group Chief Executive on 21 November 2008,
Stephen Hester was chief executive of The British Land Company PLC. He was
previously chief operating officer of Abbey National plc and prior to that he
held positions with Credit Suisse First Boston including Chief Financial
Officer, Head of Fixed Income and co-Head of European Investment Banking. In
February 2008, he was appointed non-executive deputy chairman of Northern Rock
plc, a position he relinquished on 1 October 2008. He is also a trustee of The
Foundation and Friends of the Royal Botanical Gardens, Kew.
Appointed to the
Board in March 2000, Gordon Pell was formerly group director of Lloyds TSB UK
Retail Banking before joining National Westminster Bank Plc as a director in
February 2000 and then becoming Chief Executive, Retail Banking. He is also a
director of Race for Opportunity and a member of the FSA Practitioner Panel. He
was appointed chairman of the Business Commission on Racial Equality in the
Workplace in July 2006 and deputy chairman of the Board of the British Bankers
Association in September 2007.
Appointed to the
Board in February 2006, Guy Whittaker joined RBS after spending 25 years with
Citigroup where he was the group treasurer based in New York and prior to that
had held a number of management positions within the financial markets business
based in London.
Key
to abbreviations
A member
of the Audit Committee
N member
of the Nominations Committee
R member
of the Remuneration Committee
* independent
non-executive director
125
Non-executive
directors
Appointed to the
Board in June 2002, Colin Buchan was educated in South Africa and spent the
early part of his career in South Africa and the Far East. He has considerable
international investment banking experience, as well as experience in very large
risk management in the equities business. He was formerly a member of the group
management board of UBS AG and head of equities of UBS Warburg, and was the
former chairman of UBS Securities Canada Inc. He is chairman of Standard Life
Investments Limited and a director of Standard Life plc and Black Rock World
Mining Trust Plc.
Appointed to the
Board in September 2004, Archie Hunter is a chartered accountant. He was
Scottish senior partner of KPMG between 1992 and 1999 and president of The
Institute of Chartered Accountants of Scotland in 1997/1998. He has extensive
professional experience in the UK and North and South America. He is currently
chairman of Macfarlane Group plc, a director of Edinburgh US Tracker Trust plc
and a governor of the Beatson Institute for Cancer Research.
Appointed to the
Board in September 2004, Joe MacHale is currently a non-executive director and
chairman of the remuneration committee of Brit Insurance Holdings plc, and a
trustee and treasurer of MacMillan Cancer Support. He held a number of senior
executive positions with J P Morgan between 1979 and 2001 and was latterly chief
executive of J P Morgan Europe, Middle East and Africa Region. He is a fellow of
the Institute of Chartered Accountants.
Appointed to the
Board on 1 October 2008, John McFarlane is former chief executive officer of
Australia and New Zealand Banking Group Limited. Previously he was a group
executive director of Standard Chartered and was head of Citicorp/Citibank in
the UK and Ireland. He is currently a non-executive director of Westfield
Holdings Limited and a director of Old Oak Holdings Limited. He is a former
president of the International Monetary Conference and a former chairman of the
Australian Bankers Association. He has previously served as a director of the
London Stock Exchange and a member of the Auditing Practices Board.
Appointed to the
Board on 1 October 2008, Arthur Ryan is the former chairman, chief executive
officer and president of Prudential Financial Inc. Previously he held senior
positions with Prudential Insurance and the former Chase Manhattan Bank NA. He
is currently a non-executive director of Regeneron Pharmaceuticals Inc. and an
active member of numerous community boards. He was a founding member of the
Financial Services Forum.
Group
General Counsel and Group Secretary
Miller McLean was
appointed Group Secretary in August 1994. He is a trustee of the Industry and
Parliament Trust, non-executive chairman of The Whitehall and Industry Group,
and president of the Chartered Institute of
Bankers in Scotland.
126
For certain recent
developments relating to matters discussed in this report, which is dated 25
February 2009, you should read the “Recent Developments” section of this
document.
Capital
restructuring
In
November 2008, HM Treasury announced the establishment of UK Financial
Investments Limited, a company wholly owned by the UK Government which will
manage, on an arms-length basis, the UK Government’s shareholding in the company
and other banks that subscribed to the government’s recapitalisation
fund.
Following a placing
and open offer in December 2008, HM Treasury now holds approximately 58% of the
enlarged issued ordinary share capital of the company. In addition, HM Treasury
holds £5 billion non- cumulative sterling preference shares in the
company.
Subsequently, on 19
January 2009, the company announced in conjunction with HM Treasury and UK
Financial Investments Limited, that the preference shares held by HM Treasury
will be replaced with new ordinary shares. Eligible shareholders will be able to
apply to subscribe for approximately £5 billion of new ordinary shares pro rata
to their existing shareholdings at a fixed price of 31.75 pence per share by way
of an open offer. Any shares not taken up by shareholders in the open offer (or
otherwise placed on behalf of the company) will be subscribed for by HM Treasury
at a fixed price of 31.75 pence per share and the aggregate proceeds of the open
offer will be used to fund the redemption of the preference shares held by HM
Treasury, together with the redemption premium on the preference shares, accrued
dividend, and commissions payable to HM Treasury on the offer. The preference
shares will be redeemed at 101 per cent of their issue price. Dividends will
continue to accrue on the preference shares until redemption. This may result in
HM Treasury’s shareholding increasing to approximately 70% of the enlarged
ordinary share capital of the company.
Results
and dividends
The loss
attributable to the ordinary shareholders of the company for the year ended 31
December 2008 amounted to £24,306 million compared with a profit of £7,303
million for the year ended 31 December 2007, as set out in the consolidated
income statement on page 158.
The company did not
pay an interim dividend in 2008. On 15 September 2008, shareholders received one
new ordinary share for every 40 shares held on the record date of 12 September
2008 by way of a capitalisation issue.
As
part of an agreement with HM Treasury, the company undertook not to pay any
dividends on the ordinary shares until such time as the £5 billion
non-cumulative sterling preference shares issued to HM Treasury in December 2008
were repaid.
Upon redemption of
the preference shares as noted above, the restriction on payment of ordinary
dividends will be removed. However, it is not the Board’s intention to pay a
dividend on ordinary shares in 2009.
Business
review
Activities
The company is a
holding company owning the entire issued ordinary share capital of The Royal
Bank of Scotland plc, the principal direct operating subsidiary undertaking of
the company. The “Group” comprises the company and all its subsidiary and
associated undertakings, including the Royal Bank and NatWest. Details of the
principal subsidiary undertakings of the company are shown in Note 16 on the
accounts.
The Group is
engaged principally in providing a wide range of banking, insurance and other
financial services. Further details of the organisational structure and business
overview of the Group, including the products and services provided by each of
its divisions and the competitive markets in which they operate, is contained in
the Business review on pages 4 to 5 and 12.
The
Group is currently undertaking a strategic review that is expected to re-focus
the Group on those businesses with clear competitive advantages and attractive
marketing positions, primarily in stable, low-to-medium risk
sectors.
Risk
factors
The Group’s future
performance and results could be materially different from expected results
depending on the outcome of certain potential risks and uncertainties. Details
of the principal risk factors the Group faces are given in the Business review
on pages 13 to 20.
The reported
results of the Group are also sensitive to the accounting policies, assumptions
and estimates that underlie the preparation of its financial statements. Details
of the Group’s critical accounting policies and key sources of accounting
judgements are included in the Accounting policies on pages 162 to
172.
The Group’s
approach to risk management, including its financial risk management objectives
and policies and information on the Group’s exposure to price, credit, liquidity
and cash flow risk, is discussed in the Risk, capital and liquidity management
section of the Business review on pages 57 to
123.
Financial
performance
A
review of the Group’s performance during the year ended 31 December 2008,
including details of each division, and the Group’s financial position as at
that date is contained in the Business review on pages 34 to 52.
Business
developments
In
October 2007, RFS Holdings B.V. (RFS Holdings), a company jointly owned by the
company, Fortis N.V., Fortis SA/NV and Banco Santander S.A. and controlled by
the company, completed the acquisition of ABN AMRO Holding N.V. (ABN
AMRO).
On
3 October 2008, the State of the Netherlands acquired Fortis Bank Nederland
(Holding) N.V. (including the Fortis interest in RFS Holdings that represents
the remaining Fortis-acquired businesses of ABN AMRO) as well as Fortis’
participation in certain Dutch insurance activities. On 24 December 2008, the
Fortis interest in RFS Holdings was transferred from Fortis Bank Nederland
(Holding) N.V. into the direct ownership of the State of the Netherlands,
subject to completion of certain formalities. On the same date, the State of the
Netherlands executed a Deed of Accession with the company, Banco Santander S.A.,
and RFS Holdings pursuant to which it acceded to the Consortium and
Shareholders’ Agreement dated 28 May 2007 (as subsequently amended from time to
time).
127
RFS Holdings is
implementing an orderly separation of the business units of ABN AMRO with the
company retaining the following ABN AMRO business units:
|
·
|
Continuing
businesses of Business Unit North
America;
|
|
·
|
Business Unit
Global Clients (excluding the Brazil Global Clients Business) and
wholesale clients in the Netherlands (including former Dutch wholesale
clients) and Latin America (excluding
Brazil);
|
|
·
|
Business Unit
Asia including Private Clients India and Indonesia; and Interest in Prime
Bank, Pakistan (excluding the interest in Saudi
Hollandi);
|
|
·
|
Business Unit
Europe (excluding Antonveneta);
|
Employees
As
at 31 December 2008, the Group employed over 199,000 employees (full-time
equivalent basis) throughout the world. Details of employee related costs are
included in Note 3 on the accounts on page 175.
The Group utilises
a wide range of recruitment channels to ensure that the recruitment and
development of its employees are fully aligned to its organisational
requirements.
The Group offers a
competitive remuneration and benefits package to all employees.
Employees are able
to participate in incentive plans specific to their business, and the Buy As You
Earn and Sharesave schemes align the interests of employees with those of
shareholders.
Employee
learning and development
The Group maintains
a strong commitment to creating and providing learning opportunities for all its
employees through a variety of personal development and training programmes and
learning networks. Employees are encouraged to do voluntary work with community
partners.
Employee
communication
Employee engagement
is encouraged through a range of communication channels, at both a divisional
and Group level. These channels provide access to news and information in a
number of ways, including the intranet, magazines, video, team meetings led by
line managers, briefings held by senior managers and regular dialogue with
employees and employee representatives.
The Group Chief
Executive and other senior Group executives regularly communicate with employees
across a range of channels.
Employee
consultation
Each year, all
employees are invited to complete the global employee opinion survey. The survey
is confidential and independently managed by Towers Perrin-ISR. The survey
provides a channel for employees to express their views and opinions about the
Group on a range of key issues.
In
2008, the response rate was 88%, the second highest response rate since the
survey began. This represents over 156,000 employees participating in the
survey, from more than 50 countries and in 20 languages. For the first time,
this survey was extended to former ABN AMRO employees.
The Group
recognises employee representative organisations such as trade unions and work
councils in a number of businesses and countries. The Group has a European
Employee Communication Council that provides elected representatives with an
opportunity to understand better the impact on its European
operations.
Diversity
The Group's
Diversity policy and associated policy standards set a framework for broadening
the Group’s talent base, achieving the highest levels of performance and
enabling all employees to reach their full potential irrespective of age,
disability, gender, marital status, political opinion, race, religion or belief
or sexual orientation.
The
Group is also committed to ensuring that all prospective applicants for
employment are treated fairly and equitably throughout the recruitment process
and its comprehensive resourcing standards cover the attraction and retention of
individuals with disabilities. Reasonable adjustments are provided to support
applicants in the recruitment process where these are required. The Group
provides reasonable workplace adjustments for new entrants into the Group and
for existing employees who become disabled during their employment.
Safety,
health and wellbeing
Protecting its
employees and customers from harm is a fundamental principle of the way the
Group operates and its goal is to minimise work related injuries and ill health.
The Group also recognises that the general health and wellbeing of its employees
impacts on their engagement and productivity. Promoting good health, and
providing support to its employees when they need it, is therefore also core to
its approach.
During 2008, the
Group focused on the core themes of globalisation of safety, health and
wellbeing, improving health and raising awareness, while continuing to manage
safety and health risks.
Pre-employment
screening
The Group has a
comprehensive pre-employment screening policy to guard against possible
infiltration and employee-related fraud. In addition to existing workplace
security measures, all people engaged on Group business are now being screened
prior to commencing employment.
The Code of Conduct
and related policies forms part of the terms and conditions of employment for
all those employed by the Group and sets standards for those not directly
employed such as contractors and agency workers.
The code supports
the Group’s aim to operate in a similar way across the many countries in which
it operates and is therefore applicable to employees in all locations. The code
is a high level collection of key policies to inform employees of the Group’s
expectations of their behaviour and practices.
128
Corporate
responsibility
The Group believes
that meeting high standards of environmental, social and ethical responsibility
is key to the way it does business.
The Group’s
business is managed in a way that takes account of the social and environmental
impact of its activities. In order to identify the issues that matter most to
its stakeholders, an annual research project is conducted. This work provides
the foundation of the corporate responsibility strategy. It enables all parts of
the Group to focus their efforts and resources on the most important issues.
Having the right management structures in place and clear leadership helps set
the framework against which this happens. There are issue-specific steering
groups that feed into the Corporate Responsibility Forum, which considers the
Group’s current performance and proposes new initiatives. The Group’s governance
structure for corporate responsibility extends throughout the
organisation.
Further details of
the Group’s corporate responsibility policies will be contained in the 2008
Corporate Responsibility Report.
Going
concern
The Group’s
business activities and financial position; the factors likely to affect its
future development and performance; and its objectives and policies in managing
the financial risks to which it is exposed and its capital are discussed in the
Business review.
As
set out in the Business review, recent economic conditions have seen severe
dislocation in many financial markets and an unprecedented reduction in
liquidity globally. ‘Liquidity risk’ describes the measures governments and
central banks in the UK and around the world have taken to provide capital and
liquidity to banks. The Group used a number of these funding facilities during
2008 and its funding and capital plans for the next twelve months from the date
of approval of these accounts assume continuing reliance on and the continuation
of these measures. These plans have been shared with the Tripartite Authorities
in the UK.
Following the
rights issue in June 2008 and the open offer in December 2008, the Group’s
capital ratios are at historically high levels and will be further strengthened
by the restructuring of the UK Government’s preference shares. The UK Government
owns 57.9% of the ordinary share capital of the Group. This could increase to
70.4% following the fully underwritten open offer announced in January 2009 and
provides tangible evidence of the UK Government’s support for the Group
reflecting its importance to the UK economy and financial system.
The directors have
reviewed the Group’s forecasts, projections and other relevant evidence
including the ongoing measures from governments and central banks in the UK and
around the world to sustain the banking sector. Whilst the Group has received no
guarantees, the directors have a reasonable expectation, based on experience to
date, of continued and sufficient access to the funding facilities referred to
above and, accordingly, that the Group and the company will continue in
operational existence for the foreseeable future. The financial statements of
the Group and of the company have, therefore, been prepared on a going concern
basis.
Corporate
governance
The company is
committed to high standards of corporate governance. Details are given on pages
133 to 137.
Ordinary
share capital
In
June 2008, the company issued 6,123 million ordinary shares of 25p each through
a rights issue on the basis of 11 new ordinary shares for every 18 existing
shares held, at an issue price of £2 per share, raising £12
billion.
In
September 2008, the company issued 403 million ordinary shares of 25p to
existing shareholders by way of a capitalisation issue on the basis of one new
ordinary share for every 40 shares held.
In
December 2008, the company issued 22,910 million ordinary shares of 25p each by
way of a Placing and Open Offer on the basis of 18 new ordinary shares for every
13 existing shares held, at an issue price of 65.5 pence per share, raising
£14.7 billion. HM Treasury acquired 22,854 million of these shares and now holds
57.9% of the enlarged ordinary share capital of the company.
During the year,
the ordinary share capital was also increased by 13.5 million ordinary shares
allotted as a result of awards and the exercise of options under the company’s
share schemes.
Details of the
authorised and issued ordinary share capital at 31 December 2008 are shown in
Note 27 on the accounts.
Preference
share capital
In
December 2008, the company issued 5 million non-cumulative sterling preference
shares to HM Treasury at £1,000 per preference share, raising £5
billion.
As
discussed on page 127, the company, subject to shareholder approval, intends to
issue new ordinary shares by way of an open offer, the proceeds from which will
be used to redeem the preference shares issued to HM Treasury, together with the
accrued dividend.
Details of the
authorised and issued preference share capital at 31 December 2008 are shown in
Note 27 on the accounts.
Authority
to repurchase shares
At
the Annual General Meeting in 2008, shareholders renewed the authority for the
company to make market purchases of up to 1,000,710,085 ordinary shares. The
directors have not used this authority to date and there is no current intention
that the authority will be exercised. This authority will lapse at the
conclusion of the AGM of the company in 2009 and no renewal will be
sought.
Additional
information
Where not provided
previously in the Report of the directors, the following provides the additional
information required to be disclosed by Part 7 of the Companies Act 1985 as
amended.
The rights and
obligations attaching to the company’s ordinary shares and preference shares are
set out in the company’s Articles of Association, copies of which can be
obtained from Companies House in the UK or at www.rbs.com.
On
a show of hands at a general meeting of the company every holder of ordinary
shares and cumulative preference shares present in person or by proxy and
entitled to vote shall have one vote. On a poll, every holder of ordinary shares
present in person or by proxy and entitled to vote shall have one vote for every
share held. On a poll, holders of
129
cumulative
preference shares present in person or by proxy and entitled to vote shall have
four votes for every share held. The Notice of the Annual General Meeting
specifies the deadlines for exercising voting rights and appointing a proxy or
proxies to vote in relation to resolutions to be passed at the
meeting.
The cumulative
preference shares represent less than 0.01 % of the total voting rights of the
company, the remainder being represented by the ordinary shares.
There are no
restrictions on the transfer of ordinary shares in the company other than
certain restrictions which may from time to time be imposed by laws and
regulations (for example, insider trading laws). Pursuant to the Listing Rules
of the Financial Services Authority, certain employees of the company require
the approval of the company to deal in the company’s shares.
A
number of the company’s share plans include restrictions on transfers of shares
while the shares are subject to the plans, in particular the Employee Share
Ownership Plan.
The rights and
obligations of holders of non-cumulative preference shares are set out in Note
27 on the accounts on pages 227 to 229.
The company is not
aware of any agreements between shareholders that may result in restrictions on
the transfer of securities and/or voting rights. There are no persons holding
securities carrying special rights with regard to control of the
company.
Under the rules of
certain employee share plans, eligible employees are entitled to acquire shares
in the company, and shares are held in trust for participants by The Royal Bank
and Ulster Bank Dublin Trust Company as Trustees. Voting rights are exercised by
the Trustees on receipt of participants’ instructions. If a participant does not
submit an instruction to the Trustee no vote is registered.
The Royal Bank of
Scotland Group plc 2001 Employee Share Trust, The Royal Bank of Scotland Group
plc 2007 US Employee Share Trust and The Royal Bank of Scotland plc 1992
Employee Share Trust hold shares on behalf of the Group’s employee share plans.
The voting rights are exercisable by the Trustees, however, in accordance with
investor protection guidelines, the Trustees abstain from voting. The Trustees
would take independent advice before accepting any offer in respect of their
shareholdings for the company in a takeover bid situation.
The rules governing
the appointment of directors are set out in Corporate governance on page 133.
The company’s Articles of Association may only be amended by a special
resolution at a general meeting of shareholders.
A
change of control of the company following a takeover bid may cause a number of
agreements to which the company is party to take effect, alter or terminate. In
addition, a number of executive directors' service agreements may be affected on
a change of control. All of the company’s employee share plans contain
provisions relating to a change of control. Outstanding awards and options may
vest and become exercisable on change of control, subject where appropriate to
the satisfaction of any performance conditions at that time and pro- rating of
awards. In the context of the company as a whole, these agreements are not
considered to be significant.
The names and brief
biographical details of the directors are shown on pages 125 and
126.
Gordon Pell, Guy
Whittaker, Colin Buchan, Archie Hunter and Joe MacHale served throughout the
year and to the date of signing of the financial statements.
Stephen Hester,
John McFarlane and Arthur 'Art' Ryan were appointed as directors on 1 October
2008.
Johnny Cameron
ceased to be a director on 13 October 2008.
Sir Fred Goodwin
and Mark Fisher ceased to be directors on 21 November 2008.
Larry Fish ceased
to be a director on 31 December 2008.
Sir Tom McKillop
ceased to be Chairman on 3 February 2009.
Philip Hampton was
appointed as a director and Chairman-designate on 19 January 2009 and as
Chairman on 3 February 2009.
Jim Currie, Bill
Friedrich, Bud Koch, Janis Kong, Sir Steve Robson, Bob Scott and Peter
Sutherland ceased to be directors on 6 February 2009.
Philip Hampton,
Stephen Hester, John McFarlane and Arthur ‘Art’ Ryan will retire and offer
themselves for election at the forthcoming Annual General Meeting. Details of
the service agreement for Stephen Hester are set out on page 143. No other
director seeking election has a service agreement.
Directors’
interests
The interests of
the directors in the shares of the company at 31 December 2008 are shown on page
153. None of the directors held an interest in the loan capital of the company
or in the shares or loan capital of any of the subsidiary undertakings of the
company, during the period from 1 January 2008 to 25 February 2009.
Directors'
indemnities
In
terms of section 236 of the Companies Act 2006, the directors of the company,
members of the Group Executive Management Committee and Approved Persons of the
Group (under the Financial Services and Markets Act 2000) have been granted
Qualifying Third Party Indemnity Provisions by the company.
Directors'
disclosure to auditors:
Each of the
directors at the date of approval of this report confirms that:
|
(a)
|
so far as the
director is aware, there is no relevant audit information of which the
company’s auditors are unaware; and
|
130
Report
of the directors (continued)
|
(b)
|
the
director has taken all the steps that he ought to have taken as a director
to make himself aware of any relevant audit information and to establish
that the company’s auditors are aware of that
information.
|
This confirmation
is given and should be interpreted in accordance with the provisions of section
234ZA of the Companies Act 1985.
131
The company is
committed to high standards of corporate governance, business integrity and
professionalism in all its activities.
Throughout the year
ended 31 December 2008, the company has complied with all of the provisions of
the Combined Code issued by the Financial Reporting Council in June 2006 (the
“Code”) except in relation to the provision that the Remuneration Committee
should have delegated responsibility for setting remuneration for the Chairman
and executive directors. The company considers that this is a matter which
should rightly be reserved for the Board. No director is involved in decisions
regarding his or her own remuneration.
During the period
following the changes to the Board on 6 February 2009 to the date of this Report
and Accounts, the company has not had a senior independent director and the
Remuneration Committee has comprised two independent non-executive directors and
the Chairman of the Board, not the three independent non-executive directors
required by the Code. The Board is in the process of recruiting three additional
independent non-executive directors and plans to appoint a senior independent
director and an additional member of the Remuneration Committee as part of the
recruitment process.
The company has
also complied with the Financial Reporting Council Guidance on Audit Committees
issued in October 2008 in all material respects.
Under the US
Sarbanes-Oxley Act of 2002 (the “Act”), specific standards of corporate
governance and business and financial disclosures apply to companies with
securities registered in the US. The company complies with all applicable
sections of the Act.
The
New York Stock Exchange
As
a foreign issuer with American Depositary Shares (ADS) representing ordinary
shares, preference shares and debt securities listed on the New York Stock
Exchange (NYSE), the company must disclose any significant ways in which its
corporate governance practices differ from those followed by US companies under
the NYSE’s corporate governance listing standards. In addition, the company must
comply fully with the provisions of the listing standards that relate to the
composition, responsibilities and operation of audit committees. These
provisions incorporate the relevant rules concerning audit committees of the US
Securities Exchange Act of 1934.
The company has
reviewed its corporate governance arrangements and is satisfied that these are
consistent with the NYSE’s corporate governance listing practices, with the
exception that the Chairman of the Board is Chairman of the Nominations
Committee and is a member of the Remuneration Committee, both of which are
permitted by the UK Combined Code (since the Chairman was considered independent
on appointment). The company’s Audit, Nomination and Remuneration Committees are
otherwise composed solely of non-executive directors deemed by the Board to be
independent. The NYSE’s corporate governance listing standards also require that
a compensation committee has direct responsibility to review and approve Group
Chief Executive remuneration. The Board, rather than the Remuneration Committee,
reserves the authority to make the final determination of the remuneration of
the Group Chief Executive.
The Group Audit
Committee complies with the provisions of the NYSE’s corporate governance
listing standards that relate to the composition, responsibilities and operation
of audit committees. In June 2008, the company submitted its required annual
written affirmation to the NYSE confirming its full compliance with those and
other applicable provisions. More detailed information about the Audit Committee
and its work during 2008 is set out in the Audit Committee Report on pages 136
and 137.
Board
of directors
The Board is the
principal decision-making forum for the company. It has overall responsibility
for leading and controlling the company and is accountable to shareholders for
financial and operational performance. The Board approves Group strategy and
monitors performance. The Board has adopted a formal schedule of matters
detailing key aspects of the company’s affairs reserved to it for its decision.
This schedule is reviewed annually.
The roles of the
Chairman and Group Chief Executive are distinct and separate, with a clear
division of responsibilities. The Chairman leads the Board and ensures the
effective engagement and contribution of all executive and non-executive
directors. The Group Chief Executive has responsibility for all Group businesses
and acts in accordance with the authority delegated by the Board. Responsibility
for the development of policy and strategy and operational management is
delegated to the Group Chief Executive and other executive
directors.
All directors
participate in discussing strategy, performance and the financial and risk
management of the company. Meetings of the Board are structured to allow open
discussion.
There were nine
scheduled Board meetings during 2008. The directors were supplied with
comprehensive papers in advance of each Board meeting covering the Group’s
principal business activities. Members of executive management attend and make
regular presentations at meetings of the Board. In addition to scheduled
meetings, a number of ad hoc Board meetings and Chairman’s Committee meetings
were held during 2008. These meetings were attended by the majority of
directors.
The Board is aware
of the other commitments of its directors and has established procedures for
ensuring that the Board’s powers for authorising directors’ conflicts of
interest are being operated effectively. With effect from 1 October 2008, the
Companies Act 2006 introduced a statutory duty on directors to avoid conflicts
of interest. Since that date, the Board has considered, and where appropriate
authorised, any actual or potential conflicts of interests that directors may
have.
133
Board
balance and independence
The Board currently
comprises the Chairman, three executive directors and five non-executive
directors. The Board functions effectively and efficiently and is considered to
be of an appropriate size. The directors provide the Group with the knowledge,
mix of skills, experience and networks of contacts required. The Board
Committees comprise directors with a variety of relevant skills and experience
so that no undue reliance is placed on any individual.
The non-executive
directors combine broad business and commercial experience with independent and
objective judgement. The balance between non-executive and executive directors
enables the Board to provide clear and effective leadership and maintain the
highest standards of integrity across the company’s business activities. The
names and biographies of all Board members are set out on pages 125 and
126.
In
addition to the Chairman, there are five independent and three non-independent
directors (i.e. the executive directors) on the Board. Following Bob Scott
ceasing to be a director on 6 February 2009, a replacement senior independent
director will be appointed in due course. The Board plans to appoint, in
consultation with HM Treasury, three new independent non-executive directors to
the Board during 2009.
The Board considers
that the Chairman was independent on appointment and all non-executive directors
are independent for the purposes of the Code.
Re-election
of directors
Directors must
stand for re-election by shareholders at least once every three years. Any
non-executive directors who have served for more than nine years will also stand
for annual re-election and the Board will consider their independence at that
time. The proposed re-election of directors is subject to prior review by the
Board.
The names of
directors standing for election at the 2009 Annual General Meeting are included
on page 130 and further information will be given in the Chairman’s letter to
shareholders in relation to the company’s Annual General Meeting.
Information,
induction and professional development
All directors
receive accurate, timely and clear information on all relevant matters, and have
access to the advice and services of the Group General Counsel and Group
Secretary who is responsible to the Board for ensuring that Board procedures are
followed and that applicable rules and regulations are complied with. In
addition, all directors are able, if necessary, to obtain independent
professional advice at the company’s expense.
Each new director
receives a formal induction on joining the Board, including visits to the
Group’s major businesses and meetings with directors and senior management. The
induction is tailored to the director’s specific requirements. Directors are
advised of appropriate training and professional development opportunities and
undertake the training and professional development they consider necessary in
assisting them to carry out their duties as a director.
Performance
evaluation
The Board has
undertaken a formal and rigorous evaluation of its own performance and that of
its committees and individual directors.
In
2008, this was conducted internally using detailed questionnaires and individual
meetings with each director. Amongst the areas reviewed were the role of the
Board and Committees, composition, meetings and processes, performance and
reporting, and external relationships. The Board has considered and discussed
reports on the outcomes of the evaluations and is satisfied with the way in
which the evaluations have been conducted.
A
number of initiatives are already underway aimed at improving the overall
performance and effectiveness of the Board, including further Board
appointments, restructuring Board agendas and allowing more time at Board
meetings to consider strategic issues. In addition, a number of actions have
already been taken to enhance reporting to the Board and Audit Committee on risk
matters, liquidity and funding.
In
addition, the former Chairman evaluated the individual performance of each
director. The former senior independent director canvassed the views of the
executive directors and met with the non-executive directors as a group without
the former Chairman present to consider his performance.
Board
Committees
In
order to provide effective oversight and leadership, the Board has established a
number of Board Committees with particular responsibilities. The Committee
chairmanship and membership are reviewed on a regular basis. The names and
biographies of all Board Committee members are set out on pages 125 and
126.
The terms of
reference of the Audit, Remuneration and Nominations Committees and the standard
terms and conditions of appointment of non-executive directors are available on
the Group’s website (www.rbs.com) and copies are available on
request.
Audit
Committee
All members of the
Audit Committee are independent non-executive directors. The Audit Committee
holds at least five meetings each year. The Audit Committee’s report is set out
on pages 136 and 137.
Remuneration
Committee
The Remuneration
Committee is comprised of independent non-executive directors, together with the
Chairman of the Board. The Remuneration Committee holds at least three meetings
each year.
The Directors’
Remuneration Report is contained on pages 141 to 152.
134
Nominations
Committee
The Nominations
Committee comprises independent non-executive directors, under the chairmanship
of the Chairman of the Board. The Nominations Committee meets as
required.
The Nominations
Committee is responsible for assisting the Board in the formal selection and
appointment of directors. The committee engages with external consultants, it
considers potential candidates and recommends appointments of new directors to
the Board. The appointments are based on merit against objective criteria,
including the time available of the potential director and the commitment which
will be required.
In
addition, the Nominations Committee considers succession planning for the
Chairman, Group Chief Executive and non-executive directors. The Nominations
Committee takes into account the knowledge, mix of skills, experience and
networks of contacts which are anticipated to be needed on the Board in the
future. The Chairman, Group Chief Executive and non-executive directors meet to
consider executive succession planning. No director is involved in decisions
regarding his or her own succession.
Meetings
The number of
scheduled meetings of the Board and the Audit, Remuneration and Nominations
Committees and individual attendance by members in 2008 is shown
below.
|
Board
|
Audit
|
Remuneration
|
Nominations
|
|
|
Total number
of
|
||||
|
meetings in
2008
|
9
|
6
|
3
|
5
|
|
Number of
meetings
|
||||
|
attended in
2008:
|
||||
|
Sir Tom
McKillop (1)
|
9
|
—
|
3
|
5
|
|
Sir Fred
Goodwin (2)
|
8
|
—
|
—
|
—
|
|
Mr
Buchan
|
8
|
6
|
2
|
—
|
|
Mr Cameron
(3)
|
7
|
—
|
—
|
—
|
|
Dr Currie
(4)
|
9
|
—
|
3
|
—
|
|
Mr
Fish
|
8
|
—
|
—
|
—
|
|
Mr Fisher
(2)
|
6
|
—
|
—
|
—
|
|
Mr Friedrich
(4)
|
9
|
6
|
—
|
—
|
|
Mr Hester
(5)
|
3
|
—
|
—
|
—
|
|
Mr
Hunter
|
9
|
6
|
—
|
5
|
|
Mr Koch
(4)
|
9
|
—
|
—
|
—
|
|
Mrs Kong
(4)
|
9
|
—
|
3
|
—
|
|
Mr
MacHale
|
9
|
6
|
—
|
—
|
|
Mr McFarlane
(5)
|
3
|
—
|
—
|
—
|
|
Mr
Pell
|
9
|
—
|
—
|
—
|
|
Sir Steve
Robson (4)
|
7
|
6
|
—
|
—
|
|
Mr Ryan
(5)
|
3
|
—
|
—
|
—
|
|
Mr Scott
(4)
|
9
|
—
|
3
|
3
|
|
Mr Sutherland
(4)
|
7
|
—
|
3
|
4
|
|
Mr
Whittaker
|
9
|
—
|
—
|
—
|
Notes:
|
(1)
|
Sir Tom
McKillop ceased to be a director on 3 February
2009.
|
|
(2)
|
Sir Fred
Goodwin and Mark Fisher ceased to be directors on 21 November
2008.
|
|
(3)
|
Johnny Cameron
ceased to be a director on 13 October
2008.
|
|
(4)
|
Jim Currie,
Bill Friedrich, Bud Koch, Janis Kong, Sir Steve Robson, Bob Scott and
Peter Sutherland ceased to be directors on 6 February
2009.
|
|
(5)
|
Stephen
Hester, John McFarlane and Arthur 'Art' Ryan were appointed as directors
on 1 October 2008.
|
Relations
with shareholders
The company
communicates with shareholders through the Annual Report and Accounts and by
providing information in advance of the Annual General Meeting. Individual
shareholders can raise matters relating to their shareholdings and the business
of the Group at any time throughout the year primarily by letter, telephone or
email via the Group’s website (www.rbs.com/ir).
Shareholders are
given the opportunity to ask questions at the Annual General Meeting or submit
written questions in advance. The chairmen of the Audit, Remuneration and
Nominations Committees are available to answer questions at the Annual General
Meeting.
Communication with
the company’s largest institutional shareholders is undertaken as part of the
company’s investor relations programme. The Chairman meets with the Group’s top
20 investors at least once every 12 months to discuss issues such as strategy,
business performance and corporate governance. During the year, the directors
received analysts’ reports and a monthly report from the Group’s investor
relations department which includes an analysis of share price movements, the
Group’s performance against the sector, and key broker comments. In addition,
information on major investor relations activities and changes to external
credit ratings is provided. Detailed market and shareholder feedback is provided
to the Board after results and other market announcements. The senior
independent director was available throughout 2008 to shareholders should they
have considered their concerns were not being addressed through the normal
channels. The arrangements used to ensure that directors develop an
understanding of the views of major shareholders are considered as part of the
annual Board performance evaluation.
The Chairman, Group
Chief Executive and Group Finance Director communicate shareholder views to the
Board as a whole.
The Board
commissions a survey of investor perceptions periodically. The survey is
undertaken on behalf of the Board by independent consultants and the outcomes of
the study are considered by the Board.
135
For certain recent
developments relating to matters discussed in this report, which is dated 25
February 2009, you should read the “Recent Developments” section of this
document.
The
current members of the Remuneration Committee are Colin Buchan (committee
chairman), John McFarlane and Philip Hampton. The members of the Remuneration
Committee comprise independent non- executive directors, together with the
Chairman of the Board.
During 2008, Jim
Currie, Janis Kong, Sir Tom McKillop, Bob Scott and Peter Sutherland were
members of the Remuneration Committee.
The Remuneration
Committee makes recommendations to the Board on the remuneration arrangements
for the executive directors and the Chairman. The Board as a whole reserves the
authority to make the final determination of the remuneration of directors as it
considers that this two-stage process allows greater consideration and
evaluation and is consistent with the unitary nature of the Board. No director
is included in decisions regarding his or her own remuneration.
The Remuneration
Committee also approves the remuneration arrangements of senior executives below
Board level who are members of the Group Executive Management Committee, on the
recommendation of the Group Chief Executive, and maintains high level oversight
of the application of remuneration policy below this level. The Committee
oversees annual incentive plans and reviews all long-term incentive arrangements
operated by the Group.
The non-executive
directors’ fees are reviewed annually by the Board, on the recommendation of the
Chairman of the Board. The level of remuneration reflects the responsibility and
time commitment of directors and the level of fees paid to non-executive
directors of comparable major UK companies. Non-executive directors do not
participate in any incentive or performance plan; with the exception of the
Chairman, more details of which can be found on page 143. It has been agreed
that no increase to non-executive directors’ fees will be made in
2009.
During the year,
the Remuneration Committee received advice from Watson Wyatt and Mercer on
matters relating to directors’ remuneration in the UK and US respectively,
together with advice from the Group Director, Human Resources and the Group
General Counsel and Group Secretary on general remuneration matters. In
addition, the Remuneration Committee has taken account of the views of the Group
Chief Executive on performance assessment of the executive directors and members
of the Group Executive Management Committee.
Watson Wyatt also
provided professional services in the ordinary course of business, including
actuarial advice and benefits administration services to subsidiaries of the
Group and investment consulting and actuarial advice to the trustees of some of
the Group’s pension funds. Mercer provided advice and support in connection with
a range of compensation benefits, pension actuarial and investment matters. The
advisers to the Remuneration Committee are appointed independently by the
Committee, which reviews its selection of advisers annually. The Committee is
satisfied that the consultants from Watson Wyatt and Mercer who advise the
Committee operate independently of the consulting teams undertaking other work
with the Group.
Remuneration
policy
It
has been agreed with HM Treasury that, in addition to complying with the
Association of British Insurer's best practice code on remuneration, the
Remuneration Committee will continue to work to ensure that future remuneration
arrangements are linked to long-term value creation in line with the Group’s
business strategy, with appropriate account taken of risk and avoiding a bias
towards short-term indicators such as profit or revenues. The company is also
actively engaged in discussions with the Financial Services Authority (FSA) in
relation to remuneration policies and practices across the banking sector and
intends that any remuneration policies should take account of the FSA’s
remuneration design criteria.
Accordingly, in
conjunction with the Board and independent advisers and in consultation with
shareholders, the Remuneration Committee is undertaking a comprehensive review
of its remuneration policy which it will complete during 2009.
UK-based
executive directors’ remuneration balance
The chart above
shows the make up of remuneration opportunity for on- target annual performance,
and with long term incentive awards shown at their fair value at the date of
grant. Short term incentive payments earned in relation to 2009 performance will
be deferred and will vest, subject to satisfactory performance, over the
following three years. The actual value of the share option and MPP awards will
depend on performance over the period 2009 – 2011 and the share price at the
time awards vest.
Components
of executive remuneration 2009
UK
based directors
Salary
Base salaries of
executive directors have been reviewed and it has been agreed that no increases
in base salaries will be made as part of the annual 2009 review.
141
Benefits
Executive directors
are eligible to receive various employee benefits or a cash equivalent from a
flexible benefits account, on a similar basis to other employees.
142
Details of pension
arrangements of directors are shown on page 152. Where cash allowances are paid
in place of pension accrual (or of pension accrual on salary over the pension
earnings cap), they are shown on page 147. Executive directors also receive
cover for death-in-service benefits.
For all executive
directors joining on or after 1 October 2006, pension provision is in the form
of a pension allowance which may be used to participate in The Royal Bank of
Scotland Group Defined Contribution Pension Fund which is open to all employees,
or to invest in alternative pension arrangements, or to take all or some of the
allowance in cash. In addition, as employees, executive directors are eligible
to participate in Sharesave and Buy As You Earn schemes. These schemes are not
subject to performance conditions since they are operated on an all- employee
basis.
Annual
incentives
No
annual incentive has been awarded to any executive director in relation to 2008
performance.
UK-based executive
directors have a normal maximum annual incentive opportunity of between 160% and
200% of salary (with an exceptional maximum opportunity of 200-250% of salary).
The on-target opportunity is 107% to 133% of salary.
The Remuneration
Committee has determined that, for the financial year ending 31 December 2009,
the exceptional maximum incentive opportunity will not be
available.
Any annual
incentive payments earned in 2009 will be deferred and released in equal annual
instalments over three years. The Remuneration Committee will reserve the right
to review performance prior to each element of deferred incentive vesting and
reduce the proportion that vests if there is evidence that the financial
performance for 2009 was materially inaccurate or there is a material loss or
reputational damage as a result of activity during the deferral
period.
Any incentive
payments to executive directors in 2009 will reflect performance across five
performance categories: Strategic Direction, Finance and Operations,
Stakeholders, Efficiency and Control and Capability and Development. Group
business unit and functional performance will be considered as
appropriate.
Long-term
incentives
The
company provides long-term incentives in the form of share options and share or
share equivalent awards. Their objective is to encourage the creation of value
over the long term and to align the rewards of the executive directors with the
returns to shareholders. The Remuneration Committee is formulating proposals
under which awards may be made in the future under two plans; the Medium-term
Performance Plan and the Executive Share Option Plan. Any awards will be subject
to rigorous performance conditions on which shareholders will be
consulted.
Medium-term
Performance Plan
The
Medium-term Performance Plan was approved by shareholders in April 2001. Each
executive director is eligible for an annual award under the plan in the form of
share or share equivalent awards. Whilst the rules of the plan allow awards over
shares worth up to one and a half times earnings, the Remuneration Committee has
adopted a policy of granting awards based on a multiple of salary. No changes
will be made to this policy without prior consultation with
shareholders.
The award levels
for 2009 will be reduced from the policy applied for awards in
2008.
Options
The Executive Share
Option Plan was approved by shareholders at the company’s 2007 Annual General
Meeting.
In
2008, options were granted to executive directors under the Executive Share
Option Plan approved by shareholders in 2007, over shares worth between one and
a half times salary and three times salary. For 2009, the award levels will be
reduced from the policy applied in 2008.
Shareholding
guidelines
The
Group operates shareholding guidelines for executive directors. The target
shareholding level is 200% of gross annual salary for the Group Chief Executive
and 100% of gross annual salary for executive directors. Target shareholding
levels are determined by reference to ordinary shares held, together with any
vested awards under the Group’s Medium-term Performance Plan. Executive
directors have a period of five years in which to build up their shareholdings
to meet the guideline levels.
Group
Chief Executive – Stephen Hester
Stephen
Hester became Group Chief Executive on 21 November 2008. His annual basic salary
is £1,200,000.
Mr
Hester also received certain share awards on appointment as Group Chief
Executive and share awards to replace bonus and share awards he forfeited on
leaving The British Land Company PLC. Mr Hester was granted conditional share
awards over a total of 10,407,081 shares. Subject to their terms, the majority
of these awards will vest between February 2009 (immediately after the
announcement of the 2008 annual results) and the third anniversary of his
appointment as Group Chief Executive.
Chairman
– Philip Hampton
Philip
Hampton became Chairman-designate on 19 January 2009, and Chairman on 3 February
2009. His fee is £750,000 per annum. He will also receive a one-off restricted
share award over shares in the company which will vest, subject to the
satisfaction of appropriate performance conditions, on the third anniversary of
the date of grant. The amount of this award will be two times his annual fee,
based on the share price at the date of grant.
Sir
Fred Goodwin
Sir Fred Goodwin’s
employment with the company ended on 31 January 2009. Under the terms of an
agreement reached on 13 October 2008, he has waived any payment in lieu of
notice and his rights in respect of unvested executive share options and
unvested awards under the Medium-term Performance Plan have lapsed. He will not
receive a short term incentive payment for the financial year ended 31 December
2008.
Johnny
Cameron
Johnny
Cameron’s employment with the company will end on 28 February 2009. Under the
terms of an agreement reached with him on 19 December 2008, he will not receive
pay in lieu of notice or short term incentive payments for 2008 or
2009.
143
Mark
Fisher
Mark
Fisher’s employment with the company will end on 6 March 2009. He will not
receive any short term incentive payment in respect of either 2008 or
2009.
144
The
performance graph illustrates the performance of the company over the past five
years in terms of total shareholder return compared with that of the companies
comprising the FTSE 100 Index. This Index has been selected because it
represents a cross-section of leading UK companies. The total shareholder return
for FTSE banks for the same period has been added for comparison. The total
shareholder return for the company and the indices have been rebased to 100 for
2003.
Total
shareholder return
Service
contracts
The
company’s policy in relation to the duration of contracts with directors is that
executive directors’ contracts generally continue until termination by either
party, subject to the required notice, or until retirement. The notice period
under the service contracts of executive directors will not normally exceed 12
months. In relation to newly recruited executive directors, subject to the prior
approval of the Remuneration Committee, the notice period may be extended beyond
12 months if there is a clear case for this. Where a longer period of notice is
initially approved on appointment, it will normally be structured such that it
will automatically reduce to 12 months in due course.
All new service
contracts for executive directors are subject to approval by the Remuneration
Committee. Those contracts normally include standard clauses covering the
performance review process, the company’s normal disciplinary procedure, and
terms for dismissal in the event of failure to perform or in situations
involving actions in breach of the Group’s policies and standards.
Any compensation
payment made in connection with the departure of an executive director will be
subject to approval by the Remuneration Committee, having regard to the terms of
the service contract and the reasons for termination. Any Board members who
leave the company in the future will receive a severance package which is
reasonable and perceived as fair.
No
compensation payment was made to Sir Fred Goodwin, Johnny Cameron or Mark Fisher
in respect of their ceasing to be directors.
Information
regarding directors’ service contracts is shown below:
|
Date
of
current
contract
|
Notice
period –
from
company
|
Notice
period –
from
executive
|
|
|
Executive
directors
|
|||
|
Mr
Hester
|
4 November
2008
|
see note
(1)
|
12
months
|
|
Mr
Pell
|
20 February
2006
|
12
months
|
6
months
|
|
Mr
Whittaker
|
19 December
2005
|
12
months
|
12
months
|
|
Former
executive directors
|
|||
|
Sir Fred
Goodwin
|
1 August
1998
|
see page
143
|
see page
143
|
|
Mr
Cameron
|
29 March
1998
|
12
months
|
6
months
|
|
Mr
Fisher
|
27 February
2007
|
12
months
|
12
months
|
Note:
|
(1)
|
On
appointment, Mr Hester was entitled to 24 months notice from the company.
This will be reduced on a daily basis, so that it will be 12 months by the
first anniversary of the commencement of his employment. As at 25 February
2009, Mr Hester’s notice period was 20½
months.
|
|
|
145
Except as noted
below, in the event of severance where any contractual notice period is not
worked, the employing company may pay a sum to the executive in lieu of this
period of notice. Any such payment would, at maximum, comprise base salary and a
cash value in respect of fixed benefits (including pension plan contributions).
In the event of situations involving breach of the employing company’s policies
resulting in dismissal, reduced or no payments may be made to the executive.
Depending on the circumstances of the termination of employment, the executive
may be entitled, or the Remuneration Committee may exercise its discretion to
allow, the executive to exercise outstanding awards under long-term incentive
arrangements subject to the rules of the relevant plan.
In
the event that Stephen Hester’s employment is terminated by the company (other
than by reason of his personal underperformance), the following will apply.
First Mr Hester will be entitled to receive a payment in lieu of notice to the
value of base salary, bonus and benefits (including pension contributions).
Secondly, any share awards granted to him to replace bonus and share awards he
forfeited on leaving The British Land Company PLC will vest immediately on such
termination.
If
Mr Hester’s employment is terminated by reason of his personal underperformance,
the company is entitled to terminate by giving written notice with immediate
effect and without making any payment in lieu thereof and Mr Hester will forfeit
any unvested stock awards. If he resigns voluntarily and the company does not
require him to work out his notice period, Mr Hester may receive a payment in
lieu of notice based on salary only (i.e. no bonus or benefits) and he will also
forfeit any unvested stock awards.
Gordon Pell is a
member of The Royal Bank of Scotland Group Pension Fund (the RBS Fund) and is
contractually entitled to receive all pension benefits in accordance with its
terms. The RBS Fund rules allow all members, including executive directors, who
retire early at the request of their employer to receive a pension based on
accrued service with no discount applied for early retirement. The provision for
an undiscounted pension on early retirement at employer request will not apply
to any executive director appointed in the future. The RBS Fund is closed to
employees, including any executive directors, joining the Group after 30
September 2006.
Chairman
and non-executive directors
The
original dates of appointment as directors of the company and the dates for the
Chairman and non-executive directors next election or re-election are as
follows:
|
Date
first appointed
|
Date
for election
or
next re-election
|
|
|
Philip
Hampton
|
19 January
2009
|
2009
|
|
Mr
Buchan
|
1 June
2002
|
2011
|
|
Mr
Hunter
|
1 September
2004
|
2010
|
|
Mr
MacHale
|
1 September
2004
|
2010
|
|
Mr
McFarlane
|
1 October
2008
|
2009
|
|
Mr
Ryan
|
1 October
2008
|
2009
|
Under the company’s
Articles of Association, all directors must resign and seek re-election by
shareholders at least every three years. The dates in the table above reflect
the latest date for election or re-election.
The non-executive
directors do not have service contracts or notice periods although they have
letters of engagement reflecting their responsibilities and commitments. No
compensation would be paid to any non-executive director in the event of
termination.
The Chairman,
Philip Hampton, will be entitled to receive a payment in lieu of notice if his
appointment is terminated by the Group other than by reason of his personal
underperformance. This payment will be based on a notice period of 24 months
initially, reducing on a daily basis so that from the first anniversary of his
appointment his notice period is 12 months.
146
The tables and
explanatory notes on pages 147 to 152 report the
remuneration of each director for the year ended 31 December 2008 and have been
audited by the company’s auditors, Deloitte LLP.
|
Salary/
fees
£000
|
Pension
allowance
£000
|
Benefits
£000
|
2008
Total
£000
|
2007
Total
£000
|
||||||||||||||||
|
Executive
directors
|
||||||||||||||||||||
|
Mr Hester
(1)
|
163 | 52 | 1 | 216 | — | |||||||||||||||
|
Mr
Pell
|
908 | — | 1 | 909 | 2,204 | |||||||||||||||
|
Mr
Whittaker
|
829 | 282 | 4 | 1,115 | 2,450 | |||||||||||||||
|
Former
Chairman
|
||||||||||||||||||||
|
Sir Tom
McKillop (2)
|
787 | — | — | 787 | 750 | |||||||||||||||
|
Former
executive directors
|
||||||||||||||||||||
|
Sir Fred
Goodwin (3)
|
1,297 | — | 39 | 1,336 | 4,190 | |||||||||||||||
|
Mr Cameron
(4)
|
902 | 312 | 25 | 1,239 | 3,256 | |||||||||||||||
|
Mr Fish
(5)
|
324 | — | 40 | 364 | 1,253 | |||||||||||||||
|
Mr Fisher
(6)
|
760 | 187 | 441 | 1,388 | 2,358 | |||||||||||||||
Notes:
|
(1)
|
Mr Hester was
appointed Group Chief Executive on 21 November 2008. He was previously a
non-executive director from 1 October
2008.
|
|
(2)
|
Sir Tom
McKillop ceased to be Chairman and a director on 3 February
2009.
|
|
(3)
|
Sir Fred
Goodwin ceased to be Group Chief Executive and a director on 21 November
2008. His employment with the Group ceased on 31 January
2009.
|
|
(4)
|
Mr Cameron
ceased to be a director on 13 October 2008 and will cease employment with
the Group on 28 February 2009.
|
|
(5)
|
From 1 January
2008 until 30 April 2008, Mr Fish was an executive director of the
company. He became a non-executive director on 1 May 2008 and ceased to be
a director on 31 December 2008. Throughout this period, he was
non-executive chairman of RBS America and Citizens. Mr Fish is a
non-executive director of Textron Inc. and Tiffany & Co. and retained
the fees paid to him in this respect. For 2008, he received remuneration
from Textron Inc. of US$260,500, including deferred fees. He received an
annual fee of US$48,500 from Tiffany &
Co.
|
|
(6)
|
Mr Fisher
ceased to be a director on 21 November 2008 and will cease employment with
the Group on 6 March 2009. In line with the its international assignment
policy, costs such as additional tax and accommodation incurred as a
result of Mr Fisher’s assignment to the Netherlands are met by the Group.
These additional costs are shown in ‘Benefits’
above.
|
|
Board
fees
£000
|
Board
committee
fees
£000
|
2008
Total
£000
|
2007
Total
£000
|
|||||||||||||
|
Non-executive
directors
|
||||||||||||||||
|
Mr
Buchan
|
73 | 57 | 130 | 122 | ||||||||||||
|
Mr
Hunter
|
73 | 101 | 174 | 162 | ||||||||||||
|
Mr
MacHale
|
73 | 33 | 106 | 100 | ||||||||||||
|
Mr McFarlane
(1)
|
18 | — | 18 | — | ||||||||||||
|
Mr Ryan
(1)
|
18 | — | 18 | — | ||||||||||||
|
Former
non-executive directors
|
||||||||||||||||
|
Dr Currie
(2)
|
73 | 16 | 89 | 85 | ||||||||||||
|
Mr Friedrich
(2)
|
73 | 33 | 106 | 100 | ||||||||||||
|
Mr Koch
(2)
|
73 | — | 73 | 70 | ||||||||||||
|
Mrs Kong
(2)
|
73 | 16 | 89 | 85 | ||||||||||||
|
Sir Steve
Robson (2)
|
73 | 33 | 106 | 100 | ||||||||||||
|
Mr Scott (2,
3)
|
174 | 160 | ||||||||||||||
|
Mr Sutherland
(2)
|
73 | 29 | 102 | 97 | ||||||||||||
Notes:
|
(1)
|
Appointed as
directors on 1 October 2008.
|
|
(2)
|
Retired as
directors on 6 February 2009.
|
|
(3)
|
Mr Scott’s
senior independent director fee covered all Board and Board Committee work
including Chairmanship of the Remuneration
Committee.
|
No
director received any expense allowances chargeable to UK income tax or
compensation for loss of office/termination payment. The non-executive directors
did not receive any bonus payments or benefits.
147
Options
to subscribe for ordinary shares of 25p each i n the company granted to, and
exercised by, directors during the year ended 31 December 2008 are shown in the
table below. Options held at 1 January 2008 and all subsequent figures have been
restated to reflect the rights issue in June 2008 and the capitalisation issue
in September 2008.
|
Options
exercised in
2008
|
||||||||||||||||||||||||||||||||
|
Options
held at 1 January
2008
|
Options
granted
in
2008
|
Number
|
Market
price
at
date of exercise
£
|
Options
lapsed
in
2008
|
Option
price £
|
|||||||||||||||||||||||||||
|
Options
held at 31 December 2008
|
||||||||||||||||||||||||||||||||
|
Number
|
Exercise
period
|
|||||||||||||||||||||||||||||||
|
Mr
Pell
|
104,252 | 4.80 | 104,252 | 14.08.04 – 13.08.11 | ||||||||||||||||||||||||||||
| 98,879 | 5.07 | 98,879 | 14.03.05 – 13.03.12 | |||||||||||||||||||||||||||||
| 178,412 | 3.45 | 178,412 | 13.03.06 – 12.03.13 | |||||||||||||||||||||||||||||
| 169,158 | 4.84 | 169,158 | 11.03.07 – 10.03.14 | |||||||||||||||||||||||||||||
| 181,304 | 4.83 | 181,304 | 10.03.08 – 09.03.15 | |||||||||||||||||||||||||||||
| 223,428 | 5.17 | 223,428 | 09.03.09 – 08.03.16 | |||||||||||||||||||||||||||||
| 310,364 | 4.70 | 310,364 | 16.08.10 – 15.08.17 | |||||||||||||||||||||||||||||
| 640,871 | 2.97 | 640,871 | 06.03.11 – 05.03.18 | |||||||||||||||||||||||||||||
| 1,265,797 | 1,906,668 | |||||||||||||||||||||||||||||||
|
Mr
Whittaker
|
203,113 | 5.17 | 203,113 | 09.03.09 – 08.03.16 | ||||||||||||||||||||||||||||
| 335,269 | 4.70 | 335,269 | 16.08.10 – 15.08.17 | |||||||||||||||||||||||||||||
| 4,423 | 4,423 | 3.86 | — | |||||||||||||||||||||||||||||
| 582,803 | 2.97 | 582,803 | 06.03.11 – 05.03.18 | |||||||||||||||||||||||||||||
| 9,218 | 1.89 | 9,218 | 01.10.15 – 31.03.16 | (1) | ||||||||||||||||||||||||||||
| 542,805 | 1,130,403 | |||||||||||||||||||||||||||||||
|
Sir Fred
Goodwin (2)
|
10,614 | 3.12 | 10,614 | 01.02.09 – 03.03.09 | ||||||||||||||||||||||||||||
| 97,826 | 3.34 | 97,826 | 01.02.09 – 02.06.09 | |||||||||||||||||||||||||||||
| 550,458 | 2.18 | 550,458 | 01.02.09 – 31.01.10 | |||||||||||||||||||||||||||||
| 4,538 | 3.64 | 4,538 | 01.02.09 – 31.07.09 | (1) | ||||||||||||||||||||||||||||
| 156,559 | 4.80 | 156,559 | 01.02.09 – 31.01.10 | |||||||||||||||||||||||||||||
| 147,960 | 5.07 | 147,960 | 01.02.09 – 31.01.10 | |||||||||||||||||||||||||||||
| 260,812 | 3.45 | 260,812 | 01.02.09 – 31.01.10 | |||||||||||||||||||||||||||||
| 516,521 | 4.84 | 516,521 | 01.02.09 – 31.01.10 | |||||||||||||||||||||||||||||
| 569,814 | 4.83 | 569,814 | 01.02.09 – 31.01.10 | |||||||||||||||||||||||||||||
| 580,333 | 5.17 | — |
waived
|
09.03.09 – 08.03.16 | ||||||||||||||||||||||||||||
| 830,192 | 4.70 | — |
waived
|
16.08.10 – 15.08.17 | ||||||||||||||||||||||||||||
| 1,508,727 | 2.97 | — |
waived
|
06.03.11 – 05.03.18 | ||||||||||||||||||||||||||||
| 3,725,627 | 2,315,102 | |||||||||||||||||||||||||||||||
|
Mr Cameron
(3)
|
68,764 | 3.12 | — |
lapsed
|
— | |||||||||||||||||||||||||||
| 137,610 | 2.18 | — |
lapsed
|
— | ||||||||||||||||||||||||||||
| 93,863 | 4.80 | — |
lapsed
|
— | ||||||||||||||||||||||||||||
| 113,925 | 5.07 | — |
lapsed
|
— | ||||||||||||||||||||||||||||
| 188,444 | 3.45 | — |
lapsed
|
— | ||||||||||||||||||||||||||||
| 180,781 | 4.84 | — |
lapsed
|
— | ||||||||||||||||||||||||||||
| 290,089 | 4.83 | — |
lapsed
|
— | ||||||||||||||||||||||||||||
| 304,674 | 5.17 | — |
lapsed
|
— | ||||||||||||||||||||||||||||
| 447,026 | 4.70 | — |
lapsed
|
— | ||||||||||||||||||||||||||||
| 847,713 | 2.97 | — |
lapsed
|
— | ||||||||||||||||||||||||||||
| 4,966 | 1.89 | — |
lapsed
|
— | (1) | |||||||||||||||||||||||||||
| 1,825,176 | — | |||||||||||||||||||||||||||||||
|
Mr
Fish
|
386,479 | 386,479 | 2.80 | 2.60 | — | |||||||||||||||||||||||||||
| 134,715 | 4.83 | 134,715 | 10.03.08 – 09.03.15 | |||||||||||||||||||||||||||||
| 398,130 | 5.17 | 398,130 | 09.03.09 – 08.03.16 | |||||||||||||||||||||||||||||
| 625,329 | 4.70 | 625,329 | 16.08.10 – 15.08.17 | |||||||||||||||||||||||||||||
| 1,544,653 | 1,158,174 | |||||||||||||||||||||||||||||||
|
Mr
Fisher(4)
|
51,162 | 2.58 | 51,162 | 01.04.02 – 31.03.09 | ||||||||||||||||||||||||||||
| 518 | 3.64 | 518 | 01.10.08 – 31.03.09 | (1) | ||||||||||||||||||||||||||||
| 119,267 | 2.18 | 119,267 | 29.03.03 – 28.03.10 | |||||||||||||||||||||||||||||
| 78,099 | 4.80 | 78,099 | 14.08.04 – 13.08.11 | |||||||||||||||||||||||||||||
| 81,324 | 5.07 | 81,324 | 14.03.05 – 13.03.12 | |||||||||||||||||||||||||||||
| 145,094 | 3.45 | 145,094 | 13.03.06 – 12.03.13 | |||||||||||||||||||||||||||||
| 142,041 | 4.84 | 142,041 | 11.03.07 – 10.03.14 | |||||||||||||||||||||||||||||
| 217,565 | 4.83 | 217,565 | 10.03.08 – 09.03.15 | |||||||||||||||||||||||||||||
| 220,042 | 5.17 | 220,042 | 09.03.09 – 08.03.16 | |||||||||||||||||||||||||||||
| 312,919 | 4.70 | 312,919 | 16.08.10 – 15.08.17 | |||||||||||||||||||||||||||||
| 1,922 | 1,922 | 3.93 | — | |||||||||||||||||||||||||||||
| 593,399 | 2.97 | 593,399 | 06.03.11 – 05.03.18 | |||||||||||||||||||||||||||||
| 4,966 | 1.89 | 4,966 | 01.10.11 – 31.03.12 | (1) | ||||||||||||||||||||||||||||
| 1,369,953 | 1,966,396 | |||||||||||||||||||||||||||||||
Notes:
|
(1)
|
Options held
under the sharesave schemes, which are not subject to performance
conditions.
|
|
(2)
|
Options held
at 21 November 2008 when he ceased to be a director. Unvested awards were
waived on cessation and lapsed on 31 January 2009. In respect of his
vested options under The Royal Bank of Scotland Group plc 1999 Executive
Share Option Scheme, any options.
|
148
exercisable at 31
January 2009 remain exercisable subject to and in accordance with the rules of
that plan for 12 months from that date, but not after the 10th anniversary of
their grant.
|
(3)
|
Options held
at 13 October 2008 when he ceased to be a director. All outstanding awards
will lapse when his employment with the company ends on 28 February 2009,
which is reflected in the table
above.
|
|
(4)
|
Options held
at 21 November 2008 when he ceased to be a director. All outstanding
awards will lapse when his employment with the company ends on 6 March
2009.
|
149
No
options had their terms and conditions varied during the accounting period to 31
December 2008. No payment is required on the award of an option.
For executive share
options granted in 2007 and 2008, the performance condition is based on the
average annual growth in the company’s adjusted EPS over the three-year
performance period commencing with the year of grant. The calibration of the EPS
growth measure is agreed by the Remuneration Committee at the time of each grant
having regard to the business plan, prevailing economic conditions and analysts’
forecasts.
In
respect of the grant of options in 2008, options will only be exercisable if,
over the three-year period, the growth in the company’s adjusted EPS has been at
least 5 per cent. per annum (the “threshold level”). The percentage of options
that vest is then determined on a straight-line basis between 30 per cent. at
the threshold level and 100 per cent. at the maximum level for growth in
adjusted EPS of 9 per cent. per annum.
The market price of
the company’s ordinary shares at 31 December 2008 was 49.4p and the range during
the year ended 31 December 2008 was 41.4p to 370.5p.
In
the ten year period to 31 December 2008, awards made that could require new
issue shares under the company’s share plans represented 2.1 % of the company’s
issued ordinary share capital, leaving an available dilution headroom of 7.9%.
The company meets its employee share plan obligations through a combination of
new issue shares and market purchase shares.
Medium
Term Performance Plan
Scheme
interests at 1 January 2008 and the related market price on award in the table
below have been restated to reflect the rights issue in June 2008 and the
capitalisation issue in September 2008.
|
Scheme
interests
(share
equivalents) at 1 January 2008
|
Awards
granted
in
2008
|
Market
price
on
award
£
|
Awards
vested
in
2008
|
Awards
exercised
in
2008
|
Share
interest (share equivalents) at
31
December 2008
|
End
of period
for
qualifying
conditions
to
be
fulfilled
|
|||||||||||||||||
|
Mr
Pell
|
148,953 | 5.17 |
Nil
|
— |
lapsed
|
31.12.08 | |||||||||||||||||
| 138,384 | 5.85 | 138,384 | 31.12.09 | ||||||||||||||||||||
| 305,177 | 2.97 | 305,177 | 31.12.10 | ||||||||||||||||||||
| 287,337 | 443,561 | ||||||||||||||||||||||
|
Mr
Whittaker
|
135,410 | 5.17 |
Nil
|
— |
lapsed
|
31.12.08 | |||||||||||||||||
| 128,134 | 5.85 | 128,134 | 31.12.09 | ||||||||||||||||||||
| 277,525 | 2.97 | 277,525 | 31.12.10 | ||||||||||||||||||||
| 263,544 | 405,659 | ||||||||||||||||||||||
|
Sir Fred
Goodwin (1)
|
333,324 | 4.56 | 333,324 |
vested
|
31.12.03 | ||||||||||||||||||
| 121,288 | 5.19 | 121,288 |
vested
|
31.12.04 | |||||||||||||||||||
| 348,202 | 5.17 |
Nil
|
— |
lapsed
|
31.12.08 | ||||||||||||||||||
| 333,145 | 5.85 | — |
waived
|
31.12.09 | |||||||||||||||||||
| 754,364 | 2.97 | — |
waived
|
31.12.10 | |||||||||||||||||||
| 1,135,959 | 454,612 | ||||||||||||||||||||||
|
Mr Cameron
(2)
|
199,994 | 4.56 | — |
vested
|
31.12.03 | ||||||||||||||||||
| 79,096 | 5.19 | — |
vested
|
31.12.04 | |||||||||||||||||||
| 174,103 | 5.17 |
Nil
|
— |
lapsed
|
31.12.08 | ||||||||||||||||||
| 170,845 | 5.85 | — |
lapsed
|
31.12.09 | |||||||||||||||||||
| 403,673 | 2.97 | — |
lapsed
|
31.12.10 | |||||||||||||||||||
| 624,038 | — | ||||||||||||||||||||||
|
Mr
Fish
|
111,479 | 5.17 |
Nil
|
— |
lapsed
|
31.12.08 | |||||||||||||||||
| 102,587 | 5.85 | 102,587 | 31.12.09 | ||||||||||||||||||||
| 214,066 | 102,587 | ||||||||||||||||||||||
|
Mr Fisher
(3)
|
71,651 | 4.56 | 71,651 |
vested
|
31.12.03 | ||||||||||||||||||
| 28,660 | 5.19 | 28,660 |
vested
|
31.12.04 | |||||||||||||||||||
| 125,741 | 5.17 |
Nil
|
— |
lapsed
|
31.12.08 | ||||||||||||||||||
| 119,593 | 5.85 | 119,593 | 31.12.09 | ||||||||||||||||||||
| 282,570 | 2.97 | 282,570 | 31.12.10 | ||||||||||||||||||||
| 345,645 | 502,474 | ||||||||||||||||||||||
Notes:
|
(1)
|
Awards held at
21 November 2008 when he ceased to be a director. Unvested awards were
waived on cessation and lapsed on 31 January
2009.
|
|
(2)
|
Awards held at
13 October 2008 when he ceased to be a director. Subsequently Mr Cameron
exercised his vested awards on 5 December 2008. All outstanding awards
will lapse when his employment with the company ends on 28 February
2009.
|
|
(3)
|
Awards held at
21 November 2008 when he ceased to be a director. All unvested awards and
any vested, but unexercised, awards will lapse when his employment with
the company ends on 6 March 2009.
|
For any awards that
have vested, participants holding option-based awards can exercise their right
over the underlying share equivalents at any time up to ten years from the date
of grant.
No
variation was made to any of the terms of the plan during the year.
150
Awards made in 2007
and 2008 are subject to two performance measures; 50% of the award vests on a
relative Total Shareholder Return (TSR) measure and 50% vests on growth in
adjusted earnings per share (EPS) over the three year performance
period.
For the TSR
element, vesting is based on the level of outperformance by the Group of the
median of the comparator group TSR over the performance period. Awards made
under the plan will not vest if the company’s TSR is below the median of the
comparator group. Achievement of median TSR performance against comparator
companies will result in vesting of 25% of the award. Outperformance of median
TSR performance by up to 9% will result in vesting on a straight-line basis from
25% to 125%, outperformance by 9% to 18% will result in vesting on a
straight-line basis from 125% to 200%. Vesting at 200% will occur if the company
outperforms the median TSR performance of the comparator group by at least 18%.
For awards made in 2007, the companies in the comparator group were ABN AMRO
Holdings N.V.; Banco Santander Central Hispano, S.A.; Barclays PLC; Citigroup
Inc; HBOS plc; HSBC Holdings plc; Lloyds TSB Group plc and Standard Chartered
PLC. Following the acquisition of ABN AMRO by the consortium members in October
2007, the Remuneration Committee agreed that Fortis N.V. would replace ABN AMRO
in the comparator group. Subsequently, for awards made in 2008, Fortis N.V. was
replaced by Deutsche Bank Group.
The level of EPS
growth over the three year period is calculated by comparing the adjusted EPS in
the year prior to the year of grant with that in the final year of the
performance period. Each year the vesting schedule for the EPS growth measure is
agreed by the Remuneration Committee at the time of grant, having regard to the
business plan, performance relative to comparators and analysts’
forecasts.
For the awards made
in 2007, the EPS element of the awards will not vest if EPS growth is below 5%
per annum compound over the three year period. Where EPS growth is between 5%
per annum and 10% per annum vesting will occur on a straight-line basis from 25%
to 100%. Vesting at 100% will occur if EPS growth is at least 10% per annum
compound. For the awards made in 2008, an EPS growth threshold level of 5% per
annum to a maximum level of 9% per annum was agreed.
Restricted
Share Award
Interests at 1
January 2008 and the related prices on award and vesting in the table below have
been restated to reflect the rights issue in June 2008 and the capitalisation
issue in September 2008.
|
Awards
held
at
1
January
2008
|
Awards
granted
in
2008
|
Market
price on award
£
|
Awards
vested
in
2008
|
Market
price
on
vesting
£
|
Value
of Awards
vested
£
|
Awards
held
at
31
December 2008
|
End
of the
period
for
qualifying
conditions
to
be
fulfilled
|
|||||||||||||||||||||||||
|
Mr
Hester
|
— | 8,575,019 | 0.48 | 577,964 | 0.48 | 277,423 | 7,997,055 | 21.11.08 – 29.05.11 | (1) | |||||||||||||||||||||||
| — | 1,832,062 | 0.48 | 1,832,062 | 21.11.09 – 21.11.11 | (2) | |||||||||||||||||||||||||||
| — | 10,407,081 | 9,829,117 | ||||||||||||||||||||||||||||||
|
Mr Whittaker
(3)
|
109,208 | 5.41 | 109,208 | 3.37 | 368,503 | — | ||||||||||||||||||||||||||
| 90,718 | 5.41 | 90,718 | 01.02.09 | (4,5) | ||||||||||||||||||||||||||||
| 44,500 | 5.41 | 44,500 | 01.02.10 | |||||||||||||||||||||||||||||
| 244,426 | 135,218 | |||||||||||||||||||||||||||||||
Notes:
|
(1)
|
Awards to
replace bonus and share awards Mr Hester forfeited on leaving The British
Land Company PLC, which reflect the vesting dates of the original
awards.
|
|
(2)
|
These awards
vest as to 1/3 on each of the first, second and third anniversary of
award, subject to their terms.
|
|
(3)
|
Awards were
granted to Mr Whittaker in lieu of unvested share awards from his previous
employer.
|
|
(4)
|
The end period
for qualifying conditions is subject to any restrictions on dealing in the
Group’s shares which may be in place and to which Mr Whittaker may be
subject. As a result of the close period prior to the announcement of the
Group’s results, the end of the period for qualifying conditions to be
fulfilled in 2009 is 26 February
2009.
|
|
(5)
|
Award has now
vested and shares will be released to Mr Whittaker on 26 February
2009.
|
Citizens
Long Term Incentive Plan (1)
|
Interests
at 1 January 2008
|
Benefits
received from awards
vesting
during the year
|
Interests
at 31 December 2008
|
|
|
Mr
Fish
|
LTIP awards
for the 3 year periods:
|
||
|
01.01.05 –
31.12.07
|
nil
|
—
|
|
|
01.01.06 –
31.12.08
|
nil(2)
|
—
|
|
|
01.01.07 –
31.12.09
|
nil(2)
|
—
|
Notes:
|
(1)
|
This cash LTIP
was approved by shareholders at the company’s Annual General Meeting in
April 2005. Performance is measured on a combination of growth in Profit
before tax and Relative Return on Equity based on a comparison of Citizens
with comparator US banks.
|
|
(2)
|
When Mr Fish
stepped down from the Board on 31 December 2008, under the terms of the
Citizens LTIP, his outstanding awards vested, subject to pro-rating for
the elapsed proportion of the performance period and for performance to
date. As a result, there was nil vesting for all
awards.
|
No
variation was made to any of the terms of the plan during the year.
151
Directors’
pension arrangements
Stephen Hester and
Guy Whittaker are provided with a cash allowance in place of pension benefits as
detailed on page 147.
During 2008, Johnny
Cameron, Sir Fred Goodwin and Gordon Pell accrued pensionable service in The
Royal Bank of Scotland Group Pension Fund (the “RBS Fund”). The RBS Fund is a
defined benefit fund registered with HM Revenue & Customs under the Finance
Act 2004.
Sir Fred Goodwin
was, and Gordon Pell is, provided with additional pension benefits on a defined
benefit basis outwith the RBS Fund. The figures shown below include the accrual
in respect of these arrangements. A funded, non-registered arrangement provides
Sir Fred Goodwin’s benefits to the extent they are not provided by the RBS
Fund.
Johnny Cameron’s
benefits were based on salary limited to the pensions earning cap and he
received a cash allowance in place of pension on salary above this
cap.
Mark Fisher opted
to cease future accrual of pension benefit within the RBS Fund with effect from
6 April 2006. The increase in pension shown in the table arises from his
increase in pensionable salary over the year. He was provided with a cash
allowance in place of further pension benefits as detailed on page
147.
The cash allowances
for Johnny Cameron and Mark Fisher are shown on page 147.
Larry Fish accrued
pension benefits under a number of arrangements in the US. Defined benefits were
built up under the Citizens’ Qualified Plan, Excess Plan and Supplemental
Executive Retirement Arrangement. In addition, he was a member of two defined
contribution arrangements: a Qualified 401(k) Plan and an Excess 401(k) Plan
until he became a non-executive director on 1 May 2008.
Of
the total transfer value shown as at 31 December 2008, 54% relates to benefits
in funded pension schemes.
Disclosure of these
benefits has been made in accordance with the United Kingdom Listing Authority
Listing Rules and with the Directors’ Remuneration Report Regulations
2002.
|
Age
at
31
December 2008
|
Accrued
entitlement at 31 December 2008
£000
p.a
|
Additional
pension
earned
during
the
year
ended
31
December 2008
£000
p.a
|
Additional
pension
earned
during
the
year
ended
31
December 2008*
£000
p.a
|
Transfer
value
as at
31
December 2008
£000
|
Transfer
value
as at
31
December 2007
£000
|
Increase
in
transfer
value
during year ended
31
December 2008
£000
|
Transfer
value
for
the additional pension
earned
during
the
year
ended
31
December
2008*
£000
|
|||||||||||||||||||||||||
|
Mr
Pell
|
58 | 517 | 94 | 77 | 9,831 | 8,403 | 1,428 | 1,473 | ||||||||||||||||||||||||
|
Sir Fred
Goodwin
|
50 | 693 | 114 | 92 | 16,630 | (1) | 8,370 | 8,260 | 2,060 | |||||||||||||||||||||||
|
Mr
Cameron
|
54 | 62 | 6 | 4 | 1,363 | (1) | 931 | 432 | 78 | |||||||||||||||||||||||
|
Mr
Fish
|
64 | $2,237 | $157 | $157 | $27,004 | $24,101 | $2,903 | $1,893 | ||||||||||||||||||||||||
|
Mr
Fisher
|
48 | 398 | 61 | 48 | 4,810 | 4,562 | 248 | 581 | ||||||||||||||||||||||||
*Net of statutory
revaluation applying to deferred pensions
Note:
|
(1)
|
Sir Fred
Goodwin retired from employment with effect from 31 January 2009 and
Johnny Cameron will retire from employment with effect from 28 February
2009. They were contractually entitled to an immediate pension based on
their accrued service, including any service transferred in, with no
discount for early payment. The valuation of their pensions as at 31
December 2008 in the table above takes account of the payment dates of
these pensions. Employees in the RBS Fund, including directors, who retire
early at the request of their employer, are entitled to an immediate
pension with no discount for early payment. The provision for an early
undiscounted pension on early retirement at employer request will not
apply to any executive director appointed in the future. Except as noted
above for Sir Fred Goodwin and Johnny Cameron, the valuations in the table
above make no allowance for early
retirement.
|
There is a
significant difference in the form of disclosure required by the Combined Code
and the Directors’ Remuneration Report Regulations 2002. The former requires
disclosure of the additional pension earned during the year and the transfer
value equivalent to this pension based on stock market conditions at the end of
the year. The latter requires disclosure of the difference between the transfer
value at the start and end of the year and is therefore dependent on the change
in stock market conditions over the course of the year. The above disclosure has
been made in accordance with both of these documents.
The transfer values
disclosed above do not represent a sum paid or payable to the individual
director. Instead they represent a potential liability of the Group’s pension
schemes.
The proportion of
benefits represented by funded pension schemes for Gordon Pell and Larry Fish is
46% and 2% respectively. All benefits for Johnny Cameron, Mark Fisher and Sir
Fred Goodwin are in funded pension schemes.
In
accordance with US market practice, Larry Fish’s pensionable remuneration was
limited to US$4 million per annum.
Larry Fish retired
from employment with effect from 30 April 2008 and his pension benefits started
on 1 May 2008.
Contributions and
allowances paid in the year ended 31 December 2008 under defined contribution
arrangements were:
|
2008
$000
|
2007
$000
|
|||||||
|
Mr
Fish
|
6 | 60 |
Colin
Buchan
Chairman of the
Remuneration Committee
25
February 2009
Shares
beneficially owned at 1 January 2008 in the tables below have been restated to
reflect the capitalisation issue of ordinary shares in September
2008.
|
31
December 2008
|
||||||||||||
|
Executive
directors
|
Shares
beneficially
owned
at
1
January 2008
or
date of
appointment,
if
later
|
Shares
beneficially
owned
|
Value (1)
£
|
|||||||||
|
Mr Hester
(2)
|
—
|
340,524
|
168,219
|
|||||||||
|
Mr
Pell
|
159,278
|
611,927
|
302,292
|
|||||||||
|
Mr
Whittaker
|
285,145
|
1,313,173
|
648,707
|
|||||||||
Notes:
|
(1)
|
The value is
based on the share price at 31 December 2008, which was 49.4p. During the
year ended 31 December 2008 the share price ranged from 41.4p to
370.5p.
|
|
(2)
|
Appointed as a
director on 1 October 2008.
|
As
at 31 December 2008, the executive directors held a technical interest as
potential beneficiaries in The Royal Bank of Scotland Group plc 2001 Employee
Share Trust (51,680,795 shares), The Royal Bank of Scotland plc 1992 Employee
Share Trust (1,028,914 shares) and The Royal Bank of Scotland Group plc 2007 US
Employee Share Trust (8,455,545 shares), being trusts operated for the benefit
of employees of the company and its subsidiaries.
|
Non-executive
directors
|
Shares
beneficially
owned
at
1
January
2008
or
date of
appointment,
if
later
|
Shares
beneficially
owned
at
31
December
2008
|
Value(1)
£
|
|||||||||
|
Mr
Buchan
|
41,000
|
157,515
|
77,812
|
|||||||||
|
Mr
Hunter
|
10,762
|
41,344
|
20,424
|
|||||||||
|
Mr
MacHale
|
74,005
|
284,317
|
140,453
|
|||||||||
|
Mr Ryan
(4)
|
—
|
50,000
|
24,700
|
|||||||||
|
Former
Chairman
|
||||||||||||
|
Sir Tom
McKillop (2)
|
213,200
|
819,086
|
404,628
|
|||||||||
|
Former
Non-executive directors
|
||||||||||||
|
Dr Currie
(3)
|
1,709
|
10,504
|
5,189
|
|||||||||
|
Mr Friedrich
(3)
|
113,236
|
435,039
|
214,909
|
|||||||||
|
Mr Koch
(3)
|
92,250
|
354,413
|
175,080
|
|||||||||
|
Mrs Kong
(3)
|
26,650
|
102,383
|
50,577
|
|||||||||
|
Mr Scott
(3)
|
23,927
|
91,915
|
45,406
|
|||||||||
|
Mr Sutherland
(3)
|
18,084
|
|
69,473
|
34,320
|
||||||||
Notes:
|
(1)
|
The value is
based on the share price at 31 December 2008, which was 49.4p. During the
year ended 31 December 2008 the share price ranged from 41.4p to
370.5p.
|
|
(2)
|
Sir Tom
McKillop ceased to be Chairman and a director on 3 February
2009.
|
|
(3)
|
Retired as
directors on 6 February 2009.
|
|
(4)
|
Appointed as a
director on 1 October 2008.
|
No
other director had an interest in the company’s ordinary shares during the
year.
No
director held a non-beneficial interest in the shares of the company at 31
December 2008, at 1 January 2008 or date of appointment if later.
As
at 25 February 2009 there were no changes to the directors’ interests in shares
shown in the tables above.
Preference
shares
Mr
Koch held 20,000 non-cumulative preference shares of US$0.01 each at 31 December
2008 (2007 – 20,000). No other director shown above had an interest in the
preference shares during the year.
Update
to shareholdings of directors
Gordon Pell’s option over 223,428
shares at ₤5.17 lapsed on 9 March 2009. Guy Whittaker’s options over (i)
45,592 shares at £0.38
were granted on 16 January 2009; (ii) 9,218 shares at £1.89 lapsed on 6 January
2009 and (iii) 203,113 shares at £5.17 lapsed on 9 March
2009.
Guy Whittaker’s restricted stock
award over 90,718 shares
vested on 26 February 2009. Stephen Hester’s restricted stock award over
1,502,291 shares vested on 26 February 2009. Philip Hampton’s restricted stock
award over 5,172,413 shares was granted on 27 February 2009.
As
at 24 April, 2009, the most recent practicable date prior to the filing of
this annual report on Form 20-F, the shareholdings of (i) Stephen Hester
increased to 1,225,643 shares, (ii) Guy Whittaker increased to 1,366,622 shares
and (iii) Philip Hampton increased to 26,312 shares.
153
|
1
|
Net interest
income
|
173
|
|
|
2
|
Non-interest
income
|
173
|
|
|
(excluding
insurance premium income)
|
|||
|
3
|
Operating
expenses
|
174
|
|
|
4
|
Pension
costs
|
176
|
|
|
5
|
Auditors’
remuneration
|
178
|
|
|
6
|
Tax
|
179
|
|
|
7
|
Profit
attributable to other owners
|
180
|
|
|
8
|
Ordinary
dividends
|
180
|
|
|
9
|
Profit dealt
with in the accounts of the company
|
180
|
|
|
10
|
Earnings per
ordinary share
|
181
|
|
|
11
|
Financial
instruments
|
181
|
|
|
12
|
Past due and
impaired financial assets
|
197
|
|
|
13
|
Derivatives
|
199
|
|
|
14
|
Debt
securities
|
201
|
|
|
15
|
Equity
shares
|
203
|
|
|
16
|
Investments
in Group undertakings
|
204
|
|
|
17
|
Intangible
assets
|
205
|
|
|
18
|
Property,
plant and equipment
|
208
|
|
|
19
|
Prepayments,
accrued income and other assets
|
209
|
|
|
20
|
Discontinued
operations and assets and liabilities of disposal groups
|
210
|
|
|
21
|
Settlement
balances and short positions
|
211
|
|
|
22
|
Accruals,
deferred income and other liabilities
|
211
|
|
|
23
|
Deferred
taxation
|
212
|
|
|
24
|
Insurance
business
|
213
|
|
|
25
|
Subordinated
liabilities
|
220
|
|
|
26
|
Minority
interests
|
226
|
|
|
27
|
Share
capital
|
227
|
|
|
28
|
Owners’
equity
|
230
|
|
|
29
|
Leases
|
232
|
|
|
30
|
Collateral
and securitisations
|
233
|
|
|
31
|
Capital
resources
|
235
|
|
|
32
|
Memorandum
items
|
236
|
|
|
33
|
Net cash
(outflow)/inflow from operating activities
|
240
|
|
|
34
|
Analysis of
the net investment in business interests and intangible
assets
|
241
|
|
|
35
|
Interest
received and paid
|
243
|
|
|
36
|
Analysis of
changes in financing during the year
|
244
|
|
|
37
|
Analysis of
cash and cash equivalents
|
244
|
|
|
38
|
Segmental
analysis
|
245
|
|
|
39
|
Directors’
and key management remuneration
|
250
|
|
|
40
|
Transactions
with directors, officers and others
|
251
|
|
|
41
|
Related
parties
|
251
|
|
|
42
|
Post balance
sheet events
|
252
|
|
| 43 | Consolidating financial information | 252 |
155
Independent
auditors’ report to the members of The Royal Bank of Scotland Group
plc
We
have audited the financial statements of The Royal Bank of Scotland Group plc
(“the company”) and its subsidiaries (together “the Group”) for the year ended
31 December 2008 which comprise the accounting policies, the balance sheets as
at 31 December 2008 and 2007, the consolidated income statements, the cash flow
statements, the statements of recognised income and expense for each of the
three years in the period
ended 31 December 2008, the related Notes 1 to 43 and the information identified
as ‘audited’ in the Risk, capital and liquidity management section of the
Business review. These financial statements have been prepared under the
accounting policies set out therein. We have also audited the information in the
part of the directors’ remuneration report that is described as having been
audited.
Respective
responsibilities of directors and auditors
The directors’
responsibilities for preparing the annual report, the directors’ remuneration
report and the financial statements in accordance with applicable law and
International Financial Reporting Standards (IFRS), as adopted by the European
Union, are set out in the statement of directors’ responsibilities.
Our responsibility
is to audit the financial statements and the part of the directors’ remuneration
report described as having been audited in accordance with relevant legal and
regulatory requirements and International Standards on Auditing (UK and
Ireland).
We
report to you our opinion as to whether the financial statements give a true and
fair view and whether the financial statements and the part of the directors’
remuneration report described as having been audited have been properly prepared
in accordance with the Companies Act 1985, and as regards the Group’s
consolidated financial statements, Article 4 of the IAS Regulation. We also
report to you whether in our opinion, the information given in the directors’
report is consistent with the financial statements. The information given in the
directors’ report includes that specific information presented in the Business
review that is cross referred from the business review section of the directors’
report.
In
addition we report to you if, in our opinion, the company has not kept proper
accounting records, we have not received all the information and explanations we
require for our audit, or if information specified by law regarding directors’
remuneration and other transactions is not disclosed.
We
review whether the corporate governance statement reflects the company’s
compliance with the nine provisions of the 2006 Combined Code specified for our
review by the Listing Rules of the Financial Services Authority, and we report
if it does not.
The Listing Rules
do not require us to consider whether the Board or management’s statements on
internal control cover all risks and controls, or form an opinion on the
effectiveness of the Group’s corporate governance procedures or its risk and
control procedures.
We
read the other information contained in the Annual Report and Accounts 2008 as
described in the contents section, including the unaudited part of the
directors’ remuneration report, and consider whether it is consistent with the
audited financial statements. We consider the implications for our report if we
become aware of any apparent misstatements or material inconsistencies with the
financial statements. Our responsibilities do not extend to any further
information outside the Annual Report and Accounts 2008.
Basis
of audit opinion
We
conducted our audit in accordance with International Standards on Auditing (UK
and Ireland) issued by the Auditing Practices Board and with the standards of
the Public Company Accounting Oversight Board (United States). An audit includes
examination, on a test basis, of evidence relevant to the amounts and
disclosures in the financial statements and the part of the directors’
remuneration report described as having been audited. It also includes an
assessment of the significant estimates and judgements made by the directors in
the preparation of the financial statements, and of whether the accounting
policies are appropriate to the circumstances of the company and the Group,
consistently applied and adequately disclosed.
We
planned and performed our audit so as to obtain all the information and
explanations which we considered necessary in order to provide us with
sufficient evidence to give reasonable assurance that the financial statements
and the part of the directors’ remuneration report described as having been
audited are free from material misstatement, whether caused by fraud or other
irregularity or error. In forming our opinion, we also evaluated the overall
adequacy of the presentation of information in the financial statements and the
part of the directors’ remuneration report described as having been
audited.
156
UK
opinion
In
our opinion:
|
·
|
the Group
financial statements give a true and fair view, in accordance with IFRS as
adopted by the European Union, of the state of the Group’s affairs as at
31 December 2008 and of its loss and cash flows for the year then
ended;
|
|
·
|
the company
financial statements give a true and fair view, in accordance with IFRS as
adopted by the European Union as applied in accordance with the provisions
of the companies Act 1985, of the state of affairs of the company as at 31
December 2008;
|
|
·
|
the financial
statements and the part of the directors’ remuneration report described as
having been audited have been properly prepared in accordance with the
Companies Act 1985 and, as regards the Group financial statements, Article
4 of the IAS Regulation; and
|
|
·
|
the
information given in the directors’ report is consistent with the
financial statements.
|
Separate
opinion in relation to IFRS
As
explained in the accounting policies, the Group, in addition to complying with
its legal obligation to comply with IFRS as adopted by the European Union, has
also complied with IFRS as issued by the International Accounting Standards
Board (IASB).
In
our opinion the financial statements give a true and fair view, in accordance
with IFRS, of the state of the Group’s affairs as at 31 December 2008 and of its
loss and cash flows for the year then ended.
US
opinion
In
our opinion, the financial statements present fairly, in all material respects,
the financial position of the Group as at 31 December 2008 and 2007 and the
results of its operations and its cash flows for each of the three years in the
period ended 31 December 2008, in conformity with IFRS as adopted for use in the
European Union and IFRS as issued by the IASB.
The financial
statements for the year ended 31 December 2007 were restated for the matters
disclosed in Note 1 of the Accounting Policies. As discussed in Note
1 of the Accounting Policies and Note 38 to the financial statements,
the Company (1) adopted IFRS 2 in 2009 and, retrospectively, adjusted the 2008
financial statements and related notes for the change and (2) changed the
composition of its reportable segments retrospectively restating the 2008, 2007
and 2006 related notes for the change. Note 43 to the financial statements
was added for the inclusion of consolidating financial information in respect of
The Royal Bank of Scotland plc in accordance with Regulation S-X Rule
3-10.
We
have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the Group’s internal control over
financial reporting as at 31 December 2008, based on the criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organisations of the Treadway Commission.
Our report dated 25
February 2009 which is included in this Form 6-K, expressed an unqualified
opinion on the effectiveness of the Group’s internal control over financial
reporting of the Group.
/s/ Deloitte
LLP
Chartered
Accountants and Registered Auditors
Edinburgh, United
Kingdom
25
February 2009 (30 September 2009 as to the retrospective restatements related to
the adoption of IFRS 2 described in Note 1 of the Accounting Policies, the
change in the composition of reportable segments described in Note 38 to
the financial statements and the consolidating financial information included in
Note 43 to the financial statements)
Consolidated income
statement for
the year ended 31 December 2008
|
Restated
2008
|
2007
|
2006
|
||||||||||||||
|
Note
|
£m | £m | £m | |||||||||||||
|
Interest
receivable
|
49,522 | 32,252 | 24,688 | |||||||||||||
|
Interest
payable
|
(30,847 | ) | (20,183 | ) | (14,092 | ) | ||||||||||
|
Net
interest income
|
1 | 18,675 | 12,069 | 10,596 | ||||||||||||
|
Fees and
commissions receivable
|
2 | 9,831 | 8,278 | 7,116 | ||||||||||||
|
Fees and
commissions payable
|
2 | (2,386 | ) | (2,193 | ) | (1,922 | ) | |||||||||
|
(Loss)/income
from trading activities
|
2 | (8,477 | ) | 1,292 | 2,675 | |||||||||||
|
Other
operating income (excluding insurance premium income)
|
2 | 1,899 | 4,833 | 3,564 | ||||||||||||
|
Insurance net
premium income
|
24 | 6,326 | 6,087 | 5,973 | ||||||||||||
|
Non-interest
income
|
7,193 | 18,297 | 17,406 | |||||||||||||
|
Total
income
|
25,868 | 30,366 | 28,002 | |||||||||||||
|
Staff
costs
|
10,410 | 7,338 | 6,723 | |||||||||||||
|
Premises and
equipment
|
2,593 | 1,703 | 1,421 | |||||||||||||
|
Other
administrative expenses
|
5,464 | 2,969 | 2,658 | |||||||||||||
|
Depreciation
and amortisation
|
3,154 | 1,932 | 1,678 | |||||||||||||
|
Write-down of
goodwill and other intangible assets
|
32,581 | — | — | |||||||||||||
|
Operating
expenses
|
3 | 54,202 | 13,942 | 12,480 | ||||||||||||
|
(Loss)/profit
before other operating charges and impairment
|
(28,334 | ) | 16,424 | 15,522 | ||||||||||||
|
Insurance net
claims
|
24 | 4,430 | 4,624 | 4,458 | ||||||||||||
|
Impairment
|
12 | 8,072 | 1,968 | 1,878 | ||||||||||||
|
Operating
(loss)/profit before tax
|
(40,836 | ) | 9,832 | 9,186 | ||||||||||||
|
Tax
|
6 | (2,323 | ) | 2,044 | 2,689 | |||||||||||
|
(Loss)/profit
from continuing operations
|
(38,513 | ) | 7,788 | 6,497 | ||||||||||||
|
Profit/(loss)
from discontinued operations, net of tax
|
20 | 3,971 | (76 | ) | — | |||||||||||
|
(Loss)/profit
for the year
|
(34,542 | ) | 7,712 | 6,497 | ||||||||||||
|
(Loss)/profit
attributable to:
|
||||||||||||||||
|
Minority
interests
|
(10,832 | ) | 163 | 104 | ||||||||||||
|
Other
owners
|
7 | 596 | 246 | 191 | ||||||||||||
|
Ordinary
shareholders
|
(24,306 | ) | 7,303 | 6,202 | ||||||||||||
| (34,542 | ) | 7,712 | 6,497 | |||||||||||||
|
Per
25p ordinary share:
|
||||||||||||||||
|
Basic
earnings
|
10 | (146.7p | ) | 64.0 | p | 54.4 | p | |||||||||
|
Diluted
earnings
|
10 | (146.7p | ) | 63.4 | p | 53.9 | p | |||||||||
|
Dividends
|
8 | 19.3 | p | 27.0 | p | 21.6 | p | |||||||||
The accompanying
notes on pages 173 to 252, the accounting policies on pages 162 to 172 and the
audited sections of ‘The Business Review: Risk, Capital and Liquidity
Management’ on pages 57 to 123 form an integral part of these financial
statements.
|
Group
|
Company
|
|||||||||||||||||||
|
2008
£m
|
Restated
2007
£m
|
2008
£m
|
2007
£m
|
|||||||||||||||||
|
Note
|
||||||||||||||||||||
|
Assets
|
||||||||||||||||||||
|
Cash and
balances at central banks
|
11 | 12,400 | 17,866 | — | — | |||||||||||||||
|
Loans and
advances to banks
|
11 | 138,197 | 219,460 | 27,031 | 7,686 | |||||||||||||||
|
Loans and
advances to customers
|
11 | 874,722 | 828,538 | — | 307 | |||||||||||||||
|
Debt
securities subject to repurchase agreements
|
30 | 80,576 | 107,651 | — | — | |||||||||||||||
|
Other debt
securities
|
186,973 | 187,005 | — | — | ||||||||||||||||
|
Debt
securities
|
14 | 267,549 | 294,656 | — | — | |||||||||||||||
|
Equity
shares
|
15 | 26,330 | 53,026 | — | — | |||||||||||||||
|
Investments
in Group undertakings
|
16 | — | — | 42,196 | 43,542 | |||||||||||||||
|
Settlement
balances
|
17,832 | 16,589 | — | — | ||||||||||||||||
|
Derivatives
|
13 | 992,559 | 277,402 | 1,168 | 173 | |||||||||||||||
|
Intangible
assets
|
17 | 20,049 | 49,916 | — | — | |||||||||||||||
|
Property,
plant and equipment
|
18 | 18,949 | 18,745 | — | — | |||||||||||||||
|
Deferred
taxation
|
23 | 7,082 | 3,119 | 3 | — | |||||||||||||||
|
Prepayments,
accrued income and other assets
|
19 | 24,402 | 15,662 | 489 | 127 | |||||||||||||||
|
Assets of
disposal groups
|
20 | 1,581 | 45,850 | — | — | |||||||||||||||
|
Total
assets
|
2,401,652 | 1,840,829 | 70,887 | 51,835 | ||||||||||||||||
|
Liabilities
|
||||||||||||||||||||
|
Deposits by
banks
|
11 | 258,044 | 312,294 | 1,802 | 5,572 | |||||||||||||||
|
Customer
accounts
|
11 | 639,512 | 682,363 | 26 | — | |||||||||||||||
|
Debt
securities in issue
|
11 | 300,289 | 274,172 | 14,179 | 13,453 | |||||||||||||||
|
Settlement
balances and short positions
|
21 | 54,277 | 91,021 | — | — | |||||||||||||||
|
Derivatives
|
13 | 971,364 | 272,052 | 361 | 179 | |||||||||||||||
|
Accruals,
deferred income and other liabilities
|
22 | 31,482 | 34,208 | 47 | 8 | |||||||||||||||
|
Retirement
benefit liabilities
|
4 | 2,032 | 460 | — | — | |||||||||||||||
|
Deferred
taxation
|
23 | 4,165 | 5,400 | — | 3 | |||||||||||||||
|
Insurance
liabilities
|
24 | 9,976 | 10,162 | — | — | |||||||||||||||
|
Subordinated
liabilities
|
25 | 49,154 | 38,043 | 10,314 | 7,743 | |||||||||||||||
|
Liabilities
of disposal groups
|
20 | 859 | 29,228 | — | — | |||||||||||||||
|
Total
liabilities
|
2,321,154 | 1,749,403 | 26,729 | 26,958 | ||||||||||||||||
|
Minority
interests
|
26 | 21,619 | 38,388 | — | — | |||||||||||||||
|
Equity
owners
|
27, 28 | 58,879 | 53,038 | 44,158 | 24,877 | |||||||||||||||
|
Total
equity
|
80,498 | 91,426 | 44,158 | 24,877 | ||||||||||||||||
|
Total
liabilities and equity
|
2,401,652 | 1,840,829 | 70,887 | 51,835 | ||||||||||||||||
The accompanying
notes on pages 173 to 252, the accounting policies on pages 162 to 172 and the
audited sections of ‘The Business Review: Risk, Capital and Liquidity
Management’ on pages 57 to 123 form an integral part of these financial
statements.
The accounts were
approved by the Board of directors on 25 February 2009 and signed on its behalf
by:
|
Philip
Hampton
|
Stephen
Hester
|
Guy
Whittaker
|
|
Chairman
|
Group
Chief Executive
|
Group
Finance Director
|
159
Statements of recognised
income and
expense for
the year ended 31 December 2008
|
Group
|
Company
|
|||||||||||||||||||||||
|
Restated
2008
|
2007
|
2006
|
2008
|
2007
|
2006
|
|||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||
|
Available-for-sale
investments
|
||||||||||||||||||||||||
|
Net valuation
(losses)/gains taken direct to equity
|
(8,096 | ) | (776 | ) | 4,792 | — | — | — | ||||||||||||||||
|
Net
loss/(profit) taken to income
|
690 | (513 | ) | (313 | ) | — | — | — | ||||||||||||||||
|
Cash
flow hedges
|
||||||||||||||||||||||||
|
Net losses
taken direct to equity
|
(1,618 | ) | (426 | ) | (109 | ) | — | — | — | |||||||||||||||
|
Net
losses/(gains) taken to earnings
|
162 | (138 | ) | (140 | ) | 2 | 3 | 3 | ||||||||||||||||
|
Exchange
differences on translation of foreign operations
|
15,425 | 2,210 | (1,681 | ) | — | — | — | |||||||||||||||||
|
Actuarial
(losses)/gains on defined benefit plans
|
(2,287 | ) | 2,189 | 1,781 | — | — | — | |||||||||||||||||
|
Income before
tax on items recognised direct in equity
|
4,276 | 2,546 | 4,330 | 2 | 3 | 3 | ||||||||||||||||||
|
Tax on items
recognised direct in equity
|
2,786 | (170 | ) | (1,173 | ) | (1 | ) | (1 | ) | (1 | ) | |||||||||||||
|
Net income
recognised direct in equity
|
7,062 | 2,376 | 3,157 | 1 | 2 | 2 | ||||||||||||||||||
|
(Loss)/profit
for the period
|
(34,542 | ) | 7,712 | 6,497 | (9,602 | ) | 2,499 | 3,499 | ||||||||||||||||
|
Total
recognised income and expense for the year
|
(27,480 | ) | 10,088 | 9,654 | (9,601 | ) | 2,501 | 3,501 | ||||||||||||||||
|
Attributable
to:
|
||||||||||||||||||||||||
|
Equity
owners
|
(23,148 | ) | 8,610 | 7,707 | (9,601 | ) | 2,501 | 3,501 | ||||||||||||||||
|
Minority
interests
|
(4,332 | ) | 1,478 | 1,947 | — | — | — | |||||||||||||||||
| (27,480 | ) | 10,088 | 9,654 | (9,601 | ) | 2,501 | 3,501 | |||||||||||||||||
The accompanying
notes on pages 173 to 252, the accounting policies on pages 162 to 172 and the
audited sections of ‘The Business Review: Risk, Capital and Liquidity
Management’ on pages 57 to 123 form an integral part of these financial
statements.
160
|
Group
|
Company
|
|||||||||||||||||||||||||||
|
Restated
2008
|
2007
|
2006
|
2008
|
2007
|
2006
|
|||||||||||||||||||||||
|
Note
|
£m | £m | £m | £m | £m | £m | ||||||||||||||||||||||
|
Operating
activities
|
||||||||||||||||||||||||||||
|
Operating
(loss)/profit before tax
|
(40,836 | ) | 9,832 | 9,186 | (10,017 | ) | 2,372 | 3,486 | ||||||||||||||||||||
|
Operating
profit before tax on discontinued activities
|
4,208 | 68 | — | — | — | — | ||||||||||||||||||||||
|
Adjustments
for:
|
||||||||||||||||||||||||||||
|
Depreciation
and amortisation
|
3,154 | 1,932 | 1,678 | — | — | — | ||||||||||||||||||||||
|
Write-down of
goodwill and other intangible assets
|
32,581 | — | — | — | — | — | ||||||||||||||||||||||
|
Write-down of
investment in subsidiaries
|
14,321 | — | — | |||||||||||||||||||||||||
|
Interest on
subordinated liabilities
|
2,144 | 1,518 | 1,386 | 499 | 470 | 520 | ||||||||||||||||||||||
|
Charge for
defined benefit pension schemes
|
490 | 489 | 580 | — | — | — | ||||||||||||||||||||||
|
Cash
contribution to defined benefit pension schemes
|
(810 | ) | (599 | ) | (536 | ) | — | — | — | |||||||||||||||||||
|
Elimination
of non-cash items on discontinued activities
|
592 | 62 | — | — | — | — | ||||||||||||||||||||||
|
Elimination
of foreign exchange differences
|
(41,874 | ) | (10,282 | ) | 4,516 | 1,778 | (58 | ) | (22 | ) | ||||||||||||||||||
|
Other
non-cash items
|
8,772 | (3,235 | ) | (1,120 | ) | (478 | ) | 1 | 18 | |||||||||||||||||||
|
Net
cash (outflow)/inflow from trading activities
|
(31,579 | ) | (215 | ) | 15,690 | 6,103 | 2,785 | 4,002 | ||||||||||||||||||||
|
Changes in
operating assets and liabilities
|
(42,219 | ) | 28,261 | 3,980 | (22,254 | ) | 15,562 | (508 | ) | |||||||||||||||||||
|
Net
cash flows from operating activities before tax
|
(73,798 | ) | 28,046 | 19,670 | (16,151 | ) | 18,347 | 3,494 | ||||||||||||||||||||
|
Income taxes
(paid)/received
|
(1,540 | ) | (2,442 | ) | (2,229 | ) | 119 | 6 | 154 | |||||||||||||||||||
|
Net
cash flows from operating activities
|
33 | (75,338 | ) | 25,604 | 17,441 | (16,032 | ) | 18,353 | 3,648 | |||||||||||||||||||
|
Investing
activities
|
||||||||||||||||||||||||||||
|
Sale and
maturity of securities
|
53,390 | 63,007 | 27,126 | — | — | — | ||||||||||||||||||||||
|
Purchase of
securities
|
(55,229 | ) | (61,020 | ) | (19,126 | ) | — | — | — | |||||||||||||||||||
|
Investment in
subsidiaries
|
— | — | — | (10,349 | ) | (18,510 | ) | (1,097 | ) | |||||||||||||||||||
|
Disposal of
subsidiaries
|
— | — | — | 700 | 6 | — | ||||||||||||||||||||||
|
Sale of
property, plant and equipment
|
2,228 | 5,786 | 2,990 | — | — | — | ||||||||||||||||||||||
|
Purchase of
property, plant and equipment
|
(5,757 | ) | (5,080 | ) | (4,282 | ) | — | — | — | |||||||||||||||||||
|
Proceeds on
disposal of discontinued activities
|
20,113 | (334 | ) | — | — | — | — | |||||||||||||||||||||
|
Net
investment in business interests and intangible assets
|
34 | 2,252 | 13,640 | (63 | ) | — | — | — | ||||||||||||||||||||
|
Loans to
subsidiaries
|
— | — | — | — | — | — | ||||||||||||||||||||||
|
Repayments
from subsidiaries
|
— | — | — | — | 469 | 547 | ||||||||||||||||||||||
|
Net
cash flows from investing activities
|
16,997 | 15,999 | 6,645 | (9,649 | ) | (18,035 | ) | (550 | ) | |||||||||||||||||||
|
Financing
activities
|
||||||||||||||||||||||||||||
|
Issue of
ordinary shares
|
49 | 77 | 104 | 49 | 77 | 104 | ||||||||||||||||||||||
|
Placing and
open offer
|
19,741 | — | — | 19,741 | — | — | ||||||||||||||||||||||
|
Rights
issue
|
12,000 | — | — | 12,000 | — | — | ||||||||||||||||||||||
|
Issue of
other equity interests
|
— | 3,600 | 671 | 3,600 | 671 | |||||||||||||||||||||||
|
Issue of paid
up equity
|
— | 1,073 | — | — | 1,073 | — | ||||||||||||||||||||||
|
Issue of
subordinated liabilities
|
2,413 | 1,018 | 3,027 | — | — | 399 | ||||||||||||||||||||||
|
Proceeds of
minority interests issued
|
1,427 | 31,095 | 1,354 | — | — | — | ||||||||||||||||||||||
|
Redemption of
minority interests
|
(13,579 | ) | (545 | ) | (81 | ) | — | — | — | |||||||||||||||||||
|
Repurchase of
ordinary shares
|
— | — | (991 | ) | — | — | (991 | ) | ||||||||||||||||||||
|
Shares
purchased by employee trusts
|
(64 | ) | (65 | ) | (254 | ) | — | — | — | |||||||||||||||||||
|
Shares issued
under employee share schemes
|
2 | 79 | 108 | — | — | 7 | ||||||||||||||||||||||
|
Repayment of
subordinated liabilities
|
(1,727 | ) | (1,708 | ) | (1,318 | ) | — | (469 | ) | (547 | ) | |||||||||||||||||
|
Dividends
paid
|
(3,193 | ) | (3,411 | ) | (2,727 | ) | (2,908 | ) | (3,290 | ) | (2,661 | ) | ||||||||||||||||
|
Interest on
subordinated liabilities
|
(1,967 | ) | (1,522 | ) | (1,409 | ) | (466 | ) | (455 | ) | (497 | ) | ||||||||||||||||
|
Net
cash flows from financing activities
|
15,102 | 29,691 | (1,516 | ) | 28,416 | 536 | (3,515 | ) | ||||||||||||||||||||
|
Effects of
exchange rate changes on cash and cash equivalents
|
29,209 | 6,010 | (3,468 | ) | 761 | 62 | (52 | ) | ||||||||||||||||||||
|
Net
(decrease)/increase in cash and cash equivalents
|
(14,030 | ) | 77,304 | 19,102 | 3,496 | 916 | (469 | ) | ||||||||||||||||||||
|
Cash and cash
equivalents 1 January
|
148,955 | 71,651 | 52,549 | 1,573 | 657 | 1,126 | ||||||||||||||||||||||
|
Cash
and cash equivalents 31 December
|
134,925 | 148,955 | 71,651 | 5,069 | 1,573 | 657 | ||||||||||||||||||||||
The accompanying
notes on pages 173 to 252, the accounting policies on pages 162 to 172 and the
audited sections of ‘The Business Review: Risk, Capital and Liquidity
Management’ on pages 57 to 123 form an integral part of these financial
statements.
1.
Presentation of accounts
The accounts are
prepared in accordance with International Financial Reporting Standards issued
by the International Accounting Standards Board (IASB) and interpretations
issued by the International Financial Reporting Interpretations Committee of the
IASB (together IFRS) as adopted by the European Union (EU). The EU has not
adopted the complete text of IAS 39 ‘Financial Instruments: Recognition and
Measurement’; it has relaxed some of the standard’s hedging requirements. The
Group has not taken advantage of this relaxation and has adopted IAS 39 as
issued by the IASB: the Group’s financial statements are prepared in accordance
with IFRS as issued by the IASB. The date of transition to IFRS for the Group
and the company (The Royal Bank of Scotland Group plc) and the date of their
opening IFRS balance sheets was 1 January 2004.
The Group adopted
IFRS 8 ‘Operating Segments’ with effect from 1 January 2008. Early adoption of
IFRS 8 has not materially affected segmental disclosures.
In
October 2008, the IASB issued and, the European Union endorsed, amendments to
IAS 39 ‘Financial Instruments: Recognition and Measurement’ to permit the
reclassification of financial assets out of the held-for-trading (HFT) and
available-for-sale (AFS) categories subject to certain restrictions. Transfers
must be made at fair value and this fair value becomes the instruments’ new cost
or amortised cost. The amendments are effective from 1 July 2008.
Reclassifications made before 1 November 2008 were backdated to 1 July 2008;
subsequent reclassifications were effective from the date the reclassification
was made.
The Group has
reclassified certain loans and debt securities out of the held-for-trading and
available-for-sale categories into the loans and receivables category. It has
also reclassified certain debt securities out of the held-for-trading category
into the available-for-sale category. The balance sheet values of these assets,
the effect of the reclassification on the income statement and the impairment
losses relating to these assets are shown in Note 11 Financial instruments on
page 193.
The 2007
comparative amounts have been restated for the netting of certain derivative
asset and derivative liability balances with the London Clearing House as
described in Note 13; the finalisation of the ABN AMRO acquisition accounting as
set out in Note 34; and for the classification of Banco Real as a discontinued
operation as described in Note 20.
The 2008 accounts
have been restated for an amendment to IFRS 2 ‘Share-based Payment’ issued by
the IASB in January 2008 that changed the accounting for share awards that have
non-vesting conditions. See accounting policy 24 on page 169. The adoption of
this change has increased the 2008 loss before tax by £169
million.
The Group is not
required to include reconciliations of shareholders’ equity and net income under
IFRS and US GAAP in its filings with the Securities and Exchange Commission in
the US.
The company is
incorporated in the UK and registered in Scotland. The accounts are prepared on
the historical cost basis except that the following assets and liabilities are
stated at their fair value: derivative financial instruments, held-for-trading
financial assets and financial liabilities, financial assets and financial
liabilities that are designated as at fair value through profit or loss,
available-for-sale financial assets and investment property. Recognised
financial assets and financial liabilities in fair value hedges are adjusted for
changes in fair value in respect of the risk that is hedged.
The company
accounts are presented in accordance with the Companies Act 1985.
2.
Basis of consolidation
The consolidated
financial statements incorporate the financial statements of the company and
entities (including certain special purpose entities) that continue to be
controlled by the Group (its subsidiaries). Control exists where the Group has
the power to govern the financial and operating policies of the entity;
generally conferred by holding a majority of voting rights. On acquisition of a
subsidiary, its identifiable assets, liabilities and contingent liabilities are
included in the consolidated accounts at their fair value. Any excess of the
cost (the fair value of assets given, liabilities incurred or assumed and equity
instruments issued by the Group plus any directly attributable costs) of an
acquisition over the fair value of the net assets acquired is recognised as
goodwill. The interest of minority shareholders is stated at their share of the
fair value of the subsidiary’s net assets.
The results of
subsidiaries acquired are included in the consolidated income statement from the
date control passes up until the Group ceases to control them through a sale or
significant change in circumstances.
All intra-group
balances, transactions, income and expenses are eliminated on consolidation. The
consolidated accounts are prepared using uniform accounting
policies.
3.
Revenue recognition
Interest income on
financial assets that are classified as loans and receivables,
available-for-sale or held-to-maturity and interest expense on financial
liabilities other than those at fair value through profit or loss are determined
using the effective interest method. The effective interest method is a method
of calculating the amortised cost of a financial asset or financial liability
(or group of financial assets or liabilities) and of allocating the interest
income or interest expense over the expected life of the asset or liability. The
effective interest rate is the rate that exactly discounts estimated future cash
flows to the instrument’s initial carrying amount. Calculation of the effective
interest rate takes into account fees payable or receivable, that are an
integral part of the instrument’s yield, premiums or discounts on acquisition or
issue, early redemption fees and transaction costs. All contractual terms of a
financial instrument are considered when estimating future cash
flows.
Financial assets
and financial liabilities held-for-trading or designated as at fair value
through profit or loss are recorded at fair value. Changes in fair value are
recognised in profit or loss together with dividends and interest receivable and
payable.
Commitment and
utilisation fees are determined as a percentage of the outstanding facility. If
it is unlikely that a specific lending arrangement will be entered into, such
fees are taken to profit or loss over the life of the facility otherwise they
are deferred and included in the effective interest rate on the
advance.
162
Fees in respect of
services are recognised as the right to consideration accrues through the
provision of the service to the customer. The arrangements are generally
contractual and the cost of providing the service is incurred as the service is
rendered. The price is usually fixed and always determinable. The application of
this policy to significant fee types is outlined below.
Payment
services: this
comprises income received for payment services including cheques cashed, direct
debits, Clearing House Automated Payments (the UK electronic settlement system)
and CHAPs payments (the automated clearing house that processes direct debits
and direct credits). These are generally charged on a per transaction basis. The
income is earned when the payment or transaction occurs. Charges for payment
services are usually debited to the customer’s account monthly or quarterly in
arrears. Accruals are raised for services provided but not charged at period
end.
Card related
services: fees
from credit card business include:
|
·
|
Commission
received from retailers for processing credit and debit card transactions:
income is accrued to the income statement as the service is
performed;
|
|
·
|
Interchange
received: as issuer, the Group receives a fee (interchange) each time a
cardholder purchases goods and services. The Group also receives
interchange fees from other card issuers for providing cash advances
through its branch and Automated Teller Machine networks. These fees are
accrued once the transaction has taken place;
and
|
|
·
|
An annual fee
payable by a credit card holder is deferred and taken to profit or loss
over the period of the service i.e. 12
months.
|
Insurance
brokerage: this
is made up of fees and commissions received from the agency sale of insurance.
Commission on the sale of an insurance contract is earned at the inception of
the policy, as the insurance has been arranged and placed. However, provision is
made where commission is refundable in the event of policy cancellation in line
with estimated cancellations.
Investment
management fees:
fees charged for managing investments are recognised as revenue as the services
are provided. Incremental costs that are directly attributable to securing an
investment management contract are deferred and charged as expense as the
related revenue is recognised.
Insurance
premiums: see
accounting policy 12.
4.
Assets held for sale and discontinued operations
A
non-current asset (or disposal group) is classified as held for sale if the
Group will recover the carrying amount principally through a sale transaction
rather than through continuing use. A non-current asset (or disposal group)
classified as held for sale is measured at the lower of its carrying amount and
fair value less costs to sell. If the asset (or disposal group) is acquired as
part of a business combination it is initially measured at fair value less costs
to sell. Assets and liabilities of disposal groups classified as held for sale
and non-current assets classified as held for sale are shown separately on the
face of the balance sheet.
The results of
discontinued operations are shown as a single amount on the face of the income
statement comprising the post-tax profit or loss of discontinued operations and
the post-tax gain or loss recognised either on measurement to fair value less
costs to sell or on the disposal of the discontinued operation. A discontinued
operation is a cash-generating unit or a group of cash-generating units that
either has been disposed of, or is classified as held for sale, and (a)
represents a separate major line of business or geographical area of operations,
(b) is part of a single co-ordinated plan to dispose of a separate major line of
business or geographical area of operations or (c) is a subsidiary acquired
exclusively with a view to resale.
5.
Pensions and other post-retirement benefits
The Group provides
post-retirement benefits in the form of pensions and healthcare plans to
eligible employees.
For defined benefit
schemes, scheme liabilities are measured on an actuarial basis using the
projected unit credit method and discounted at a rate that reflects the current
rate of return on a high quality corporate bond of equivalent term and currency
to the scheme liabilities. Scheme assets are measured at their fair value. Any
surplus or deficit of scheme assets over liabilities is recognised in the
balance sheet as an asset (surplus) or liability (deficit). The current service
cost and any past service costs together with the expected return on scheme
assets less the unwinding of the discount on the scheme liabilities is charged
to operating expenses. Actuarial gains and losses are recognised in full in the
period in which they occur outside profit or loss and presented in the statement
of recognised income and expense. Contributions to defined contribution pension
schemes are recognised in the income statement when payable.
6.
Intangible assets and goodwill
Intangible assets
that are acquired by the Group are stated at cost less accumulated amortisation
and impairment losses. Amortisation is charged to profit or loss over the
assets’ estimated economic lives using methods that best reflect the pattern of
economic benefits and is included in depreciation and amortisation. The
estimated useful economic lives are as follows:
|
Core deposit
intangibles
|
6 to 10
years
|
|
Other
acquired intangibles
|
5 to 10
years
|
|
Computer
software
|
3 to 5
years
|
Expenditure on
internally generated goodwill and brands is written-off as incurred. Direct
costs relating to the development of internal-use computer software are
capitalised once technical feasibility and economic viability have been
established. These costs include payroll, the costs of materials and services,
and directly attributable overheads. Capitalisation of costs ceases when the
software is capable of operating as intended. During and after development,
accumulated costs are reviewed for impairment against the projected benefits
that the software is expected to generate. Costs incurred prior to the
establishment of technical feasibility and economic viability are expensed as
incurred as are all training costs and general overheads. The costs of licences
to use computer software that are expected to generate economic benefits beyond
one year are also capitalised.
163
Acquired goodwill,
being the excess of the cost of an acquisition over the Group’s interest in the
net fair value of the identifiable assets, liabilities and contingent
liabilities of the subsidiary, associate or joint venture acquired, is initially
recognised at cost and subsequently at cost less any accumulated impairment
losses. Goodwill arising on the acquisition of subsidiaries and joint ventures
is included in the balance sheet category ‘Intangible assets’ and that on
associates within their carrying amounts. The gain or loss on the disposal of a
subsidiary, associate or joint venture includes the carrying value of any
related goodwill.
On
implementation of IFRS, the Group did not restate business combinations that
occurred before January 2004. Under previous GAAP, goodwill arising on
acquisitions after 1 October 1998 was capitalised and amortised over its
estimated useful economic life. Goodwill arising on acquisitions before 1
October 1998 was deducted from equity. The carrying amount of goodwill in the
Group’s opening IFRS balance sheet (1 January 2004) was £ 13,131 million, its
carrying value under previous GAAP.
7.
Property, plant and equipment
Items of property,
plant and equipment are stated at cost less accumulated depreciation and
impairment losses. Where an item of property, plant and equipment comprises
major components having different useful lives, they are accounted for
separately. Property that is being constructed or developed for future use as
investment property is classified as property, plant and equipment and stated at
cost until construction or development is complete, at which time it is
reclassified as investment property.
Depreciation is
charged to profit or loss on a straight-line basis so as to write-off the
depreciable amount of property, plant and equipment (including assets owned and
let on operating leases (except investment property – see accounting policy 9))
over their estimated useful lives. The depreciable amount is the cost of an
asset less its residual value. Land is not depreciated. Estimated useful lives
are as follows:
|
Freehold and
long leasehold buildings
|
50
years
|
|
Short
leaseholds
|
unexpired
period of the
lease
|
|
Property
adaptation costs
|
10 to 15
years
|
|
Computer
equipment
|
up to 5
years
|
|
Other
equipment
|
4 to 15
years
|
Under previous
GAAP, the Group’s freehold and long leasehold property occupied for its own use
was recorded at valuation on the basis of existing use value. The Group elected
to use this valuation as at 31 December 2003 (£ 2,391 million) as deemed cost
for its opening IFRS balance sheet (1 January 2004).
8.
Impairment of intangible assets and property, plant and equipment
At
each reporting date, the Group assesses whether there is any indication that its
intangible assets, or property, plant and equipment are impaired. If any such
indication exists, the Group estimates the recoverable amount of the asset and
the impairment loss if any. Goodwill is tested for impairment annually or more
frequently if events or changes in circumstances indicate that it might be
impaired. If an asset does not generate cash flows that are independent from
those of other assets or groups of assets, recoverable amount is determined for
the cash-generating unit to which the asset belongs. The recoverable amount of
an asset is the higher of its fair value less cost to sell and its value in use.
Value in use is the present value of future cash flows from the asset or
cash-generating unit discounted at a rate that reflects market interest rates
adjusted for risks specific to the asset or cash-generating unit that have not
been reflected in the estimation of future cash flows. If the recoverable amount
of an intangible or tangible asset is less than its carrying value, an
impairment loss is recognised immediately in profit or loss and the carrying
value of the asset reduced by the amount of the loss. A reversal of an
impairment loss on intangible assets (excluding goodwill) or property, plant and
equipment is recognised as it arises provided the increased carrying value does
not exceed that which it would have been had no impairment loss been recognised.
Impairment losses on goodwill are not reversed.
9.
Investment property
Investment property
comprises freehold and leasehold properties that are held to earn rentals or for
capital appreciation or both. It is not depreciated but is stated at fair value
based on valuations by independent registered valuers. Fair value is based on
current prices for similar properties in the same location and condition. Any
gain or loss arising from a change in fair value is recognised in profit or
loss. Rental income from investment property is recognised on a straight-line
basis over the term of the lease. Lease incentives granted are recognised as an
integral part of the total rental income.
10.
Foreign currencies
The Group’s
consolidated financial statements are presented in sterling which is the
functional currency of the company.
Transactions in
foreign currencies are translated into sterling at the foreign exchange rate
ruling at the date of the transaction. Monetary assets and liabilities
denominated in foreign currencies are translated into sterling at the rates of
exchange ruling at the balance sheet date. Foreign exchange differences arising
on translation are reported in income from trading activities except for
differences arising on cash flow hedges and hedges of net investments in foreign
operations. Non-monetary items denominated in foreign currencies that are stated
at fair value are translated into sterling at foreign exchange rates ruling at
the dates the values were determined. Translation differences arising on
non-monetary items measured at fair value are recognised in profit or loss
except for differences arising on available-for-sale non-monetary financial
assets, for example equity shares, which are included in the available-for-sale
reserve in equity unless the asset is the hedged item in a fair value
hedge.
The assets and
liabilities of foreign operations, including goodwill and fair value adjustments
arising on acquisition, are translated into sterling at foreign exchange rates
ruling at the balance sheet date. The revenues and expenses of foreign
operations are translated into sterling at average exchange rates unless these
do not approximate to the foreign exchange rates ruling at the dates of the
transactions. Foreign exchange differences arising on the translation of a
foreign operation are recognised directly in equity and included in profit or
loss on its disposal.
164
11.
Leases
Contracts to lease
assets are classified as finance leases if they transfer substantially all the
risks and rewards of ownership of the asset to the customer. Other contracts to
lease assets are classified as operating leases.
Finance lease
receivables are stated in the balance sheet at the amount of the net investment
in the lease being the minimum lease payments and any unguaranteed residual
value discounted at the interest rate implicit in the lease. Finance lease
income is allocated to accounting periods so as to give a constant periodic rate
of return before tax on the net investment. Unguaranteed residual values are
subject to regular review to identify potential impairment. If there has been a
reduction in the estimated unguaranteed residual value, the income allocation is
revised and any reduction in respect of amounts accrued is recognised
immediately.
Rental income from
operating leases is credited to the income statement on a receivable basis over
the term of the lease. Operating lease assets are included within Property,
plant and equipment and depreciated over their useful lives (see accounting
policy 7).
12.
Insurance
General insurance
General insurance
comprises short-duration contracts, principally property and liability insurance
contracts. Due to the nature of the products sold – retail-based property and
casualty, motor, home and personal health insurance contracts – the insurance
protection is provided on an even basis throughout the term of the
policy.
Premiums from
general insurance contracts are recognised in the accounting period in which
they begin. Unearned premiums represent the proportion of the net premiums that
relate to periods of insurance after the balance sheet date and are calculated
over the period of exposure under the policy, on a daily basis, 24th’s basis or
allowing for the estimated incidence of exposure under policies which are longer
than twelve months. Provision is made where necessary for the estimated amount
of claims over and above unearned premiums including that in respect of future
written business on discontinued lines under the run-off of delegated
underwriting authority arrangements. The provision is designed to meet future
claims and related expenses and is calculated across related classes of business
on the basis of a separate carry forward of deferred acquisition expenses after
making allowance for investment income.
Acquisition
expenses relating to new and renewed business for all classes are expensed over
the period during which the premiums are earned. The principal acquisition costs
so deferred are commissions payable, costs associated with the telesales and
underwriting staff and prepaid claims handling costs in respect of delegated
claims handling arrangements for claims which are expected to occur after the
balance sheet date. Claims and the related reinsurance are recognised in the
accounting period in which the loss occurs. Provision is made for the full cost
of settling outstanding claims at the balance sheet date, including claims
estimated to have been incurred but not yet reported at that date, and claims
handling expenses. The related reinsurance receivable is recognised at the same
time.
Life
assurance
The Group’s
long-term assurance contracts include whole-life term assurance, endowment
assurance, flexible whole-life, pension and annuity contracts that are expected
to remain in force for an extended period of time. Long-term assurance contracts
under which the Group does not accept significant insurance risk are classified
as financial instruments.
The Group
recognises the value of in-force long-term assurance contracts as an asset. Cash
flows associated with in-force contracts and related assets, including
reinsurance cash flows, are projected, using appropriate assumptions as to
future mortality, persistency and levels of expenses and excluding the value of
future investment margins, to estimate future surpluses attributable to the
Group. These surpluses, discounted at a risk-adjusted rate, are recognised as a
separate asset. Changes in the value of this asset are included in profit or
loss.
Premiums
on long-term insurance contracts are recognised as income when receivable.
Claims on long-term insurance contracts reflect the cost of all claims arising
during the year, including claims handling costs. Claims are recognised when the
Group becomes aware of the claim.
Reinsurance
The Group has
reinsurance treaties that transfer significant insurance risk. Liabilities for
reinsured contracts are calculated gross of reinsurance and a separate
reinsurance asset recorded.
13.
Provisions
The Group
recognises a provision for a present obligation resulting from a past event when
it is more likely than not that it will be required to transfer economic
benefits to settle the obligation and the amount of the obligation can be
estimated reliably.
Provision is made
for restructuring costs, including the costs of redundancy, when the Group has a
constructive obligation to restructure. An obligation exists when the Group has
a detailed formal plan for the restructuring and has raised a valid expectation
in those affected by starting to implement the plan or announcing its main
features.
If
the Group has a contract that is onerous, it recognises the present obligation
under the contract as a provision. An onerous contract is one where the
unavoidable costs of meeting the obligations under it exceed the expected
economic benefits. When the Group vacates a leasehold property, a provision is
recognised for the costs under the lease less any expected economic benefits
(such as rental income).
Contingent
liabilities are possible obligations arising from past events whose existence
will be confirmed only by uncertain future events or present obligations arising
from past events that are not recognised because either an outflow of economic
benefits is not probable or the amount of the obligation cannot be reliably
measured. Contingent liabilities are not recognised but information about them
is disclosed unless the possibility of any outflow of economic benefits in
settlement is remote.
165
14.
Taxation
Provision is made
for taxation at current enacted rates on taxable profits, arising in income or
in equity, taking into account relief for overseas taxation where appropriate.
Deferred taxation is accounted for in full for all temporary differences between
the carrying amount of an asset or liability for accounting purposes and its
carrying amount for tax purposes, except in relation to overseas earnings where
remittance is controlled by the Group, and goodwill.
Deferred tax assets
are only recognised to the extent that it is probable that they will be
recovered.
15.
Financial assets
On
initial recognition, financial assets are classified into held-to-maturity
investments; available-for-sale financial assets; held-for-trading; designated
as at fair value through profit or loss; or loans and receivables.
Held-to-maturity
investments – a financial asset may be classified as a held-to-maturity
investment only if it has fixed or determinable payments, a fixed maturity and
the Group has the positive intention and ability to hold to maturity.
Held-to-maturity investments are initially recognised at fair value plus
directly related transaction costs. They are subsequently measured at amortised
cost using the effective interest method (see accounting policy 3) less any
impairment losses.
Held-for-trading
– a financial asset is classified as held-for-trading if it is acquired
principally for sale in the near term, or forms part of a portfolio of financial
instruments that are managed together and for which there is evidence of
short-term profit taking, or it is a derivative (not in a qualifying hedge
relationship). Held-for-trading financial assets are recognised at fair value
with transaction costs being recognised in profit or loss. Subsequently they are
measured at fair value. Gains and losses on held-for-trading financial assets
are recognised in profit or loss as they arise.
Designated as at
fair value through profit or loss – financial assets may be designated as
at fair value through profit or loss only if such designation (a) eliminates or
significantly reduces a measurement or recognition inconsistency; or (b) applies
to a group of financial assets, financial liabilities or both, that the Group
manages and evaluates on a fair value basis; or (c) relates to an instrument
that contains an embedded derivative which is not evidently closely related to
the host contract.
Financial assets
that the Group designates on initial recognition as being at fair value through
profit or loss are recognised at fair value, with transaction costs being
recognised in profit or loss, and are subsequently measured at fair value. Gains
and losses on financial assets that are designated as at fair value through
profit or loss are recognised in profit or loss as they arise.
The principal
category of financial assets designated as at fair value through profit or loss
is policyholders’ assets underpinning insurance and investment contracts issued
by the Group's life assurance businesses. Fair value designation significantly
reduces the measurement inconsistency that would arise if these assets were
classified as available-for-sale.
Loans and
receivables – non-derivative financial assets with fixed or determinable
repayments that are not quoted in an active market are classified as loans and
receivables, except those that are classified as available-for-sale or as
held-for-trading, or designated as at fair value through profit or loss. Loans
and receivables are initially recognised at fair value plus directly related
transaction costs. They are subsequently measured at amortised cost using the
effective interest method (see accounting policy 3) less any impairment
losses.
Available-for-sale
–financial assets that are not classified as held-to-maturity; held-for-trading;
designated as at fair value through profit or loss; or loans and receivables,
are classified as available-for-sale. Financial assets can be designated as
available-for-sale on initial recognition. Available-for-sale financial assets
are initially recognised at fair value plus directly related transaction costs.
They are subsequently measured at fair value. Unquoted equity investments whose
fair value cannot be measured reliably are carried at cost and classified as
available-for-sale financial assets. Impairment losses and exchange differences
resulting from retranslating the amortised cost of foreign currency monetary
available-for-sale financial assets are recognised in profit or loss together
with interest calculated using the effective interest method (see accounting
policy 3). Other changes in the fair value of available-for-sale financial
assets are reported in a separate component of shareholders’ equity until
disposal, when the cumulative gain or loss is recognised in profit or
loss.
Reclassifications
– held-for-trading and available-for-sale financial assets that meet the
definition of loans and receivables (non-derivative financial assets with fixed
or determinable payments that are not quoted in an active market) may be
reclassified to loans and receivables if the Group has the intention and ability
to hold the financial asset for the foreseeable future or until maturity. The
Group typically regards the foreseeable future as twelve months from the date of
reclassification. Additionally, held-for-trading financial assets that do not
meet the definition of loans and receivables may, in rare circumstances, be
transferred to available-for-sale financial assets or to held-to-maturity
investments.
Regular
way purchases of financial assets classified as loans and receivables are
recognised on settlement date; all other regular way purchases are recognised on
trade date.
Fair value for a
net open position in a financial asset that is quoted in an active market is the
current bid price times the number of units of the instrument held. Fair values
for financial assets not quoted in an active market are determined using
appropriate valuation techniques including discounting future cash flows, option
pricing models and other methods that are consistent with accepted economic
methodologies for pricing financial assets.
166
16.
Impairment of financial assets
The
Group assesses at each balance sheet date whether there is any objective
evidence that a financial asset or group of financial assets classified as
held-to-maturity, available-for-sale or loans and receivables is impaired. A
financial asset or portfolio of financial assets is impaired and an impairment
loss incurred if there is objective evidence that an event or events since
initial recognition of the asset have adversely affected the amount or timing of
future cash flows from the asset.
Financial assets
carried at amortised cost – if there is objective evidence that an
impairment loss on a financial asset or group of financial assets classified as
loans and receivables or as held-to- maturity investments has been incurred, the
Group measures the amount of the loss as the difference between the carrying
amount of the asset or group of assets and the present value of estimated future
cash flows from the asset or group of assets discounted at the effective
interest rate of the instrument at initial recognition.
Impairment losses
are assessed individually for financial assets that are individually significant
and individually or collectively for assets that are not individually
significant. In making collective assessment of impairment, financial assets are
grouped into portfolios on the basis of similar risk characteristics. Future
cash flows from these portfolios are estimated on the basis of the contractual
cash flows and historical loss experience for assets with similar credit risk
characteristics. Historical loss experience is adjusted, on the basis of current
observable data, to reflect the effects of current conditions not affecting the
period of historical experience.
Impairment losses
are recognised in profit or loss and the carrying amount of the financial asset
or group of financial assets reduced by establishing an allowance for impairment
losses. If, in a subsequent period, the amount of the impairment loss reduces
and the reduction can be ascribed to an event after the impairment was
recognised, the previously recognised loss is reversed by adjusting the
allowance. Once an impairment loss has been recognised on a financial asset or
group of financial assets, interest income is recognised on the carrying amount
using the rate of interest at which estimated future cash flows were discounted
in measuring impairment.
Financial assets
carried at fair value – when a decline in the fair value of a financial
asset classified as available-for-sale has been recognised directly in equity
and there is objective evidence that the asset is impaired, the cumulative loss
is removed from equity and recognised in profit or loss. The loss is measured as
the difference between the amortised cost of the financial asset and its current
fair value. Impairment losses on available-for-sale equity instruments are not
reversed through profit or loss, but those on available-for-sale debt
instruments are reversed, if there is an increase in fair value that is
objectively related to a subsequent event.
17.
Financial liabilities
On
initial recognition financial liabilities are classified into held-for-trading;
designated as at fair value through profit or loss; or amortised
cost.
A
financial liability is classified as held-for-trading if it is incurred
principally for repurchase in the near term, or forms part of a portfolio of
financial instruments that are managed together and for which there is evidence
of short-term profit taking, or it is a derivative (not in a qualifying hedge
relationship). Held-for-trading financial liabilities are recognised at fair
value with transaction costs being recognised in profit or loss. Subsequently
they are measured at fair value. Gains and losses are recognised in profit or
loss as they arise.
Financial
liabilities that the Group designates on initial recognition as being at fair
value through profit or loss are recognised at fair value, with transaction
costs being recognised in profit or loss, and are subsequently measured at fair
value. Gains and losses on financial liabilities that are designated as at fair
value through profit or loss are recognised in profit or loss as they
arise.
Financial
liabilities may be designated as at fair value through profit or loss only if
such designation (a) eliminates or significantly reduces a measurement or
recognition inconsistency; or (b) applies to a group of financial assets,
financial liabilities or both that the Group manages and evaluates on a fair
value basis; or (c) relates to an instrument that contains an embedded
derivative which is not evidently closely related to the host
contract.
The
principal categories of financial liabilities designated as at fair value
through profit or loss are (a) structured liabilities issued by the Group:
designation significantly reduces the measurement inconsistency between these
liabilities and the related derivatives carried at fair value; and (b)
investment contracts issued by the Group's life assurance businesses: fair value
designation significantly reduces the measurement inconsistency that would arise
if these liabilities were measured at amortised cost.
All other financial
liabilities are measured at amortised cost using the effective interest method
(see accounting policy 3).
Fair value for a
net open position in a financial liability that is quoted in an active market is
the current offer price times the number of units of the instrument held or
issued. Fair values for financial liabilities not quoted in an active market are
determined using appropriate valuation techniques including discounting future
cash flows, option pricing models and other methods that are consistent with
accepted economic methodologies for pricing financial liabilities.
167
18.
Loan commitments
Provision is made
for loan commitments, other than those classified as held-for-trading, if it is
probable that the facility will be drawn and the resulting loan will be
recognised at a value less than the cash advanced. Syndicated loan commitments
in excess of the level of lending under the commitment approved for retention by
the Group are classified as held-for-trading and measured at fair
value.
19.
Derecognition
A
financial asset is derecognised when it has been transferred and the transfer
qualifies for derecognition. A transfer requires that the Group either: (a)
transfers the contractual rights to receive the asset’s cash flows; or (b)
retains the right to the asset’s cash flows but assumes a contractual obligation
to pay those cash flows to a third party. After a transfer, the Group assesses
the extent to which it has retained the risks and rewards of ownership of the
transferred asset. If substantially all the risks and rewards have been
retained, the asset remains on the balance sheet. If substantially all the risks
and rewards have been transferred, the asset is derecognised. If substantially
all the risks and rewards have been neither retained nor transferred, the Group
assesses whether or not it has retained control of the asset. If it has not
retained control, the asset is derecognised. Where the Group has retained
control of the asset, it continues to recognise the asset to the extent of its
continuing involvement.
A
financial liability is removed from the balance sheet when the obligation is
discharged, or cancelled, or expires.
20.
Sale and repurchase transactions
Securities subject
to a sale and repurchase agreement under which substantially all the risks and
rewards of ownership are retained by the Group continue to be shown on the
balance sheet and the sale proceeds recorded as a deposit. Securities acquired
in a reverse sale and repurchase transaction under which the Group is not
exposed to substantially all the risks and rewards of ownership are not
recognised on the balance sheet and the consideration is recorded in Loans and
advances to banks or Loans and advances to customers as
appropriate.
Securities
borrowing and lending transactions are usually secured by cash or securities
advanced by the borrower. Borrowed securities are not recognised on the balance
sheet or lent securities derecognised. Cash collateral received or given is
treated as a loan or deposit; collateral in the form of securities is not
recognised. However, where securities borrowed are transferred to third parties,
a liability for the obligation to return the securities to the stock lending
counterparty is recorded.
21.
Netting
Financial assets
and financial liabilities are offset and the net amount presented in the balance
sheet when, and only when, the Group currently has a legally enforceable right
to set off the recognised amounts; and it intends either to settle on a net
basis, or to realise the asset and settle the liability simultaneously. The
Group is party to a number of arrangements, including master netting agreements,
that give it the right to offset financial assets and financial liabilities but
where it does not intend to settle the amounts net or simultaneously and
therefore the assets and liabilities concerned are presented gross.
22.
Capital instruments
The Group
classifies a financial instrument that it issues as a financial asset, financial
liability or an equity instrument in accordance with the substance of the
contractual arrangement. An instrument is classified as a liability if it is a
contractual obligation to deliver cash or another financial asset, or to
exchange financial assets or financial liabilities on potentially unfavourable
terms. An instrument is classified as equity if it evidences a residual interest
in the assets of the Group after the deduction of liabilities. The components of
a compound financial instrument issued by the Group are classified and accounted
for separately as financial assets, financial liabilities or equity as
appropriate.
23.
Derivatives and hedging
Derivative
financial instruments are initially recognised, and subsequently measured, at
fair value. Derivative fair values are determined from quoted prices in active
markets where available. Where there is no active market for an instrument, fair
value is derived from prices for the derivative’s components using appropriate
pricing or valuation models.
A
derivative embedded in a contract is accounted for as a stand-alone derivative
if its economic characteristics are not closely related to the economic
characteristics of the host contract; unless the entire contract is carried at
fair value through profit or loss.
Gains and losses
arising from changes in the fair value of a derivative are recognised as they
arise in profit or loss unless the derivative is the hedging instrument in a
qualifying hedge. The Group enters into three types of hedge relationship:
hedges of changes in the fair value of a recognised asset or liability or firm
commitment (fair value hedges); hedges of the variability in cash flows from a
recognised asset or liability or a forecast transaction (cash flow hedges); and
hedges of the net investment in a foreign operation.
Hedge relationships
are formally documented at inception. The documentation includes identification
of the hedged item and the hedging instrument, details the risk that is being
hedged and the way in which effectiveness will be assessed at inception and
during the period of the hedge. If the hedge is not highly effective in
offsetting changes in fair values or cash flows attributable to the hedged risk,
consistent with the documented risk management strategy, hedge accounting is
discontinued.
Fair value
hedge – in a fair value hedge, the gain or loss on the hedging instrument
is recognised in profit or loss. The gain or loss on the hedged item
attributable to the hedged risk is recognised in profit or loss and adjusts the
carrying amount of the hedged item. Hedge accounting is discontinued if the
hedge no longer meets the criteria for hedge accounting or if the hedging
instrument expires or is sold, terminated or exercised or if hedge designation
is revoked. If the hedged item is one for which the effective interest rate
method is used, any cumulative adjustment is amortised to profit or loss over
the life of the hedged item using a recalculated effective interest
rate.
Cash flow
hedge –where a derivative financial instrument is designated as a hedge
of the variability in cash flows of a recognised asset or liability or a highly
probable forecast transaction, the effective portion of
168
the gain or loss on
the hedging instrument is recognised directly in equity. The ineffective portion
is recognised in profit or loss. When the forecast transaction results in the
recognition of a financial asset or financial liability, the cumulative gain or
loss is reclassified from equity in the same periods in which the asset or
liability affects profit or loss. Otherwise the cumulative gain or loss is
removed from equity and recognised in profit or loss at the same time as the
hedged transaction. Hedge accounting is discontinued if the hedge no longer
meets the criteria for hedge accounting; if the hedging instrument expires or is
sold, terminated or exercised; if the forecast transaction is no longer expected
to occur; or if hedge designation is revoked. On the discontinuance of hedge
accounting (except where a forecast transaction is no longer expected to occur),
the cumulative unrealised gain or loss recognised in equity is recognised in
profit or loss when the hedged cash flow occurs or, if the forecast transaction
results in the recognition of a financial asset or financial liability, in the
same periods during which the asset or liability affects profit or loss. Where a
forecast transaction is no longer expected to occur, the cumulative unrealised
gain or loss is recognised in profit or loss immediately.
Hedge of net
investment in a foreign operation – in the hedge of a net investment in a
foreign operation, the portion of foreign exchange differences arising on the
hedging instrument determined to be an effective hedge is recognised directly in
equity. Any ineffective portion is recognised in profit or loss. Non-derivative
financial liabilities as well as derivatives may be the hedging instrument in a
net investment hedge.
24.
Share-based payments
The Group grants
options over shares in The Royal Bank of Scotland Group plc to its employees
under various share option schemes. The Group has applied IFRS 2 ‘Share-based
Payment’ to grants under these schemes after 7 November 2002 that had not vested
on 1 January 2005. The expense for these transactions is measured based on the
fair value on the date the options are granted. The fair value is estimated
using valuation techniques which take into account the option’s exercise price,
its term, the risk-free interest rate and the expected volatility of the market
price of The Royal Bank of Scotland Group plc’s shares. Vesting conditions are
not taken into account when measuring fair value, but are reflected by adjusting
the number of options included in the measurement of the transaction such that
the amount recognised reflects the number that actually vest. The fair value is
expensed on a straight-line basis over the vesting period. Following an
amendment to IFRS 2 for accounting periods starting after 1 January
2009, the cancellation of an award with non-vesting conditions triggers
immediate recognition of an expense in respect of any unrecognised element of
the fair value of the award.
25.
Cash and cash equivalents
Cash and cash
equivalents comprises cash and demand deposits with banks together with
short-term highly liquid investments that are readily convertible to known
amounts of cash and subject to insignificant risk of change in
value.
26.
Shares in Group entities
The company’s
investments in its subsidiaries are stated at cost less any
impairment.
Critical
accounting policies and key sources of estimation uncertainty
The reported
results of the Group are sensitive to the accounting policies, assumptions and
estimates that underlie the preparation of its financial statements. UK company
law and IFRS require the directors, in preparing the Group’s financial
statements, to select suitable accounting policies, apply them consistently and
make judgements and estimates that are reasonable and prudent. In the absence of
an applicable standard or interpretation, IAS 8 ‘Accounting Policies, Changes in
Accounting Estimates and Errors’, requires management to develop and apply an
accounting policy that results in relevant and reliable information in the light
of the requirements and guidance in IFRS dealing with similar and related issues
and the IASB’s Framework for the Preparation and Presentation of Financial
Statements. The judgements and assumptions involved in the Group’s accounting
policies that are considered by the Board to be the most important to the
portrayal of its financial condition are discussed below. The use of estimates,
assumptions or models that differ from those adopted by the Group would affect
its reported results.
The
Group’s loan impairment provisions are established to recognise incurred
impairment losses in its portfolio of loans classified as loans and receivables
and carried at amortised cost. A loan is impaired when there is objective
evidence that events since the loan was granted have affected expected cash
flows from the loan. The impairment loss is the difference between the carrying
value of the loan and the present value of estimated future cash flows at the
loan’s original effective interest rate.
At
31 December 2008, gross loans and advances to customers totalled £ 885,611
million (2007 – £ 834,987 million) and customer loan impairment provisions
amounted to £ 10,889 million (2007 – £ 6,449 million).
There are two
components to the Group’s loan impairment provisions: individual and
collective.
Individual
component – all impaired loans that exceed specific thresholds are individually
assessed for impairment. Individually assessed loans principally comprise the
Group’s portfolio of commercial loans to medium and large businesses. Impairment
losses are recognised as the difference between the carrying value of the loan
and the discounted value of management’s best estimate of future cash repayments
and proceeds from any security held. These estimates take into account the
customer’s debt capacity and financial flexibility; the level and quality of its
earnings; the amount and sources of cash flows; the industry in which the
counterparty operates; and the realisable value of any security held. Estimating
the quantum and timing of future recoveries involves significant judgement. The
size of receipts will depend on the future performance of the borrower and the
value of security, both of which will be affected by future economic conditions;
additionally, collateral may not be readily marketable. The actual amount of
future cash flows and the date they are received may differ from these estimates
and consequently actual losses incurred may differ from those recognised in
these financial statements.
169
Collective
component –this is made up of two elements: loan impairment provisions for
impaired loans that are below individual assessment thresholds (collective
impaired loan provisions) and for loan losses that have been incurred but have
not been separately identified at the balance sheet date (latent loss
provisions). These are established on a portfolio basis using a present value
methodology taking into account the level of arrears, security, past loss
experience, credit scores and defaults based on portfolio trends. The most
significant factors in establishing these provisions are the expected loss rates
and the related average life. These portfolios include credit card receivables
and other personal advances including mortgages. The future credit quality of
these portfolios is subject to uncertainties that could cause actual credit
losses to differ materially from reported loan impairment provisions. These
uncertainties include the economic environment, notably interest rates and their
effect on customer spending, the unemployment level, payment behaviour and
bankruptcy trends.
Pensions
The Group operates
a number of defined benefit pension schemes as described in Note 4 on the
accounts. The assets of the schemes are measured at their fair value at the
balance sheet date. Scheme liabilities are measured using the projected unit
method, which takes account of projected earnings increases, using actuarial
assumptions that give the best estimate of the future cash flows that will arise
under the scheme liabilities. These cash flows are discounted at the interest
rate applicable to high-quality corporate bonds of the same currency and term as
the liabilities. Any recognisable surplus or deficit of scheme assets over
liabilities is recognised in the balance sheet as an asset (surplus) or
liability (deficit). In determining the value of scheme liabilities, assumptions
are made as to price inflation, dividend growth, pension increases, earnings
growth and employees. There is a range of assumptions that could be adopted in
valuing the schemes’ liabilities. Different assumptions could significantly
alter the amount of the surplus or deficit recognised in the balance sheet and
the pension cost charged to the income statement. The assumptions adopted for
the Group’s pension schemes are set out in Note 4 on the accounts together with
the sensitivity of reported amounts to changes in those assumptions. A pension
asset of £36 million and a liability of £2,032 million were recognised in the
balance sheet at 31 December 2008 (2007 asset – £575 million; liability – £460
million).
Financial
instruments classified as held-for-trading or designated as at fair value
through profit or loss and financial assets classified as available-for-sale are
recognised in the financial statements at fair value. All derivatives are
measured at fair value. Gains or losses arising from changes in the fair value
of financial instruments classified as held-for-trading or designated as at fair
value through profit or loss are included in the income statement. Unrealised
gains and losses on available-for-sale financial assets are recognised directly
in equity unless an impairment loss is recognised.
Financial
instruments measured at fair value include:
Loans and advances
(held-for-trading and designated as at fair value though profit or loss) –
principally comprise reverse repurchase agreements (reverse repos) and
syndicated loans. In repurchase agreements one party agrees to sell securities
to another and simultaneously agrees to repurchase the securities at a future
date for a specified price. The repurchase price is fixed at the outset, usually
being the original sale price plus an amount representing interest for the
period from the sale to the repurchase. Syndicated loans measured at fair value
are amounts retained, from syndications where the Group was lead manager or
underwriter, in excess of the Group’s intended long term
participation.
Debt securities
(held-for-trading, designated as at fair value though profit or loss and
available-for-sale) – debt securities include those issued by governments,
municipal bodies, mortgage agencies and financial institutions as well as
corporate bonds, debentures and residual interests in
securitisations.
Equity securities
(held-for-trading, designated as at fair value though profit or loss and
available-for-sale) –
comprise equity shares of companies or corporations both listed and
unlisted.
Deposits
by banks and customer accounts (held-for-trading and designated as at fair value
though profit or loss) – deposits measured at fair value principally include
repurchase agreements (repos) discussed above and investment contracts issued by
the Group’s life assurance businesses.
Debt securities in
issue (held-for-trading and designated as at fair value though profit or loss) –
measured at fair value and principally comprise medium term notes.
Short positions
(held-for-trading) – arise in dealing and market making activities where debt
securities and equity shares are sold which the Group does not currently
possess.
Derivatives – these
include swaps, forwards, futures and options. They may be traded on an organised
exchange (exchange-traded) or over-the-counter (OTC). Holders of exchange traded
derivatives are generally required to provide margin daily in the form of cash
or other collateral.
Swaps include
currency swaps, interest rate swaps, credit default swaps, total return swaps
and equity and equity index swaps. A swap is an agreement to exchange cash flows
in the future in accordance with a pre-arranged formula. In currency swap
transactions, interest payment obligations are exchanged on assets and
liabilities denominated in different currencies; the exchange of principal may
be notional or actual. Interest rate swap contracts generally involve exchange
of fixed and floating interest payment obligations without the exchange of the
underlying principal amounts.
Forwards include
forward foreign exchange contracts and forward rate agreements. A forward
contract is a contract to buy (or sell) a specified amount of a physical or
financial commodity, at an agreed price, on an agreed future date. Forward
foreign exchange contracts are contracts for the delayed delivery of currency on
a specified future date. Forward
170
rate
agreements are contracts under which two counterparties agree on the interest to
be paid on a notional deposit of a specified term starting on a specific future
date; there is no exchange of principal. Futures are
exchange-traded forward contracts to buy (or sell) standardised amounts of
underlying physical or financial commodities. The Group buys and sells currency,
interest rate and equity futures.
Options include
exchange-traded options on currencies, interest rates and equities and equity
indices and OTC currency and equity options, interest rate caps and floors and
swaptions. They are contracts that give the holder the right but not the
obligation to buy (or sell) a specified amount of the underlying physical or
financial commodity at an agreed price on an agreed date or over an agreed
period.
Fair value is the
amount for which an asset could be exchanged, or a liability settled, between
knowledgeable, willing parties in an arm’s length transaction. Fair values are
determined from quoted prices in active markets for identical financial assets
or financial liabilities where these are available. Fair value for a net open
position in a financial asset or financial liability in an active market is the
current bid or offer price times the number of units of the instrument held.
Where a trading portfolio contains both financial assets and financial
liabilities which are derivatives of the same underlying instrument, fair value
is determined by valuing the gross long and short positions at current mid
market prices, with an adjustment at portfolio level to the net open long or
short position to amend the valuation to bid or offer as appropriate. Where the
market for a financial instrument is not active, fair value is established using
a valuation technique. These valuation techniques involve a degree of
estimation, the extent of which depends on the instrument’s complexity and the
availability of market-based data. The sensitivity to reasonably possible
alternative assumptions of the fair value of financial instruments valued using
techniques where at least one significant input is unobservable is given in Note
11 on pages 187 and 188.
General
insurance claims
The Group makes
provision for the full cost of settling outstanding claims arising from its
general insurance business at the balance sheet date, including claims estimated
to have been incurred but not yet reported at that date and claims handling
expenses. General insurance claims provisions amounted to £ 5,478 million at 31
December 2008 (2007 – £ 5,466 million).
Provisions are
determined by management based on experience of claims settled and on
statistical models which require certain assumptions to be made regarding the
incidence, timing and amount of claims and any specific factors such as adverse
weather conditions. In order to calculate the total provision required, the
historical development of claims is analysed using statistical methodology to
extrapolate, within acceptable probability parameters, the value of outstanding
claims at the balance sheet date. Also included in the estimation of outstanding
claims are other assumptions such as the inflationary factor used for bodily
injury claims which is based on historical trends and, therefore, allows for
some increase due to changes in common law and statute. Costs for both direct
and indirect claims handling expenses are also included. Outward reinsurance
recoveries are accounted for in the same accounting period as the direct claims
to which they relate. The outstanding claims provision is based on information
available to management and the eventual outcome may vary from the original
assessment. Actual claims experience may differ from the historical pattern on
which the estimate is based and the cost of settling individual claims may
exceed that assumed.
Goodwill
The Group
capitalises goodwill arising on the acquisition of businesses, as discussed in
accounting policy 6. The carrying value of goodwill as at 31 December 2008 was £
15,562 million (2007 – £42,953 million).
Goodwill is the
excess of the cost of an acquired business over the fair value of its net
assets. The determination of the fair value of assets and liabilities of
businesses acquired requires the exercise of management judgement; for example
those financial assets and liabilities for which there are no quoted prices, and
those non-financial assets where valuations reflect estimates of market
conditions, such as property. Different fair values would result in changes to
the goodwill arising and to the post-acquisition performance of the acquisition.
Goodwill is not amortised but is tested for impairment annually or more
frequently if events or changes in circumstances indicate that it might be
impaired.
For the
purposes of impairment testing, goodwill acquired in a business combination is
allocated to each of the Group’s cash-generating units or groups of
cash-generating units expected to benefit from the combination. Goodwill
impairment testing involves the comparison of the carrying value of a
cash-generating unit or group of cash-generating units with its recoverable
amount. The recoverable amount is the higher of the unit’s fair value and its
value in use. Value in use is the present value of expected future cash flows
from the cash-generating unit or group of cash-generating units. Fair value is
the amount obtainable for the sale of the cash-generating unit in an arm’s
length transaction between knowledgeable, willing parties.
Impairment testing
inherently involves a number of judgmental areas: the preparation of cash flow
forecasts for periods that are beyond the normal requirements of management
reporting; the assessment of the discount rate appropriate to the business;
estimation of the fair value of cash-generating units; and the valuation of the
separable assets of each business whose goodwill is being reviewed. Sensitivity
to changes in assumptions is discussed in Note 17 on page 207.
Deferred
tax
The Group makes
provision for deferred tax on short-term and other temporary differences where
tax recognition occurs at a different time from accounting
recognition.
The Group has
recognised deferred tax assets in respect of losses, principally in the UK, and
short-term timing differences. Tax relief is given for operating losses by
offset when future profits arise and therefore the recoverability of deferred
tax assets is a matter of judgement.
171
International
Financial Reporting Standards
The
International Accounting Standards Board issued a revised IAS 23 ‘Borrowing
Costs’ in March 2007. Entities are required to capitalise borrowing costs
attributable to the development or construction of intangible assets or property
plant or equipment. The standard is effective for accounting periods beginning
on or after 1 January 2009 and is not expected to have a material effect on the
Group or company.
The IASB issued a
revised IAS 1 ‘Presentation of Financial Statements’ in September 2007 effective
for accounting periods beginning on or after 1 January 2009. The amendments to
the presentation requirements for financial statements are not expected to have
a material effect on the Group or company.
The IASB published
a revised IFRS 3 ‘Business Combinations’ and related revisions to IAS 27
‘Consolidated and Separate Financial Statements’ following the completion in
January 2008 of its project on the acquisition and disposal of subsidiaries. The
standards improve convergence with US GAAP and provide new guidance on
accounting for changes in interests in subsidiaries. The cost of an acquisition
will comprise only consideration paid to vendors for equity; other costs will be
expensed immediately. Groups will only account for goodwill on acquisition of a
subsidiary; subsequent changes in interest will be recognised in equity and only
on a loss of control will there be a profit or loss on disposal to be recognised
in income. The changes are effective for accounting periods beginning on or
after 1 July 2009 but both standards may be adopted together for accounting
periods beginning on or after 1 July 2007. These changes will affect the Group’s
accounting for future acquisitions and disposals of subsidiaries.
The IASB published
revisions to IAS 32 ‘Financial Instruments: Presentation’ and consequential
revisions to other standards in February 2008 to improve the accounting for and
disclosure of puttable financial instruments. The revisions are effective for
accounting periods beginning on or after 1 January 2009 but together they may be
adopted earlier. They are not expected to have a material affect on the Group or
the company.
The IASB issued
amendments to a number of standards in May 2008 as part of its annual
improvements project. The amendments are effective for accounting periods
beginning on or after 1 January 2009 and are not expected to have a material
effect on the Group or company.
Also in May 2008,
the IASB issued amendments to IFRS 1 ‘First-time Adoption of International
Financial Reporting Standards’ and IAS 27 ‘Consolidated and Separate Financial
Statements’ that change the investor's accounting for the cost of an investment
in a subsidiary, jointly controlled entity or associate. It does not affect the
consolidated accounts but may prospectively affect the company’s accounting and
presentation of receipts of dividends from such entities.
The IASB issued an
amendment to IAS 39 in July 2008 to clarify the IFRS stance on eligible hedged
items. The amendment is effective for accounting periods beginning on or after 1
January 2009 and is not expected to have a material effect on the Group or the
Bank.
The International
Financial Reporting Interpretations Committee (IFRIC) issued interpretation
IFRIC 15 ‘Agreements for the Construction of Real Estate’ in July 2008. This
interpretation clarifies the accounting for construction profits. It is
applicable for accounting periods beginning on or after 1 January 2009 and is
not expected to have a material effect on the Group or company.
The
IFRIC issued interpretation IFRIC 16 ‘Hedges of a Net Investment in a Foreign
Operation’ in July 2008. The interpretation addresses the nature of the hedged
risk and the amount of the hedged item; where in a group the hedging item could
be held; and what amounts should be reclassified from equity on the disposal of
a foreign operation that had been subject to hedging. The interpretation is
effective for accounting periods beginning on or after 1 October 2008 and is not
expected to have a material effect on the Group or company.
The IFRIC issued
interpretation IFRIC 17 ‘Distributions of Non-Cash Assets to Owners’ and the
IASB made consequential amendments to IFRS 5 'Non-Current Assets Held for Sale
and Discontinued Operations' in December 2008. The interpretation requires
distributions to be presented at fair value with any surplus or deficit to be
recognised in income. The amendment to IFRS 5 extends the definition of disposal
groups and discontinued operations to disposals by way of distribution. The
interpretation is effective for accounting periods beginning on or after 1 July
2009, to be adopted at the same time as IFRS 3 (revised 2008), and is not
expected to have a material effect on the Group or company.
The IFRIC issued
interpretation IFRIC 18 ‘Transfers of Assets from Customers’ in January 2009.
The interpretation addresses the accounting by suppliers that receive assets
from customers, requiring measurement at fair value. The interpretation is
effective for assets from customers received on or after 1 July 2009 and is not
expected to have a material effect on the Group or company.
172
Notes on the
accounts
|
Group
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
| £m | £m | £m | ||||||||||
|
Loans and
advances to customers
|
41,812 | 28,568 | 22,195 | |||||||||
|
Loans and
advances to banks
|
2,356 | 1,570 | 843 | |||||||||
|
Debt
securities
|
5,354 | 2,114 | 1,650 | |||||||||
|
Interest
receivable
|
49,522 | 32,252 | 24,688 | |||||||||
|
Customer
accounts: demand deposits
|
4,341 | 4,327 | 3,083 | |||||||||
|
Customer
accounts: savings deposits
|
3,911 | 2,560 | 1,373 | |||||||||
|
Customer
accounts: other time deposits
|
8,108 | 6,301 | 4,444 | |||||||||
|
Deposits by
banks
|
6,576 | 3,406 | 2,621 | |||||||||
|
Debt
securities in issue
|
9,941 | 5,687 | 3,286 | |||||||||
|
Subordinated
liabilities
|
2,144 | 1,530 | 1,386 | |||||||||
|
Internal
funding of trading business
|
(4,174 | ) | (3,628 | ) | (2,101 | ) | ||||||
|
Interest
payable
|
30,847 | 20,183 | 14,092 | |||||||||
|
Net interest
income
|
18,675 | 12,069 | 10,596 | |||||||||
|
Group
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
| £m | £m | £m | ||||||||||
|
Fees
and commissions receivable
|
9,831 | 8,278 | 7,116 | |||||||||
|
Fees
and commissions payable:
|
||||||||||||
|
–
banking
|
(1,985 | ) | (1,727 | ) | (1,432 | ) | ||||||
|
– insurance
related
|
(401 | ) | (466 | ) | (490 | ) | ||||||
| (2,386 | ) | (2,193 | ) | (1,922 | ) | |||||||
|
(Loss)/income
from trading activities:
|
||||||||||||
|
Foreign
exchange (1)
|
1,994 | 1,085 | 738 | |||||||||
|
Interest rate
(2)
|
1,454 | 1,414 | 973 | |||||||||
|
Credit (3)
|
(12,200 | ) | (1,446 | ) | 841 | |||||||
|
Equities and
commodities (4)
|
275 | 239 | 123 | |||||||||
| (8,477 | ) | 1,292 | 2,675 | |||||||||
|
Other
operating income:
|
||||||||||||
|
Operating
lease and other rental income
|
1,525 | 1,671 | 1,755 | |||||||||
|
Changes in
the fair value of own debt
|
977 | 152 | — | |||||||||
|
Changes in
the fair value of securities and other financial assets and
liabilities
|
(1,730 | ) | 970 | 430 | ||||||||
|
Changes in
the fair value of investment properties
|
(86 | ) | 288 | 486 | ||||||||
|
Profit on
sale of securities
|
342 | 544 | 369 | |||||||||
|
Profit on
sale of property, plant and equipment
|
167 | 741 | 216 | |||||||||
|
Profit on
sale of subsidiaries and associates
|
943 | 67 | 44 | |||||||||
|
Life company
(losses)/profits
|
(52 | ) | 187 | 219 | ||||||||
|
Dividend
income
|
281 | 137 | 92 | |||||||||
|
Share of
profits less losses of associated entities
|
69 | 25 | 36 | |||||||||
|
Other
income
|
(537 | ) | 51 | (83 | ) | |||||||
| 1,899 | 4,833 | 3,564 | ||||||||||
The analysis of
trading income is based on how the business is organised and the underlying
risks managed.
Notes:
Trading income
comprises gains and losses on financial instruments held for trading, both
realised and unrealised, interest income and dividends and the related funding
costs. The types of instruments include:
|
(1)
|
Foreign
exchange: spot foreign exchange contracts, currency swaps and options,
emerging markets and related hedges and
funding.
|
|
(2)
|
Interest rate:
interest rate swaps, forward foreign exchange contracts, forward rate
agreements, interest rate options, interest rate futures and related
hedges and funding.
|
|
(3)
|
Credit:
asset-backed securities, corporate bonds, credit derivatives and related
hedges and funding.
|
|
(4)
|
Equities and
commodities: equities, commodities, equity derivatives, commodity
contracts and related hedges and
funding.
|
173
|
Group
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
| £m | £m | £m | ||||||||||
|
Wages,
salaries and other staff costs
|
8,907 | 6,230 | 5,652 | |||||||||
|
Social
security costs
|
696 | 471 | 389 | |||||||||
|
Share-based
compensation
|
169 | 65 | 65 | |||||||||
|
Pension
costs
|
||||||||||||
|
– defined
benefit schemes (see Note 4)
|
490 | 489 | 580 | |||||||||
|
– defined
contribution schemes
|
148 | 83 | 37 | |||||||||
|
Staff
costs
|
10,410 | 7,338 | 6,723 | |||||||||
|
Premises and
equipment
|
2,593 | 1,703 | 1,421 | |||||||||
|
Other
administrative expenses
|
5,464 | 2,969 | 2,658 | |||||||||
|
Property,
plant and equipment (see Note 18)
|
1,584 | 1,297 | 1,293 | |||||||||
|
Intangible
assets (see Note 17)
|
1,570 | 635 | 385 | |||||||||
|
Depreciation
and amortisation
|
3,154 | 1,932 | 1,678 | |||||||||
|
Write-down of
goodwill and other intangible assets
|
32,581 | — | — | |||||||||
| 54,202 | 13,942 | 12,480 | ||||||||||
Integration costs
included in operating expenses comprise expenditure incurred in respect of cost
reduction and revenue enhancement programmes set in connection with the various
acquisitions made by the Group.
|
Group
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
| £m | £m | £m | ||||||||||
|
Staff
costs
|
503 | 18 | 76 | |||||||||
|
Premises
and equipment
|
25 | 4 | 10 | |||||||||
|
Other
administrative expenses
|
486 | 26 | 32 | |||||||||
|
Depreciation
and amortisation
|
36 | 60 | 16 | |||||||||
| 1,050 | 108 | 134 | ||||||||||
Restructuring costs
included in operating expenses comprise:
|
2008
£m
|
||||
|
Staff
costs
|
251 | |||
|
Premises and
equipment
|
15 | |||
|
Other
administrative expenses
|
41 | |||
| 307 |
No
restructuring costs were incurred in 2007 and 2006.
174
The average number
of persons employed in the continuing operations of the Group during the year,
excluding temporary staff, was 197,100 (2007 – 157,200; 2006 – 142,600); on the
same basis the discontinued operations employed 32,200 (2007 – 13,300; 2006 –
nil). The average number of temporary employees during 2008 was 7,000 (2007 –
4,900). The number of persons employed in the continuing operations of the Group
at 31 December, excluding temporary staff, was as follows:
|
Group
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
| UK Retail | 31,700 | 31,400 | 32,700 | |||||||||
| UK Corporate | 13,300 | 13,000 | 12,600 | |||||||||
| Wealth | 4,300 | 7,100 | 4,600 | |||||||||
|
Global
Banking & Markets
|
15,500 | 15,600 | 6,900 | |||||||||
|
Global
Transaction Services
|
3,600 | 3,600 | 2,300 | |||||||||
|
Ulster Bank
|
5,600 | 6,100 | 4,700 | |||||||||
|
UK Retail
& Commercial
|
17,300 | 17,400 | 18,100 | |||||||||
|
RBS
Insurance
|
15,500 | 16,400 | 17,200 | |||||||||
|
Central
Items
|
4,300 | 3,800 | 2,600 | |||||||||
| Core | 111,100 | 114,400 | 101,700 | |||||||||
| Non-Core | 15,100 | 14,600 | 4,400 | |||||||||
| 126,200 | 129,000 | 106,100 | ||||||||||
|
Group
Manufacturing
|
45,700 | 45,900 | 35,700 | |||||||||
| Integration | 900 | - | - | |||||||||
|
RFS Holdings
minority interest
|
26,700 | 28,600 | - | |||||||||
|
Group
total
|
199,500 | 203,500 | 141,800 | |||||||||
Discontinued
operations, excluding temporary staff, employed 2,600 persons at 31 December
2008 (2007 – 53,200; 2006 – nil).
175
Members
of the Group sponsor a number of pension schemes in the UK and overseas,
predominantly defined benefit schemes, whose assets are independent of the
Group’s finances. The Group’s defined benefit schemes generally provide a
pension of one-sixtieth of final pensionable salary for each year of service
prior to retirement up to a maximum of 40 years. Employees do not make
contributions for basic pensions but may make voluntary contributions to secure
additional benefits on a money-purchase basis. Since October 2006 The Royal Bank
of Scotland Group Pension Fund (‘Main scheme’) has been closed to new
entrants.
The Group also
provides post-retirement benefits other than pensions, principally through
subscriptions to private healthcare schemes in the UK and the US and unfunded
post-retirement benefit plans. Provision for the costs of these benefits is
charged to the income statement over the average remaining future service lives
of eligible employees. The amounts are not material.
Interim valuations
of the Group’s schemes were prepared to 31 December by independent actuaries,
using the following assumptions:
|
Main
scheme
|
All
schemes
|
|||||||||||||||||||||||
|
Principal
actuarial assumptions at 31 December
|
2008
|
2007
|
2006
|
2008
|
2007
|
2006
|
||||||||||||||||||
|
Weighted
average
|
||||||||||||||||||||||||
|
Discount
rate
|
6.5 | % | 6.0 | % | 5.3 | % | 6.0 | % | 5.8 | % | 5.3 | % | ||||||||||||
|
Expected
return on plan assets (weighted average)
|
7.1 | % | 6.9 | % | 6.9 | % | 6.3 | % | 6.8 | % | 6.9 | % | ||||||||||||
|
Rate
of increase in salaries*
|
4.0 | % | 4.5 | % | 4.2 | % | 3.4 | % | 4.0 | % | 4.1 | % | ||||||||||||
|
Rate
of increase in pensions in payment
|
2.7 | % | 3.2 | % | 2.9 | % | 2.4 | % | 2.8 | % | 2.8 | % | ||||||||||||
|
Inflation
assumption
|
2.7 | % | 3.2 | % | 2.9 | % | 2.4 | % | 2.9 | % | 2.9 | % | ||||||||||||
*
Rate of increase in salaries in the Main Scheme assumed to be 2.0% over the next
two years.
|
Main
scheme
|
All
schemes
|
|||||||||||||||||||||||
|
Major
classes of plan assets as a percentage of total plan
assets
|
2008
|
2007
|
2006
|
2008
|
2007
|
2006
|
||||||||||||||||||
|
Equities
|
59.4 | % | 61.0 | % | 60.5 | % | 42.2 | % | 57.8 | % | 60.7 | % | ||||||||||||
|
Index-linked
bonds
|
18.0 | % | 18.2 | % | 17.3 | % | 11.4 | % | 13.1 | % | 16.1 | % | ||||||||||||
|
Government
fixed interest bonds
|
1.2 | % | 1.2 | % | 2.5 | % | 26.8 | % | 12.9 | % | 3.3 | % | ||||||||||||
|
Corporate
and other bonds
|
18.5 | % | 15.1 | % | 14.0 | % | 14.3 | % | 12.0 | % | 13.9 | % | ||||||||||||
|
Property
|
3.7 | % | 3.8 | % | 4.3 | % | 3.9 | % | 3.0 | % | 4.5 | % | ||||||||||||
|
Cash
and other assets
|
(0.8 | %) | 0.7 | % | 1.4 | % | 1.4 | % | 1.2 | % | 1.5 | % | ||||||||||||
Ordinary shares of
the company with a fair value of £15 million (2007 – £69 million; 2006 – £89
million) are held by the Group’s pension schemes; £15 million (2007 – £65
million; 2006 – £87 million) in the Main scheme which also holds other financial
instruments issued by the Group with a value of £ 421 million (2007 – £ 606
million; 2006 – £ 258 million).
The expected return
on plan assets at 31 December is based upon the weighted average of the
following assumed returns on the major classes of plan assets:
|
Main
scheme
|
All
schemes
|
|||||||||||||||||||||||
|
2008
|
2007
|
2006
|
2008
|
2007
|
2006
|
|||||||||||||||||||
|
Equities
|
8.4 | % | 8.1 | % | 8.1 | % | 8.4 | % | 8.1 | % | 8.1 | % | ||||||||||||
|
Index-linked
bonds
|
3.9 | % | 4.5 | % | 4.5 | % | 3.9 | % | 4.5 | % | 4.5 | % | ||||||||||||
|
Government
fixed interest bonds
|
3.9 | % | 4.5 | % | 4.5 | % | 4.3 | % | 4.7 | % | 4.5 | % | ||||||||||||
|
Corporate
and other bonds
|
6.1 | % | 5.5 | % | 5.3 | % | 5.7 | % | 5.5 | % | 5.3 | % | ||||||||||||
|
Property
|
6.1 | % | 6.3 | % | 6.3 | % | 6.1 | % | 6.3 | % | 6.3 | % | ||||||||||||
|
Cash
and other assets
|
2.5 | % | 4.6 | % | 4.6 | % | 5.1 | % | 4.5 | % | 4.4 | % | ||||||||||||
|
Post-retirement
mortality assumptions (Main scheme)
|
2008
|
2007
|
2006
|
|||||||||
|
Longevity at
age 60 for current pensioners (years):
|
||||||||||||
|
Males
|
26.1 | 26.0 | 26.0 | |||||||||
|
Females
|
26.9 | 26.8 | 28.9 | |||||||||
|
Longevity
at age 60 for future pensioners (years):
|
||||||||||||
|
Males
|
28.1 | 28.1 | 26.8 | |||||||||
|
Females
|
28.2 | 28.2 | 29.7 | |||||||||
176
|
Main
scheme
|
All
schemes
|
|||||||||||||||||||||||
|
Fair
value of plan assets
|
Present
value
of defined benefit obligations
|
Net
pension deficit/
(surplus)
|
Fair
value of plan assets
|
Present
value
of defined benefit obligations
|
Net
pension deficit/
(surplus)
|
|||||||||||||||||||
|
Changes
in value of net pension deficit/(surplus)
|
£m | £m | £m | £m | £m | £m | ||||||||||||||||||
|
At 1 January
2007
|
17,374 | 19,004 | 1,630 | 18,959 | 20,951 | 1,992 | ||||||||||||||||||
|
Currency
translation and other adjustments
|
— | — | — | 381 | 397 | 16 | ||||||||||||||||||
|
Income
statement:
|
||||||||||||||||||||||||
|
Expected
return
|
1,182 | (1,182 | ) | 1,394 | (1,394 | ) | ||||||||||||||||||
|
Interest
cost
|
1,007 | 1,007 | 1,177 | 1,177 | ||||||||||||||||||||
|
Current
service cost
|
566 | 566 | 684 | 684 | ||||||||||||||||||||
|
Past
service cost
|
19 | 19 | 22 | 22 | ||||||||||||||||||||
| 1,182 | 1,592 | 410 | 1,394 | 1,883 | 489 | |||||||||||||||||||
|
Statement
of recognised income and expense:
|
||||||||||||||||||||||||
|
Actuarial
gains and losses
|
163 | (1,937 | ) | (2,100 | ) | 19 | (2,170 | ) | (2,189 | ) | ||||||||||||||
|
Acquisition
of subsidiaries
|
— | — | — | 6,997 | 7,173 | 176 | ||||||||||||||||||
|
Intra-group
transfers
|
30 | 30 | — | — | — | — | ||||||||||||||||||
|
Contributions
by employer
|
416 | — | (416 | ) | 599 | — | (599 | ) | ||||||||||||||||
|
Contributions
by plan participants
|
— | — | — | 5 | 5 | — | ||||||||||||||||||
|
Benefits
paid
|
(551 | ) | (551 | ) | — | (652 | ) | (652 | ) | — | ||||||||||||||
|
Expenses
included in service cost
|
(39 | ) | (39 | ) | — | (40 | ) | (40 | ) | — | ||||||||||||||
|
At 1 January
2008
|
18,575 | 18,099 | (476 | ) | 27,662 | 27,547 | (115 | ) | ||||||||||||||||
|
Transfers to
disposal groups
|
— | — | — | (1 | ) | (49 | ) | (48 | ) | |||||||||||||||
|
Currency
translation and other adjustments
|
— | — | — | 2,497 | 2,692 | 195 | ||||||||||||||||||
|
Income
statement:
|
||||||||||||||||||||||||
|
Expected
return
|
1,271 | (1,271 | ) | 1,865 | (1,865 | ) | ||||||||||||||||||
|
Interest
cost
|
1,080 | 1,080 | 1,622 | 1,622 | ||||||||||||||||||||
|
Current
service cost
|
437 | 437 | 705 | 705 | ||||||||||||||||||||
|
Past service
cost
|
21 | 21 | 28 | 28 | ||||||||||||||||||||
| 1,271 | 1,538 | 267 | 1,865 | 2,355 | 490 | |||||||||||||||||||
|
Statement of
recognised income and expense:
|
||||||||||||||||||||||||
|
Actuarial
gains and losses
|
(4,784 | ) | (3,389 | ) | 1,395 | (6,051 | ) | (3,764 | ) | 2,287 | ||||||||||||||
|
Disposal of
subsidiaries
|
— | — | — | (31 | ) | (34 | ) | (3 | ) | |||||||||||||||
|
Contributions
by employer
|
396 | — | (396 | ) | 810 | — | (810 | ) | ||||||||||||||||
|
Contributions
by plan participants
|
— | — | — | 9 | 9 | — | ||||||||||||||||||
|
Benefits
paid
|
(630 | ) | (630 | ) | — | (978 | ) | (978 | ) | — | ||||||||||||||
|
Expenses
included in service cost
|
(24 | ) | (24 | ) | — | (26 | ) | (26 | ) | — | ||||||||||||||
|
At 31
December 2008
|
14,804 | 15,594 | 790 | 25,756 | 27,752 | 1,996 | ||||||||||||||||||
|
Net
pension deficit comprises:
|
£m | |||
|
Net assets of
schemes in surplus (included in Prepayments, accrued income and other
assets, Note 19)
|
(36 | ) | ||
|
Net
liabilities of schemes in deficit
|
2,032 | |||
| 1,996 |
At 31
December 2008, ABN AMRO’s principal pension scheme in the Netherlands had fair
value of plan assets of £8,181 million (2007 – £6,417 million) and present value
of defined benefit obligations £8,589 million (2007 – £6,189 million). The
principal actuarial assumptions at 31 December 2008 were: discount rate 5.4%
(2007 – 5.4%); expected return on plan assets (weighted average) 4.7% (2007 –
6.2%); rate of increase in salaries 2.5% (2007 – 2.5%); rate of increase in
pensions in payment 2.0% (2007 – 2.0%); and inflation assumption 2.0% (2007 –
2.0%).
The Group expects
to contribute £807 million to its defined benefit pension schemes in 2009 (Main
scheme – £385 million). Of the net liabilities of schemes in deficit, £201
million (2007 – £212 million) relates to unfunded schemes.
Cumulative net
actuarial losses of £717 million (2007 – £1,570 million gains; 2006 – £619
million losses) have been recognised in the statement of recognised income and
expense, of which £184 million gains (2007 – £1,579 million gains; 2006 – £521
million losses) relate to the Main scheme.
177
4 Pension
costs (continued)
|
Main
scheme
|
All
schemes
|
|||||||||||||||||||||||||||||||||||||||
|
History
of defined benefit schemes
|
2008
£m
|
2007
£m
|
2006
£m
|
2005
£m
|
2004
£m
|
2008
£m
|
2007
£m
|
2006
£m
|
2005
£m
|
2004
£m
|
||||||||||||||||||||||||||||||
|
Fair
value of plan assets
|
14,804 | 18,575 | 17,374 | 15,914 | 13,569 | 25,756 | 27,662 | 18,959 | 17,388 | 14,798 | ||||||||||||||||||||||||||||||
|
Present
value of defined benefit obligations
|
15,594 | 18,099 | 19,004 | 19,118 | 16,051 | 27,752 | 27,547 | 20,951 | 21,123 | 17,738 | ||||||||||||||||||||||||||||||
|
Net
(deficit)/surplus
|
(790 | ) | 476 | (1,630 | ) | (3,204 | ) | (2,482 | ) | (1,996 | ) | 115 | (1,992 | ) | (3,735 | ) | (2,940 | ) | ||||||||||||||||||||||
|
Experience
losses on plan liabilities
|
(55 | ) | (256 | ) | (4 | ) | (41 | ) | (624 | ) | (65 | ) | (210 | ) | (19 | ) | (68 | ) | (631 | ) | ||||||||||||||||||||
|
Experience
gains on plan assets
|
(4,784 | ) | 163 | 552 | 1,556 | 392 | (6,051 | ) | 19 | 587 | 1,661 | 408 | ||||||||||||||||||||||||||||
|
Actual
return on pension schemes assets
|
(3,513 | ) | 1,345 | 1,574 | 2,486 | 1,230 | (4,186 | ) | 1,413 | 1,660 | 2,677 | 1,328 | ||||||||||||||||||||||||||||
The table below
sets out the sensitivities of the pension cost for the year and the present
value of detailed benefit obligations at the balance sheet dates to a change in
the principal actuarial assumptions:
|
Main
scheme
|
All
schemes
|
|||||||||||||||||||||||||||||||
|
Increase/(decrease)
|
Increase/(decrease)
|
|||||||||||||||||||||||||||||||
|
in
pension cost
for
the year
|
in
obligation
at
31 December
|
in
pension cost
for
the year
|
in
obligation
at
31 December
|
|||||||||||||||||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||||
|
25
bps increase in the discount rate
|
(37 | ) | (41 | ) | (696 | ) | (874 | ) | (53 | ) | (49 | ) | (1,161 | ) | (1,318 | ) | ||||||||||||||||
|
25
bps increase in inflation
|
77 | 83 | 624 | 800 | 114 | 98 | 1,089 | 1,245 | ||||||||||||||||||||||||
|
25
bps additional rate of increase in pensions in payment
|
41 | 43 | 383 | 461 | 63 | 51 | 695 | 760 | ||||||||||||||||||||||||
|
25
bps additional rate of increase in deferred pensions
|
8 | 5 | 94 | 113 | 15 | 7 | 227 | 239 | ||||||||||||||||||||||||
|
25
bps additional rate of increase in salaries
|
28 | 35 | 168 | 216 | 35 | 40 | 219 | 265 | ||||||||||||||||||||||||
|
Longevity
increase of 1 year
|
31 | 31 | 302 | 390 | 50 | 37 | 700 | 761 | ||||||||||||||||||||||||
Amounts paid to the
company’s auditors for statutory audit and other services were as
follows:
|
Group
|
||||||||
|
2008
|
2007
|
|||||||
| £m | £m | |||||||
|
Audit
Services
|
||||||||
|
–
Statutory audit (1)
|
44.1 | 20.4 | ||||||
|
– Audit
related including regulatory reporting
|
3.1 | 1.4 | ||||||
| 47.2 | 21.8 | |||||||
|
Tax
Services
|
||||||||
|
– Compliance
services
|
0.3 | 0.2 | ||||||
|
– Advisory
services
|
0.3 | 0.2 | ||||||
| 0.6 | 0.4 | |||||||
|
All other
services
|
10.9 | 9.0 | ||||||
|
Total
|
58.7 | 31.2 | ||||||
Note:
|
(1)
|
Includes fees
of £23.1 million (2007 – nil) in respect of the audit of ABN AMRO Holding
N.V. Deloitte were appointed as auditors of ABN AMRO in 2008. In 2007,
fees paid to Ernst & Young for the audit of ABN AMRO Holding N.V. were
£33.9 million. These fees are not included
above.
|
178
|
Group
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
| £m | £m | £m | ||||||||||
|
Current
taxation:
|
||||||||||||
|
Charge for
the year
|
1,230 | 2,514 | 2,626 | |||||||||
|
Over
provision in respect of prior periods
|
(254 | ) | (39 | ) | (253 | ) | ||||||
|
Relief
for overseas taxation
|
(34 | ) | (198 | ) | (147 | ) | ||||||
| 942 | 2,277 | 2,226 | ||||||||||
|
Deferred
taxation:
|
||||||||||||
|
(Credit)/charge
for the year
|
(3,167 | ) | 95 | 396 | ||||||||
|
(Under)/over
provision in respect of prior periods
|
(98 | ) | (328 | ) | 67 | |||||||
|
Tax
(credit)/charge for the year
|
(2,323 | ) | 2,044 | 2,689 | ||||||||
179
The actual tax
charge differs from the expected tax charge computed by applying the standard
rate of UK corporation tax of 28.5% (2007 – 30%; 2006 – 30%) as
follows:
|
2008
|
2007
|
2006
|
||||||||||
| £m | £m | £m | ||||||||||
|
Expected tax
(credit)/charge
|
(11,638 | ) | 2,950 | 2,756 | ||||||||
|
Non-deductible
goodwill impairment
|
8,292 | 12 | — | |||||||||
|
Unrecognised
timing differences
|
274 | 29 | — | |||||||||
|
Other
non-deductible items
|
378 | 222 | 288 | |||||||||
|
Non-taxable
items
|
(491 | ) | (595 | ) | (251 | ) | ||||||
|
Taxable
foreign exchange movements
|
80 | 16 | 5 | |||||||||
|
Foreign
profits taxed at other rates
|
203 | (25 | ) | 63 | ||||||||
|
Reduction
in deferred tax liability following change in the rate of UK corporation
tax
|
— | (189 | ) | — | ||||||||
|
Losses
in year not recognised
|
942 | 2 | — | |||||||||
|
Losses
brought forward and utilised
|
(11 | ) | (11 | ) | 14 | |||||||
|
Adjustments in
respect of prior periods (1)
|
(352 | ) | (367 | ) | (186 | ) | ||||||
|
Actual
tax (credit)/charge
|
(2,323 | ) | 2,044 | 2,689 | ||||||||
Note:
(1)
Prior period tax adjustments principally comprise releases of tax provisions in
respect of structured transactions and investment disposals, and adjustments to
reflect submitted tax computations in the UK and overseas.
The effective tax
rate for the year was 5.7% (2007 – 20.8%; 2006 – 29.3%). The deferred tax credit
is net of £210 million deferred tax expense arising from the write-down of the
carrying value of previously recognised deferred tax assets.
|
Group
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
| £m | £m | £m | ||||||||||
|
Dividends
paid to other owners:
|
||||||||||||
|
Non-cumulative
preference shares of US$0.01
|
293 | 152 | 99 | |||||||||
|
Non-cumulative
preference shares of €0.01
|
183 | 94 | 92 | |||||||||
|
Non-cumulative
preference shares of £1
|
60 | — | — | |||||||||
|
Interest
on securities classified as equity, net of tax
|
60 | — | — | |||||||||
|
Total
|
596 | 246 | 191 | |||||||||
Notes:
(1)
In accordance with IAS 32, certain preference share issued by the company are
included in subordinated liabilities and the related finance cost in interest
payable.
(2)
Between 1 January 2009 and the date of approval of these accounts, dividends
amounting to US$163 million have been declared in respect of equity preference
shares for payment on 31 March 2009.
Prior year ordinary
dividends per share in the table below have been restated for the effect of the
rights issue in June 2008 and the capitalisation issue in September
2008.
|
Group
|
||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
2008
|
2007
|
2006
|
|||||||||||||||||||
|
p
per share
|
p
per share
|
p
per share
|
£m | £m | £m | |||||||||||||||||||
|
Final
dividend for previous year declared during the current
year
|
19.3 | 18.5 | 14.8 | 2,312 | 2,091 | 1,699 | ||||||||||||||||||
|
Interim
dividend
|
— | 8.5 | 6.8 | — | 953 | 771 | ||||||||||||||||||
|
Total
dividends paid on ordinary equity shares
|
19.3 | 27.0 | 21.6 | 2,312 | 3,044 | 2,470 | ||||||||||||||||||
As
permitted by section 230(3) of the Companies Act 1985, the primary financial
statements of the company do not include an income statement. Condensed
information is set out below:
|
Company
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
| £m | £m | £m | ||||||||||
|
Dividends
received from banking subsidiary
|
4,639 | 2,330 | 3,502 | |||||||||
|
Dividends
received from other subsidiaries
|
163 | 415 | 229 | |||||||||
|
Total
income
|
4,802 | 2,745 | 3,731 | |||||||||
|
Interest
receivable from subsidiaries
|
793 | 460 | 516 | |||||||||
|
Interest
payable to subsidiaries
|
(495 | ) | (307 | ) | (246 | ) | ||||||
|
Other
net interest payable and operating expenses
|
(796 | ) | (526 | ) | (515 | ) | ||||||
|
Write-down
of investments in subsidiaries
|
(14,321 | ) | — | — | ||||||||
|
Operating
(loss)/profit before tax
|
(10,017 | ) | 2,372 | 3,486 | ||||||||
|
Tax
|
415 | 127 | 13 | |||||||||
|
(Loss)/profit
for the year
|
(9,602 | ) | 2,499 | 3,499 | ||||||||
|
(Loss)/profit
attributable to:
|
||||||||||||
|
Ordinary
shareholders
|
(10,198 | ) | 2,253 | 3,308 | ||||||||
|
Other
owners
|
596 | 246 | 191 | |||||||||
| (9,602 | ) | 2,499 | 3,499 | |||||||||
180
The
earnings per share are based on the following:
|
Company
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
| £m | £m | £m | ||||||||||
|
Earnings:
|
||||||||||||
|
(Loss)/profit
attributable to ordinary shareholders
|
(24,306 | ) | 7,303 | 6,202 | ||||||||
|
Add
back finance cost on dilutive convertible securities
|
— | 60 | 64 | |||||||||
|
Diluted
earnings attributable to ordinary shareholders
|
(24,306 | ) | 7,363 | 6,266 | ||||||||
|
Number
of shares - millions
|
||||||||||||
|
Number
of ordinary shares:
|
||||||||||||
|
Weighted
average number of ordinary shares in issue during the year
|
16,563 | 11,413 | 11,411 | |||||||||
|
Effect
of dilutive share options and convertible securities
|
— | 198 | 208 | |||||||||
|
Diluted
weighted average number of ordinary shares during the year
|
16,563 | 11,611 | 11,619 | |||||||||
The numbers of
ordinary shares in issue in prior years have been adjusted retrospectively for
the bonus element of the rights issue completed in June 2008 and the
capitalisation issue in September 2008. None of the convertible securities had a
dilutive effect in 2008. All convertible securities had a dilutive effect in
2007 and 2006 and have been included in the computation of diluted earnings per
share.
The effect of
discontinued operations on earnings per share is not material.
Classification
The following
tables analyse the Group’s financial assets and financial liabilities in
accordance with the categories of financial instruments in IAS 39. Assets and
liabilities outside the scope of IAS 39 are shown separately.
|
Group
|
||||||||||||||||||||||||||||||||||||
|
Held-for-trading
|
Designated
as at fair value through profit or loss
|
Hedging
derivatives
|
Available-for-sale
|
Loans
and receivables
|
Other
(amortised cost)
|
Finance
leases
|
Non
financial assets/
liabilities
|
Total
|
||||||||||||||||||||||||||||
|
2008
|
£m | £m | £m | £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||||||||||
|
Cash and
balances at central banks
|
— | — | — | 12,400 | — | 12,400 | ||||||||||||||||||||||||||||||
|
Loans and
advances to banks (1)
|
56,234 | — | — | 81,963 | — | 138,197 | ||||||||||||||||||||||||||||||
|
Loans and
advances to customers (2,
3)
|
51,501 | 2,141 | — | 806,627 | 14,453 | 874,722 | ||||||||||||||||||||||||||||||
|
Debt
securities (4)
|
116,280 | 5,428 | 132,856 | 12,985 | — | 267,549 | ||||||||||||||||||||||||||||||
|
Equity
shares
|
17,054 | 2,101 | 7,175 | — | — | 26,330 | ||||||||||||||||||||||||||||||
|
Settlement
balances
|
— | — | — | 17,832 | — | 17,832 | ||||||||||||||||||||||||||||||
|
Derivatives
|
985,700 | — | 6,859 | — | — | — | 992,559 | |||||||||||||||||||||||||||||
|
Intangible
assets
|
— | — | — | — | 20,049 | 20,049 | ||||||||||||||||||||||||||||||
|
Property,
plant and equipment
|
— | — | — | 18,949 | 18,949 | |||||||||||||||||||||||||||||||
|
Deferred
taxation
|
— | — | — | — | — | 7,082 | 7,082 | |||||||||||||||||||||||||||||
|
Prepayments,
accrued income and other assets
|
— | — | — | 1,326 | 23,076 | 24,402 | ||||||||||||||||||||||||||||||
|
Assets of
disposal groups
|
— | — | — | 1,581 | 1,581 | |||||||||||||||||||||||||||||||
| 1,226,769 | 9,670 | 6,859 | 140,031 | 933,133 | 14,453 | 70,737 | 2,401,652 | |||||||||||||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||||||||||||||
|
Deposits by
banks (5)
|
81,154 | — | 176,890 | — | 258,044 | |||||||||||||||||||||||||||||||
|
Customer
accounts (6,
7)
|
55,926 | 8,054 | 575,532 | — | 639,512 | |||||||||||||||||||||||||||||||
|
Debt
securities in issue (8,
9)
|
3,992 | 47,451 | 248,846 | — | 300,289 | |||||||||||||||||||||||||||||||
|
Settlement
balances and short positions
|
42,536 | — | 11,741 | — | 54,277 | |||||||||||||||||||||||||||||||
|
Derivatives
|
963,088 | — | 8,276 | — | — | 971,364 | ||||||||||||||||||||||||||||||
|
Accruals,
deferred income and other liabilities
|
260 | — | 1,619 | 22 | 29,581 | 31,482 | ||||||||||||||||||||||||||||||
|
Retirement
benefit liabilities
|
2,032 | 2,032 | ||||||||||||||||||||||||||||||||||
|
Deferred
taxation
|
4,165 | 4,165 | ||||||||||||||||||||||||||||||||||
|
Insurance
liabilities
|
9,976 | 9,976 | ||||||||||||||||||||||||||||||||||
|
Subordinated
liabilities
|
— | 1,509 | 47,645 | — | — | 49,154 | ||||||||||||||||||||||||||||||
|
Liabilities
of disposal groups
|
— | — | — | 859 | 859 | |||||||||||||||||||||||||||||||
| 1,146,956 | 57,014 | 8,276 | 1,062,273 | 22 | 46,613 | 2,321,154 | ||||||||||||||||||||||||||||||
|
Equity
|
80,498 | |||||||||||||||||||||||||||||||||||
| 2,401,652 | ||||||||||||||||||||||||||||||||||||
181
|
Group
|
||||||||||||||||||||||||||||||||||||
|
Held-for-trading
|
Designated
as at fair value through profit or loss
|
Hedging
derivatives
|
Available-for-sale
|
Loans
and receivables
|
Other
(amortised cost)
|
Finance
leases
|
Non
financial assets/
liabilities
|
Total
|
||||||||||||||||||||||||||||
|
2007
|
£m | £m | £m | £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||||||||||
|
Cash
and balances at central banks
|
— | — | — | 17,866 | — | 17,866 | ||||||||||||||||||||||||||||||
|
Loans and advances to banks (1)
|
71,639 | — | — | 147,821 | — | 219,460 | ||||||||||||||||||||||||||||||
|
Loans and advances to customers (2,
3)
|
103,811 | 3,067 | — | 709,090 | 12,570 | 828,538 | ||||||||||||||||||||||||||||||
|
Debt securities (4)
|
190,671 | 5,777 | 95,536 | 2,672 | — | 294,656 | ||||||||||||||||||||||||||||||
|
Equity
shares
|
37,546 | 7,866 | 7,614 | — | — | 53,026 | ||||||||||||||||||||||||||||||
|
Settlement
balances
|
— | — | — | 16,589 | — | 16,589 | ||||||||||||||||||||||||||||||
|
Derivatives
|
274,849 | — | 2,553 | — | — | — | 277,402 | |||||||||||||||||||||||||||||
|
Intangible
assets
|
49,916 | 49,916 | ||||||||||||||||||||||||||||||||||
|
Property,
plant and equipment
|
18,745 | 18,745 | ||||||||||||||||||||||||||||||||||
|
Deferred
taxation
|
— | — | — | — | — | — | — | 3,119 | 3,119 | |||||||||||||||||||||||||||
|
Prepayments,
accrued income and other assets
|
— | — | — | 877 | — | 14,785 | 15,662 | |||||||||||||||||||||||||||||
|
Assets
of disposal groups
|
45,850 | 45,850 | ||||||||||||||||||||||||||||||||||
| 678,516 | 16,710 | 2,553 | 103,150 | 894,915 | 12,570 | 132,415 | 1,840,829 | |||||||||||||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||||||||||||||
|
Deposits by banks (5)
|
65,491 | — | 246,803 | — | 312,294 | |||||||||||||||||||||||||||||||
|
Customer accounts (6,
7)
|
60,426 | 7,505 | 614,432 | — | 682,363 | |||||||||||||||||||||||||||||||
|
Debt securities in issue (8,
9)
|
9,455 | 41,834 | 222,883 | — | 274,172 | |||||||||||||||||||||||||||||||
|
Settlement
balances and short positions
|
73,501 | — | 17,520 | — | 91,021 | |||||||||||||||||||||||||||||||
|
Derivatives
|
269,343 | — | 2,709 | — | — | 272,052 | ||||||||||||||||||||||||||||||
|
Accruals,
deferred income and other liabilities
|
209 | — | 1,545 | 19 | 32,435 | 34,208 | ||||||||||||||||||||||||||||||
|
Retirement
benefit liabilities
|
460 | 460 | ||||||||||||||||||||||||||||||||||
|
Deferred
taxation
|
5,400 | 5,400 | ||||||||||||||||||||||||||||||||||
|
Insurance
liabilities
|
10,162 | 10,162 | ||||||||||||||||||||||||||||||||||
|
Subordinated
liabilities
|
— | 897 | 37,146 | — | — | 38,043 | ||||||||||||||||||||||||||||||
|
Liabilities
of disposal groups
|
29,228 | 29,228 | ||||||||||||||||||||||||||||||||||
| 478,425 | 50,236 | 2,709 | 1,140,329 | 19 | 77,685 | 1,749,403 | ||||||||||||||||||||||||||||||
|
Equity
|
91,426 | |||||||||||||||||||||||||||||||||||
| 1,840,829 | ||||||||||||||||||||||||||||||||||||
Notes:
|
(1)
|
Includes
reverse repurchase agreements of £58,771 million (2007 – £175,941 million)
and items in the course of collection from other banks of £2,888 million
(2007 – £3,095 million).
|
|
(2)
|
Includes
reverse repurchase agreements of £39,313 million (2007 – £142,357
million).
|
|
(3)
|
The change in
fair value of loans and advances to customers designated as at fair value
through profit and loss attributable to changes in credit risk was £328
million for the year and £440 million cumulatively. The amounts for 2007
were not material.
|
|
(4)
|
Includes
treasury bills and similar securities of £31,509 million (2007 – £16,315
million) and other eligible bills of £25,028 million (2007 – £1,914
million).
|
|
(5)
|
Includes
repurchase agreements of £83,666 million (2007 – £163,038 million) and
items in the course of transmission to other banks of £542 million (2007 –
£372 million).
|
|
(6)
|
Includes
repurchase agreements of £58,143 million (2007 – £134,916
million).
|
|
(7)
|
The carryng
amount of other customer accounts designated as at fair value through
profit or loss is £47 million lower (2007 – £77 million greater) than the
principal amount. No amounts have been recognised in profit or loss for
changes in credit risk associated with these liabilities as the changes
are immaterial measured as the change in fair value from movements in the
period in the credit risk premium payable. The amounts include investment
contracts with a carrying value of £5,364 million (2007 – £5,555
million).
|
|
(8)
|
Comprises
bonds and medium term notes of £156,841 million (2007 – £119,578 million)
and certificates of deposit and other commercial paper of £143,448 million
(2007 – £154,594 million).
|
|
(9)
|
£1,054 million
(2007 – £162 million) has been recognised in profit or loss for changes in
credit risk associated with debt securities in issue designated as at fair
value through profit or loss measured as the change in fair value from
movements in the period in the credit risk premium payable by the Group.
The carrying amount is £1,145 million (2007 – £317 million) lower than the
principal amount.
|
|
(10)
|
During 2008
the Group reclassified financial assets from the held-for-trading and
available-for-sale categories into the loans and receivables category and
from the held-for-trading category into the available-for-sale category
(see page 193).
|
182
11 Financial
instruments (continued)
The
following tables analyse the company’s financial assets and financial
liabilities in accordance with the categories of financial instruments in IAS
39. Assets and liabilities outside the scope of IAS 39 are shown
separately.
|
Company
|
||||||||||||||||||||||||
|
Held-for-trading
|
Hedging
derivatives
|
Loans
and receivables
|
Other
(amortised cost)
|
Non
financial assets/
liabilities
|
Total
|
|||||||||||||||||||
|
2008
|
£m | £m | £m | £m | £m | £m | ||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||
|
Loans and
advances to banks (1)
|
— | 27,031 | — | 27,031 | ||||||||||||||||||||
|
Investments
in Group undertakings
|
— | — | 42,196 | 42,196 | ||||||||||||||||||||
|
Derivatives
(3)
|
975 | 193 | — | — | 1,168 | |||||||||||||||||||
|
Deferred
taxation
|
— | — | — | — | 3 | 3 | ||||||||||||||||||
|
Prepayments,
accrued income and other assets
|
— | — | 489 | 489 | ||||||||||||||||||||
| 975 | 193 | 27,031 | 42,688 | 70,887 | ||||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||
|
Deposits by
banks (2)
|
— | — | 1,802 | — | 1,802 | |||||||||||||||||||
|
Customer
accounts (2)
|
26 | 26 | ||||||||||||||||||||||
|
Debt
securities in issue
|
— | — | 14,179 | — | 14,179 | |||||||||||||||||||
|
Derivatives
(2)
|
136 | 225 | — | — | — | 361 | ||||||||||||||||||
|
Accruals,
deferred income and other liabilities
|
— | — | — | 47 | 47 | |||||||||||||||||||
|
Subordinated
liabilities
|
— | — | 10,314 | — | 10,314 | |||||||||||||||||||
| 136 | 225 | — | 26,321 | 47 | 26,729 | |||||||||||||||||||
|
Equity
|
44,158 | |||||||||||||||||||||||
| 70,887 | ||||||||||||||||||||||||
|
2007
|
||||||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||
|
Loans and
advances to banks (1)
|
— | — | 7,686 | — | 7,686 | |||||||||||||||||||
|
Loans and advances to customers (3)
|
— | — | 307 | — | 307 | |||||||||||||||||||
|
Investments
in Group undertakings
|
— | — | — | 43,542 | 43,542 | |||||||||||||||||||
|
Derivatives (3)
|
173 | — | — | — | 173 | |||||||||||||||||||
|
Prepayments,
accrued income and other assets
|
— | — | — | 127 | 127 | |||||||||||||||||||
| 173 | — | 7,993 | 43,669 | 51,835 | ||||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||
|
Deposits by
banks (2)
|
— | — | 5,572 | — | 5,572 | |||||||||||||||||||
|
Debt
securities in issue
|
— | — | 13,453 | — | 13,453 | |||||||||||||||||||
|
Derivatives
(2)
|
125 | 54 | — | — | 179 | |||||||||||||||||||
|
Accruals,
deferred income and other liabilities
|
— | — | — | 8 | 8 | |||||||||||||||||||
|
Deferred
taxation
|
— | — | — | 3 | 3 | |||||||||||||||||||
|
Subordinated
liabilities
|
— | — | 7,743 | — | 7,743 | |||||||||||||||||||
| 125 | 54 | 26,768 | 11 | 26,958 | ||||||||||||||||||||
|
Equity
|
24,877 | |||||||||||||||||||||||
| 51,835 | ||||||||||||||||||||||||
Notes:
(1)
Includes amounts due from subsidiaries of £27,031 million (2007 – £7,130
million).
(2)
Due to subsidiaries.
(3)
Due from subsidiaries.
183
Valuation
of financial instruments
Control
environment
The
Group’s control environment for the determination of the fair value of financial
instruments has been designed to ensure there are formalised review protocols
for independent review and validation of fair values separate from those
businesses entering into the transactions. This includes specific controls to
ensure consistent pricing policies and procedures, incorporating disciplined
price verification for both proprietary and counterparty risk trades. The Group
ensures special attention is given to bespoke transactions, structured products,
illiquid products, and other assets which are difficult to price.
The business
entering into the transaction is responsible for the initial determination and
recording of the fair value of the transaction. There are daily controls over
the profit or loss recorded by trading and treasury front office
traders.
A
key element of the control environment, segregated from the recording of the
transaction’s valuation, is the independent price verification (IPV) process.
Valuations are first calculated by the business which entered into the
transaction. Such valuations may be direct prices, or may be derived using a
model and variable model inputs. These valuations are reviewed, and if necessary
amended, by the IPV process. This process involves a team, independent of those
trading the financial instruments, reviewing valuations in the light of
available pricing evidence. IPV is performed at a frequency to match the
availability of independent data, and the size of the Group’s exposure. For
liquid instruments the process is performed daily. The minimum frequency of
review in GBM is monthly for regulatory trading book positions, and six monthly
for regulatory banking book positions. The IPV control includes formalised
reporting and escalation of any valuation differences in breach of defined
thresholds. In addition, within GBM, there is a dedicated team (the Global
Pricing Unit) which determines IPV policy, monitors adherence to policy, and
performs additional independent review on highly subjective valuation
issues.
In
GBM, when models are used to value products, those models are subject to a
review process which requires different levels of model documentation, testing
and review, depending on the complexity of the model and the size of the Group’s
exposure. A key element of the control environment over model use in GBM is a
review committee which comprises of valuations experts from several functions
within GBM. The committee sets the policy for model documentation, testing and
review, and prioritises models with significant exposure for review by the
Group’s quantitative research centre. This centre, which is independent of the
trading businesses, assesses the appropriateness of the application of the model
to the product, the mathematical robustness of the model, and (where
appropriate), considers alternative modelling approaches.
GBM also maintains
a valuation control committee that meets formally on a monthly basis to discuss
and review escalated items and to consider highly complex and subjective
valuation matters. The committee includes valuation specialists representing
several independent review functions (including market risk, quantitative
research and finance) and senior members of the Group’s front office trading
businesses.
Certain financial
instruments have become more difficult and subjective to value and have
therefore been transferred to a centrally managed asset unit, to separate them
from business as usual activities and to allow dedicated focus on the management
and valuation of the exposures. The unit has a valuation committee comprising
senior representatives of the trading function, risk management and GBM Global
Pricing Unit which meets regularly and is responsible for monitoring, assessing
and enhancing the adequacy of the valuation techniques being adopted for these
instruments.
Valuation
techniques
The Group uses a
number of methodologies to determine the fair values of financial instruments
for which observable prices in active markets for identical instruments are not
available. These techniques include: relative value methodologies based on
observable prices for similar instruments; present value approaches where future
cash flows from the asset or liability are estimated and then discounted using a
risk-adjusted interest rate; option pricing models (such as Black-Scholes or
binomial option pricing models) and simulation models such as
Monte-Carlo.
The
principal inputs to these valuation techniques are listed below. Values between
and beyond available data points are obtained by interpolation and
extrapolation. When utilising valuation techniques, the fair value can be
significantly affected by the choice of valuation model and underlying
assumptions made concerning factors such as the amounts and timing of cash
flows, discount rates and credit risk.
|
·
|
Bond prices –
quoted prices are generally available for government bonds, certain
corporate securities and some mortgage-related
products.
|
|
·
|
Credit
spreads – where available, these are derived from prices of CDS or other
credit based instruments, such as debt securities. For others, credit
spreads are obtained from pricing
services.
|
|
·
|
Interest
rates – these are principally benchmark interest rates such as the London
Inter-Bank Offered Rate (LIBOR) and quoted interest rates in the swap,
bond and futures markets.
|
|
·
|
Foreign
currency exchange rates – there are observable markets both for spot and
forward contracts and futures in the world’s major
currencies.
|
184
11 Financial
instruments (continued)
|
·
|
Equity and
equity index prices – quoted prices are generally readily available for
equity shares listed on the world’s major stock exchanges and for major
indices on such shares.
|
|
·
|
Commodity
prices – many commodities are actively traded in spot and forward
contracts and futures on exchanges in London, New York and other
commercial centres.
|
|
·
|
Price
volatilities and correlations – volatility is a measure of the tendency of
a price to change with time. Correlation measures the degree to which two
or more prices or other variables are observed to move together. If they
move in the same direction there is positive correlation; if they move in
opposite directions there is negative correlation. Volatility is a key
input in valuing options and the valuation of certain products such as
derivatives with more than one underlying variable that are
correlation-dependent. Volatility and correlation values are obtained from
broker quotations, pricing services or derived from option
prices.
|
|
·
|
Prepayment
rates – the fair value of a financial instrument that can be prepaid by
the issuer or borrower differs from that of an instrument that cannot be
prepaid. In valuing prepayable instruments that are not quoted in active
markets, the Group considers the value of the prepayment
option.
|
|
·
|
Counterparty
credit spreads – adjustments are made to market prices (or parameters)
when the creditworthiness of the counterparty differs from that of the
assumed counterparty in the market price (or
parameters).
|
|
·
|
Recovery
rates / loss given default – these are used as an input to valuation
models and reserves for ABS and other credit products as an indicator of
severity of losses on default. Recovery rates are primarily sourced from
market data providers or inferred from observable credit
spreads.
|
In
order to determine a reliable fair value, where appropriate, the Group applies
valuation adjustments to the pricing information derived from the above sources.
These adjustments reflect the Group’s assessment of factors that market
participants would consider in setting a price, to the extent that these factors
have not already been included in the information from the above sources.
Furthermore, on an ongoing basis, the Group assesses the appropriateness of any
model used. To the extent that the price provided by internal models does not
represent the fair value of the instrument, for instance in highly stressed
market conditions, the Group makes adjustments to the model valuation to
calibrate to other available pricing sources. Where unobservable inputs are
used, the Group may determine a range of possible valuations based upon
differing and stress scenarios to determine the sensitivity associated with the
valuation. When establishing the fair value of a financial instrument using a
valuation technique, the Group considers certain adjustments to the modelled
price which market participants would make when pricing that instrument. Such
adjustments include the credit quality of the counterparty and adjustments to
correct model valuations for any known limitations. In addition, the Group makes
adjustments to defer income for financial instruments valued at inception where
the valuation of that financial instrument materially depends on one or more
unobservable model inputs.
The Group refines
and modifies its valuation techniques as markets and products develop and as the
pricing for individual products becomes more or less readily available. While
the Group believes its valuation techniques are appropriate and consistent with
other market participants, the use of different methodologies or assumptions
could result in different estimates of fair value at the balance sheet
date.
185
Valuation
hierarchy
The
table below shows the financial instruments carried at fair value by valuation
method.
|
31
December 2008
|
31
December 2007
|
|||||||||||||||||||||||||||||||
|
Level
1(1)
|
Level
2 (2)
|
Level
3 (3)
|
Total
|
Level
1 (1)
|
Level
2 (2)
|
Level
3 (3)
|
Total
|
|||||||||||||||||||||||||
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
|||||||||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||||||||||
|
Fair value
through profit or loss:
|
||||||||||||||||||||||||||||||||
|
Loans and
advances to banks
|
— | 56.2 | — | 56.2 | — | 71.5 | 0.1 | 71.6 | ||||||||||||||||||||||||
|
Loans
and advances to customers
|
— | 50.5 | 3.1 | 53.6 | — | 93.8 | 13.1 | 106.9 | ||||||||||||||||||||||||
|
Debt
securities
|
52.8 | 65.1 | 3.8 | 121.7 | 83.1 | 101.8 | 11.6 | 196.5 | ||||||||||||||||||||||||
|
Equity
shares
|
10.6 | 7.8 | 0.8 | 19.2 | 36.5 | 8.0 | 0.9 | 45.4 | ||||||||||||||||||||||||
|
Derivatives
|
3.9 | 978.4 | 10.3 | 992.6 | 1.9 | 270.3 | 5.2 | 277.4 | ||||||||||||||||||||||||
| 67.3 | 1,158.0 | 18.0 | 1,243.3 | 121.5 | 545.4 | 30.9 | 697.8 | |||||||||||||||||||||||||
|
Available-for-sale:
|
||||||||||||||||||||||||||||||||
|
Debt
securities
|
20.9 | 108.8 | 3.1 | 132.8 | 32.1 | 62.3 | 1.1 | 95.5 | ||||||||||||||||||||||||
|
Equity
shares
|
4.8 | 2.1 | 0.3 | 7.2 | 5.8 | 1.0 | 0.8 | 7.6 | ||||||||||||||||||||||||
| 25.7 | 110.9 | 3.4 | 140.0 | 37.9 | 63.3 | 1.9 | 103.1 | |||||||||||||||||||||||||
| 93.0 | 1,268.9 | 21.4 | 1,383.3 | 159.4 | 608.7 | 32.8 | 800.9 | |||||||||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||||||||||
|
Deposits by
banks and customers
|
— | 144.8 | 0.3 | 145.1 | — | 132.0 | 1.4 | 133.4 | ||||||||||||||||||||||||
|
Debt
securities in issue
|
— | 47.0 | 4.4 | 51.4 | — | 42.1 | 9.2 | 51.3 | ||||||||||||||||||||||||
|
Short
positions
|
36.0 | 6.5 | — |
42.5
|
63.6 | 9.9 | — | 73.5 | ||||||||||||||||||||||||
|
Derivatives
|
3.6 | 963.8 | 4.0 | 971.4 | 2.1 | 265.6 | 4.4 | 272.1 | ||||||||||||||||||||||||
|
Other financial liabilities (4)
|
— | 1.5 | 0.3 | 1.8 | — | 0.9 | 0.2 | 1.1 | ||||||||||||||||||||||||
| 39.6 | 1,163.8 | 9.0 | 1,212.2 | 65.7 | 450.5 | 15.2 | 531.4 | |||||||||||||||||||||||||
Notes:
|
(1)
|
Valued using
unadjusted quoted prices in active markets for identical financial
instruments. This category includes listed equity shares, certain
exchange-traded derivatives, G10 government securities and certain US
agency securities.
|
|
(2)
|
Valued using
techniques based significantly on observable market data. Instruments in
this category are valued using:
|
|
(a)
|
quoted prices
for similar instruments or identical instruments in markets which are not
considered to be active; or
|
|
(b)
|
valuation
techniques where all the inputs that have a significant effect on the
valuation are directly or indirectly based on observable market
data.
|
The
type of instruments that trade in markets that are not considered to be active,
but are based on quoted market prices, broker dealer quotations, or alternative
pricing sources with reasonable levels of price transparency and those
instruments valued using techniques include most government agency securities,
investment-grade corporate bonds, certain mortgage products, certain bank and
bridge loans, repos and reverse repos, less liquid listed equities, state and
municipal obligations, most physical commodities, investment contracts issued by
the Group’s life assurance businesses and certain money market securities and
loan commitments and most OTC derivatives.
|
(3)
|
Instruments in
this category have been valued using a valuation technique where at least
one input (which could have a significant effect on the instrument’s
valuation) is not based on observable market data. Where inputs can be
observed from market data without undue cost and effort, the observed
input is used. Otherwise, the Group determines a reasonable level for the
input.
|
Financial
instruments included within level 3 of the fair value hierarchy primarily
consist of cash instruments which trade infrequently, certain syndicated and
commercial mortgage loans, unlisted equity shares, certain residual interests in
securitisations, super senior tranches of high grade and mezzanine
collateralised debt obligations (CDOs), and other mortgage-based products and
less liquid debt securities, certain structured debt securities in issue and OTC
derivatives where valuation depends upon unobservable inputs such as certain
credit and exotic derivatives. No gain or loss is recognised on the initial
recognition of a financial instrument valued using a technique incorporating
significant unobservable data.
|
(4)
|
Other
financial liabilities comprise subordinated liabilities and write downs
relating to undrawn syndicated loan
facilities.
|
186
11 Financial
instruments (continued)
Level 3
loans and advances decreased by £10 billion, primarily reflecting
reclassification of certain loans (leveraged finance and other corporate loans)
to loans and receivables (LAR) and fair value adjustments on the remaining
portfolio at the end of the year.
Debt securities
categorised as level 3 at the end of the year include £5.2 billion of
asset-backed securities and £1.7 billion of corporate and other debt securities.
The decrease during the year reflects termination of a deal in early 2008,
reclassification of illiquid mortgage-backed securities (MBS) to loans and
receivables, fair value changes, and the transfer of certain previous illiquid
MBS, primarily sub-prime from level 3 to level 2.
Level 3 derivative
assets at 31 December 2008 include credit derivative trades with credit
derivative product companies (CDPCs) with a fair value of £3.5 billion after
credit valuation adjustments of £1.3 billion. At 31 December 2007 these credit
derivative trades with CDPCs had a fair value of £0.8 billion after a credit
valuation of £44 million and were included within level 2 of the fair value
hierarchy. Other level 3 derivative assets at 31 December 2008 include illiquid
credit default swaps (CDSs), other credit derivatives, commodity derivatives and
illiquid interest rate derivatives.
Debt securities in
issue, categorised as level 3, were structured medium term notes and the
decrease in the year primarily reflects the termination of a deal in the first
half of 2008.
The tables below
presents the Level 3 financial instruments carried at fair value as at the
balance sheet date, valuation basis, main assumptions used in the valuation of
these instruments and reasonably possible increases or decreases in fair value
based on reasonably possible alternative assumptions:
|
Reasonably
possible
alternative
assumptions
|
|||||||||||||||
|
Assets
|
Valuation
basis/
technique
|
Main
assumptions
|
Carrying
value
£bn
|
Increase
in
fair
value
£m
|
Decrease
in
fair
value
£m
|
||||||||||
|
Loans and
advances
|
Proprietary
model
|
Credit
spreads, indices
|
3.1 | 70 | 50 | ||||||||||
|
Debt
securities:
|
|||||||||||||||
|
– RMBS (1)
|
Industry
standard model
|
Prepayment
rates, probability of
|
|||||||||||||
|
default, loss
severity and yield
|
0.5 | 40 | 90 | ||||||||||||
|
– CMBS (2)
|
Industry
standard model
|
Prepayment
rates, probability of
|
|||||||||||||
|
default, loss
severity and yield
|
0.6 | 30 | 30 | ||||||||||||
|
–
CDOs
|
Proprietary
model
|
Implied
collateral
|
|||||||||||||
|
valuation,
defaults rates,
|
|||||||||||||||
|
housing
prices, correlation
|
1.7 | 410 | 440 | ||||||||||||
|
– CLOs (3)
|
Industry
standard simulation model
|
Credit
spreads
|
|||||||||||||
|
recovery
rates, correlation
|
1.0 | 40 | 40 | ||||||||||||
|
–
Other
|
Proprietary
model
|
Credit
spreads
|
3.1 | 50 | 50 | ||||||||||
|
Derivatives
|
|||||||||||||||
|
–
credit
|
Proprietary
CVA model, industry
|
Counterparty
credit risk,
|
|||||||||||||
|
option
models, correlation model
|
correlation,
volatility
|
8.0 | 1,030 | 1,200 | |||||||||||
|
–
equity
|
Proprietary
model
|
Volatility,
correlation, dividends
|
0.1 | – | 10 | ||||||||||
|
– interest
rate and commodity
|
Proprietary
model
|
Volatility,
correlation
|
2.2 | 130 | 130 | ||||||||||
|
Equity shares
– private equity
|
Valuation
statements
|
Fund
valuations
|
1.1 | 80 | 160 | ||||||||||
|
31 December
2008
|
21.4 | 1,880 | 2,200 | ||||||||||||
|
31 December
2007
|
32.7 | 610 | 700 | ||||||||||||
Notes:
(1)
Residential mortgage-backed securities.
(2)
Commercial mortgage-backed securities.
(3)
Collateralised loan obligations.
187
|
Reasonably
possible
alternative
assumptions
|
|||||||||||||||
|
Liabilities
|
Valuation
basis/
technique
|
Main
assumptions
|
Carrying
amount
£bn
|
Increase
fair
value
£m
|
Decrease
fair
value
£m
|
||||||||||
|
Debt
securities in issue
|
Proprietary
model
|
Credit
spreads
|
4.4 | 170 | 190 | ||||||||||
|
Derivatives
|
|||||||||||||||
|
Credit
derivatives
|
Proprietary
CVA model,
|
Counterparty
credit risk
|
|||||||||||||
|
industry
option models, correlation model
|
correlation,
volatility
|
2.6 | 160 | 180 | |||||||||||
|
Other
derivatives
|
Proprietary
model
|
Volatility,
correlation
|
1.4 | 120 | 120 | ||||||||||
|
Other
portfolios
|
Proprietary
model
|
Credit
spreads, correlation
|
0.6 | 40 | 60 | ||||||||||
|
31 December
2008
|
9.0 | 490 | 550 | ||||||||||||
|
31 December
2007
|
15.3 | 120 | 120 | ||||||||||||
For each of the
portfolio categories shown in the above table, set out below is a description of
the types of products that comprise the portfolio and the valuation techniques
that are applied in determining fair value, including a description of valuation
techniques used, including for those in level 2, and inputs to those models and
techniques. Where reasonably possible alternative assumptions of unobservable
inputs used in models would change the fair value of the portfolio
significantly, the alternative inputs are indicated along with the impact this
would have on the fair value. Where there have been significant changes to
valuation techniques during the year a discussion of the reasons for this are
also included.
Loans
and advances to customers
Loans in level 3
primarily comprise US commercial mortgages and syndicated loans.
Commercial
mortgages
These senior and
mezzanine commercial mortgages are loans secured on commercial land and
buildings that were originated or acquired by GBM for securitisation. Senior
commercial mortgages carry a variable interest rate and mezzanine or more junior
commercial mortgages may carry a fixed or variable interest rate. Factors
affecting the value of these loans may include, but are not limited to, loan
type, underlying property type and geographic location, loan interest rate, loan
to value ratios, debt service coverage ratios, prepayment rates, cumulative loan
loss information, yields, investor demand, market volatility since the last
securitisation, and credit enhancement. Where observable market prices for a
particular loan are not available, the fair value will typically be determined
with reference to observable market transactions in other loans or credit
related products including debt securities and credit derivatives. Assumptions
are made about the relationship between the loan and the available benchmark
data. Using reasonably possible alternative assumptions for credit spreads
(taking into account all other applicable factors) would reduce the fair value
of these mortgages of £1.1 billion by up to £18 million or increase the fair
value by up to £25 million.
Syndicated
lending
The Group’s
syndicated lending activities are conducted by the syndicate business in
conjunction with the various product lines covering corporate, leveraged, real
estate and project finance activities. When a commitment to lend is entered
into, the Group estimates the proportion of the loan that is intended to be held
for trading on draw down, and the proportion it anticipates to retain on its
balance sheet as a loan and receivable. Where the commitment is intended to be
syndicated, the commitment to lend is fair valued through profit or loss. On
drawdown, the portion of the loan expected to be syndicated is recorded at fair
value as a held-for-trading asset, and the expected hold portion is measured at
amortised cost less, where appropriate, impairment.
The
Group values the portion of the loan expected to be syndicated held at fair
value by using market observable syndication prices in the same or similar
assets. Where these prices are not available, a discounted cash flow model is
used. The model incorporates observable assumptions such as current interest
rates and yield curves, the notional and tender amount of the loan, and
counterparty credit quality where it is derived from credit default swap spreads
using market indices. The model also incorporates unobservable assumptions,
including expected refinancing periods, and counterparty credit quality where it
is derived from the Group’s internal risk assessments. Derivatives arising from
commitments to lend are measured using the same model, based on proxy notional
amounts.
Using reasonably
possible alternative assumptions for expected cash flows to value these assets
of £2.0 billion would reduce the fair value by up to £32 million or increase the
fair value by up to £45 million. The assumptions to determine these amounts were
based on restructuring scenarios and expected margins.
Debt
securities
Residential
mortgage backed securities (RMBS)
RMBS where the
underlying assets are US agency-backed mortgages and there is regular trading
are generally classified as level 2 in the fair value hierarchy. RMBS are also
classified as level 2 when regular trading is not prevalent in the market, but
similar executed trades or third-party data including indices, broker quotes and
pricing services can be used to substantiate the fair value. RMBS are classified
as level 3 when trading activity is not available and a model is utilised which
uses significant unobservable data.
In
determining whether an instrument is similar to that being valued, the Group
considers a range of factors, principally: the lending standards of the brokers
and underwriters that originated the mortgages, the lead manager of the
security, the issue date of the respective securities, the underlying asset
composition (including origination date, loan to value ratios, historic loss
information and geographic location of the mortgages), the credit rating of the
instrument, and any credit protection that the instrument may benefit from, such
as insurance wraps or subordinated tranches. Where there are instances of market
observable data for several similar RMBS tranches, the Group considers the
extent of similar characteristics shared with the instrument being valued,
together with the frequency,
188
11 Financial
instruments (continued)
tenor and nature of
the trades that have been observed. This method is most frequently used for US
and UK RMBS. The RMBS of Dutch and Spanish originated mortgages guaranteed by
those governments are valued using the credit spreads of the respective
government debt and certain assumptions made by the Group, or based on
observable prices from Bloomberg or consensus pricing services.
Where
there is an absence of trading activity, models are used. The Group primarily
uses an industry standard model to project the expected future cash flows to be
received from the underlying mortgages and to forecast how these cash flows will
be distributed to the various holders of the RMBS. This model utilises data
provided by the servicer of the underlying mortgage portfolio, layering on
assumptions for mortgage prepayments, probability of default, expected losses,
and yield. The Group uses data from third-party sources to calibrate its
assumptions, including pricing information from third party pricing services,
independent research, broker quotes, and other independent sources. An
assessment is made of third-party data source to determine its applicability and
reliability. The Group adjusts the model price with a liquidity premium to
reflect the price that the instrument could be traded at in the market and may
also make adjustments for model deficiencies.
The weighted
average of the key significant inputs utilised in valuing US level 3 RMBS
positions are shown in the table below.
|
Weighted-average
inputs
|
|||||
|
2008
|
Non-agency
prime
RMBS
|
Alt-A
RMBS
|
|||
|
Yield
|
11.02%
|
20.69%
|
|||
|
Probability
of default
|
3.00 CDR
|
(2) |
40.00 CDR
|
(1) | |
|
Loss
severity
|
45.00%
|
(2) |
52.25%
|
(2) | |
|
Prepayment
|
12.67
CPR
|
10.65
CPR
|
|||
Notes:
(1)
Constant default rate or probability of default.
(2)
Constant prepayment rate.
The fair value of
securities within each class of asset changes on a broadly consistent basis in
response to changes in given market factors. However, the extent of the change,
and therefore the range of reasonably possible alternative assumptions, may be
either more or less pronounced, depending on the particular terms and
circumstances of the individual security. Through most of 2008, while default
rates on sub-prime mortgages were on the rise, there was less transparency and
historical data to predict future defaults on both Alt-A and prime securities.
As such, the Group felt that probability of default was the least transparent
input into Alt-A and prime RMBS modelled valuations throughout 2008 (and most
sensitive to variations). The Group believes that a range of 500 basis points
greater than and 500 basis points less than the weighted average constant
default rate, and a range of 200 basis points greater than and 200 basis points
less than the weighted average constant default rate represents a reasonably
possible set of acceptable pricing alternatives for Alt-A and prime RMBS,
respectively. These assumptions consider the inherently risky nature of Alt-A
over prime securities, as well as declining economic conditions leading to an
increased likelihood of default at year-end. While other key inputs may possess
characteristics of unobservability in both Alt-A and prime modelled valuations,
the effect of utilising reasonably possible alternatives for these respective
inputs would have an immaterial effect on the overall valuation. Using these
reasonably possible alternative assumptions the fair value of RMBS of £0.5
billion would be £90 million lower or £40 million higher.
Commercial
mortgage backed securities
CMBS is valued
using an industry standard model and the inputs, where possible, are
corroborated using observable market data.
For senior CMBS and
subordinated tranches, the Group determined that the most sensitive input to
reasonably possible alternatives valuation is probability of default and yield
respectively. Using reasonably possible alternative assumptions for these
inputs, the fair value of CMBS of £0.6 billion would be £30 million lower or £30
million higher.
Collateralised
debt obligations
CDOs
purchased from third parties are valued using independent, third- party quotes
or independent lead manager indicative prices. For super senior CDOs which have
been originated by the Group no specific third- party information is available.
The valuation of these super senior CDOs therefore takes into consideration
outputs from a proprietary model, market data and appropriate valuation
adjustments.
The Group’s
proprietary model calculates the expected cashflows from the underlying
mortgages using assumptions, derived from publicly available data on future
macroeconomic conditions (including house price appreciation and depreciation)
and on defaults and delinquencies on these underlying mortgages. The model used
by the Group comprises an econometric loan-level model which provides the input
to an industry standard ABS model, the output of which feeds a proprietary model
generating expected cashflows which are discounted using a risk adjusted
rate.
189
Due to the
subjectivity of the inputs to the pricing model, alternative valuation points
are constructed to benchmark the output of the model. These valuation points
include determining an ABS index implied collateral valuation, which provides a
market calibrated valuation data point. A collateral net asset value methodology
is also considered which uses dealer buy side marks to determine an upper bound
for super senior CDO valuations. Both the ABS index implied valuation and the
collateral net asset value methodology apply an assumed immediate liquidation
approach.
The Group, using
all pricing points available, may make necessary and appropriate valuation
adjustments to the pricing information derived from the proprietary model. These
adjustments reflect the Group’s assessment of factors that market participants
would consider in setting a price, to the extent that these factors that have
not already been included in the model and may include adjustments made for
liquidity discounts.
In
order to provide disclosures of the valuation of super senior CDOs using
reasonably possible alternative assumptions, the Group has considered
macroeconomic conditions, including house price appreciation and depreciation,
and the effect of regional variations. The output from using these alternative
assumptions has been compared with inferred pricing from other published data.
The Group believes that reasonably possible alternative assumptions could reduce
or increase valuations by up to 4%. Using these alternative assumptions would
reduce the fair value of level 3 CDOs of £1.7 billion by up to £440 million
(super senior CDOs: £292 million) and increase the fair value by up to £410
million (super senior CDOs: £ 292 million).
Collateralised
loan obligations
To
determine the fair value of CLOs purchased from third parties, the Group use
third-party broker or lead manager quotes as the primary pricing source. These
quotes are benchmarked to consensus pricing sources where they are
available.
For CLOs originated
and still held by the Group, the fair value is determined using a correlation
model based on a Monte Carlo simulation framework. The main model inputs are
credit spreads and recovery rates of the underlying assets and their
correlation. A credit curve is assigned to each underlying asset based on
prices, from third- party dealer quotes, and cash flow profiles, sourced from an
industry standard model. Losses are calculated taking into account the
attachment and detachment point of the exposure. As the correlation inputs to
this model are not observable CLOs are deemed to be level 3. Using reasonably
possible alternative assumptions the fair value of CLOs of £1.0 billion would be
£40 million lower or £40 million higher.
Other
debt securities
Other level 3 debt
securities comprise £1.4 billion of other ABS and £1.7 billion of other debt
securities. Where observable market prices for a particular debt security are
not available, the fair value will typically be determined with reference to
observable market transactions in other related products, such as similar debt
securities or credit derivatives. Assumptions are made about the relationship
between the individual debt security and the available benchmark data. Where
significant management judgement has been applied in identifying the most
relevant related product, or in determining the relationship between the related
product and the instrument itself, the valuation is shown in level 3. Using
differing assumptions about this relationship would result in different fair
values for these assets. The main assumption made is that of relative
creditworthiness. Using reasonably possible alternative assumption credit
assumptions, taking into account the underlying currency, tenor, and rating of
the debt securities within each portfolio, would reduce the fair value of other
debt securities of £3.1 billion by up to £50 million or increase the fair value
by up to £50 million.
Derivatives
Level 3 derivative
assets comprised credit derivatives of £8.0 billion, equity derivatives of £0.1
billion and interest rate, foreign exchange rate and commodity derivative
contracts of £2.2 billion. Derivative liabilities comprise credit derivatives of
£2.6 billion interest rate, foreign exchange rate and commodity derivatives
contracts of £1.4 billion.
Derivatives are
priced using quoted prices for the same or similar instruments where these are
available. However, the majority of derivatives are valued using pricing models.
Inputs for these models are usually observed directly in the market, or derived
from observed prices. However, it is not always possible to observe or
corroborate all model inputs. Unobservable inputs used are based on estimates
taking into account a range of available information including historic
analysis, historic traded levels, market practice, comparison to other relevant
benchmark observable data and consensus pricing data.
Credit
derivatives
The Group’s credit
derivatives include vanilla and bespoke portfolio tranches, gap risk products
and certain other unique trades. The bespoke portfolio tranches are synthetic
tranches referenced to a bespoke portfolio of corporate names on which the Group
purchases credit protection. Bespoke portfolio tranches are valued using
Gaussian Copula, a standard method which uses observable market inputs (credit
spreads, index tranche prices and recovery rates) to generate an output price
for the tranche via a mapping methodology. In essence this method takes the
expected loss of the tranche expressed as a fraction of the expected loss of the
whole underlying portfolio and calculates which detachment point on the liquid
index, and hence which correlation level, coincides with this expected loss
fraction. Where the inputs into this valuation technique are observable in the
market, bespoke tranches are considered to be level 2 assets. Where inputs are
not observable, bespoke tranches are considered to be level 3 assets. However,
all transactions executed with a CDPC counterparty are considered level 3 as the
counterparty credit risk assessment is a significant component of these
valuations.
Gap risk products
are leveraged trades, with the counterparty’s potential loss capped at the
amount of the initial principal invested. Gap risk is the probability that the
market will move discontinuously too quickly to exit a portfolio and return the
principal to the counterparty without incurring losses, should an unwind event
be triggered. This optionality is embedded within these portfolio structures and
is very rarely traded outright in the market. Gap risk is not observable in the
markets and, as such, these structures are deemed to be level 3
instruments.
Other unique trades
are valued using a specialised model for each instrument and the same market
data inputs as all other trades where applicable. By their nature, the valuation
is also driven by a variety of other model inputs, many of which are
unobservable in the market.
190
11 Financial
instruments (continued)
Where
these instruments have embedded optionality it is valued using a variation of
the Black-Scholes option pricing formula, and where they have correlation
exposure it is valued using a variant of the Gaussian Copula model. The
volatility or unique correlation inputs required to value these products are
generally unobservable and the instruments are therefore deemed to be level 3
instruments.
Other
derivatives
Exotic equity,
interest rate and commodity options provide a payout (or series of payouts)
linked to the performance of one or more underlying, including equities,
interest rates, foreign exchange rates and commodities. Included in commodities
derivatives are energy contracts entered into by RBS Sempra Commodities. Most of
these contracts are valued using models that incorporate observable data. A
small number are more complex, structured derivatives which incorporate in their
valuation assumptions regarding power price volatilities and correlation between
inputs, which are not market observable. These include certain tolling
agreements, where power is purchased in return for a given quantity of fuel, and
load deals, where a seller agrees to deliver a fixed proportion of power used by
a client’s utility customers.
Exotic options do
not trade in active markets except in a small number of cases. Consequently, the
Group uses models to determine fair value using valuation techniques typical for
the industry. These techniques can be divided, firstly, into modelling
approaches and, secondly, into methods of assessing appropriate levels for model
inputs. The Group uses a variety of proprietary models for valuing exotic
trades. Exotic valuation inputs include correlation between equities,
interest rates, foreign exchange rates and commodity prices. Correlations for
more liquid equity and rate pairs are valued using independently sourced
consensus pricing levels. Where a consensus pricing benchmark is unavailable,
these instruments are categorised as level 3.
Reasonably
possible alternative assumptions
In
determining the effect of reasonably possible alternative assumptions for
unobservable inputs, the Group has considered credit derivative trades with
CDPCs separately from all other level 3 derivatives due to the significant
element of subjectivity in determining the counterparty credit
risk.
The fair value of
credit derivative trades with CDPCs as at 31 December 2008 was £4.8 billion
before applying a CVA of £1.3 billion. The Group’s credit derivative exposures
to CDPCs are valued using pricing models with inputs observed directly in the
market. An adjustment is made to the model valuation as the creditworthiness of
CDPC counterparties differs from that of the credit risk assumptions used in the
model. The adjustment reflects the estimated cost of hedging the counterparty
risk arising from each trade. In the absence of market observable credit spreads
of CDPCs, the cost of hedging the counterparty risk is estimated from an
analysis of the underlying trades and the cost of hedging expected default
losses in excess of the capital available in each vehicle. A reasonably possible
alternative approach would be to estimate the cost of hedging the counterparty
risk from market observable credit spreads of entities considered similar to
CDPCs (for example monoline insurers with similar business or similarly rated
entities). These reasonably possible alternative approaches would reduce the
fair value credit derivatives with CDPCs by up to £740 million or increase the
fair value by up to £600 million.
For all other level
3 derivatives, unobservable inputs are principally comprised of correlations and
volatilities. Where a derivative valuation relies significantly on an
unobservable input, the valuation is shown in level 3. It is usual for such
derivative valuations to depend on several observable, and one or few
unobservable model inputs. In determining reasonably possible alternative
assumptions, the relative impact of unobservable inputs as compared to those
which may be observed was considered. Using reasonably possible alternative
assumptions the fair value of all other level 3 derivative assets (excluding
CDPCs) would be reduced by up to £600 million or increased by up to £560 million
and derivative liabilities of £4.0 billion, would be reduced by up to £300
million or increased by upto £280 million.
Equity
shares – private equity
Private equity
investments include unit holdings and limited partnership interests primarily in
corporate private equity funds, debt funds and fund of hedges funds. Externally
managed funds are valued using recent prices where available. Where not
available, the fair value of investments in externally managed funds is
generally determined using statements or other information provided by the fund
managers.
Although such
valuations are provided from third parties, the Group recognises that such
valuations may rely significantly on the judgements and estimates made by those
fund managers, particularly in assessing private equity components. Following
the decline in liquidity in world markets, the Group believes that there is
sufficient subjectivity in such valuations to report them in level
3.
Reasonably possible
alternative valuations have been determined based on the historic trends in
valuations received, and by considering the possible impact of market movements
towards the end of the reporting period, which may not be fully reflected in
valuations received. Using these reasonably possible alternate assumptions would
reduce the fair value of externally managed funds of £1.1 billion by up to £160
million or increase the fair value by up to £80 million.
Other
financial instruments
Other than the
portfolios discussed above, there are other financial instruments which are held
at fair value determined from data which are not market observable, or
incorporating material adjustments to market observed data. Using reasonably
possible alternate assumptions appropriate to the liability in question, such as
credit spreads, derivative inputs and equity correlations, would reduce the fair
value of other financial instruments held at fair value of £5.0 billion,
primarily debt securities in issue of £4.4 billion, by up to £250 million or
increase the fair value by up to £210 million.
191
Own
credit
When
valuing financial liabilities recorded at fair value, the Group takes into
account the effect of its own credit standing. The categories of financial
liabilities on which own credit spread adjustments are made are issued debt,
including issued structured notes, and derivatives. An own credit adjustment is
applied to positions where it is believed that counterparties would consider the
Group’s creditworthiness when pricing trades.
For issued debt and
structured notes, this adjustment is based on independent quotes from market
participants for the debt issuance spreads above average inter-bank rates (at a
range of tenors) which the market would demand when purchasing new senior or
sub-debt issuances from the Group. Where necessary, these quotes are
interpolated using a curve shape derived from CDS prices.
The fair value of
the Group’s derivative financial liabilities reflects the Group’s own credit
risk. The adjustment takes into account collateral posted by the Group and the
effects of master netting agreements. No adjustments were made for own credit
risk in relation to derivative liabilities in prior periods as it was not a
significant factor in the pricing of derivative transactions by market
participants. The change in methodology reflects market turbulence in 2008 which
led to participants focussing increased attention on counterparty credit
quality.
The table below
shows the own credit spread adjustments on liabilities recorded in the income
statement during the year.
|
Debt
securities in issue
|
||||||||||||||||||||
|
Held-for-trading
|
Designated
at
fair
value through profit and loss
|
Total
|
Derivatives
|
Total
|
||||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
|
At 1 January
2008
|
304 | 152 | 456 | — | 456 | |||||||||||||||
|
Effect of
changes to credit spreads
|
376 | 583 | 959 | 450 | 1,409 | |||||||||||||||
|
Benefit of
foreign exchange hedges
|
392 | 195 | 587 | — | 587 | |||||||||||||||
|
New
issues
|
274 | 97 | 371 | — | 371 | |||||||||||||||
|
At 31
December 2008
|
1,346 | 1,027 | 2,373 | 450 | 2,823 | |||||||||||||||
192
11 Financial
instruments (continued)
Reclassification
of financial instruments
As
discussed in accounting policies on page 162, during 2008 the Group reclassified
financial assets from the held-for-trading and available-for-sale categories
into the loans and receivables category (as permitted by paragraph 50D of IAS 39
as amended) and from the held¬for-trading category into the available-for-sale
category (as permitted by paragraph 50B of IAS 39 as amended).
The turbulence in
the financial markets during the second half of 2008 was regarded by management
as rare circumstances in the context of paragraph 50B of IAS 39 as
amended.
The balance sheet
values of these assets, the effect of the reclassification on the income
statement for the period from the date of reclassification to 31 December 2008
and the gains and losses relating to these assets recorded in the income
statement for the years ended 31 December 2008, 2007 and 2006 were as
follows:
|
2008
|
2007
|
2006
|
||||||||||||||||||||||||||||||||||||||||||||||
|
2008
– on reclassification
|
31
December 2008
|
After
reclassification
|
||||||||||||||||||||||||||||||||||||||||||||||
|
Carrying
value
|
Effective
interest
rate
|
Expected
cash
flows
|
Carrying
value
|
Fair
value
|
Gains/(losses)
up
to the
date
of
reclassi-
fication
|
Income
|
Impairment
losses
|
Gains/
(losses)
in
AFS
reserves
|
Amount
that
would
have
been
recognised
|
Gains/(losses)
recognised
in
the
income
statement
in
prior
periods
|
||||||||||||||||||||||||||||||||||||||
| £m |
%
|
£m | £m | £m | £m | £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||||||||||||||||
|
Reclassified
from HFT to LAR:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Loans:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Leveraged
finance
|
3,602 | 10.15 | 6,083 | 4,304 | 2,523 | (457 | ) | 454 | — | (1,206 | ) | (155 | ) | — | ||||||||||||||||||||||||||||||||||
|
Corporate
loans
|
5,040 | 6.19 | 7,582 | 5,827 | 4,940 | (76 | ) | 198 | — | (681 | ) | (50 | ) | 3 | ||||||||||||||||||||||||||||||||||
| 8,642 | 13,665 | 10,131 | 7,463 | (533 | ) | 652 | — | (1,887 | ) | (205 | ) | 3 | ||||||||||||||||||||||||||||||||||||
|
Debt
securities:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
CDO of
RMBS
|
215 | 4.92 | 259 | 236 | 221 | 4 | 5 | — | (11 | ) | 5 | 6 | ||||||||||||||||||||||||||||||||||||
|
RMBS
|
1,765 | 6.05 | 2,136 | 2,011 | 1,536 | (115 | ) | 157 | — | (302 | ) | (12 | ) | — | ||||||||||||||||||||||||||||||||||
|
CMBS
|
1 | 11.11 | 4 | 1 | 1 | 1 | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||
|
CLOs
|
835 | 6.34 | 1,141 | 952 | 717 | (22 | ) | 104 | — | (130 | ) | (14 | ) | (2 | ) | |||||||||||||||||||||||||||||||||
|
Other
ABS
|
2,203 | 5.07 | 3,202 | 2,514 | 2,028 | (67 | ) | 129 | — | (338 | ) | 3 | (1 | ) | ||||||||||||||||||||||||||||||||||
|
Other
|
2,538 | 2.62 | 2,764 | 2,602 | 2,388 | 72 | 3 | — | (166 | ) | 94 | 476 | ||||||||||||||||||||||||||||||||||||
| 7,557 | 9,506 | 8,316 | 6,891 | (127 | ) | 398 | — | (947 | ) | 76 | 479 | |||||||||||||||||||||||||||||||||||||
|
Total
|
16,199 | 23,171 | 18,447 | 14,354 | (660 | ) | 1,050 | — | (2,834 | ) | (129 | ) | 482 | |||||||||||||||||||||||||||||||||||
|
Reclassified
from HFT to AFS:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Debt
securities:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
CDO
of RMBS
|
6,228 | 8.14 | 8,822 | 5,695 | 5,695 | (1,330 | ) | 1,147 | (464 | ) | (1,069 | ) | (280 | ) | (400 | ) | — | |||||||||||||||||||||||||||||||
|
RMBS
|
5,205 | 8.03 | 8,890 | 5,171 | 5,171 | (530 | ) | 24 | — | (162 | ) | (122 | ) | (4 | ) | 73 | ||||||||||||||||||||||||||||||||
|
CMBS
|
32 | 6.81 | 85 | 31 | 31 | (5 | ) | 5 | — | (3 | ) | 2 | (4 | ) | — | |||||||||||||||||||||||||||||||||
|
CLOs
|
1,457 | 5.02 | 1,804 | 1,288 | 1,288 | (168 | ) | 421 | (383 | ) | 58 | (36 | ) | 1 | ||||||||||||||||||||||||||||||||||
|
Other
ABS
|
2,199 | 6.02 | 3,183 | 1,847 | 1,847 | (356 | ) | (10 | ) | — | (354 | ) | (311 | ) | (42 | ) | 72 | |||||||||||||||||||||||||||||||
|
Other
|
614 | 12.55 | 1,311 | 698 | 698 | — | 130 | — | (166 | ) | (5 | ) | (1 | ) | — | |||||||||||||||||||||||||||||||||
| 15,735 | 24,095 | 14,730 | 14,730 | (2,389 | ) | 1,717 | (464 | ) | (2,137 | ) | (658 | ) | (487 | ) | 146 | |||||||||||||||||||||||||||||||||
|
Reclassification
from AFS to LAR:
|
||||||||||||||||||||||||||||||||||||||||||||||||
|
Debt
securities
|
704 | 1.38 | 772 | 1,028 | 968 | (12 | )(1) | 6 | — | — | (37 | )(1) | — | — | ||||||||||||||||||||||||||||||||||
|
Total
|
32,638 | 48,038 | 34,205 | 30,052 | (3,061 | ) | 2,773 | (464 | ) | (2,137 | ) | (3,529 | ) | (616 | ) | 628 | ||||||||||||||||||||||||||||||||
Note:
(1)
Gains/(losses) recognised in the available-for-sale reserve.
193
Amounts included in
the consolidated income statement:
|
Group
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
| £m | £m | £m | ||||||||||
|
Gains on
financial assets/liabilities designated as at fair value through profit or
loss
|
(901 | ) | 1,074 | 573 | ||||||||
|
Gains on
disposal or settlement of loans and receivables
|
4 | 3 | 21 | |||||||||
On the
initial recognition of financial assets and liabilities valued using valuation
techniques incorporating information other than observable market data, any
difference between the transaction price and that derived from the valuation
technique is deferred. Such amounts are recognised in profit or loss over the
life of the transaction; when market data become observable; or when the
transaction matures or is closed out as appropriate. At 31 December 2008, net
gains of £ 102 million (2007 – £ 72 million) were carried forward in the balance
sheet. During the year net gains of £89 million (2007 – £67 million) were
deferred and £65 million (2007 – £ 10 million) released to profit or
loss.
Fair
value of financial instruments not carried at fair value
The following table
shows the carrying values and the fair values of financial instruments carried
on the balance sheets at amortised cost.
|
Group
|
Company
|
|||||||||||||||||||||||||||||||
|
2008
Carrying
Value
|
2008
Fair
value
|
2007
Carrying
value
|
2007
Fair
value
|
2008
Carrying
value
|
2008
Fair
value
|
2007
Carrying
value
|
2007
Fair
value
|
|||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||||
|
Financial
assets
|
||||||||||||||||||||||||||||||||
|
Cash and
balances at central banks
|
12,400 | 12,400 | 17,866 | 17,866 | — | — | — | — | ||||||||||||||||||||||||
|
Loans
and advances to banks
|
||||||||||||||||||||||||||||||||
|
Loans
and receivables
|
81,963 | 81,929 | 147,821 | 147,818 | 27,031 | 27,031 | 7,686 | 7,686 | ||||||||||||||||||||||||
|
Loans
and advances to customers
|
||||||||||||||||||||||||||||||||
|
Loans
and receivables
|
806,627 | 761,619 | 709,090 | 711,346 | — | — | 307 | 307 | ||||||||||||||||||||||||
|
Finance
leases
|
14,453 | 14,527 | 12,570 | 12,376 | — | — | — | — | ||||||||||||||||||||||||
|
Debt
securities
|
||||||||||||||||||||||||||||||||
|
Loans
and receivables
|
12,985 | 11,500 | 2,672 | 2,644 | — | — | — | — | ||||||||||||||||||||||||
|
Settlement
balances
|
17,832 | 17,832 | 16,589 | 16,589 | — | — | — | — | ||||||||||||||||||||||||
|
Financial
liabilities
|
||||||||||||||||||||||||||||||||
|
Deposits
by banks
|
176,890 | 176,266 | 246,803 | 246,627 | 1,802 | 1,802 | 5,572 | 5,572 | ||||||||||||||||||||||||
|
Customer
accounts
|
575,532 | 576,378 | 614,432 | 614,067 | 26 | 26 | — | — | ||||||||||||||||||||||||
|
Debt
securities in issue
|
248,846 | 241,295 | 222,883 | 222,763 | 14,179 | 14,010 | 13,453 | 13,453 | ||||||||||||||||||||||||
|
Settlement
balances
|
11,741 | 11,741 | 17,520 | 17,520 | — | — | — | — | ||||||||||||||||||||||||
|
Subordinated
liabilities
|
47,645 | 36,446 | 37,146 | 35,793 | 10,314 | 8,752 | 7,743 | 6,983 | ||||||||||||||||||||||||
Notes:
|
(1)
|
Financial
assets and financial liabilities for which carrying amount approximates to
fair value because they are of short
maturity.
|
|
(2)
|
Fair values
are estimated by discounting expected future cash flows; using current
interest rates and making adjustments for
credit.
|
|
(3)
|
The fair value
of deposits repayable on demand is equal to their carrying value. The fair
value of other deposits by banks and customer accounts is estimated by
discounting expected future cash flows at current rates and adjusting,
where appropriate, for the Group’s own credit spread. The fair value of
many of these instruments approximates to their carrying value because
they are of short maturity or reprice
frequently.
|
|
(4)
|
The fair value
of short-term debt securities in issue is close to their carrying value.
The fair value of other debt securities in issue is based on quoted
prices; where these are unavailable fair value is estimated using other
valuation techniques.
|
|
(5)
|
The fair value
of subordinated liabilities in issue is based on quoted prices; where
these are unavailable fair value is estimated using other valuation
techniques.
|
|
(6)
|
The fair value
of amounts due from and to subsidiaries is equal to their carrying
value.
|
194
|
11
|
Financial
instruments (continued)
|
Remaining
maturity
The following table
shows the residual maturity of financial instruments, based on contract date of
maturity.
|
Group
|
||||||||||||||||||||||||
|
2008
|
2007
|
|||||||||||||||||||||||
|
Less
than
12
months
|
More
than
12
months
|
Total
|
Less
than
12
months
|
More
than
12
months
|
Total
|
|||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||
|
Cash and
balances at central banks
|
12,364 | 36 | 12,400 | 17,866 | — | 17,866 | ||||||||||||||||||
|
Loans
and advances to banks
|
133,565 | 4,632 | 138,197 | 187,969 | 31,491 | 219,460 | ||||||||||||||||||
|
Loans
and advances to customers
|
338,751 | 535,971 | 874,722 | 395,753 | 432,785 | 828,538 | ||||||||||||||||||
|
Debt
securities
|
69,912 | 197,637 | 267,549 | 70,088 | 224,568 | 294,656 | ||||||||||||||||||
|
Equity
shares
|
— | 26,330 | 26,330 | — | 53,026 | 53,026 | ||||||||||||||||||
|
Settlement
balances
|
17,795 | 37 | 17,832 | 16,561 | 28 | 16,589 | ||||||||||||||||||
|
Derivatives
|
184,278 | 808,281 | 992,559 | 50,841 | 226,561 | 277,402 | ||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||
|
Deposits by
banks
|
248,896 | 9,148 | 258,044 | 302,934 | 9,360 | 312,294 | ||||||||||||||||||
|
Customer
accounts
|
611,047 | 28,465 | 639,512 | 650,685 | 31,678 | 682,363 | ||||||||||||||||||
|
Debt
securities in issue
|
174,507 | 125,782 | 300,289 | 156,020 | 118,152 | 274,172 | ||||||||||||||||||
|
Settlement
balances and short positions
|
24,448 | 29,829 | 54,277 | 44,466 | 46,555 | 91,021 | ||||||||||||||||||
|
Derivatives
|
175,908 | 795,456 | 971,364 | 54,624 | 217,428 | 272,052 | ||||||||||||||||||
|
Subordinated
liabilities
|
3,394 | 45,760 | 49,154 | 1,896 | 36,147 | 38,043 | ||||||||||||||||||
|
Company
|
||||||||||||||||||||||||
|
2008
|
2007
|
|||||||||||||||||||||||
|
Less
than
12
months
|
More
than
12
months
|
Total
|
Less
than
12
months
|
More
than
12
months
|
Total
|
|||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||
|
Assets
|
||||||||||||||||||||||||
|
Loans and
advances to banks
|
16,096 | 10,935 | 27,031 | 1,655 | 6,031 | 7,686 | ||||||||||||||||||
|
Loans
and advances to customers
|
— | — | — | 307 | — | 307 | ||||||||||||||||||
|
Derivatives
|
221 | 947 | 1,168 | 127 | 46 | 173 | ||||||||||||||||||
|
Liabilities
|
||||||||||||||||||||||||
|
Deposits by
banks
|
1,802 | — | 1,802 | 5,572 | — | 5,572 | ||||||||||||||||||
|
Customer
accounts
|
26 | — | 26 | — | — | — | ||||||||||||||||||
|
Debt
securities in issue
|
7,253 | 6,926 | 14,179 | 8,855 | 4,598 | 13,453 | ||||||||||||||||||
|
Derivatives
|
227 | 134 | 361 | 102 | 77 | 179 | ||||||||||||||||||
|
Subordinated
liabilities
|
424 | 9,890 | 10,314 | 119 | 7,624 | 7,743 | ||||||||||||||||||
195
The following
tables show the contractual undiscounted cash flows payable up to a period of
twenty years including future payments of interest.
On
balance sheet liabilities
|
Group
|
||||||||||||||||||||||||
|
2008
|
2007
|
|||||||||||||||||||||||
|
0-3
months
|
3-12
months
|
1-3
years
|
3-5
years
|
5-10
years
|
10-20
years
|
|||||||||||||||||||
|
2008
|
£m | £m | £m | £m | £m | £m | ||||||||||||||||||
|
Deposits by
banks
|
154,614 | 14,347 | 3,345 | 2,754 | 2,048 | 34 | ||||||||||||||||||
|
Customer
accounts
|
523,268 | 33,450 | 6,577 | 6,337 | 7,298 | 5,319 | ||||||||||||||||||
|
Debt
securities in issue
|
131,714 | 48,652 | 40,067 | 38,223 | 38,667 | 5,626 | ||||||||||||||||||
|
Derivatives
held for hedging
|
394 | 2,216 | 2,543 | 1,334 | 2,682 | 1,373 | ||||||||||||||||||
|
Subordinated
liabilities
|
1,753 | 4,271 | 6,824 | 5,793 | 24,503 | 13,030 | ||||||||||||||||||
|
Settlement
balances and other liabilities
|
13,351 | 5 | 12 | 6 | 10 | 6 | ||||||||||||||||||
| 825,094 | 102,941 | 59,368 | 54,447 | 75,208 | 25,388 | |||||||||||||||||||
|
2007
|
||||||||||||||||||||||||
|
Deposits by
banks
|
220,914 | 21,580 | 3,206 | 2,225 | 1,509 | 434 | ||||||||||||||||||
|
Customer
accounts
|
561,003 | 30,539 | 9,430 | 4,509 | 11,615 | 9,052 | ||||||||||||||||||
|
Debt
securities in issue
|
111,292 | 37,292 | 57,562 | 34,917 | 44,166 | 4,223 | ||||||||||||||||||
|
Derivatives
held for hedging
|
252 | 667 | 822 | 449 | 605 | 118 | ||||||||||||||||||
|
Subordinated
liabilities
|
641 | 3,720 | 5,603 | 3,466 | 22,735 | 6,354 | ||||||||||||||||||
|
Settlement
balances and other liabilities
|
17,998 | 5 | 14 | 6 | 12 | 7 | ||||||||||||||||||
| 912,100 | 93,803 | 76,637 | 45,572 | 80,642 | 20,188 | |||||||||||||||||||
|
Company
|
||||||||||||||||||||||||
|
2008
|
2007
|
|||||||||||||||||||||||
|
0-3
months
|
3-12
months
|
1-3
years
|
3-5
years
|
5-10
years
|
10-20
years
|
|||||||||||||||||||
|
2008
|
£m | £m | £m | £m | £m | £m | ||||||||||||||||||
|
Deposits by
banks
|
116 | 1,707 | — | — | — | — | ||||||||||||||||||
|
Debt
securities in issue
|
4,448 | 3,105 | 1,334 | 6,105 | — | — | ||||||||||||||||||
|
Derivatives
held for hedging
|
186 | 16 | 30 | 1 | — | — | ||||||||||||||||||
|
Subordinated
liabilities
|
158 | 458 | 1,464 | 1,376 | 4,241 | 5,149 | ||||||||||||||||||
| 4,908 | 5,286 | 2,828 | 7,482 | 4,241 | 5,149 | |||||||||||||||||||
|
2007
|
||||||||||||||||||||||||
|
Deposits by
banks
|
116 | 5,544 | — | — | — | — | ||||||||||||||||||
|
Debt
securities in issue
|
824 | 8,477 | 3,447 | 1,372 | — | — | ||||||||||||||||||
|
Derivatives
held for hedging
|
52 | 1 | — | 2 | — | — | ||||||||||||||||||
|
Subordinated
liabilities
|
116 | 347 | 1,119 | 1,045 | 3,282 | 3,909 | ||||||||||||||||||
| 1,108 | 14,369 | 4,566 | 2,419 | 3,282 | 3,909 | |||||||||||||||||||
The tables above
show the timing of cash outflows to settle financial liabilities. They have been
prepared on the following basis:
Financial
liabilities are included at the earliest date on which the counterparty can
require repayment regardless of whether or not such early repayment results in a
penalty. If repayment is triggered by, or is subject to, specific criteria such
as market price hurdles being reached, the liability is included at the earliest
possible date that the conditions could be fulfilled without considering the
probability of the conditions being met. For example, if a structured note is
automatically prepaid when an equity index exceeds a certain level, the cash
outflow will be included in the less than three months period whatever the level
of the index at the year end. The settlement date of debt securities in issue
issued by certain securitisation vehicles consolidated by the Group depends on
when cash flows are received from the securitised assets. Where these assets are
prepayable, the timing of the cash outflow relating to securities assumes that
each asset will be prepaid at the earliest possible date.
Liabilities with a contractual
maturity of greater than 20 years – the principal amounts of financial
liabilities that are repayable after 20 years or where the counterparty has no
right to repayment of the principal are excluded from the table as are interest
payments after 20 years.
Held-for-trading liabilities
– held-for-trading liabilities amounting to £1,146.7 billion (liabilities) (2007
– £ 478.6 billion) have been excluded from the table in view of their short
term nature.
196
The following table
shows the movement in the provision for impairment losses for loans and
advances.
|
Group
|
||||||||||||||||||||||||
|
Individually
assessed
|
Collectively
assessed
|
Latent
|
Total
2008
|
2007
|
2006
|
|||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||
|
At 1
January
|
1,568 | 3,834 | 1,050 | 6,452 | 3,935 | 3,887 | ||||||||||||||||||
|
Transfer
to disposal groups
|
(222 | ) | (351 | ) | (194 | ) | (767 | ) | — | — | ||||||||||||||
|
Currency
translation and other adjustments
|
1,065 | 81 | 295 | 1,441 | 137 | (61 | ) | |||||||||||||||||
|
Acquisition
of subsidiaries
|
— | — | — | — | 2,221 | — | ||||||||||||||||||
|
Disposal
of subsidiaries
|
— | (149 | ) | (29 | ) | (178 | ) | — | — | |||||||||||||||
|
Net
increase in provisions of discontinued operations
|
— | — | — | — | 46 | — | ||||||||||||||||||
|
Amounts
written-off
|
(1,165 | ) | (1,983 | ) | — | (3,148 | ) | (2,011 | ) | (1,841 | ) | |||||||||||||
|
Recoveries
of amounts previously written-off
|
113 | 206 | — | 319 | 342 | 215 | ||||||||||||||||||
|
Charged
to the income statement
|
3,663 | 2,606 | 822 | 7,091 | 1,946 | 1,877 | ||||||||||||||||||
|
Unwind
of discount
|
(52 | ) | (142 | ) | — | (194 | ) | (164 | ) | (142 | ) | |||||||||||||
|
At 31 December (1)
|
4,970 | 4,102 | 1,944 | 11,016 | 6,452 | 3,935 | ||||||||||||||||||
Notes:
|
(1)
|
The provision
for impairment losses at 31 December 2008 includes £127 million relating
to loans and advances to banks (2007 – £3 million; 2006 – £2
million).
|
|
(2)
|
There is no
provision for impairment losses in the
company.
|
|
Group
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
Impairment
losses charged to the income statement
|
£m | £m | £m | |||||||||
|
Loans and
advances to customers
|
6,973 | 1,946 | 1,877 | |||||||||
|
Loans
and advances to banks
|
118 | — | — | |||||||||
| 7,091 | 1,946 | 1,877 | ||||||||||
|
Debt
securities
|
878 | 20 | — | |||||||||
|
Equity
shares
|
103 | 2 | 1 | |||||||||
| 981 | 22 | 1 | ||||||||||
| 8,072 | 1,968 | 1,878 | ||||||||||
|
Group
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
| £m | £m | £m | ||||||||||
|
Gross income
not recognised but which would have been recognised under the original
terms of non-accrual and restructured loans
|
||||||||||||
|
Domestic
|
393 | 390 | 370 | |||||||||
|
Foreign
|
342 | 155 | 77 | |||||||||
| 735 | 545 | 447 | ||||||||||
|
Interest
on non-accrual and restructured loans included in net interest
income
|
||||||||||||
|
Domestic
|
150 | 165 | 142 | |||||||||
|
Foreign
|
43 | 16 | 15 | |||||||||
| 193 | 181 | 157 | ||||||||||
197
The following table
shows analysis of impaired financial assets.
|
Group
|
||||||||||||||||||||||||
|
2008
|
2007
|
|||||||||||||||||||||||
|
Cost
£m
|
Provision
£m
|
Net
book
value
£m
|
Cost
£m
|
Provision
£m
|
Net
book
value
£m
|
|||||||||||||||||||
|
Impaired
financial assets
|
||||||||||||||||||||||||
|
Loans and
advances to banks (1)
|
129 | 127 | 2 | 25 | 3 | 22 | ||||||||||||||||||
|
Loans and advances to customers (2)
|
19,350 | 8,945 | 10,405 | 10,337 | 5,399 | 4,938 | ||||||||||||||||||
|
Debt securities (1)
|
52 | 37 | 15 | 5 | 4 | 1 | ||||||||||||||||||
|
Equity shares (1)
|
260 | 173 | 87 | 142 | 70 | 72 | ||||||||||||||||||
| 19,791 | 9,282 | 10,509 | 10,509 | 5,476 | 5,033 | |||||||||||||||||||
Notes:
|
(1)
|
Impairment
provisions individually assessed.
|
|
(2)
|
Impairment
provisions individually assessed on balances of £11,313 million (2007 –
£3,178 million).
|
The Group holds
collateral in respect of certain loans and advances to banks and to customers
that are past due or impaired. Such collateral includes mortgages over property
(both personal and commercial); charges over business assets such as plant,
inventories and trade debtors; and guarantees of lending from parties other than
the borrower.
The following table
shows financial and non-financial assets, recognised on the Group's balance
sheet, obtained during the year by taking possession of collateral or calling on
other credit enhancements.
|
2008
|
2007
|
|||||||
|
Group
|
£m | £m | ||||||
|
Residential
property
|
41 | 32 | ||||||
|
Other
property
|
6 | 8 | ||||||
|
Cash
|
59 | 18 | ||||||
|
Other
assets
|
30 | 5 | ||||||
| 136 | 63 | |||||||
In
general, the Group seeks to dispose of property and other assets obtained by
taking possession of collateral that are not readily convertible into cash as
rapidly as the market for the individual asset permits.
Loans that have
been renegotiated in the past 12 months that would otherwise have been past due
or impaired amounted to £2,637 million as at 31 December 2008 (2007 – £ 930
million).
198
Companies in the
Group transact derivatives as principal either as a trading activity or to
manage balance sheet foreign exchange, interest rate and credit
risk.
The Group enters
into fair value hedges, cash flow hedges and hedges of net investments in
foreign operations. The majority of the Group’s interest rate hedges relate to
the management of the Group’s non-trading interest rate risk. The Group manages
this risk to Value-at-Risk limits. The risk is assessed using gap reports that
show maturity mismatches. To the extent that such mismatches exceed
predetermined limits they are closed by executing derivatives principally
interest rate swaps. Suitable larger ticket financial instruments are fair value
hedged; the remaining exposure, where possible, is hedged by derivatives
documented as cash flow hedges and qualifying for hedge accounting. The majority
of the Group’s fair value hedges involve interest rate swaps hedging the
interest rate risk in recognised financial assets and financial liabilities.
Cash flow hedges relate to exposure to variability in future interest payments
and receipts on forecast transactions and on recognised financial assets and
financial liabilities. The Group hedges its net investments in foreign
operations with currency borrowings and forward foreign exchange
contracts.
For cash flow hedge
relationships of interest rate risk, the hedged items are actual and forecast
variable interest rate cash flows arising from financial assets and financial
liabilities with interest rates linked to LIBOR, EURIBOR or the Bank of England
Official Bank Rate. The financial assets are customer loans and the financial
liabilities are customer deposits and LIBOR linked medium-term notes and other
issued securities. As at 31 December 2008, variable rate financial assets of
£34.6 billion and variable rate financial liabilities of £56.4 billion were
hedged in such cash flow hedge relationships.
For cash flow
hedging relationships, the initial and ongoing prospective effectiveness is
assessed by comparing movements in the fair value of the expected highly
probable forecast interest cash flows with movements in the fair value of the
expected changes in cash flows from the hedging interest rate swap or by
comparing the respective changes in the price value of a basis point.
Prospective effectiveness is measured on a cumulative basis i.e. over the entire
life of the hedge relationship. The method of calculating hedge ineffectiveness
is the hypothetical derivative method. Retrospective effectiveness is assessed
by comparing the actual movements in the fair value of the cash flows and actual
movements in the fair value of the hedged cash flows from the interest rate swap
over the life to date of the hedging relationship.
Exchange rate
contracts in cash flow hedge relationships hedge future foreign currency cash
inflow and outflows; mainly principal and interest on foreign currency
loans.
For fair value
hedge relationships of interest rate risk, the hedged items are typically large
corporate fixed-rate loans, fixed-rate finance leases, fixed-rate medium-term
notes or preference shares classified as debt. As at 31 December 2008 fixed rate
financial assets of £42.5 billion and fixed rate financial liabilities of £46.4
billion were hedged by interest rate swaps in fair value hedge
relationships.
The initial and
ongoing prospective effectiveness of fair value hedge relationships is assessed
on a cumulative basis by comparing movements in the fair value of the hedged
item attributable to the hedged risk with changes in the fair value of the
hedging interest rate swap or by comparing the respective changes in the price
value of a basis point. Retrospective effectiveness is assessed by comparing the
actual movements in the fair value of the hedged items attributable to the
hedged risk with actual movements in the fair value of the hedging derivative
over the life to date of the hedging relationship.
199
|
Group
|
||||||||||||||||||||||||
|
2008
|
2007
|
|||||||||||||||||||||||
|
Notional
amounts
£bn
|
Assets
£m
|
Liabilities
£m
|
Notional
amounts
£bn
|
Assets
£m
|
Liabilities
£m
|
|||||||||||||||||||
|
Exchange
rate contracts
|
||||||||||||||||||||||||
|
Spot,
forwards and futures
|
2,316 | 83,065 | 83,568 | 2,134 | 29,829 | 29,629 | ||||||||||||||||||
|
Currency
swaps
|
1,074 | 53,398 | 54,728 | 887 | 14,785 | 13,789 | ||||||||||||||||||
|
Options
purchased
|
616 | 36,762 | — | 488 | 13,750 | — | ||||||||||||||||||
|
Options
written
|
668 | — | 35,017 | 519 | — | 13,892 | ||||||||||||||||||
|
Interest
rate contracts
|
||||||||||||||||||||||||
|
Interest rate
swaps
|
37,901 | 548,040 | 532,180 | 24,798 | 142,470 | 141,479 | ||||||||||||||||||
|
Options
purchased
|
5,673 | 99,192 | — | 4,084 | 30,681 | — | ||||||||||||||||||
|
Options
written
|
3,775 | — | 102,216 | 3,640 | — | 31,199 | ||||||||||||||||||
|
Futures
and forwards
|
8,555 | 7,600 | 6,620 | 3,164 | 807 | 987 | ||||||||||||||||||
|
Credit
Derivatives
|
2,208 | 142,366 | 132,734 | 2,402 | 34,123 | 29,855 | ||||||||||||||||||
|
Equity
and commodity contracts
|
622 | 22,136 | 24,301 | 281 | 10,957 | 11,222 | ||||||||||||||||||
| 992,559 | 971,364 | 277,402 | 272,052 | |||||||||||||||||||||
Certain derivative
asset and liability balances with the London Clearing House, which meet the
offset criteria in IAS 32 ‘Financial Instruments Presentation’, are now shown
net. Comparative figures have been restated, reducing derivative assets and
liabilities at 31 December 2007 by £60,008 million.
Included above are
derivatives held for hedging purposes as follows:
|
2008
|
2007
|
|||||||||||||||
|
Assets
£m
|
Liabilities
£m
|
Assets
£m
|
Liabilities
£m
|
|||||||||||||
|
Fair value
hedging:
|
||||||||||||||||
|
Exchange rate
contracts
|
1,257 | 1,412 | 62 | 344 | ||||||||||||
|
Interest
rate contracts
|
2,944 | 3,330 | 1,598 | 1,062 | ||||||||||||
|
Cash
flow hedging:
|
||||||||||||||||
|
Exchange
rate contracts
|
2 | 90 | 155 | 78 | ||||||||||||
|
Interest
rate contracts
|
2,503 | 2,834 | 738 | 1,014 | ||||||||||||
|
Commodity
contracts
|
39 | 14 | — | — | ||||||||||||
|
Net
investment hedging:
|
||||||||||||||||
|
Exchange
rate contracts
|
114 | 596 | — | 211 | ||||||||||||
Hedge
ineffectiveness recognised in other operating income comprised:
|
2008
£m
|
2007
£m
|
2006
£m
|
||||||||||
|
Fair value
hedging:
|
||||||||||||
|
(Losses)/gains
on the hedged items attributable to the hedged risk
|
(965 | ) | 81 | 219 | ||||||||
|
Gains/(losses)
on the hedging instruments
|
884 | (87 | ) | (215 | ) | |||||||
|
Fair
value ineffectiveness
|
(81 | ) | (6 | ) | 4 | |||||||
|
Cash
flow hedging ineffectiveness
|
(16 | ) | 9 | 4 | ||||||||
| (97 | ) | 3 | 8 |
200
|
Derivatives
(continued)
|
The following
tables show for interest rate swaps in cash flow hedges, when the hedged cash
flows are expected to occur and when they will affect profit or
loss.
|
2008
|
||||||||||||||||||||||||||||||||||||
|
Hedged
forecast cash flows
expected
to occur
|
0-1
years
£m
|
1-2
years
£m
|
2-3
years
£m
|
3-4
years
£m
|
4-5
years
£m
|
5-10
years
£m
|
10-20
years
£m
|
Over
20
years
£m
|
Total
£m
|
|||||||||||||||||||||||||||
|
Forecast
receivable cash flows
|
985 | 779 | 667 | 554 | 423 | 1,323 | 407 | 45 | 5,183 | |||||||||||||||||||||||||||
|
Forecast
payable cash flows
|
(1,732 | ) | (1,614 | ) | (1,390 | ) | (1,059 | ) | (890 | ) | (2,880 | ) | (1,397 | ) | (257 | ) | (11,219 | ) | ||||||||||||||||||
|
2008
|
||||||||||||||||||||||||||||||||||||
|
Hedged
forecast cash flows
affect
profit or loss
|
0-1
years
£m
|
1-2
years
£m
|
2-3
years
£m
|
3-4
years
£m
|
4-5
years
£m
|
5-10
years
£m
|
10-20
years
£m
|
Over
20
years
£m
|
Total
£m
|
|||||||||||||||||||||||||||
|
Forecast
receivable cash flows
|
871 | 758 | 659 | 548 | 421 | 1,284 | 397 | 40 | 4,978 | |||||||||||||||||||||||||||
|
Forecast
payable cash flows
|
(1,701 | ) | (1,576 | ) | (1,323 | ) | (1,023 | ) | (878 | ) | (2,771 | ) | (1,337 | ) | (128 | ) | (10,737 | ) | ||||||||||||||||||
|
Company
|
||||||||||||||||||||||||
|
2008
|
2007
|
|||||||||||||||||||||||
|
Notional
amounts
£bn
|
Assets
£m
|
Liabilities
£m
|
Notional
amounts
£bn
|
Assets
£m
|
Liabilities
£m
|
|||||||||||||||||||
|
Exchange rate
contracts
|
7 | 792 | 353 | 13 | 154 | 178 | ||||||||||||||||||
|
Interest
rate contracts
|
5 | 376 | 8 | 1 | 19 | 1 | ||||||||||||||||||
| 1,168 | 361 | 173 | 179 | |||||||||||||||||||||
Included above are
derivatives held for hedging purposes as follows;
|
2008
|
2007
|
|||||||||||||||
|
Fair
value hedging
|
Assets
£m
|
Liabilities
£m
|
Assets
£m
|
Liabilities
£m
|
||||||||||||
|
Exchange rate
contracts
|
— | 225 | — | 54 | ||||||||||||
|
Interest rate
contracts
|
193 | — | — | — | ||||||||||||
|
Group
|
||||||||||||||||||||||||||||||||
|
UK
central
and
local
government
|
US
central
and
local
government
|
Other
central
and
local
government
|
Bank
and
building
society
|
Mortgage
and
other
asset
backed
securities(1)
|
Corporate
|
Other(2)
|
Total
|
|||||||||||||||||||||||||
|
2008
|
£m | £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||||||||
|
Held-for-trading
|
5,372 | 9,859 | 37,519 | 4,407 | 39,879 | 17,671 | 1,573 | 116,280 | ||||||||||||||||||||||||
|
Designated as
at fair value
through
profit or loss
|
2,085 | 510 | 472 | 89 | 236 | 1,580 | 456 | 5,428 | ||||||||||||||||||||||||
|
Available-for-sale
|
11,330 | 6,152 | 32,480 | 12,038 | 62,067 | 6,501 | 2,288 | 132,856 | ||||||||||||||||||||||||
|
Loans and
receivables
|
— | — | — | 114 | 8,961 | 3,749 | 161 | 12,985 | ||||||||||||||||||||||||
| 18,787 | 16,521 | 70,471 | 16,648 | 111,143 | 29,501 | 4,478 | 267,549 | |||||||||||||||||||||||||
|
Available-for-sale
|
||||||||||||||||||||||||||||||||
|
Gross
unrealised gains
|
41 | 41 | 1,104 | 1,372 | 1,238 | 332 | 266 | 4,394 | ||||||||||||||||||||||||
|
Gross
unrealised losses
|
— | (166 | ) | (3,457 | ) | (146 | ) | (3,533 | ) | (448 | ) | (80 | ) | (7,830 | ) | |||||||||||||||||
201
|
Group
|
||||||||||||||||||||||||||||||||
|
UK
central and local government
|
US
central and local government
|
Other
central and local government
|
Bank
and building society
|
Mortgage and other asset backed
securities(1)
|
Corporate
|
Other(2)
|
Total
|
|||||||||||||||||||||||||
|
2007
|
£m | £m | £m | £m | £m | £m | £m | £m | ||||||||||||||||||||||||
|
Held-for-trading
|
10,370 | 12,670 | 60,356 | 7,830 | 62,430 | 35,769 | 1,246 | 190,671 | ||||||||||||||||||||||||
|
Designated
as at fair value
|
||||||||||||||||||||||||||||||||
|
through
profit or loss
|
2,235 | 397 | 101 | 154 | 340 | 2,125 | 425 | 5,777 | ||||||||||||||||||||||||
|
Available-for-sale
|
1,030 | 2,169 | 31,597 | 11,835 | 36,607 | 6,551 | 5,747 | 95,536 | ||||||||||||||||||||||||
|
Loans
and receivables
|
— | — | 1,896 | — | 704 | — | 72 | 2,672 | ||||||||||||||||||||||||
| 13,635 | 15,236 | 93,950 | 19,819 | 100,081 | 44,445 | 7,490 | 294,656 | |||||||||||||||||||||||||
|
Available-for-sale
|
||||||||||||||||||||||||||||||||
|
Gross
unrealised gains
|
29 | 14 | 56 | 12 | 18 | 22 | 1 | 152 | ||||||||||||||||||||||||
|
Gross
unrealised losses
|
— | (62 | ) | (276 | ) | (42 | ) | (181 | ) | (22 | ) | (10 | ) | (593 | ) | |||||||||||||||||
Notes:
|
(1)
|
Includes
securities issued by US federal agencies and government sponsored
entities.
|
|
(2)
|
Includes non
asset backed securities issued by US federal agencies and government
sponsored entities.
|
|
(3)
|
During 2008
the Group reclassified financial assets from the held-for-trading and
available-for-sale categories into the loans and receivables category and
from the held-for-trading category into the available-for-sale category
(see page 193).
|
The following table
analyses by issuer the Group’s available-for-sale debt securities by remaining
maturity and the related yield (based on weighted averages).
|
Within
1 year
|
After
1 but
within
5 years
|
After
5 but
within
10 years
|
After
10 years
|
Total
|
||||||||||||||||||||||||||||||||||||
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
Amount
|
Yield
|
|||||||||||||||||||||||||||||||
|
2008
|
£m |
%
|
£m |
%
|
£m |
%
|
£m |
%
|
£m |
%
|
||||||||||||||||||||||||||||||
|
UK central
and local government
|
9,320 | 2.0 | % | 1,307 | 3.8 | % | 670 | 7.2 | % | 33 | 4.6 | % | 11,330 | 2.5 | % | |||||||||||||||||||||||||
|
US central
and local government
|
37 | 3.6 | % | 232 | 3.9 | % | 4,980 | 3.8 | % | 903 | 5.6 | % | 6,152 | 4.0 | % | |||||||||||||||||||||||||
|
Other central
and local government
|
4,770 | 3.5 | % | 9,046 | 4.3 | % | 18,655 | 3.2 | % | 9 | 3.2 | % | 32,480 | 3.5 | % | |||||||||||||||||||||||||
|
Bank and
building society
|
5,753 | 2.2 | % | 3,919 | 3.7 | % | 2,046 | 4.8 | % | 320 | 3.3 | % | 12,038 | 3.0 | % | |||||||||||||||||||||||||
|
Mortgage-backed
securities(1)
|
2,806 | 4.1 | % | 13,286 | 2.6 | % | 17,510 | 3.9 | % | 28,465 | 4.6 | % | 62,067 | 3.9 | % | |||||||||||||||||||||||||
|
Corporate
|
1,024 | 4.6 | % | 3,454 | 5.1 | % | 1,565 | 7.4 | % | 458 | 3.5 | % | 6,501 | 5.4 | % | |||||||||||||||||||||||||
|
Other(2)
|
202 | 3.4 | % | 298 | 3.9 | % | 1,134 | 4.5 | % | 654 | 4.4 | % | 2,288 | 4.2 | % | |||||||||||||||||||||||||
|
Total fair
value
|
23,912 | 2.7 | % | 31,542 | 3.5 | % | 46,560 | 3.8 | % | 30,842 | 4.6 | % | 132,856 | 3.7 | % | |||||||||||||||||||||||||
Notes:
|
(1)
|
Includes
securities issued by US federal agencies and government sponsored
entities.
|
|
(2)
|
Includes
non-asset backed securities issued by US federal agencies and government
sponsored entities.
|
The table below
shows the fair value of available-for-sale debt securities that were in an
unrealised loss position at 31 December.
|
Less
than 12 months
|
More
than 12 months
|
Total
|
||||||||||||||||||||||
|
Fair
value
|
Gross
unrealised losses
|
Fair
value
|
Gross
unrealised losses
|
Fair
value
|
Gross
unrealised losses
|
|||||||||||||||||||
|
2008
|
£m | £m | £m | £m | £m | £m | ||||||||||||||||||
|
US central
and local government
|
260 | 3 | 10,777 | 163 | 11,037 | 166 | ||||||||||||||||||
|
Other central
and local government
|
17,939 | 3,450 | 39 | 7 | 17,978 | 3,457 | ||||||||||||||||||
|
Bank and
building society
|
1,402 | 95 | 1,192 | 51 | 2,594 | 146 | ||||||||||||||||||
|
Mortgage-backed
securities(1)
|
15,032 | 2,840 | 25,033 | 693 | 40,065 | 3,533 | ||||||||||||||||||
|
Corporate
|
618 | 267 | 2,326 | 181 | 2,944 | 448 | ||||||||||||||||||
|
Other(2)
|
9 | 1 | 235 | 79 | 244 | 80 | ||||||||||||||||||
| 35,260 | 6,656 | 39,602 | 1,174 | 74,862 | 7,830 | |||||||||||||||||||
Notes:
|
(1)
|
Includes
securities issued by US federal agencies and government sponsored
entities.
|
|
(2)
|
Includes non
asset-backed securities issued by US federal agencies and government
sponsored entities.
|
Gross gains of
£1,633 million (2007 – £60 million) and gross losses of £1,411 million (2007 –
£12 million) were realised on the sale of available-for-sale
securities.
202
|
14
|
Debt
securities (continued)
|
Impairment losses
on available-for-sale debt securities are recognised when there is objective
evidence of impairment. The Group reviews its portfolios of available-for-sale
financial assets for such evidence which includes: default or delinquency in
interest or principal payments; significant financial difficulty of the issuer
or obligor; and it becoming probable that the issuer will enter bankruptcy or
other financial reorganisation. However, the disappearance of an active market
because an entity’s financial instruments are no longer publicly traded is not
evidence of impairment. Furthermore, a downgrade of an entity’s credit rating is
not, of itself, evidence of impairment, although it may be evidence of
impairment when considered with other available information. A decline in the
fair value of a financial asset below its cost or amortised cost is not
necessarily evidence of impairment. Determining whether objective evidence of
impairment exists requires the exercise of management judgment. The unrecognised
losses on the Group’s available-for-sale debt securities are concentrated in its
portfolios of mortgage-backed securities and of securities issued by central and
local governments other than the UK and the US. The losses reflect the widening
of credit spreads as a result of the reduced market liquidity in these
securities and the current uncertain macro-economic outlook in US and Europe.
The underlying securities remain unimpaired.
|
Group
|
||||||||||||||||||||||||
|
2008
|
2007
|
|||||||||||||||||||||||
|
Listed
|
Unlisted
|
Total
|
Listed
|
Unlisted
|
Total
|
|||||||||||||||||||
| £m | £m | £m | £m | £m | £m | |||||||||||||||||||
|
Held-for-trading
|
15,894 | 1,160 | 17,054 | 33,696 | 3,850 | 37,546 | ||||||||||||||||||
|
Designated
as at fair value through profit or loss
|
1,340 | 761 | 2,101 | 1,856 | 6,010 | 7,866 | ||||||||||||||||||
|
Available-for-sale
|
4,882 | 2,293 | 7,175 | 5,622 | 1,992 | 7,614 | ||||||||||||||||||
| 22,116 | 4,214 | 26,330 | 41,174 | 11,852 | 53,026 | |||||||||||||||||||
|
Available-for-sale
|
||||||||||||||||||||||||
|
Gross
unrealised gains
|
1,505 | 172 | 1,677 | 3,467 | 130 | 3,597 | ||||||||||||||||||
|
Gross
unrealised losses
|
(225 | ) | (103 | ) | (328 | ) | (3 | ) | (7 | ) | (10 | ) | ||||||||||||
Gross gains of £190
million (2007 – £475 million) and gross losses of £70 million (2007 – £9
million) were realised on the sale of available-for- sale equity
shares.
Dividend income
from available-for-sale equity shares was £281 million (2007 – £ 137 million;
2006 – £92 million).
Unquoted equity
investments whose fair value cannot be reliably measured are carried at cost and
classified as available-for-sale financial assets. They include capital stock
(redeemable at cost) in the Federal Home Loan Bank and the Federal Reserve Bank
of £0.9 billion (2007 – £0.5 billion) that the Group’s banking subsidiaries in
the US are required to hold; and a number of individually small shareholdings in
unlisted companies. Disposals in the year generated no gains or losses (2007 –
£0.5 million gain; 2006 – £ 56 million gain).
203
Investments in
Group undertakings are carried at cost less impairment. Movements during the
year were as follows:
|
Company
|
||||||||
|
2008
|
2007
|
|||||||
| £m | £m | |||||||
|
At 1
January
|
43,542 | 21,784 | ||||||
|
Currency
translation and other adjustments
|
2,839 | 535 | ||||||
|
Additional
investments in Group undertakings
|
10,323 | 3,663 | ||||||
|
Impairment
of investment in RFS Holdings B.V.
|
(14,321 | ) | — | |||||
|
Disposals
|
(213 | ) | (6 | ) | ||||
|
Additions
|
26 | 17,566 | ||||||
|
At
31 December
|
42,196 | 43,542 | ||||||
The principal
subsidiary undertakings of the company are shown below. Their capital consists
of ordinary and preference shares which are unlisted with the exception of
certain preference shares issued by NatWest and ABN AMRO. The Royal Bank of
Scotland plc, RBS Insurance Group Limited and RFS Holdings B.V. are directly
owned by the company, and all of the other subsidiary undertakings are owned
directly, or indirectly through intermediate holding companies, by these
companies. All of these subsidiaries are included in the Group’s consolidated
financial statements and have an accounting reference date of 31
December.
| Nature of business | Country of
incorporation and principal area of operation |
Group interest | |
| The Royal Bank of Scotland plc | Banking | Great Britain | 100% |
| National Westminster Bank Plc(1) | Banking | Great Britain | 100% |
| Citizens Financial Group, Inc. | Banking | US | 100% |
| Coutts & Co(2) | Private banking | Great Britain | 100% |
| Greenwich Capital Markets, Inc. | Broker dealer | US | 100% |
| RBS Insurance Group Limited | Insurance | Great Britain | 100% |
| Ulster Bank Limited(3) | Banking | Northern Ireland | 100% |
| ABN AMRO Bank N.V.(4) | Banking | The Netherlands | 38% |
Notes:
| (1) | The company does not hold any of the NatWest preference shares in issue. |
| (2) | Coutts & Co is incorporated with unlimited liability. Its registered office is 440 Strand, London WC2R 0QS. |
| (3) | Ulster Bank Limited and its subsidiaries also operate in the Republic of Ireland. |
| (4) | RFS Holdings B.V. (RFS) owns 100% of the outstanding shares of ABN AMRO Holding N.V. (ABN AMRO). The company owns 38% of RFS; the balance of shares is held by the State of the Netherlands, successor to Fortis N.V., Fortis SA/NV, and Banco Santander S.A. (the consortium members). Although the company does not control a majority of the voting rights in RFS, through the terms fo the Consortium and Shareholders' Agreement and RFS's Articles of Association, it controls the board of RFS and RFS is a subsidiary of the company. The capital and income rights of shares issued by RFS are linked to the net assets and income of the ABN AMRO business units which the individual consortium members have agreed to acquire. |
The above
information is provided in relation to the principal related undertakings as
permitted by Section 231(5) of the Companies Act 1985. Full information on all
related undertakings will be included in the Annual Return delivered to the
Registrant of Companies for Scotland.
204
|
Group
|
||||||||||||||||||||
|
Goodwill
|
Core
deposit intangibles
|
Other
purchased intangibles
|
Internally
generated software
|
Total
|
||||||||||||||||
|
2008
|
£m | £m | £m | £m | £m | |||||||||||||||
|
Cost:
|
||||||||||||||||||||
|
At 1 January
2008
|
42,953 | 2,344 | 3,489 | 3,882 | 52,668 | |||||||||||||||
|
Transfers to
disposal groups
|
(3,692 | ) | (240 | ) | (105 | ) | (146 | ) | (4,183 | ) | ||||||||||
|
Currency
translation and other adjustments
|
8,905 | 680 | 961 | 214 | 10,760 | |||||||||||||||
|
Acquisition
of subsidiaries
|
524 | — | — | — | 524 | |||||||||||||||
|
Additions
|
— | — | 23 | 602 | 625 | |||||||||||||||
|
Disposal of
subsidiaries
|
(3,066 | ) | — | — | (7 | ) | (3,073 | ) | ||||||||||||
|
Disposals and
write-off of fully amortised assets
|
— | (4 | ) | (1 | ) | (21 | ) | (26 | ) | |||||||||||
|
At 31
December 2008
|
45,624 | 2,780 | 4,367 | 4,524 | 57,295 | |||||||||||||||
|
Accumulated
amortisation and impairment:
|
||||||||||||||||||||
|
At 1 January
2008
|
— | 238 | 223 | 2,291 | 2,752 | |||||||||||||||
|
Transfer to
disposal groups
|
— | — | — | (37 | ) | (37 | ) | |||||||||||||
|
Currency
translation and other adjustments
|
— | 150 | 210 | 69 | 429 | |||||||||||||||
|
Disposals and
write-off of fully amortised assets
|
— | (3 | ) | (1 | ) | (19 | ) | (23 | ) | |||||||||||
|
Charge for
the year
|
— | 337 | 582 | 651 | 1,570 | |||||||||||||||
|
Write down of
goodwill and other intangible assets
|
30,062 | 685 | 1,355 | 453 | 32,555 | |||||||||||||||
|
At 31
December 2008
|
30,062 | 1,407 | 2,369 | 3,408 | 37,246 | |||||||||||||||
|
Net book
value at 31 December 2008
|
15,562 | 1,373 | 1,998 | 1,116 | 20,049 | |||||||||||||||
|
2007
|
||||||||||||||||||||
|
Cost:
|
||||||||||||||||||||
|
At 1 January
2007
|
17,889 | 265 | 275 | 2,642 | 21,071 | |||||||||||||||
|
Currency
translation and other adjustments
|
1,187 | 105 | 177 | 52 | 1,521 | |||||||||||||||
|
Acquisition
of subsidiaries
|
23,917 | 1,974 | 3,034 | 791 | 29,716 | |||||||||||||||
|
Additions
|
— | — | 6 | 481 | 487 | |||||||||||||||
|
Goodwill
written off
|
(40 | ) | — | — | — | (40 | ) | |||||||||||||
|
Disposals
and write-off of fully amortised assets
|
— | — | (3 | ) | (84 | ) | (87 | ) | ||||||||||||
|
At
31 December 2007
|
42,953 | 2,344 | 3,489 | 3,882 | 52,668 | |||||||||||||||
|
Accumulated
amortisation:
|
||||||||||||||||||||
|
At
1 January 2007
|
— | 127 | 97 | 1,943 | 2,167 | |||||||||||||||
|
Currency
translation and other adjustments
|
— | 1 | 3 | 3 | 7 | |||||||||||||||
|
Disposals
and write-off of fully amortised assets
|
— | — | (1 | ) | (80 | ) | (81 | ) | ||||||||||||
|
Charge
for the year – continuing operations
|
— | 110 | 124 | 401 | 635 | |||||||||||||||
|
Charge
for the year – discontinued operations
|
— | — | — | 24 | 24 | |||||||||||||||
|
At
31 December 2007
|
— | 238 | 223 | 2,291 | 2,752 | |||||||||||||||
|
Net
book value at 31 December 2007
|
42,953 | 2,106 | 3,266 | 1,591 | 49,916 | |||||||||||||||
205
Impairment
review
The Group’s
goodwill acquired in business combinations is reviewed annually at 30 September
for impairment by comparing the recoverable amount of each cash generating unit
(CGU) to which goodwill has been allocated with its carrying value. In light of
the unprecedented market conditions the review has been updated to reflect the
latest position as at 31 December 2008.
The Group
recognised goodwill of £23.3 billion (€33.5 billion) following the preliminary
allocation of fair values since acquiring ABN AMRO on 17 October 2007. On final
allocation of fair values, goodwill of £23.9 billion (€34.2 billion) was
recognised (see Note 34), of which £17.6 billion (€25.3 billion) was
attributable to minority interests. Of the minority interests goodwill, £5.4
billion (€5.7 billion) was in respect of Santander acquired businesses which
were subsequently sold during 2008. The remaining goodwill in respect of the
State of the Netherlands minority interest of £18.8 billion (€19.6 billion) was
reduced in part by £2.7 billion (€2.9 billion) following the sale of the Asset
Management business with £14.6 billion (€15.2 billion) of the remainder
subsequently impaired following the acquisition by the State of the Netherlands
for £6.2 billion (€6.5 billion). In addition, a further £1.1 billion (€1.2
billion) impairment was recognised on other intangible assets attributable to
the State of the Netherlands acquired businesses.
On
the finalisation of the allocation of fair values, goodwill arising on the
acquisition of ABN AMRO attributable to the Group has been allocated to those
CGUs which are expected to benefit from the synergies of the combination based
on their relative values. In addition, following the reorganisation of the Group
reporting structure, NatWest and Citizens goodwill was reallocated to the
appropriate CGUs.
The CGUs where the
goodwill arising is significant, principally on the acquisitions of NatWest,
Charter One, ABN AMRO and Churchill, are as follows:
|
Recoverable
amount
based
on:
|
Goodwill
prior
to
write
down
|
Write
down
|
Goodwill
at
31
December
|
||||||||||
|
2008
|
£m | £m | £m | ||||||||||
|
Global
Banking & Markets
|
Value in
use
|
8,946 | (8,946 | ) | — | ||||||||
|
Global
Transaction Services
|
Value in
use
|
3,121 | — | 3,121 | |||||||||
|
UK Retail
& Commercial Banking
|
Value in
use
|
6,009 | — | 6,009 | |||||||||
|
US Retail
& Commercial Banking
|
Value in
use
|
7,405 | (4,382 | ) | 3,023 | ||||||||
|
Europe &
Middle East Retail & Commercial Banking
|
Value in
use
|
1,201 | (1,201 | ) | — | ||||||||
|
Asia Retail
& Commercial Banking
|
Value in
use
|
970 | (863 | ) | 107 | ||||||||
|
RBS
Insurance
|
Value in
use
|
935 | — | 935 | |||||||||
|
Recoverable
amount
|
Goodwill
at
30
September
|
||||
|
2007
|
based
on:
|
£m | |||
|
RBS
Insurance
|
Fair value
less costs to sell
|
1,064 | |||
|
Global
Banking & Markets
|
Fair value
less costs to sell
|
2,346 | |||
|
UK Corporate
Banking
|
Fair value
less costs to sell
|
1,630 | |||
|
Retail
|
Fair value
less costs to sell
|
4,278 | |||
|
Wealth
Management
|
Fair value
less costs to sell
|
1,100 | |||
|
Citizens –
Retail Banking
|
Value in
use
|
2,067 | |||
|
Citizens –
Commercial Banking
|
Value in
use
|
2,274 | |||
|
Citizens –
Consumer Financial Services
|
Value in
use
|
1,701 | |||
The analysis of
goodwill by operating segment is shown in Note 38. The change in reportable
segments disclosed in Note 38 did not impact the impairment tests performed at
31 December 2008.
206
|
17
|
Intangible
assets (continued)
|
In
2007, the recoverable amounts for all CGUs, except Citizens, were based on fair
value less costs to sell. Fair value was based upon a price-earnings methodology
using current earnings for each unit. Approximate price earnings multiples,
validated against independent analyst information, were applied to each CGU. The
multiples used were in the range 9.5 – 13.0 times earnings after charging
manufacturing costs. The goodwill allocated to Global Banking & Markets, UK
Corporate Banking, Retail and Wealth Management principally arose from the
acquisition of NatWest in 2000. The recoverable amount of these cash generating
units exceeded their carrying value by over £15 billion. The recoverable amount
for RBS Insurance exceeded its carrying value by over £1.5 billion. The
multiples or earnings would have to be less than one third of those used to
cause the value in use of the units to equal their carrying value.
In
light of the unprecedented market turmoil, fair value was increasingly hard to
appraise and consequently the Group has generally adopted value in use tests for
CGUs in 2008, based upon management’s latest five year forecasts. The long-term
growth rates have been based on respective country GDP rates adjusted for
inflation. The risk discount rates are based on observable market long-term
government bond yields and average industry betas adjusted for an appropriate
risk premium based on independent analysis.
Goodwill in respect
of Global Banking & Markets principally arose from the acquisition of ABN
AMRO in October 2007. The failure of a number of banks and severe weakness in
the global economy during the second half of 2008 resulted in a fundamental
reappraisal of business forecasts, leading to the conclusion that the Global
Banking & Markets business at 31 December 2008 could support no goodwill
allocated from the ABN AMRO or NatWest acquisitions. In addition, impairments
were recognised in respect of intangible assets and certain property, plant and
equipment: the customer relationship intangible was impaired by £0.9 billion and
capitalised software was impaired by £0.4 billion. The value in use was based on
a 3% terminal growth rate and pre-tax discount rate of 19.5%. The result was
insensitive to reasonably possible changes in key assumptions.
The recoverable
amount of the Global Transaction Services business based on a 3% terminal growth
rate and 15.7% pre tax risk discount rate exceeded its carrying value by more
than 100% and was insensitive to a reasonably possible change in key
assumptions. The goodwill arises principally from the global payments business
acquired through the ABN AMRO acquisition along with cash management and
corporate money transmission businesses previously in Citizens and Regional
businesses.
UK
Retail and Commercial Banking was formed at the beginning of 2008 when the Group
brought together the businesses that use its UK branch network. It primarily
comprised the UK Retail and Corporate banks but excluded their transaction
services business. The recoverable amount was equal to the carrying amount
including goodwill arising from the NatWest acquisition. This is based on a 4%
terminal growth rate and 15.9% pre tax risk discount rate. A 1 % change in
discount rate or the terminal growth rate would change the recoverable amount by
over £2 billion and £1 billion respectively. In addition, a 5% change in
forecast pre-tax earnings would change the recoverable amount by approximately
£1 billion.
The goodwill in
Europe & Middle East Retail and Commercial Banking arose from the Group’s
interests in Ulster Bank Group principally arising out of the acquisitions of
NatWest and First Active. The Irish economy stalled in 2008, with the Government
providing rescue packages to local banks, and forecasts within the eurozone
economies have reduced accordingly. The impairment review, based on a 3%
terminal growth rate and 14.1 % pre-tax risk discount rate, showed all goodwill
associated with the business was impaired. The result was insensitive to
reasonably possible changes in key assumptions.
The Asia Retail and
Commercial Banking business comprises much of the Group’s Wealth management
business and retail operations in Asia. The outlook in the Asian economies has
deteriorated and falling investment values have reduced the yield from managed
portfolios. The allocated goodwill principally arising on the acquisition of ABN
AMRO was impaired by £862 million based on a 5% terminal growth rate and 14%
pre-tax risk discount rate. A 1% change in the discount rate or similar change
in the terminal growth rate would change the recoverable amount by approximately
£200 million and £100 million respectively. In addition, a 5% change in forecast
pre-tax earnings would change the recoverable amount by approximately £50
million.
Further
developments in the Group’s US businesses have led to the separation of the
transaction services business, with the retail and commercial business being
managed as a single unit. The 2007 impairment review indicated the recoverable
amount of Citizens exceeded its carrying value by over £2.5 billion ($5 billion)
using a terminal growth rate of 5% and a pre tax discount rate of 16.5%. In
2008, rates of 5% and 18% were used respectively and the recoverable amount
indicated an impairment of £4.4 billion ($6.4 billion). A 1% change in discount
rate or the terminal growth rate would change the recoverable amount and hence
goodwill impairment by over £1 billion ($2 billion) and £0.7 billion ($1
billion) respectively. In addition, a 5% change in forecast pre-tax earnings
would change the recoverable amount by approximately £0.5 billion ($0.8
billion).
The goodwill
allocated to RBS Insurance principally arose from the acquisition of Churchill
in 2003. The recoverable amount based on a 3% terminal growth rate and 14.6% pre
tax risk discount rate exceeded the carrying amount by over £3 billion, and was
insensitive to reasonably possible changes in key assumptions.
207
|
Group
|
||||||||||||||||||||||||||||
|
Investment
properties
|
Freehold
premises
|
Long
leasehold
premises
|
Short
leasehold
premises
|
Computers
and
other
equipment
|
Operating
lease
assets
|
Total
|
||||||||||||||||||||||
|
2008
|
£m | £m | £m | £m | £m | £m | £m | |||||||||||||||||||||
|
Cost or
valuation:
|
||||||||||||||||||||||||||||
|
At 1 January
2008
|
3,431 | 3,645 | 215 | 1,688 | 3,929 | 11,437 | 24,345 | |||||||||||||||||||||
|
Transfers to
disposal groups
|
— | (262 | ) | — | (188 | ) | (349 | ) | — | (799 | ) | |||||||||||||||||
|
Currency
translation and other adjustments
|
320 | 452 | 5 | 149 | 436 | 1,313 | 2,675 | |||||||||||||||||||||
|
Acquisition
of subsidiaries
|
— | — | — | 30 | 31 | — | 61 | |||||||||||||||||||||
|
Disposal of
subsidiaries
|
— | — | — | (2 | ) | (57 | ) | (5,015 | ) | (5,074 | ) | |||||||||||||||||
|
Reclassifications
|
— | (176 | ) | — | 197 | (14 | ) | (7 | ) | — | ||||||||||||||||||
|
Additions
|
417 | 486 | 22 | 61 | 837 | 3,794 | 5,617 | |||||||||||||||||||||
|
Expenditure
on investment properties
|
8 | — | — | — | — | — | 8 | |||||||||||||||||||||
|
Change in
fair value of investment properties
|
(86 | ) | — | — | — | — | — | (86 | ) | |||||||||||||||||||
|
Disposals and
write-off of fully depreciated assets
|
(222 | ) | (113 | ) | (18 | ) | (68 | ) | (645 | ) | (2,188 | ) | (3,254 | ) | ||||||||||||||
|
At 31
December 2008
|
3,868 | 4,032 | 224 | 1,867 | 4,168 | 9,334 | 23,493 | |||||||||||||||||||||
|
Accumulated
impairment, depreciation and amortisation:
|
||||||||||||||||||||||||||||
|
At 1 January
2008
|
— | 391 | 74 | 436 | 1,952 | 2,747 | 5,600 | |||||||||||||||||||||
|
Transfers to
disposal groups
|
— | (60 | ) | — | (91 | ) | (243 | ) | — | (394 | ) | |||||||||||||||||
|
Currency
translation and other adjustments
|
— | (9 | ) | 1 | 9 | 148 | 202 | 351 | ||||||||||||||||||||
|
Disposal of
subsidiaries
|
— | — | — | (1 | ) | (39 | ) | (1,447 | ) | (1,487 | ) | |||||||||||||||||
|
Reclassifications
|
— | 17 | (2 | ) | 1 | (9 | ) | (7 | ) | — | ||||||||||||||||||
|
Write-off of
property, plant and equipment
|
— | 19 | — | — | 7 | — | 26 | |||||||||||||||||||||
|
Disposals and
write-off of fully depreciated assets
|
— | (22 | ) | — | (31 | ) | (539 | ) | (544 | ) | (1,136 | ) | ||||||||||||||||
|
Charge for
the year
|
— | 86 | 6 | 169 | 639 | 684 | 1,584 | |||||||||||||||||||||
|
At 31
December 2008
|
— | 422 | 79 | 492 | 1,916 | 1,635 | 4,544 | |||||||||||||||||||||
|
Net book
value at 31 December 2008
|
3,868 | 3,610 | 145 | 1,375 | 2,252 | 7,699 | 18,949 | |||||||||||||||||||||
|
2007
|
||||||||||||||||||||||||||||
|
Cost
or valuation:
|
||||||||||||||||||||||||||||
|
At 1 January
2007
|
4,885 | 2,579 | 310 | 1,254 | 3,069 | 11,589 | 23,686 | |||||||||||||||||||||
|
Currency
translation and other adjustments
|
96 | 65 | 1 | 11 | 12 | (10 | ) | 175 | ||||||||||||||||||||
|
Acquisition
of subsidiaries
|
— | 950 | — | 157 | 191 | 202 | 1,500 | |||||||||||||||||||||
|
Reclassifications
|
3 | (4 | ) | 3 | 1 | (3 | ) | — | — | |||||||||||||||||||
|
Additions
|
450 | 592 | 34 | 309 | 857 | 2,791 | 5,033 | |||||||||||||||||||||
|
Transfers
to disposal groups
|
— | (4 | ) | (13 | ) | — | — | (422 | ) | (439 | ) | |||||||||||||||||
|
Expenditure
on investment properties
|
41 | — | — | — | — | — | 41 | |||||||||||||||||||||
|
Change
in fair value of investment properties
|
288 | — | — | — | — | — | 288 | |||||||||||||||||||||
|
Disposals
and write-off of fully depreciated assets
|
(2,332 | ) | (533 | ) | (120 | ) | (44 | ) | (197 | ) | (2,713 | ) | (5,939 | ) | ||||||||||||||
|
At
31 December 2007
|
3,431 | 3,645 | 215 | 1,688 | 3,929 | 11,437 | 24,345 | |||||||||||||||||||||
|
Accumulated
depreciation and amortisation:
|
||||||||||||||||||||||||||||
|
At
1 January 2007
|
— | 446 | 96 | 374 | 1,670 | 2,680 | 5,266 | |||||||||||||||||||||
|
Currency
translation and other adjustments
|
— | (4 | ) | — | (1 | ) | (1 | ) | 2 | (4 | ) | |||||||||||||||||
|
Transfers
to disposal groups
|
— | — | — | — | — | (52 | ) | (52 | ) | |||||||||||||||||||
|
Reclassifications
|
— | (2 | ) | 2 | — | — | — | — | ||||||||||||||||||||
|
Disposals
and write-off of fully depreciated assets
|
— | (122 | ) | (32 | ) | (25 | ) | (132 | ) | (610 | ) | (921 | ) | |||||||||||||||
|
Charge
for the year – continuing operations
|
— | 66 | 8 | 87 | 409 | 727 | 1,297 | |||||||||||||||||||||
|
Charge
for the year – discontinued operations
|
— | 7 | — | 1 | 6 | — | 14 | |||||||||||||||||||||
|
At
31 December 2007
|
— | 391 | 74 | 436 | 1,952 | 2,747 | 5,600 | |||||||||||||||||||||
|
Net
book value at 31 December 2007
|
3,431 | 3,254 | 141 | 1,252 | 1,977 | 8,690 | 18,745 | |||||||||||||||||||||
208
|
18
|
Property,
plant and equipment (continued)
|
|
2008
|
2007
|
|||||||
| £m | £m | |||||||
|
Contracts for
future capital expenditure not provided for in the accounts at the year
end (excluding investment properties and operating lease
assets)
|
128 | 201 | ||||||
|
Contractual
obligations to purchase, construct or develop investment properties or to
repair, maintain or enhance investment properties
|
7 | 9 | ||||||
|
Property,
plant and equipment pledged as security
|
— | 935 | ||||||
Investment
properties are valued to reflect fair value, that is, the market value of the
Group’s interest at the reporting date excluding any special terms or
circumstances relating to the use or financing of the property and transaction
costs that would be incurred in making a sale. Observed market data such as
rental yield, replacement cost and useful life, reflect relatively few
transactions involving property that is not necessarily identical to property
owned by the Group.
Valuations are
carried out by management with the support of qualified surveyors who are
members of the Royal Institution of Chartered Surveyors, or an equivalent
overseas body. The valuation as at 31 December 2008 for a significant majority
of the Group’s investment properties was undertaken by external
valuers.
The fair value of
investment properties includes £172 million (2007 – £234 million) of
appreciation since purchase.
Rental income from
investment properties was £257 million (2007 – £300 million; 2006 – £278
million). Direct operating expenses of investment properties were £22 million
(2007 – £49 million; 2006 – £54 million).
Property, plant and
equipment, excluding investment properties, include £1,132 million (2007 – £717
million) assets in the course of construction.
Freehold and long
leasehold properties with a net book value of nil (2007 – £451 million; 2006 –
£164 million) were sold subject to operating leases.
|
Group
|
Company
|
|||||||||||||||
|
2008
|
2007
|
2008
|
2007
|
|||||||||||||
| £m | £m | £m | £m | |||||||||||||
|
Prepayments
|
1,949 | 1,988 | — | — | ||||||||||||
|
Accrued
income
|
1,206 | 1,214 | — | — | ||||||||||||
|
Deferred
expenses
|
709 | 385 | — | — | ||||||||||||
|
Pension
schemes in net surplus
|
36 | 575 | — | — | ||||||||||||
|
Other
assets
|
20,502 | 11,500 | 489 | 127 | ||||||||||||
| 24,402 | 15,662 | 489 | 127 | |||||||||||||
209
|
Discontinued
operations and assets and liabilities of disposal
groups
|
(a) Profit/(loss)
from discontinued operations, net of tax
|
2008
|
2007
|
|||||||
| £m | £m | |||||||
|
Discontinued
operations:
|
||||||||
|
Total
income
|
2,571 | 749 | ||||||
|
Operating
expenses
|
(1,407 | ) | (493 | ) | ||||
|
Insurance
net claims
|
— | (28 | ) | |||||
|
Impairment
losses
|
(564 | ) | (160 | ) | ||||
|
Profit
before tax
|
600 | 68 | ||||||
|
Gain
on disposal
|
3,859 | — | ||||||
|
Operating
profit before tax
|
4,459 | 68 | ||||||
|
Tax
on profit
|
(204 | ) | (8 | ) | ||||
|
Tax
on gain on disposal
|
(33 | ) | — | |||||
|
Profit
after tax
|
4,222 | 60 | ||||||
|
Businesses
acquired exclusively with a view to disposal
|
||||||||
|
Loss
after tax
|
(251 | ) | (136 | ) | ||||
|
Profit/(loss)
from discontinued operations, net of tax
|
3,971 | (76 | ) | |||||
Discontinued
operations reflect the results of Banco Real sold to Santander on 24 July 2008.
There were no discontinued operations during 2006.
Businesses acquired
exclusively with a view to disposal comprise those ABN AMRO businesses,
including Banca Antonveneta, Asset Management and Private Equity, classified as
disposal groups on the acquisition of ABN AMRO on 17 October 2007. The Asset
Management business was sold to Fortis on 3 April 2008. Banca Antonveneta,
excluding its subsidiary Interbanca, was sold to Banca Monte dei Paschi di Siena
S.p.A. on 30 May 2008.
(b)
Cash flows attributable to discontinued operations
Included within the
Group’s cash flows are the following amounts attributable to discounted
operations:
|
2008
|
2007
|
|||||||
| £m | £m | |||||||
|
Net cash
flows from operating activities
|
(124 | ) | (1,304 | ) | ||||
|
Net
cash flows from investing activities
|
(368 | ) | 4,341 | |||||
|
Net
cash flows from financing activities
|
339 | (25 | ) | |||||
|
Net
increase in cash and cash equivalents
|
287 | 3,172 | ||||||
(c)
Assets and liabilities of disposal groups
|
2008
|
2007
|
|||||||
|
Assets
of disposal groups
|
£m | £m | ||||||
|
Disposal
groups and other disposals
|
66 | 395 | ||||||
|
Assets
acquired exclusively with a view to disposal
|
1,515 | 45,455 | ||||||
| 1,581 | 45,850 | |||||||
|
Liabilities
of disposal groups
|
||||||||
|
Liabilities
acquired exclusively with a view to disposal
|
859 | 29,228 | ||||||
210
|
Group
|
||||||||
|
2008
£m
|
2007
£m
|
|||||||
|
Settlement
balances (amortised cost)
|
11,741 | 17,520 | ||||||
|
Short
positions (held-for-trading):
|
||||||||
|
Debt securities –
Government
|
32,519 | 41,048 | ||||||
|
– Other issuers
|
6,374 | 25,310 | ||||||
|
Equity
shares
|
3,643 | 7,143 | ||||||
| 54,277 | 91,021 | |||||||
|
Group
|
Company
|
|||||||||||||||
|
2008
£m
|
2007
£m
|
2008
£m
|
2007
£m
|
|||||||||||||
|
Notes in
circulation
|
1,619 | 1,545 | — | — | ||||||||||||
|
Current
taxation
|
585 | 1,630 | — | — | ||||||||||||
|
Accruals
|
7,531 | 8,377 | 3 | — | ||||||||||||
|
Deferred
income
|
7,640 | 6,289 | 4 | — | ||||||||||||
|
Other
liabilities (1)
|
14,107 | 16,367 | 40 | 8 | ||||||||||||
| 31,482 | 34,208 | 47 | 8 | |||||||||||||
Note:
|
(1)
|
Other
liabilities include £1 million (2007 – £9 million) in respect of
share-based compensation.
|
Included in other
liabilities are provisions for liabilities and charges as follows:
|
Group
|
£m | |||
|
At 1 January
2008
|
168 | |||
|
Currency
translation and other movements
|
12 | |||
|
Charge to
income statement
|
116 | |||
|
Releases to
income statement
|
(42 | ) | ||
|
Provisions
utilised
|
(32 | ) | ||
|
At 31
December 2008
|
222 |
Note:
|
(1)
|
Comprises
property provisions and other provisions arising in the normal course of
business.
|
211
Provision for
deferred taxation has been made as follows:
|
Group
|
Company
|
|||||||||||||||
|
2008
£m
|
2007
£m
|
2008
£m
|
2007
£m
|
|||||||||||||
|
Deferred tax
liability
|
4,165 | 5,400 | — | 3 | ||||||||||||
|
Deferred tax
asset
|
(7,082 | ) | (3,119 | ) | (3 | ) | — | |||||||||
|
Net deferred
tax
|
(2,917 | ) | 2,281 | (3 | ) | 3 | ||||||||||
|
Group
|
||||||||||||||||||||||||||||||||||||||||||||||||||||
|
Pension
£m
|
Accelerated
capital allowances
£m
|
Provisions
£m
|
Deferred
gains
£m
|
IFRS
transition
£m
|
Fair
value of financial instruments
£m
|
Available
for sale financial assets
£m
|
Intangibles
£m
|
Cash
flow hedging
£m
|
Share
schemes
£m
|
Tax
losses carried forward
£m
|
Other
£m
|
Total
£m
|
||||||||||||||||||||||||||||||||||||||||
|
At 1 January
2007
|
(628 | ) | 3,818 | (284 | ) | 922 | (669 | ) | (132 | ) | — | 255 | (97 | ) | (75 | ) | — | (2 | ) | 3,108 | ||||||||||||||||||||||||||||||||
|
Acquisition/(disposals)
of subsidiaries
|
(119 | ) | (284 | ) | (539 | ) | 50 | — | (184 | ) | — | 1,037 | — | — | (867 | ) | (64 | ) | (970 | ) | ||||||||||||||||||||||||||||||||
|
Charge/(credit)
to income statement
|
43 | (138 | ) | (44 | ) | (141 | ) | 46 | 72 | — | (65 | ) | (48 | ) | 8 | (57 | ) | 91 | (233 | ) | ||||||||||||||||||||||||||||||||
|
Charge/(credit)
to equity directly
|
660 | — | — | (187 | ) | — | 17 | — | — | (107 | ) | 57 | — | (14 | ) | 426 | ||||||||||||||||||||||||||||||||||||
|
Other
|
(7 | ) | (12 | ) | (19 | ) | (38 | ) | 4 | (6 | ) | 26 | — | (1 | ) | 20 | (17 | ) | (50 | ) | ||||||||||||||||||||||||||||||||
|
At 1 January
2008
|
(51 | ) | 3,384 | (886 | ) | 606 | (619 | ) | (233 | ) | — | 1,253 | (252 | ) | (11 | ) | (904 | ) | (6 | ) | 2,281 | |||||||||||||||||||||||||||||||
|
Transfers to
disposal groups
|
19 | 69 | 528 | 36 | — | — | 80 | (29 | ) | — | — | — | 238 | 941 | ||||||||||||||||||||||||||||||||||||||
|
Acquisition/(disposals)of
subsidiaries
|
— | (509 | ) | — | — | 6 | 2 | (2 | ) | 3 | 1 | — | — | 58 | (441 | ) | ||||||||||||||||||||||||||||||||||||
|
Charge/(credit)
to income statement
|
157 | (127 | ) | (106 | ) | 21 | 195 | (125 | ) | 350 | (898 | ) | 286 | (2 | ) | (3,079 | ) | 63 | (3,265 | ) | ||||||||||||||||||||||||||||||||
|
(Credit)/charge
to equity directly
|
(476 | ) | — | — | (6 | ) | 1 | 3 | (547 | ) | — | (317 | ) | 10 | (709 | ) | (3 | ) | (2,044 | ) | ||||||||||||||||||||||||||||||||
|
Other
|
(31 | ) | 267 | (350 | ) | (46 | ) | (3 | ) | — | 84 | 445 | (201 | ) | — | (38 | ) | (516 | ) | (389 | ) | |||||||||||||||||||||||||||||||
|
At 31
December 2008
|
(382 | ) | 3,084 | (814 | ) | 611 | (420 | ) | (353 | ) | (35 | ) | 774 | (483 | ) | (3 | ) | (4,730 | ) | (166 | ) | (2,917 | ) | |||||||||||||||||||||||||||||
|
Company
|
IFRS
transition
£m
|
Cash
flow hedging
£m
|
Other
£m
|
Total
£m
|
||||||||||||
|
At 1 January
2007
|
— | (3 | ) | — | (3 | ) | ||||||||||
|
Charge to
equity directly
|
— | 1 | 5 | 6 | ||||||||||||
|
At 1 January
2008
|
— | (2 | ) | 5 | 3 | |||||||||||
|
(Credit)/charge
to income statement
|
(4 | ) | 2 | (5 | ) | (7 | ) | |||||||||
|
Other
|
1 | — | — | 1 | ||||||||||||
|
At 31
December 2008
|
(3 | ) | — | — | (3 | ) | ||||||||||
Notes:
|
(1)
|
Deferred tax
assets are recognised, as set out above, that depend on the availability
of future taxable profits in excess of profits arising from the reversal
of other temporary differences. Business projections prepared for
impairment reviews (see Note 17) indicate it is probable that sufficient
future taxable income will be available against which to offset these
recognised deferred tax assets within 8 years. UK losses do not expire and
Netherlands losses expire after nine years. In jurisdictions where doubt
exists over the availability of future taxable profits, deferred tax
assets of £1,748 million (2007 – £687 million) have not been recognised in
respect of tax losses carried forward of £5,779 million (2007 – £2,043
million). Of these losses, £15 million will expire within one year, £137
million within five years and £5,214 million thereafter. The balance of
tax losses carried forward has no time
limit.
|
|
(2)
|
Deferred tax
liabilities of £980 million (2007 – £977 million) have not been recognised
in respect of retained earnings of overseas subsidiaries and held-over
gains on the incorporation of overseas branches. Retained earnings of
overseas subsidiaries are expected to be reinvested indefinitely or
remitted to the UK free from further taxation. No taxation is expected to
arise in the foreseeable future in respect of held-over
gains.
|
212
|
Group
|
||||||||||||
| 2008 £m |
2007 £m |
2006 £m |
||||||||||
|
Insurance
premium income
|
6,626 | 6,376 | 6,243 | |||||||||
|
Reinsurer’s
share
|
(300 | ) | (289 | ) | (270 | ) | ||||||
|
Net premium
income
|
6,326 | 6,087 | 5,973 | |||||||||
|
Insurance
claims
|
4,603 | 4,742 | 4,550 | |||||||||
|
Reinsurer’s
share
|
(173 | ) | (118 | ) | (92 | ) | ||||||
|
Net
claims
|
4,430 | 4,624 | 4,458 | |||||||||
|
Group
|
||||||||
|
Insurance
liabilities
|
2008 £m |
2007 £m |
||||||
|
Life
assurance business:
|
||||||||
|
Unit linked
insurance contracts
|
260 | 364 | ||||||
|
Other linked
insurance contracts
|
3,929 | 4,034 | ||||||
|
Other
insurance contracts
|
309 | 298 | ||||||
| 4,498 | 4,696 | |||||||
|
General
insurance business
|
5,478 | 5,466 | ||||||
| 9,976 | 10,162 | |||||||
General
insurance business
(i) Claims and loss
adjustment expenses
|
Group
|
||||||||||||
|
Gross
£m
|
Reinsurance
£m
|
Net
£m
|
||||||||||
|
Notified
claims
|
3,735 | (205 | ) | 3,530 | ||||||||
|
Incurred but
not reported
|
1,512 | (86 | ) | 1,426 | ||||||||
|
At 1 January
2007
|
5,247 | (291 | ) | 4,956 | ||||||||
|
Cash paid for
claims settled in the year
|
(3,876 | ) | 94 | (3,782 | ) | |||||||
|
Increase/(decrease)
in liabilities
|
||||||||||||
|
– arising
from current year claims
|
4,643 | (49 | ) | 4,594 | ||||||||
|
– arising
from prior year claims
|
(573 | ) | (20 | ) | (593 | ) | ||||||
|
Net exchange
differences
|
25 | 3 | 28 | |||||||||
|
At 31
December 2007
|
5,466 | (263 | ) | 5,203 | ||||||||
|
Notified
claims
|
3,894 | (264 | ) | 3,630 | ||||||||
|
Incurred but
not reported
|
1,572 | 1 | 1,573 | |||||||||
|
At 1 January
2008
|
5,466 | (263 | ) | 5,203 | ||||||||
|
Cash paid for
claims settled in the year
|
(3,969 | ) | 97 | (3,872 | ) | |||||||
|
Increase/(decrease)
in liabilities
|
||||||||||||
|
– arising
from current year claims
|
4,079 | (45 | ) | 4,034 | ||||||||
|
– arising
from prior year claims
|
(241 | ) | (66 | ) | (307 | ) | ||||||
|
Net exchange
differences
|
143 | (10 | ) | 133 | ||||||||
|
At 31
December 2008
|
5,478 | (287 | ) | 5,191 | ||||||||
|
Notified
claims
|
4,052 | (260 | ) | 3,792 | ||||||||
|
Incurred but
not reported
|
1,426 | (27 | ) | 1,399 | ||||||||
|
At 31
December 2008
|
5,478 | (287 | ) | 5,191 | ||||||||
213
(ii) Provisions for
unearned premiums and unexpired short-term insurance risks
|
Group
|
||||||||||||
|
Unearned
premium provision
|
Gross
£m
|
Reinsurance
£m
|
Net
£m
|
|||||||||
|
At 1 January
2007
|
2,850 | (43 | ) | 2,807 | ||||||||
|
Release in
the year
|
(98 | ) | 2 | (96 | ) | |||||||
|
At 1 January
2008
|
2,752 | (41 | ) | 2,711 | ||||||||
|
Increase in
the year
|
175 | — | 175 | |||||||||
|
Release in
the year
|
(280 | ) | (38 | ) | (318 | ) | ||||||
|
Net exchange
differences
|
64 | — | 64 | |||||||||
|
At 31
December 2008
|
2,711 | (79 | ) | 2,632 | ||||||||
|
Group
|
||||||||
|
Gross
performance of life business (life contracts)
|
2008
£m
|
2007
£m
|
||||||
|
Opening net
assets
|
604 | 579 | ||||||
|
Profit from
existing business:
|
||||||||
|
Expected
return
|
41 | 35 | ||||||
|
Experience
variances
|
(15 | ) | (23 | ) | ||||
| 26 | 12 | |||||||
|
New business
contribution (1)
|
14 | 5 | ||||||
|
Operating
assumption changes
|
2 | 6 | ||||||
|
Investment
return variances
|
(46 | ) | (14 | ) | ||||
|
Economic
assumption changes
|
(2 | ) | — | |||||
|
Other
|
(10 | ) | 16 | |||||
|
Closing net
assets
|
588 | 604 | ||||||
Note:
|
(1)
|
New business contribution
represents the present value of future profits on new insurance contract
business written during the
year.
|
214
24
Insurance business (continued)
|
Group
|
||||||||
|
Movement
in provision for liabilities under life contracts and under linked and
other investment contracts
|
Life
contracts
£m
|
Investment
contracts
£m
|
||||||
|
At 1 January
2007
|
2,209 | 2,246 | ||||||
|
Acquisition
of subsidiaries
|
2,275 | 3,245 | ||||||
|
Premiums
received
|
784 | 140 | ||||||
|
Fees and
expenses
|
(30 | ) | (25 | ) | ||||
|
Investment
return
|
251 | 93 | ||||||
|
Actuarial
adjustments
|
(493 | ) | — | |||||
|
Account
balances paid on surrender and other terminations in the
year
|
(468 | ) | (320 | ) | ||||
|
Exchange and
other adjustments
|
168 | 176 | ||||||
|
At 1 January
2008
|
4,696 | 5,555 | ||||||
|
Premiums
received
|
868 | 330 | ||||||
|
Fees and
expenses
|
(21 | ) | (38 | ) | ||||
|
Investment
return
|
17 | (970 | ) | |||||
|
Actuarial
adjustments
|
(233 | ) | — | |||||
|
Account
balances paid on surrender and other terminations in the
year
|
(734 | ) | (455 | ) | ||||
|
Transfers to
disposal groups
|
(686 | ) | — | |||||
|
Exchange and
other adjustments
|
591 | 904 | ||||||
|
At 31
December 2008
|
4,498 | 5,326 | ||||||
Investment
contracts are presented within customer deposits.
Changes in
assumptions during the year were not material to the profit
recognised.
|
Group
|
||||||||
|
Assets
backing linked liabilities
|
2008
£m
|
2007
£m
|
||||||
|
Debt
securities
|
4,500 | 2,899 | ||||||
|
Equity
securities
|
4,816 | 6,863 | ||||||
|
Cash and cash
equivalents
|
81 | 68 | ||||||
|
The
associated liabilities are:
|
||||||||
|
Linked
contracts classified as insurance contracts
|
4,189 | 4,398 | ||||||
|
Linked
contracts classified as investment contracts
|
5,208 | 5,432 | ||||||
There are no
options and guarantees relating to life assurance contracts that could in
aggregate have a material effect on the amount, timing and uncertainty of the
Group’s future cash flows.
The Group is
exposed to insurance risk, either directly through its businesses or through
using insurance to reduce other risk exposures.
Insurance risk is
the risk of fluctuations in the timing, frequency or severity of insured events,
relative to the expectations of the Group at the time of
underwriting.
Underwriting
and pricing risk
The Group manages
underwriting and pricing risk through the use of underwriting guidelines which
detail the class, nature and type of business that may be accepted; pricing
policies by product line and by brand; and centralised control of policy
wordings and any subsequent changes.
Claims
management risk
The risk that
claims are handled or paid inappropriately is managed using a range of IT system
controls and manual processes conducted by experienced staff. These, together
with a range of detailed policies and procedures ensure that all claims are
handled in a timely, appropriate and accurate manner.
Reinsurance
risk
Reinsurance is used
to protect against the impact of major catastrophic events or unforeseen volumes
of, or adverse trends in, large individual claims and to transfer risk that is
outside the Group’s current risk appetite.
Reinsurance of
risks above the Group’s risk appetite is only effective if the reinsurance
premium makes economic sense and the counterparty is financially secure.
Acceptable reinsurers are rated A- or better unless specifically
authorised.
215
Reserving
risk
Reserving risk
relates to both premiums and claims. It is the risk that reserves are assessed
incorrectly such that insufficient funds have been retained to pay or handle
claims as the amounts fall due. Claims development data provides information on
the historical pattern of reserving risk.
|
Accident
year
|
|||||||||||||||||||||||||||||||||||||
|
Insurance
claims – gross
|
2001
£m
|
2002
£m
|
2003
£m
|
2004
£m
|
2005
£m
|
2006
£m
|
2007
£m
|
2008
£m
|
Total
£m
|
||||||||||||||||||||||||||||
|
Estimate of
ultimate claims costs:
|
|||||||||||||||||||||||||||||||||||||
|
At end of
accident year
|
2,395 | 3,013 | 3,658 | 3,710 | 4,265 | 4,269 | 4,621 | 4,080 | 30,011 | ||||||||||||||||||||||||||||
|
One year
later
|
(70 | ) | 91 | (140 | ) | (186 | ) | (92 | ) | (275 | ) | (71 | ) | — | (743 | ) | |||||||||||||||||||||
|
Two years
later
|
20 | 1 | (106 | ) | (88 | ) | (147 | ) | (77 | ) | — | — | (397 | ) | |||||||||||||||||||||||
|
Three years
later
|
12 | (12 | ) | (55 | ) | (85 | ) | (60 | ) | — | — | — | (200 | ) | |||||||||||||||||||||||
|
Four years
later
|
(40 | ) | (17 | ) | (47 | ) | (31 | ) | — | — | — | — | (135 | ) | |||||||||||||||||||||||
|
Five years
later
|
(1 | ) | (19 | ) | (21 | ) | — | — | — | — | — | (41 | ) | ||||||||||||||||||||||||
|
Six years
later
|
(9 | ) | (11 | ) | — | — | — | — | — | — | (20 | ) | |||||||||||||||||||||||||
|
Seven years
later
|
6 | — | — | — | — | — | — | — | 6 | ||||||||||||||||||||||||||||
|
Current
estimate of cumulative claims
|
2,313 | 3,046 | 3,289 | 3,320 | 3,966 | 3,917 | 4,550 | 4,080 | 28,481 | ||||||||||||||||||||||||||||
|
Cumulative
payments to date
|
(2,235 | ) | (2,932 | ) | (3,060 | ) | (2,977 | ) | (3,442 | ) | (3,121 | ) | (3,393 | ) | (2,052 | ) | (23,212 | ) | |||||||||||||||||||
| 78 | 114 | 229 | 343 | 524 | 796 | 1,157 | 2,028 | 5,269 | |||||||||||||||||||||||||||||
|
Liability in
respect of prior years
|
91 | ||||||||||||||||||||||||||||||||||||
|
Claims
handling costs
|
118 | ||||||||||||||||||||||||||||||||||||
|
Gross general
insurance claims liability
|
5,478 | ||||||||||||||||||||||||||||||||||||
|
Accident
year
|
||||||||||||||||||||||||||||||||||||
|
Insurance
claims – net of reinsurance
|
2001
£m
|
2002
£m
|
2003
£m
|
2004
£m
|
2005
£m
|
2006
£m
|
2007
£m
|
2008
£m
|
Total
£m
|
|||||||||||||||||||||||||||
|
Estimate of
ultimate claims costs:
|
||||||||||||||||||||||||||||||||||||
|
At end of
accident year
|
2,011 | 2,584 | 3,215 | 3,514 | 4,168 | 4,215 | 4,572 | 4,034 | 28,313 | |||||||||||||||||||||||||||
|
One year
later
|
(61 | ) | 59 | (106 | ) | (168 | ) | (67 | ) | (261 | ) | (90 | ) | — | (694 | ) | ||||||||||||||||||||
|
Two years
later
|
22 | (12 | ) | (103 | ) | (90 | ) | (161 | ) | (87 | ) | — | — | (431 | ) | |||||||||||||||||||||
|
Three years
later
|
13 | (3 | ) | (53 | ) | (81 | ) | (64 | ) | — | — | — | (188 | ) | ||||||||||||||||||||||
|
Four years
later
|
(41 | ) | (21 | ) | (44 | ) | (46 | ) | — | — | — | — | (152 | ) | ||||||||||||||||||||||
|
Five years
later
|
1 | (24 | ) | (23 | ) | — | — | — | — | — | (46 | ) | ||||||||||||||||||||||||
|
Six years
later
|
(19 | ) | (5 | ) | — | — | — | — | — | — | (24 | ) | ||||||||||||||||||||||||
|
Seven years
later
|
— | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
|
Current
estimate of cumulative claims
|
1,926 | 2,578 | 2,886 | 3,129 | 3,876 | 3,867 | 4,482 | 4,034 | 26,778 | |||||||||||||||||||||||||||
|
Cumulative
payments to date
|
(1,873 | ) | (2,492 | ) | (2,714 | ) | (2,835 | ) | (3,364 | ) | (3,085 | ) | (3,347 | ) | (2,032 | ) | (21,742 | ) | ||||||||||||||||||
| 53 | 86 | 172 | 294 | 512 | 782 | 1,135 | 2,002 | 5,036 | ||||||||||||||||||||||||||||
|
Liability in
respect of prior years
|
42 | |||||||||||||||||||||||||||||||||||
|
Claims
handling costs
|
113 | |||||||||||||||||||||||||||||||||||
|
Net general
insurance claims liability
|
5,191 | |||||||||||||||||||||||||||||||||||
Claims
reserves
It
is the Group’s policy to hold undiscounted claims reserves (including reserves
to cover claims which have been incurred but not reported (IBNR reserves)) for
all classes at a sufficient level to meet all liabilities as they fall
due.
The Group’s focus
is on high volume and relatively straightforward products, for example home and
motor. This facilitates the generation of comprehensive underwriting and claims
data, which are used to accurately price and monitor the risks
accepted.
216
24 Insurance
business (continued)
The following table
shows loss ratios for each major class of business, gross and net of
reinsurance.
|
2008
|
2007
|
2006
|
|||||||||||||||||||||||||||
|
Earned
premiums
£m
|
Claims
incurred
£m
|
Loss
ratio
%
|
Earned
premiums
£m
|
Loss
ratio
%
|
Earned
premiums
£m
|
Loss
ratio
%
|
|||||||||||||||||||||||
|
Residential
property
|
Gross
|
1,103 | 529 | 48 | 1,087 | 82 | 1,121 | 56 | |||||||||||||||||||||
|
Net
|
1,034 | 529 | 51 | 1,020 | 86 | 1,061 | 59 | ||||||||||||||||||||||
|
Personal
motor
|
Gross
|
3,173 | 2,679 | 84 | 3,254 | 80 | 3,384 | 84 | |||||||||||||||||||||
|
Net
|
3,075 | 2,565 | 83 | 3,161 | 81 | 3,279 | 85 | ||||||||||||||||||||||
|
Commercial
property
|
Gross
|
194 | 79 | 41 | 211 | 55 | 218 | 37 | |||||||||||||||||||||
|
Net
|
174 | 80 | 46 | 191 | 60 | 198 | 38 | ||||||||||||||||||||||
|
Commercial
motor
|
Gross
|
143 | 130 | 91 | 142 | 75 | 90 | 69 | |||||||||||||||||||||
|
Net
|
141 | 128 | 91 | 133 | 80 | 88 | 68 | ||||||||||||||||||||||
|
Other
|
Gross
|
994 | 422 | 42 | 851 | 40 | 842 | 47 | |||||||||||||||||||||
|
Net
|
828 | 426 | 51 | 839 | 41 | 833 | 49 | ||||||||||||||||||||||
|
Total
|
Gross
|
5,607 | 3,839 | 68 | 5,545 | 73 | 5,655 | 71 | |||||||||||||||||||||
|
Net
|
5,252 | 3,728 | 71 | 5,344 | 75 | 5,459 | 73 | ||||||||||||||||||||||
The Group has no
interest rate exposure from general insurance liabilities because provisions for
claims under short-term insurance contracts are not discounted.
Frequency
and severity of specific risks and sources of uncertainty
Most general
insurance contracts are written on an annual basis, which means that the Group’s
liability extends for a 12 month period, after which the Group is entitled to
decline or renew or can impose renewal terms by amending the premium, terms and
conditions, or both.
The frequency and
severity of claims and the sources of uncertainty for the key classes that the
Group is exposed to are as follows:
Motor
insurance contracts (private and commercial)
Claims experience
is quite variable, due to a wide range of factors, but the principal ones are
age, sex and driving experience of the driver, type and nature of vehicle, use
of vehicle and area.
There are many
sources of uncertainty that will affect the Group’s experience under motor
insurance, including operational risk, reserving risk, premium rates not
matching claims inflation rates, weather, the social, economic and legislative
environment and reinsurance failure risk.
Property
insurance contracts (residential and commercial)
The major causes of
claims for property insurance are theft, flood, escape of water, fire, storm,
subsidence and various types of accidental damage.
The major source of
uncertainty in the Group’s property accounts is the volatility of weather.
Weather in the UK can affect most of the above perils. Over a longer period, the
strength of the economy is also a factor.
Other
commercial insurance contracts
Other commercial
claims come mainly from business interruption and loss arising from the
negligence of the insured (liability insurance). Business interruption losses
come from the loss of income, revenue and/or profit as a result of property
damage claims. Liability insurance includes employers liability and
public/products liability. Liability insurance is written on an occurrence
basis, and is subject to claims that are identified over a substantial period of
time, but where the loss event occurred during the life of the
policy.
Fluctuations in the
social and economic climate are a source of uncertainty in the Group’s business
interruption and general liability accounts. Other sources of uncertainty are
changes in the law, or its interpretation, and reserving risk. Other
uncertainties are significant events (for example terrorist attacks) and any
emerging new heads of damage or types of claim that are not envisaged when the
policy is written.
The following table
shows the expected maturity of insurance liabilities up to twenty years
excluding those linked directly to the financial assets backing these contracts
(2008 – £4,189 million; 2007 – £4,398 million).
|
Group
|
||||||||||||||||||||||||
|
0-3
months
£m
|
3-12
months
£m
|
1-3
years
£m
|
3-5
years
£m
|
5-10
years
£m
|
10-20
years
£m
|
|||||||||||||||||||
|
2008
|
623 | 1,645 | 1,899 | 903 | 487 | 53 | ||||||||||||||||||
|
2007
|
710 | 1,796 | 1,961 | 882 | 395 | 33 | ||||||||||||||||||
217
Life
business
The
Group’s three UK regulated life companies, National Westminster Life Assurance
Limited (NatWest Life), Royal Scottish Assurance plc (RSA) and Direct Line Life
Insurance Company Limited, are required to meet minimum capital requirements at
all times under the UK Financial Service Authority’s Prudential Sourcebook. The
capital resources covering the regulatory requirement are not transferable to
other areas of the Group. To ensure that the capital requirement is satisfied at
all times, each company holds an additional voluntary buffer above the
regulatory minimum.
The Group is not
exposed to price, currency, credit, or interest risk on unit linked life
contracts but it is exposed to variation in management fees. A decrease of 10%
in the value of the assets would reduce the asset management fees by £5 million
per annum (2007 – £2 million). The Group writes insurance contracts with minimum
guaranteed death benefits that expose it to the risk that declines in the value
of underlying investments may increase the Group’s net exposure to death
risk.
The Group’s
long-term assurance contracts include whole-life, term assurance, endowment
assurances, flexible whole life, pension and annuity contracts that are expected
to remain in force for an extended period of time.
Contracts under
which the Group does not accept significant insurance risk are classified as
investment contracts. As required by IFRS 4 ‘Insurance Contracts’ long term
business provisions are calculated in accordance with existing local GAAP (UK
accounting standard FRS 27 ‘Life Assurance’).
Estimations (assumptions) including
future mortality, morbidity, persistency and levels of
expenses are made in calculating actuarial reserves. Key metrics for the UK
include:
|
Assumptions
|
2008
|
2007
|
2006
|
|||||||||
|
Valuation
interest rate
|
||||||||||||
|
Term
assurance
|
2.50 | % | 3.00 | % | 3.00 | % | ||||||
|
Interest
|
2.50 | % | 3.00 | % | 3.00 | % | ||||||
|
Unit
growth
|
3.70 | % | 3.50 | % | 3.50 | % | ||||||
|
Expense
inflation
|
3.00 | % | 4.00 | % | 4.00 | % | ||||||
Sample mortality
rates, expressed as deaths per million per annum, for term assurance products
(age 40).
|
Mortality
|
||||||||||||
|
Male
non-smoker
|
723 | 810 | 517 | |||||||||
|
Male
smoker
|
1,590 | 1,830 | 983 | |||||||||
|
Female
non-smoker
|
568 | 460 | 278 | |||||||||
|
Female
smoker
|
1,277 | 1,310 | 618 | |||||||||
In
2007 the Group moved from the UK 80 series to the 00 series for
mortality.
Expenses:
|
Pre-2000
products – RSA
|
2008
per
annum
|
2007
per
annum
|
2006
per
annum
|
|||||||||
|
Lifestyle
protection plan
|
£29.30 | £25.18 | £28.96 | |||||||||
|
Mortgage
savings plan
|
£65.92 | £56.67 | £65.15 | |||||||||
|
Pre-2000
products – NatWest Life
|
||||||||||||
|
Term
assurances
|
£26.01 | £26.01 | £26.01 | |||||||||
|
Linked life
bonds
|
£26.01 | £23.17 | £23.17 | |||||||||
|
Post-2000
products
|
||||||||||||
|
Term
assurances
|
£23.17 | £23.16 | £23.16 | |||||||||
|
Guaranteed
bonds
|
£25.71 | £25.71 | £25.71 | |||||||||
218
24 Insurance
business (continued)
Frequency and severity of claims
– for contracts where death is the insured risk, the most significant
factors that could increase the overall frequency of claims are epidemics or
widespread changes in lifestyle, resulting in earlier or more claims than
expected.
For contracts where
survival is the insured risk, the most significant factor is continued
improvement in medical science and social conditions that would increase
longevity.
For contracts with
fixed and guaranteed benefits and fixed future premiums, there are no mitigating
terms and conditions that reduce the insurance risk accepted. Participating
contracts can result in a significant portion of the insurance risk being shared
with the insured party.
Sources of uncertainty in the
estimation of future benefit payments and premium receipts – the Group
uses base tables of standard mortality appropriate to the type of contract being
written and the territory in which the insured person resides. These are
adjusted to reflect the Group’s experience, mortality improvements and voluntary
termination behaviour.
|
Sensitivity
factor
|
Description
of sensitivity factor applied
|
|
Interest rate
and investment return
|
Change in
market interest rates of ±1 %.
|
|
The test
allows consistently for similar changes to investment returns and
movements in the market value of backing fixed interest
securities.
|
|
|
Expenses
|
Increase in
maintenance expenses of 10%
|
|
Assurance
mortality/morbidity
|
Increase in
mortality/morbidity rates for assurance contracts of 5%
|
|
Annuitant
mortality
|
Reduction in
mortality rates for annuity contracts of
5%
|
The above
sensitivity factors are applied via actuarial and statistical models, with the
following effect on the financial statements.
|
Increase/(decrease)
in
profit and equity
|
||||||||
|
Risk
factor
|
2008
£m
|
2007
£m
|
||||||
|
Interest
rates
|
(11 | ) | (18 | ) | ||||
|
Interest
rates
|
11 | 15 | ||||||
|
Expenses
|
(7 | ) | (5 | ) | ||||
|
Assurance
mortality/morbidity
|
(9 | ) | (8 | ) | ||||
Limitations of sensitivity
analysis: the above tables demonstrate the effect of a change in a key UK
assumption whilst other assumptions remain unaffected. In reality, such an
occurrence is unlikely, due to correlation between the assumptions and other
factors. It should also be noted that these sensitivities are non-linear, and
larger or smaller impacts should not be interpolated or extrapolated from these
results. The sensitivity analyses do not take into consideration that assets and
liabilities are actively managed and may vary at the time that any actual market
movement occurs.
219
|
Group
|
Company
|
|||||||||||||||
|
2008
£m
|
2007
£m
|
2008
£m
|
2007
£m
|
|||||||||||||
|
Dated loan
capital
|
30,162 | 23,065 | 7,421 | 5,585 | ||||||||||||
|
Undated loan
capital
|
11,697 | 9,866 | 1,071 | 781 | ||||||||||||
|
Preference
shares
|
2,194 | 1,686 | 1,822 | 1,377 | ||||||||||||
|
Trust
preferred securities
|
5,101 | 3,426 | — | — | ||||||||||||
| 49,154 | 38,043 | 10,314 | 7,743 | |||||||||||||
Certain preference
shares issued by the company are classified as liabilities; these securities
remain subject to the capital maintenance rules of the Companies Act
1985.
The following
tables analyse the remaining maturity of subordinated liabilities by (1) the
final redemption date; and (2) the next callable date.
|
Group
|
||||||||||||||||||||||||||||
|
2008
– final redemption
|
2009
£m
|
2010
£m
|
2011-2013
£m
|
2014-2018
£m
|
Thereafter
£m
|
Perpetual
£m
|
Total
£m
|
|||||||||||||||||||||
|
Sterling
|
192 | 15 | 176 | 1,458 | 370 | 6,287 | 8,498 | |||||||||||||||||||||
|
US
dollars
|
1,308 | 342 | 1,123 | 7,435 | 561 | 7,655 | 18,424 | |||||||||||||||||||||
|
Euro
|
1,865 | 1,378 | 1,991 | 7,923 | 1,957 | 4,087 | 19,201 | |||||||||||||||||||||
|
Other
|
29 | — | 7 | 2,284 | 34 | 677 | 3,031 | |||||||||||||||||||||
|
Total
|
3,394 | 1,735 | 3,297 | 19,100 | 2,922 | 18,706 | 49,154 | |||||||||||||||||||||
|
Group
|
||||||||||||||||||||||||||||||||
|
2008
– call date
|
Currently
£m
|
2009
£m
|
2010
£m
|
2011-2013
£m
|
2014-2018
£m
|
Thereafter
£m
|
Perpetual
£m
|
Total
£m
|
||||||||||||||||||||||||
|
Sterling
|
— | 192 | 752 | 1,039 | 2,729 | 3,615 | 171 | 8,498 | ||||||||||||||||||||||||
|
US
dollars
|
1,833 | 3,247 | 2,601 | 4,814 | 1,951 | 2,053 | 1,925 | 18,424 | ||||||||||||||||||||||||
|
Euro
|
— | 2,351 | 3,137 | 5,699 | 7,021 | 942 | 51 | 19,201 | ||||||||||||||||||||||||
|
Other
|
— | 500 | 405 | 922 | 954 | 250 | — | 3,031 | ||||||||||||||||||||||||
|
Total
|
1,833 | 6,290 | 6,895 | 12,474 | 12,655 | 6,860 | 2,147 | 49,154 | ||||||||||||||||||||||||
|
Group
|
||||||||||||||||||||||||||||
|
2007
– final redemption
|
2008
£m
|
2009
£m
|
2010-2012
£m
|
2013-2017
£m
|
Thereafter
£m
|
Perpetual
£m
|
Total
|
|||||||||||||||||||||
|
Sterling
|
194 | — | 34 | 1,405 | 389 | 5,818 | 7,840 | |||||||||||||||||||||
|
US
dollars
|
903 | 1,540 | 620 | 5,477 | 743 | 3,985 | 13,268 | |||||||||||||||||||||
|
Euro
|
764 | 1,312 | 1,405 | 5,711 | 1,674 | 3,164 | 14,030 | |||||||||||||||||||||
|
Other
|
35 | — | 6 | 2,076 | 325 | 463 | 2,905 | |||||||||||||||||||||
|
Total
|
1,896 | 2,852 | 2,065 | 14,669 | 3,131 | 13,430 | 38,043 | |||||||||||||||||||||
|
Group
|
||||||||||||||||||||||||||||||||
|
2007
– call date
|
Currently
£m
|
2008
£m
|
2009
£m
|
2010-2012
£m
|
2013-2017
£m
|
Thereafter
£m
|
Perpetual
£m
|
Total
£m
|
||||||||||||||||||||||||
|
Sterling
|
— | 194 | — | 1,497 | 2,456 | 3,527 | 166 | 7,840 | ||||||||||||||||||||||||
|
US
dollars
|
1,347 | 1,492 | 2,585 | 4,485 | 1,678 | 1,681 | — | 13,268 | ||||||||||||||||||||||||
|
Euro
|
— | 1,612 | 1,685 | 4,992 | 5,091 | 611 | 39 | 14,030 | ||||||||||||||||||||||||
|
Other
|
— | 35 | 431 | 843 | 1,468 | 128 | — | 2,905 | ||||||||||||||||||||||||
|
Total
|
1,347 | 3,333 | 4,701 | 11,817 | 10,693 | 5,947 | 205 | 38,043 | ||||||||||||||||||||||||
220
25
Subordinated liabilities (continued)
|
Company
|
||||||||||||||||||||||||||||
|
2008
– final redemption
|
2009
£m
|
2010
£m
|
2011-2013
£m
|
2014-2018
£m
|
Thereafter
£m
|
Perpetual
£m
|
Total
£m
|
|||||||||||||||||||||
|
Sterling
|
9 | — | — | — | 400 | 200 | 609 | |||||||||||||||||||||
|
US
dollars
|
415 | — | 717 | 1,381 | 2,863 | 2,661 | 8,037 | |||||||||||||||||||||
|
Euro
|
— | — | — | — | 1,668 | — | 1,668 | |||||||||||||||||||||
|
Total
|
424 | — | 717 | 1,381 | 4,931 | 2,861 | 10,314 | |||||||||||||||||||||
|
Company
|
||||||||||||||||||||||||||||||||
|
2008
– call date
|
Currently
£m
|
2009
£m
|
2010
£m
|
2011-2013
£m
|
2014-2018
£m
|
Thereafter
£m
|
Perpetual
£m
|
Total
£m
|
||||||||||||||||||||||||
|
Sterling
|
— | 9 | 199 | — | 400 | — | 1 | 609 | ||||||||||||||||||||||||
|
US
dollars
|
582 | 1,511 | 682 | 1,296 | 2,710 | 1,256 | — | 8,037 | ||||||||||||||||||||||||
|
Euro
|
— | — | — | 1,190 | 478 | — | — | 1,668 | ||||||||||||||||||||||||
|
Total
|
582 | 1,520 | 881 | 2,486 | 3,588 | 1,256 | 1 | 10,314 | ||||||||||||||||||||||||
|
Company
|
||||||||||||||||||||||||||||
|
2007
– final redemption
|
2008
£m
|
2009
£m
|
2010-2012
£m
|
2013-2017
£m
|
Thereafter
£m
|
Perpetual
£m
|
Total
£m
|
|||||||||||||||||||||
|
Sterling
|
13 | — | — | — | 399 | 199 | 611 | |||||||||||||||||||||
|
US
dollars
|
61 | 199 | 148 | 1,204 | 2,259 | 1,935 | 5,806 | |||||||||||||||||||||
|
Euro
|
45 | — | — | — | 1,281 | — | 1,326 | |||||||||||||||||||||
|
Total
|
119 | 199 | 148 | 1,204 | 3,939 | 2,134 | 7,743 | |||||||||||||||||||||
|
Company
|
||||||||||||||||||||||||||||||||
|
2007
– call date
|
Currently
£m
|
2008
£m
|
2009
£m
|
2010-2012
£m
|
2013-2017
£m
|
Thereafter
£m
|
Perpetual
£m
|
Total
£m
|
||||||||||||||||||||||||
|
Sterling
|
— | 13 | — | 198 | 399 | — | 1 | 611 | ||||||||||||||||||||||||
|
US
dollars
|
425 | 435 | 620 | 643 | 2,594 | 1,089 | — | 5,806 | ||||||||||||||||||||||||
|
Euro
|
— | 45 | — | 914 | 367 | — | — | 1,326 | ||||||||||||||||||||||||
|
Total
|
425 | 493 | 620 | 1,755 | 3,360 | 1,089 | 1 | 7,743 | ||||||||||||||||||||||||
221
Dated
loan capital
|
2008
£m
|
2007
£m
|
|||||||
|
The
company
|
||||||||
|
US$400
million 6.4% subordinated notes 2009 (1)
|
278 | 202 | ||||||
|
US$300
million 6.375% subordinated notes 2011 (1)
|
231 | 163 | ||||||
|
US$750
million 5% subordinated notes 2013 (1)
|
579 | 382 | ||||||
|
US$750
million 5% subordinated notes 2014 (1)
|
616 | 386 | ||||||
|
US$250
million 5% subordinated notes 2014 (1)
|
169 | 123 | ||||||
|
US$675
million 5.05% subordinated notes 2015 (1)
|
550 | 357 | ||||||
|
US$350
million 4.7% subordinated notes 2018 (1)
|
286 | 173 | ||||||
| 2,709 | * | 1,786 | * | |||||
|
The
Royal Bank of Scotland plc
|
||||||||
|
€255 million
5.25% subordinated notes 2008 (redeemed July 2008)
|
— | 192 | ||||||
|
€300 million
4.875% subordinated notes 2009
|
298 | 228 | ||||||
|
€1,000
million 6% subordinated notes 2013
|
1,083 | 790 | ||||||
|
US$50 million
floating rate subordinated notes 2013
|
36 | 26 | ||||||
|
€1,000
million floating rate subordinated notes 2013 (redeemed October
2008)
|
— | 744 | ||||||
|
€500 million
6% subordinated notes 2013
|
487 | 374 | ||||||
|
£150 million
10.5% subordinated bonds 2013 (2)
|
180 | 169 | ||||||
|
US$1,250
million floating rate subordinated notes 2014 (callable July
2009)
|
862 | 630 | ||||||
|
AUD590
million 6% subordinated notes 2014 (callable October 2009)
|
281 | 254 | ||||||
|
AUD410
million floating rate subordinated notes 2014 (callable October
2009)
|
195 | 182 | ||||||
|
CAD700
million 4.25% subordinated notes 2015 (callable March
2010)
|
409 | 358 | ||||||
|
£250 million
9.625% subordinated bonds 2015
|
311 | 286 | ||||||
|
US$750
million floating rate subordinated notes 2015 (callable September
2010)
|
513 | 374 | ||||||
|
€750 million
floating rate subordinated notes 2015
|
783 | 564 | ||||||
|
CHF400
million 2.375% subordinated notes 2015
|
257 | 166 | ||||||
|
CHF100
million 2.375% subordinated notes 2015
|
72 | 41 | ||||||
|
CHF200
million 2.375% subordinated notes 2015
|
125 | 86 | ||||||
|
US$500
million floating rate subordinated notes 2016 (callable October
2011)
|
346 | 252 | ||||||
|
US$1,500
million floating rate subordinated notes 2016 (callable April
2011)
|
1,038 | 757 | ||||||
|
€500 million
4.5% subordinated 2016 (callable January 2011)
|
511 | 379 | ||||||
|
CHF200
million 2.75% subordinated notes 2017 (callable December
2012)
|
129 | 89 | ||||||
|
€100 million
floating rate subordinated notes 2017
|
97 | 73 | ||||||
|
€500 million
floating rate subordinated notes 2017 (callable June 2012)
|
482 | 371 | ||||||
|
€750 million
4.35% subordinated notes 2017 (callable January 2017)
|
770 | 548 | ||||||
|
AUD450
million 6.5% subordinated notes 2017 (callable February
2012)
|
217 | 202 | ||||||
|
AUD450
million floating rate subordinated notes 2017 (callable February
2012)
|
214 | 199 | ||||||
|
US$1,500
million floating rate subordinated callable step up
|
||||||||
|
notes 2017
(callable August 2012)
|
1,029 | 752 | ||||||
|
€2,000
million 6.93% subordinated notes 2018 (issued April 2008; callable April
2018)
|
2,136 | — | ||||||
|
US$125.6
million floating rate subordinated notes 2020
|
87 | 64 | ||||||
|
€1,000
million 4.625% subordinated notes 2021 (callable September
2016)
|
1,019 | 724 | ||||||
|
€300 million
CMS linked floating rate subordinated notes 2022
|
303 | 228 | ||||||
|
€144.4
million floating rate subordinated notes 2022 (issued June 2008; callable
June 2022)
|
152 | — | ||||||
|
National
Westminster Bank Plc
|
||||||||
|
US$1,000
million 7.375% subordinated notes 2009
|
697 | 507 | ||||||
|
€600 million
6% subordinated notes 2010
|
623 | 474 | ||||||
|
€500 million
5.125% subordinated notes 2011
|
488 | 376 | ||||||
|
£300 million
7.875% subordinated notes 2015
|
379 | 349 | ||||||
|
£300 million
6.5% subordinated notes 2021
|
376 | 330 | ||||||
|
Charter
One Financial, Inc
|
||||||||
|
US$400
million 6.375% subordinated notes 2012
|
287 | 212 | ||||||
|
Greenwich
Capital Holdings, Inc
|
||||||||
|
US$170
million subordinated loan capital floating rate notes 2009
|
116 | 85 | ||||||
|
US$100
million 5.575% senior subordinated revolving credit 2009
|
69 | 50 | ||||||
|
US$500
million subordinated loan capital floating rate notes 2010 (callable on
any interest payment date)
|
342 | 249 | ||||||
|
First
Active Plc
|
||||||||
|
£60 million
6.375% subordinated bonds 2018 (callable April 2013)
|
66 | 65 |
222
25
Subordinated liabilities (continued)
Dated
loan capital (continued)
|
2008
£m
|
2007
£m
|
|||||||
|
Other
minority interest subordinated issues
|
16 | 16 | ||||||
|
ABN
AMRO and subsidiaries
|
||||||||
|
€113 million
7.50% subordinated notes 2008 (redeemed January 2008)
|
— | 83 | ||||||
|
€182 million
6.00% subordinated notes 2009
|
169 | 132 | ||||||
|
€182 million
6.13% subordinated notes 2009
|
165 | 127 | ||||||
|
€1,150
million 4.63% subordinated notes 2009
|
1,104 | 848 | ||||||
|
€250 million
4.70% CMS linked subordinated notes 2019
|
195 | 131 | ||||||
|
€800 million
6.25% subordinated notes 2010
|
795 | 598 | ||||||
|
€100 million
5.13% flip flop Bermudan callable subordinated notes 2017 (callable
December 2012)
|
89 | 75 | ||||||
|
€500 million
floating rate Bermudan callable subordinated lower tier 2 notes 2018
(callable May 2013)
|
455 | 350 | ||||||
|
€1,000
million floating rate Bermudan callable subordinated lower tier 2 notes
2016 (callable September 2011)
|
923 | 710 | ||||||
|
€13 million
zero coupon subordinated notes 2029 (callable June 2009)
|
8 | 2 | ||||||
|
€82 million
floating rate subordinated notes 2017
|
72 | 55 | ||||||
|
€103 million
floating rate subordinated lower tier 2 notes 2020
|
89 | 68 | ||||||
|
€170 million
floating rate sinkable subordinated notes 2041
|
205 | 184 | ||||||
|
€15 million
CMS linked floating rate subordinated lower tier 2 notes
2020
|
10 | 11 | ||||||
|
€1,500
million floating rate Bermudan callable subordinated lower tier 2 notes
2015 (callable June 2010)
|
1,419 | 1,087 | ||||||
|
€5 million
floating rate Bermudan callable subordinated lower tier 2 notes 2015
(callable October 2010)
|
5 | 4 | ||||||
|
€65 million
floating rate Bermudan callable subordinated lower tier 2 notes 2015
(callable October 2010)
|
62 | 48 | ||||||
|
US$12 million
floating rate subordinated notes 2008 (redeemed June 2008)
|
— | 6 | ||||||
|
US$12 million
floating rate subordinated notes 2008 (redeemed June 2008)
|
— | 6 | ||||||
|
US$165
million 6.14% subordinated notes 2019
|
152 | 94 | ||||||
|
US$72 million
5.98% subordinated notes 2019
|
49 | 7 | ||||||
|
US$500
million 4.65% subordinated notes 2018
|
359 | 214 | ||||||
|
US$500
million floating rate Bermudan callable subordinated notes 2013 (redeemed
September 2008)
|
— | 232 | ||||||
|
US$1,500
million floating rate Bermudan callable subordinated notes 2015 (callable
March 2010)
|
982 | 717 | ||||||
|
US$100
million floating rate Bermudan callable subordinated lower tier 2 notes
2015 (callable October 2010)
|
68 | 50 | ||||||
|
US$36 million
floating rate Bermudan callable subordinated lower tier 2 notes 2015
(callable October 2010)
|
25 | 18 | ||||||
|
US$1,000
million floating rate Bermudan callable subordinated lower tier 2 notes
2017 (callable January 2012)
|
661 | 479 | ||||||
|
AUD575
million 6.50% Bermudan callable subordinated lower tier 2 notes 2018
(callable May 2013)
|
286 | 231 | ||||||
|
AUD175
million 7.46% Bermudan callable subordinated lower tier 2 notes 2018
(callable May 2013)
|
79 | 73 | ||||||
|
€26 million
7.42% subordinated notes 2016
|
28 | 20 | ||||||
|
€7 million
7.38% subordinated notes 2016
|
8 | 6 | ||||||
|
€256 million
5.25% subordinated notes 2008 (redeemed July 2008)
|
— | 190 | ||||||
|
€13 million
floating rate subordinated notes 2008 (redeemed June 2008)
|
— | 9 | ||||||
|
£42 million
8.18% subordinated notes 2010
|
15 | 19 | ||||||
|
£25 million
9.18% amortising MTN subordinated lower tier 2 notes 2011
|
9 | 15 | ||||||
|
£750 million
5% Bermudan callable subordinated upper tier 2 notes 2016
|
728 | 642 | ||||||
|
US$250
million 7.75% subordinated notes 2023
|
173 | 127 | ||||||
|
US$150
million 7.13% subordinated notes 2093
|
104 | 76 | ||||||
|
US$250
million 7.00% subordinated notes 2008 (redeemed April
2008)
|
— | 127 | ||||||
|
US$68 million
floating rate subordinated notes 2009 (6)
|
— | 34 | ||||||
|
US$12 million
floating rate subordinated notes 2009 (6)
|
— | 6 | ||||||
|
BRL50 million
floating rate subordinated notes 2013 (6)
|
— | 14 | ||||||
|
BRL250
million floating rate subordinated notes 2013 (6)
|
— | 71 | ||||||
|
BRL250
million floating rate subordinated notes 2014 (6)
|
— | 71 | ||||||
|
BRL885
million floating rate subordinated notes 2014 (6)
|
— | 251 | ||||||
|
BRL300
million floating rate subordinated notes 2014 (6)
|
— | 85 | ||||||
|
PKR0.80
million floating rate subordinated notes 2012
|
7 | 6 | ||||||
|
MYR200
million subordinated notes 2017
|
40 | 30 | ||||||
|
TRY60 million
subordinated notes
|
34 | 25 | ||||||
| 30,162 | 23,065 |
|
*
|
In addition
the company has issued 0.5 million subordinated loan notes of €1,000 each,
1.95 million subordinated loan notes of US$1,000 each and 0.4 million
subordinated loan notes of £1,000 each. These loan notes are included in
the company balance sheet as loan capital but are reclassified as minority
interest Trust Preferred Securities on consolidation (see Note
26).
|
Notes:
|
(1)
|
On-lent to The
Royal Bank of Scotland plc on a subordinated
basis.
|
|
(2)
|
Unconditionally
guaranteed by the company.
|
|
(3)
|
In the event
of certain changes in tax laws, dated loan capital issues may be redeemed
in whole, but not in part, at the option of the issuer, at the principal
amount thereof plus accrued interest, subject to prior regulatory
approval.
|
|
(4)
|
Except as
stated above, claims in respect of the Group’s dated loan capital are
subordinated to the claims of other creditors. None of the Group’s dated
loan capital is secured.
|
|
(5)
|
Interest on
all floating rate subordinated notes is calculated by reference to market
rates.
|
|
(6)
|
Transferred to
Banco Santander S.A in July 2008.
|
223
Undated
loan capital
|
2008
£m
|
2007
£m
|
|||||||
|
The
company
|
||||||||
|
US$350
million undated floating rate primary capital notes (callable on any
interest payment date) (1)
|
240 | 175 | ||||||
|
US$1,200
million 7.648% perpetual regulatory tier one securities (callable
September 2031) (1, 2)
|
831 | 606 | ||||||
| 1,071 | 781 | |||||||
|
The
Royal Bank of Scotland plc
|
||||||||
|
£150 million
5.625% undated subordinated notes (callable June 2032)
|
144 | 144 | ||||||
|
£175 million
7.375% undated subordinated notes (callable August 2010)
|
190 | 183 | ||||||
|
€152 million
5.875% undated subordinated notes (redeemed October 2008)
|
— | 114 | ||||||
|
£350 million
6.25% undated subordinated notes (callable December 2012)
|
380 | 354 | ||||||
|
£500 million
6% undated subordinated notes (callable September 2014)
|
565 | 517 | ||||||
|
€500 million
5.125% undated subordinated notes (callable July 2014)
|
516 | 371 | ||||||
|
€1,000
million floating rate undated subordinated notes (callable July
2014)
|
966 | 742 | ||||||
|
£500 million
5.125% undated subordinated notes (callable March 2016)
|
556 | 499 | ||||||
|
£200 million
5.625% subordinated upper tier 2 notes (callable September
2026)
|
210 | 210 | ||||||
|
£600 million
5.5% undated subordinated notes (callable December 2019)
|
677 | 595 | ||||||
|
£500 million
6.2% undated subordinated notes (callable March 2022)
|
614 | 543 | ||||||
|
£200 million
9.5% undated subordinated bonds (callable August 2018) (3)
|
253 | 228 | ||||||
|
£400 million
5.625% subordinated upper tier 2 notes (callable September
2026)
|
397 | 397 | ||||||
|
£300 million
5.625% undated subordinated notes (callable September
2026)
|
431 | 318 | ||||||
|
£350 million
5.625% undated subordinated notes (callable June 2032)
|
364 | 363 | ||||||
|
£400 million
5% undated subordinated notes (callable March 2011)
|
424 | 402 | ||||||
|
JPY25 billion
2.605% undated subordinates notes (callable November 2034)
|
217 | 103 | ||||||
|
CAD700
million 5.37% fixed rate undated subordinated notes (callable May
2016)
|
464 | 363 | ||||||
|
National
Westminster Bank Plc
|
||||||||
|
US$500
million primary capital floating rate notes, Series A (callable on any
interest payment date)
|
343 | 251 | ||||||
|
US$500
million primary capital floating rate notes, Series B (callable on any
interest payment date)
|
347 | 256 | ||||||
|
US$500
million primary capital floating rate notes, Series C (callable on any
interest payment date)
|
346 | 255 | ||||||
|
€400 million
6.625% fixed/floating rate undated subordinated notes (callable October
2009)
|
388 | 303 | ||||||
|
€100 million
floating rate undated step-up notes (callable October
2009)
|
97 | 74 | ||||||
|
£325 million
7.625% undated subordinated step-up notes (callable January
2010)
|
363 | 357 | ||||||
|
£200 million
7.125% undated subordinated step-up notes (callable October
2022)
|
201 | 205 | ||||||
|
£200 million
11.5% undated subordinated notes (callable December 2022)
(4)
|
269 | 269 | ||||||
|
First
Active plc
|
||||||||
|
£20 million
11.75% perpetual tier two capital
|
26 | 23 | ||||||
|
€38 million
11.375% perpetual tier two capital
|
52 | 39 | ||||||
|
£1.3 million
floating rate perpetual tier two capital
|
2 | 2 | ||||||
|
ABN
AMRO and subsidiaries
|
||||||||
|
€9 million
4.650% perpetual convertible financing preference shares (redeemed October
2008)
|
— | 7 | ||||||
|
€1,000
million 4.310% perpetual Bermudan callable subordinated tier 1 notes
(callable March 2016)
|
824 | 598 | ||||||
| 11,697 | 9,866 |
Notes:
|
(1)
|
On-lent to The
Royal Bank of Scotland plc on a subordinated
basis.
|
|
(2)
|
The company
can satisfy interest payment obligations by issuing sufficient ordinary
shares to appointed Trustees to enable them, on selling these shares, to
settle the interest payment.
|
|
(3)
|
Guaranteed by
the company.
|
|
(4)
|
Exchangeable
at the option of the issuer into 200 million 8.392% (gross) non-cumulative
preference shares of £1 each of National Westminster Bank Plc at any
time.
|
|
(5)
|
Except as
stated above, claims in respect of the Group’s undated loan capital are
subordinated to the claims of other creditors. None of the Group’s undated
loan capital is secured.
|
|
(6)
|
In the event
of certain changes in tax laws, undated loan capital issues may be
redeemed in whole, but not in part, at the option of the Group, at the
principal amount thereof plus accrued interest, subject to prior
regulatory approval.
|
|
(7)
|
Interest on
all floating rate subordinated notes is calculated by reference to market
rates.
|
224
25
Subordinated liabilities (continued)
Preference
shares
|
2008
£m
|
2007
£m
|
|||||||
|
The
company
|
||||||||
|
Non-cumulative
preference shares of US$0.01 (1)
|
||||||||
|
Series F
US$200 million 7.65% (redeemable at option of issuer)
|
137 | 100 | ||||||
|
Series H
US$300 million 7.25% (redeemable at option of issuer)
|
205 | 150 | ||||||
|
Series L
US$850 million 5.75% (redeemable September 2009)
|
582 | 421 | ||||||
|
Non-cumulative
convertible preference shares of US$0.01 (1)
|
||||||||
|
Series 1
US$1,000 million 9.118% (redeemable March 2010)
|
698 | 510 | ||||||
|
Non-cumulative
convertible preference shares of £0.01 (1)
|
||||||||
|
Series 1 £200
million 7.387% (redeemable December 2010)
|
211 | 201 | ||||||
|
Cumulative
preference shares of £1
|
||||||||
|
£0.5 million
11 % and £0.4 million 5.5% (non-redeemable)
|
1 | 1 | ||||||
| 1,834 | 1,383 | |||||||
|
National
Westminster Bank Plc
|
||||||||
|
Non-cumulative
preference shares of £1
|
||||||||
|
Series A £140
million 9% (non-redeemable)
|
145 | 143 | ||||||
|
Non-cumulative
preference shares of US$25
|
||||||||
|
Series C
US$300 million 7.7628% (2)
|
215 | 160 | ||||||
| 2,194 | 1,686 |
Notes:
|
(1)
|
Further
details of the contractual terms of the preference shares are given in
Note 27 on page 229.
|
|
(2)
|
Series C
preference shares each carry a gross dividend of 8.625% inclusive of
associated tax credit. Redeemable at the option of the issuer at
par.
|
Trust
preferred securities
|
2008
£m
|
2007
£m
|
|||||||
|
€1,250
million 6.467% (redeemable June 2012) (1)
|
1,325 | 979 | ||||||
|
US$750
million 6.8% (redeemable March 2008) (1)
|
514 | 374 | ||||||
|
US$850
million 4.709% (redeemable July 2013) (1)
|
640 | 421 | ||||||
|
US$650
million 6.425% (redeemable January 2034) (1)
|
677 | 344 | ||||||
|
ABN
AMRO and subsidiaries
|
||||||||
|
US$1,285
million 6.03% Trust Preferred V
|
760 | 464 | ||||||
|
US$200
million 6.25% Trust Preferred VI
|
121 | 82 | ||||||
|
US$1,800
million 6.08% Trust Preferred VI I
|
1,064 | 762 | ||||||
| 5,101 | 3,426 |
|
|
Note:
|
|
(1)
|
The trust
preferred securities issued by subsidiaries have no maturity date and are
not redeemable at the option of the holders at any time. These securities
may, with the consent of the UK Financial Services Authority, be redeemed,
by the issuer on the dates specified above or on any interest payment date
thereafter. They may also be redeemed in whole, but not in part, upon the
occurrence of certain tax and regulatory events. The company classifies
its obligations to these subsidiaries as dated loan
capital.
|
225
|
ABN
AMRO
£m
|
Other
interests
£m
|
Total
£m
|
||||||||||
|
At 1 January
2007
|
— | 5,263 | 5,263 | |||||||||
|
Currency
translation and other adjustments
|
1,694 | 140 | 1,834 | |||||||||
|
Acquisition
of ABN AMRO
|
31,317 | 928 | 32,245 | |||||||||
|
Profit
attributable to minority interests
|
10 | 153 | 163 | |||||||||
|
Dividends
paid
|
— | (121 | ) | (121 | ) | |||||||
|
Losses
on available-for-sale securities, net of tax
|
(59 | ) | (505 | ) | (564 | ) | ||||||
|
Movements
in cash flow hedging reserves, net of tax
|
26 | — | 26 | |||||||||
|
Actuarial
gains recognised in retirement benefit schemes, net of tax
|
19 | — | 19 | |||||||||
|
Equity
raised
|
10 | 66 | 76 | |||||||||
|
Equity
withdrawn
|
(20 | ) | (533 | ) | (553 | ) | ||||||
|
At 31
December 2007
|
32,997 | 5,391 | 38,388 | |||||||||
|
Currency
translation and other adjustments
|
8,098 | 1,158 | 9,256 | |||||||||
|
Acquisition
of outstanding ABN AMRO ordinary shares
|
356 | — | 356 | |||||||||
|
(Loss)/profit
attributable to minority interests
|
(11,244 | ) | 412 | (10,832 | ) | |||||||
|
Dividends
paid
|
— | (285 | ) | (285 | ) | |||||||
|
Losses on
available-for-sale securities, net of tax
|
(144 | ) | (1,303 | ) | (1,447 | ) | ||||||
|
Movements in
cash flow hedging reserves, net of tax
|
(831 | ) | — | (831 | ) | |||||||
|
Actuarial
losses recognised in retirement benefit schemes, net of
tax
|
(478 | ) | — | (478 | ) | |||||||
|
Equity
raised
|
— | 1,071 | 1,071 | |||||||||
|
Equity
withdrawn
|
(12,571 | ) | (1,008 | ) | (13,579 | ) | ||||||
|
At 31
December 2008
|
16,183 | 5,436 | 21,619 | |||||||||
ABN AMRO represents
the other consortium members’ interests in RFS Holdings B.V. The capital and
income rights of shares issued by RFS Holdings B.V. are linked to the net assets
and income of the ABN AMRO business units which the individual consortium
members have agreed to acquire. Other minority interests include trust preferred
securities of £1,821 million (2007 – £1,821 million) and RBS China Sarl of
£1,898 million (2007 – £2,438 million). Equity withdrawn in respect of ABN AMRO
relates to distributions to consortium members.
Included in
minority interests are the following trust preferred securities
(1):
|
2008
£m
|
2007
£m
|
|||||||
|
US$950
million 5.512% (redeemable September 2014)
|
529 | 529 | ||||||
|
US$1,000
million 3 month US$ LIBOR plus 0.80% (redeemable September
2014)
|
555 | 555 | ||||||
|
€500 million
4.243% (redeemable January 2016)
|
337 | 337 | ||||||
|
£400 million
5.6457% (redeemable June 2017)
|
400 | 400 | ||||||
| 1,821 | 1,821 |
Note:
|
(1)
|
The trust
preferred securities issued by subsidiaries have no maturity date and are
not redeemable at the option of the holders at any time. These securities
may, with the consent of the UK Financial Services Authority, be redeemed,
in whole or in part, by the issuer on the dates specified above or on any
interest payment date thereafter. They may also be redeemed in whole, but
not in part, upon the occurrence of certain tax and regulatory events. The
company classifies its obligations to these subsidiaries as dated loan
capital.
|
226
|
Allotted,
called up and fully paid
|
Authorised
|
|||||||||||||||||||
|
1
January
2008
£m
|
Issued
during
the year
£m
|
31
December
2008
£m
|
31
December
2008
£m
|
31
December
2007
£m
|
||||||||||||||||
|
Ordinary
shares of 25p
|
2,501 | 7,363 | 9,864 | 11,151 | 3,018 | |||||||||||||||
|
Non-voting
deferred shares of £0.01
|
27 | — | 27 | 323 | 323 | |||||||||||||||
|
Additional
Value Shares of £0.01
|
— | — | — | 27 | 27 | |||||||||||||||
|
Non-cumulative
preference shares of US$0.01
|
2 | — | 2 | 3 | 2 | |||||||||||||||
|
Non-cumulative
convertible preference shares of US$0.01
|
— | — | — | — | — | |||||||||||||||
|
Non-cumulative
preference shares of €0.01
|
— | — | — | — | — | |||||||||||||||
|
Non-cumulative
convertible preference shares of €0.01
|
— | — | — | — | — | |||||||||||||||
|
Non-cumulative
convertible preference shares of £0.25
|
— | — | — | 225 | 225 | |||||||||||||||
|
Non-cumulative
convertible preference shares of £0.01
|
— | — | — | — | — | |||||||||||||||
|
Cumulative
preference shares of £1
|
1 | — | 1 | 1 | 1 | |||||||||||||||
|
Non-cumulative
preference shares of £1
|
1 | 5 | 6 | 300 | 300 | |||||||||||||||
|
Allotted,
called up and fully paid
|
Authorised
|
|||||||||||||||||||||||
|
Number
of shares – thousands
|
2008
|
2007
|
2006
|
2008
|
2007
|
2006
|
||||||||||||||||||
|
Ordinary
shares of 25p
|
39,456,005 | 10,006,215 | 3,152,844 | 44,603,278 | 12,070,492 | 5,079,375 | ||||||||||||||||||
|
Non-voting
deferred shares of £0.01
|
2,660,556 | 2,660,556 | 2,660,556 | 32,300,000 | 32,300,000 | 32,300,000 | ||||||||||||||||||
|
Additional
Value Shares of £0.01
|
— | — | — | 2,700,000 | 2,700,000 | 2,700,000 | ||||||||||||||||||
|
Non-cumulative
preference shares of US$0.01
|
308,015 | 308,015 | 240,000 | 516,000 | 419,500 | 419,500 | ||||||||||||||||||
|
Non-cumulative
convertible preference shares of US$0.01
|
1,000 | 1,000 | 1,000 | 3,900 | 3,900 | 3,900 | ||||||||||||||||||
|
Non-cumulative
preference shares of €0.01
|
2,526 | 2,526 | 2,500 | 66,000 | 66,000 | 66,000 | ||||||||||||||||||
|
Non-cumulative
convertible preference shares of €0.01
|
— | — | — | 3,000 | 3,000 | 3,000 | ||||||||||||||||||
|
Non-cumulative
convertible preference shares of £0.25
|
— | — | — | 900,000 | 900,000 | 900,000 | ||||||||||||||||||
|
Non-cumulative
convertible preference shares of £0.01
|
200 | 200 | 200 | 1,000 | 1,000 | 1,000 | ||||||||||||||||||
|
Cumulative
preference shares of £1
|
900 | 900 | 900 | 900 | 900 | 900 | ||||||||||||||||||
|
Non-cumulative
preference shares of £1
|
5,750 | 750 | — | 300,000 | 300,000 | 300,000 | ||||||||||||||||||
Movement
in ordinary shares in issue during the year:
|
Number
of shares - thousands
|
||||
|
At 1 January
2008
|
10,006,215 | |||
|
Shares issued
in respect of the rights issue
|
6,123,010 | |||
|
Shares issued
in respect of the capitalisation issue
|
403,468 | |||
|
Shares issued
in respect of the placing and open offer
|
22,909,776 | |||
|
Other shares
issued
|
13,536 | |||
|
At 31
December 2008
|
39,456,005 | |||
227
Ordinary
shares
In
June 2008, the company issued
6,123 million ordinary shares of 25p each at 200p per share by way of a rights
issue. The rights issue was on the basis of 11 new shares for every 18 shares
held on 9 May 2008. The net proceeds were £12 billion.
In
September 2008, the company issued 403 million ordinary shares of 25p each by
way of a capitalisation issue. The capitalisation was on the basis of one new
share for every 40 shares held by shareholders on 12 September
2008.
In
December 2008, the company issued 22,910 million ordinary shares of 25p each at
65.5p per share through a placing and open offer. This placing and open offer,
which was fully underwritten by HM Treasury, was made available to shareholders
on 31 October 2008. The net proceeds were £14.7 billion.
In
addition, 13.5 million ordinary shares were issued during the year ended 31
December 2008 following the exercise of options under the company’s share
schemes.
Total
consideration, including the rights issue and placing and open offer identified
above, of £27.3 billion was received on the issue of ordinary shares for
cash.
During the year
ended 31 December 2008, options were granted over 187.7 million ordinary shares
under the company’s executive and sharesave schemes. At 31 December 2008,
options granted under the company’s various schemes, exercisable up to 2018 at
prices ranging from 189p to 586p per share, were outstanding in respect of 181.9
million ordinary shares.
On
16 January 2009, further options were granted over 1,176.1 million ordinary
shares under the company’s sharesave scheme.
In
addition, options granted under the NatWest executive scheme were outstanding in
respect of 0.8 million ordinary shares exercisable up to 2009 at prices ranging
from 248p to 258p per share.
Employee share
trusts purchased 54.0 million ordinary shares at a cost of £63.7 million and
awarded 3.3 million ordinary shares on receipt of £0.9 million on the exercise
of awards under employee share schemes.
The employee share
trusts incurred costs of £0.3 million in purchasing the company’s ordinary
shares.
Preference
shares
In
December 2008, the company issued 5 million Series 2 non- cumulative preference
shares of £1 at £1,000 each, the net proceeds being £5 billion.
On
19 January 2009, the Group announced that it had reached agreement with HM
Treasury and UK Financial Investments to replace the £5 billion of preference
shares it holds with new ordinary shares. The offer of the new ordinary shares
and redemption of the preference shares are subject to shareholder approval at
an Extraordinary General Meeting.
Under IFRS certain
of the Group’s preference shares are classified as debt and are included in
subordinated liabilities on the balance sheet.
Other
securities
Certain of the
Group’s subordinated securities in the legal form of debt are classified as
equity under IFRS.
These securities
entitle the holders to interest which may be deferred at the sole discretion of
the company. Repayment of the securities is at the sole discretion of the
company on giving between 30 and 60 days notice.
Non-cumulative
preference shares
Non-cumulative
preference shares entitle the holders thereof (subject to the terms of issue) to
receive periodic non-cumulative cash dividends at specified fixed rates for each
Series payable out of distributable profits of the company.
The non-cumulative
preference shares are redeemable at the option of the company, in whole or in
part from time to time at the rates detailed on the next page plus
dividends otherwise payable for the then current dividend period accrued to the
date of redemption.
228
27 Share
capital (continued)
|
Class
of preference share
|
Number
of
shares
in issue
|
Interest
rate
|
Redemption
date on or
after
|
Redemption
price
per share
|
Debt
or equity(1)
|
|
Non-cumulative
preference shares of US$0.01
|
|||||
|
Series
F
|
8
million
|
7.65%
|
31 March
2007
|
US$25
|
Debt
|
|
Series
H
|
12
million
|
7.25%
|
31 March
2004
|
US$25
|
Debt
|
|
Series
L
|
34
million
|
5.75%
|
30 September
2009
|
US$25
|
Debt
|
|
Series
M
|
37
million
|
6.4%
|
30 September
2009
|
US$25
|
Equity
|
|
Series
N
|
40
million
|
6.35%
|
30 June
2010
|
US$25
|
Equity
|
|
Series
P
|
22
million
|
6.25%
|
31 December
2010
|
US$25
|
Equity
|
|
Series
Q
|
27
million
|
6.75%
|
30 June
2011
|
US$25
|
Equity
|
|
Series
R
|
26
million
|
6.125%
|
30 December
2011
|
US$25
|
Equity
|
|
Series
S
|
38
million
|
6.6%
|
30 June
2012
|
US$25
|
Equity
|
|
Series
T
|
64
million
|
7.25%
|
31 December
2012
|
US$25
|
Equity
|
|
Series
U
|
15,000
|
7.64%
|
29 September
2017
|
US$100,000
|
Equity
|
|
Non-cumulative
convertible preference shares of US$0.01
|
|||||
|
Series
1
|
1
million
|
9.118%
|
31 March
2010
|
US$1,000
|
Debt
|
|
Non-cumulative
preference shares of €0.01
|
|||||
|
Series
1
|
1.25
million
|
5.5%
|
31 December
2009
|
€1,000
|
Equity
|
|
Series
2
|
1.25
million
|
5.25%
|
30 June
2010
|
€1,000
|
Equity
|
|
Series
3
|
26,000
|
7.0916%
|
29 September
2017
|
€50,000
|
Equity
|
|
Non-cumulative
convertible preference shares of £0.01
|
|||||
|
Series
1
|
200,000
|
7.387%
|
31 December
2010
|
£1,000
|
Debt
|
|
Non-cumulative
preference shares of £1
|
|||||
|
Series
1
|
750,000
|
8.162%
|
5 October
2012
|
£1,000
|
Equity
|
|
Series
2
|
5
million
|
12%
|
2 December
2013
|
£1,000
|
Equity
|
Notes:
|
(1)
|
Those
preference shares where the Group has an obligation to pay dividends are
classified as debt; those where distributions are discretionary are
classified as equity. The conversion rights attaching to the convertible
preference shares may result in the Group delivering a variable number of
equity shares to preference shareholders; these convertible preference
shares are treated as debt.
|
|
(2)
|
The whole of
each series of preference share is issued or redeemed at the same
time.
|
In
the event that the non-cumulative convertible preference shares are not redeemed
on or before the redemption date, the holder may convert them into ordinary
shares in the company.
Under existing
arrangements, no redemption or purchase of any non-cumulative preference shares
may be made by the company without the prior consent of the UK Financial
Services Authority.
On
a winding-up or liquidation of the company, the holders of the non-cumulative
preference shares will be entitled to receive, out of any surplus assets
available for distribution to the company’s shareholders (after payment of
arrears of dividends on the cumulative preference shares up to the date of
repayment) pari passu with the cumulative preference shares and all other shares
of the company ranking pari passu with the non-cumulative preference shares as
regards participation in the surplus assets of the company, a liquidation
distribution per share equal to the applicable redemption price detailed in the
table above, together with an amount equal to dividends for the then current
dividend period accrued to the date of payment, before any distribution or
payment may be made to holders of the ordinary shares as regards participation
in the surplus assets of the company.
Except as described
above, the holders of the non-cumulative preference shares have no right to
participate in the surplus assets of the company.
Holders of the
non-cumulative preference shares are not entitled to receive notice of or attend
general meetings of the company except if any resolution is proposed for
adoption by the shareholders of the company to vary or abrogate any of the
rights attaching to the non- cumulative preference shares or proposing the
winding-up or liquidation of the company. In any such case, they are entitled to
receive notice of and to attend the general meeting of shareholders at which
such resolution is to be proposed and are entitled to speak and vote on such
resolution (but not on any other resolution). In addition, in the event that,
prior to any general meeting of shareholders, the company has failed to pay in
full the three most recent quarterly dividend payments due on the non-cumulative
dollar preference shares (other than Series U), the two most recent semi-annual
dividend payments due on the non-cumulative convertible dollar preference shares
and the most recent dividend payments due on the non-cumulative euro preference
shares, the non- cumulative sterling preference shares, the Series U
non-cumulative dollar preference shares and the non-cumulative convertible
sterling preference shares, the holders shall be entitled to receive notice of,
attend, speak and vote at such meeting on all matters together with the holders
of the ordinary shares. In these circumstances only, the rights of the holders
of the non-cumulative preference shares so to vote shall continue until the
company shall have resumed the payment in full of the dividends in
arrears.
The series 2
non-cumulative preference shares of £1 each were issued to HM Treasury. The
company, subject to shareholder approval, intends to issue new ordinary shares
by way of an open offer, the proceeds will be used to repay the preference
shares, issued to HM Treasury, together with the accrued dividend.
229
|
Group
|
Company
|
|||||||||||||||||||||||
|
2008
£m
|
2007
£m
|
2006
£m
|
2008
£m
|
2007
£m
|
2006
£m
|
|||||||||||||||||||
|
Called-up
share capital
|
||||||||||||||||||||||||
|
At 1
January
|
2,530 | 815 | 826 | 2,530 | 815 | 826 | ||||||||||||||||||
|
Ordinary
shares issued in respect of rights issue
|
1,531 | — | — | 1,531 | — | — | ||||||||||||||||||
|
Ordinary
shares issued in respect of capitalisation issue
|
101 | — | — | 101 | — | — | ||||||||||||||||||
|
Ordinary
shares issued in respect of placing and open offer
|
5,728 | — | — | 5,728 | — | — | ||||||||||||||||||
|
Preference
shares issued in respect of placing and open offer
|
5 | — | — | 5 | — | — | ||||||||||||||||||
|
Other shares
issued
|
3 | 139 | 2 | 3 | 139 | 2 | ||||||||||||||||||
|
Bonus issue
of ordinary shares
|
— | 1,576 | — | — | 1,576 | — | ||||||||||||||||||
|
Shares
repurchased
|
— | — | (13 | ) | — | — | (13 | ) | ||||||||||||||||
|
At 31
December
|
9,898 | 2,530 | 815 | 9,898 | 2,530 | 815 | ||||||||||||||||||
|
Paid-in
equity
|
||||||||||||||||||||||||
|
At 1
January
|
1,073 | — | — | 1,073 | — | — | ||||||||||||||||||
|
Securities
issued during the year
|
— | 1,073 | — | — | 1,073 | — | ||||||||||||||||||
|
At 31
December
|
1,073 | 1,073 | — | 1,073 | 1,073 | — | ||||||||||||||||||
|
Share
premium account
|
||||||||||||||||||||||||
|
At 1
January
|
17,322 | 12,482 | 11,777 | 17,322 | 12,482 | 11,777 | ||||||||||||||||||
|
Ordinary
shares issued in respect of rights issue,
|
||||||||||||||||||||||||
|
net of £246
million expenses
|
10,469 | — | — | 10,469 | — | — | ||||||||||||||||||
|
Ordinary
shares issued in respect of capitalisation issue
|
(101 | ) | — | — | (101 | ) | — | — | ||||||||||||||||
|
Expenses of
placing and open offer
|
(265 | ) | — | — | (265 | ) | — | — | ||||||||||||||||
|
Other shares
issued
|
46 | 6,257 | 815 | 46 | 6,257 | 815 | ||||||||||||||||||
|
Bonus issue
of ordinary shares
|
— | (1,576 | ) | — | — | (1,576 | ) | — | ||||||||||||||||
|
Redemption of
preference shares classified as debt
|
— | 159 | 271 | — | 159 | 271 | ||||||||||||||||||
|
Shares
repurchased
|
— | — | (381 | ) | — | — | (381 | ) | ||||||||||||||||
|
At 31
December
|
27,471 | 17,322 | 12,482 | 27,471 | 17,322 | 12,482 | ||||||||||||||||||
|
Merger
reserve
|
||||||||||||||||||||||||
|
At 1
January
|
10,881 | 10,881 | 10,881 | — | — | — | ||||||||||||||||||
|
Placing and
open offer
|
14,273 | — | — | 14,273 | — | — | ||||||||||||||||||
|
Transfer to
retained earnings
|
(14,273 | ) | — | — | (14,273 | ) | — | — | ||||||||||||||||
|
At 31
December
|
10,881 | 10,881 | 10,881 | — | — | — | ||||||||||||||||||
|
Available-for-sale
reserve
|
||||||||||||||||||||||||
|
At 1
January
|
1,032 | 1,528 | (73 | ) | — | — | — | |||||||||||||||||
|
Unrealised
(losses)/gains in the year
|
(6,808 | ) | (191 | ) | 2,609 | — | — | — | ||||||||||||||||
|
Realised
losses/(gains) in the year
|
842 | (513 | ) | (313 | ) | — | — | — | ||||||||||||||||
|
Tax
|
1,373 | 208 | (695 | ) | — | — | — | |||||||||||||||||
|
At 31
December
|
(3,561 | ) | 1,032 | 1,528 | — | — | — | |||||||||||||||||
|
Cash
flow hedging reserve
|
||||||||||||||||||||||||
|
At 1
January
|
(555 | ) | (149 | ) | 59 | (5 | ) | (7 | ) | (9 | ) | |||||||||||||
|
Amount
recognised in equity during the year
|
(603 | ) | (460 | ) | (109 | ) | — | — | — | |||||||||||||||
|
Amount
transferred from equity to earnings in the year (1)
|
198 | (138 | ) | (140 | ) | 2 | 3 | 3 | ||||||||||||||||
|
Tax
|
84 | 192 | 41 | (1 | ) | (1 | ) | (1 | ) | |||||||||||||||
|
At 31
December
|
(876 | ) | (555 | ) | (149 | ) | (4 | ) | (5 | ) | (7 | ) | ||||||||||||
|
Foreign
exchange reserve
|
||||||||||||||||||||||||
|
At 1
January
|
(426 | ) | (872 | ) | 469 | — | — | — | ||||||||||||||||
|
Retranslation
of net assets
|
11,970 | 1,339 | (2,159 | ) | — | — | — | |||||||||||||||||
|
Foreign
currency (losses)/gains on hedges of net assets (2)
|
(5,801 | ) | (963 | ) | 818 | — | — | — | ||||||||||||||||
|
Tax
|
642 | 70 | — | — | — | — | ||||||||||||||||||
|
At 31
December
|
6,385 | (426 | ) | (872 | ) | — | — | — | ||||||||||||||||
|
Capital
redemption reserve
|
||||||||||||||||||||||||
|
At 1
January
|
170 | 170 | 157 | 170 | 170 | 157 | ||||||||||||||||||
|
Shares
repurchased during the year
|
— | — | 13 | — | — | 13 | ||||||||||||||||||
|
At 31
December
|
170 | 170 | 170 | 170 | 170 | 170 | ||||||||||||||||||
Notes:
|
(1)
|
Of the amount
transferred to earnings, £198 million (2007 – £138 million; 2006 – £140
million) was recorded in net interest income and nil (2007 and 2006 – nil)
in other operating income.
|
|
(2)
|
The hedging
instruments in the majority of the Group’s net investment hedges are
foreign currency borrowings, the effectiveness of these hedges is assessed
prospectively (and on an ongoing basis) by comparing expected (actual)
changes in the fair value of the currency net investments in foreign
operations and expected (actual) changes in the fair value of the external
currency liabilities (excluding accrued interest) attributable to changes
in the spot exchange rate between the currency of the investment and
sterling.
|
230
28 Owners’ equity
(continued)
|
Group
|
Company
|
|||||||||||||||||||||||
|
2008
£m
|
2007
£m
|
2006
£m
|
2008
£m
|
2007
£m
|
2006
£m
|
|||||||||||||||||||
|
Retained
earnings
|
||||||||||||||||||||||||
|
At 1
January
|
21,072 | 15,487 | 11,346 | 3,787 | 4,737 | 4,794 | ||||||||||||||||||
|
(Loss)/profit
attributable to ordinary and equity preference
shareholders
|
(23,710 | ) | 7,549 | 6,393 | (9,602 | ) | 2,499 | 3,499 | ||||||||||||||||
|
Ordinary
dividends paid
|
(2,312 | ) | (3,044 | ) | (2,470 | ) | (2,312 | ) | (3,044 | ) | (2,470 | ) | ||||||||||||
|
Equity
preference dividends paid
|
(536 | ) | (246 | ) | (191 | ) | (536 | ) | (246 | ) | (191 | ) | ||||||||||||
|
Paid-in
equity dividends paid, net of tax
|
(60 | ) | — | — | (60 | ) | — | — | ||||||||||||||||
|
Shares
repurchased during the
year
|
— | — | (624 | ) | — | — | (624 | ) | ||||||||||||||||
|
Redemption of
preference shares classified as debt
|
— | (159 | ) | (271 | ) | — | (159 | ) | (271 | ) | ||||||||||||||
|
Transfer from
merger reserve
|
14,273 | — | — | 14,273 | — | — | ||||||||||||||||||
|
Actuarial
(losses)/gains recognised in retirement benefit schemes, net of tax
|
(1,335 | ) | 1,517 | 1,262 | — | — | — | |||||||||||||||||
|
Net cost of
shares bought and used to satisfy share-based payments
|
(19 | ) | (40 | ) | (38 | ) | — | — | ||||||||||||||||
|
Share-based
payments, net of tax
|
169 | 8 | 80 | — | — | — | ||||||||||||||||||
|
At 31
December
|
7,542 | 21,072 | 15,487 | 5,550 | 3,787 | 4,737 | ||||||||||||||||||
|
Own
shares held
|
||||||||||||||||||||||||
|
At 1
January
|
(61 | ) | (115 | ) | (7 | ) | — | — | (7 | ) | ||||||||||||||
|
Shares
purchased during the year
|
(64 | ) | (65 | ) | (254 | ) | — | — | — | |||||||||||||||
|
Shares issued
under employee share schemes
|
21 | 119 | 146 | — | — | 7 | ||||||||||||||||||
|
At 31
December
|
(104 | ) | (61 | ) | (115 | ) | — | — | — | |||||||||||||||
|
Owners’
equity at 31 December
|
58,879 | 53,038 | 40,227 | 44,158 | 24,877 | 18,197 | ||||||||||||||||||
The merger reserve
comprises the premium on shares issued to acquire NatWest less goodwill
amortisation charged under previous GAAP. No share premium was recorded in the
company financial statements through the operation of the merger relief
provisions of the Companies Act 1985.
UK
law prescribes that only the reserves of the company are taken into account for
the purpose of making distributions and in determining the permissible
applications of the share premium account.
The Group optimises
capital efficiency by maintaining reserves in subsidiaries, including regulated
entities. Certain preference shares and subordinated debt are also included
within regulatory capital. The remittance of reserves to the company or the
redemption of shares or subordinated capital by regulated entities may be
subject to maintaining the capital resources required by the relevant
regulator.
At
31 December 2008, 61,165,254 (2007 – 10,474,782) ordinary shares of 25p each of
the company were held by Employee Share Trusts in respect of share awards and
options granted to employees.
Paid-in equity
represents notes issued under the company’s euro medium term note programme with
par value of US$1,600 million and CAD600 million that are classified as equity
under IFRS. The notes attract coupons of 6.99% and 6.666% respectively until
October 2017 when they change to 2.67% above the London interbank offered rate
for 3-month US dollar deposits and 2.76% above the Canadian dollar offered rate
respectively.
Under the
arrangements for the placing and open offer in December 2008, the company issued
shares in exchange for shares in Encuentro Limited. No share premium was
recorded in the company financial statements through the operation of the merger
relief provisions of the Companies Act 1985. The subsequent redemption of these
shares gave rise to distributable profits of £14,273 million which have been
transferred from merger reserve to retained earnings.
231
29 Leases
Minimum amounts
receivable and payable under non-cancellable leases.
|
Group
|
||||||||||||||||
|
Year
in which receipt or payment will occur
|
||||||||||||||||
|
2008
|
Within
1 year
£m
|
After
1 but within 5 years £m
|
After
5 year
£m
|
Total
£m
|
||||||||||||
|
Finance lease
assets:
|
||||||||||||||||
|
Amounts
receivable
|
1,485 | 6,112 | 12,567 | 20,164 | ||||||||||||
|
Present value
adjustment
|
(613 | ) | (2,004 | ) | (3,094 | ) | (5,711 | ) | ||||||||
|
Other
movements
|
(24 | ) | (128 | ) | (341 | ) | (493 | ) | ||||||||
|
Present value
amounts receivable
|
848 | 3,980 | 9,132 | 13,960 | ||||||||||||
|
Operating
lease assets:
|
||||||||||||||||
|
Future
minimum lease receivables
|
918 | 2,479 | 1,141 | 4,538 | ||||||||||||
|
Operating
lease obligations:
|
||||||||||||||||
|
Future
minimum lease payables:
|
||||||||||||||||
|
Premises
|
567 | 1,715 | 3,299 | 5,581 | ||||||||||||
|
Equipment
|
12 | 12 | — | 24 | ||||||||||||
| 579 | 1,727 | 3,299 | 5,605 | |||||||||||||
|
2007
|
||||||||||||||||
|
Finance lease
assets:
|
||||||||||||||||
|
Amounts
receivable
|
1,297 | 4,968 | 11,648 | 17,913 | ||||||||||||
|
Present value
adjustment
|
(390 | ) | (1,766 | ) | (3,187 | ) | (5,343 | ) | ||||||||
|
Other
movements
|
(23 | ) | (144 | ) | (288 | ) | (455 | ) | ||||||||
|
Present value
amounts receivable
|
884 | 3,058 | 8,173 | 12,115 | ||||||||||||
|
Operating
lease assets:
|
||||||||||||||||
|
Future
minimum lease receivables
|
1,073 | 3,046 | 1,473 | 5,592 | ||||||||||||
|
Operating
lease obligations:
|
||||||||||||||||
|
Future
minimum lease payables:
|
||||||||||||||||
|
Premises
|
350 | 1,210 | 3,017 | 4,577 | ||||||||||||
|
Equipment
|
9 | 14 | — | 23 | ||||||||||||
| 359 | 1,224 | 3,017 | 4,600 | |||||||||||||
|
Group
|
||||||||
|
2008
£m
|
2007
£m
|
|||||||
|
Nature
of operating lease assets in balance sheet
|
||||||||
|
Transportation
|
5,883 | 6,859 | ||||||
|
Cars and
light commercial vehicles
|
1,199 | 1,390 | ||||||
|
Other
|
617 | 441 | ||||||
| 7,699 | 8,690 | |||||||
|
Amounts
recognised as income and expense
|
||||||||
|
Finance lease
receivables – contingent rental income
|
(37 | ) | (23 | ) | ||||
|
Operating
lease payables – minimum payments
|
566 | 322 | ||||||
|
Contracts
for future capital expenditure not provided for at the year
end
|
||||||||
|
Operating
leases
|
237 | 545 | ||||||
|
Finance
lease receivables
|
||||||||
|
Unearned
finance income
|
5,711 | 5,343 | ||||||
|
Accumulated
allowance for uncollectible minimum lease receivables
|
96 | 63 | ||||||
232
29 Leases (continued)
Residual
value exposures
The tables below
give details of the unguaranteed residual values included in the carrying value
of finance lease receivables (see page 194) and operating lease assets (see page
208).
|
Year
in which residual value will be recovered
|
||||||||||||||||||||
|
2008
|
Within
1 year
£m
|
After
1 year but within 2 years
£m
|
After
2 years but within 5 years
£m
|
After
5 years
£m
|
Total
£m
|
|||||||||||||||
|
Operating
leases
|
||||||||||||||||||||
|
Transportation
|
794 | 130 | 1,701 | 2,103 | 4,728 | |||||||||||||||
|
Cars and
light commercial vehicles
|
577 | 195 | 182 | 8 | 962 | |||||||||||||||
|
Other
|
112 | 35 | 48 | 8 | 203 | |||||||||||||||
|
Finance
leases
|
24 | 29 | 99 | 341 | 493 | |||||||||||||||
| 1,507 | 389 | 2,030 | 2,460 | 6,386 | ||||||||||||||||
|
2007
|
||||||||||||||||||||
|
Operating
leases
|
||||||||||||||||||||
|
Transportation
|
485 | 253 | 1,762 | 2,505 | 5,005 | |||||||||||||||
|
Cars and
light commercial vehicles
|
331 | 467 | 118 | – | 916 | |||||||||||||||
|
Other
|
26 | 47 | 64 | 18 | 155 | |||||||||||||||
|
Finance
leases
|
23 | 29 | 115 | 288 | 455 | |||||||||||||||
| 865 | 796 | 2,059 | 2,811 | 6,531 | ||||||||||||||||
The Group provides
asset finance to its customers through acting as a lessor. It purchases plant,
equipment and intellectual property, renting them to customers under lease
arrangements that, depending on their terms, qualify as either operating or
finance leases.
Securities
repurchase agreements and lending transactions
The Group enters
into securities repurchase agreements and securities lending transactions under
which it receives or transfers collateral in accordance with normal market
practice. Generally, the agreements require additional collateral to be provided
if the value of the securities falls below a predetermined level.
Under standard
terms for repurchase transactions in the UK and US markets, the recipient of
collateral has an unrestricted right to sell or repledge it, subject to
returning equivalent securities on settlement of the transaction.
The fair value (and
carrying value) of securities transferred under repurchase transactions included
within debt securities on the balance sheet were £80,576 million (2007 –
£107,651 million). All of these securities could be sold or repledged by the
holder. Securities received as collateral under reverse repurchase agreements
amounted to £89.3 billion (2007 – £373.7 billion), of which £49.0 billion (2007
– £337.8 billion) had been resold or repledged as collateral for the Group’s own
transactions.
233
Other
collateral given
|
Group
assets charged as security for liabilities
|
2008
£m
|
2007
£m
|
||||||
|
Loans and
advances to banks
|
13 | 753 | ||||||
|
Loans and
advances to customers
|
118,933 | 80,719 | ||||||
|
Debt
securities
|
15,490 | 29,709 | ||||||
|
Property,
plant and equipment
|
– | 935 | ||||||
|
Other
|
8 | 1,765 | ||||||
| 134,444 | 113,881 |
|
Liabilities
secured by charges on Group assets
|
2008
£m
|
2007
£m
|
||||||
|
Deposits by
banks
|
15,429 | 21,693 | ||||||
|
Customer
accounts
|
11,050 | 6,670 | ||||||
|
Debt
securities in issue
|
58,689 | 65,080 | ||||||
| 85,168 | 93,443 |
Note:
|
(1)
|
The table
above includes assets used as collateral for central bank liquidity
schemes.
|
Of
the assets above, £91.3 billion (2007 – £62.0 billion) relate to
securitisations. In securitisations, debt securities are issued that are secured
on assets of the Group: the rights to the cash flows from those assets are
transferred to special purpose vehicles which issue debt securities. The holders
of the notes are generally not able to sell or repledge the underlying assets.
The remaining balances mainly relate to assets charged as security against
deposits from central and federal banks and other public sector
bodies.
Securitisations
and other asset transfers
Continued
recognition
The table below
sets out the asset categories together with the carrying amounts of the assets
and associated liabilities for those securitisations and other asset transfers
where substantially all the risks and rewards of the asset have been retained by
the Group.
|
2008
|
2007
|
|||||||||||||||
|
Asset
type
|
Assets
£m
|
Liabilities
£m
|
Assets
£m
|
Liabilities
£m
|
||||||||||||
|
Residential
mortgages
|
49,184 | 20,075 | 23,652 | 23,436 | ||||||||||||
|
Credit card
receivables
|
3,004 | 3,197 | 2,948 | 2,664 | ||||||||||||
|
Other
loans
|
1,679 | 1,071 | 1,703 | 1,149 | ||||||||||||
|
Commercial
paper conduits
|
36,395 | 35,835 | 32,613 | 31,193 | ||||||||||||
|
Finance lease
receivables
|
1,077 | 857 | 1,038 | 823 | ||||||||||||
| 91,339 | 61,035 | 61,954 | 59,265 | |||||||||||||
Continuing
involvement
At
31 December 2008, securitised assets were £1.1 billion (2007 – £18.1 billion);
retained interest £50 million (2007 – £1,037 million); subordinated assets £9
million (2007 – £314 million); and related liabilities £9 million (2007 – £314
million).
234
The Group’s
regulatory capital resources at 31 December in accordance with Financial
Services Authority (FSA) definitions were as follows:
|
Composition
of regulatory capital
|
Basel
II
2008
£m
|
Basel
I
2007
£m
|
||||||
|
Tier
1:
|
||||||||
|
Ordinary
shareholders’ equity
|
45,525 | 44,684 | ||||||
|
Minority
interests
|
21,619 | 38,388 | ||||||
|
Adjustment
for:
|
||||||||
|
– Goodwill
and other intangible assets
|
(20,049 | ) | (48,492 | ) | ||||
|
– Goodwill
and other intangible assets of discontinued businesses
|
– | (3,232 | ) | |||||
|
– Unrealised
losses on available-for-sale debt securities
|
3,687 | 630 | ||||||
|
– Reserves
arising on revaluation of property and unrealised gains on
available-for-sale equities
|
(984 | ) | (3,321 | ) | ||||
|
–
Reallocation of preference shares and innovative
securities
|
(1,813 | ) | (1,813 | ) | ||||
|
– Other
regulatory adjustments
|
(362 | ) | 480 | |||||
|
Core Tier 1
capital
|
47,623 | 27,324 | ||||||
|
Preference
shares
|
16,655 | 10,560 | ||||||
|
Innovative
Tier 1 securities
|
7,383 | 6,480 | ||||||
|
Tax on the
excess of expected losses over provisions
|
615 | n/a | ||||||
|
Tier 1
deductions
|
(2,429 | ) | n/a | |||||
|
Total Tier 1
capital
|
69,847 | 44,364 | ||||||
|
Tier
2:
|
||||||||
|
Reserves
arising on revaluation of property and unrealised gains on
available-for-sale equities
|
984 | 3,321 | ||||||
|
Collective
impairment allowances
|
666 | 2,582 | ||||||
|
Perpetual
subordinated debt
|
9,829 | 9,042 | ||||||
|
Term
subordinated debt
|
23,162 | 18,639 | ||||||
|
Minority and
other interests in Tier 2 capital
|
11 | 109 | ||||||
|
Tier 2
deductions
|
(2,429 | ) | n/a | |||||
|
Total Tier 2
capital
|
32,223 | 33,693 | ||||||
|
Tier
3
|
260 | 200 | ||||||
|
Supervisory
deductions:
|
||||||||
|
Unconsolidated
investments
|
4,044 | 4,297 | ||||||
|
Other
deductions
|
111 | 5,986 | ||||||
|
Total
deductions other than from Tier 1 capital
|
4,155 | 10,283 | ||||||
|
Total
regulatory capital
|
98,175 | 67,974 | ||||||
It
is the Group’s policy to maintain a strong capital base, to expand it as
appropriate and to utilise it efficiently throughout its activities to optimise
the return to shareholders while maintaining a prudent relationship between the
capital base and the underlying risks of the business. In carrying out this
policy, the Group has regard to the supervisory requirements of the FSA. The FSA
uses Risk Asset Ratio (RAR) as a measure of capital adequacy for UK banks,
comparing a bank’s capital resources with its risk-weighted assets (the assets
and off-balance sheet exposures are ‘weighted’ to reflect the inherent credit
and other risks); by international agreement, the RAR should be not less than 8%
with a Tier 1 component of not less than 4%. The Group has complied with the
FSAs capital requirements throughout the year.
A
number of subsidiaries and sub-groups within the Group, principally banking and
insurance entities, are subject to various individual regulatory capital
requirements in the UK and overseas.
235
32 Memorandum
items
Contingent
liabilities and commitments
The amounts shown
in the table below are intended only to provide an indication of the volume of
business outstanding at 31 December. Although the Group is exposed to credit
risk in the event of non-performance of the obligations undertaken by customers,
the amounts shown do not, and are not intended to, provide any indication of the
Group’s expectation of future losses.
|
Group
|
||||||||||||||||||||||||
|
Less
than 1 year
£m
|
More
than 1 year but less than 3 years
£m
|
More
than 3 years but less than 5 years
£m
|
Over
5 years
£m
|
2008 £m |
2007 £m |
|||||||||||||||||||
|
Contingent
liabilities:
|
||||||||||||||||||||||||
|
Guarantees
and assets pledged as collateral security
|
29,350 | 7,738 | 2,898 | 9,276 | 49,262 | 46,441 | ||||||||||||||||||
|
Other
contingent liabilities
|
9,093 | 6,637 | 2,252 | 4,293 | 22,275 | 15,479 | ||||||||||||||||||
| 38,443 | 14,375 | 5,150 | 13,569 | 71,537 | 61,920 | |||||||||||||||||||
|
Commitments:
|
||||||||||||||||||||||||
|
Undrawn
formal standby facilities, credit lines and other commitments to
lend
|
||||||||||||||||||||||||
|
– less than
one year
|
166,572 | – | – | – | 166,572 | 181,914 | ||||||||||||||||||
|
– one year
and over
|
22,209 | 70,301 | 62,725 | 30,591 | 185,826 | 150,897 | ||||||||||||||||||
|
Other
commitments
|
6,715 | 309 | 1,210 | 1,092 | 9,326 | 5,368 | ||||||||||||||||||
| 195,496 | 70,610 | 63,935 | 31,683 | 361,724 | 338,179 | |||||||||||||||||||
Banking commitments
and contingent obligations, which have been entered into on behalf of customers
and for which there are corresponding obligations from customers, are not
included in assets and liabilities. The Group’s maximum exposure to credit loss,
in the event of non-performance by the other party and where all counterclaims,
collateral or security proves valueless, is represented by the contractual
nominal amount of these instruments included in the table above. These
commitments and contingent obligations are subject to the Group’s normal credit
approval processes.
Contingent
liabilities
Guarantees – the
Group gives guarantees on behalf of customers. A financial guarantee represents
an irrevocable undertaking that the Group will meet a customer’s obligations to
third parties if the customer fails to do so. The maximum amount that the Group
could be required to pay under a guarantee is its principal amount as disclosed
in the table above. The Group expects most guarantees it provides to expire
unused.
Other contingent
liabilities – these include standby letters of credit, supporting customer debt
issues and contingent liabilities relating to customer trading activities such
as those arising from performance and customs bonds, warranties and
indemnities.
Commitments
Commitments to lend
– under a loan commitment the Group agrees to make funds available to a customer
in the future. Loan commitments, which are usually for a specified term may be
unconditionally cancellable or may persist, provided all conditions in the loan
facility are satisfied or waived. Commitments to lend include commercial standby
facilities and credit lines, liquidity facilities to commercial paper conduits
and unutilised overdraft facilities.
Other commitments –
these include documentary credits, which are commercial letters of credit
providing for payment by the Group to a named beneficiary against presentation
of specified documents, forward asset purchases, forward deposits placed and
undrawn note issuance and revolving underwriting facilities, and other
short-term trade related transactions.
Trustee
and other fiduciary activities
In
its capacity as trustee or other fiduciary role, the Group may hold or place
assets on behalf of individuals, trusts, companies, pension schemes and others.
The assets and their income are not included in the Group’s financial
statements. The Group earned fee income of £1,442 million (2007 – £695 million;
2006 – £472 million) from these activities.
The
Financial Services Compensation Scheme
The Financial
Services Compensation Scheme (FSCS), the UK's statutory fund of last resort for
customers of authorised financial services firms, pays compensation if a firm is
unable to meet its obligations. The FSCS funds compensation for customers by
raising management expenses levies and compensation levies on the industry. In
relation to protected deposits, each deposit-taking institution contributes
towards these levies in proportion to their share of total protected deposits on
31 December of the year preceding the scheme year (which runs from 1 April to 31
March), subject to annual maxima set by the Financial Services Authority (FSA).
In addition, the FSCS has the power to raise levies (‘exit levies’) on firms who
have ceased to participate in the scheme and are in the process of ceasing to be
authorised for the amount that the firm would otherwise have been asked to pay
during the relevant levy year. The FSCS also has the power to raise exit levies
on such firms which look at their potential liability to pay levies in future
years.
FSCS has borrowed
from HM Treasury to fund the compensation costs associated with Bradford &
Bingley, Heritable Bank, Kaupthing Singer & Friedlander, Landsbanki
‘Icesave’ and London Scottish Bank plc. These borrowings are on an interest-only
basis until September 2011. The annual limit on the FSCS management expenses
levy for the three years from September 2008 in relation to these institutions
has been capped at £1 billion per annum.
The FSCS will
receive funds from asset sales, surplus cash flow, or other recoveries in
relation to these institutions which will be used to reduce the principal amount
of the FSCS's borrowings. Only after the interest only period, which is expected
to end in September 2011, will a schedule
236
32 Memorandum
items (continued)
for repayment of
any remaining principal outstanding (after recoveries) on the borrowings be
agreed between the FSCS and HM Treasury. It is expected that, from that point,
the FSCS will begin to raise compensation levies (principal repayments). No
provision has been made for these levies as the amount is not yet known and is
unlikely to be determined before 2011.
The Group has
accrued £150 million for its share of FSCS management expenses levies for the
2008/9 and 2009/10 scheme years.
Investigations
The Group’s
businesses and financial condition can be affected by the fiscal or other
policies and other actions of various governmental and regulatory authorities in
the United Kingdom, the European Union, the United States and
elsewhere.
The Group has
engaged, and will continue to engage, in discussions with relevant regulators,
including in the United Kingdom and the United States, on an ongoing and regular
basis informing them of operational, systems and control evaluations and issues
as deemed appropriate or required and it is possible that any matters discussed
or identified may result in investigatory actions by the regulators, increased
costs being incurred by the Group, remediation of systems and controls, public
or private censure or fines. Any of these events or circumstances could have a
material adverse impact on the Group its business, reputation, results of
operations or share price.
There is continuing
political and regulatory scrutiny of the operation of the retail banking and
consumer credit industries in the United Kingdom and elsewhere. The nature and
impact of future changes in policies and regulatory action are not predictable
and are beyond the Group’s control but could have an adverse impact on the
Group’s businesses and earnings.
European
Union
In
the European Union, regulatory actions included an inquiry into retail banking
in all of the then 25 member states by the European Commission’s Directorate
General for Competition. The inquiry examined retail banking in Europe
generally. On 31 January 2007, the European Commission announced that barriers
to competition in certain areas of retail banking, payment cards and payment
systems in the European Union had been identified. The European Commission
indicated that it will consider using its powers to address these barriers and
will encourage national competition authorities to enforce European and national
competition laws where appropriate.
In
2007, the European Commission issued a decision that, while interchange is not
illegal per se, MasterCard’s current multilateral interchange fee (MIF)
arrangement for cross border payment card transactions with MasterCard and
Maestro-branded consumer credit and debit cards in the European Union are in
breach of competition law. MasterCard was required by the decision to withdraw
the relevant cross border MIFs by 21 June 2008. MasterCard lodged an appeal
against the decision with the European Court of First Instance on 1 March 2008,
and on 12 June 2008 it announced that it would be temporarily withdrawing its
cross border MIF, pending the outcome of the appeal. The Group has been granted
leave to intervene in the appeal proceedings. Visa’s MIFs were exempted in 2002
by the European Commission for a period of five years up to 31 December 2007
subject to certain conditions. On 26 March 2008, the European Commission opened
a formal inquiry into Visa’s current MIF arrangements for cross border payment
card transactions with Visa-branded debit and consumer credit cards in the
European Union. There is no deadline for the closure of the
inquiry.
United
Kingdom
In
the United Kingdom, in September 2005, the Office of Fair Trading (OFT) received
a super-complaint from the Citizens Advice Bureau relating to payment protection
insurance (PPI). As a result, the OFT commenced a market study on PPI in April
2006. In October 2006, the OFT announced the outcome of the market study and, on
7 February 2007, following a period of consultation, the OFT referred the PPI
market to the Competition Commission (CC) for an in-depth inquiry. The CC
published its final report on 29 January 2009. It found a lack of competition in
the PPI market as a result of various factors, including a lack of transparency
and barriers to entry for standalone providers. The CC will therefore impose by
Order a range of remedies, including a prohibition on actively selling PPI at
point of sale of the credit product (and for 7 days thereafter), a ban on single
premium policies and other measures to increase transparency (in order to
improve customers’ ability to search and improve price competition). The
deadline for implementation will be 2010.
The FSA has been
conducting a broad industry thematic review of PPI sales practices and in
September 2008 announced that it intends to escalate its level of regulatory
intervention. The FSA is expected to publish a further update in 2009.
Substantial numbers of customer complaints alleging the mis-selling of PPI
policies have been made to banks and to the Financial Ombudsman Service (FOS)
and many of these are being upheld by the FOS against the banks. Discussions
continue between the FSA, the FOS and industry bodies on how best to handle
these complaints. Separately, discussions are ongoing between the FSA and the
Group in respect of concerns expressed by the FSA over certain categories of
historic PPI sales.
The OFT has carried
out investigations into Visa and MasterCard domestic credit card interchange
rates. The decision by the OFT in the MasterCard interchange case was set aside
by the Competition Appeals Tribunal in June 2006. The OFT’s investigations in
the Visa interchange case and a second MasterCard interchange case are ongoing.
The outcome is not known, but these investigations may have an impact on the
consumer credit industry in general and, therefore, on the Group’s business in
this sector. On 9 February 2007, the OFT announced that it was expanding its
investigation into domestic interchange rates to include debit
cards.
On
29 March 2007, the OFT announced that, following an initial review into bank
current account charges, it had decided to conduct a market study into personal
current accounts in the United Kingdom and a formal investigation into the
fairness of bank current account charges.
237
On
16 July 2008, the OFT published the results of its market study into personal
current accounts in the United Kingdom. The OFT found evidence of competition
and several positive features in the personal current account market but
believes that the market as a whole is not working well for consumers and that
the ability of the market to function well has become distorted. The OFT is
currently consulting with the banking industry, consumer groups and interested
parties on its report. After this consultation the OFT will decide on next
steps, which could include further discussions or agreed remedies with the
industry, or possibly a reference of the market to the CC.
The OFT’s
investigation into the fairness of bank current account charges is ongoing. On
12 August 2008, the OFT indicated to the Group and other banks that, although it
had not concluded its investigation and had reached no final view, it had
serious concerns that contractual terms relating to Relevant Charges in personal
current account agreements were unfair under the Regulations. The OFT is
currently consulting with the Group and other banks on this issue. Given the
stage of the investigation, the Group cannot reliably estimate the impact of any
adverse outcome of the OFT’s market study or investigation upon it, if any.
However, the Group is co-operating fully with the OFT to achieve resolution of
the matters under investigation.
On
26 January 2007, the FSA issued a Statement of Good Practice relating to
Mortgage Exit Administration Fees. On 1 March 2007, the Group adopted a policy
of charging all customers the fee applicable at the time the customers took out
the mortgage or, if later, varied their mortgage. The Group believes that it is
currently in compliance with the Statement of Good Practice and will continue to
monitor its performance against those standards.
United
States
In
July 2004, ABN AMRO signed a written agreement with the US regulatory
authorities concerning ABN AMRO’s dollar clearing activities in the New York
branch. In addition, in December 2005, ABN AMRO agreed to a Cease and Desist
Order with the Dutch Central Bank and various US federal and state regulators.
This involved an agreement to pay an aggregate civil penalty of US$75 million
and a voluntary endowment of US$5 million in connection with deficiencies in the
US dollar clearing operations at ABN AMRO’s New York branch and OFAC compliance
procedures regarding transactions originating at its Dubai branch. ABN AMRO and
members of ABN AMRO’s management continue to provide information to law
enforcement authorities in connection with ongoing criminal investigations
relating to ABN AMRO’s dollar clearing activities, OFAC compliance procedures
and other Bank Secrecy Act compliance matters. The Cease and Desist Order with
the Dutch Central Bank was lifted on 26 July 2007 and the Cease and Desist Order
agreed with the US authorities was lifted on 9 September 2008. Although no
written agreement has yet been reached and negotiations are ongoing, ABN AMRO
has reached an agreement in principle with the US Department of Justice that
would resolve all presently known aspects of the ongoing investigation. Under
the terms of the agreement in principle, ABN AMRO and the United States would
enter into a deferred prosecution agreement in which ABN AMRO would waive
indictment and agree to the filing of information in the United States District
Court charging it with certain violations of federal law based on information
disclosed in an agreed factual statement. ABN AMRO would also agree to continue
co-operating in the United States’ ongoing investigation and to settle all known
civil and criminal claims currently held by the United States for the sum of
US$500 million. The precise terms of the deferred prosecution agreement are
still under negotiation.
These compliance
issues and the related sanctions and investigations have had, and will continue
to have, an impact on ABN AMRO’s operations in the United States, including
limitations on expansion. ABN AMRO is actively exploring all possible options to
resolve these issues. The ultimate resolution of these compliance issues and
related investigations and the nature and severity of possible additional
sanctions cannot be predicted.
The New York State
Attorney General has issued subpoenas to a wide array of participants in the
sub-prime mortgage industry, including mortgage originators, appraisers, due
diligence firms, investment banks and rating agencies, focusing on the
information underwriters obtained as part of the due diligence process from the
independent due diligence firms and whether that information is adequately
disclosed to investors. RBS Greenwich Capital has produced documents requested
by the New York State Attorney General principally related to sub-prime loans
that were pooled into one securitisation transaction.
In
addition to the above, certain of the Group’s subsidiaries have received
requests for information from various US governmental agencies and
self-regulatory organisations including in connection with sub-prime mortgages
and securitisations, collateralised debt obligations and synthetic products
related to sub-prime mortgages. In particular, during March 2008, the Group was
advised by the SEC that it had commenced a non-public, formal investigation
relating to the Group’s US sub-prime securities exposures and US residential
mortgage exposures. The Group and its subsidiaries are co-operating with these
various requests for information and investigations.
Litigation
United
Kingdom
In
common with other banks in the United Kingdom, the Royal Bank and NatWest have
received claims and complaints from a large number of customers challenging
unarranged overdraft charges (the ‘Charges’) as contravening the Unfair Terms in
Consumer Contracts Regulations 1999 (the ‘Regulations’) or being unenforceable
penalties (or both).
On
27 July 2007, the OFT issued proceedings in a test case against the banks which
was intended to determine certain preliminary issues concerning the legal status
and enforceability of contractual terms relating to the Charges. Because of the
test case, most existing and new claims in the County Courts are currently
stayed, the FSA temporarily waived the customer complaints-handling process and
there is a standstill of Financial Ombudsman Service decisions.
238
32 Memorandum
items (continued)
A
High Court judgment in April 2008 addressed preliminary issues in respect of the
banks’ contractual terms relating to the Charges in force in early 2008 (the
‘Current Terms’). The judgment held that the Current Terms used by the Royal
Bank and NatWest (i) are not unenforceable as penalties, but (ii) are not exempt
from assessment for fairness under the Regulations. The Group (in common with
the other banks) has accepted that the ruling in the April judgment that the
Current Terms are not exempt from assessment for fairness applies also to a
sample of the Royal Bank and NatWest contractual terms relating to the Charges
in force between 2001 and 2007 (the ‘Historic Terms’). The High Court made an
order to this effect in October 2008.
The Group and the
other banks have appealed against the rulings in April and October 2008 that the
Current Terms and Historic Terms are not exempt from assessment for fairness
under the Regulations. The hearing of the appeal in relation to Current Terms
took place before the Court of Appeal in October and November 2008. The decision
of the Court of Appeal is expected shortly. The appeal in relation to the
Historic Terms is stayed pending the resolution of the appeal in relation to the
Current Terms.
High Court
judgments on further preliminary issues were handed down in October 2008 and
January 2009. These judgments primarily addressed the question of whether
certain Historic Terms were capable of being unenforceable penalties. The Judge
decided that all of the Royal Bank’s and most of NatWest’s Historic Terms were
not penalties, but that a term contained in a set of NatWest 2001 terms and
conditions was a contractual prohibition against using a card to obtain an
unarranged overdraft. The Judge did not decide whether any charge payable upon a
breach of this prohibition was a penalty. The Group has not appealed that
decision.
The issues relating
to the legal status and enforceability of the Charges are complex. The Group
maintains that its Charges are fair and enforceable and believes that it has a
number of substantive and credible defences. The Group cannot at this stage
predict with any certainty the final outcome of the customer claims and
complaints, the appeals referred to above and any further stages of the test
case. It is unable reliably to estimate the liability, if any, that may arise as
a result of or in connection with these matters or its effect on the Group’s
consolidated net assets, operating results or cash flows in any particular
period.
United
States
Proceedings,
including consolidated class actions on behalf of former Enron securities
holders, have been brought in the United States against a large number of
defendants, including the Group, following the collapse of Enron. The claims
against the Group could be significant; the class plaintiff’s position is that
each defendant is responsible for an entire aggregate damage amount less
settlements – they have not quantified claimed damages against the Group in
particular. The Group considers that it has substantial and credible legal and
factual defences to these claims and will continue to defend them vigorously.
Recent decisions by the US Supreme Court and the US Federal Court for the Fifth
Circuit provide further support for the Group’s position. The Group is unable
reliably to estimate the liability, if any, that might arise or its effect on
the Group’s consolidated net assets, operating results or cash flows in any
particular period.
Group companies
have been named as defendants in a number of purported class action and other
lawsuits in the United States that relate to the sub-prime mortgage business. In
general, the cases involve the issuance of sub-prime-related securities or the
issuance of shares in companies with sub-prime-related exposure, where the
plaintiffs have brought actions against the issuers and underwriters (including
Group companies) of such securities claiming that certain disclosures made in
connection with the relevant offerings of such securities were false or
misleading. The Group considers that it has substantial and credible legal and
factual defences to these claims and will continue to defend them vigorously.
The Group does not currently expect that these lawsuits, individually or in the
aggregate, will have a material impact on its consolidated net assets, operating
results or cash flows in any particular period.
The company and a
number of its subsidiaries and certain individual officers and directors have
been named as defendants in a number of class action complaints filed in the
United States District Court for the
Southern District of New York. The complaints allege that public filings in
connection with the issuance of non-cumulative dollar preference shares, ADS,
including Series Q, Series R, Series S and Series T, contained false and
misleading statements, and variously assert claims under Sections 11, 12 and 15
of the Securities Act 1933, Section 10 of the Securities Exchange Act of 1934
and SEC Rule 10b-5. Plaintiffs seek unquantified damages on behalf of purchasers
of these shares. The proceedings are in their initial stages. The Group
considers that it has substantial and credible legal and factual defences to
these claims and will defend them vigorously. The Group is unable reliably to
estimate the liability, if any, that might arise or its effect on the Group’s
consolidated net assets, operating results or cash flows in any particular
period.
Other
disputes, legal proceedings and litigation
Members of the
Group are engaged in other litigation in the United Kingdom and a number of
overseas jurisdictions, including the United States, involving claims by and
against them arising in the ordinary course of business. The Group has reviewed
these other actual, threatened and known potential claims and proceedings and,
after consulting with its legal advisers, does not expect that the outcome of
these other claims and proceedings will have a material adverse effect on its
consolidated net assets, operating results or cash flows in any particular
period.
239
|
Group
|
Company
|
|||||||||||||||||||||||
|
2008
£m
|
2007
£m
|
2006
£m
|
2008
£m
|
2007
£m
|
2006
£m
|
|||||||||||||||||||
|
Operating
(loss)/profit before tax
|
(40,836 | ) | 9,832 | 9,186 | (10,017 | ) | 2,372 | 3,486 | ||||||||||||||||
|
Operating
profit before tax on discontinued activities
|
4,208 | 68 | — | — | — | — | ||||||||||||||||||
|
(Increase)/decrease
in prepayments and accrued income
|
(921 | ) | (662 | ) | 322 | — | (1 | ) | — | |||||||||||||||
|
Interest on
subordinated liabilities
|
2,144 | 1,518 | 1,386 | 499 | 470 | 520 | ||||||||||||||||||
|
Increase/(decrease)
in accruals and deferred income
|
3,961 | (818 | ) | 515 | 7 | — | (27 | ) | ||||||||||||||||
|
Provisions
for impairment losses
|
8,072 | 1,968 | 1,877 | — | — | — | ||||||||||||||||||
|
Loans and
advances written-off net of recoveries
|
(2,829 | ) | (1,669 | ) | (1,626 | ) | — | — | — | |||||||||||||||
|
Unwind of
discount on impairment losses
|
(194 | ) | (164 | ) | (142 | ) | — | — | — | |||||||||||||||
|
Profit on
sale of property, plant and equipment
|
(167 | ) | (741 | ) | (216 | ) | — | — | — | |||||||||||||||
|
Profit on
sale of subsidiaries and associates
|
(943 | ) | (67 | ) | (44 | ) | (487 | ) | — | — | ||||||||||||||
|
Profit on
sale of securities
|
(342 | ) | (544 | ) | (369 | ) | — | — | — | |||||||||||||||
|
Charge for
defined benefit pension schemes
|
490 | 489 | 580 | — | — | — | ||||||||||||||||||
|
Cash
contribution to defined benefit pension schemes
|
(810 | ) | (599 | ) | (536 | ) | — | — | — | |||||||||||||||
|
Other
provisions utilised
|
(32 | ) | (211 | ) | (42 | ) | — | — | — | |||||||||||||||
|
Depreciation
and amortisation
|
3,154 | 1,932 | 1,678 | — | — | — | ||||||||||||||||||
|
Write down of
goodwill and other intangible assets
|
32,581 | — | — | — | — | — | ||||||||||||||||||
|
Write down of
investment in subsidiaries
|
— | — | — | 14,321 | — | — | ||||||||||||||||||
|
Elimination
of foreign exchange differences
|
(41,874 | ) | (10,282 | ) | 4,516 | 1,778 | (58 | ) | (22 | ) | ||||||||||||||
|
Elimination
of non-cash items on discontinued activities
|
592 | 62 | — | — | — | — | ||||||||||||||||||
|
Other
non-cash items
|
2,167 | (327 | ) | (1,395 | ) | 2 | 2 | 45 | ||||||||||||||||
|
Net cash
(outflow)/inflow from trading activities
|
(31,579 | ) | (215 | ) | 15,690 | 6,103 | 2,785 | 4,002 | ||||||||||||||||
|
(Increase)/decrease
in loans and advances to banks and customers
|
(5,469 | ) | (90,829 | ) | (44,525 | ) | (15,542 | ) | (8 | ) | 346 | |||||||||||||
|
Decrease/(increase)
in securities
|
75,964 | (26,167 | ) | (16,703 | ) | — | — | — | ||||||||||||||||
|
(Increase)/decrease
in other assets
|
(5,845 | ) | (384 | ) | 671 | (73 | ) | — | 2 | |||||||||||||||
|
(Increase)/decrease
in derivative assets
|
(708,607 | ) | (88,948 | ) | (18,616 | ) | (995 | ) | (173 | ) | 55 | |||||||||||||
|
Changes in
operating assets
|
(643,957 | ) | (206,328 | ) | (79,173 | ) | (16,610 | ) | (181 | ) | 403 | |||||||||||||
|
(Decrease)/increase
in deposits by banks and customers
|
(78,166 | ) | 81,645 | 63,091 | (4,064 | ) | 4,677 | (164 | ) | |||||||||||||||
|
(Decrease)/increase
in insurance liabilities
|
(186 | ) | 2,706 | 244 | — | — | — | |||||||||||||||||
|
Increase/(decrease)
in debt securities in issue
|
27,222 | 59,735 | (4,457 | ) | (1,794 | ) | 10,936 | (803 | ) | |||||||||||||||
|
(Decrease)/increase
in other liabilities
|
(8,869 | ) | (1,036 | ) | 935 | 32 | (7 | ) | 14 | |||||||||||||||
|
Increase in
derivative liabilities
|
699,601 | 83,466 | 19,272 | 182 | 137 | 42 | ||||||||||||||||||
|
(Decrease)/increase
in settlement balances and short positions
|
(37,864 | ) | 8,073 | 4,068 | — | — | — | |||||||||||||||||
|
Changes in
operating liabilities
|
601,738 | 234,589 | 83,153 | (5,644 | ) | 15,743 | (911 | ) | ||||||||||||||||
|
Total income
taxes (paid)/received
|
(1,540 | ) | (2,442 | ) | (2,229 | ) | 119 | 6 | 154 | |||||||||||||||
|
Net cash
(outflow)/inflow from operating activities
|
(75,338 | ) | 25,604 | 17,441 | (16,032 | ) | 18,353 | 3,648 | ||||||||||||||||
240
(a)
Acquisition of ABN AMRO
On
17 October 2007, the Group, through its subsidiary RFS Holdings B.V. (RFS),
acquired 99% of the ordinary shares of ABN AMRO Holding N.V., the holding
company of a major European banking group based in the Netherlands with
subsidiaries that undertake commercial banking operations, investment banking
and other related financial activities. During 2008, RFS acquired the remaining
1 % of the ordinary shares of ABN AMRO.
The provisional
fair values of ABN AMRO’s assets and liabilities at the date of acquisition were
finalised as follows:
|
Pre-acquisition
carrying amounts
£m
|
Disposal groups(1)
£m
|
Provisional fair value
adjustments(2)
£m
|
Amendments
to provisional fair value adjustments
£m
|
Recognised acquisition
values(2)
£m
|
||||||||||||||||
|
Cash and
balances at central banks
|
7,263 | (186 | ) | — | — | 7,077 | ||||||||||||||
|
Loans and
advances to banks
|
120,120 | (3,646 | ) | — | — | 116,474 | ||||||||||||||
|
Loans and
advances to customers
|
314,287 | (26,158 | ) | (1,843 | ) | (699 | ) | 285,587 | ||||||||||||
|
Treasury and
other eligible bills and debt and equity securities
|
166,018 | (3,804 | ) | — | — | 162,214 | ||||||||||||||
|
Derivatives
|
86,695 | (322 | ) | — | — | 86,373 | ||||||||||||||
|
Intangible
assets
|
4,239 | (3,522 | ) | 4,282 | 788 | 5,787 | ||||||||||||||
|
Property,
plant and equipment
|
2,062 | (747 | ) | 175 | (5 | ) | 1,485 | |||||||||||||
|
Other
assets
|
32,710 | (7 | ) | 1,357 | (180 | ) | 33,880 | |||||||||||||
|
Assets of
disposal groups(1)
|
2,987 | 38,392 | 787 | (98 | ) | 42,068 | ||||||||||||||
|
Deposits by
banks
|
(160,906 | ) | 2,808 | (321 | ) | 322 | (158,097 | ) | ||||||||||||
|
Customer
accounts
|
(253,583 | ) | 13,786 | (152 | ) | 2 | (239,947 | ) | ||||||||||||
|
Debt
securities in issue
|
(134,630 | ) | 5,937 | 776 | (551 | ) | (128,468 | ) | ||||||||||||
|
Settlement
balances and short positions
|
(44,748 | ) | 36 | — | — | (44,712 | ) | |||||||||||||
|
Derivatives
|
(85,491 | ) | 417 | — | — | (85,074 | ) | |||||||||||||
|
Subordinated
liabilities
|
(11,748 | ) | 868 | 685 | (61 | ) | (10,256 | ) | ||||||||||||
|
Other
liabilities
|
(21,268 | ) | 271 | (1,814 | ) | (114 | ) | (22,925 | ) | |||||||||||
|
Liabilities
of disposal groups (1)
|
(2,377 | ) | (24,123 | ) | – | – | (26,500 | ) | ||||||||||||
|
Net
identifiable assets and liabilities
|
21,630 | – | 3,932 | (596 | ) | 24,966 | ||||||||||||||
|
Minority
interests
|
(242 | ) | ||||||||||||||||||
|
Goodwill on
acquisition
|
23,851 | |||||||||||||||||||
|
Consideration
|
48,575 | |||||||||||||||||||
|
Satisfied
by:
|
||||||||||||||||||||
|
Issue of 531
million ordinary shares of the company
|
2,719 | |||||||||||||||||||
|
Cash
|
45,786 | |||||||||||||||||||
|
Fees and
expenses relating to the acquisition
|
70 | |||||||||||||||||||
|
Consideration
|
48,575 | |||||||||||||||||||
|
Net
cash:
|
||||||||||||||||||||
|
Cash
consideration
|
45,856 | |||||||||||||||||||
|
Cash
acquired
|
(60,093 | ) | ||||||||||||||||||
| 14,237 | ||||||||||||||||||||
Notes:
|
(1)
|
Banca
Antonveneta SpA. and ABN AMRO’s asset management business were identified
as disposal groups on the acquisition of ABN AMRO and sold during 2008. In
addition, under the terms of the Consortium and Shareholders’ Agreement,
consortium members other than the Group agreed to acquire, in due course,
various ABN AMRO businesses including operations in Brazil (sold 1 Juy
2008), the commercial and retail businesses in the Netherlands, the
private clients business and
Interbanca.
|
|
(2)
|
The initial
accounting for the acquisition was determined provisionally at 31 December
2007 because of its complexity and the limited time available between the
acquisition and the preparation of the 2007 financial statements. The
principal adjustments, excluding reclassifications, on finalising fair
values were:
|
|
(a)
|
The Group’s
methodology for calculating the fair value of trading financial
instruments produced values lower by £524 million than those recorded by
ABN AMRO;
|
|
(b)
|
Following
further work on identifying intangible assets, additional customer
relationship assets and core deposit intangibles of £724 million have been
recognised;
|
|
(c)
|
Net assets of
the Netherlands pension scheme have been reduced by £250
million.
|
241
|
(d)
|
The fair value
of private equity investments was reduced by £98 million based on
additional evidence provided by disposals in
2008;
|
|
(e)
|
The liability
for instruments issued by conduits should be increased by £366
million;
|
No
material change was required to the deferred tax effect of fair value
adjustments.
It
is estimated that the Group would have reported total income of £37.2 billion
and profit after tax of £7.7 billion from continuing operations for the year
ended 31 December 2007 had all acquisitions occurred on 1 January 2007. These
results would not have been materially affected by the finalisation of fair
values.
242
(b) Other
acquisitions and disposals
|
Group
|
||||||||||||
|
2008
£m
|
2007
£m
|
2006
£m
|
||||||||||
|
Fair value
given for businesses acquired
|
(1,810 | ) | (280 | ) | (21 | ) | ||||||
|
Cash and cash
equivalents acquired
|
— | 5 | — | |||||||||
|
Non-cash
consideration
|
(17 | ) | — | — | ||||||||
|
Net outflow
of cash in respect of purchases
|
(1,827 | ) | (275 | ) | (21 | ) | ||||||
|
Cash and cash
equivalents in businesses sold
|
— | 21 | 229 | |||||||||
|
Other assets
sold
|
739 | 16 | 36 | |||||||||
|
Non-cash
consideration
|
(103 | ) | (2 | ) | (1 | ) | ||||||
|
Profit on
disposal
|
943 | 67 | 44 | |||||||||
|
Net inflow of
cash in respect of disposals
|
1,579 | 102 | 308 | |||||||||
|
Dividends
received from joint ventures
|
89 | 11 | 29 | |||||||||
|
Cash
expenditure on intangible assets
|
2,411 | (435 | ) | (379 | ) | |||||||
|
Net
outflow
|
2,252 | (597 | ) | (63 | ) | |||||||
The Group’s
reported result from continuing operations for the year would not have been
materially affected had all acquisitions occurred on 1 January 2008. The profit
on disposal arises on the sales of Angel Trains, Tesco Personal Finance and the
European Consumer Finance business during the year.
|
Group
|
Company
|
|||||||||||||||||||||||
|
2008
£m
|
2007
£m
|
2006
£m
|
2008
£m
|
2007
£m
|
2006
£m
|
|||||||||||||||||||
|
Interest
received
|
52,393 | 31,552 | 24,381 | 794 | 457 | 594 | ||||||||||||||||||
|
Interest
paid
|
(31,614 | ) | (18,407 | ) | (14,656 | ) | (1,325 | ) | (746 | ) | (632 | ) | ||||||||||||
| 20,779 | 13,145 | 9,725 | (531 | ) | (289 | ) | (38 | ) | ||||||||||||||||
243
|
Group
|
Company
|
|||||||||||||||||||||||||||||||
|
Share
capital, share premium, paid-in equity and merger
reserve
|
Subordinated
liabilities
|
Share
capital, share premium, paid-in equity and merger
reserve
|
Subordinated
liabilities
|
|||||||||||||||||||||||||||||
|
2008
£m
|
2007
£m
|
2008
£m
|
2007
£m
|
2008
£m
|
2007
£m
|
2008
£m
|
2007
£m
|
|||||||||||||||||||||||||
|
At 1
January
|
31,806 | 24,178 | 38,043 | 27,654 | 20,925 | 13,297 | 7,743 | 8,194 | ||||||||||||||||||||||||
|
Issue of
ordinary shares
|
49 | 77 | 49 | 77 | ||||||||||||||||||||||||||||
|
Issue of
other equity securities
|
— | 4,673 | — | 4,673 | ||||||||||||||||||||||||||||
|
Placing and
open offer
|
19,741 | — | 19,741 | |||||||||||||||||||||||||||||
|
Rights
issue
|
12,000 | — | 12,000 | |||||||||||||||||||||||||||||
|
Net proceeds
from issue of subordinated liabilities
|
2,413 | 1,018 | — | |||||||||||||||||||||||||||||
|
Repayment of
subordinated liabilities
|
(1,727 | ) | (1,708 | ) | (469 | ) | ||||||||||||||||||||||||||
|
Net cash
inflow/(outflow) from financing
|
31,790 | 4,750 | 686 | (690 | ) | 31,790 | 4,750 | — | (469 | ) | ||||||||||||||||||||||
|
Acquisition
of subsidiaries
|
— | 2,719 | — | 10,256 | — | 2,719 | — | — | ||||||||||||||||||||||||
|
Transfer to
retained earnings
|
(14,273 | ) | — | — | — | (14,273 | ) | — | — | — | ||||||||||||||||||||||
|
Currency
translation and other adjustments
|
— | 159 | 10,425 | 823 | — | 159 | 2,571 | 18 | ||||||||||||||||||||||||
|
At 31
December
|
49,323 | 31,806 | 49,154 | 38,043 | 38,442 | 20,925 | 10,314 | 7,743 | ||||||||||||||||||||||||
|
Group
|
Company
|
|||||||||||||||||||||||
|
2008
£m
|
2007
£m
|
2006
£m
|
2008
£m
|
2007
£m
|
2006
£m
|
|||||||||||||||||||
|
At 1
January
|
||||||||||||||||||||||||
|
—
cash
|
52,796 | 28,378 | 25,476 | 5 | 11 | 30 | ||||||||||||||||||
|
— cash
equivalents
|
96,159 | 43,273 | 27,073 | 1,568 | 646 | 1,096 | ||||||||||||||||||
| 148,955 | 71,651 | 52,549 | 1,573 | 657 | 1,126 | |||||||||||||||||||
|
Acquisition
of subsidiaries
|
— | 60,098 | — | — | — | — | ||||||||||||||||||
|
Disposal of
subsidiaries
|
(3,171 | ) | — | — | — | — | — | |||||||||||||||||
|
Net cash
(outflow)/inflow
|
(10,859 | ) | 17,206 | 19,102 | 3,496 | 916 | (469 | ) | ||||||||||||||||
|
At 31
December
|
134,925 | 148,955 | 71,651 | 5,069 | 1,573 | 657 | ||||||||||||||||||
|
Comprising:
|
||||||||||||||||||||||||
|
Cash and
balances at central banks
|
12,007 | 17,428 | 5,752 | — | — | — | ||||||||||||||||||
|
Treasury
bills and debt securities
|
15,623 | 6,818 | 1,596 | — | — | — | ||||||||||||||||||
|
Loans and
advances to banks
|
107,295 | 124,709 | 64,303 | 5,069 | 1,573 | 657 | ||||||||||||||||||
|
Cash and cash
equivalents
|
134,925 | 148,955 | 71,651 | 5,069 | 1,573 | 657 | ||||||||||||||||||
Certain subsidiary
undertakings are required to maintain balances with the Bank of England which,
at 31 December 2008, amounted to £393 million (2007 — £439 million). Certain
subsidiary undertakings are required by law to maintain reserve balances with
the Federal Reserve Bank in the US. Such reserve balances were nil at 31
December 2008 (2007 — US$1 million). ABN AMRO had mandatory reserve deposits of
€3 million at 31 December 2008 (2007 — €6 million).
244
(a)
Divisions
Changes have been made to the Group’s
operating segments in the first half of 2009. A Non-Core
division has been created comprising those lines of business, portfolios and
individual assets that the Group intends to run off or
sell. Furthermore, Group Manufacturing is no longer reported as a
separate division whose costs are now allocated to the customer-facing divisions
along with certain central costs. UK Retail & Commercial Banking
has been split into three segments (UK Retail, UK Corporate and Wealth).
Ulster Bank has become a specific segment. The remaining elements of Europe
& Middle East Retail & Commercial Banking, Asia Retail & Commercial
Banking and Share of shared assets form part
of Non-Core. The segment measure is now Operating profit/(loss)
before tax which differs from Contribution used previously; it
excludes strategic disposals. Comparative data have been restated
accordingly.
The directors
manage the Group primarily by class of business and present the segmental
analysis on that basis. The Group’s activities are organised as
follows:
UK
Retail offers
a comprehensive range of banking products and related financial services
to the personal market. It serves customers through the RBS and NatWest networks
of branches and ATMs in the United Kingdom, and also through telephone and
internet channels.
UK Corporate is a provider of
banking, finance, and risk management services to the corporate and SME sector
in the United Kingdom. It offers a full range of banking products and related
financial services through a nationwide network of relationship managers, and
also through telephone and internet channels. The product range includes asset
finance through the Lombard brand.
Wealth provides private
banking and investment services in the UK through Coutts & Co and Adam &
Company, offshore banking through RBS International, NatWest Offshore and Isle
of Man Bank, and international private banking through RBS Coutts.
Global Banking & Markets
is a leading banking partner to major corporations and financial institutions
around the world, providing an extensive range of debt and equity financing,
risk management and investment services to its customers. The division is
organised along seven principal business lines: money markets; rates flow
trading; currencies; commodities (including RBS Sempra Commodities LLP, the
commodities-marketing joint venture between RBS and Sempra Energy); equities;
credit markets and portfolio management & origination.
Global Transaction Services
ranks among the top five global transaction services providers, offering global
payments, cash and liquidity management, and trade finance, United Kingdom and
international merchant acquiring and commercial card products and services. It
includes the Group’s corporate money transmission activities in the United
Kingdom and the United States.
Ulster Bank is the leading
retail and commercial bank in Northern Ireland and the third largest banking
group on the island of Ireland. It provides a comprehensive range of financial
services through both its Retail Markets division which has a network of
branches and operates in the personal and bancassurance sectors, while its
Corporate Markets division provides services to SME business customers,
corporates and institutional markets.
US Retail & Commercial
provides financial services primarily through the Citizens and Charter One
brands. US Retail is engaged in retail and corporate banking activities through
its branch network in 12 states in the United States and through non-branch
offices in other states. It ranks among the top five banks in New England and
the Mid Atlantic regions.
RBS Insurance sells and
underwrites retail and SME insurance over the telephone and internet, as well as
through brokers and partnerships. Its brands include Direct Line, Churchill and
Privilege, which sell general insurance products direct to the customers, as
well as Green Flag and NIG. Through its international division, RBS Insurance
sells general insurance, mainly motor, in Germany and Italy. The Intermediary
and Broker division sells general insurance products through independent
brokers.
Central items comprises group
and corporate functions, such as treasury, funding and finance, risk management,
legal, communications and human resources. The Centre manages the Group’s
capital resources and Group-wide regulatory projects and provides services to
the operating divisions.
Non-Core Division manages
separately assets that the Group intends to run off or dispose of. The division
contains a range of businesses and asset portfolios primarily from the GBM
division, linked to proprietary trading, higher risk profile asset portfolios
including excess risk concentrations, and other illiquid portfolios. It also
includes a number of other portfolios and businesses including regional markets
businesses that the Group has concluded are no longer strategic.
245
38
Segmental analysis (continued)
|
Group
|
||||||||||||||||||||||||||||
|
2008
|
Net
interest income
£m
|
Non-interest
income
£m
|
Total
£m
|
Operating
expenses
and
insurance claims
£m
|
Depreciation
and amortisation
£m
|
Impairment
losses
£m
|
Operating
(loss)/profit before tax
£m
|
|||||||||||||||||||||
|
UK
Retail
|
3,229 | 1,935 | 5,164 | (3,390 | ) | (2 | ) | (1,019 | ) | 753 | ||||||||||||||||||
|
UK
Corporate
|
2,344 | 1,179 | 3,523 | (1,408 | ) | (150 | ) | (321 | ) | 1,644 | ||||||||||||||||||
|
Wealth
|
588 | 486 | 1,074 | (688 | ) | (9 | ) | (16 | ) | 361 | ||||||||||||||||||
|
Global
Banking & Markets
|
2,357 | 1,321 | 3,678 | (4,155 | ) | (297 | ) | (541 | ) | (1,315 | ) | |||||||||||||||||
|
Global
Transaction Services
|
939 | 1,491 | 2,430 | (1,327 | ) | — | (48 | ) | 1,055 | |||||||||||||||||||
|
Ulster
Bank
|
708 | 331 | 1,039 | (715 | ) | — | (106 | ) | 218 | |||||||||||||||||||
|
US Retail
& Commercial
|
1,726 | 861 | 2,587 | (1,471 | ) | (151 | ) | (437 | ) | 528 | ||||||||||||||||||
|
RBS
Insurance
|
496 | 3,934 | 4,430 | (3,767 | ) | (37 | ) | (42 | ) | 584 | ||||||||||||||||||
|
Central
Items
|
1,712 | (1,200 | ) | 512 | 1,148 | (654 | ) | 18 | 1,024 | |||||||||||||||||||
| Core | 14,099 | 10,338 | 24,437 | (15,773 | ) | (1,300 | ) | (2,512 | ) | 4,852 | ||||||||||||||||||
|
Non-Core
|
1,665 | (5,503 | ) | (3,838 | ) | (2,500 | ) | (532 | ) | (4,920 | ) | (11,790 | ) | |||||||||||||||
| Group before RFS Holdings minority interest | 15,764 | 4,835 | 20,599 | (18,273 | ) | (1,832 | ) | (7,432 | ) | (6,938 | ) | |||||||||||||||||
|
RFS Holdings
minority interest
|
2,911 | 1,916 | 4,827 | (3,303 | ) | (843 | ) | (640 | ) | 41 | ||||||||||||||||||
|
Amortisation
of purchased intangible assets
|
— | — | — | — | (443 | ) | — | (443 | ) | |||||||||||||||||||
|
Integration
and restructuring costs
|
— | — | — | (1,321 | ) |
(36
|
) | — | (1,357 | ) | ||||||||||||||||||
|
Goodwill and
other intangibles write-downs
|
— | — | — | (32,581 | ) | — | — | (32,581 | ) | |||||||||||||||||||
| Strategic disposals | — | 442 | 442 | — | — | — | 442 | |||||||||||||||||||||
| 18,675 | 7,193 | 25,868 | (55,478 | ) | (3,154 | ) | (8,072 | ) | (40,836 | ) | ||||||||||||||||||
|
Group
|
|||||||||||||||||||||||||||||
|
2007
|
Net
Interest Income
£m
|
Non-interest
income
£m
|
Total
£m
|
Operating
expenses and insurance claims
£m
|
Depreciation
and amortisation
£m
|
Impairment
losses
£m
|
Operating
(loss)/profit before tax
£m
|
||||||||||||||||||||||
|
UK
Retail
|
3,269 | 2,508 | 5,777 | (3,531 | ) | (6 | ) | (975 | ) | 1,265 | |||||||||||||||||||
|
UK
Corporate
|
2,193 | 1,152 | 3,345 | (1,339 | ) | (120 | ) | (178 | ) | 1,708 | |||||||||||||||||||
| Wealth | 664 | 469 | 1,133 | (615 | ) | (11 | ) | (3 | ) | 504 | |||||||||||||||||||
|
Global
Banking & Markets
|
435 | 3,502 | 3,937 | (2,654 | ) | (133 | ) | (66 | ) | 1,084 | |||||||||||||||||||
|
Global Transaction
Services
|
647 | 1,150 | 1,797 | (888 | ) | — | (14 | ) | 895 | ||||||||||||||||||||
|
Ulster
Bank
|
659 | 328 | 987 | (619 | ) | (5 | ) | (46 | ) | 317 | |||||||||||||||||||
|
US Retail
& Commercial
|
1,613 | 801 | 2,414 | (1,312 | ) | (113 | ) | (246 | ) | 743 | |||||||||||||||||||
|
RBS
Insurance
|
514 | 4,060 | 4,574 | (3,987 | ) | (45 | ) | — | 542 | ||||||||||||||||||||
|
Central items
|
498 | 55 | 553 | 892 | (598 | ) | (3 | ) | 844 | ||||||||||||||||||||
| Core | 10,492 | 14,025 | 24,517 | (14,053 | ) | (1,031 | ) | (1,531 | ) | 7,902 | |||||||||||||||||||
|
Non-Core
|
1,032 | 3,985 | 5,017 | (1,920 | ) | (561 | ) | (399 | ) | 2,137 | |||||||||||||||||||
| Group before RFS Holdings minority interest | 11,524 | 18,010 | 29,534 | (15,973 | ) | (1,592 | ) | (1,930 | ) | 10,039 | |||||||||||||||||||
|
RFS Holdings
minority interest
|
545 | 287 | 832 | (573 | ) | (58 | ) | (38 | ) | 163 | |||||||||||||||||||
|
Amortisation
of purchased intangible assets
|
— | — | — | (40 | ) | (222 | ) | — | (262 | ) | |||||||||||||||||||
|
Integration and
restructuring costs
|
— | — | — | (48 | ) | (60 | ) | — | (108 | ) | |||||||||||||||||||
| 12,069 | 18,297 | 30,366 | (16,634 | ) | (1,932 | ) | (1,968 | ) | 9,832 | ||||||||||||||||||||
|
Group
|
||||||||||||||||||||||||||||
|
2006
|
Net
interest income
£m
|
Non-interest
income
£m
|
Total
£m
|
Operating
expenses and insurance claims
£m
|
Depreciation
and amortisation £m
|
Impairment
losses
£m
|
Operating
(loss)/profit before tax £m |
|||||||||||||||||||||
|
UK
Retail
|
3,132 | 2,406 | 5,538 | (3,505 | ) | (7 | ) | (1,038 | ) | 988 | ||||||||||||||||||
|
UK
Corporate
|
2,268 | 1,059 | 3,327 | (1,180 | ) | (136 | ) | (181 | ) | 1,830 | ||||||||||||||||||
| Wealth | 516 | 400 | 916 | (593 | ) | (6 | ) | (1 | ) | 316 | ||||||||||||||||||
|
Global
Banking & Markets
|
559 | 2,371 | 2,930 | (2,368 | ) | (59 | ) | (35 | ) | 468 | ||||||||||||||||||
|
Global
Transaction Services
|
458 | 1,059 | 1,517 | (753 | ) | (4 | ) | (4 | ) | 756 | ||||||||||||||||||
|
Ulster
Bank
|
582 | 283 | 865 | (528 | ) | (5 | ) | (34 | ) | 298 | ||||||||||||||||||
|
US Retail
& Commercial
|
1,773 | 903 | 2,676 | (1,357 | ) | (150 | ) | (149 | ) | 1,020 | ||||||||||||||||||
|
RBS
Insurance
|
424 | 4,178 | 4,602 | (3,928 | ) | (43 | ) | — | 631 | |||||||||||||||||||
|
Central
items
|
(185 | ) | (315 | ) | (500 | ) | 903 | (550 | ) | (9 | ) | (156 | ) | |||||||||||||||
| Core | 9,527 | 12,344 | 21,871 | (13,309 | ) | (960 | ) | (1,451 | ) | 6,151 | ||||||||||||||||||
|
Non-Core
|
1,069 | 5,062 | 6,131 | (1,833 | ) | (608 | ) | (427 | ) | 3,263 | ||||||||||||||||||
| Group before RFS Holdings minority interest | 10,596 | 17,406 | 28,002 | (15,142 | ) | (1,568 | ) | (1,878 | ) | 9,414 | ||||||||||||||||||
|
Amortisation
of purchased intangible assets
|
— | — | — | — | (94 | ) | — | (94 | ) | |||||||||||||||||||
|
Integration
and restructuring costs
|
— | — | — | (118 | ) | (16 | ) | — | (134 | ) | ||||||||||||||||||
| 10,596 | 17,406 | 28,002 | (15,260 | ) | (1,678 | ) | (1,878 | ) | 9,186 | |||||||||||||||||||
246
38 Segmental analysis
(continued)
|
2008
|
2007
|
2006
|
|||||||||||||||||||||||||||||||||||
|
Total
Revenue
|
External
£m
|
Inter
Segment £m
|
Total
£m
|
External
£m
|
Inter
Segment £m
|
Total
£m
|
External
£m
|
Inter
Segment £m
|
Total
£m
|
||||||||||||||||||||||||||||
|
UK Retail
|
8,416 | 1,652 | 10,068 | 8,376 | 1,689 | 10,065 | 7,768 | 1,442 | 9,210 | ||||||||||||||||||||||||||||
|
UK Corporate
|
7,798 | 92 | 7,890 | 7,721 | 43 | 7,764 | 6,323 | 19 | 6,342 | ||||||||||||||||||||||||||||
|
Wealth
|
1,133 | 2,122 | 3,255 | 1,111 | 2,218 | 3,329 | 997 | 1,430 | 2,427 | ||||||||||||||||||||||||||||
|
Global Banking
& Markets
|
12,709 | 11,554 | 24,263 | 6,996 | 6,462 | 13,458 | 4,424 | 4,084 | 8,508 | ||||||||||||||||||||||||||||
|
Global
Transaction Services
|
2,940 | 81 | 3,021 | 2,940 | 77 | 3,017 | 2,059 | 4 | 2,063 | ||||||||||||||||||||||||||||
|
Ulster Bank
|
2,774 | 738 | 3,512 | 2,500 | 197 | 2,697 | 2,030 | 196 | 2,226 | ||||||||||||||||||||||||||||
|
US Retail
& Commercial
|
4,200 | 475 | 4,675 | 4,370 | 504 | 4,874 | 4,750 | 436 | 5,186 | ||||||||||||||||||||||||||||
|
RBS
Insurance
|
5,040 | 33 | 5,073 | 5,221 | 89 | 5,310 | 5,242 | 82 | 5,324 | ||||||||||||||||||||||||||||
|
Central items
|
1,610 | 13,387 | 14,997 | 1,650 | 9,973 | 11,623 | 323 | 7,990 | 8,313 | ||||||||||||||||||||||||||||
| Core | 46,620 | 30,134 | 76,754 | 40,885 | 21,252 | 62,137 | 33,916 | 15,683 | 49,599 | ||||||||||||||||||||||||||||
|
Non-Core
|
3,078 | 1,325 | 4,403 | 10,612 | 2,778 | 13,390 | 10,370 | 3,285 | 13,655 | ||||||||||||||||||||||||||||
| Group before RFS Holdings minority interest | 49,698 | 31,459 | 81,157 | 51,497 | 24,030 | 75,527 | 44,286 | 18,968 | 63,254 | ||||||||||||||||||||||||||||
|
RFS Holdings
minority interest
|
9,703 | (24 | ) | 9,679 | 1,534 | (255 | ) | 1,279 | — | — | — | ||||||||||||||||||||||||||
|
Elimination
of intra-group transactions
|
— | (31,435 | ) | (31,435 | ) | — | (23,775 | ) | (23,775 | ) | — | (18,968 | ) | (18,968 | ) | ||||||||||||||||||||||
| 59,401 | — | 59,401 | 53,031 | — | 53,031 | 44,286 | — | 44,286 | |||||||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
||||||||||||||||||||||||||||||||||
|
Total
Income
|
External
£m
|
Inter
Segment
£m
|
Total
£m
|
External
£m
|
Inter
Segment
£m
|
Total
£m
|
External
£m
|
Inter
Segment
£m
|
Total
£m
|
|||||||||||||||||||||||||||
|
UK Retail
|
5,541 | (377 | ) | 5,164 | 6,130 | (353 | ) | 5,777 | 5,937 | (399 | ) | 5,538 | ||||||||||||||||||||||||
|
UK Corporate
|
5,895 | (2,372 | ) | 3,523 | 5,589 | (2,244 | ) | 3,345 | 5,096 | (1,769 | ) | 3,327 | ||||||||||||||||||||||||
|
Wealth
|
(746 | ) | 1,820 | 1,074 | (941 | ) | 2,074 | 1,133 | (480 | ) | 1,396 | 916 | ||||||||||||||||||||||||
|
Global Banking
& Markets
|
2,558 | 1,120 | 3,678 | 3,261 | 676 | 3,937 | 2,321 | 609 | 2,930 | |||||||||||||||||||||||||||
|
Global
Transaction Services
|
1,959 | 471 | 2,430 | 2,153 | (356 | ) | 1,797 | 1,515 | 2 | 1,517 | ||||||||||||||||||||||||||
|
Ulster Bank
|
1,325 | (286 | ) | 1,039 | 1,422 | (435 | ) | 987 | 986 | (121 | ) | 865 | ||||||||||||||||||||||||
|
US Retail
& Commercial
|
2,141 | 446 | 2,587 | 1,944 | 470 | 2,414 | 2,295 | 381 | 2,676 | |||||||||||||||||||||||||||
|
RBS Insurance
|
4,413 | 17 | 4,430 | 4,567 | 7 | 4,574 | 4,585 | 17 | 4,602 | |||||||||||||||||||||||||||
|
Central items
|
(3,399 | ) | 4,353 | 954 | (2,948 | ) | 3,501 | 553 | (3,099 | ) | 2,599 | (500 | ) | |||||||||||||||||||||||
| Core | 19,687 | 5,192 | 24,879 | 21,177 | 3,340 | 24,517 | 19,156 | 2,715 | 21,871 | |||||||||||||||||||||||||||
|
Non-Core
|
816 | (4,654 | ) | (3,838 | ) | 7,958 | (2,941 | ) | 5,017 | 8,846 | (2,715 | ) | 6,131 | |||||||||||||||||||||||
| Group before RFS Holdings minority interest | 20,503 | 538 | 21,041 | 29,135 | 399 | 29,534 | 28,002 | — | 28,002 | |||||||||||||||||||||||||||
|
RFS Holdings
minority interest
|
5,365 | (538 | ) | 4,827 | 1,231 | (399 | ) | 832 | — | — | — | |||||||||||||||||||||||||
|
|
25,868 | — | 25,868 | 30,366 | — | 30,366 | 28,002 | — | 28,002 | |||||||||||||||||||||||||||
|
Group
|
||||||||||||||||||||||||
|
2008
|
2007
|
|||||||||||||||||||||||
|
Assets
£m
|
Liabilities
£m
|
Cost
to acquire fixed assets and intangible assets
£m
|
Assets
£m
|
Liabilities
£m
|
Cost
to acquire fixed assets and intangible assets
£m
|
|||||||||||||||||||
|
UK
Retail
|
102,430 | 83,804 | 4 | 100,318 | 81,663 | 1 | ||||||||||||||||||
|
UK
Corporate
|
109,834 | 81,862 | 1,418 | 101,512 | 68,232 | 1,467 | ||||||||||||||||||
|
Wealth
|
16,356 | 35,474 | 41 | 14,229 | 34,987 | 34 | ||||||||||||||||||
|
Global
Banking & Markets
|
1,423,805 | 1,472,997 | 2,836 | 978,566 | 978,892 | 1,576 | ||||||||||||||||||
|
Global
Transaction Services
|
22,534 | 54,390 | 6 | 21,822 | 58,149 | 22 | ||||||||||||||||||
|
Ulster
Bank
|
49,107 | 47,672 | 1 | 42,453 | 44,004 | 32 | ||||||||||||||||||
|
US Retail
& Commercial
|
88,673 | 89,254 | 204 | 67,099 | 55,874 | 171 | ||||||||||||||||||
|
RBS
Insurance
|
11,018 | 7,510 | 61 | 10,574 | 7,036 | 93 | ||||||||||||||||||
|
Central
items
|
70,201 | 156,248 | 1,235 | 3,052 | 71,866 | 1,000 | ||||||||||||||||||
| Core | 1,893,958 | 2,029,211 | 5,806 | 1,339,625 | 1,400,703 | 4,396 | ||||||||||||||||||
|
Non-Core
|
324,734 | 125,167 | 270 | 255,441 | 135,934 | 490 | ||||||||||||||||||
| Group before RFS Holdings minority interest | 2,218,692 | 2,154,378 | 6,076 | 1,595,066 | 1,536,637 | 4,886 | ||||||||||||||||||
|
RFS Holdings
minority interest
|
182,960 | 166,776 | 174 | 245,763 | 212,766 | 675 | ||||||||||||||||||
| 2,401,652 | 2,321,154 | 6,250 | 1,840,829 | 1,749,403 | 5,561 | |||||||||||||||||||
247
38
Segmental analysis (continued)
Owner’s
equity
|
2008
|
2007
|
|||||||
| ₤m | ₤m | |||||||
|
UK
Retail
|
3,251 | 2,747 | ||||||
|
UK
Corporate
|
4,994 | 5,329 | ||||||
|
Wealth
|
665 | 263 | ||||||
|
Global
Banking & Markets
|
10,168 | 5,356 | ||||||
|
Global
Transaction Services
|
1,031 | 666 | ||||||
|
Ulster
Bank
|
1,476 | 1,181 | ||||||
|
US Retail
& Commercial
|
9,842 | 10,013 | ||||||
|
RBS
Insurance
|
2,580 | 2,169 | ||||||
|
Central
items
|
14,748 | 19,418 | ||||||
|
Core
|
48,755 | 47,142 | ||||||
|
Non-Core
|
10,124 | 5,896 | ||||||
| 58,879 | 53,038 | |||||||
Note:
|
(1)
|
Segmental
results for 2007 have been restated to reflect transfers of businesses
between segments in 2008.
|
Segmental analysis
of goodwill is as follows:
|
UK Retail
|
UK
Corporate
|
Wealth
|
Global
Banking & Markets
|
Global
Transaction Services
|
Ulster
Bank
|
US
Retail & Commercial
|
RBS
Insurance
|
Non-Core
|
Group
before RFS Holdings minority interest
|
RFS
Holdings minority interest
|
Total
|
|||||||||||||||||||||||||||||||||||||
|
At 1 January
2007
|
2,803 | 2,741 | 746 | 1,065 | 1,657 | 820 | 5,429 | 1,064 | 1,564 | 17,889 | - | 17,889 | ||||||||||||||||||||||||||||||||||||
|
Currency
translation and other adjustments
|
- | - | 7 | 137 | 18 | 38 | (103 | ) | - | 133 | 230 | 957 | 1,187 | |||||||||||||||||||||||||||||||||||
|
Acquisitions
|
- | - | - | 2,989 | 721 | - | 66 | - | 2,677 | 6,453 | 17,464 | 23,917 | ||||||||||||||||||||||||||||||||||||
|
Goodwill
written off
|
- | - | - | - | - | - | - | - | (40 | ) | (40 |
)
|
- | (40 | ) | |||||||||||||||||||||||||||||||||
|
At 1 January
2008
|
2,803 | 2,741 | 753 | 4,191 | 2,396 | 858 | 5,392 | 1,064 | 4,334 | 24,532 | 18,421 | 42,953 | ||||||||||||||||||||||||||||||||||||
|
Transfers to
disposal groups
|
- | - | - | - | - | - | - | - | - | - | (3,692 | ) | (3,692 | ) | ||||||||||||||||||||||||||||||||||
|
Currency
translation and other adjustments
|
- | - | 56 | 933 | 680 | 133 | 2,013 | 7 | 747 | 4,569 | 4,336 | 8,905 | ||||||||||||||||||||||||||||||||||||
|
Acquisitions
|
- | - | - | 357 | 35 | - | - | - | 132 | 524 | - | 524 | ||||||||||||||||||||||||||||||||||||
|
Disposals
|
- | - | - | - | - | - | - | - | (49 | ) | (49 |
)
|
(3,017 | ) | (3,066 | ) | ||||||||||||||||||||||||||||||||
|
Write-down of
goodwill
|
- | (46 | ) | (9 | ) | (5,179 | ) | (44 | ) | (991 | ) | (4,382 | ) | (42 | ) | (4,831 | ) | (15,524 |
)
|
(14,538 | ) | (30,062 | ) | |||||||||||||||||||||||||
|
At 31 December
2008
|
2,803 | 2,695 | 800 | 302 | 3,067 | - | 3,023 | 1,029 | 333 | 14,052 | 1,510 | 15,562 | ||||||||||||||||||||||||||||||||||||
248
(b)
Geographical segments
The geographical
analyses in the tables below have been compiled on the basis of location of
office where the transactions are recorded.
|
Group
|
||||||||||||||||||||||||||||
|
UK
|
USA
|
Europe
|
Rest
of the World
|
Total
|
Less:
RFS Holdings minority interest
|
Group
|
||||||||||||||||||||||
|
2008
|
£m | £m | £m | £m | £m | £m | £m | |||||||||||||||||||||
|
Total
revenue
|
23,748 | 8,518 | 21,112 | 6,023 | 59,401 | 9,679 | 49,722 | |||||||||||||||||||||
|
Net interest
income
|
9,853 | 2,790 | 5,018 | 1,014 | 18,675 | 2,911 | 15,764 | |||||||||||||||||||||
|
Net fees and
commissions
|
3,728 | 1,492 | 1,648 | 577 | 7,445 | 1,011 | 6,434 | |||||||||||||||||||||
|
Income from
trading activities
|
(7,103 | ) | (1,604 | ) | (552 | ) | 782 | (8,477 | ) | 352 | (8,829 | ) | ||||||||||||||||
|
Other
operating income
|
2,337 | 49 | (528 | ) | 41 | 1,899 | (64 | ) | 1,963 | |||||||||||||||||||
|
Insurance
premium income (net of reinsurers’ share)
|
5,190 | — | 1,136 | — | 6,326 | 617 | 5,709 | |||||||||||||||||||||
|
Total
income
|
14,005 | 2,727 | 6,722 | 2,414 | 25,868 | 4,827 | 21,041 | |||||||||||||||||||||
|
Operating
(loss)/profit before tax
|
(7,989 | ) | (5,809 | ) | (26,883 | ) | 14 | (40,667 | ) | (15,629 | ) | (25,038 | ) | |||||||||||||||
|
Total
assets
|
1,304,714 | 607,511 | 368,290 | 121,137 | 2,401,652 | 182,959 | 2,218,693 | |||||||||||||||||||||
|
Total
liabilities
|
1,253,814 | 592,272 | 361,590 | 113,478 | 2,321,154 | 166,776 | 2,154,378 | |||||||||||||||||||||
|
Net assets
attributable to equity owners and minority interests
|
50,900 | 15,239 | 6,700 | 7,659 | 80,498 | 16,183 | 64,315 | |||||||||||||||||||||
|
Contingent
liabilities and commitments
|
200,763 | 131,435 | 79,941 | 21,122 | 433,261 | 9,272 | 423,989 | |||||||||||||||||||||
|
Cost to
acquire property, plant and equipment and intangible
assets
|
3,415 | 445 | 2,204 | 186 | 6,250 | 174 | 6,076 | |||||||||||||||||||||
|
2007
|
||||||||||||||||||||||||||||
|
Total
revenue
|
33,743 | 8,570 | 8,140 | 2,578 | 53,031 | 1,678 | 51,353 | |||||||||||||||||||||
|
Net interest
income
|
8,350 | 2,054 | 1,510 | 155 | 12,069 | 545 | 11,524 | |||||||||||||||||||||
|
Net fees and
commissions
|
3,933 | 1,176 | 560 | 416 | 6,085 | 224 | 5,861 | |||||||||||||||||||||
|
Income from
trading activities
|
1,252 | (486 | ) | 348 | 178 | 1,292 | (139 | ) | 1,431 | |||||||||||||||||||
|
Other
operating income
|
3,844 | 260 | 587 | 142 | 4,833 | 96 | 4,737 | |||||||||||||||||||||
|
Insurance
premium income (net of reinsurers’ share)
|
5,562 | — | 525 | — | 6,087 | 106 | 5,981 | |||||||||||||||||||||
|
Total
income
|
22,941 | 3,004 | 3,530 | 891 | 30,366 | 832 | 29,534 | |||||||||||||||||||||
|
Operating
profit before tax
|
7,761 | 719 | 1,136 | 216 | 9,832 | 163 | 9,669 | |||||||||||||||||||||
|
Total
assets
|
938,064 | 340,170 | 422,058 | 140,537 | 1,840,829 | 245,763 | 1,595,066 | |||||||||||||||||||||
|
Total
liabilities
|
902,340 | 326,499 | 392,362 | 128,202 | 1,749,403 | 212,766 | 1,536,637 | |||||||||||||||||||||
|
Net assets
attributable to equity owners and minority interests
|
35,724 | 13,671 | 29,696 | 12,335 | 91,426 | 32,997 | 58,429 | |||||||||||||||||||||
|
Contingent
liabilities and commitments
|
197,637 | 95,547 | 82,316 | 24,599 | 400,099 | 21,000 | 379,099 | |||||||||||||||||||||
|
Cost to
acquire property, plant and equipment and intangible
assets
|
3,305 | 238 | 1,793 | 225 | 5,561 | 675 | 4,886 | |||||||||||||||||||||
249
38 Segmental analysis (continued)
|
Group
|
||||||||||||||||||||
|
UK
|
USA
|
Europe
|
Rest
of the World
|
Total
|
||||||||||||||||
|
2006
|
£m | £m | £m | £m | £m | |||||||||||||||
|
Total
revenue
|
29,162 | 9,411 | 4,683 | 1,030 | 44,286 | |||||||||||||||
|
Net interest
income
|
7,541 | 2,278 | 709 | 68 | 10,596 | |||||||||||||||
|
Net fees and
commissions
|
3,443 | 1,245 | 412 | 94 | 5,194 | |||||||||||||||
|
Income from
trading activities
|
1,585 | 939 | 108 | 43 | 2,675 | |||||||||||||||
|
Other
operating income
|
2,766 | 295 | 491 | 12 | 3,564 | |||||||||||||||
|
Insurance
premium income (net of reinsurers’ share)
|
5,604 | — | 369 | — | 5,973 | |||||||||||||||
|
Total
income
|
20,939 | 4,757 | 2,089 | 217 | 28,002 | |||||||||||||||
|
Operating
profit before tax
|
6,038 | 2,334 | 785 | 29 | 9,186 | |||||||||||||||
|
Total
assets
|
579,075 | 197,421 | 60,759 | 19,577 | 856,832 | |||||||||||||||
|
Total
liabilities
|
557,605 | 183,430 | 56,662 | 13,645 | 811,342 | |||||||||||||||
|
Net assets
attributable to equity owners and minority interests
|
21,470 | 13,991 | 4,097 | 5,932 | 45,490 | |||||||||||||||
|
Contingent
liabilities and commitments
|
186,627 | 57,873 | 13,244 | 7,159 | 264,903 | |||||||||||||||
|
Cost to
acquire property, plant and equipment and intangible
assets
|
3,040 | 254 | 1,427 | 19 | 4,740 | |||||||||||||||
|
Group
|
||||||||
|
2008
|
2007
|
|||||||
|
Directors’
remuneration
|
£000 | £000 | ||||||
|
Non-executive
directors — emoluments
|
1,408 | 1,081 | ||||||
|
Chairman and
executive directors — emoluments
|
7,132 | 16,461 | ||||||
|
—
contributions and allowances in respect of defined
contribution pension schemes
|
3 | 30 | ||||||
| 8,543 | 17,572 | |||||||
|
— amounts
receivable under long-term incentive plans
|
646 | 1,839 | ||||||
|
— gains on
exercise of share options
|
77 | 1,474 | ||||||
| 9,266 | 20,885 | |||||||
Retirement benefits
are accruing to one director (2007 — five) under defined benefit schemes. No
directors (2007 — one) are accruing benefits under defined contribution
schemes.
The executive
directors may also participate in the company’s executive share option and
sharesave schemes and details of their interests in the company’s shares arising
from their participation are given on page 148. Details of the remuneration
received by each director during the year and each director’s pension
arrangements are given on pages 147 to 152.
Compensation
of key management
The aggregate
remuneration of directors and other members of key management during the year
was as follows:
|
Group
|
||||||||
|
2008
|
2007
|
|||||||
| £000 | £000 | |||||||
|
Short-term
benefits
|
16,813 | 37,763 | ||||||
|
Post-employment
benefits
|
13,174 | 10,051 | ||||||
|
Other
long-term
|
496 | 708 | ||||||
|
Termination
benefits
|
345 | — | ||||||
|
Share-based
payments
|
2,078 | 5,165 | ||||||
| 32,906 | 53,687 | |||||||
250
|
(a)
|
At 31
December 2008, the amounts outstanding in relation to transactions,
arrangements and agreements entered into by authorised institutions in the
Group, as defined in UK legislation, were £117,847 in respect of loans to
27 persons who were directors of the company (or persons connected with
them) at any time during the financial
period.
|
|
(b)
|
For the
purposes of IAS 24 ‘Related Party Disclosures’, key management comprise
directors of the company and members of the Group Executive Management
Committee. The captions in the Group’s primary financial statements
include the following amounts attributable, in aggregate, to key
management:
|
|
2008
|
2007
|
|||||||
| £000 | £000 | |||||||
|
Loans and
advances to customers
|
4,217 | 2,023 | ||||||
|
Customer
accounts
|
9,572 | 13,309 | ||||||
Key management have
banking relationships with Group entities which are entered into in the normal
course of business and on substantially the same terms, including interest rates
and security, as for comparable transactions with other persons of a similar
standing or, where applicable, with other employees. These transactions did not
involve more than the normal risk of repayment or present other unfavourable
features.
Key management had
no reportable transactions or balances with the company except for
dividends.
|
(a)
|
In their
roles as providers of finance, Group companies provide development and
other types of capital support to businesses. These investments are made
in the normal course of business and on arm’s-length terms. In some
instances, the investment may extend to ownership or control over 20% or
more of the voting rights of the investee company. However, these
investments are not considered to give rise to transactions of a
materiality requiring disclosure under IAS
24.
|
|
(b)
|
The Group
recharges The Royal Bank of Scotland Group Pension Fund with the cost of
administration services incurred by it. The amounts involved are not
material to the Group.
|
|
(c)
|
In accordance
with IAS 24, transactions or balances between Group entities that have
been eliminated on consolidation are not
reported.
|
|
(d)
|
The captions
in the primary financial statements of the parent company include amounts
attributable to subsidiaries. These amounts have been disclosed in
aggregate in the relevant notes to the financial
statements.
|
|
(e)
|
On 1 December
2008, the UK Government through HM Treasury became the ultimate
controlling party of The Royal Bank of Scotland Group plc. The UK
Government’s shareholding is managed by UK Financial Investments Limited,
a company wholly owned by the UK Government. As a result the UK Government
and UK Government controlled bodies became related parties of the Group.
The Group enters into transactions with many of these bodies on an arms'
length basis. The volume and diversity of such transaction are such that
disclosure of their amounts in the period 1 December 2008 to 31 December
2008 is impractical.
|
As
at 31 December 2008 balances with the UK Government and UK Government controlled
bodies were:
|
Central
government (including the Bank of England)
|
Local
government |
Banks,
financial corporations and public corporations
|
2008
Total |
|||||||||||||
| £m | £m | £m | £m | |||||||||||||
|
Assets
|
||||||||||||||||
|
Balances at
central banks
|
393 | — | — | 393 | ||||||||||||
|
Loans and
advances to banks
|
— | — | 1,081 | 1,081 | ||||||||||||
|
Loans and
advances to customers
|
5 | 721 | 468 | 1,194 | ||||||||||||
|
Debt
securities
|
21,628 | — | 113 | 21,741 | ||||||||||||
|
Derivatives
|
1,286 | 64 | 17 | 1,367 | ||||||||||||
|
Other
|
249 | — | — | 249 | ||||||||||||
|
Liabilities
|
||||||||||||||||
|
Deposits by
banks
|
26,541 | — | 633 | 27,174 | ||||||||||||
|
Customer
accounts
|
1,536 | 3,320 | 598 | 5,454 | ||||||||||||
|
Derivatives
|
276 | 78 | 29 | 383 | ||||||||||||
|
Other
|
176 | — | — | 176 | ||||||||||||
Notes:
|
(1)
|
In addition to
UK Government’s shareholding in the Group, the UK Government and UK
Government controlled bodies may hold debt securities, subordinated
liabilities and other liabilities or shares issued by the Group in the
normal course of their business. It is not practicable to ascertain and
disclose these amounts.
|
|
(2)
|
Certain of the
liability balances are secured.
|
251
41 Related parties (continued)
No
impairment losses were recognised by the Group in 2008 in respect of balances
with UK Government and UK Government controlled bodies.
The Group
participates in a number of schemes operated by the Bank of England and the UK
Government and made available to eligible banks and building
societies.
Bank
of England facilities include:
|
·
|
Open market
operations — these provide market participants with funding at market
rates on a tender basis in the form of short and long-term repos on a wide
range of collateral and outright purchases of high-quality bonds to enable
them to meet the reserves that they must hold at the Bank of
England.
|
|
·
|
US dollar
repo operations — these commenced in September 2008 taking the form of an
auction. Eligible collateral consists of securities routinely eligible in
the Bank's short-term repo open market operations together with
conventional US Treasuries.
|
|
·
|
The special
liquidity scheme — this was launched in April 2008 to allow financial
institutions to swap temporarily illiquid assets for treasury bills, with
fees charged based on the spread between 3-month LIBOR and the 3-month
gilt repo rate.
|
As
at 31 December 2008, the Group’s utilisation of these facilities amounted to
£41.8 billion.
Government credit guarantee
scheme — this was announced in October 2008. The Government, in return
for a fee (50 basis points plus the bank’s median five-year credit default
spread during the twelve months to 7 October 2008), guarantees new unsecured
borrowing.
As
at 31 December 2008, the Group had obtained funding from the Bank of England and
issued debt guaranteed by the government totalling £32.2 billion.
There have been no
significant events between the year end and the date of approval of these
accounts which would require a change to or disclosure in the
accounts.
43
Consolidating financial information
The Royal Bank of
Scotland plc ('RBS plc') is a wholly owned subsidiary of The Royal Bank of
Scotland Group plc ('RBSG plc') and is able to offer and sell certain securities
in the US from time to time pursuant to a registration statement on Form F-3
filed with the SEC with a full and unconditional guarantee from RBSG
plc.
RBS plc utilises an
exception provided in Rule 3-10 of Regulation S-X, and therefore does not file
its financial statements with the SEC. In accordance with the
requirements to qualify for the exception, presented below is condensed
consolidating financial information for:
- RBSG
plc on a stand-alone basis as guarantor ('RBSG Company');
- RBS
plc on a stand-alone basis as issuer ('RBS Company');
- Non-guarantor
subsidiaries of RBSG Company and RBS Company on a combined basis
('Subsidiaries');
- Consolidation
adjustments; and
- RBSG
plc consolidated amounts ('RBSG Group').
Under IAS 27, RBSG
Company and RBS Company account for investments in their subsidiary undertakings
at cost less impairment. Rule 3-10 of Regulation S-X requires a
company to account for its investments in subsidiary undertakings using the
equity method, which would increase /(decrease) the results for the period of
RBSG Company and RBS Company in the information below by £(14,108) million and
£(7,610) million for the year ended 31 December 2008; £5,050 million and £(56)
million for the year ended 31 December 2007; and £2,894 million and £2,357
million for the year ended 31 December 2006. The net assets of RBSG
Company and RBS Company in the information below would also be
increased by £14,721 million
and £11,913 million at 31 December 2008 and £28,161 million and £16,594
million at 31 December 2007.
|
Income
Statement
|
|
RBSG
|
RBS
|
Consolidation
|
RBSG
|
|||||||||||||||||
|
For the year ended 31 December
2008
|
Company
|
Company
|
Subsidiaries
|
adjustments
|
Group
|
|||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
|
Net interest
income
|
(680 | ) | 4,742 | 14,591 | 22 | 18,675 | ||||||||||||||
|
Non-interest income (excluding
insurance net premium income)
|
(9,311 | ) | 1,379 | (2,444 | ) | 11,243 | 867 | |||||||||||||
|
Insurance net premium
income
|
- | - | 6,326 | - | 6,326 | |||||||||||||||
|
Total
income
|
(9,991 | ) | 6,121 | 18,473 | 11,265 | 25,868 | ||||||||||||||
|
Operating
expenses
|
(26 | ) | (6,487 | ) | (45,157 | ) | (2,532 | ) | (54,202 | ) | ||||||||||
|
Insurance net
claims
|
- | - | (4,430 | ) | - | (4,430 | ) | |||||||||||||
|
Impairment
losses
|
- | (2,007 | ) | (5,857 | ) | (208 | ) | (8,072 | ) | |||||||||||
|
Operating loss
before tax
|
(10,017 | ) | (2,373 | ) | (36,971 | ) | 8,525 | (40,836 | ) | |||||||||||
|
Tax
|
415 | 1,064 | 1,721 | (877 | ) | 2,323 | ||||||||||||||
|
Loss from
continuing operations
|
(9,602 | ) | (1,309 | ) | (35,250 | ) | 7,648 | (38,513 | ) | |||||||||||
|
Profit from
discontinued operations, net of tax
|
- | - | 3,971 | - | 3,971 | |||||||||||||||
|
Loss for the
year
|
(9,602 | ) | (1,309 | ) | (31,279 | ) | 7,648 | (34,542 | ) | |||||||||||
|
RBSG
|
RBS
|
Consolidation
|
RBSG
|
|||||||||||||||||
|
For the year ended 31 December
2007
|
Company
|
Company
|
Subsidiaries
|
adjustments
|
Group
|
|||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
|
Net interest
income
|
(343 | ) | 3,000 | 9,350 | 62 | 12,069 | ||||||||||||||
|
Non-interest income (excluding
insurance net premium income)
|
2,716 | 11,088 | 6,731 | (8,325 | ) | 12,210 | ||||||||||||||
|
Insurance net
premium income
|
- | - | 6,087 | - | 6,087 | |||||||||||||||
|
Total
income
|
2,373 | 14,088 | 22,168 | (8,263 | ) | 30,366 | ||||||||||||||
|
Operating
expenses
|
(1 | ) | (5,856 | ) | (8,308 | ) | 223 | (13,942 | ) | |||||||||||
|
Insurance net
claims
|
- | - | (4,624 | ) | - | (4,624 | ) | |||||||||||||
|
Impairment
losses
|
- | (473 | ) | (1,495 | ) | - | (1,968 | ) | ||||||||||||
|
Operating
profit / (loss) before tax
|
2,372 | 7,759 | 7,741 | (8,040 | ) | 9,832 | ||||||||||||||
|
Tax
|
127 | (504 | ) | (1,591 | ) | (76 | ) | (2,044 | ) | |||||||||||
|
Profit /
(loss) from continuing operations
|
2,499 | 7,255 | 6,150 | (8,116 | ) | 7,788 | ||||||||||||||
|
Loss from
discontinued operations, net of tax
|
- | - | (76 | ) | - | (76 | ) | |||||||||||||
|
Profit / (loss) for the
year
|
2,499 | 7,255 | 6,074 | (8,116 | ) | 7,712 | ||||||||||||||
|
RBSG
|
RBS
|
Consolidation
|
RBSG
|
|||||||||||||||||
|
For the year ended 31 December
2006
|
Company
|
Company
|
Subsidiaries
|
adjustments
|
Group
|
|||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
|
Net interest
income
|
(169 | ) | 3,126 | 7,625 | 14 | 10,596 | ||||||||||||||
|
Non-interest
income (excluding insurance net premium income)
|
3,815 | 7,014 | 7,276 | (6,672 | ) | 11,433 | ||||||||||||||
|
Insurance net
premium income
|
- | - | 5,973 | - | 5,973 | |||||||||||||||
|
Total
income
|
3,646 | 10,140 | 20,874 | (6,658 | ) | 28,002 | ||||||||||||||
|
Operating
expenses
|
(160 | ) | (5,409 | ) | (7,112 | ) | 201 | (12,480 | ) | |||||||||||
|
Insurance net
claims
|
- | - | (4,458 | ) | - | (4,458 | ) | |||||||||||||
|
Impairment
losses
|
- | (692 | ) | (1,202 | ) | 16 | (1,878 | ) | ||||||||||||
|
Operating
profit before tax
|
3,486 | 4,039 | 8,102 | (6,441 | ) | 9,186 | ||||||||||||||
|
Tax
|
13 | (520 | ) | (2,158 | ) | (24 | ) | (2,689 | ) | |||||||||||
|
Profit / (loss) for the
year
|
3,499 | 3,519 | 5,944 | (6,465 | ) | 6,497 | ||||||||||||||
|
Balance
Sheets
|
|
RBSG
|
RBS
|
Consolidation
|
RBSG
|
|||||||||||||||||
|
At 31 December
2008
|
Company
|
Company
|
Subsidiaries
|
adjustments
|
Group
|
|||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
|
Assets
|
||||||||||||||||||||
|
Cash and balances at central
banks
|
- | 3,714 | 8,686 | - | 12,400 | |||||||||||||||
|
Loans and
advances to banks
|
27,031 | 91,717 | 222,172 | (202,723 | ) | 138,197 | ||||||||||||||
|
Loans and
advances to customers
|
- | 327,040 | 596,306 | (48,624 | ) | 874,722 | ||||||||||||||
|
Debt
securities
|
- | 159,698 | 151,004 | (43,153 | ) | 267,549 | ||||||||||||||
|
Equity
shares
|
- | 1,020 | 26,063 | (753 | ) | 26,330 | ||||||||||||||
|
Investments in
Group undertakings
|
42,196 | 26,814 | 11,166 | (80,176 | ) | - | ||||||||||||||
|
Settlement
balances
|
- | 5,335 | 12,497 | - | 17,832 | |||||||||||||||
|
Derivatives
|
1,168 | 938,505 | 187,009 | (134,123 | ) | 992,559 | ||||||||||||||
|
Intangible
assets
|
- | 136 | 13,132 | 6,781 | 20,049 | |||||||||||||||
|
Property,
plant and equipment
|
- | 2,368 | 16,450 | 131 | 18,949 | |||||||||||||||
|
Deferred
taxation
|
3 | 1,323 | 4,745 | 1,011 | 7,082 | |||||||||||||||
|
Prepayments,
accrued income and other assets
|
489 | 5,930 | 18,423 | (440 | ) | 24,402 | ||||||||||||||
|
Assets of
disposal groups
|
- | - | 1,581 | - | 1,581 | |||||||||||||||
|
Total
assets
|
70,887 | 1,563,600 | 1,269,234 | (502,069 | ) | 2,401,652 | ||||||||||||||
|
Liabilities
|
||||||||||||||||||||
|
Deposits by
banks
|
1,802 | 201,266 | 205,036 | (150,060 | ) | 258,044 | ||||||||||||||
|
Customer
accounts
|
26 | 229,266 | 496,037 | (85,817 | ) | 639,512 | ||||||||||||||
|
Debt
securities in issue
|
14,179 | 115,149 | 213,859 | (42,898 | ) | 300,289 | ||||||||||||||
|
Settlement
balances and short positions
|
- | 29,361 | 25,258 | (342 | ) | 54,277 | ||||||||||||||
|
Derivatives
|
361 | 911,174 | 193,952 | (134,123 | ) | 971,364 | ||||||||||||||
|
Accruals,
deferred income and other liabilities
|
47 | 9,618 | 22,491 | (674 | ) | 31,482 | ||||||||||||||
|
Retirement
benefit liabilities
|
- | 23 | 2,006 | 3 | 2,032 | |||||||||||||||
|
Deferred
taxation
|
- | - | 2,892 | 1,273 | 4,165 | |||||||||||||||
|
Insurance
liabilities
|
- | - | 9,976 | - | 9,976 | |||||||||||||||
|
Subordinated
liabilities
|
10,314 | 33,698 | 23,455 | (18,313 | ) | 49,154 | ||||||||||||||
|
Liabilities of
disposal groups
|
- | - | 859 | - | 859 | |||||||||||||||
|
Total
liabilities
|
26,729 | 1,529,555 | 1,195,821 | (430,951 | ) | 2,321,154 | ||||||||||||||
|
Minority
interests
|
- | - | 2,041 | 19,578 | 21,619 | |||||||||||||||
|
Equity
owners
|
44,158 | 34,045 | 71,372 | (90,696 | ) | 58,879 | ||||||||||||||
|
Total
equity
|
44,158 | 34,045 | 73,413 | (71,118 | ) | 80,498 | ||||||||||||||
|
Total liabilities and
equity
|
70,887 | 1,563,600 | 1,269,234 | (502,069 | ) | 2,401,652 | ||||||||||||||
|
RBSG
|
RBS
|
Consolidation
|
RBSG
|
|||||||||||||||||
|
At 31 December
2007
|
Company
|
Company
|
Subsidiaries
|
adjustments
|
Group
|
|||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
|
Assets
|
||||||||||||||||||||
|
Cash and balances at central
banks
|
- | 3,333 | 14,533 | - | 17,866 | |||||||||||||||
|
Loans
and advances to banks
|
7,686 | 91,982 | 289,000 | (169,208 | ) | 219,460 | ||||||||||||||
|
Loans
and advances to customers
|
307 | 329,147 | 577,329 | (78,245 | ) | 828,538 | ||||||||||||||
|
Debt
securities
|
- | 107,250 | 189,302 | (1,896 | ) | 294,656 | ||||||||||||||
|
Equity
shares
|
- | 4,019 | 49,861 | (854 | ) | 53,026 | ||||||||||||||
|
Investments
in Group undertakings
|
43,542 | 22,210 | 11,172 | (76,924 | ) | - | ||||||||||||||
|
Settlement
balances
|
- | 2,046 | 14,543 | - | 16,589 | |||||||||||||||
|
Derivatives
|
173 | 207,913 | 81,681 | (12,365 | ) | 277,402 | ||||||||||||||
|
Intangible
assets
|
- | 295 | 40,063 | 9,558 | 49,916 | |||||||||||||||
|
Property,
plant and equipment
|
- | 2,116 | 16,435 | 194 | 18,745 | |||||||||||||||
|
Deferred
taxation
|
- | 319 | 3,400 | (600 | ) | 3,119 | ||||||||||||||
|
Prepayments,
accrued income and other assets
|
127 | 1,680 | 14,144 | (289 | ) | 15,662 | ||||||||||||||
|
Assets
of disposal groups
|
- | - | 45,850 | - | 45,850 | |||||||||||||||
|
Total
assets
|
51,835 | 772,310 | 1,347,313 | (330,629 | ) | 1,840,829 | ||||||||||||||
|
Liabilities
|
||||||||||||||||||||
|
Deposits by
banks
|
5,572 | 196,968 | 291,098 | (181,344 | ) | 312,294 | ||||||||||||||
|
Customer
accounts
|
- | 197,926 | 539,666 | (55,229 | ) | 682,363 | ||||||||||||||
|
Debt
securities in issue
|
13,453 | 79,877 | 182,708 | (1,866 | ) | 274,172 | ||||||||||||||
|
Settlement
balances and short positions
|
- | 33,677 | 57,344 | - | 91,021 | |||||||||||||||
|
Derivatives
|
179 | 204,234 | 80,004 | (12,365 | ) | 272,052 | ||||||||||||||
|
Accruals,
deferred income and other liabilities
|
8 | 5,783 | 29,517 | (1,100 | ) | 34,208 | ||||||||||||||
|
Retirement
benefit liabilities
|
- | 11 | 1,490 | (1,041 | ) | 460 | ||||||||||||||
|
Deferred
taxation
|
3 | - | 5,065 | 332 | 5,400 | |||||||||||||||
|
Insurance
liabilities
|
- | - | 10,162 | - | 10,162 | |||||||||||||||
|
Subordinated
liabilities
|
7,743 | 22,745 | 19,208 | (11,653 | ) | 38,043 | ||||||||||||||
|
Liabilities of
disposal groups
|
- | - | 29,228 | - | 29,228 | |||||||||||||||
|
Total
liabilities
|
26,958 | 741,221 | 1,245,490 | (264,266 | ) | 1,749,403 | ||||||||||||||
|
Minority
interests
|
- | - | 3,195 | 35,193 | 38,388 | |||||||||||||||
|
Equity
owners
|
24,877 | 31,089 | 98,628 | (101,556 | ) | 53,038 | ||||||||||||||
|
Total
equity
|
24,877 | 31,089 | 101,823 | (66,363 | ) | 91,426 | ||||||||||||||
|
Total liabilities and
equity
|
51,835 | 772,310 | 1,347,313 | (330,629 | ) | 1,840,829 | ||||||||||||||
|
Cash Flow
Statements
|
|
RBSG
|
RBS
|
Consolidation
|
RBSG
|
|||||||||||||||||
|
For
the year ended 31 December 2008
|
Company
|
Company
|
Subsidiaries
|
adjustments
|
Group
|
|||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
|
Net cash
flows from operating activities
|
(16,032 | ) | 29,425 | (100,181 | ) | 11,450 | (75,338 | ) | ||||||||||||
|
Net
cash flows from investing activities
|
(9,649 | ) | (54,131 | ) | 63,614 | 17,163 | 16,997 | |||||||||||||
|
Net
cash flows from financing activities
|
28,416 | 8,057 | (9,659 | ) | (11,712 | ) | 15,102 | |||||||||||||
|
Effects
of exchange rate changes on cash and cash equivalents
|
761 | 12,849 | 23,452 | (7,853 | ) | 29,209 | ||||||||||||||
|
Net
increase / (decrease) in cash and cash equivalents
|
3,496 | (3,800 | ) | (22,774 | ) | 9,048 | (14,030 | ) | ||||||||||||
|
Cash
and cash equivalents at the beginning of the period
|
1,573 | 77,249 | 137,301 | (67,168 | ) | 148,955 | ||||||||||||||
|
Cash
and cash equivalents at the end of the period
|
5,069 | 73,449 | 114,527 | (58,120 | ) | 134,925 | ||||||||||||||
|
RBSG
|
RBS
|
Consolidation
|
RBSG
|
|||||||||||||||||
|
For
the year ended 31 December 2007
|
Company
|
Company
|
Subsidiaries
|
adjustments
|
Group
|
|||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
|
Net
cash flows from operating activities
|
18,353 | 14,876 | 13,654 | (21,279 | ) | 25,604 | ||||||||||||||
|
Net
cash flows from investing activities
|
(18,035 | ) | (3,640 | ) | 19,353 | 18,321 | 15,999 | |||||||||||||
|
Net
cash flows from financing activities
|
536 | (174 | ) | 44,725 | (15,396 | ) | 29,691 | |||||||||||||
|
Effects
of exchange rate changes on cash and cash equivalents
|
62 | 2,601 | 3,724 | (377 | ) | 6,010 | ||||||||||||||
|
Net
increase / (decrease) in cash and cash equivalents
|
916 | 13,663 | 81,456 | (18,731 | ) | 77,304 | ||||||||||||||
|
Cash
and cash equivalents at the beginning of the period
|
657 | 63,586 | 55,845 | (48,437 | ) | 71,651 | ||||||||||||||
|
Cash
and cash equivalents at the end of the period
|
1,573 | 77,249 | 137,301 | (67,168 | ) | 148,955 | ||||||||||||||
|
RBSG
|
RBS
|
Consolidation
|
RBSG
|
|||||||||||||||||
|
For
the year ended 31 December 2006
|
Company
|
Company
|
Subsidiaries
|
adjustments
|
Group
|
|||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
|
Net cash
flows from operating activities
|
3,648 | 23,394 | 6,779 | (16,380 | ) | 17,441 | ||||||||||||||
|
Net
cash flows from investing activities
|
(550 | ) | 3,857 | 2,049 | 1,289 | 6,645 | ||||||||||||||
|
Net
cash flows from financing activities
|
(3,515 | ) | (1,036 | ) | 391 | 2,644 | (1,516 | ) | ||||||||||||
|
Effects
of exchange rate changes on cash and cash equivalents
|
(52 | ) | (2,036 | ) | (2,665 | ) | 1,285 | (3,468 | ) | |||||||||||
|
Net
(decrease) / increase in cash and cash equivalents
|
(469 | ) | 24,179 | 6,554 | (11,162 | ) | 19,102 | |||||||||||||
|
Cash
and cash equivalents at the beginning of the period
|
1,126 | 39,407 | 49,291 | (37,275 | ) | 52,549 | ||||||||||||||
|
Cash
and cash equivalents at the end of the period
|
657 | 63,586 | 55,845 | (48,437 | ) | 71,651 | ||||||||||||||
252
Additional
information
|
254
|
Financial
Summary
|
|
254
|
Amounts in
accordance with IFRS
|
|
263
|
Exchange
rates
|
|
264
|
Economic and
monetary environment
|
|
265
|
Supervision
|
|
266
|
Regulatory
reviews and developments
|
|
267
|
Description
of property and equipment
|
|
267
|
Major
shareholders
|
|
267
|
Material
contracts
|
|
272
|
FSA Listing
Rules disclosure
|
253
The Group’s
financial statements are prepared in accordance with IFRS as issued by the IASB.
Selected data under IFRS for each of the five years ended 31 December 2008 are
presented on pages 254 to 262.
The dollar
financial information included below has been converted from sterling at a rate
of £1.00 to US$1.4619, being the Noon Buying Rate on 31 December
2008.
Amounts
in accordance with IFRS
|
2008
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||||||
|
Summary
consolidated income statement — IFRS
|
$m | £m | £m | £m | £m | £m | ||||||||||||||||||
|
Net interest
income
|
27,301 | 18,675 | 12,069 | 10,596 | 9,918 | 9,071 | ||||||||||||||||||
|
Non-interest
income
(1)
|
10,515 | 7,193 | 18,297 | 17,406 | 15,984 | 14,320 | ||||||||||||||||||
|
Total
income
|
37,816 | 25,868 | 30,366 | 28,002 | 25,902 | 23,391 | ||||||||||||||||||
|
Operating
expenses (2, 3,
4, 5, 6)
|
79,238 | 54,202 | 13,942 | 12,480 | 11,946 | 10,362 | ||||||||||||||||||
|
(Loss)/profit
before other operating charges and impairment losses
|
(41,422 | ) | (28,334 | ) | 16,424 | 15,522 | 13,956 | 13,029 | ||||||||||||||||
|
Insurance net
claims
|
6,476 | 4,430 | 4,624 | 4,458 | 4,313 | 4,260 | ||||||||||||||||||
|
Impairment
|
11,800 | 8,072 | 1,968 | 1,878 | 1,707 | 1,485 | ||||||||||||||||||
|
Operating
(loss)/profit before tax
|
(59,698 | ) | (40,836 | ) | 9,832 | 9,186 | 7,936 | 7,284 | ||||||||||||||||
|
Tax
|
(3,396 | ) | (2,323 | ) | 2,044 | 2,689 | 2,378 | 1,995 | ||||||||||||||||
|
(Loss)/profit
from continuing operations
|
(56,302 | ) | (38,513 | ) | 7,788 | 6,497 | 5,558 | 5,289 | ||||||||||||||||
|
Profit/(loss)
from discontinued operations, net of tax
|
5,805 | 3,971 | (76 | ) | — | — | — | |||||||||||||||||
|
(Loss)/profit
for the year
|
(50,497 | ) | (34,542 | ) | 7,712 | 6,497 | 5,558 | 5,289 | ||||||||||||||||
|
(Loss)/profit
attributable to:
|
||||||||||||||||||||||||
|
Minority
interests
|
(15,835 | ) | (10,832 | ) | 163 | 104 | 57 | 177 | ||||||||||||||||
|
Other
owners
|
871 | 596 | 246 | 191 | 109 | 256 | ||||||||||||||||||
|
Ordinary
shareholders
|
(35,533 | ) | (24,306 | ) | 7,303 | 6,202 | 5,392 | 4,856 | ||||||||||||||||
Notes:
|
(1)
|
Includes gain
on sale of strategic investment of £333 million in
2005.
|
|
(2)
|
Includes loss
on sale of subsidiaries of £93 million in
2005.
|
|
(3)
|
Includes
integration expenditure of £1,050 million in 2008 (2007 — £108 million;
2006 — £134 million; 2005 — £458 million; 2004 —£520
million).
|
|
(4)
|
Includes
purchased intangibles amortisation of £919 million in 2008 (2007 — £234
million; 2006 — £94 million; 2005 — £97 million; 2004 —£45
million).
|
|
(5)
|
Includes
restructuring expenditure of £307 million in
2008.
|
|
(6)
|
Includes
write-down of goodwill and other intangibles assets of £32,581 million in
2008.
|
|
2008
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||||||
|
Summary
consolidated balance sheet — IFRS
|
$m | £m | £m | £m | £m | £m | ||||||||||||||||||
|
Loans and
advances (1)
|
1,480,786 | 1,012,919 | 1,047,998 | 549,499 | 487,813 | 408,324 | ||||||||||||||||||
|
Debt
securities and equity shares
|
429,622 | 293,879 | 347,682 | 146,246 | 135,804 | 104,741 | ||||||||||||||||||
|
Derivatives
and settlement balances (2)
|
1,477,091 | 1,010,391 | 293,991 | 109,506 | 89,470 | 15,193 | ||||||||||||||||||
|
Other
assets
(1)
|
123,476 | 84,463 | 151,158 | 51,581 | 51,542 | 51,575 | ||||||||||||||||||
|
Total
assets
|
3,510,975 | 2,401,652 | 1,840,829 | 856,832 | 764,629 | 579,833 | ||||||||||||||||||
|
Owners’
equity
|
86,075 | 58,879 | 53,038 | 40,227 | 35,435 | 33,905 | ||||||||||||||||||
|
Minority
interests
|
31,605 | 21,619 | 38,388 | 5,263 | 2,109 | 3,492 | ||||||||||||||||||
|
Subordinated
liabilities
(1)
|
71,858 | 49,154 | 38,043 | 27,654 | 28,274 | 20,366 | ||||||||||||||||||
|
Deposits
(1)
|
1,312,137 | 897,556 | 994,657 | 516,365 | 453,274 | 383,198 | ||||||||||||||||||
|
Derivatives,
settlement balances and short positions (2)
|
1,499,385 | 1,025,641 | 363,073 | 152,988 | 128,228 | 43,577 | ||||||||||||||||||
|
Other
liabilities (1)
|
509,915 | 348,803 | 353,630 | 114,335 | 117,309 | 95,295 | ||||||||||||||||||
|
Total
liabilities and equity
|
3,510,975 | 2,401,652 | 1,840,829 | 856,832 | 764,629 | 579,833 | ||||||||||||||||||
Notes:
|
(1)
|
2007
comparative data have been restated following finalisation of the ABN AMRO
acquisition accounting.
|
|
(2)
|
2007 to 2004
comparative amounts have been restated for the netting of certain
derivative asset and derivative liability balances with the London
Clearing House.
|
254
The per share data in the table below have been restated for the
effect of the rights issue in June 2008 and the capitalisation issue in
September 2008.
|
Other
financial data based upon IFRS
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||
|
Earnings per
ordinary share — pence
|
(146.7 | ) | 64.0 | 54.4 | 47.3 | 43.9 | ||||||||||||||
|
Diluted
earnings per ordinary share — pence (1)
|
(146.7 | ) | 63.4 | 53.9 | 47.0 | 43.5 | ||||||||||||||
|
Dividends per
ordinary share — pence
|
19.3 | 27.0 | 21.6 | 17.0 | 14.7 | |||||||||||||||
|
Dividend
payout ratio (2)
|
— | 45% | 46% | 43% | 38% | |||||||||||||||
|
Share price
per ordinary share at year end — £
|
0.494 | 3.72 | 5.56 | 4.90 | 4.89 | |||||||||||||||
|
Market
capitalisation at year end — £bn
|
19.5 | 44.4 | 62.8 | 56.1 | 55.6 | |||||||||||||||
|
Net asset
value per ordinary share — £
|
1.15 | 3.74 | 3.24 | 2.83 | 2.59 | |||||||||||||||
|
Return on
average total assets (3)
|
(1.19% | ) | 0.65% | 0.74% | 0.73% | 0.94% | ||||||||||||||
|
Return on
average ordinary shareholders’ equity
(4)
|
(50.3% | ) | 18.8% | 18.5% | 17.5% | 18.3% | ||||||||||||||
|
Average
owners’ equity as a percentage of average total assets
|
2.9% | 3.9% | 4.4% | 4.5% | 5.9% | |||||||||||||||
|
Risk asset
ratio — Tier 1
|
10.0% | 7.3% | 7.5% | 7.6% | 7.0% | |||||||||||||||
|
Risk asset
ratio — Total
|
14.1% | 11.2% | 11.7% | 11.7% | 11.7% | |||||||||||||||
|
Ratio of
earnings to combined fixed charges and preference share dividends (5)
|
||||||||||||||||||||
|
— including
interest on deposits
|
(0.29 | ) | 1.45 | 1.62 | 1.67 | 1.88 | ||||||||||||||
|
— excluding
interest on deposits
|
(11.96 | ) | 5.73 | 6.12 | 6.05 | 7.43 | ||||||||||||||
|
Ratio of
earnings to fixed charges only
(5)
|
||||||||||||||||||||
|
— including
interest on deposits
|
(0.30 | ) | 1.47 | 1.64 | 1.69 | 1.94 | ||||||||||||||
|
— excluding
interest on deposits
|
(14.71 | ) | 6.53 | 6.87 | 6.50 | 9.70 | ||||||||||||||
Notes:
|
(1)
|
None of the
convertible preference shares had a dilutive effect in 2008. All the
convertible preference shares had a dilutive effect in 2007, 2006 and 2005
and as such were included in the computation of diluted earnings per
share. In 2004, $1,500 million of convertible preference shares was not
included in the computation of diluted earnings per share as their effect
was anti-dilutive.
|
|
(2)
|
Dividend
payout ratio represents the interim dividend paid and current year final
dividend proposed as a percentage of profit attributable to ordinary
shareholders.
|
|
(3)
|
Return on
average total assets represents profit attributable to ordinary
shareholders as a percentage of average total
assets.
|
|
(4)
|
Return on
average ordinary shareholders’ equity represents profit attributable to
ordinary shareholders expressed as a percentage of average ordinary
shareholders’ equity.
|
|
(5)
|
For this
purpose, earnings consist of income before tax and minority interests,
plus fixed charges less the unremitted income of associated undertakings
(share of profits less dividends received). Fixed charges consist of total
interest expense, including or excluding interest on deposits and debt
securities in issue, as appropriate, and the proportion of rental expense
deemed representative of the interest factor (one third of total rental
expenses).
|
255
Amounts
in accordance with IFRS (continued)
Analysis
of loans and advances to customers — IFRS
The following table
analyses loans and advances to customers before provisions by remaining
maturity, geographical area and type of customer.
|
Within
1
year
|
After
1
but
within
5
years
|
After
5
years
|
2008
Total
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||||||||||||
| £m | £m | £m | £m | £m | £m | £m | £m | |||||||||||||||||||||||||
|
UK
|
||||||||||||||||||||||||||||||||
|
Central and
local government
|
2,760 | 27 | 304 | 3,091 | 3,135 | 6,732 | 3,340 | 1,866 | ||||||||||||||||||||||||
|
Manufacturing
|
8,615 | 4,552 | 1,907 | 15,074 | 13,452 | 11,051 | 11,615 | 6,292 | ||||||||||||||||||||||||
|
Construction
|
6,465 | 2,482 | 1,224 | 10,171 | 10,202 | 8,251 | 7,274 | 5,024 | ||||||||||||||||||||||||
|
Finance
|
35,055 | 3,547 | 3,830 | 42,432 | 70,006 | 25,017 | 27,091 | 24,638 | ||||||||||||||||||||||||
|
Service
industries and business activities
|
25,763 | 13,076 | 19,799 | 58,638 | 53,965 | 43,887 | 40,687 | 30,867 | ||||||||||||||||||||||||
|
Agriculture,
forestry and fishing
|
1,361 | 302 | 1,309 | 2,972 | 2,473 | 2,767 | 2,645 | 2,481 | ||||||||||||||||||||||||
|
Property
|
19,231 | 15,251 | 17,645 | 52,127 | 50,051 | 39,296 | 32,899 | 26,448 | ||||||||||||||||||||||||
|
Individuals —
home mortgages
|
19,005 | 1,672 | 60,290 | 80,967 | 73,916 | 70,884 | 65,286 | 57,535 | ||||||||||||||||||||||||
|
—
other
|
20,027 | 3,337 | 3,625 | 26,989 | 28,186 | 27,922 | 26,323 | 26,459 | ||||||||||||||||||||||||
|
Finance
leases and instalment credit
|
2,705 | 6,666 | 7,992 | 17,363 | 15,632 | 14,218 | 13,909 | 13,044 | ||||||||||||||||||||||||
|
Accrued
interest
|
2,348 | 29 | 86 | 2,463 | 2,344 | 1,497 | 1,250 | — | ||||||||||||||||||||||||
|
Total
domestic
|
143,335 | 50,941 | 118,011 | 312,287 | 323,362 | 251,522 | 232,319 | 194,654 | ||||||||||||||||||||||||
|
Overseas
residents
|
60,415 | 36,570 | 22,671 | 119,656 | 98,845 | 69,242 | 52,234 | 48,183 | ||||||||||||||||||||||||
|
Total
UK offices
|
203,750 | 87,511 | 140,682 | 431,943 | 422,207 | 320,764 | 284,553 | 242,837 | ||||||||||||||||||||||||
|
Overseas
|
||||||||||||||||||||||||||||||||
|
US
|
38,706 | 42,123 | 45,448 | 126,277 | 135,059 | 92,166 | 90,606 | 74,027 | ||||||||||||||||||||||||
|
Rest of the
World
|
107,184 | 66,794 | 153,413 | 327,391 | 277,721 | 57,896 | 45,951 | 34,555 | ||||||||||||||||||||||||
|
Total
Overseas offices
|
145,890 | 108,917 | 198,861 | 453,668 | 412,780 | 150,062 | 136,557 | 108,582 | ||||||||||||||||||||||||
|
Loans
and advances to customers — gross
|
349,640 | 196,428 | 339,543 | 885,611 | 834,987 | 470,826 | 421,110 | 351,419 | ||||||||||||||||||||||||
|
Loan
impairment provisions
|
(10,889 | ) | (6,449 | ) | (3,933 | ) | (3,884 | ) | (4,168 | ) | ||||||||||||||||||||||
|
Loans
and advances to customers — net
|
874,722 | 828,538 | 466,893 | 417,226 | 347,251 | |||||||||||||||||||||||||||
|
Fixed
rate
|
57,671 | 46,487 | 79,536 | 183,693 | 351,336 | 115,240 | 100,748 | 101,227 | ||||||||||||||||||||||||
|
Variable
rate
|
291,969 | 149,941 | 260,007 | 701,918 | 483,651 | 355,586 | 320,362 | 250,192 | ||||||||||||||||||||||||
|
Loans
and advances to customers — gross
|
349,640 | 196,428 | 339,543 | 885,611 | 834,987 | 470,826 | 421,110 | 351,419 | ||||||||||||||||||||||||
Cross
border exposures
Cross border
exposures are defined as loans to banks and customers (including finance lease
and instalment credit receivables) and other monetary assets, including
non-local currency claims of overseas offices on local residents.
The Group monitors
the geographical breakdown of these exposures based on the country of domicile
of the borrower or guarantor of ultimate risk.
The table below
sets out the Group’s cross border outstandings in excess of 0.75% of Group total
assets (including acceptances), which totalled £2,401.7 billion at 31 December
2008 (2007 — £1,840.8 billion; 2006 — £856.8 billion). None of these
countries has experienced repayment difficulties that have required refinancing
of outstanding debt.
|
2008
|
2007
|
2006
|
||||||||||
| £m | £m | £m | ||||||||||
|
United
States
|
91,544 | 91,653 | 43,718 | |||||||||
|
France
|
58,251 | 65,430 | 18,136 | |||||||||
|
Germany
|
40,812 | 51,123 | 20,130 | |||||||||
|
Spain
|
36,441 | 31,651 | 9,341 | |||||||||
|
Netherlands
|
34,283 | 27,707 | 12,407 | |||||||||
|
Republic of
Ireland
|
18,662 | 17,736 | 8,530 | |||||||||
|
Cayman
Islands
|
18,126 | 17,099 | 9,063 | |||||||||
|
Japan
|
* | 31,922 | 7,725 | |||||||||
|
Italy
|
* | 23,925 | 7,506 | |||||||||
|
Norway
|
* | * | 7,768 | |||||||||
|
Switzerland
|
* | * | 7,262 | |||||||||
|
China
|
* | * | 6,574 | |||||||||
|
*
|
Less than
0.75% of Group total assets.
|
256
Loan
impairment provisions
For a discussion of
the factors considered in determining the amount of the provisions, see
‘Impairment’ on page 78 and ‘Critical accounting policies — Loan impairment
provisions’ on pages 169 and 170.
The following table
shows the elements of loan impairment provisions.
|
IFRS
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
|
Provisions
at the beginning of the year
|
||||||||||||||||||||
|
Domestic
|
3,258 | 3,037 | 2,759 | 2,675 | 2,408 | |||||||||||||||
|
Foreign
|
3,194 | 898 | 1,128 | 1,470 | 1,477 | |||||||||||||||
| 6,452 | 3,935 | 3,887 | 4,145 | 3,885 | ||||||||||||||||
|
Transfer
to disposal groups
|
||||||||||||||||||||
|
Domestic
|
— | — | — | — | — | |||||||||||||||
|
Foreign
|
(767 | ) | — | — | — | — | ||||||||||||||
| (767 | ) | — | — | — | — | |||||||||||||||
|
Currency
translation and other adjustments
|
||||||||||||||||||||
|
Domestic
|
107 | 5 | (17 | ) | (7 | ) | (8 | ) | ||||||||||||
|
Foreign
|
1,334 | 178 | (44 | ) | 58 | (90 | ) | |||||||||||||
| 1,441 | 183 | (61 | ) | 51 | (98 | ) | ||||||||||||||
|
(Disposals)/acquisitions
of businesses
|
||||||||||||||||||||
|
Domestic
|
(108 | ) | 10 | — | — | 2 | ||||||||||||||
|
Foreign
|
(70 | ) | 2,211 | — | — | 288 | ||||||||||||||
| (178 | ) | 2,221 | — | — | 290 | |||||||||||||||
|
Amounts
written-off
|
||||||||||||||||||||
|
Domestic
|
(1,446 | ) | (1,222 | ) | (1,360 | ) | (1,252 | ) | (901 | ) | ||||||||||
|
Foreign
|
(1,702 | ) | (789 | ) | (481 | ) | (788 | ) | (548 | ) | ||||||||||
| (3,148 | ) | (2,011 | ) | (1,841 | ) | (2,040 | ) | (1,449 | ) | |||||||||||
|
Recoveries
of amounts written-off in previous years
|
||||||||||||||||||||
|
Domestic
|
116 | 158 | 119 | 97 | 85 | |||||||||||||||
|
Foreign
|
203 | 184 | 96 | 75 | 59 | |||||||||||||||
| 319 | 342 | 215 | 172 | 144 | ||||||||||||||||
|
Charged
to income statement
|
||||||||||||||||||||
|
Domestic
|
2,698 | 1,420 | 1,663 | 1,376 | 960 | |||||||||||||||
|
Foreign
|
4,393 | 526 | 214 | 327 | 442 | |||||||||||||||
| 7,091 | 1,946 | 1,877 | 1,703 | 1,402 | ||||||||||||||||
|
Unwind
of discount
|
||||||||||||||||||||
|
Domestic
|
(151 | ) | (150 | ) | (127 | ) | (130 | ) | — | |||||||||||
|
Foreign
|
(43 | ) | (14 | ) | (15 | ) | (14 | ) | — | |||||||||||
| (194 | ) | (164 | ) | (142 | ) | (144 | ) | — | ||||||||||||
|
Provisions
at the end of the year (1)
|
||||||||||||||||||||
|
Domestic
|
4,474 | 3,258 | 3,037 | 2,759 | 2,546 | |||||||||||||||
|
Foreign
|
6,542 | 3,194 | 898 | 1,128 | 1,628 | |||||||||||||||
| 11,016 | 6,452 | 3,935 | 3,887 | 4,174 | ||||||||||||||||
|
Gross
loans and advances to customers
|
||||||||||||||||||||
|
Domestic
|
312,287 | 323,362 | 251,522 | 232,319 | 194,654 | |||||||||||||||
|
Foreign
|
573,324 | 511,625 | 219,304 | 188,791 | 156,765 | |||||||||||||||
| 885,611 | 834,987 | 470,826 | 421,110 | 351,419 | ||||||||||||||||
|
Closing
customer provisions as a % of gross loans and advances to customers
(2)
|
||||||||||||||||||||
|
Domestic
|
1.43 | % | 1.01 | % | 1.21 | % | 1.19 | % | 1.31 | % | ||||||||||
|
Foreign
|
1.12 | % | 0.62 | % | 0.41 | % | 0.60 | % | 1.04 | % | ||||||||||
|
Total
|
1.23 | % | 0.77 | % | 0.84 | % | 0.92 | % | 1.19 | % | ||||||||||
|
Customer
charge to income statement as a % of gross loans and advances to
customers
|
||||||||||||||||||||
|
Domestic
|
0.86 | % | 0.44 | % | 0.66 | % | 0.59 | % | 0.49 | % | ||||||||||
|
Foreign
|
0.75 | % | 0.10 | % | 0.10 | % | 0.17 | % | 0.28 | % | ||||||||||
|
Total
|
0.79 | % | 0.23 | % | 0.40 | % | 0.40 | % | 0.40 | % | ||||||||||
Notes:
|
(1)
|
Includes
closing provisions against loans and advances to banks of £127 million
(2007 — £3 million; 2006 — £2 million; 2005 — £3 million; 2004 —£6
million).
|
|
(2)
|
Closing
customer provisions exclude closing provisions against loans and advances
to banks.
|
257
Amounts
in accordance with IFRS (continued)
Loan
impairment provisions (continued)
The following table
shows additional information in respect of the loan impairment
provisions.
|
IFRS
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
|
Loan
impairment provisions at end of year:
|
||||||||||||||||||||
|
–
customers
|
10,889 | 6,449 | 3,933 | 3,884 | ||||||||||||||||
|
–
banks
|
127 | 3 | 2 | 3 | ||||||||||||||||
|
Specific
provisions
|
||||||||||||||||||||
|
–
customers
|
3,607 | |||||||||||||||||||
|
–
banks
|
6 | |||||||||||||||||||
|
General
provision
|
561 | |||||||||||||||||||
| 11,016 | 6,452 | 3,935 | 3,887 | 4,174 | ||||||||||||||||
|
Average loans
and advances to customers (gross)
|
858,333 | 567,900 | 445,766 | 402,473 | 299,430 | |||||||||||||||
|
As a % of
average loans and advances to customers during the year:
|
||||||||||||||||||||
|
Total
customer provisions charged to income statement
|
0.81 | % | 0.34 | % | 0.42 | % | 0.42 | % | 0.47 | % | ||||||||||
|
Amounts
written-off (net of recoveries) – customers
|
0.33 | % | 0.29 | % | 0.36 | % | 0.46 | % | 0.44 | % | ||||||||||
Analysis
of closing loan impairment provisions
The following table
analyses customer loan impairment provisions by geographical area and type of
domestic customer.
|
IFRS
|
||||||||||||||||||||||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||||||||||||||||||||||
|
Closing
provision
|
%
of loans to total loans
|
Closing
provision
|
%
of loans to total loans
|
Closing
provision
|
%
of loans to total loans
|
Closing
provision
|
%
of loans to total loans
|
Closing
provision
|
%
of loans to total loans
|
|||||||||||||||||||||||||||||||
| £m |
%
|
£m |
%
|
£m |
%
|
£m |
%
|
£m |
%
|
|||||||||||||||||||||||||||||||
|
Domestic
|
||||||||||||||||||||||||||||||||||||||||
|
Central and
local government
|
— | 0.3 | — | 0.4 | — | 1.4 | — | 0.8 | — | 0.6 | ||||||||||||||||||||||||||||||
|
Manufacturing
|
127 | 1.7 | 93 | 1.6 | 94 | 2.4 | 138 | 2.8 | 127 | 1.8 | ||||||||||||||||||||||||||||||
|
Construction
|
254 | 1.1 | 75 | 1.2 | 63 | 1.8 | 74 | 1.7 | 71 | 1.4 | ||||||||||||||||||||||||||||||
|
Finance
|
67 | 4.8 | 52 | 8.4 | 33 | 5.3 | 104 | 6.4 | 54 | 7.0 | ||||||||||||||||||||||||||||||
|
Service
industries and business activities
|
778 | 6.6 | 562 | 6.5 | 647 | 9.3 | 647 | 9.7 | 516 | 8.8 | ||||||||||||||||||||||||||||||
|
Agriculture,
forestry and fishing
|
19 | 0.3 | 21 | 0.3 | 25 | 0.6 | 26 | 0.6 | 23 | 0.7 | ||||||||||||||||||||||||||||||
|
Property
|
490 | 5.9 | 85 | 6.0 | 70 | 8.3 | 63 | 7.8 | 64 | 7.5 | ||||||||||||||||||||||||||||||
|
Individuals —
home mortgages
|
36 | 9.1 | 36 | 8.8 | 37 | 15.1 | 36 | 15.5 | 32 | 16.4 | ||||||||||||||||||||||||||||||
|
—
other
|
2,235 | 3.0 | 2,054 | 3.4 | 1,826 | 5.9 | 1,513 | 6.3 | 1,277 | 7.5 | ||||||||||||||||||||||||||||||
|
Finance
leases and instalment credit
|
194 | 2.0 | 132 | 1.9 | 103 | 3.0 | 88 | 3.3 | 122 | 3.7 | ||||||||||||||||||||||||||||||
|
Accrued
interest
|
— | 0.3 | — | 0.3 | — | 0.3 | — | 0.3 | ||||||||||||||||||||||||||||||||
|
Total
domestic
|
4,200 | 35.1 | 3,110 | 38.8 | 2,898 | 53.4 | 2,689 | 55.2 | 2,286 | 55.4 | ||||||||||||||||||||||||||||||
|
Foreign
|
4,745 | 64.9 | 2,289 | 61.2 | 442 | 46.6 | 652 | 44.8 | 1,321 | 44.6 | ||||||||||||||||||||||||||||||
|
Impaired book
provisions
|
8,945 | 100.0 | 5,399 | 100.0 | 3,340 | 100.0 | 3,341 | 100.0 | 100.0 | |||||||||||||||||||||||||||||||
|
Latent book
provisions
|
1,944 | 1,050 | 593 | 543 | ||||||||||||||||||||||||||||||||||||
|
Specific
provisions
|
3,607 | |||||||||||||||||||||||||||||||||||||||
|
General
provision
|
561 | |||||||||||||||||||||||||||||||||||||||
|
Total
provisions
|
10,889 | 6,449 | 3,933 | 3,884 | 4,168 | |||||||||||||||||||||||||||||||||||
258
Analysis
of write-offs
The following table
analyses amounts written-off by geographical area and type of domestic
customer.
|
IFRS
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
|
Domestic
|
||||||||||||||||||||
|
Manufacturing
|
61 | 29 | 41 | 40 | 55 | |||||||||||||||
|
Construction
|
51 | 21 | 29 | 17 | 12 | |||||||||||||||
|
Finance
|
31 | 47 | 17 | 21 | 19 | |||||||||||||||
|
Service
industries and business activities
|
299 | 190 | 212 | 176 | 163 | |||||||||||||||
|
Agriculture,
forestry and fishing
|
5 | 4 | 5 | 4 | 9 | |||||||||||||||
|
Property
|
34 | 9 | 6 | 25 | 33 | |||||||||||||||
|
Individuals —
home mortgages
|
1 | — | 5 | 4 | 4 | |||||||||||||||
|
—
others
|
938 | 909 | 1,021 | 950 | 516 | |||||||||||||||
|
Finance
leases and instalment credit
|
26 | 13 | 24 | 15 | 90 | |||||||||||||||
|
Total
domestic
|
1,446 | 1,222 | 1,360 | 1,252 | 901 | |||||||||||||||
|
Foreign
|
1,702 | 789 | 481 | 788 | 548 | |||||||||||||||
|
Total write-offs (1)
|
3,148 | 2,011 | 1,841 | 2,040 | 1,449 | |||||||||||||||
Note:
(1) Excludes
£2 million written-off in respect of loans and advances to banks in
2005.
Analysis
of recoveries
The following table
analyses recoveries of amounts written-off by geographical area and type of
domestic customer.
|
IFRS
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
| £m | £m | £m | £m | £m | ||||||||||||||||
|
Domestic
|
||||||||||||||||||||
|
Manufacturing
|
2 | — | — | 1 | 1 | |||||||||||||||
|
Construction
|
— | — | — | 1 | — | |||||||||||||||
|
Finance
|
2 | — | — | — | 2 | |||||||||||||||
|
Service
industries and business activities
|
12 | 7 | 5 | 2 | 1 | |||||||||||||||
|
Property
|
— | — | 1 | 2 | — | |||||||||||||||
|
Individuals —
home mortgages
|
— | — | — | — | 1 | |||||||||||||||
|
—
others
|
96 | 143 | 101 | 84 | 78 | |||||||||||||||
|
Finance
leases and instalment credit
|
4 | 8 | 12 | 7 | 2 | |||||||||||||||
|
Total
domestic
|
116 | 158 | 119 | 97 | 85 | |||||||||||||||
|
Foreign
|
203 | 184 | 96 | 75 | 59 | |||||||||||||||
|
Total
recoveries
|
319 | 342 | 215 | 172 | 144 | |||||||||||||||
259
Amounts
in accordance with IFRS (continued)
Risk
elements in lending and potential problem loans
The Group’s loan
control and review procedures do not include the classification of loans as
non-accrual, accruing past due, restructured and potential problem loans, as
defined by the SEC in the US. The following table shows the estimated amount of
loans that would be reported using the SEC’s classifications. The figures are
stated before deducting the value of security held or related
provisions.
IFRS require
interest to be recognised on a financial asset (or a group of financial assets)
after impairment at the rate of interest used to discount recoveries when
measuring the impairment loss. Thus, interest on impaired financial assets is
credited to profit or loss as the discount on expected recoveries unwinds.
Despite this, such assets are not considered performing. All loans that have an
impairment provision are classified as non-accrual. This is a change from
practice in 2004 and earlier years where certain loans with provisions were
classified as past due 90 days or potential problem loans (and interest accrued
on them).
|
IFRS
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
£m
|
£m
|
£m
|
£m
|
£m
|
||||||||||||||||
|
Loans
accounted for on a non-accrual basis (2):
|
||||||||||||||||||||
|
Domestic
|
8,588 | 5,599 | 5,420 | 4,977 | 3,658 | |||||||||||||||
|
Foreign
|
10,891 | 4,763 | 812 | 949 | 1,075 | |||||||||||||||
|
Total
|
19,479 | 10,362 | 6,232 | 5,926 | 4,733 | |||||||||||||||
|
Accruing
loans which are contractually overdue
|
||||||||||||||||||||
|
90 days or
more as to principal or interest (3):
|
||||||||||||||||||||
|
Domestic
|
1,201 | 217 | 81 | 2 | 634 | |||||||||||||||
|
Foreign
|
581 | 152 | 24 | 7 | 79 | |||||||||||||||
|
Total
|
1,782 | 369 | 105 | 9 | 713 | |||||||||||||||
|
Loans not
included above which are classified as
|
||||||||||||||||||||
|
‘troubled
debt restructurings’ by the SEC:
|
||||||||||||||||||||
|
Domestic
|
— | — | — | 2 | 14 | |||||||||||||||
|
Foreign
|
— | — | — | — | 10 | |||||||||||||||
|
Total
|
— | — | — | 2 | 24 | |||||||||||||||
|
Total
risk elements in lending
|
21,261 | 10,731 | 6,337 | 5,937 | 5,470 | |||||||||||||||
|
Potential
problem loans (4)
|
||||||||||||||||||||
|
Domestic
|
218 | 63 | 47 | 14 | 173 | |||||||||||||||
|
Foreign
|
8 | 608 | 5 | 5 | 107 | |||||||||||||||
|
Total
potential problem loans
|
226 | 671 | 52 | 19 | 280 | |||||||||||||||
|
Closing
provisions for impairment as a % of total risk elements in
lending
|
52 | % | 60 | % | 62 | % | 65 | % | 76 | % | ||||||||||
|
Closing
provisions for impairment as a % of total risk elements in lending and
potential problem loans
|
51 | % | 57 | % | 62 | % | 65 | % | 72 | % | ||||||||||
|
Risk elements
in lending as a % of gross lending to customers excluding reverse
repos
|
2.51 | % | 1.55 | % | 1.55 | % | 1.60 | % | 1.83 | % | ||||||||||
Notes:
|
(1)
|
For the
analysis above, ‘Domestic’ consists of the United Kingdom domestic
transactions of the Group. ‘Foreign’ comprises the Group’s transactions
conducted through offices outside the UK and through those offices in the
UK specifically organised to service international banking
transactions.
|
|
(2)
|
All loans
against which an impairment provision is held are reported in the
non-accrual category.
|
|
(3)
|
Loans where an
impairment event has taken place but no impairment recognised. This
category is used for fully collateralised non-revolving credit
facilities.
|
|
(4)
|
Loans for
which an impairment event has occurred but no impairment provision is
necessary. This category is used for fully collateralised advances and
revolving credit facilities where identification as 90 days overdue is not
feasible.
|
|
IFRS
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
£m
|
£m
|
£m
|
£m
|
£m
|
||||||||||||||||
|
Gross income
not recognised but which would have been recognised under the original
terms of non-accrual and restructured loans:
|
||||||||||||||||||||
|
Domestic
|
393 | 390 | 370 | 334 | 235 | |||||||||||||||
|
Foreign
|
342 | 155 | 77 | 62 | 58 | |||||||||||||||
| 735 | 545 | 447 | 396 | 293 | ||||||||||||||||
|
Interest on
non-accrual and restructured loans included in net interest
income:
|
||||||||||||||||||||
|
Domestic
|
150 | 165 | 142 | 130 | 58 | |||||||||||||||
|
Foreign
|
43 | 16 | 15 | 14 | 7 | |||||||||||||||
| 193 | 181 | 157 | 144 | 65 | ||||||||||||||||
260
Analysis
of deposits — product analysis
The following table
shows the distribution of the Group’s deposits by type and geographical
area.
|
IFRS
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
£m
|
£m
|
£m
|
||||||||||
|
UK
Domestic:
|
||||||||||||
|
Demand
deposits – interest-free
|
43,376 | 43,721 | 39,149 | |||||||||
|
– interest-bearing
|
107,159 | 121,343 | 118,315 | |||||||||
|
Time deposits
– savings
|
88,434 | 41,185 | 31,656 | |||||||||
|
– other
|
130,951 | 207,263 | 80,496 | |||||||||
|
Overseas
residents:
|
||||||||||||
|
Demand
deposits – interest-free
|
907 | 563 | 573 | |||||||||
|
– interest-bearing
|
16,320 | 25,129 | 37,729 | |||||||||
|
Time deposits
– savings
|
1,819 | 605 | 1,122 | |||||||||
|
– other
|
67,477 | 87,437 | 51,568 | |||||||||
|
Total
UK offices
|
456,443 | 527,246 | 360,608 | |||||||||
|
Overseas
|
||||||||||||
|
Demand
deposits – interest-free
|
29,253 | 27,959 | 12,173 | |||||||||
|
–
interest-bearing
|
92,354 | 70,758 | 27,441 | |||||||||
|
Time deposits
– savings
|
68,014 | 52,381 | 19,049 | |||||||||
|
– other
|
251,492 | 316,313 | 97,094 | |||||||||
|
Total
overseas offices
|
441,113 | 467,411 | 155,757 | |||||||||
|
Total
deposits
|
897,556 | 994,657 | 516,365 | |||||||||
|
Held-for-trading
|
137,080 | 125,917 | 104,249 | |||||||||
|
Designated as
at fair value through profit or loss
|
8,054 | 7,505 | 3,922 | |||||||||
|
Amortised
cost
|
752,422 | 861,235 | 408,194 | |||||||||
|
Total
deposits
|
897,556 | 994,657 | 516,365 | |||||||||
|
Overseas
|
||||||||||||
|
US
|
153,163 | 152,324 | 115,121 | |||||||||
|
Rest of the
World
|
287,950 | 315,087 | 40,636 | |||||||||
|
Total
overseas offices
|
441,113 | 467,411 | 155,757 | |||||||||
261
Short
term borrowings
|
IFRS
|
||||||||||||
|
2008
|
2007
|
2006
|
||||||||||
|
£m
|
£m
|
£m
|
||||||||||
|
Commercial
paper
|
||||||||||||
|
Outstanding
at year end
|
78,581 | 78,612 | 12,675 | |||||||||
|
Maximum
outstanding at any month end during the year
|
111,108 | 81,187 | 14,402 | |||||||||
|
Approximate
average amount during the year
|
98,150 | 32,498 | 13,225 | |||||||||
|
Approximate
weighted average interest rate during the year
|
3.3% | 4.8% | 4.9% | |||||||||
|
Approximate
weighted average interest rate at year end
|
3.0% | 5.5% | 5.0% | |||||||||
|
Other
short term borrowings
|
||||||||||||
|
Outstanding
at year end
|
194,346 | 280,526 | 122,576 | |||||||||
|
Maximum
outstanding at any month end during the year
|
395,132 | 312,557 | 130,867 | |||||||||
|
Approximate
average amount during the year
|
299,513 | 188,326 | 112,008 | |||||||||
|
Approximate
weighted average interest rate during the year
|
3.2% | 4.6% | 4.5% | |||||||||
|
Approximate
weighted average interest rate at year end
|
2.5% | 4.1% | 4.5% | |||||||||
Average interest
rates during the year are computed by dividing total interest expense by the
average amount borrowed. Average interest rates at year end are average rates
for a single day and as such may reflect one-day market distortions which may
not be indicative of generally prevailing rates. Original maturities of
commercial paper are not in excess of one year. ‘Other short-term borrowings’
consist principally of borrowings in the money markets included within ‘Deposits
by banks’ and ‘Customer accounts’ in the financial statements, and generally
have original maturities of one year or less.
The following table
shows details of the Group’s certificates of deposit and other time deposits
over $100,000 or equivalent by remaining maturity.
|
Within
3
months
|
Over
3 months but within
6
months
|
Over
6 months but within
12
months
|
Over
12
months
|
2008
Total
|
||||||||||||||||
|
£m
|
£m
|
£m
|
£m
|
£m
|
||||||||||||||||
|
UK
based companies and branches
|
||||||||||||||||||||
|
Certificates
of deposit
|
23,076 | 7,475 | 9,236 | 13 | 39,800 | |||||||||||||||
|
Other time
deposits
|
62,623 | 7,665 | 5,939 | 12,359 | 88,586 | |||||||||||||||
|
Overseas
based companies and branches
|
||||||||||||||||||||
|
Certificates
of deposit
|
32,263 | 1,666 | 1,316 | — | 35,245 | |||||||||||||||
|
Other time
deposits
|
111,542 | 13,498 | 7,983 | 15,641 | 148,664 | |||||||||||||||
| 229,504 | 30,304 | 24,474 | 28,013 | 312,295 | ||||||||||||||||
262
Other
contractual cash obligations
The table below
summarises the Group’s other contractual cash obligations by payment
date.
|
Group
|
||||||||||||||||||||||||
|
0-3
months
|
3-12
months
|
1-3
years
|
3-5
years
|
5-10
years
|
10-20
years
|
|||||||||||||||||||
|
2008
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
||||||||||||||||||
|
Operating
leases
|
146 | 433 | 976 | 751 | 1,448 | 1,851 | ||||||||||||||||||
|
Contractual
obligations to purchase goods or services
|
237 | 892 | 486 | 208 | 303 | 1 | ||||||||||||||||||
| 383 | 1,325 | 1,462 | 959 | 1,751 | 1,852 | |||||||||||||||||||
|
2007
|
||||||||||||||||||||||||
|
Operating
leases
|
90 | 268 | 655 | 569 | 1,060 | 1,958 | ||||||||||||||||||
|
Contractual
obligations to purchase goods or services
|
441 | 1,007 | 748 | 199 | 5 | 2 | ||||||||||||||||||
| 531 | 1,275 | 1,403 | 768 | 1,065 | 1,960 | |||||||||||||||||||
The Group’s undrawn
formal facilities, credit lines and other commitments to lend were £352,398
million (2007 — £332,811 million). While the Group has given commitments to
provide these funds, some facilities may be subject to certain conditions being
met by the counterparty. The Group does not expect all facilities to be drawn,
and some may lapse before drawdown.
Except as stated,
the following tables show, for the dates or periods indicated, the Noon Buying
Rate in New York for cable transfers in sterling as certified for customs
purposes by the Federal Reserve Bank of New York.
|
March
|
February
|
January
|
December
|
November
|
October
|
||||||||||||||||
|
US dollars
per £1
|
2009
|
2009
|
2009
|
2008
|
2008
|
2008
|
|||||||||||||||
|
Noon Buying
Rate
|
|||||||||||||||||||||
|
High
|
1.4730
|
1.4936 | 1.5254 | 1.5457 | 1.6156 | 1.7804 | |||||||||||||||
|
Low
|
1.3757
|
1.4224 | 1.3658 | 1.4395 | 1.4789 | 1.5472 | |||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
|||||||||||||||||
|
Noon Buying
Rate
|
|||||||||||||||||||||
|
Period end
rate
|
1.4619 | 1.9843 | 1.9586 | 1.7188 | 1.9160 | ||||||||||||||||
|
Average rate
for the period (1)
|
1.8424 | 2.0073 | 1.8582 | 1.8147 | 1.8356 | ||||||||||||||||
|
Consolidation
rate (2)
|
|||||||||||||||||||||
|
Period end
rate
|
1.4604 | 2.0043 | 1.9651 | 1.7214 | 1.9346 | ||||||||||||||||
|
Average rate
for the period
|
1.8528 | 2.0015 | 1.8436 | 1.8198 | 1.8325 | ||||||||||||||||
Notes:
|
(1)
|
The average of
the Noon Buying Rates on the last business day of each month during the
period.
|
|
(2)
|
The rates used
by the Group for translating US dollars into sterling in the preparation
of its financial statements.
|
|
(3)
|
On 24
April 2009, the Noon Buying Rate was £1.00 =
US$1.4697.
|
263
The world economy
entered its most difficult period in a generation in the second half of 2008.
The failure of a large financial institution in September coincided with the
near-seizure of already fragile interbank funding markets. Heightened risk
aversion among investors led to unprecedented volatility across global financial
markets including equities, fixed income and foreign exchange. Many asset prices
tumbled, with global real estate and equity markets the worst hit, while a
‘flight to quality’ prompted an historic rally in government bond markets that
pushed long-term risk free interest rates towards all time lows in many
developed economies.
The pronounced
increase in commodity prices in the first half of 2008, together with the
intensifying financial crisis led to a further sharp deterioration in private
sector confidence in all major economies. Private spending weakened
significantly. Softer demand conditions adversely affected prospects for
profitability and employment. Policymakers responded aggressively. Since
September, governments have either proposed or implemented measures that include
the recapitalisation of the banking sector, tax cuts and/or new infrastructure
spending. Central banks provided support through rate cuts and increased
liquidity provision. Despite these supportive actions, the global economy
remained on a downward trajectory at the beginning of 2009, with many
industrialised economies in recession.
In
the UK, the Bank Rate fell from 5.5% at the beginning of 2008 to 1.0% in
February 2009. The Bank of England remained cautious in the first half of 2008,
lowering policy rates a modest 25bps twice. Mounting inflationary pressures were
a major constraint, with the annual inflation rate climbing as high as 5.2% in
September, the highest reading since the Bank of England’s operational
independence in 1997, and some way above the official target of 2%. Before
October, the Bank focused on liquidity measures to support the financial system.
When it became clear in the final quarter of 2008 that the confidence in the
wider economy had fallen to levels consistent with a deep contraction, policy
became more aggressive. The government assisted the recapitalisation of the
banking sector, while the Bank of England reduced rates rapidly, from 5.0% in
October to 1.0% in February 2009 and then to 0.5% in March 2009.
However, the
economy had already gathered too much negative momentum to stop an official
recession — GDP declined by 2.1 % in the second half of 2008, and is widely
expected to fall further in 2009. One reason is lower policy rates have failed
to translate effectively into looser monetary conditions for the private sector.
Three-month sterling LIBOR, a key determinant of borrowing costs for households
and firms, remained on average almost 100bps above the prevailing Bank Rate,
well above its long-term average of 20bps. Sterling’s 17% depreciation on a
trade-weighted basis did not deliver a significant offset to weakening domestic
demand due to the difficult economic conditions prevailing in the UK’s main
trading partners.
US
policy rates also declined substantially in 2008, from 4.25% in January to
effectively zero in December. With no room to cut interest rates further, the
Federal Reserve has since started to target longer term market interest rates to
directly lower the cost of funds for households and firms, for example by
purchasing mortgage-backed securities and corporate commercial paper. More
unorthodox policy measures are likely this year. Similar to the UK, monetary
policy failed to gain much traction in the wider economy. Three-month US$ LIBOR
averaged close to 100bps higher than the prevailing policy rate.
The US officially
entered recession in December 2007 and, in spite of a fiscal stimulus in the
first half of the year, activity continued to fall through 2008 and is forecast
to decline markedly in 2009. The effects were acutely felt in employment, with
US non-farm businesses shedding 2.6 million jobs in the twelve months to
December. The dollar’s 11% depreciation in 2007 helped to boost net exports,
making trade the single biggest contributor to GDP growth in 2008. However, this
support was fading in early 2009, due to slumping overseas demand.
The Eurozone
started 2008 on a strong footing, with some member countries experiencing
above-trend growth in the first quarter. However, for reasons that varied across
countries, conditions worsened markedly throughout the remainder of the year,
and the region officially entered recession in the second quarter. Growth in
Germany, the region’s largest economy and the world’s largest exporter, was hit
hard by the slowdown in global trade. Many of the more peripheral economies,
like Ireland and Spain, with higher debt levels were hit hard by the turbulence
in credit markets and falling asset prices. Economic activity in the entire
region is forecast to continue to contract in 2009.
Policy in the
Eurozone was on average less supportive than in the UK or the US, with the Repo
Rate on hold at 4% in the first half of 2008. In July 2008, the ECB raised rates
by 25bps to fend off the dangers of spiralling inflation. Official rates finally
started to fall in October, when the ECB participated in a globally co-ordinated
rate cut to calm investors’ fears amid intensifying strains in the global
financial system. The euro’s strong appreciation against the dollar also reduced
the competitiveness of the region’s exporters.
Initially, Asia
Pacific appeared insulated from economic difficulties elsewhere as China and
India continued to grow strongly in the first half of 2008. In fact, surging
inflation reinforced concerns about overheating, and prompted a series of policy
measures aimed at cooling monetary conditions. But this perception changed
towards the end of 2008, when recession in the major industrialised countries
highlighted the region’s exposure to a retrenchment in global trade. Growth
forecasts have been cut substantially, with 2009 growth in China and India
potentially falling to half its level from a year earlier. Increasing risk
aversion of international investors also led to large capital outflows, putting
downward pressure on floating currencies and local equity markets.
Exchange rates
affect earnings and costs reported by the Group’s non-UK subsidiaries, and the
value of non-sterling denominated assets and liabilities. Sterling weakened
significantly during 2008, losing 28% against the dollar and 30% against the
euro, respectively. These movements increase the sterling-value of non-sterling
earnings, costs, assets and liabilities. As a result, the Group recognises
translation benefits if it reports profits and/or has a positive net asset
position denominated in foreign currency.
264
United
Kingdom
The UK Financial
Services Authority (FSA) is the consolidated supervisor of the Group. As at 31
December 2008, 31 companies in the Group (excluding subsidiaries of ABN AMRO),
spanning a range of financial services sectors (banking, insurance and
investment business), were authorised to conduct financial activities regulated
by the FSA.
The UK authorised
banks in the Group include the Royal Bank, NatWest, Coutts & Co and Ulster
Bank Limited. Wholesale activities, other than Group Treasury activities, are
concentrated in the Group’s Global Markets division and are undertaken under the
names of the Royal Bank and NatWest. UK retail banking activities are managed by
Regional Markets, RBS UK. The exception is Ulster Bank Limited, which is run as
a separate division within the Group. Ulster Bank Group will move to a single
brand in the Republic of Ireland, with First Active merging with Ulster Bank.
Ulster Bank Limited provides banking services in Northern Ireland while the
banking service in the Republic of Ireland is provided by Ulster Bank Ireland
Limited which is primarily supervised by the Irish Financial Services Regulatory
Authority.
Investment
management business is principally undertaken by companies in the Regional
Markets division, including Coutts & Co, Adam & Company Investment
Management Limited, and in the Global Markets division through RBS Asset
Management Limited.
General insurance
business is principally undertaken by Direct Line Insurance plc and Churchill
Insurance Company Limited. Life assurance business is principally undertaken by
Royal Scottish Assurance plc and National Westminster Life Assurance Limited (in
partnership with Aviva plc).
United
States
The Group is both a
bank holding company and a financial holding company within the meaning of the
US Bank Holding Company Act of 1956. As such, it is subject to the regulation
and supervision of the Board of Governors of the Federal Reserve System (the
“Federal Reserve”). Among other things, the Group’s direct and indirect
activities and investments in the United States are limited to those that are
‘financial in nature’ or ‘incidental’ or ‘complementary’ to a financial
activity, as determined by the Federal Reserve. The Group is also required to
obtain the prior approval of the Federal Reserve before acquiring directly or
indirectly, the ownership or control of more than 5% of any class of the voting
shares of any US bank or holding company.
Under current
Federal Reserve policy, the Group is required to act as a source of financial
strength for its US bank subsidiaries. Among other things, this source of
strength obligation could require the Group to inject capital into any of its US
bank subsidiaries if any of them became undercapitalised.
The Group’s US bank
and non-bank subsidiaries and the Royal Bank’s US branches are also subject to
supervision and regulation by a variety of other US regulatory agencies. RBS
Citizens, NA is supervised by the Office of the Comptroller of the Currency,
which is charged with the regulation and supervision of nationally chartered
banks. Citizens Financial Group is under the supervision of the Federal Reserve
as a bank holding company. Citizens Bank of Pennsylvania is subject to the
regulation and supervision of the Pennsylvania Department of Banking and the US
Federal Deposit Insurance Corporation. The Royal Bank’s New York branch is
supervised by the New York State Banking Department, and its Connecticut branch
is supervised by the Connecticut Department of Banking. Both branches are also
subject to supervisory oversight by the Federal Reserve, through the Federal
Reserve Bank of Boston.
The Group’s US
insurance agencies are regulated by state insurance authorities. The Group’s US
broker dealer, Greenwich Capital Markets, Inc., is subject to regulation and
supervision by the US Securities and Exchange Commission (SEC) and the Financial
Industry Regulatory Authority (FINRA) with respect to its securities activities.
The futures activities of Greenwich Capital Markets, Inc. are subject to
regulation and oversight by the US Commodity Futures Trading Commission (CFTC)
and the Chicago Board of Trade (CBOT). The Group's US commodities business, RBS
Sempra Commodities, is primarily regulated by the Federal Energy Regulatory
Commission (FERC) and CFTC.
The Group is
subject to extensive regulations that impose obligations on financial
institutions to maintain appropriate policies, procedures and controls to insure
compliance with the rules and regulations to which they are subject, in
particular to detect, prevent and report money laundering and terrorist
financing and to ensure compliance with economic sanctions against designated
foreign countries, nationals and others. Anti-money laundering, anti-terrorism
and economic sanctions regulations have become a major focus of US government
policy relating to financial institutions and are rigorously enforced by US
government agencies.
Netherlands
The consolidated
supervisor of ABN AMRO is the Dutch Central Bank, De Nederlandsche Bank (DNB).
The DNB operates as prudential supervisor of banks and insurance companies and
also as part of the European System of Central Banks.
Other
jurisdictions
The Group operates
in over 50 countries through a network of branches, local banks and non-bank
subsidiaries.
265
The Group works
with domestic and international trade associations and proactively engages with
regulators and other authorities such as the Basel Committee, the Committee of
European Banking Supervisors and the EU Commission in order to understand the
implications of proposed regulatory change and to contribute to the development
of regulatory policy.
The Group and its
subsidiaries have co-operated fully with various regulatory reviews and
developments in the UK and internationally, including enquiries or
investigations into alleged or possible breaches of regulations.
United
Kingdom
The Group
successfully implemented the Markets in Financial Instruments Directive (MiFID)
by the implementation date of 1 November 2007. MiFID established a comprehensive
legislative framework at the European level, which is now implemented in the UK,
for the establishment and conduct of investment firms, multilateral trading
facilities and regulated markets.
FSA authorised
firms must also comply with rules designed to reduce the scope for firms to be
used for financial crime and in particular money laundering. Revised Joint Money
Laundering Steering Group Guidance Notes were issued on 13 November 2007 to take
into account the new Money Laundering Regulations 2007. These Regulations came
into force on 15 December 2007 and implemented the EU’s Third Money Laundering
Directive. Amongst their other provisions, the Regulations endorse a risk based
approach to combating money laundering, while also prescribing ‘enhanced due
diligence’ for non face to face customers, ‘politically exposed persons’ (PEPs)
and correspondent banking. Whilst for all material purposes the Group is already
compliant — these provisions having been anticipated in industry guidance for
some time — internal processes are continually reviewed to ensure best practice
standards are met. In particular, the Group has issued new internal policy
guidelines based on the regulations and supporting industry guidance against
which all divisions have undertaken a gap analysis as a basis for further action
plans where necessary.
In
the UK, the Group has engaged proactively with a variety of legislative and
regulatory consultations. Financial stability and depositor protection have been
a key focus for the UK regulatory authorities. The Group participated fully in
the consultation process on the Banking Reform Bill. In addition, the Group
continues to comment on regulatory and legal changes that impact its business.
Examples include the Department for Business, Enterprise and Regulatory Reform
(BERR) transposition of the Consumer Credit Directive and Consumer Law Review;
HM Treasury’s Dormant Bank and Building Society Accounts Bill; Lord Hunt’s
Review of the Financial Ombudsman Service and the review of the Banking Codes
and the FSA’s consultations on liquidity and regulatory capital.
A
review by the Competition Commission and the FSA into Payment Protection
Insurance is ongoing, with the Competition Commission drafting the
implementation order following finalisation of its remedies.
In
July 2008, the Office of Fair Trading (OFT) published the results of its market
study into personal current accounts and is now consulting on remedial action in
the three key areas of transparency, complexity of charging structure and
switching. The OFT is also continuing its inquiry into credit and debit card
interchange fees.
UK
regulated firms within the Group are members of the Financial Services
Compensation Scheme (FSCS), which provides compensation to eligible customers of
authorised financial services firms that are unable to meet their obligations.
The FSCS is funded through annual levies charged to UK regulated firms. These
levies are apportioned between firms on the basis of their shares of the FSCS
tariff base: in the case of deposit takers, this means that levies are
determined by their share of protected deposits. As a result of FSCS involvement
in a number of bank failures in 2008, there will be a significant impact on
levies charged to deposit takers, starting with those for 2008-09. These impacts
are reflected in the accounts.
The FSA, in their
2008/09 Business Plan, emphasised the continued focus on ‘Treating Customers
Fairly’ in line with their view that the area of greatest structural concern
remains the retail market. The Group has undertaken a process of continuous
improvement of management information and root cause analysis of customer issues
in order to ensure that it can demonstrate that it is consistently treating
customers fairly throughout the product lifecycle.
The Group also
continues to co-operate with the Information Commissioner’s Office, the UK’s
independent public body set up to promote access to official information and to
protect personal information. The Group continues to improve its processes in
line with changing guidelines in order to meet information security
requirements.
European
Union
In
the EU, the Group has also responded to a number of proposals for regulatory and
legislative change, including proposed amendments to the Capital Requirements
Directive and the establishment of Colleges of Supervisors to enhance cross
border cooperation between supervisors. The Group also follows closely the work
(and recommendations) of the G7 and G10.
United
States
In
the US the Group also engages constructively with regulators and other bodies on
regulatory and legislative change and seeks to ensure proper implementation and
compliance. Current issues include mortgage reform and student
lending.
266
As
previously disclosed by ABN AMRO, the United States Department of Justice has
been conducting a criminal investigation into ABN AMRO’s dollar clearing
activities, Office of Foreign Assets Control compliance procedures and other
Bank Secrecy Act compliance matters. ABN AMRO has cooperated and continues to
cooperate fully with the investigation. Prior to the acquisition by the Group,
ABN AMRO had reached an agreement in principle with the Department of Justice
that would resolve all presently known aspects of the ongoing investigation by
way of a Deferred Prosecution Agreement in return for a settlement payment by
ABN AMRO of US$500 million (accrued by ABN AMRO in its interim financial
statements for the six months ended 30 June 2007). Negotiations are continuing
to enable a written agreement to be concluded.
Sub-prime
exposures
Certain of the
Group’s subsidiaries have received requests for information from various US
governmental agencies and self-regulatory organisations including in connection
with sub-prime mortgages and securitisations, collateralised debt obligations
and synthetic products related to sub-prime mortgages. In particular, during
March 2008, the Group was advised by the SEC that it had commenced a non-public,
formal investigation relating to the Group’s US sub-prime securities exposures
and US residential mortgage exposures. The Group and its subsidiaries are
cooperating with these various requests for information and
investigations.
The outcome of
these reviews is outside the Group’s control and it is not possible to predict
the effect, if any, on the Group’s operations of future regulatory actions or
policy changes.
Other
jurisdictions
The Group is active
in monitoring regulatory developments in each country in which it operates to
ensure internal policies are sufficient to ensure the effective management of
regulatory risk.
The Group operates
from a number of locations worldwide, principally in the UK. At 31 December
2008, the Royal Bank and NatWest had 651 and 1,628 retail branches,
respectively, in the UK. Ulster Bank and First Active had a network of 295
branches and business centres in Northern Ireland and the Republic of Ireland.
Citizens had 1,606 retail banking offices (including in-store branches) covering
Connecticut, Delaware, Illinois, Indiana, Massachusetts, Michigan, New
Hampshire, New Jersey, New York, Ohio, Pennsylvania, Rhode Island and Vermont. A
substantial majority of the UK branches are owned by the Royal Bank, NatWest and
their subsidiaries or are held under leases with unexpired terms of over 50
years. The Group’s principal properties include its headquarters at Gogarburn,
Edinburgh, its principal offices in London at 135 and 280 Bishopsgate and the
Drummond House administration centre located at South Gyle,
Edinburgh.
Total capital
expenditure on premises (excluding investment properties), computers and other
equipment in the year ended 31 December 2008 was £1,406 million (2007 — £1,792
million; 2006 — £1,140 million).
Details of major
shareholders of the company’s ordinary and preference shares are given on page
132.
In
December 2008, The Solicitor for the Affairs of Her Majesty’s Treasury acquired
22,854 million ordinary shares representing 57.92% of the company’s issued
ordinary share capital and in April 2009, acquired a further 16,791 million
ordinary shares taking its shareholding to 70.33% of the company's enlarged
issued ordinary share capital. The ordinary shareholding of Legal & General
Group plc decreased from 5.04% in December 2007 to below 3% in December
2008.
Other than detailed
above, there have been no significant changes in the percentage ownership of
major shareholders of the company’s ordinary and preference shares during the
three years ended 25 February 2009. All shareholders within a class of the
company’s shares have the same voting rights.
At
25 February 2009, the directors of the company had options to purchase a total
of 3,073,445 ordinary shares of the company.
As
at 31 December 2008, almost all of the company’s US$ denominated preference
shares and American Depositary Shares representing ordinary shares were held by
shareholders registered in the US. All other shares were predominantly held by
shareholders registered outside the US.
The company and its
subsidiaries are party to various contracts in the ordinary course of business.
Material contracts include the following:
Consortium
and Shareholders Agreement (CSA)
On
28 May 2007, Fortis, the company, Santander and RFS Holdings entered into the
CSA. Fortis Bank Nederland acceded to the CSA on 26 July 2007. On 3 October
2008, the State of the Netherlands acquired Fortis Bank Nederland. On 24
December 2008 the State of the Netherlands acceded to the CSA following its
acquisition of the shares held by Fortis Bank Nederland in RFS Holdings pursuant
to a Deed of Accession entered into between RFS Holdings, the company, Fortis
Bank Nederland, Santander and the State of the Netherlands. The CSA governs the
relationships amongst the parties thereto in relation to the acquisition by RFS
Holdings of ABN AMRO. The CSA details, inter alia, the funding of RFS Holdings
in connection with the acquisition of ABN AMRO, the equity interests in RFS
Holdings, the governance of RFS Holdings both before and after the acquisition
of ABN AMRO, the arrangements for the transfer of certain ABN AMRO businesses,
assets and liabilities to the State of the Netherlands (previously Fortis Bank
Nederland), the company and Santander post-acquisition of ABN AMRO, further
funding obligations of the State of the Netherlands (previously Fortis Bank
Nederland), the company and Santander after the acquisition of ABN AMRO where
funding is required by regulatory authorities in connection with the ABN AMRO
businesses, the allocation of Core Tier 1 capital and the allocation of taxes
and conduct of tax affairs.
267
Preference
and other non-equity dividends
|
IFRS
2008
|
IFRS
2007
|
IFRS
2006
|
IFRS
2005
|
|||||||||||||||||||||||||||||||||||||
|
Subordinated
liabilities
|
Equity
|
Subordinated
liabilities
|
Equity
|
Subordinated
liabilities
|
Equity
|
Subordinated
liabilities
|
Equity
|
|||||||||||||||||||||||||||||||||
|
Amount
per share
|
$ | £ | $ | £ | £ | £ | £ | £ | £ | £ | ||||||||||||||||||||||||||||||
|
Non-cumulative
preference shares of
US$0.01
|
||||||||||||||||||||||||||||||||||||||||
|
– Series D
(redeemed March 2006)
|
— | — | — | 0.21 | 1.13 | |||||||||||||||||||||||||||||||||||
|
– Series E
(redeemed January 2007)
|
— | — | 0.04 | 1.10 | 1.12 | |||||||||||||||||||||||||||||||||||
|
– Series
F
|
1.91 | 1.04 | 0.96 | 1.03 | 1.06 | |||||||||||||||||||||||||||||||||||
|
– Series G
(redeemed January 2007)
|
— | — | 0.04 | 1.00 | 1.02 | |||||||||||||||||||||||||||||||||||
|
– Series
H
|
1.81 | 0.99 | 0.91 | 0.98 | 1.00 | |||||||||||||||||||||||||||||||||||
|
– Series I
(redeemed March 2006)
|
— | — | — | 0.20 | 1.10 | |||||||||||||||||||||||||||||||||||
|
– Series J
(redeemed November 2005)
|
— | — | — | — | 1.06 | |||||||||||||||||||||||||||||||||||
|
– Series K
(redeemed January 2007)
|
— | — | 0.04 | 1.06 | 1.09 | |||||||||||||||||||||||||||||||||||
|
– Series
L
|
1.44 | 0.78 | 0.72 | 0.78 | 0.79 | |||||||||||||||||||||||||||||||||||
|
– Series
M
|
1.60 | 0.89 | 0.80 | 0.87 | 0.88 | |||||||||||||||||||||||||||||||||||
|
– Series
N
|
1.59 | 0.88 | 0.79 | 0.86 | 0.55 | |||||||||||||||||||||||||||||||||||
|
– Series
P
|
1.56 | 0.87 | 0.78 | 0.85 | 0.13 | |||||||||||||||||||||||||||||||||||
|
– Series
Q
|
1.69 | 0.94 | 0.84 | 0.53 | — | |||||||||||||||||||||||||||||||||||
|
– Series
R
|
1.53 | 0.85 | 0.77 | — | — | |||||||||||||||||||||||||||||||||||
|
– Series
S
|
1.65 | 0.92 | 0.41 | — | — | |||||||||||||||||||||||||||||||||||
|
– Series
T
|
1.81 | 1.01 | 0.23 | — | — | |||||||||||||||||||||||||||||||||||
|
– Series
U
|
7,555 | 3,935 | — | — | — | |||||||||||||||||||||||||||||||||||
|
Non-cumulative
convertible preference shares of
US$0.01
|
||||||||||||||||||||||||||||||||||||||||
|
– Series
1
|
91.18 | 49.66 | 45.58 | 50.26 | 50.33 | |||||||||||||||||||||||||||||||||||
|
– Series 2
(redeemed March 2005)
|
— | — | — | — | 11.60 | |||||||||||||||||||||||||||||||||||
|
– Series 3
(redeemed December 2005)
|
— | — | — | — | 43.03 | |||||||||||||||||||||||||||||||||||
|
Non-cumulative
convertible preference shares of
€0.01
|
||||||||||||||||||||||||||||||||||||||||
|
– Series 1
(redeemed March 2005)
|
— | — | — | — | 11.54 | |||||||||||||||||||||||||||||||||||
|
Non-cumulative
preference shares of €0.01
|
||||||||||||||||||||||||||||||||||||||||
|
– Series
1
|
67.95 | 46.53 | 39.63 | 37.18 | 41.14 | |||||||||||||||||||||||||||||||||||
|
– Series
2
|
61.03 | 41.79 | 35.52 | 36.22 | — | |||||||||||||||||||||||||||||||||||
|
Non-cumulative
convertible preference shares of
£0.01
|
||||||||||||||||||||||||||||||||||||||||
|
– Series
1
|
107.88 | 73.87 | 73.87 | 73.87 | 73.87 | |||||||||||||||||||||||||||||||||||
|
UK
GAAP
2004
|
|
|
Amount
per share
|
£
|
|
Non-cumulative
preference shares of US$0.01
|
|
|
– Series D
(redeemed March 2006)
|
1.11
|
|
– Series E
(redeemed January 2007)
|
1.10
|
|
– Series
F
|
1.04
|
|
– Series G
(redeemed January 2007)
|
1.00
|
|
– Series
H
|
0.98
|
|
– Series I
(redeemed March 2006)
|
1.08
|
|
– Series J
(redeemed November 2005)
|
1.15
|
|
– Series K
(redeemed January 2007)
|
1.07
|
|
– Series
L
|
0.19
|
|
– Series
M
|
0.30
|
|
Non-cumulative
convertible preference shares of US$0.01
|
|
|
– Series
1
|
49.05
|
|
– Series 2
(redeemed March 2005)
|
47.43
|
|
– Series 3
(redeemed December 2005)
|
41.74
|
|
Non-cumulative
convertible preference shares of €0.01
|
|
|
– Series 1
(redeemed March 2005)
|
44.19
|
|
Non-cumulative
preference shares of €0.01
|
|
|
– Series
1
|
3.45
|
|
Non-cumulative
convertible preference shares of £0.01
|
|
|
– Series
1
|
73.87
|
Ordinary
dividends
Ordinary dividends
per share for prior years in the table below have been restated for the effect
of the rights issue in June 2008 and the capitalisation issue in September
2008.
|
IFRS
2007
|
IFRS
2006
|
IFRS
2005
|
||||||||||
|
Amount
per share and American Depository Shares (1)
|
pence
|
pence
|
pence
|
|||||||||
|
Interim
|
8.5 | 6.8 | 5.4 | |||||||||
|
Final (2)
|
19.3 | 18.5 | 14.8 | |||||||||
|
Total
dividends on equity shares
|
27.8 | 25.3 | 20.2 | |||||||||
|
UK
GAAP
2004
|
||||
|
Amount
per share and American Depository Shares (1)
|
pence
|
|||
|
Interim
|
4.7 | |||
|
Final (2)
|
11.5 | |||
|
Total
dividends on equity shares
|
16.2 | |||
Notes:
|
(1)
|
Each American
Depository Share represents 20 ordinary shares. The historical amounts
listed in the table apply to the ordinary shares, as the American
Depositary Shares were not issued until October 2007 as described above
under Trading Market.
|
|
(2)
|
Final
dividends for each year were proposed in the indicated year and paid in
the following year.
|
In
September 2008, the company issued new ordinary shares by way of a
capitalisation issue rather than paying an interim dividend.
In
December 2008, the company issued Series 2 non-cumulative preference shares of
£1 each to HM Treasury, with an attached condition that no dividend is paid to
ordinary shareholders until those preference shares are no longer in issue,
unless otherwise agreed by HM Treasury. The company has reached agreement with
HM Treasury to replace the Series 2 non-cumulative preference shares held by HM
Treasury with new ordinary shares. Following redemption, the dividend
restriction on ordinary shares will be removed. However, it is currently the
Board’s intention not to pay any ordinary dividends for 2009.
For further
information, see Notes 7 and 8 on the accounts.
281
the Memorandum; or
cancel any shares which have not been taken or agreed to be taken by any person
and diminish the amount of its share capital by the amount of the shares so
cancelled.
Subject to the
provisions of the 1985 Act, if at any time the capital of the company is divided
into different classes of shares, the rights attached to any class of shares may
(unless further conditions are provided by the terms of issue of the shares of
that class) be varied or abrogated, whether or not the company is being wound
up, either with the consent in writing of the holders of three-quarters
in-nominal value of the issued shares of the class or with the sanction of an
extraordinary resolution passed at a separate general meeting of holders of the
shares of the class (but not otherwise).
To
any such separate general meeting the provision of the Articles relating to
general meetings will apply, save that:
|
|
(i)
|
if at any
adjourned meeting of such holders a quorum as defined above is not
present, two people who hold shares of the class, or their proxies. are a
quorum; and
|
|
|
(ii)
|
any such
holder present in person or by proxy may demand a
poll.
|
The rights
attaching to any class of shares having preferential rights are not, unless
otherwise expressly provided by the terms of issue thereof, deemed to be varied
by the creation or issue of further shares ranking, as regards participation in
the profits or assets of the company, pari passu therewith, but in no respect in
priority thereto.
Disclosure
of interests in shares
The 2006 Act gives
the company the power to require persons who it believes to be, or have been
within the previous three years, interested in its shares, to disclose
prescribed particulars of those interests. Failure to supply the information or
supplying a statement which is materially false may lead to the Board imposing
restrictions upon the relevant shares. The restrictions available are the
suspension of voting or other rights conferred by membership in relation to
meetings of the company in respect of the relevant shares and, additionally, in
the case of a shareholding representing at least 0.25 per cent of the class of
shares concerned, the withholding of payment of dividends on, and the
restriction of transfers of, the relevant shares.
Limitations
on rights to own share
There are no
limitations imposed by UK law or the Memorandum and Articles on the right of
non-residents or foreign persons to hold or vote the company's shares other than
the limitations that would generally apply to all of the company's
shareholders.
Members
resident abroad
Members with
registered addresses outside the United Kingdom are not entitled to receive
notices from the company unless they have given the company an address within
the United Kingdom at which such notices may be served.
Incorporation
and registration
The company was
incorporated and registered in Scotland under the Companies Act 1948 as a
limited company on 25 March 1968 under the name National and Commercial Banking
Group Limited. On 10 March 1982, it changed its name to its present name and was
registered under the Companies Acts 1948 to 1980 as a public company with
limited liability. The company is registered under Company No. SC
45551.
Documents
concerning the company may be inspected at 36 St Andrew Square, Edinburgh, EH2
2YB.
Executive
directors’ service contracts and copies of directors’ indemnities granted by the
company in terms of section 309C of the Companies Act 1985 may be inspected at
the company’s office at Gogarburn, Edinburgh, EH12 1HQ (telephone 0131 626
4114).
In
addition, we file reports and other information with the SEC. You can read and
copy these reports and other information at the SEC’s Public Reference Room at
100 F Street, N.E., Room 1580, Washington, D.C. 20549. You can call the SEC at
1-800-SEC-0330 for further information on the Public Reference Room or contact
the offices of The New York Stock Exchange, on which certain of our securities
are listed, at 20 Broad Street, New York, New York 10005. The SEC
also maintains a website at www.sec.gov which contains in electronic form each
of the reports and other information that we have filed electronically with the
SEC.
289
Shareholder
information continued
Shareholder
enquiries
Registrar
Computershare
Investor Services PLC
The
Pavilions
Bridgwater
Road
Bristol BS99
6ZZ
Telephone: 0870 702
0135
Facsimile: 0870 703
6009
Email:
web.queries@computershare.co.uk
ADR
Depositary Bank
BNY Mellon
Shareowner Services
PO
Box 358516
Pittsburgh, PA
15252-8516
Telephone: 866 241
9317 (US callers)
Telephone: 201 680
6825 (International)
Email:
shrrelations@bnymellon.com
Website:
www.bnymellon.com/shareowner
The Royal Bank of
Scotland Group plc
PO
Box 1000
Business House
F
Gogarburn
Edinburgh EH12
1HQ
Telephone: 0131 556
8555
Facsimile: 0131 626
3081
Investor
Relations
280
Bishopsgate
London EC2M
4RB
Telephone: +44
(0)207 672 1758
Facsimile: +44
(0)207 672 1801
Email:
investor.relations@rbs.com
Registered
office
36
St Andrew Square
Edinburgh EH2
2YB
Telephone: 0131 556
8555
Registered in
Scotland No. 45551
Website
www.rbs.com
The
Royal Bank of Scotland Group plc
PO
Box 1000 Gogarburn Edinburgh EH12 1HQ
Telephone: 0131 626
0000
The
Royal Bank of Scotland plc
PO
Box 1000 Gogarburn Edinburgh EH12 1HQ
280 Bishopsgate
London EC2M 4RB
National
Westminster Bank Plc
135 Bishopsgate
London EC2M 3UR
Citizens
Citizens Financial
Group, Inc.
One Citizens Plaza
Providence Rhode Island 02903 USA
Ulster
Bank
11-16 Donegall
Square East Belfast BT1 5UB
George’s Quay
Dublin 2
RBS
Insurance
Direct Line House 3
Edridge Road Croydon Surrey CR9 1AG
Churchill Court
Westmoreland Road Bromley Kent BR1 1DP
RBS
Greenwich Capital
600 Steamboat
Road
Greenwich
Connecticut 06830 USA
Coutts
Group
440 Strand London
WC2R 0QS
290
Shareholder
information continued
The
Royal Bank of Scotland International Limited
Royal Bank House 71
Bath Street
St
Helier Jersey Channel Islands JE4 8PJ
NatWest
Offshore
23/25 Broad
Street
St
Helier Jersey Channel Islands JE4 8QJ
ABN
AMRO Holding N.V.
Gustav Mahlerlaan
10
1082 PP Amsterdam
The Netherlands
291
Exhibit
Index
|
Exhibit
|
|
|
Number
|
Description
|
|
15.1
|
Consent of
Independent registered public accounting
firm
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on behalf by
the undersigned, thereunto duly authorised.
The Royal
Bank of Scotland Group
Registrant
/s/ Guy
Robert Whittaker
Guy
Robert Whittaker
Group Finance
Director
30
September, 2009
294