RBS 2003 Annual Report Download - page 58

Operating and financial review continued
56
Operating and financial review
international banks and building societies active in the market.
Competition is intensifying as both UK and Irish institutions
seek to expand their businesses.
In the United States, Citizens competes in the New England
and Mid-Atlantic 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.
In other international markets, principally in continental Europe,
the Group faces competition from the leading domestic and
international institutions active in the relevant national markets.
Risk factors
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 could also be
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 financial performance of the Group is affected by
borrower credit quality and general economic conditions, in
particular in the UK and the US
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.
Adverse changes in the credit quality of the Group’s borrowers
and counterparties or a general deterioration in UK, US or
global economic conditions, or arising from systemic risks in
the financial systems, could affect the recoverability and value
of the Group’s assets and require an increase in the provision
for bad and doubtful debts and other provisions.
Changes in interest rates, foreign exchange rates, equity prices
and other market factors affect the Group’s business
The most significant market risks the Group faces are interest
rate, foreign exchange and bond and equity price risks.
Changes in interest rate levels, yield curves and spreads may
affect the interest rate margin realised between lending and
borrowing costs. Changes in currency rates, particularly in the
sterling-dollar and sterling-euro exchange rates, affect the
value of assets and liabilities denominated in foreign
currencies and affect earnings reported by the Group’s non-
UK subsidiaries, mainly Citizens, RBS Greenwich Capital and
Ulster Bank, and may affect income from foreign exchange
dealing. The performance of financial markets may cause
changes in the value of the Group’s investment and trading
portfolios. The Group has implemented risk management
methods to mitigate and control these and other market risks to
which the Group is exposed. However, it is difficult 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.
The Group’s insurance businesses are subject to inherent risks
involving claims provisions
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. Such
changes would affect the profitability of current and future
insurance products and services. The Group re-insures some
of the risks it has assumed.
Operational risks are inherent in the Group’s business
The Group’s businesses are dependent on the ability to
process a very large number of transactions efficiently and
accurately. Operational risk and losses can result from fraud,
errors by employees, failure to document transactions properly
or to obtain proper internal authorisation, failure to comply with
regulatory requirements and Conduct of Business rules,
equipment failures, natural disasters or the failure of external
systems, for example, 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 and to staff training, it is only
possible to be reasonably, but not absolutely, certain that such
procedures will be effective in controlling each of the
operational risks faced by the Group.
Each of the Group’s businesses is subject to substantial
regulation and regulatory oversight. Any significant regulatory
developments could have an effect on how the Group
conducts its business and on the Group’s results of operations
The Group is subject to financial services laws, regulations,
administrative actions and policies in each location in which
the Group operates. This supervision and regulation, in
particular in the UK, if changed could materially affect the
Group’s business, the products and services offered or the
value of assets.
The Group’s future growth in earnings and shareholder value
depends on strategic decisions regarding organic growth and
potential acquisitions
The Group devotes substantial management and planning
resources to the development of strategic plans for organic
growth and identification of possible acquisitions, supported
by substantial expenditure to generate growth in customer
business. If these strategic plans do not meet with success,
the Group’s earnings could grow more slowly or decline.