RBS 2004 Annual Report Download - page 103

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Annual Report and Accounts 2004
Operating and financial review
Operating and
financial review
Risk elements in lending and potential problem loans
The table below sets out the Group’s loans that are classified as non-accrual, accruing past due and restructured loans (together
risk elements in lending (REIL)) or potential problem loans (PPL) as defined by the SEC in the US. The figures incorporate estimates
and are stated before deducting the value of security held or related provisions.
2004 2003 2002
REIL and PPL £m £m £m
Non-accrual loans (2) 4,780 4,432 4,175
Accrual loans past due 90 days (3) 725 642 492
Troubled debt restructurings 24 83 204
Total REIL 5,529 5,157 4,871
PPL (4) 280 591 1,183
Total REIL and PPL 5,809 5,748 6,054
Notes:
(1) The classification of a loan as non-accrual, past due 90 days or troubled debt restructuring does not necessarily indicate that the principal of the loan is uncollectable in whole
or in part. Collection depends in each case on the individual circumstances of the loan, including the adequacy of any collateral securing the loan and therefore classification of
a loan as non-accrual, past due 90 days or troubled debt restructuring does not always require that a provision be made against such a loan. In accordance with the Group’s
provisioning policy for bad and doubtful debts, it is considered that adequate provisions for the above risk elements in lending have been made.
(2) The Group’s UK banking subsidiary undertakings account for loans on a non-accrual basis from the point in time at which the collectability of interest is in significant doubt.
Certain subsidiary undertakings of the Group, principally Citizens, generally account for loans on a non-accrual basis when interest or principal is past due 90 days.
(3) Overdrafts generally have no fixed repayment schedule and consequently are not included in this category.
(4) Loans which are current as to the payment of principal and interest but in respect of which management have serious doubts about the ability of the borrowers to comply with
contractual repayment terms. Substantial security is held in respect of these loans and appropriate provisions are made in accordance with the Group’s provisioning policy for
bad and doubtful debts.
REIL increased to £5,529 million, a rise of 7% compared with
2003 partly due to acquisitions made in 2004. REIL as a
proportion of total loans and advances to customers was 1.58%
in 2004 (2003 – 2.01%; 2002 – 2.14%), reflecting active risk
management, growth in lower risk portfolios and improvements
in the economic environment in the Group’s key markets.
REIL and PPL in aggregate, as a proportion of loans and
advances also shows an improving trend, accounting for
1.66% of loans and advances to customers in 2004
(2003 – 2.24%; 2002 – 2.66%).
REIL and PPL as a percentage of loans and advances
Provisions
The Group provides for losses in its loan portfolio so as to
record impaired loans and advances at their expected ultimate
net realisable value. The objective is to set provisions based on
the current understanding of the portfolio. To reach this
understanding, retail and corporate loans and advances are
treated separately.
The Group’s retail portfolios which consist of small value, high
volume 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 measures.
Corporate portfolios consist of higher value, lower volume
credits, which tend to be structured to meet individual
customers requirements. These portfolios do not have an
automated provisioning process, relying on individual expert
judgement and provisioning committees to provide the
necessary controls and oversight to identify problems.
Early and proactive management of problem exposures ensures
that credit losses are minimised. Specialised units are used for
different customer types to ensure that the appropriate risk
mitigation is taken in a timely manner.