RBS 2008 Annual Report Download - page 14

13RBS Group Annual Report and Accounts 2008
The Division will pursue above market growth in customer
deposits to improve its funding contribution to the Group, and
will diversify its customer lending, reducing its exposure to
commercial property.
US Retail & Commercial Banking
US Retail & Commercial Banking provides financial
services primarily through the Citizens and Charter
One brands.
Citizens is engaged in retail and corporate banking activities
through its branch network in 13 states in the United States and
through non-branch offices in other states. Citizens was ranked
the tenth-largest commercial banking organisation in the United
States based on deposits as at 30 September 2008 and is a top
tier bank in its New England and Mid Atlantic regional markets.
In a year of continued, acute market turbulence and a sharp
slowdown in economic activity, the Division’s total income was
essentially unchanged at $5,578 million, a rise of 8% in sterling
terms to £3,010 million. Operating profit fell by 57% to $972
million and by 54% in sterling terms to £524 million. Direct
expenses rose by 5% to $2,012 million, reflecting both the
continued expansion of commercial banking relationship
management teams and write-downs on mortgage servicing
rights and other costs related to loan workout and collection
activity. The indicative ROE of US Retail & Commercial
Banking was 8%.
Rising impairments were the main cause of the decline in
operating profit and reflected an environment in which house
prices continued to fall and unemployment to rise, credit spreads
widened and household wealth contracted. Impairment losses
increased by 184% to $1,929 million, compared with 2007.
In the externally sourced home equity portfolio, impairments
rose by 80% to $592 million, although the second half figure of
$268 million was lower than the first half’s $324 million. In the
core US Retail & Commercial portfolio, impairments were 281%
higher than in 2007 at $1,337 million, with a marked deterioration
in the second half of the year. Stress was evident in all sectors.
Citizens’ loss rates were low relative to its peers.
Average 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 average customer
deposits. Net interest margin was held steady, reflecting
widening asset margins and careful management of savings
rates in a competitive deposit market.
The Division continued to evaluate opportunities to optimise
capital allocation by exiting or reducing exposure to lower
growth or sub-scale segments. In the fourth quarter of 2008,
18 rural branches in the Adirondack region of New York were
sold to Community Bank System. An agreement has also been
reached to sell the Indiana retail branch network, consisting of
65 branches, and the Indiana business banking and regional
banking activities, to Old National Bank. These and other
measures will also assist in containing costs in future.
One benefit of increased volatility in the economy was that the
Commercial Markets business generated strong revenues as
customers sought to manage risks. Revenues from interest rate
and foreign exchange products increased significantly on 2007
figures, with foreign exchange particularly strong. The Division
continued to innovate to enhance customer service. Citizens
upgraded its Online Banking and Bill Pay system, giving
customers the ability to pay bills more quickly and to track and