RBS 2008 Annual Report Download - page 5

RBS Group Annual Report and Accounts 20084
2008 Results
While a downturn was anticipated, no one could have foretold
the unprecedented market disruption and global economic
downturn that we now experience. With roots in economic
imbalances across many countries, the downturn has weakened
many. However, that is little consolation for the particular
vulnerability that RBS has exhibited.
In 2008 the Group’s overall results were bad, with net attributable
losses, before goodwill impairments, of £7.9 billion. This is
particularly disappointing since many parts of our business did
well, serving customers and generating high quality profitability.
All our Divisions were profitable except Global Banking &
Markets (‘GBM’) and Asia Retail & Commercial Banking. Even in
GBM, underlying income reached £10.2 billion on the back of
many strong business performances. Unfortunately, these profits
were more than wiped out by credit and market losses in
concentrated areas around proprietary trading, structured credit
and counterparty exposures. Over 50% of these losses pertained
to ABN AMRO-originated portfolios.
In addition, the change in market outlook and our vulnerability
thereto has required a £16.2 billion accounting write-down of
goodwill and other intangibles relating to prior year acquisitions,
most notably of ABN AMRO in 2007 and Charter One in the US
in 2004. This non-cash item has minimal impact on capital but
does highlight the risk of acquisitions if economic conditions
change adversely.
From a capital perspective, successive capital raisings have
substantially strengthened the Group’s capital ratios. Reported
losses have only partially eroded these, and our core Tier 1 ratio
stood at 7.0% at the end of 2008, pro forma for the conversion
of our preference shares, compared with 4.0% a year earlier.
Additionally, the funded balance sheet was reduced by
£93 billion, or 17% in constant currency terms. Unfortunately,
the extreme dislocation of markets has impeded the risk
reduction we target, leaving much still to do. Moreover, the fall in
sterling exchange rates inflates our international balance sheet
and this, plus extreme market movements, also increases the
value of our derivatives balances, albeit recording amounts that
would be largely netted off under US GAAP.
RBS has strong businesses, and has taken steps to restore
its capital base and benefits from clear Government support.
It is our primary task to rebuild standalone strength in the
coming years.
Group Chief Executive’s review
As this is my first letter to RBS
shareholders, I should open by
saying how aware we all are of
the responsibility for leading this
institution into better times. We have
a great importance to 40 million
customers, to many corporations and
governments worldwide, to our
shareholders and to all those in the
communities we serve. In common with
many, we are facing tough times. We
will do our best to work through these,
to support our customers and to
restore RBS to standalone financial
health and success.