RBS 2008 Annual Report Download - page 61

RBS Group Annual Report and Accounts 200860
Business review continued
Credit quality has continued to deteriorate sharply in the externally
sourced home equity portfolio (the Serviced By Others (SBO) portfolio).
This portfolio, now managed by a separate work-out group and in run-
off, has been reduced by $1.5 billion over the last year to $7.1 billion at
31 December 2008. Non-performing SBO loans represent 2.66% of
SBO balances. Impairment losses in relation to the SBO portfolio
totalled $592 million for 2008, with $268 million incurred in the second
half of 2008 compared with $324 million in the first half. Closing SBO
provision balances amounted to $474 million at 31 December 2008, up
from $413 million at 30 June 2008, providing a coverage ratio of 2.5
times non-performing loans.
The overall commercial loan portfolio has begun to show signs of stress,
with a marked deterioration in the commercial real estate book.
Impairments in the commercial and industrial portfolio, including lease
financing, totalled $212 million, or 0.74% of balances. Total impairments
within the commercial real estate portfolio were $177 million, or 1.63%
of balances.
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.
Strategic review
Citizens has a high quality retail and commercial banking franchise in
the north eastern US. New England and the Mid Atlantic are attractive
banking markets, and Citizens is well positioned in them in terms of
market share and key local market coverage. The business intends to
invest in this core business through increased marketing activity and
targeted technology investments, whilst reducing activity in its out-of-
footprint national businesses in consumer and commercial finance. This
strategy will allow Citizens to become fully funded from its own
customer deposits over time, and will support a low risk profile.