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Annual Report and Accounts 2009

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Annual Report and Accounts 2009 rbs.com

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...Group Chief Executive's review Our markets Q&As on progress Board of directors and secretary Executive Committee 20 22 24 26 28 30 32 34 36 Divisional review UK Retail UK Corporate Wealth Global Banking & Markets Global Transaction Services Ulster Bank US Retail & Commercial RBS Insurance Business...

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...15% on our tangible equity capital â€¢ The Government will have sold or at least begun to sell its shares at a profit 2009 key highlights Significantly lower loss attributable to ordinary and B shareholders Strong Core Bank operating profit Strong Core Bank return on equity Total assets reduced by...

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...on market share, with a particular focus on our small and medium-sized enterprise (SME) business in the UK, and will lead to the sale of the RBS branch network in England and Wales, and, the NatWest branches in Scotland. Other divestments are intended to act as a deterrent to companies seeking state...

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... levels for achievement against the targets we have published to make the bank safe, successful and valuable again. Gordon Pell, Deputy Chief Executive, who retires at the end of March 2010, also waived any bonus award for 2009. Governance - comprehensive change to Board and Executive Management...

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... in so doing to enable the UK Government to sell its shareholding profitably over time. The riskiest part of RBS's journey is now behind us. There are four years left of our recovery plan. Each year we expect to report strong, measurable progress. Strategy Our strategy is simple and its concepts are...

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... shaped in 2010 with the timing of implementation also clearer. This will affect customer activity and pricing as well as capital structure and shareholder returns. â€¢ Thirdly, as the prospect of share sales becomes more realistic, RBS can transition from financial 'problem' to 'opportunity...

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... year wore on. At the beginning of 2009, the global economy was in the grip of a recession described by the International Monetary Fund as "unprecedented in the post-World War II era". This prompted a coordinated policy response by central banks and governments around the world. Interest rates were...

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... return and income. It is our intention over time to resume the payment of a dividend as soon as it is prudent to do so, taking account of the Group's capital position, retained earnings and prospects, as well as of the enhanced dividend rights attached to the B Shares held by the UK Government...

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...25 years financial services experience. From 1997 to 2008 he held a number of senior positions with Bank of New York and later Bank of New York Mellon, most recently as vice chairman and chief financial officer and before that he was responsible for the Asset Management and Market Related businesses...

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...and long-term savings businesses. He has held a number of senior executive positions during his career at Aviva, including his role as Group Finance Director until January 2010. Philip is also an experienced non-executive director and is currently on the board of Diageo plc. RBS Group Annual Report...

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... and reports to the Group Board on all operational and day to day activities in relation to the Group's businesses. It is responsible for managing Group wide issues and those operational issues material to the broader Group. 1 4 7 10 Key to pictures 1. Stephen Hester, Group Chief Executive 2. Bruce...

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... The RBS Group as Chief Executive of Business Services, becoming the Group Chief Administrative Officer in February 2009. At the same time he was re-appointed to the Managing Board of ABN AMRO to oversee the integration programme. Ron started his career with ABN Bank in 1986 as an IT/Systems analyst...

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Our strategic plan and progress 12 RBS Group Annual Report and Accounts 2009

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...been comprehensive. Andrew MacInnes RBS customer for 33 years For years Andrew has wanted to ride his motorbike across South Africa. This time last year he came to see us and we helped him put a savings plan together. Soon he'll be on his way for real. RBS Group Annual Report and Accounts 2009 13

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...robust capital support Focus on implementing state of the art risk controls, run-off of excess risk concentrations and maintenance of strong equity capital Focussed on retail and commercial banking Activity focussed on UK, US and Ireland and supported by significant business investment plans Refocus...

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...through improved employee efficiency programmes. The Core bank cost:income ratio, net of claims, improved from 66.2% in 2008 to 53.5% in 2009. Risk weighted assets, return on equity and fully allocated cost:income ratio targets set at Divisional as well as Group level. During 2009 total assets were...

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...cash and liquidity management, as well as trade finance, and commercial card products and services. Target 2013 Leading global player, serving Group clients and with a central role in deposit gathering. r nt C F al un o cti UK Retail We offer a range of banking and financial services to over 15...

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...give farmers certainty over the payment they will receive. Insurance - In 2009, 500,000 insurance policies were sold via the branch networks of RBS and NatWest. Our Retail Division hosts services for business banking in branches. â€¢ â€¢ â€¢ â€¢ â€¢ RBS Group Annual Report and Accounts 2009 17

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... Core attributable profit taxed at 28% on attributable core spot tangible equity (circa 70% of Group tangible equity based on RWAs). (10) 2008. UK Retail Return on equity (%) Cost:income (%) Loan:deposit (%) GTS Cost:income (%) Loan:deposit (%) 2009 actual 2011 2013 UK Corporate 4 >1 >15 60...

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... Group may have to make additional contributions to its defined benefit pension schemes. â€¢ We have taken steps to mitigate the cost and risk of our main UK pension scheme and other UK and Republic of Ireland schemes by capping pensionable salary growth. RBS Group Annual Report and Accounts 2009...

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Divisional review 20 RBS Group Annual Report and Accounts 2009

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.... We can and must do better still, however. The new RBS will be known for its unswerving focus on customers. NatWest Saturday opening During the year, we changed the opening hours of more than 600 branches so that we could better meet customers' needs. RBS Group Annual Report and Accounts 2009 21

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...Chief Executive Australia for all ANZ business lines. 11% increase in customer deposits in the year 10% increase in mortgage customers in the year Target Return on equity (%) Cost:income (%) Loan:deposit (%) 2011 2013 >1 >15

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... RBS and NatWest retain a strong position for service in our customers' eyes. We know we still have a long way to go and that 2010 will be a demanding year. However, we're confident that with the changes we're making we'll build a successful business that will play a huge part in returning the Group...

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... in costs in the year Target Return on equity (%) Cost:income (%) Loan:deposit (%) 2011 2013 >5 >15

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...Bridging the gap between loans and deposits is an important part of our plan. Corporate Banking Division deposits increased by Â£6 billion yearon-year from their January 2009 levels, and a significant focus for us is to self-fund the loans on our books. RBS Group Annual Report and Accounts 2009 25

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... and Isle of Man Bank, and international private banking through RBS Coutts. 2009 Â£m 2008 Â£m Brian Hartzer Chief Executive, UK Retail, Wealth and Ulster Bank M For biographies see pages 8-11 Net interest income Non-interest income Total income Expenses Operating profit before impairment losses...

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... of RBS International's activities. All of our staff supported National Customer Service Week in October. Among other things, that involved senior managers swapping places with their customers for a day. The UK National Customer Service Awards for Financial Services named our Isle of Man Peel branch...

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... debt and equity financing, risk management and investment services to its customers. The division is organised along six principal business lines: money markets; rates flow trading; currencies and commodities; equities; credit markets and portfolio management & origination. 2009 Â£m 2008 Â£m John...

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... gave us the award as "Most Innovative in Loans & Leveraged Finance 2009" and Euromoney named us "Best Structured Products House". As well as serving customers, we had to deal with the problems of the past and make sure we are in the best shape to compete in future. Our balance sheet needed to...

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..., and trade finance and commercial card products and services. It includes the Group's corporate money transmission activities in the UK and the US as well as Global Merchant Services, the Group's United Kingdom and international merchant acquiring business. 2009 Â£m 2008 Â£m Brian Stevenson, Chief...

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... (UK - Global) from Trade Finance; and â€¢ 2009 Deal of the Year for J Sainsbury from Trade and Forfaiting. It's great to win these awards and to receive the recognition of our peers, but the real test of our service is how our customers react. RBS Group Annual Report and Accounts 2009 31

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... which enables them to take our customers >54,000 retail customers acquired during the year â,¬1.25 billion in business deposits taken during the year Target Return on equity (%) Cost:income (%) Loan:deposit (%) 2011 2013 >0 >15

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...Bonus Saver, eSavings Plus, Pathway and a number of fixed term and fixed rate products which saw retail customer deposits increase by almost Â£1 billion during the year. While the global economy is showing some signs of recovery, conditions in Ireland remain challenging. However the early actions we...

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..., we'll become a leading super-regional bank. 4% increase in customer deposits in the year >3.7 million customers converted to upgraded online platform Target Return on equity (%) Cost:income (%) Loan:deposit (%) 2011 2013 c.10 >15

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... managers to target the mass-affluent market. We regularly used the expertise and global reach of the RBS Group to support our customers. Other RBS Group entities, including RBS Securities, collaborated with Citizens Bank, Charter One and RBS Citizens in a number of high-profile bond issues and loan...

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.... 2009 Â£m 2008 Â£m Paul Geddes Chief Executive, RBS Insurance M For biographies see pages 8-11 Insurance net premium income Total income Expenses Net claims Operating profit before impairment losses Impairment losses Operating profit Return on equity Cost:income ratio Adjusted cost:income ratio...

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... year might have been a rocky one because of the uncertainties surrounding RBS Insurance. But our people have delivered strongly once more, showing their commitment to serving customers. We have to sell RBS Insurance, but until then it remains in our good hands. RBS Group Annual Report and Accounts...

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... stakeholders, including unions and social partners. By providing our people with active support throughout the process, we have been able to limit the number of compulsory redundancies. 40,000m2 of space saved by our Intelligent Working initiative 38 RBS Group Annual Report and Accounts 2009

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...and high quality transaction processing and technology hubs in India and Poland. The Indian operations hub is a shared service, which supports our major businesses in the UK, USA, Asia and Europe. Capabilities include investment banking, trade and payments, retail, corporate and mortgage back office...

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... primarily transferred from our UK Corporate Banking Division, Ulster Bank and Citizens. It is the largest employer in the division with almost 13,000 employees globally. Â£12.6 billion of disposals during the year 40 RBS Group Annual Report and Accounts 2009 â€¢ Non-Core Markets includes trading...

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... end of 2009. Our disposal programme developed momentum during 2009. We successfully completed a number of asset sales in the year, including the RBS equity stakes in Bank of China and Linea Directa, the sale to ANZ of the Retail & Commercial and wholesale banking businesses in non-core businesses...

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Corporate Sustainability 42 RBS Group Annual Report and Accounts 2009

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... to address a range of issues that relate to our broader impact on society. This section outlines the key developments in this important area of our business in 2009, based around five key themes: â€¢ Fair banking â€¢ Supporting enterprise â€¢ Employee engagement â€¢ Safety and security â€¢ Global...

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... of credit and support for customers in financial difficulty. â€¢ In July 2009, we voluntarily extended the credit card 30 Day Fair banking Supporting enterprise Employee engagement Safety and security Global citizenship Breathing Space commitment to all NatWest and RBS unsecured personal loans and...

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...develop a savings habit. â€¢ In Ireland, we extended our offering to first-time home buyers by teaming up with Habitat for Humanity. This programme offers customers with a housing need the opportunity to step on the property ladder in an affordable manner. RBS Group Annual Report and Accounts 2009...

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... track of their debit and credit card transactions. â€¢ We increased controls that protect customer information by completing a global assurance review of more than 800 of our highrisk third parties in 2009, agreeing actions to manage identified risks. 46 RBS Group Annual Report and Accounts 2009

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... is to increase financial capability and financial inclusion. A core part of this programme is MoneySense for Schools, where RBS employees deliver lessons in secondary schools designed to help young people to manage their money; we provide resources for RBS Group Annual Report and Accounts 2009 47

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Report and accounts 48 RBS Group Annual Report and Accounts 2009

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... income statement Analysis of results Divisional performance 108 Consolidated balance sheet 111 Cash flow 112 Capital resources 113 Reconciliations of pro forma to statutory income statements and balance sheets 117 Risk, capital and liquidity management RBS Group Annual Report and Accounts 2009...

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...N.V ., each licensed separately by the Dutch Central Bank. Both banks continue to be governed by the current managing and supervisory boards of ABN AMRO Holding N.V . until the legal separation of the new ABN AMRO Bank N.V . from ABN AMRO Holding N.V .. 50 RBS Group Annual Report and Accounts 2009

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... is jointly owned by the consortium members. It is controlled by the company and is therefore fully consolidated in its financial statements. Consequently, the statutory results of the Group include the results of ABN AMRO. The interests of Fortis, and its successor the State of the Netherlands, and...

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... Chief Executive's review'. In particular, this document includes forward-looking statements relating, but not limited to: the Group's restructuring plans, capitalisation, portfolios, capital ratios, liquidity, risk weighted assets, return on equity, cost:income ratios, leverage and loan:deposit...

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...cent. and a Tier 1 capital ratio of 14.1 per cent., as at 31 December 2009. UK Retail offers a comprehensive range of banking products and related financial services to the personal market. It serves customers through the RBS and NatWest networks of branches and ATMs in the United Kingdom, and also...

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.... 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. 54 RBS Group Annual Report and Accounts 2009

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... of powers to transfer property, rights or liabilities of a relevant entity and shares and other securities issued by a relevant entity. HM Treasury may also take the parent company of a relevant entity (such as the company) into temporary public ownership provided that certain conditions set out in...

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... not yet fully normalised. These conditions led to severe dislocation of financial markets around the world and unprecedented levels of illiquidity in 2008 and 2009, resulting in the development of significant problems at a number of the The Group was required to obtain State aid approval, for the...

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... of 2009 money market conditions improved, with the Group seeing a material reduction of funding from central banks and the issuance of non-government guaranteed term debt, further tightening of credit markets could have a negative impact on the Group. RBS Group Annual Report and Accounts 2009 57

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...any funding currently available in the market, will not lead to a further increase in the Group's overall cost of funding, which could have an adverse impact on the Group's financial condition and results of operations or result in a loss of value in its securities. To the extent government support...

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...operations or result in a loss of value in its securities. Further information about the write-downs which the Group has incurred and the assets it has reclassified can be found in the Risk, capital and liquidity management section of the Business review. Changes in interest rates, foreign exchange...

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...result of such payment. As at 31 December 2009, the Group's Tier 1 capital and Core Tier 1 capital ratios were 14.1 per cent. and 11.0 per cent. respectively, calculated in accordance with FSA definitions. Any change that limits the Group's ability to manage effectively its balance sheet and capital...

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... Services if required by the purchaser, and its interest in RBS Sempra Commodities, as well as divesting the Royal Bank branch-based business in England and Wales and the NatWest branches in Scotland, along with the direct SME customers and certain mid-corporate customers across the United Kingdom...

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... to lend to UK businesses and Â£9 billion above the amount the company had budgeted to lend to UK homeowners in the year commencing 1 March 2009. There is also a The Group could fail to attract or retain senior management, which may include members of the Board, or other key employees, and it may...

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... markets in which the Group operates or may increase the costs of doing business in those markets; changes to financial reporting standards; changes in regulatory requirements relating to capital, such as limitations on the use of deferred tax assets in calculating Core Tier 1 and/or Tier 1 capital...

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... Group's capital position, results of operations or financial condition or result in a loss of value in its securities. The next funding valuation of the Group's major defined benefit pension plan, The Royal Bank of Scotland Group Pension Fund, will take place with an effective date of 31 March 2010...

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... financial condition and results of operations. It is not expected that the Dutch State's acquisition of Fortis Bank Nederland's shares in RFS Holdings, will materially affect the integration benefits envisaged by the Group. The recoverability and regulatory capital treatment of certain deferred tax...

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...'s capital ratios to the desired or requisite levels. If the Group is unable to issue the Â£8 billion Contingent B shares, the Group's business, results of operations, financial condition and capital position and ratios will suffer, its credit ratings may drop, its ability to lend and access funding...

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...capital ratios, its business, results of operations and financial condition will suffer, its credit ratings may drop, its ability to lend and access funding will be further limited and its cost of funding may increase. The occurrence of any or all of such events may cause the price of the securities...

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... the Â£8 billion Contingent B shares was to improve capital ratios at a consolidated level for the Group and at an individual level for certain relevant Group members. The Royal Bank will or may in the future enter into certain back-to-back arrangements with Group members holding assets or exposures...

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Business review capital ratios, this could cause the Group's business, results of operations and financial condition to suffer, its credit rating to drop, its ability to lend and access to funding to be further limited and its cost of funding to increase. The occurrence of any or all of such events...

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... step-in rights may serve to limit materially the Group's operations. In addition, the market's reaction to such controls and limitations may have an adverse impact on the price of the company's securities. Under the Scheme Conditions, the Group has extensive governance, asset management, audit and...

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... strategy depends on the availability of its senior management and other key employees. If the Group is unable to dedicate sufficient senior management resources to the Group's business outside the APS, its business, results of operations and financial condition will suffer. The cost of the Tax...

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... (1) 2008 Â£m Statutory 2009 Â£m Restated (1) 2008 Â£m for the year ended 31 December Total income (2) Operating loss (3) Operating loss before tax (4) Loss attributable to ordinary and B shareholders Cost:income ratio (5) Basic loss per ordinary and B share from continuing operations (pence...

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... operating loss excludes amortisation of purchased intangible assets, write-down of goodwill and other intangible assets, integration and restructuring costs, gain on redemption of own debt, strategic disposals, gains on pensions curtailment and bonus tax. RBS Group Annual Report and Accounts 2009...

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... pension benefits in the defined benefit scheme and certain other subsidiary schemes. A charge related to the UK Government's bonus tax proposals of Â£208 million was reflected in 2009 with a further Â£160 million deferred until 2010 and 2011. 74 RBS Group Annual Report and Accounts 2009

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... Operating loss before tax for the year was Â£2,595 million compared with a loss of Â£40,836 million in 2008. Total income Total income increased 50% to Â£38,690 million in 2009. Capital Capital ratios at 31 December 2009 were 11.0% (Core Tier 1), 14.1% (Tier 1) and 16.1% (Total). RBS Group Annual...

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... gross yield and the interest rate paid on average interest-bearing liabilities of the banking business. (5) Net interest margin is net interest income of the banking business as a percentage of average interest-earning assets of the banking business. 76 RBS Group Annual Report and Accounts 2009

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... 2009 Average balance Â£m Interest Â£m Rate % Average balance Â£m Pro forma 2008 Interest Â£m Rate % Assets Loans and advances to banks - UK - Overseas Loans and advances to customers - UK - Overseas Debt securities - UK - Overseas Total interest-earning assets - banking business (2, 3) - trading...

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... interest Statutory 2009 Average balance Â£m Interest Â£m Rate % Average balance Â£m Statutory 2008 Interest Â£m Rate % Assets Loans and advances to banks - UK - Overseas Loans and advances to customers - UK - Overseas Debt securities - UK - Overseas Total interest-earning assets - banking business...

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...: savings deposits UK Overseas Customer accounts: other time deposits UK Overseas Debt securities in issue UK Overseas Subordinated liabilities UK Overseas Internal funding of trading business UK Overseas Total interest payable of the banking business UK Overseas Movement in net interest income UK...

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...) and US Retail & Commercial (Â£50 million). Income from trading activities rose substantially during the year by Â£12,635 million, principally due to lower credit market losses reflecting improved underlying asset prices compared with 2008. Increased market volatility and strong customer demand in...

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...2009 compared with 2008 - statutory Staff costs, excluding pension schemes curtailment gains, were up Â£1,373 million with most of the movement relating to adverse movements in foreign exchange rates and some salary inflation. Changes in incentive compensation, primarily in Global Banking & Markets...

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... resulting from the strategic review undertaken earlier in the year. This was more than offset by lower ABN AMRO integration activity during the year. Accruals in relation to integration costs are set out below. At 31 December 2008 Â£m Currency translation adjustments Â£m Charge to income statement...

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Business review Impairment losses Pro forma 2009 Â£m 2008 Â£m Statutory 2009 Â£m 2008 Â£m New impairment losses less: recoveries of amounts previously written-off Charge to income statement Comprising Loan impairment losses Impairment of available-for-sale securities Charge to income statement 14...

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...market losses Monoline exposures CDPCs Asset-backed products (2) Other credit exotics Equities Leveraged finance Banking book hedges Other Group Notes: (1) Included in 'Income/(loss) from trading activities'. (2) Includes super senior asset-backed structures and other asset-backed products. (1) 2009...

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... statements Sub-section Market turmoil exposures Note 11 Financial instruments Critical accounting policies Note 11 Financial instruments Page 184 278 256 275 Taxation Pro forma 2009 Â£m 2008 Â£m Statutory 2009 Â£m 2008 Â£m Tax credit 339 1,280 371 2,323 % % % % UK corporation tax rate...

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...; and capital cost or benefit is allocated based on share of divisional riskadjusted RWAs. 2009 Â£m 2008 Â£m UK Retail UK Corporate Wealth Global Banking & Markets Global Transaction Services Ulster Bank US Retail & Commercial RBS Insurance Central items Core Non-Core Operating loss Amortisation...

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...51 1.34 8.25 1.89 2.68 0.87 2.08 Risk-weighted assets by division UK Retail UK Corporate Wealth Global Banking & Markets Global Transaction Services Ulster Bank US Retail & Commercial Other Core Non-Core Group before benefit of APS Benefit of APS Total 2009 Â£bn 2008 Â£bn 51.3 90.2 11.2 123.7 19...

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... Return on equity (1) Net interest margin Cost:income ratio 4.2% 3.59% 59.8% 13.1% 3.58% 62.4% Â£bn Â£bn Capital and balance sheet Loans and advances to customers - gross - mortgages - personal - cards Customer deposits (excluding bancassurance) Assets under management (excluding deposits) Risk...

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... banking and a record share of new sales achieved through direct channels. More than 5.5 million accounts have switched to paperless statements and 254 branches now utilise automated cash deposit machines. â€¢ â€¢ Mortgage growth was due to good retention of existing customers and new business...

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... by business Corporate and commercial lending Asset and invoice finance Corporate deposits Other Total income Analysis of impairment by sector Banks and financial institutions Hotels and restaurants Housebuilding and construction Manufacturing Other Private sector education, health, social work...

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... funding and credit costs. For the year as a whole net interest margin was 18 basis points lower than in 2008, reflecting higher funding costs and continued competitive pricing for deposits. Gross new lending to customers remained resilient in 2009, with a noticeable acceleration of lending activity...

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... internal pricing applied to Wealth's deposit base. This was offset by a marked decrease in investment income year on year as assets under management decreased by 8% at constant exchange rates during 2009, with investors turning to more liquid assets and away from longer term investments. Loans...

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Business review Global Banking & Markets 2009 Â£m 2008 Â£m Net interest income from banking activities Net fees and commissions receivable Income from trading activities Other operating income (net of related funding costs) Non-interest income Total income Direct expenses - staff - other Indirect ...

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...Global Banking & Markets continued 2009 Â£bn 2008 Â£bn Capital and balance sheet Loans and advances (including banks) Reverse repos Securities Cash and eligible bills Other assets Total third party assets (excluding derivatives mark to market) Net derivative assets (after netting) Customer deposits...

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... International cash management Trade finance Merchant acquiring Commercial cards Total income Performance ratios Net interest margin Cost:income ratio 805 734 290 528 130 2,487 795 722 241 554 119 2,431 9.22% 59.3% 8.25% 56.6% Â£bn Â£bn Capital and balance sheet Total third party assets Loans...

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....9 18.1 10.9 12.9 2.1 24.3 0.3 0.5 0.3 0.1 179% 24.5 Note: (1) Return on equity is based on divisional operating profit after tax, divided by divisional notional equity (based on 7% of divisional risk-weighted assets, adjusted for capital deductions). 96 RBS Group Annual Report and Accounts 2009

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... consumer spending have been affected by the double digit decline in 2009 with rising default rates evident. Customer account numbers increased by 3% during 2009, with growth fuelled by strong current account activity and new-to-bank savings customers. RBS Group Annual Report and Accounts 2009 97

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... US$bn Capital and balance sheet Total assets Loans and advances to customers - gross - residential mortgages - home equity - corporate and commercial - other consumer Customer deposits Risk elements in lending - retail - commercial Loan: deposit ratio Risk-weighted assets Spot exchange rate - US...

Page 101
...origination vintages. Cross-selling of card, deposit and checking account products has increased substantially, with over 65% of new mortgage customers also taking out a checking account. The division has also increased commercial banking market penetration, with lead bank share within its footprint...

Page 102
Business review continued RBS Insurance 2009 Â£m 2008 Â£m Earned premiums Reinsurers' share Insurance net premium income Net fees and commissions Other income Total income Direct expenses - staff - other Indirect expenses Gross claims Reinsurers' share Net claims Operating profit before ...

Page 103
... operating ratio, including business services costs, was 105.9% compared with 93.6% in the previous year, with the impact of the increase in reserves for bodily injury claims and the bad weather experience only partially mitigated by commission and expense ratio improvement. RBS Group Annual Report...

Page 104
...1,025 2009 compared with 2008 Funding and operating costs have been allocated to operating divisions, based on direct service usage, requirement for market funding and other appropriate drivers where services span more than one division. Residual unallocated items relate to volatile corporate items...

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Business review Non-Core 2009 Â£m 2008 Â£m Net interest income from banking activities Net fees and commissions receivable Loss from trading activities Insurance net premium income Other operating income Non-interest income Total income Direct expenses - staff - other Indirect expenses Operating ...

Page 106
Business review continued Non-Core continued 2009 Â£m 2008 Â£m Credit and other market write-downs Monoline exposures CDPCs Asset backed products (2) Other credit exotics Equities Leveraged finance Banking book hedges Other (1) 2,387 947 288 558 47 - 1,613 (679) 5,161 3,121 615 3,220 935 947 ...

Page 107
...Banks & financials Lombard Invoice finance Other Total UK Corporate Global Banking & Markets Manufacturing & infrastructure Property & construction Transport Telecoms, media & technology Banks & financials Other Total Global Banking & Markets Ulster Bank Mortgages Commercial investment & development...

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... Ulster Bank US Retail & Commercial Auto & consumer Cards SBO/home equity Residential mortgages Commercial real estate Commercial & other Total US Retail & Commercial Other Wealth Global Transaction Services RBS Insurance Central items Total Other Total loans and advances to customers 2009 Â£bn 2008...

Page 109
... adverse market risk. Employee numbers at 31 December (full time equivalents rounded to the nearest hundred) 2009 2008 UK Retail UK Corporate Wealth Global Banking & Markets Global Transaction Services Ulster Bank US Retail & Commercial RBS Insurance Central items Core Non-Core Business services...

Page 110
...and stock borrowing Loans and advances to customers Debt securities Equity shares Settlement balances Derivatives Intangible assets Property, plant and equipment Deferred taxation Prepayments, accrued income and other assets Assets of disposal groups Total assets Liabilities Bank deposits Repurchase...

Page 111
...in credit spreads in the continuing low interest rate environment. Increases in assets and liabilities of disposal groups reflect the inclusion of the RBS Sempra Commodities business and the planned sale of a number of the Group's retail and commercial activities in Asia and Latin America. Deposits...

Page 112
...in credit spreads in the continuing low interest rate environment. Increases in assets and liabilities of disposal groups reflect the inclusion of the RBS Sempra Commodities business and the planned sale of a number of the Group's retail and commercial activities in Asia and Latin America. Deposits...

Page 113
Business review Cash flow 2009 Â£m 2008 Â£m Net cash flows from operating activities Net cash flows from investing activities Net cash flows from financing activities Effects of exchange rate changes on cash and cash equivalents Net increase/(decrease) in cash and cash equivalents (992) 54 18,791...

Page 114
... credit and other risks); by international agreement, the RAR should be not less than 8% with a Tier 1 component of not less than 4%. At 31 December 2009, the Group's total RAR was 16.1% (2008 - 14.1%) and the Tier 1 RAR was 14.1% (2008 - 10.0%). 112 RBS Group Annual Report and Accounts 2009

Page 115
... by RBS. This information is being provided to give a better understanding of what the results of the operations might have looked like had the acquisition of ABN AMRO as well as the transfers of businesses to the other Consortium Members occurred on 1 January 2008. Group operating (loss)/profit on...

Page 116
... for the year ended 31 December 2008 Pro forma Â£m RFS minority interest Â£m Reallocation of one-off items Â£m Statutory Â£m Net interest income Non-interest income (excluding insurance net premium income) Insurance net premium income Non-interest income Total income Operating expenses Profit/(loss...

Page 117
...and stock borrowing Loans and advances to customers Debt securities Equity shares Settlement balances Derivatives Intangible assets Property, plant and equipment Deferred taxation Prepayments, accrued income and other assets Assets of disposal groups Total assets Liabilities Bank deposits Repurchase...

Page 118
...and stock borrowing Loans and advances to customers Debt securities Equity shares Settlement balances Derivatives Intangible assets Property, plant and equipment Deferred taxation Prepayments, accrued income and other assets Assets of disposal groups Total assets Liabilities Bank deposits Repurchase...

Page 119
...This reflects a global effort by many governments and central banks to ease monetary conditions, increase liquidity within the financial system and support banks with a combination of increased capital, guarantees and strengthened deposit insurance. One resulting benefit for banks generally has been...

Page 120
... risk, capital and liquidity management strategies are owned and set by the Group's Board of Directors, and implemented by executive management led by the Group Chief Executive. There are a number of committees and executives that support the execution of the business plan and strategy, as set out...

Page 121
...Chief Accountant Group Treasurer and Deputy Group Treasurer Chief Financial Officer, ABN AMRO Director, Group Corporate Finance Director, Group Financial Planning & Analysis Head of Balance Sheet Management, Group Treasury Group Chief Executive Head of Restructuring and Risk Group Chief Risk Officer...

Page 122
... the day-to-day management of capital, liquidity and risk which is set and managed by specialist staff in: â€¢ Risk Management: credit risk, market risk, operational risk, regulatory risk, reputational risk, insurance risk and country risk, together with risk analytics; and Group Treasury: balance...

Page 123
...first loss Total Tier 2 capital Tier 3 Supervisory deductions Unconsolidated investments - RBS Insurance - Other investments Other Deductions from total capital Total regulatory capital Risk weighted assets Credit risk Counterparty risk Market risk Operational risk APS relief 2009 Â£m 2008 Â£m 69...

Page 124
... from Tier 2 capital Less APS first loss Total Tier 2 capital Tier 3 Supervisory deductions Unconsolidated investments Other Deductions from total capital Total regulatory capital Risk-weighted assets Credit risk Counterparty risk Market risk Operational risk APS relief 2009 Â£m 2008 Â£m 69...

Page 125
Business review Risk, capital and liquidity management The Group has seen a continuation of challenging financial market and economic conditions during 2009. Although some signs of improvement have started to emerge, the performance of key economies remains uncertain and the Group has continued to ...

Page 126
... and securities financing activities; the Basel II The Group adopted Basel II on 1 January 2008. Pillar 1 focuses on the calculation of minimum capital required to support the credit, market and operational risks in the business. For credit risk, the majority of the Group uses the Advanced Internal...

Page 127
... focuses on pension fund risk, interest rate risk in the banking book together with stress tests to assess the adequacy of capital over one year and the economic cycle. The Group publishes its Pillar 3 (Market disclosures) on its website, providing a range of additional information relating to Basel...

Page 128
...risk is the risk that the Group may have to make additional contributions to its defined benefit pension schemes. Pension risk arises because of the uncertainty of future investment returns and the projected value of schemes' liabilities. * unaudited 126 RBS Group Annual Report and Accounts 2009

Page 129
... events on the Group's income and capital. Global Restructuring Group (GRG) GRG manages problem and potential problem exposures in the Group's wholesale credit portfolios. Its primary function is to work closely with the Group's customer facing businesses to support the proactive management of any...

Page 130
... specialist units. These include higher value more complex small business transactions and some residential mortgage applications. Divisional risk management committees focus on portfolio level decisions which drive credit quality, changes to policy and strategy, and the setting of credit scorecard...

Page 131
... and internal policies and requires a formal agreement with the customer to net the balances and a legal right of set-off; Under market standard documentation net exposure on over-thecounter (OTC) derivative and secured financing transactions is further mitigated by the exchange of financial...

Page 132
...(pages 130 to 141) are unaudited and are labelled with an asterisk (*). Credit risk assets UK Retail UK Corporate Wealth Global Banking & Markets Global Transaction Services Ulster Bank US Retail & Commercial Other Core(1) Non-Core 2009 Â£m 2008(1) Â£m 103,029 109,908 15,951 224,355 7,152 42,042...

Page 133
...Poor's or Moody's, and is stated gross of mitigating action which may have been taken to reduce or eliminate exposure to country risk events. 2009 Banks and financial institutions Â£m 2008 Banks and financial institutions Â£m Personal Â£m Sovereign Â£m Corporate Â£m Total Â£m Core Â£m Non-Core...

Page 134
... the UK, exposure to corporate sectors was down 8%. Banks, financial institutions and public sector were unchanged and exposure to personal customers was up 6% in 2009. Single name concentrations During the first half of the year, the Group implemented an enhanced framework to address the risk...

Page 135
Business review Risk, capital and liquidity management Credit risk asset quality Using the PD models described above, customers are assigned credit grades and scores, which are used for internal management reporting across portfolios, including a Group level asset quality scale, as shown below. ...

Page 136
... Ulster Bank: - Mortgages - Other personal Citizens: - Mortgages - Auto and cards - Other (1) EMEA and Asia Pacific Non-Core Other (2) Notes: (1) Mainly student loans and recreational vehicles/marine. (2) Personal exposures in other divisions, including Wealth, and RBS Insurance. 2009 Â£m 2008...

Page 137
...conservative risk policies. Loan acceptance criteria were tightened during 2009 to address deteriorating economic and market conditions. At 31 December 2009, the portfolio consisted of $34 billion (80% of the total portfolio) in these footprint states. RBS Group Annual Report and Accounts 2009 135

Page 138
...a general market trend of customers repaying debt on credit cards and loan balances and a reduction in new lending. Risk appetite continues to be actively managed across all unsecured products, reflecting the challenging economic environment. Support continues for customers in financial difficulties...

Page 139
... are subject to close monitoring within the originating division and a dedicated unit in the GRG focuses on commercial real estate to ensure that expertise is readily available to manage this portfolio actively on a coordinated basis globally. RBS Group Annual Report and Accounts 2009 137

Page 140
... conditions, reduced credit availability and high input costs. The global OEMs are experiencing changing demand patterns with a greater focus on developing markets versus their established markets. Shifting production capacity to lower cost overseas locations remains a priority but one that risks...

Page 141
...of payment default and in the majority of cases owners have supported transactions via cash injections. Cases on the Group's watch list that are more closely monitored and controlled have increased and now stand at Â£1 billion, or 7% of the total portfolio. RBS Group Annual Report and Accounts 2009...

Page 142
Business review continued Credit risk continued Credit risk assets* continued Corporate sectors continued Aviation 2009 Core Â£m Non-Core Â£m Total Â£m % 2008 Total Â£m % Operating leases (1) Secured debt Sovereign guaranteed debt Unsecured debt Other - 1,360 - 910 - 2,270 7,126 3,352 2,774 - -...

Page 143
... sector with poor operating models and stretched balance sheets. The more successful operators continue to adapt their customer proposition, operating models and capital structure to the new environment whilst keeping tight control on working capital. RBS Group Annual Report and Accounts 2009 141

Page 144
...to senior management on the credit performance of the Group's portfolios. REIL Â£m PPL Â£m REIL & PPL Â£m Total provision Â£m Total provision as % of REIL % Total provision as % of REIL & PPL % 2009 UK Retail UK Corporate Wealth Global Banking & Markets Global Transaction Services Ulster Bank...

Page 145
... as the year progressed. REIL levels in the fourth quarter were flat to the third quarter. REIL and PPL represented 5.5% of gross lending to customers, up from 2.5% at the end of 2008. â€¢ PPL also increased compared with 31 December 2008. â€¢ RBS Group Annual Report and Accounts 2009 143

Page 146
... are assessed on a case by case basis by experienced specialists with input from professional valuers and accountants. The Group operates a transparent provisions governance framework, setting thresholds to trigger enhanced oversight and challenge. 144 RBS Group Annual Report and Accounts 2009

Page 147
... by division Division UK Retail UK Corporate Wealth Global Banking & Markets Global Transaction Services Ulster Bank US Retail & Commercial RBS Insurance Central items Core Non-Core Group before RFS Holdings minority interest RFS Holdings minority interest Group 2009 Â£m 2008 Â£m 2007 Â£m 1,679 927...

Page 148
... 17,126 1,719 3,692 3,913 9,324 1,944 4,102 4,843 10,889 734 3,162 1,073 4,969 1,050 3,845 1,554 6,449 Note: (1) Excludes provision of Â£157 million relating to loans and advances to banks (2008 - Â£127 million; 2007 - Â£3 million). 146 RBS Group Annual Report and Accounts 2009

Page 149
Business review Risk, capital and liquidity management Movement in loan impairment provisions The following table shows the movement in the provision for impairment losses for loans and advances. Individually assessed Banks Â£m Customers Â£m Collectively assessed Â£m Latent Â£m 2009 Total Â£m 2008 ...

Page 150
Business review continued Credit risk continued Movement in loan impairment provisions continued The movement in provisions balance by division is shown in the table below. UK Corporate Banking Â£m Global Banking & Markets Â£m Global Transaction Services Â£m US Ulster Retail & Bank Commercial Â£m ...

Page 151
Business review Risk, capital and liquidity management Balance sheet analysis All the disclosures in this section (pages 149 to 153) are audited. The following tables provide an analysis of the credit quality and distribution of financial assets by the Group's internal credit quality gradings, ...

Page 152
Business review continued Balance sheet analysis continued Credit quality continued The following tables show 2007 and 2008 based on the old AQ1-5 bands. Cash and balances at central banks Â£m Loans and Loans and advances advances to customers to banks (1) Â£m Â£m Other financial instruments Â£m ...

Page 153
... review Risk, capital and liquidity management Debt securities The table below analyses debt securities by external ratings, mapped on to the Standard & Poor's ratings scale. 2009 UK and US government Â£m Other government Â£m Bank and Building Society Â£m Asset-backed securities Â£m Corporate...

Page 154
...Manufacturing Construction Finance (3) Service industries and business activities Agriculture, forestry and fishing Property Individuals: Home mortgages Other Finance lease and instalment credit Interest accruals For notes refer to the following page. 152 RBS Group Annual Report and Accounts 2009

Page 155
Business review Risk, capital and liquidity management 2008 Loans and advances to banks and customers Â£m Securities Â£m Derivatives Â£m Other Â£m (1) Total Â£m Netting and off-set (2) Â£m UK US Europe RoW 538,917 132,107 293,498 59,413 1,023,935 15,712 75,489 20,907 285,550 190,537 9,055 ...

Page 156
... as 90 days. Potential sources of liquidity include cash inflows from maturing assets, new borrowings or the sale of various debt securities held. Short-term liquidity risk is generally managed on a consolidated basis with liquidity mismatch limits in place for subsidiaries and non-UK branches which...

Page 157
... of bank deposits). In common with other UK banks, the Group has benefited from the UK Government's scheme to guarantee debt issuance. At 31 December 2009 the Group had debt securities in issue amounting to Â£52 billion (2008 - Â£32 billion), which is approximately 38% of the total UK Government...

Page 158
... risk to the Group through the commitments provided for this type of business. Repo Agreements: At 31 December 2009 the Group had Â£68 billion of customer secured funding and Â£38 billion of bank secured funding, which includes borrowing using central bank funding schemes. With markets continuing...

Page 159
... funds to customers under undrawn formal facilities, credit lines and other commitments to lend subject to certain conditions being met by the counterparty. The Group does not expect all facilities to be drawn, and some may lapse before drawdown. RBS Group Annual Report and Accounts 2009 157

Page 160
... from Â£144 billion at 31 December 2008. 2009 Â£m % 2008 Â£m % Deposits by banks (1) Debt securities in issue: - Commercial paper - Certificates of deposits - Medium term notes and other bonds - Securitisations Subordinated debt Total wholesale funding Customer deposits (1) 115,642 44,307 58,195...

Page 161
... Reserve Bank, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation and Financial Industry Regulatory Authority. In the Netherlands, ABN AMRO is subject the De Nederlandsche Bank liquidity regulation regime. * unaudited RBS Group Annual Report and Accounts 2009 159

Page 162
.... Over time this will be reviewed as proposals are developed and industry standards implemented. 2009 2008 ASF (1) Â£bn Â£bn ASF (1) Â£bn Weighting % Structural term liabilities Equity Wholesale lending > 1 year Wholesale lending < 1 year Derivatives Repos Customer deposits Others (deferred tax...

Page 163
... limited to: debt securities, loans, deposits, equities, securities sale and repurchase agreements and derivative financial instruments (futures, forwards, swaps and options). The Group participates in exchange traded and over-the-counter (OTC) derivatives markets. The Group buys and sells financial...

Page 164
... VaR for the Group's 2009 trading portfolios segregated by type of market risk exposure is shown below. Daily VaR graph* Note: (1) The traded market risk VaR excludes super senior tranches of asset backed CDOs and credit derivative product company exposures. Key points â€¢ The average total VaR...

Page 165
... the course of the year to dynamically reduce the underlying risk sensitivity. 2009 (99%ile) 2008 (99%ile) Minimum Â£m Average Â£m Period end Â£m Maximum Â£m Minimum Â£m Trading VaR Summary (2008 and 2009) Interest rate Credit spread Currency Equity Commodity Diversification Average Â£m Period...

Page 166
... at key trading strategy level, for those strategies where the associated market risks are not adequately captured by VaR. Stress test exposures are discussed with senior management and are reported to GRC, ERF and the Board. Breaches in the Group's market risk stress testing limits are monitored...

Page 167
... from changes in equity prices/income. This risk may crystallise during the course of normal business activities or in stressed market conditions. Equity positions in the Group's banking book are retained to achieve strategic objectives, support venture capital transactions or in respect of customer...

Page 168
... to the change are enhanced modelling of embedded deposit floors, active position management to benefit from the impact of a tightening US monetary policy regime by Citizens Financial Group and the impact of not fully hedging the interest rate exposure related to the APS capital proceeds which...

Page 169
... sterling would result in a These movements in equity would off-set retranslation effects on the Group's foreign currency denominated RWAs, reducing the sensitivity of the Group's Tier 1 capital ratio to movements in foreign currency exchange rates. RBS Group Annual Report and Accounts 2009 167

Page 170
... purpose of managing the Group's non-trading interest rate and foreign exchange exposures. All market risk methodologies that relate to limits specified under this delegated authority are applied under the direction of Group Market Risk. * unaudited 168 RBS Group Annual Report and Accounts 2009

Page 171
... â€¢ Life assurance business The Group's three regulated life companies, National Westminster Life Assurance Limited, Royal Scottish Assurance plc and Direct Line Life Insurance Company Limited underwrite life insurance products within the UK retail insurance market. The key assurance risks are as...

Page 172
...the Group's business as it is inherent in the processes it operates to provide services to customers and generate profit for shareholders. An objective of operational risk management is not to remove operational risk altogether, but to manage the risk to an acceptable level, taking into account the...

Page 173
...control reports, which provide detail on the risk exposures and action plans. Events that have a material, actual or potential impact on the Group's finances, reputation or customers, are escalated and reported to divisional and Group executive. Operational risk events by risk category - % of total...

Page 174
... policy. The same standards apply to information controlled by the Group or managed by authorised third parties. The Group continues to invest in programmes to enhance and maintain information security controls and systems. For example, during 2009, we completed security reviews on all of our high...

Page 175
... was closed to new employees. In November 2009, the Group confirmed that it was making changes, proposed in August 2009, to the RBS Group Pension Fund and a number of other defined benefit schemes, with a view to controlling the cost and the risk of operating these pension plans. The main change was...

Page 176
... relate to 'Group before RFS Holdings minority interest'. Key aspects of the Scheme On 22 December 2009, the Group acceded to the Asset Protection Scheme ('APS' or 'the Scheme') with HM Treasury (HMT) acting on behalf of the UK Government. Under the Scheme, the Group purchased credit protection...

Page 177
... underlying risks will be unchanged. Key points â€¢ The majority of the reduction (68%) in the covered assets reflects repayments by customers. â€¢ Additionally the Group took advantage of market conditions and executed a number of loan sales. RBS Group Annual Report and Accounts 2009 175

Page 178
... credit impairment losses and adjustments to par value (including AFS reserves) relating to covered assets: 2009 Â£m 2008 Â£m Loans and advances Debt securities Derivatives 14,240 7,816 6,834 28,890 7,705 7,942 6,575 22,222 By division: UK Retail UK Corporate Global Banking & Markets Ulster Bank...

Page 179
Business review Risk, capital and liquidity management The table below summarises the total triggered amount and related cash recoveries by division at 31 December 2009. Triggered amount Â£m Cash recoveries to date Â£m Net triggered amount Â£m UK Retail UK Corporate Global Banking & Markets Ulster...

Page 180
...the Scheme conditions and by division: Global Banking & Markets Â£m UK Retail Â£m UK Corporate Â£m Ulster Bank Â£m Non-Core Â£m Covered amount Â£m 2009 Residential mortgages Consumer finance Commercial real estate finance Leveraged finance Lease finance Project finance Structured finance Loans...

Page 181
...,696 230,530 181,838 15,202 33,490 230,530 21,242 49,227 44,017 11,869 104,175 230,530 Further analysed: Loans and advances Debt securities Derivatives By division: UK Retail UK Corporate Global Banking & Markets Ulster Bank Non-Core RBS Group Annual Report and Accounts 2009 179

Page 182
... UK Corporate Global Banking & Markets Ulster Bank Non-Core Notes: (1) The balances at 31 December 2008 and 31 December 2009 within specific asset classes reflect the Group's application of the asset class definitions in the Scheme rules, particularly in relation to consumer finance, commercial...

Page 183
Business review Risk, capital and liquidity management Sector analysis The table below analyses covered assets by sector and division; and by sector and HMT asset class at 31 December 2009 and 31 December 2008. 2009 UK Retail Â£m UK Corporate Â£m GBM Â£m Ulster Bank Â£m Non-Core Â£m Covered amount ...

Page 184
... assets. 2009 Â£m 2008 Â£m GBP Euro USD AUD JPY Other 107,731 56,586 58,489 3,276 1,725 2,723 230,530 121,440 72,989 77,298 3,981 2,157 4,094 281,959 The analysis by currency does not reflect hedges that the Group may have in place. * unaudited 182 RBS Group Annual Report and Accounts 2009

Page 185
Business review Risk, capital and liquidity management Risk elements in lending (REIL) and potential problem loans (PPL) REIL and PPL for the Group and the amount relating to assets in the Scheme are set out below. 2009 Group Â£m APS Â£m 2008 Group Â£m APS Â£m Non-performing loans Other REIL Total...

Page 186
... and rest of the world (RoW) and by the measurement classification - held-for-trading (HFT), available-for-sale (AFS), loans and receivables (LAR) and designated at fair value through profit or loss (DFV) - of the underlying assets at 31 December 2009. 184 RBS Group Annual Report and Accounts 2009

Page 187
Business review Risk, capital and liquidity management Asset-backed securities by geography and measurement classification US Â£m UK Â£m Other Europe (4) Â£m RoW Â£m Total Â£m HFT Â£m AFS Â£m LAR Â£m DFV Â£m 2009 Gross exposure: (1) RMBS: G10 governments RMBS: prime (4) RMBS: non-conforming RMBS:...

Page 188
..., referencing primarily Dutch and Spanish government-backed loans. (3) Net exposures represent the carrying value after taking account of hedge protection purchased from monoline insurers and other counterparties but exclude the effect of counterparty credit valuation adjustments. The hedges provide...

Page 189
Business review Risk, capital and liquidity management The table below summarises ABS carrying values and net exposures by geography and measurement classification at 31 December 2008 and 2007. US Â£m UK Â£m Other Europe (3) Â£m RoW Â£m Total Â£m HFT Â£m AFS Â£m LAR Â£m DFV Â£m 2008 Carrying ...

Page 190
... 3,778 5,230 4,929 12,000 5,676 11,521 99,376 Notes: (1) Credit ratings are based on those from rating agency Standard & Poor's (S&P). Moody's and Fitch have been mapped onto the S&P scale. (2) Fair value hierarchy levels 2 and 3 as defined by IFRS. 188 RBS Group Annual Report and Accounts 2009

Page 191
Business review Risk, capital and liquidity management Key points â€¢ Total asset-backed securities decreased from Â£111.1 billion at 31 December 2008 to Â£88.2 billion at 31 December 2009, due principally to exchange rate movements and the significant sell-down activity which took place in the ...

Page 192
...486 11,151 19,138 40,267 2,750 2,910 6,244 4,071 15,975 187 448 1,351 1,792 3,778 1,028 1,176 2,017 1,014 5,235 â€¢ Key point The change in vintage composition is a result of the balance sheet sell-down as well as the US Mortgage trading activity. 190 RBS Group Annual Report and Accounts 2009

Page 193
...trading. The largest holding of CMBS arose as a result of the Group's purchase of senior tranches in mezzanine and high grade CMBS structures from third parties. These securities are predominantly hedged with monoline insurers. As a result, the Group's risk is limited to the counterparty credit risk...

Page 194
..., particularly in relation to consumer positions. â€¢ The covered bonds comprise asset-backed securities issued primarily by Spanish financial institutions. These securities benefit from credit enhancement provided by the issuing institutions. 192 RBS Group Annual Report and Accounts 2009

Page 195
... certain trades and higher prices of underlying reference instruments. The reduction in CVA held against exposures to other counterparties was primarily driven by a reduction in counterparty risk due to the tightening of credit spreads. â€¢ RBS Group Annual Report and Accounts 2009 193

Page 196
... billion to Â£13.7 billion over the year. The increase was driven by revised credit risk assessments of these counterparties in the first nine months of the year, partially off-set by reductions in the last quarter due to restructuring. * unaudited 194 RBS Group Annual Report and Accounts 2009

Page 197
Business review Risk, capital and liquidity management The table below summarises monoline exposures by rating. Notional amount: protected assets Â£m Fair value: protected assets Â£m Gross exposure Â£m Credit valuation adjustment Â£m Net exposure to monoline insurers Â£m 2009 Hedges Â£m AA rated...

Page 198
... and other assets with credit enhancement provided by monoline insurers. These securities are traded with the benefit of this credit enhancement. Any deterioration in the credit rating of the monoline is reflected in the fair value of these assets. 196 RBS Group Annual Report and Accounts 2009

Page 199
Business review Risk, capital and liquidity management Credit derivative product companies (CDPC) A CDPC is a company that sells protection on credit derivatives. CDPCs are similar to monoline insurers, however, they are not regulated as insurers. The Group has purchased credit protection from ...

Page 200
...valuation adjustment at 31 December 2009 Decrease in credit valuation adjustment Net debit relating to hedges, foreign exchange and other movements Net debit to income statement (income from trading activities) (1,311) (499) 812 (1,769) (957) Key points â€¢ The Group has additional hedges in place...

Page 201
... that the Group has purchased from HMT , as part of its participation in the APS, due to the unique features of this derivative. The net income statement effect arising from the change in level of CVA for all other counterparties and related trades is shown in the table below. Â£m Credit valuation...

Page 202
...Market turmoil exposures continued Leveraged finance Leveraged finance is commonly employed to facilitate corporate finance transactions, such as acquisitions or buy-outs, and is so called due to the high ratio of debt to equity (leverage) common in such transactions. A bank acting as a lead manager...

Page 203
Business review Risk, capital and liquidity management The table below analyses the movements in leveraged finance exposures for the year. Drawn Â£m Undrawn Â£m Total Â£m Balance at 1 January 2009 Transfers in (from credit trading business) Sales Repayments and facility reductions Funded deals ...

Page 204
... multi-seller conduits which finance assets from Europe, North America and Asia-Pacific. Assets purchased or financed by the multi-seller conduits include auto loans, residential mortgages, credit card receivables, consumer loans and trade receivables. 202 RBS Group Annual Report and Accounts 2009

Page 205
... table below. Key points â€¢ The maturity of commercial paper issued by the Group's conduits is managed to mitigate the short-term contingent liquidity risk of providing back-up facilities. The Group's limits sanctioned for such liquidity facilities at 31 December 2009 totalled approximately Â£25...

Page 206
... relating to the Group's consolidated conduits are detailed below. Funded assets 2009 Loan Â£m Securities Â£m Total Â£m Undrawn Â£m Liquidity for third parties Â£m Total exposure Â£m Auto loans Corporate loans Credit card receivables Trade receivables Student loans Consumer loans Mortgages...

Page 207
... review Risk, capital and liquidity management Group exposure to consolidated conduits CP funded assets Geographic distribution UK Â£m Other Europe Â£m US Â£m RoW Â£m Total Â£m Weighted average life years AAA Â£m Credit ratings (S&P equivalent) AA Â£m A Â£m BBB Â£m Below BBB Â£m 2009 Auto loans...

Page 208
...manager money market funds denominated in sterling, US dollars and euro. The funds invest in short dated, highly rated securities with the objective of maximising current income consistent with the preservation of capital and liquidity. Non-money market funds The Group has also established a number...

Page 209
... Governance Contents 208 Report of the directors 214 Corporate governance 223 Letter from the Chairman of the Remuneration Committee 225 Directors' remuneration report 237 Directors' interests in shares 238 Statement of directors' responsibilities RBS Group Annual Report and Accounts 2009...

Page 210
... on dividend or coupon payments or call options. Business review Activities The company is a holding company owning the entire issued ordinary share capital of The Royal Bank of Scotland plc, the principal direct operating subsidiary undertaking of the company. The "Group" comprises the company and...

Page 211
... and policies and information on the Group's exposure to price, credit, liquidity and cash flow risk, is discussed in the Risk, capital and liquidity management section of the Business review on pages 72 to 116. Employees As at 31 December 2009, the Group employed over 160,000 employees (full-time...

Page 212
...and ethical responsibility. Corporate sustainability issues are governed by the Group Corporate Sustainability Committee (GCSC), which was established in 2009. The GCSC is supported by the executive-led Environment Working Group which has representatives from across the Group and reports to the GCSC...

Page 213
...in the market by the company's employee benefit trusts. Corporate governance The company is committed to high standards of corporate governance. Details are given on pages 214 to 222. The Corporate governance statement forms part of this Report of the directors. Ordinary share capital In April 2009...

Page 214
...to take effect, alter or terminate. In addition, a number of executive directors' service agreements may be affected on a change of control. All of the company's employee share plans contain provisions relating to a change of control. Outstanding awards and options may vest and become exercisable on...

Page 215
... in office. A resolution to re-appoint Deloitte LLP as the company's auditors will be proposed at the forthcoming Annual General Meeting. By order of the Board Miller McLean Secretary 24 February 2010 The Royal Bank of Scotland Group plc is registered in Scotland No. 45551. RBS Group Annual Report...

Page 216
... the final determination of the remuneration of the Group Chief Executive. The Group Audit Committee complies with the provisions of the NYSE corporate governance listing standards that relate to the composition, responsibilities and operation of audit committees. In May 2009, the company submitted...

Page 217
... that time. The names of directors standing for election at the 2010 Annual General Meeting are included on page 212 and further information is given in the Chairman's letter to shareholders in relation to the company's Annual General Meeting. Information, induction and professional development All...

Page 218
... senior management. It reports into the Board and is responsible for setting and reviewing the Group's overall sustainability strategy, values and policies. It receives reports from the Environment Working Group and other relevant internal programmes. 216 RBS Group Annual Report and Accounts 2009

Page 219
...the FSA Code, senior recruitment and the development of the new deferral plan and long-term incentive plans. Board Audit Remuneration Nominations* Relations with shareholders The company communicates with shareholders through the Annual Report and Accounts and by providing information in advance of...

Page 220
...and management of the significant risks faced by the Group, which operated throughout the year ended 31 December 2009 and to 24 February 2010, the date the directors approved the Report and Accounts. This process is regularly reviewed by the Board and meets the requirements of the guidance 'Internal...

Page 221
... reviews of registration statements; provision of accounting opinions relating to the financial statements of the Group; provision of reports that, according to law or regulation, must be rendered by the external auditors; tax compliance services; corporate finance services relative to companies...

Page 222
... in the Group's general insurance business; the accounting treatment of bonus tax; accounting issues relating to the Asset Protection Scheme; actuarial assumptions for the Group Pension Fund; impairment losses in the Group's portfolio of loans and advances and available-for-sale securities; carrying...

Page 223
... years. Ernst and Young will conduct an external review of the 2009 performance of Group Internal Audit in 2010. Internal reviews were undertaken of 2008 and 2009 performance, both of which concluded that the function operated effectively and the Board agreed with the Audit Committee findings...

Page 224
...arising from the Group's financial instruments required under International Financial Reporting Standard (IFRS) 7, are incorporated within the financial statements and Business review. Philip Scott Chairman of the Board Risk Committee 24 February 2010 222 RBS Group Annual Report and Accounts 2009

Page 225
...restrained but commercial and fair. Our plans take account of the need for a careful balance to be struck reflecting competitor positions, the UK bonus tax, the overall results of RBS and the capital support the Group has received. The Remuneration Committee reviewed remuneration policies, processes...

Page 226
... that the performance achieved is in line with the Board's risk policies and that a balanced performance has been achieved across a number of risk adjusted metrics. â€¢ Colin A. M. Buchan Chairman of the Remuneration Committee 24 February 2010 â€¢ 224 RBS Group Annual Report and Accounts 2009

Page 227
...that business. â€¢ Market facing Reward offerings in the markets where the Group operates should be understood and reward programmes should be designed and developed that offer value for money. Total compensation (comprising base pay progression and variable pay), benefits and long-term incentives...

Page 228
... risk management and the long term interests of shareholders. The remuneration policy as regards individual elements of employees' remuneration packages are as follows: Selected senior individuals in Global Banking & Markets will receive part of their awards for performance in 2009 in shares...

Page 229
... 39 years of service with Lloyds TSB and the Group, part of which has been funded by a transfer payment from a Lloyds TSB pension plan. Following Gordon Pell's retirement, no current director will be a member of one of the Group's final salary pension plans. The RBS Group Pension Fund is closed to...

Page 230
... Saun. The Group Chief Executive, Stephen Hester, has declined his annual performance bonus for 2009 in the light of the public controversy currently prevailing on pay and the potential impediment taking such an award might have on support for the RBS turnaround which he was hired 15 months ago to...

Page 231
... balance Executive director (including Chief Executive) pay mix The chart above shows the make up of remuneration opportunity for ontarget annual performance, and with long term incentive awards shown at their fair value at the date of grant. Short term incentive payments earned in relation to 2010...

Page 232
... would be based on salary only (i.e. not bonus or benefits). The company has agreed that, provided certain conditions are met, on leaving employment, Bruce Van Saun will not forfeit awards under the rules of the Deferral Plan, the MPP and the ESOP . 230 RBS Group Annual Report and Accounts 2009

Page 233
... the 2010 Annual General Meeting. Under the company's Articles of Association, all directors must retire and seek re-election by shareholders at least every three years. The dates in the table above reflect the latest date for election or re-election. The non-executive directors do not have service...

Page 234
... 10 12 8 10 11 18 11 89 106 73 89 106 174 102 No director received any expense allowances chargeable to UK income tax or compensation for loss of office/termination payment. The non-executive directors did not receive any bonus payments or benefits. 232 RBS Group Annual Report and Accounts 2009

Page 235
...'s share plans represented 4.1% of the company's issued ordinary share capital, leaving an available dilution headroom of 5.9%. The company meets its employee share plan obligations through a combination of new issue shares and market purchase shares. RBS Group Annual Report and Accounts 2009 233

Page 236
... exercise their right over the underlying share equivalents at any time up to ten years from the date of grant. No variation was made to any of the terms of the plan during the year other than introducing a clawback provision for awards made in 2009. 234 RBS Group Annual Report and Accounts 2009

Page 237
... of the award, to comply with or take account of any proposed or existing legislation or to obtain or maintain favourable tax, exchange control or regulatory treatment for Philip Hampton or his employer. The benefit of the award is not pensionable. RBS Group Annual Report and Accounts 2009 235

Page 238
Directors' remuneration report continued Directors' pension arrangements During 2009 Gordon Pell accrued pensionable service in The Royal Bank of Scotland Group Pension Fund (the "RBS Fund"). The RBS Fund is a defined benefit fund registered with HM Revenue & Customs under the Finance Act 2004. ...

Page 239
...31 December 2009, at 1 January 2009 or date of appointment if later. The interests shown above include the connected persons of the directors. As at 24 February 2010 there were no changes to the directors' interests in shares shown in the tables above. RBS Group Annual Report and Accounts 2009 237

Page 240
...departures disclosed and explained in the accounts. Miller McLean Secretary 24 February 2010 We, the directors listed below, confirm that to the best of our knowledge: â€¢ â€¢ the financial statements, prepared in accordance with International Financial Reporting Standards, give a true and fair...

Page 241
... Tax Profit attributable to preference shareholders and paid-in equity holders Ordinary dividends Profit dealt with in the accounts of the company Earnings per ordinary and B share Financial instruments Financial assets - impairments Derivatives Debt securities Equity shares Investments in Group...

Page 242
...the consolidated statement of comprehensive income, the statements of changes in equity and the cash flow statements for the year ended 31 December 2009, the related Notes 1 to 42 and the information identified as 'audited' in the Risk, capital and liquidity management section of the Business review...

Page 243
...accounting policies on pages 248 to 258 and the audited sections of the Business review: Risk, capital and liquidity management on pages 117 to 206 form an integral part of these financial statements. Note: (1) B shares rank pari-passu with ordinary shares. RBS Group Annual Report and Accounts 2009...

Page 244
... The accompanying notes on pages 259 to 348, the accounting policies on pages 248 to 258 and the audited sections of the Business review: Risk, capital and liquidity management on pages 117 to 206 form an integral part of these financial statements. 242 RBS Group Annual Report and Accounts 2009

Page 245
... Board of directors and authorised for issue on 24 February 2010 and signed on its behalf by: Philip Hampton Chairman Stephen Hester Group Chief Executive Bruce Van Saun Group Finance Director The Royal Bank of Scotland Group plc Registered No. SC45551 RBS Group Annual Report and Accounts 2009...

Page 246
Statements of changes in equity for the year ended 31 December 2009 Group 2009 Â£m Restated 2008 Â£m 2007 Â£m 2009 Â£m Company 2008 Â£m 2007 Â£m Called-up share capital At 1 January Ordinary shares issued in respect of placing and open offers Ordinary shares issued in respect of rights issue ...

Page 247
... benefit schemes - gross - taxation Net cost of shares bought and used to satisfy share-based payments Share-based payments - gross - taxation At 31 December Own shares held At 1 January Shares purchased during the year Shares issued under employee share schemes At 31 December Owners' equity...

Page 248
... The accompanying notes on pages 259 to 348, the accounting policies on pages 248 to 258 and the audited sections of the Business review: Risk, capital and liquidity management on pages 117 to 206 form an integral part of these financial statements. 246 RBS Group Annual Report and Accounts 2009

Page 249
...573 The accompanying notes on pages 259 to 348, the accounting policies on pages 248 to 258 and the audited sections of the Business review: Risk, capital and liquidity management on pages 117 to 206 form an integral part of these financial statements. RBS Group Annual Report and Accounts 2009 247

Page 250
... basis. The income is earned when the payment or transaction occurs. Charges for payment services are usually debited to the customer's account monthly or quarterly in arrears. Accruals are raised for services provided but not charged at period end. 248 RBS Group Annual Report and Accounts 2009

Page 251
... plans to eligible employees. For defined benefit schemes, scheme liabilities are measured on an actuarial basis using the projected unit credit method and discounted at a rate that reflects the current rate of return on a high quality corporate bond of equivalent term and currency to the scheme...

Page 252
...at the balance sheet date. Foreign exchange differences arising on translation are reported in income from trading activities except for differences arising on cash flow hedges and hedges of net investments in foreign operations. Nonmonetary items denominated in foreign currencies that are stated at...

Page 253
...purposes and its carrying amount for tax purposes, except in relation to overseas earnings where remittance is controlled by the Group, and goodwill. Deferred tax assets are only recognised to the extent that it is probable that they will be recovered. RBS Group Annual Report and Accounts 2009 251

Page 254
...cost are recognised on settlement date; all other regular way transactions in financial instruments are recognised on trade date. Fair value for a net open position in a financial asset that is quoted in an active market is the current bid price times the number of units of the instrument held. Fair...

Page 255
... method (see accounting policy 3). Fair value for a net open position in a financial liability that is quoted in an active market is the current offer price times the number of units of the instrument held or issued. Fair values for financial liabilities not quoted in an active market are determined...

Page 256
... risk management strategy, hedge accounting is discontinued. 20. Sale and repurchase transactions Securities subject to a sale and repurchase agreement under which substantially all the risks and rewards of ownership are retained by the Group continue to be shown on the balance sheet and the sale...

Page 257
... the date the awards are granted. The fair value of an option is estimated using valuation techniques which take into account its exercise price, its term, the risk-free interest rate and the expected volatility of the market price of The Royal Bank of Scotland Group plc's shares. Vesting conditions...

Page 258
... interests in securitisations. Equity securities (held-for-trading, designated as at fair value though profit or loss and available-for-sale) - comprise equity shares of companies or corporations both listed and unlisted. Deposits by banks and customer accounts (held-for-trading and designated as at...

Page 259
... in active markets for identical financial assets or financial liabilities where these are available. Fair value for a net open position in a financial asset or financial liability in an active market is the current bid or offer price times the number of units of the instrument held. Where a trading...

Page 260
...the Group's financial statements of the ABN AMRO businesses to be acquired by the State of Netherlands following the reorganisation of ABN AMRO Bank N.V . described in Note 16. The IFRIC issued interpretation IFRIC 18 'Transfers of Assets from Customers' in January 2009. The interpretation addresses...

Page 261
Financial statements Notes on the accounts 1 Net interest income Group 2009 Â£m 2008 Â£m 2007 Â£m Loans and advances to customers Loans and advances to banks Debt securities Interest receivable Customer accounts: demand deposits Customer accounts: savings deposits Customer accounts: other time ...

Page 262
...on the accounts continued 2 Non-interest income (excluding insurance premium income) Group 2009 Â£m 2008 Â£m 2007 Â£m Fees and commissions receivable Fees and commissions payable - banking - insurance related Income/(loss) from trading activities Foreign exchange Interest rate Credit Equities and...

Page 263
Financial statements Notes on the accounts 3 Operating expenses Group 2009 Â£m Restated 2008 Â£m 2007 Â£m Wages, salaries and other staff costs Social security costs Share-based compensation Pension costs - defined benefit schemes (see Note 4) - curtailment gains (see Note 4) - defined ...

Page 264
... as follows: Group 2009 2008 2007 UK Retail UK Corporate Wealth Global Banking & Markets Global Transaction Services Ulster Bank US Retail & Commercial RBS Insurance Centre Core Non-Core Business Services Integration RFS Holdings minority interest Total UK USA Europe Rest of the World Total 28,500...

Page 265
... each year of service prior to retirement up to a maximum of 40 years. Employees do not make contributions for basic pensions but may make voluntary contributions to secure additional benefits on a money-purchase basis. Since October 2006 The Royal Bank of Scotland Group Pension Fund ('Main scheme...

Page 266
...All schemes Present value of defined benefit obligations Â£m Net pension deficit/ (surplus) Â£m Changes in value of net pension deficit/(surplus) At 1 January 2008 Transfers to disposal groups Currency translation and other adjustments Income statement: Expected return Interest cost Current service...

Page 267
... to the lower of 2% or the rate of inflation in any year. At 31 December 2009, ABN AMRO's principal pension scheme in the Netherlands had fair value of plan assets of Â£8,118 million (2008 - Â£8,181 million; 2007 - Â£6,417 million) and present value of defined benefit obligations of Â£8,298 million...

Page 268
... other services - Services relating to taxation - Services relating to corporate finance transactions, including securitisations, entered into by the Group All other services - Accounting advice - Review of internal controls - Other assurance services - Consulting services Total other services Fees...

Page 269
... and the related finance cost in interest payable. (3) Between 1 January 2010 and the date of approval of these accounts, dividends amounting to US$163 million have been declared in respect of equity preference shares for payment on 31 March 2010. RBS Group Annual Report and Accounts 2009 267

Page 270
...in equity holders Ordinary and B shareholders Total comprehensive income for the year 2009 Â£m 2008 Â£m 2007 Â£m (1,503) 3 - 3 (1,500) (9,602) 2 (1) 1 (9,601) 2,499 3 (1) 2 2,501 878 57 (2,435) (1,500) 536 60 (10,197) (9,601) 246 - 2,255 2,501 268 RBS Group Annual Report and Accounts 2009

Page 271
Financial statements Notes on the accounts 10 Earnings per ordinary and B share Earnings per ordinary and B share have been calculated based on the following: Group 2009 Â£m 2008 Â£m 2007 Â£m Earnings: (Loss)/earnings attributable to ordinary and B shareholders Add back loss from discontinued ...

Page 272
... 1,696,486 Liabilities Deposits by banks (5) Customer accounts (6, 7) Debt securities in issue (8, 9) Settlement balances and short positions Derivatives Accruals, deferred income and other liabilities Retirement benefit liabilities Deferred taxation Insurance liabilities Subordinated liabilities...

Page 273
...disposal groups 1,226,769 Liabilities Deposits by banks (5) Customer accounts (6, 7) Debt securities in issue (8, 9) Settlement balances and short positions Derivatives Accruals, deferred income and other liabilities Retirement benefit liabilities Deferred taxation Insurance liabilities Subordinated...

Page 274
... disposal groups 678,516 Liabilities Deposits by banks (5) Customer accounts (6, 7) Debt securities in issue (8, 9) Settlement balances and short positions Derivatives Accruals, deferred income and other liabilities Retirement benefit liabilities Deferred taxation Insurance liabilities Subordinated...

Page 275
... cost) Â£m Non financial assets/ liabilities Â£m 2009 Held-fortrading Â£m Hedging derivatives Â£m Loans and receivables Â£m Total Â£m Assets Loans and advances to banks (1) Loans and advances to customers (3) Debt securities (3) Investments in Group undertakings Settlement balances Derivatives...

Page 276
... income statement: Group 2009 Â£m 2008 Â£m 2007 Â£m Gains/(losses) on financial assets/liabilities designated as at fair value through profit or loss (Losses)/gains on disposal or settlement of loans and receivables 1,441 (573) (901) 4 1,074 3 274 RBS Group Annual Report and Accounts 2009

Page 277
Financial statements Notes on the accounts Reclassification of financial instruments The Group reclassified financial assets from the held-for-trading (HFT) and available-for-sale (AFS) categories into the loans and receivables (LAR) category (as permitted by paragraph 50D of IAS 39 as amended) and...

Page 278
... The balance sheet values of these assets, the effect of the reclassification on the income statement for the period from the date of reclassification to 31 December 2009 and the gains and losses relating to these assets recorded in the income statement for the years ended 31 December 2009, 2008 and...

Page 279
... in 2008. The balance sheet values of these assets, the effect of the reclassification on the income statement for the period from the date of reclassification to 31 December 2008 and the gains and losses relating to these assets recorded in the income statement for the years ended 31 December 2008...

Page 280
... of areas with very high residual valuation uncertainty. Committee membership includes the Group Finance Director, the Group Chief Accountant, Head of Group Market Risk, GBM CFO and NonCore CFO, and representation from front office trading and Finance. 278 RBS Group Annual Report and Accounts 2009

Page 281
... readily available for equity shares listed on the world's major stock exchanges and for major indices on such shares. Commodity prices - many commodities are actively traded in spot and forward contracts and futures on exchanges in London, New York and other commercial centres. Price volatilities...

Page 282
... instruments. Where there is limited bid-offer information for a product a conservative approach is taken, taking into account pricing approach and risk management strategy. Market risk close-out costs excluding CVA were Â£2,814 million as at 31 December 2009 (2008 - Â£3,260 million; 2007 - Â£1,154...

Page 283
...-for-trading portfolio consists of wholesale and retail note issuances. (2) The effect of foreign exchange rates, new issues and redemptions are not captured separately. Â£bn Â£bn Â£bn Â£bn Â£bn 36.6 25.5 13.3 16.9 49.9 42.4 16.8 43.5 66.7 85.9 RBS Group Annual Report and Accounts 2009...

Page 284
...bn Level 2 Â£bn Level 3 Â£bn Level 3 sensitivity Â£m (2) Â£m Level 3 valuation technique and related assumptions Assets Loans and advances: - banks - customers Debt securities Government RMBS CMBS CDOs CLOs Other ABS Corporate Other (3) Equity shares Derivatives Foreign exchange Interest rate...

Page 285
... the accounts 2008 Total Â£bn Level 1 Â£bn Level 2 Â£bn Level 3 Â£bn Level 3 sensitivity Â£m (2) Â£m Level 3 valuation technique and related assumptions Assets Loans and advances - banks - customers Debt securities Government RMBS CMBS CDOs CLOs Other ABS Corporate Other (3) Equity shares...

Page 286
... in active markets, examples include G10 government securities, listed equity shares, certain exchange-traded derivatives and certain US agency securities. Level 2: includes most government agency securities, investment-grade corporate bonds, certain mortgage products, most bank and bridge loans...

Page 287
... that originated the mortgages, the lead manager of the security, the issue date of the respective securities, the underlying asset composition (including origination date, loan to value ratios, historic loss information and geographic location of the mortgages), the credit rating of the instrument...

Page 288
... shown in level 3. Equity shares Private equity investments include unit holdings and limited partnership interests primarily in corporate private equity funds, debt funds and fund of hedges funds. Externally managed funds are valued using recent prices where available. Where not available, the fair...

Page 289
... which are held at fair value determined from data which are not market observable, or incorporating material adjustments to market observed data. These include subordinated liabilities and write downs relating to undrawn syndicated loan facilities. RBS Group Annual Report and Accounts 2009 287

Page 290
... or losses relating to instruments held at year end Â£m At 1 January 2009 Â£m Transfers in/out of Level 3 Â£m Reclassification Â£m Purchases and issues Â£m Sales and settlements Â£m Foreign exchange Â£m At 31 December 2009 Â£m Assets FVTPL(2): Loans and advances Debt securities Equity shares...

Page 291
... the market rate applicable at the balance sheet date for a similar portfolio with similar maturity and credit risk characteristics. Debt securities Fair values are determined using quoted prices where available or by reference to quoted prices of similar instruments. Deposits by banks and customer...

Page 292
... months Â£m Total Â£m Assets Cash and balances at central banks Loans and advances to banks Loans and advances to customers Debt securities Equity shares Settlement balances Derivatives Liabilities Deposits by banks Customer accounts Debt securities in issue Settlement balances and short positions...

Page 293
... of 20 years from the balance sheet date, including future payments of interest. On balance sheet liabilities Group 2009 0-3 months Â£m 3-12 months Â£m 1-3 years Â£m 3-5 years Â£m 5-10 years Â£m 10-20 years Â£m Deposits by banks Customer accounts Debt securities in issue Derivatives held...

Page 294
... to the income statement Loans and advances to customers Loans and advances to banks 2009 Â£m 2008 Â£m 2007 Â£m 14,100 34 14,134 601 215 816 14,950 6,973 118 7,091 878 103 981 8,072 1,946 - 1,946 20 2 22 1,968 Debt securities Equity shares Group 2009 Â£m 2008 Â£m 2007 Â£m Gross income not...

Page 295
... the market for the individual asset permits. Loans that have been renegotiated in the past 12 months that would otherwise have been past due or impaired amounted to Â£2,698 million as at 31 December 2009 (2008 - Â£2,637 million; 2007 - Â£930 million). RBS Group Annual Report and Accounts 2009 293

Page 296
... Companies in the Group transact derivatives as principal either as a trading activity or to manage balance sheet foreign exchange, interest rate and credit risk. The Group enters into fair value hedges, cash flow hedges and hedges of net investments in foreign operations. The majority of the Group...

Page 297
... of the Group's derivatives. Group 2009 Notional amounts Â£bn Assets Â£m Liabilities Â£m Notional amounts Â£bn 2008 Assets Â£m Liabilities Â£m Notional amounts Â£bn 2007 Assets Â£m Liabilities Â£m Exchange rate contracts Spot, forwards and futures Currency swaps Options purchased Options written...

Page 298
...derivatives held for hedging purposes as follows: 2009 2008 Liabilities Â£m Assets Â£m Liabilities Â£m 2007 Assets Â£m Liabilities Â£m Fair value hedging Exchange rate contracts Interest rate contracts Assets Â£m - 239 - 14 - 193 225 - - - 54 - 296 RBS Group Annual Report and Accounts 2009

Page 299
... category and during 2008 from the held-fortrading category into the available-for-sale category (see pages 275 to 277). The company holds other debt securities issued by a Group undertaking of Â£1,286 million, classified as loans and receivables. RBS Group Annual Report and Accounts 2009 297

Page 300
... management judgment. The unrealised losses on the Group's available-for-sale debt securities are concentrated in its portfolios of mortgage-backed securities. The losses reflect the widening of credit spreads as a result of the reduced market liquidity in these securities and the current uncertain...

Page 301
Financial statements Notes on the accounts 15 Equity shares Group 2009 Listed Â£m Unlisted Â£m Total Â£m Listed Â£m 2008 Unlisted Â£m Total Â£m Listed Â£m 2007 Unlisted Â£m Total Â£m Held-for-trading Designated as at fair value through profit or loss Available-for-sale 14,394 1,548 937 16,879 49...

Page 302
...Nature of business Country of incorporation and principal area of operation Group interest The Royal Bank of Scotland plc National Westminster Bank Plc (1) Citizens Financial Group, Inc. Coutts & Company (2) RBS Securities Inc. RBS Insurance Group Limited Ulster Bank Limited (3) ABN AMRO Holding...

Page 303
Financial statements Notes on the accounts 17 Intangible assets Group Core deposit intangibles Â£m Other purchased intangibles Â£m Internally generated software Â£m 2009 Goodwill Â£m Total Â£m Cost: At 1 January 2009 Transfers to disposal groups Currency translation and other adjustments ...

Page 304
..., principally on the acquisitions of NatWest, ABN AMRO, Charter One and Churchill are as follows: 2009 Recoverable amount based on: Goodwill at 30 September Â£m UK Retail UK Corporate Wealth Global Transaction Services US Retail & Commercial RBS Insurance Value Value Value Value Value Value...

Page 305
... in relation to NatWest and ABN AMRO goodwill allocated to Non-Core businesses following the restructure of the Group. In 2008, the recoverable amounts for all CGUs were based on value in use tests. Goodwill write downs were recorded in Global Banking & Markets, US Retail & Commercial, Europe...

Page 306
...plant and equipment Group Investment properties Â£m Freehold premises Â£m Long leasehold premises Â£m Short leasehold premises Â£m Computers and other equipment Â£m Operating lease assets Â£m 2009 Total Â£m Cost or valuation: At 1 January 2009 Transfers to disposal groups Currency translation and...

Page 307
... during 2009 includes Â£1,336 million arising on assumption by the Group of control of properties for which it provided finance to a customer. The fair value of investment properties includes Â£84 million (2008 - Â£172 million; 2007 - Â£234 million) of appreciation since purchase. Rental income from...

Page 308
... of tax Discontinued operations in 2008 reflect the results of Banco Real sold to Santander on 24 July 2008. Businesses acquired exclusively with a view to disposal comprise those ABN AMRO businesses, including Banca Antonveneta, Asset Management and Private Equity, classified as disposal groups on...

Page 309
...liabilities of disposal groups Sempra Â£m Other Â£m 2009 Â£m 2008 Â£m 2007 Â£m Assets of disposal groups Cash and balances at central banks Loans and advances to banks Loans and advances to customers Debt securities and equity shares Derivatives Intangible assets Settlement balances Property, plant...

Page 310
Notes on the accounts continued 21 Settlement balances and short positions Group 2009 Â£m 2008 Â£m 2007 Â£m Settlement balances (amortised cost) Short positions (held-for-trading): Debt securities - Government - Other issuers Equity shares 10,413 26,647 10,871 2,945 50,876 11,741 32,519 6,374 ...

Page 311
...Intangibles Â£m Share schemes Â£m Other Â£m Total Â£m At 1 January 2008 (51) Transfers to disposal groups 19 Acquisition/(disposals) of subsidiaries - Charge/(credit) to income statement 157 (Credit)/charge to equity directly (476) Other (31) At 1 January 2009 (382) Transfers to disposal groups...

Page 312
Notes on the accounts continued 24 Insurance business Group 2009 Â£m 2008 Â£m 2007 Â£m Insurance premium income Reinsurers' share Net premium income Insurance claims Reinsurers' share Net claims 5,807 (263) 5,544 4,992 (135) 4,857 6,626 (300) 6,326 4,603 (173) 4,430 6,376 (289) 6,087 4,742 (...

Page 313
...Operating assumption changes Investment return variances Economic assumption changes Transfer to shareholders' funds Other Closing net assets Note: (1) New business contribution represents the present value of future profits on new insurance contract business written during the year. 2009 Â£m 2008...

Page 314
...January 2008 Premiums received Fees and expenses Investment return Actuarial adjustments Account balances paid on surrender and other terminations in the year Transfers to disposal groups Exchange and other adjustments At 1 January 2009 Premiums received Fees and expenses Investment return Actuarial...

Page 315
Financial statements Notes on the accounts Insurance risk Insurance risk is the risk of fluctuations in the timing, frequency or severity of insured events, relative to the expectations of the Group at the time of underwriting. Underwriting and pricing risk The Group manages underwriting and ...

Page 316
...020 3,254 3,161 211 191 142 133 851 839 5,545 5,344 82 86 80 81 55 60 75 80 40 41 73 75 The Group has no interest rate exposure from general insurance liabilities because provisions for claims under short-term insurance contracts are not discounted. 314 RBS Group Annual Report and Accounts 2009

Page 317
..., the strength of the economy is also a factor. Group 0-3 months Â£m 3-12 months Â£m 1-3 years Â£m 3-5 years Â£m 5-10 years Â£m 10-20 years Â£m 2009 2008 2007 561 623 710 1,685 1,645 1,796 1,898 1,899 1,961 949 903 882 665 487 395 73 53 33 RBS Group Annual Report and Accounts 2009 315

Page 318
... Life business The Group's three UK regulated life companies, National Westminster Life Assurance Limited (NatWest Life), Royal Scottish Assurance plc (RSA) and Direct Line Life Insurance Company Limited, are required to meet minimum capital requirements at all times under the UK Financial Service...

Page 319
... and liabilities are actively managed and may vary at the time that any actual market movement occurs. 25 Subordinated liabilities Group 2009 Â£m 2008 Â£m 2007 Â£m 2009 Â£m Company 2008 Â£m 2007 Â£m Dated loan capital Undated loan capital Preference shares Trust preferred securities 24,597 8,164...

Page 320
...its direct or indirect subsidiaries (excluding companies in the ABN AMRO Group) will pay external investors any dividends or coupons on existing hybrid capital instruments (including preference shares, B shares and upper and lower tier 2 instruments) from a date starting not later than 30 April 2010...

Page 321
... Euro Total Currently Â£m 2008 Â£m 2009 Â£m 2010-2012 Â£m 2013-2017 Â£m Thereafter Â£m Perpetual Â£m Total Â£m - 425 - 425 13 435 45 493 - 620 - 620 198 643 914 1,755 399 2,594 367 3,360 - 1,089 - 1,089 1 - - 1 611 5,806 1,326 7,743 319 RBS Group Annual Report and Accounts 2009

Page 322
... 2010 (callable on any interest payment date) First Active plc Â£60 million 6.375% subordinated bonds 2018 (callable April 2013) - 564 455 365 351 697 623 488 379 376 507 474 376 349 330 255 287 212 - - 311 116 69 342 85 50 249 66 66 65 320 RBS Group Annual Report and Accounts 2009

Page 323
...'s dated loan capital are subordinated to the claims of other creditors. None of the Group's dated loan capital is secured. (5) Interest on all floating rate subordinated notes is calculated by reference to market rates. (6) Transferred to Banco Santander. RBS Group Annual Report and Accounts 2009...

Page 324
...Westminster Bank Plc at any time. (6) Except as stated above, claims in respect of the Group's undated loan capital are subordinated to the claims of other creditors. None of the Group's undated loan capital is secured. (7) In the event of certain changes in tax laws, undated loan capital issues may...

Page 325
... not in part, upon the occurrence of certain tax and regulatory events. The company classifies its obligations to these subsidiaries as dated loan capital. (2) Partially redeemed following the completion of the exchange and tender offers in April 2009. RBS Group Annual Report and Accounts 2009 323

Page 326
...events. The company classifies its obligations to these subsidiaries as dated loan capital. The trust preferred securities above were also included in the series of exchange offers and tender offers concluded by the Group in April 2009 (see page 318). 324 RBS Group Annual Report and Accounts 2009

Page 327
... resolved to grant the directors the power to issue a nominal amount of Â£1,610 million B shares of 1p each and Â£44,250 million ordinary shares of 25p each in connection with the company's participation in the UK Government's Asset Protection Scheme. RBS Group Annual Report and Accounts 2009 325

Page 328
... preference shares are redeemable at the option of the company, in whole or in part from time to time at the rates detailed on the next page plus dividends otherwise payable for the then current dividend period accrued to the date of redemption. 326 RBS Group Annual Report and Accounts 2009

Page 329
...its direct or indirect subsidiaries (excluding companies in the ABN AMRO Group) will pay external investors any dividends or coupons on existing hybrid capital instruments (including preference shares, B shares and upper and lower tier 2 instruments) from a date starting not later than 30 April 2010...

Page 330
... million of this capital was redeemed in April 2009. Under the arrangements for the placing and open offer in December 2008, the company issued shares in exchange for shares in Encuentro Limited. No share premium was recorded in the company financial statements through the operation of the merger...

Page 331
... asset finance to its customers through acting as a lessor. It purchases plant, equipment and intellectual property, renting them to customers under lease arrangements that, depending on their terms, qualify as either operating or finance leases. RBS Group Annual Report and Accounts 2009 329

Page 332
... against Group liabilities Loans and advances to banks Loans and advances to customers Debt securities 2009 Â£m 2008* Â£m 13 147,150 8,723 155,886 13 125,463 15,490 140,966 Liabilities secured by Group assets Deposits by banks Customer accounts Debt securities in issue * revised 2009 Â£m 2008...

Page 333
... with the FSAs capital requirements throughout the year. A number of subsidiaries and sub-groups within the Group, principally banking and insurance entities, are subject to various individual regulatory capital requirements in the UK and overseas. RBS Group Annual Report and Accounts 2009 331

Page 334
... contingent liabilities - these include standby letters of credit, supporting customer debt issues and contingent liabilities relating to customer trading activities such as those arising from performance and customs bonds, warranties and indemnities. 332 RBS Group Annual Report and Accounts 2009

Page 335
... FSCS management expenses levies for the 2009/10 and 2010/11 scheme years. Litigation As a participant in the financial services industry, the Group operates in a legal and regulatory environment that exposes it to potentially significant litigation risks. As a result, the company and other members...

Page 336
..., remediation of systems and controls, public or private censure or fines. Any of these events or circumstances could have a material adverse impact on the Group, its business, reputation, results of operations or the price of securities issued by it. 334 RBS Group Annual Report and Accounts 2009

Page 337
... on monthly statements. To improve the switching process, a number of steps are being introduced following work with BACS, the payment processor, including measures to reduce the impact on consumers of any problems with transferring direct debits. RBS Group Annual Report and Accounts 2009 335

Page 338
... March 2010. US dollar clearing activities In connection with a previously disclosed investigation of ABN AMRO's New York Branch by US regulatory authorities, ABN AMRO and members of ABN AMRO's management continue to provide information to the United States Department of Justice relating to ABN AMRO...

Page 339
... securities in issue Increase/(decrease) in other liabilities (Decrease)/increase in derivative liabilities Increase/(decrease) in settlement balances and short positions Changes in operating liabilities Total income taxes (paid)/received Net cash (outflow)/inflow from operating activities (2,595...

Page 340
...business and Interbanca. It is estimated that the Group would have reported total income of Â£37.2 billion and profit after tax of Â£7.7 billion from continuing operations for the year ended 31 December 2007 had all acquisitions occurred on 1 January 2007. 338 RBS Group Annual Report and Accounts...

Page 341
...'s reported result from continuing operations for 2009 and 2008 would not have been materially affected had all acquisitions occurred on 1 January 2008 or 1 January 2009. The profit on disposal arises on the sales of Angel Trains, Tesco Personal Finance and the European Consumer Finance business...

Page 342
... balances with the Federal Reserve Bank in the US. Such reserve balances were nil at 31 December 2009 (2008 - nil; 2007 - US$1 million). ABN AMRO had mandatory reserve deposits of â,¬6 million at 31 December 2009 (2008 - â,¬3 million; 2007 - â,¬6 million). 340 RBS Group Annual Report and Accounts...

Page 343
... financing, risk management and investment services to its customers. The division is organised along six principal business lines: money markets; rates flow trading; currencies and commodities; equities; credit markets and portfolio management & origination. RBS Group Annual Report and Accounts...

Page 344
... Â£m Total income Â£m Group Operating expenses and insurance claims Â£m Depreciation and amortisation Â£m 2009 Impairment losses Â£m Operating profit/(loss) Â£m UK Retail UK Corporate Wealth Global Banking & Markets Global Transaction Services Ulster Bank US Retail & Commercial RBS Insurance...

Page 345
... Eliminations 2009 External Â£m Inter segment Â£m Total Â£m External Â£m 2008 Inter segment Â£m Total Â£m External Â£m 2007 Inter segment Â£m Total Â£m Total income UK Retail UK Corporate Wealth Global Banking & Markets Global Transaction Services Ulster Bank US Retail & Commercial RBS Insurance...

Page 346
...follows: Reportable segments Global Global Banking Transaction & Markets Services Â£m Â£m US Retail & Commercial Â£m RFS Holdings minority interest Â£m UK Retail Â£m UK Corporate Â£m Wealth Â£m Ulster Bank Â£m RBS Insurance Â£m NonCore Â£m Total Â£m At 1 January 2007 Currency translation and...

Page 347
...of location of office where the transactions are recorded. Group UK Â£m USA Â£m Europe Â£m Rest of the World Â£m Total Â£m 2009 Total revenue Net interest income Net fees and commissions Income from trading activities Other operating income/(loss) Insurance premium income (net of reinsurers' share...

Page 348
... management during the year was as follows: Group 2009 Â£000 2008 Â£000 Short-term benefits Post-employment benefits Other long-term benefits Termination benefits Share-based payments 29,292 9,781 - - 8,953 48,026 16,813 13,174 496 345 2,078 32,906 346 RBS Group Annual Report and Accounts 2009

Page 349
... no reportable transactions or balances with the company except for dividends. 41 Related parties UK Government On 1 December 2008, the UK Government through HM Treasury became the ultimate controlling party of The Royal Bank of Scotland Group plc. The UK Government's shareholding is managed by UK...

Page 350
... 2009, the Group had obtained funding from the Bank of England and issued debt guaranteed by the Government totalling Â£51.5 billion (2008 - Â£32.2 billion) Other related parties (a) In their roles as providers of finance, Group companies provide development and other types of capital support...

Page 351
...Additional information Contents 350 Financial summary 359 Exchange rates 360 Economic and monetary environment 361 Supervision 361 Regulatory developments and reviews 362 Description of property and equipment 363 Major shareholders 363 Material contracts RBS Group Annual Report and Accounts 2009...

Page 352
... dollar financial information included below has been converted from sterling at a rate of Â£1.00 to US$1.6167, being the Noon Buying Rate on 31 December 2009. Summary consolidated income statement Net interest income Non-interest income (1, 2) Total income Operating expenses (3, 4, 5, 6, 7) Profit...

Page 353
...share - pence Dividends per ordinary share - pence Dividend payout ratio (2) Share price per ordinary share at year end - Â£ Market capitalisation at year end - Â£bn Net asset value per ordinary and B share - Â£ Return on average total assets (3) Return on average ordinary and B shareholders' equity...

Page 354
...After 5 years Â£m 2009 Total Â£m 2008 Â£m 2007 Â£m 2006 Â£m 2005 Â£m UK Central and local government Manufacturing Construction Finance Service industries and business activities Agriculture, forestry and fishing Property Individuals - home mortgages - other Finance leases and instalment credit...

Page 355
... closing provisions against loans and advances to banks of Â£157 million (2008 - Â£127 million; 2007 - Â£3 million; 2006 - Â£2 million; 2005 - Â£3 million). (3) Closing customer provisions exclude closing provisions against loans and advances to banks. RBS Group Annual Report and Accounts 2009...

Page 356
... loans % 2005 Closing provision Â£m % of loans to total loans % Domestic Central and local government Manufacturing Construction Finance Service industries and business activities Agriculture, forestry and fishing Property Individuals - home mortgages - other Finance leases and instalment credit...

Page 357
... customer. 2009 Â£m 2008 Â£m 2007 Â£m 2006 Â£m 2005 Â£m Domestic Manufacturing Construction Finance Service industries and business activities Agriculture, forestry and fishing Property Individuals - home mortgages - others Finance leases and instalment credit Total domestic Foreign Total write...

Page 358
...'Domestic' consists of the United Kingdom domestic transactions of the Group. 'Foreign' comprises the Group's transactions conducted through offices outside the UK and through those offices in the UK specifically organised to service international banking transactions. (2) All loans against which an...

Page 359
... of the Group's deposits by type and geographical area. 2009 Â£m 2008 Â£m 2007 Â£m UK Domestic: Demand deposits - interest-free - interest-bearing Time deposits - savings - other Overseas residents: Demand deposits - interest-free - interest-bearing Time deposits - savings - other Total UK offices...

Page 360
...-day market distortions which may not be indicative of generally prevailing rates. Original maturities of commercial paper are not in excess of one year. 'Other short-term borrowings' consist principally of borrowings in the money markets included within 'Deposits by banks' and 'Customer accounts...

Page 361
... Rates on the last business day of each month during the period. (2) The rates used by the Group for translating US dollars into sterling in the preparation of its financial statements. (3) On 23 February 2010, the Noon Buying Rate was Â£1.00 = US$1.5432. RBS Group Annual Report and Accounts 2009...

Page 362
... normalise conditions in financial markets and support liquidity were extended in 2009. In an effort to lower long-term market interest rates, the Federal Reserve announced that it would purchase $200 billion of Government Sponsored Enterprise debt, $1.25 trillion of mortgage backed securities, and...

Page 363
..., 30 companies in the Group (excluding subsidiaries of ABN AMRO), spanning a range of financial services sectors (banking, insurance and investment business), were authorised to conduct financial activities regulated by the FSA. The UK authorised banks in the Group include the Royal Bank, NatWest...

Page 364
... country in which it operates to ensure internal policies are sufficient to ensure the effective management of regulatory risk. Description of property and equipment The Group operates from a number of locations worldwide, principally in the UK. At 31 December 2009, the Royal Bank and NatWest had...

Page 365
... State, the company and Santander after the acquisition of ABN AMRO where funding is required by regulatory authorities in connection with the ABN AMRO businesses, the allocation of Core Tier 1 capital and the allocation of taxes and conduct of tax affairs. RBS Group Annual Report and Accounts 2009...

Page 366
...2007 levels until the end of 2011 with the active marketing of competitively priced loan products; (iv) to increase its support to shared equity projects until the end of 2009 in order to assist those in difficulties with their mortgage payments to stay in their homes, either through individual bank...

Page 367
...now also apply to the company's lending to larger commercial and industrial companies in the United Kingdom; and a commitment to increase the level at which competitively priced lending is made available and actively marketed by the Group in the United Kingdom by Â£6 billion. First Subscription and...

Page 368
... and to maintain in the 12 months commencing 1 March 2010 similar levels of residential mortgage lending as in the 12 months commencing 1 March 2009 subject to adjustment of the commitments by the UK Government departments from time to time. The company's compliance with its lending commitments is...

Page 369
... Scheme Conditions is accounted for as a credit derivative and it tailors the APS to the company (by, amongst other things, setting applicable bank-specific thresholds and addressing a limited number of other bank-specific issues). Under the APS, HM Treasury is liable to make payments to the company...

Page 370
... businesses in the UK, personal current accounts in the UK as well as to develop and implement a capital optimisation exercise designed to increase the Group's Core Tier 1 capital. Second Subscription and Transfer Agreements In connection with the B share Issue which took place on 22 December 2009...

Page 371
... State aid and State aid approval. Exchange Offers and Tender Offers Pursuant to two Dealer Management Agreements dated 26 March 2009 entered into between (i) RBS Financing Limited, the Royal Bank, UBS Limited and HSBC Bank plc and (ii) the company, RBS Financing Limited, Greenwich Capital Markets...

Page 372
Shareholder information 370 RBS Group Annual Report and Accounts 2009

Page 373
... 374 Trading market 377 Dividend history 378 Taxation for US Holders 382 Exchange controls 382 Memorandum and Articles of Association 382 Incorporation and registration 382 Code of conduct 383 Glossary of terms 388 Important addresses 388 Principal offices RBS Group Annual Report and Accounts 2009...

Page 374
....fsa.gov.uk/contactus Details of any share dealing facilities that the company endorses will be included in company mailings. More detailed information on this or similar activity can be found on the FSA website www.moneymadeclear.fsa.gov.uk 372 RBS Group Annual Report and Accounts 2009

Page 375
...2p for shareholders who accepted the basic terms of the RBS offer. This takes account of the following: The information set out above is intended as a general guide only and is based on current United Kingdom legislation and HM Revenue & Customs practice as at this date. This information deals only...

Page 376
... time of ADSs issued thereunder. The ordinary shares of the company are listed and traded on the London Stock Exchange. All ordinary shares are deposited with the principal London office of The Bank of New York Mellon, as custodian for the depository. 374 RBS Group Annual Report and Accounts 2009

Page 377
Shareholder information The following table shows, for the periods indicated, the high and low sales prices for each of the outstanding ADSs representing non-cumulative dollar preference shares and PROs, as reported on the NYSE or NASDAQ: Series F ADSs Series H ADSs Series L ADSs Series M ADSs ...

Page 378
... 2008, the ratio of one ADS representing one ordinary share changed to one ADS representing 20 ordinary shares. The prices in the table have been adjusted accordingly. On 23 February 2010, the closing price of the ordinary ADSs on the New York Stock Exchange was $11.00. 376 RBS Group Annual Report...

Page 379
...its direct or indirect subsidiaries (excluding companies in the ABN AMRO Group) will pay external investors any dividends or coupons on existing hybrid capital instruments (including preference shares, B shares and upper and lower tier 2 instruments) from a date starting not later than 30 April 2010...

Page 380
...under Trading Market. (2) In 2008, the company issued new ordinary shares by way of a capitalisation issue rather than paying an interim dividend. (3) Final dividends for each year were proposed in the indicated year and paid in the following year. (1) 2009 pence 2008 pence 2007 pence 2006 pence...

Page 381
... of an ordinary share, a non-cumulative dollar preference share, an ordinary ADS or a preference ADS will generally be entitled, subject to certain limitations, to credit the UK tax against its US federal income tax liability in respect of such gain. RBS Group Annual Report and Accounts 2009 379

Page 382
... or gift tax. PROs United States Payments of interest on a PRO (including any UK withholding tax, as to which see below) will constitute foreign source dividend income for US federal income tax purposes to the extent paid out of the current or accumulated earnings and profits of the company, as...

Page 383
... market of the New York Stock Exchange. In all other cases, an amount must be withheld on account of UK income tax at the basic rate (currently 20%) subject to any direction to the contrary by HM Revenue & Customs under the Treaty and except that the withholding obligation does not apply to payments...

Page 384
.... Exchange controls The company has been advised that there are currently no UK laws, decrees or regulations which would prevent the import or export of capital, including the availability of cash or cash equivalents for use by the Group, or the remittance of dividends, interest or other payments...

Page 385
...in return for contracting to make payments to the protection buyer upon a defined credit event in relation to a reference financial asset or portfolio of financial assets. Credit events usually include bankruptcy, payment default and rating downgrades. RBS Group Annual Report and Accounts 2009 383

Page 386
...principally issued by banks, on the secondary market, pools them, and sells them as residential mortgage-backed securities to investors on the open market. Its obligations are not explicitly guaranteed by the full faith and credit of the US Government. 384 RBS Group Annual Report and Accounts 2009

Page 387
... or financial commodity, at an agreed price, at an agreed future date. Freddie Mac (Federal Home Loan Mortgage Corporation) is a US Government Sponsored Enterprise. It buys mortgages, principally issued by thrifts, on the secondary market, pools them, and sells them as residential mortgage-backed...

Page 388
... of shared assets expressed as a percentage of total income excluding credit market write-downs and one-off items. Probability of default (PD) - the likelihood that a customer will fail to make full and timely repayment of credit obligations over a one year time horizon. Regular way purchase or sale...

Page 389
...-purpose operating company that undertakes arbitrage activities by purchasing highly rated medium and long-term, fixed-income assets and funding itself with short-term, highly rated commercial paper and medium-term notes. Structured notes are securities that pay a return linked to the value or level...

Page 390
... 2 RBS Insurance Direct Line House 3 Edridge Road Croydon Surrey CR9 1AG Churchill Court Westmoreland Road Bromley Kent BR1 1DP RBS Holdings USA Inc. 600 Washington Blvd Stamford CT 06901 USA Coutts Group 440 Strand London WC2R 0QS The Royal Bank of Scotland International Limited Royal Bank House...

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