RBS 2009 Annual Report Download - page 210

RBS Group Annual Report and Accounts 2009208
Report of the directors
The directors present their report together with the audited accounts for
the year ended 31 December 2009.
Capital restructuring
In November 2008, HM Treasury announced the establishment of UK
Financial Investments Limited (UKFI), a company wholly owned by the
UK Government which will manage, on an arms-length basis, the UK
Government’s shareholding in the company and other banks that
subscribed to the government’s recapitalisation fund.
On 19 January 2009 the company announced, in conjunction with HM
Treasury and UKFI, that the £5 billion non-cumulative sterling preference
shares held by HM Treasury would be replaced with new ordinary
shares. Eligible shareholders were able to apply to subscribe for
approximately £5 billion of new ordinary shares pro rata to their existing
shareholdings at a fixed price of 31.75 pence per share by way of an
open offer. Any shares not taken up by shareholders in the open offer
(or otherwise placed on behalf of the company) were subscribed for by
HM Treasury at a fixed price of 31.75 pence per share and the
aggregate proceeds of the open offer were used to fund the
redemption of the preference shares held by HM Treasury, together with
the redemption premium on the preference shares, accrued dividend,
and commissions payable to HM Treasury on the offer. The preference
shares were redeemed on 14 April 2009 at 101% of their issue price.
This resulted in HM Treasury’s shareholding increasing by
16,791,036,376 ordinary shares to 70.3% of the enlarged ordinary share
capital of the company.
On 27 November 2009 the company announced, in conjunction with HM
Treasury and UKFI, that it would issue £25.5 billion of new capital to HM
Treasury. This new capital, issued on 22 December 2009, took the form
of B shares, which do not generally carry voting rights at meetings of
ordinary shareholders but which are convertible into ordinary shares
and count as Core Tier 1 capital. Whilst the B shares themselves are
entitled to the same dividends as ordinary shares, a Dividend Access
Share was issued in conjunction with them. The combined effect is that
HM Treasury will enjoy preferential but non-transferable dividend rights
on the new capital it provides. Although the capital issue of £25.5 billion
is expected to be sufficient to provide RBS with robust capital ratios
according to the Group’s current base case forecasts, the FSA also
requires banks to have enough capital to maintain a minimum Core
Tier 1 ratio of at least 4 per cent. even in a severely stressed scenario in
which economic conditions deteriorate well beyond consensus
forecasts. To enable RBS to meet this test, HM Treasury has agreed to
subscribe for up to an additional £8 billion of capital (in the form of
additional B shares) if RBS’s Core Tier 1 ratio falls below 5 per cent. (the
‘‘Contingent Subscription”). This Contingent Subscription will enable
RBS to maintain its capital resilience even if such a severely stressed
scenario were to occur.
Following approval at the General Meeting held on 15 December 2009,
RBS joined the Asset Protection Scheme, set up by HM Treasury, which
provides additional protection to the Group’s capital ratio and financial
position.
Results and dividends
The loss attributable to the ordinary and B shareholders of the company
for the year ended 31 December 2009 amounted to £3,607 million
compared with a loss of £24,306 million for the year ended 31
December 2008, as set out in the consolidated income statement on
page 241.
The company did not pay a dividend on ordinary shares in 2009.
The Group has undertaken that, unless otherwise agreed with the
European Commission, neither the company nor any of 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 and for a period of two years thereafter (“the deferral period”), or
exercise any call rights in relation to these capital instruments between
24 November 2009 and the end of the deferral period, unless there is a
legal obligation to do so. Hybrid capital instruments issued after 24
November 2009 will generally not be subject to the restriction 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 all its subsidiary and associated
undertakings, including the Royal Bank and NatWest. Details of the
principal subsidiary undertakings of the company are shown in Note 16
on the accounts.
The Group is engaged principally in providing a wide range of banking,
insurance and other financial services. Further details of the
organisational structure and business overview of the Group, including
the products and services provided by each of its divisions and the
competitive markets in which they operate, is contained in the Business
review on pages 53 and 54.
Following the conclusion of a strategic review, the Group has realigned
its Core divisions, in particular the separation of RBS UK into UK Retail
and UK Corporate. A Non-Core division has also been established to
manage and run off or dispose of a number of assets and businesses
that do not meet the Group’s target criteria.