RBS 2009 Annual Report Download - page 4

RBS Group Annual Report and Accounts 20092
Chairman’s statement
Philip Hampton, Chairman
dWatch or listen to
Philip Hampton at www.rbs.com/annualreport2009
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see pages 8-11
“I hope that the Group’s results give you the
clarity about our performance and direction that
enables you to share the confidence I have in
the brighter future for RBS.”
2009 was a year of profound change and
substantial challenges for RBS. But, in the
course of the year, we have put in place the
building blocks of our recovery plan and have
begun the process of restoring the company
to good health. The Group now has appropriate
levels of new capital and our job is to make it
work on behalf of shareholders.
Economic backdrop – a deep recession, but signs of recovery
Last year was a tumultuous one for the global economy. In our most
important market, the UK, gross domestic product shrank by 4.8% in
real terms. Significant contractions were also registered in the USA
and, in particular, Ireland.
The recession hurt many of our customers, with unemployment rising
sharply and corporate profitability coming under pressure, which in turn
led to a marked deterioration in credit quality. In addition, lower interest
rates squeezed margins on many of our savings products. Viewed in
that context, there are resilient aspects of our performance in another
disappointing year of overall losses.
More positively, the economic environment started to improve in the
second half of the year, with the USA and UK emerging from recession,
and many asset prices rising sharply. Expectations for growth in 2010
are muted, and important adjustments still need to take place in the
global economy. We plan for the future on a conservative basis. But we
take comfort from the fact that we appear to be moving into the
recovery phase.
External influences – a price worth paying
The benefits to RBS of political involvement, in the widest possible
sense, are significantly larger than the costs. Put simply, if RBS hadn’t
received government support, it wouldn’t be here today. Moreover, the
extent of the support it received means we are in a position to rebuild
carefully on our strengths.
This support has come at a price, most notably the divestments we are
required to make as part of our settlement with the European Commission.
These partly relate to the Commission’s views 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 aid, most notably the required sale of our insurance business.
This is not how we would have chosen to change RBS, because our
absolute priority is restoring value for investors, including the UK taxpayer.
Collectively, the businesses we will sell represent under 15% of the
Group, and the disposals are a distraction we would have preferred to
avoid. However, we have four years to make all our disposals. In that
time frame, we are confident we can minimise any adverse impact and
we expect to get proper value for shareholders.
The Government’s Asset Protection Scheme (APS) comes with a high
price tag, but is a worthwhile investment on two counts. First, it enables
us to pass the Financial Services Authority’s stress tests. The insurance
element of the scheme is the only way we could realistically achieve
that. Second, it fills the hole in our capital ratios created by the losses
we made in 2009, the further charges we expect to make in 2010, and
the associated increase in risk-weighted assets from pro-cyclicality and
regulatory change. We need the support of the APS if we are to
accomplish our goals.
It is the Board’s view that the restructured terms of the APS, which were
endorsed by independent shareholders in December 2009, represent a
better outcome for shareholders than the outline agreement reached in
February 2009, when market conditions were much more uncertain and
difficult. It insures fewer assets and costs less. We do not expect to claim