RBS 2010 Annual Report Download - page 7

5RBS Group 2010
Essential reading
Group Chief Executive’s review
made – the “gold standard” we are targeting. Improvements in risk
are also evident through reductions in single name and sectoral
credit concentrations.
RBS has strong capital ratios – with a Core Tier 1 ratio of 10.7%.
The additional protection of the Asset Protection Scheme, as expected,
is unlikely to be called upon and we target scheme exit by the end
of 2012, subject to continued progress on risk reduction and to
regulatory approvals.
Shareholder value: This vital part of our goals is on track but inevitably
will take the most time to deliver fully. The potential is there and the
performance of the Bank will increasingly speak for itself. 2010 results
were a large improvement on 2009 and our budgets for the year. At
Group level RBS posted £1.9 billion of operating profits, excluding fair
value of own debt (from a £6.1 billion loss in 2009). It was only after the
post tax effect of APS (£1.1 billion) that we reported a net attributable
loss of £1.1 billion. We are taking significant steps toward repaying the
support we have received.
The RBS Core business posted operating profits of £7.4 billion and
return on equity of 13%, above its cost of capital. Importantly the
quality of results also improved. While still significantly impacted by
high credit costs, low interest rates and other economic challenges,
our Retail and Commercial businesses increased operating profits by
66% to £3.8 billion with a 10% ROE. Our Irish bank and our Insurance
business remained in loss as a result of prior risk exposures which we
are working down. Our investment banking arm, despite tough markets,
posted £3.4 billion operating profits and a 17% ROE – a competitive
result when compared with peers, though down from the record prior
year. Adding the related parts of our GTS business gives still stronger
returns for our wholesale client activity as a whole.
2010 results were achieved with strong attention to efficiency – beating
our cost targets and allowing vital investment right across the Group to
enhance future growth and business quality.
In Non-Core progress was also pleasing, though losses will continue
in this division during the remaining Plan period as assets are sold
and run down. Non-Core assets reduced by £63 billion to £138 billion
during 2010, beating our targets. Losses narrowed sharply though
they are still significant.
People
Our people are doing a great job in producing the turnaround we
have targeted despite great stresses and challenges. I thank all of
my colleagues at RBS for this.
Our ability to attract, retain and motivate the best people is still not
what we want it to be. Our business challenges and the external
environment lead to management compromises that add risk to the
achievement of our business goals. We are working hard to move
forward and balance staff motivation with external acceptance that
past mistakes have been addressed.
Regulation
We support the revolution in regulatory standards that, when complete,
and coupled with the dramatic industry changes taking place, will make for
a safer financial services industry for everyone. But a safer economy also
needs global macro-economic imbalances to be successfully addressed.
The Basel-led process seems likely to get to the right place on bank
safety and there is good progress in the design of bank resolution and
recapitalisation (“bail-in”) mechanisms, which should remove the need
for future state capital support. The impact of these measures materially
impacts bank costs and return prospects. These in turn impact cost and
availability of customer service, including credit provision. There is an
important balance to be struck by policy-makers.
2011 will be noteworthy in the UK for the conclusion of the Independent
Commission on Banking (ICB). The ICB has the opportunity to reflect on
all of the change under way and to determine if additional measures
would be beneficial. There are traps to avoid in areas where UK reform,
which is not followed elsewhere, might bring more cost than benefit,
hamper banks and the economy and give the illusion of more safety
without its reality. The Commission’s work is continuing thoughtfully and
we are co-operating fully to give insights wherever helpful.
Outlook
RBS is on track to meet its ambitious goals. These goals set out the
path for our recovery period but also establish the foundations for the
“new” RBS to enjoy strong and enduring prospects well into the future.
For 2011, we target continued progress toward published targets. We
continue to prioritise risk reduction, strengthening of customer service
and building the quality and quantity of Core profits.
We are alert to the risks facing our businesses. In 2010, our results
were accomplished despite eurozone market volatility, additional Irish
impairments and higher than expected insurance provisioning. 2011
will doubtless have its own challenges as the global economic recovery
seeks a firmer footing. Our plans might also face further substantial
impacts from national and international regulatory changes.
And, as visible exemplars of the financial crisis, RBS remains vulnerable
to “public mood”. The journey from “problem” to “opportunity” is important
and our progress will aid customer trust, staff stability and investor
confidence. In that context we hope that the opportunity to sell part of
the UK Government’s shareholding becomes increasingly visible and
appealing – a “win win” for the taxpayer and for RBS. That moment will
be an emblem of our progress and, in some respects, of progress in
the wider UK economy.
RBS in 2011
Our goals for 2011 are clear. External events can still blow us off course
and caution is needed until these clarify. But for our part, the strategy is
delivering. We are focussing on serving our customers well and better.
We are stripping away excess risk inherited from the past. We are
building enduring strength and value in the new RBS and supporting
the economies we serve.
In conclusion, I would like to thank all of our staff, our shareholders and
other stakeholders for their continued support as we build the new RBS.
Stephen Hester
Group Chief Executive