RBS 2011 Annual Report Download - page 135

RBS Group 2011 133
Structural foreign currency exposures
Structural foreign exchange exposures represent net investment in subsidiaries, associates and branches, the functional currencies of which are
currencies other than sterling. The Group hedges structural foreign currency exposures only in limited circumstances. The Group’s objective is to
ensure, where practical, that its consolidated capital ratios are largely protected from the effect of changes in exchange rates. The Group seeks to limit
the sensitivity to its Core Tier 1 ratio to 20 basis points in a 10% rate shock scenario. The Group’s structural foreign currency position is reviewed by
GALCO regularly.
The table below shows the Group’s structural foreign currency exposures.
Net
assets of
overseas
operations
RFS
MI
Net
investments
in foreign
operations
Net
investment
hedges
Structural
foreign
currency
exposures
pre-economic
hedges
Economic
hedges (1)
Residual
structural
foreign
currency
exposures
2011 £m £m £m £m £m £m £m
US dollar 17,570 1 17,569 (2,049) 15,520 (4,071) 11,449
Euro 8,428 (3) 8,431 (621) 7,810 (2,236) 5,574
Other non-sterling 5,224 272 4,952 (4,100) 852 — 852
31,222 270 30,952 (6,770) 24,182 (6,307) 17,875
2010
US dollar 17,137 2 17,135 (1,820) 15,315 (4,058) 11,257
Euro 8,443 33 8,410 (578) 7,832 (2,305) 5,527
Other non-sterling 5,320 244 5,076 (4,135) 941 — 941
30,900 279 30,621 (6,533) 24,088 (6,363) 17,725
2009
US dollar 15,589 (2) 15,591 (3,846) 11,745 (5,696) 6,049
Euro 21,900 13,938 7,962 (2,351) 5,611 (3,522) 2,089
Other non-sterling 5,706 511 5,195 (4,001) 1,194 — 1,194
43,195 14,447 28,748 (10,198) 18,550 (9,218) 9,332
Note:
(1) The economic hedges represent US dollar and euro preference shares in issue that are treated as equity under IFRS, and do not qualify as hedges for accounting purposes.
Key points
xThe Group’s structural foreign currency exposure at 31 December
2011 was £24.2 billion and £17.9 billion before and after economic
hedges respectively, broadly unchanged from the end of 2010
position.
xChanges in foreign currency exchange rates will affect equity in
proportion to structural foreign currency exposure. A 5%
strengthening in foreign currencies against sterling would result in a
gain of £1.27 billion (2010 - £1.27 billion; 2009 - £0.98 billion) in
equity, while a 5% weakening would result in a loss of £1.15 billion
(2010 - £1.15 billion; 2009 - £0.88 billion) in equity.
Equity risk
The Group holds equity positions in the banking book in order to achieve strategic objectives, such as membership of an exchange or clearing house, or
to support venture capital transactions or customer restructuring arrangements. The Group is exposed to market risk on these banking book equity
positions because they are measured at fair value. Fair values are based on available market prices where possible. In the event that market prices are
not available, fair value is based on appropriate valuation techniques or management estimates.
The table below sets out the Group’s banking book equity positions.
Listed Unlisted Total
2011 £m £m £m
Group 576 1,768 2,344
2010
Group 535 2,080 2,615
2009
Group before RFS Holdings minority interest 401 2,388 2,789
RFS Holdings minority interest 60 211 271
Group 461 2,599 3,060
Note:
(1) The table above excludes equity exposures held-for-trading and those held by insurance/assurance entities.