RBS 2011 Annual Report Download - page 144

142 RBS Group 2011
Risk management: Credit risk continued
Credit risk mitigation continued
Corporate exposures
The type of collateral taken by the Group’s commercial and corporate
businesses and the manner in which it is taken will vary according to the
activity and assets of the customer.
xPhysical assets - these include business assets such as stock, plant
and machinery, vehicles, ships and aircraft. In general, physical
assets qualify as collateral only if they can be unambiguously
identified, located or traced, and segregated from uncharged assets.
Assets are valued on a number of bases according to the type of
security that is granted.
xReal estate - the Group takes collateral in the form of real estate,
which includes residential and commercial properties. The loan
amount will typically exceed the market value of the collateral at
origination date. The market value is defined as the estimated
amount for which the asset could be sold in an arms length
transaction by a willing seller to a willing buyer.
xReceivables - when taking a charge over receivables, the Group
assesses their nature and quality and the borrower’s management
and collection processes. The value of the receivables offered as
collateral will typically be adjusted to exclude receivables that are
past their due dates.
The security charges may be floating or fixed, with the type of security
likely to impact (i) the credit decision; and (ii) the potential loss upon
default. In the case of a general charge such as a mortgage debenture,
balance sheet information may be used as a proxy for market value if the
information is deemed reliable.
The Group does not recognise certain asset classes as collateral: for
example, short leasehold property and equity shares of the borrowing
company. Collateral whose value is correlated to that of the obligor is
assessed on a case-by-case basis and, where necessary, over-
collateralisation may be required.
The Group uses industry-standard loan and security documentation
wherever possible. Non standard documentation is typically prepared by
external lawyers on a case-by-case basis. The Group’s business and
credit teams are supported by in-house specialist documentation teams.
The existence of collateral has an impact on provisioning. Where the
Group no longer expects to recover the principal and interest due on a
loan in full or in accordance with the original terms and conditions, it is
assessed for impairment. If exposures are secured, the current net
realisable value of the collateral will be taken into account when
assessing the need for a provision. No impairment provision is
recognised in cases where all amounts due are expected to be settled in
full on realisation of the security.
2011 2010
Corporate risk elements in lending and potential problem loans
(excluding commercial real estate) Loans
£m
Provisions
£m
Loans
£m
Provisions
£m
Secured 7,782 3,369 6,526 2,564
Unsecured 2,712 1,836 2,769 1,762
Commercial real estate
The table below analyses commercial real estate lending by loan-to-value (LTV). Due to market conditions in Ireland and to a lesser extent in the UK,
there is a shortage of market based data. In the absence of external valuations, the Group deploys a range of alternative approaches including internal
expert judgement and indexation.
Ulster Bank Rest of the Group Group
LTVs AQ1-AQ9
£m
AQ10
£m
AQ1-AQ9
£m
AQ10
£m
AQ1-AQ9
£m
AQ10
£m
2011
<= 50% 81 28 7,091 332 7,172 360
>50% and <= 70% 642 121 14,105 984 14,747 1,105
> 70% and <= 90% 788 293 10,042 1,191 10,830 1,484
>90% and <= 100% 541 483 2,616 1,679 3,157 2,162
>100% and <= 110% 261 322 1,524 1,928 1,785 2,250
> 110% and <= 130% 893 1,143 698 1,039 1,591 2,182
>130% 1,468 10,004 672 2,994 2,140 12,998
Total with LTVs 4,674 12,394 36,748 10,147 41,422 22,541
Other (1) 7 38 8,994 1,844 9,001 1,882
Total 4,681 12,432 45,742 11,991 50,423 24,423
Total portfolio average LTV (2) 140% 259% 69% 129% 77% 201%
Notes:
(1) Other performing loans of £9.0 billion include unsecured lending to commercial real estate clients, such as major UK homebuilders. The credit quality of these exposures is consistent with that of the
performing portfolio overall. Other non-performing loans of £1.9 billion are subject to the Group’s standard provisioning policies.
(2) Weighted average by exposure.
Business review Risk and balance sheet management continued