RBS 2011 Annual Report Download - page 17

RBS Group 2011 15
Medium-term target
All our principal Core businesses sustain
positions amongst the leaders in their markets.
Core cost: income ratio <55%
Originally implemented in 2009 and on-
going to reflect revised Group targets.
Group leverage below 18x, in line with
strongest global peers.
Group loan:deposit ratio of c.100%
Core Tier 1 capital ratio >10%
Approximately three quarters of Group
profit and revenue to come from retail and
commercial banking.
Markets to account for approximately one
quarter of Group profit and revenue.
Run-down of the Non-Core Division.
All implemented in 2009 and ongoing.
Our progress so far
Our focus is to build the success of the Group on customer-driven businesses with substantial competitive strengths in
their respective markets. We continue to track our market positions and to target competitive opportunities.
2011 was a challenging year, as economic conditions in many of the markets the Group operated in deteriorated
from 2010. However, our Core Retail & Commercial businesses remained resilient, with income broadly flat compared
with 2010 (adjusting for the sale of Global Merchant Services in November 2010).
Each core business is being reshaped to provide improved and, importantly, enduring performance and, we believe,
will be strongly positioned to achieve income growth as world markets and economies normalise.
The Group’s cost reduction programme delivered over £3 billion of annualised cost savings by the end of 2011, ahead of
where we expected to be by 2013. Lower programme spend than originally projected has allowed us to reinvest savings
into enhancing systems infrastructure to support improvements in customer service, enhance product offerings and
respond to regulatory changes.
The Core cost:income ratio was 60% for 2011, slightly higher than 2010, reflecting weaker income performance in GBM,
but significantly down from a peak of 97% in 2008.
The Group has clearly defined targets for the medium-term, updated to reflect the changed economic and regulatory
environment since the introduction of our strategic plan in 2009. Therefore, in the medium term, each of our businesses
will be expected to more than cover its cost of equity in line with the overall Group target of >12%, be self-funded, have a
targeted average cost:income ratio of between 50 – 55% and to operate within the bounds of an appropriate risk appetite.
Divisional progress will continue to be monitored.
The Group’s funded balance sheet fell to £977 billion in 2011. Non-Core reduced its funded assets to £94 billion, ahead of
the £96 billion target set for the year. Non-Core’s funded balance sheet has reduced by 64% from the December 2008
portfolio of £258 billion.
Our Tier 1 leverage ratio increased slightly to 16.9% in 2011 from 16.8% in 2010, below our medium-term target.
We significantly improved our Group loan-to-deposit ratio to 108% by the end of 2011, compared with 118% a year earlier.
Our Core businesses achieved a loan:deposit ratio of 94% by the end of 2011, taking in more than £1 of deposits for
every £1 of loans made.
We continued to reduce our reliance on short-term wholesale funding. Excluding derivatives collateral, short-term
wholesale funding fell from £130 billion in 2010 to £102 billion by the end of 2011.
Our liquidity reserves were £155 billion at the end of 2011, above our medium-term target.
Our Core Tier 1 capital ratio was 10.6% at the end of 2011, which although marginally lower than a year earlier, is above
our upwardly revised medium-term target and positions the Group well to deal with future regulatory changes in capital
requirements.
Retail and commercial businesses generated 64% of the Core operating profit for 2011. We announced in January 2012
that we are restructuring our wholesale businesses in light of the emergence of significant new pressures since the 2009
Strategic Plan was agreed. This restructure will increase our focus on our retail and commercial businesses in the UK, US
and Ireland.
In the UK, we increased our business lending by 22% in 2011, exceeding our business lending targets as agreed under
Project Merlin.
GBM operating profit fell by 54% in 2011 compared with 2010, with the year characterised by volatile and deteriorating,
credit markets, as the European sovereign debt crisis worsened. GBM operating profit represented 26% of Core Group
operating profit for 2011. The wholesale restructure announced in January 2012 seeks to prioritise our resources on those
businesses where we are best placed with our customers and can operate most profitably for shareholders.
GBM third party assets, excluding derivatives, were down £35 billion compared with 31 December 2010 and are targeted
to reduce by a further c.£60 billion to c.£300 billion over the implementation period of the restructure.
Run-down and disposals decreased Non-Core’s funded balance sheet to £94 billion by the end of 2011, below the
revised year end target of £96 billion and significantly ahead of the original strategic plan target of £118 billion. Non-
Core’s funded balance sheet is now less than 10% of the Group’s funded balance sheet, compared with 21% when the
division was created.
In 2011, Non-Core also focused on accelerating its de-risking programme and reducing capital exposures to help improve
the financial resilience of the Group as a whole.
In 2009, we announced clearly defined financial targets and in 2011 we re-visited these targets in light of significantly
changed economic and regulatory environments. We remain committed to reducing risk and increasing sustainable
returns in customer-driven businesses. Our quarterly reporting provides updates on our progress.
Performance against the Group’s strategy, can be tracked at our rbs.com website.
We provide financial information to the market quarterly.
We continue to track customer satisfaction scores and market position metrics for each of our core businesses and target
improvements. We believe we are making progress, but there is still much we need to achieve, and providing our
customers consistently high quality service remains a key priority in our Strategic Plan.
During 2011, the Group appointed three new non-executive directors to the Board. Alison Davies and Baroness Noakes
were appointed with effect from 1 August 2011 and are now members of the Group Remuneration Committee and Group
Audit Committee respectively. Tony Di Iorio was appointed with effect from 1 September 2011 and is now a member of
the Group Audit Committee and Board Risk Committee.
We are committed to restoring the Group to a sustainable and conservative risk profile. The RBS risk management
framework, and our risk management teams, are clearly aligned with this Group priority. For an overview of how this is
working in practice, see pages 17 and 18.