RBS 2011 Annual Report Download - page 453

RBS Group 2011 451
Risk factors
Set out below are certain risk factors which could adversely affect the
Group's future results and cause them to be materially different from
expected results. The Group's results could also be affected by
competition and other factors. The factors discussed in this report should
not be regarded as a complete and comprehensive statement of all
potential risks and uncertainties.
The Group’s businesses and performance can be negatively affected by
actual or perceived global economic and financial market conditions and
by other geopolitical risks
The Group’s businesses and performance are affected by local and
global economic conditions and perceptions of those conditions and
future economic prospects. The outlook for the global economy over the
near to medium-term remains challenging and many forecasts predict at
best only stagnant or modest levels of gross domestic product (GDP)
growth across a number of the Group’s key markets over that period. In
the UK, latest estimates suggest the economy grew by only 1% in 2011,
while the current consensus of forecasts predicts GDP growth of just
0.5% in 2012. GDP in the European Monetary Union (EMU) in 2011 was
estimated to have grown by 1.6% in 2011 (although this was mainly
boosted by Germany, the EMU’s largest economy, which grew by 3%).
While the German economy has proven to be relatively robust, austerity
measures in many EMU economies, initiated in response to increased
sovereign debt risk, have resulted in weak economic and GDP growth.
Economic growth in the EMU is predicted to fall in 2012 by 0.3% (source:
Consensus Economics Inc, Eurostat, ONS). Despite significant
interventions by governments and other non-governmental bodies during
and since the financial crisis in 2008/2009, capital and credit markets
around the world continue to be volatile and be subject to intermittent and
prolonged disruptions. In particular, increasingly during the second half of
2011, a heightened risk of sovereign default relating to certain EU
member states has had a negative impact on capital and credit markets.
Such challenging economic and market conditions have exerted
downward pressure on asset prices and on credit availability and upward
pressure on funding costs, and continue to impact asset recovery rates
and the credit quality of the Group’s businesses, customers and
counterparties, including sovereigns. In particular, the Group has
significant exposure to customers and counterparties within the EU
(including the UK and Ireland), which includes sovereign debt exposures
that have been, and may in the future be, affected by restructuring of their
terms, principal, interest and maturity. These exposures have resulted in
the Group making significant provisions and recognising significant write-
downs in prior periods, which may also occur in future periods. These
conditions, alone or in combination with regulatory changes or actions of
market participants, may also cause the Group to experience reduced
activity levels, additional write-downs and impairment charges and lower
profitability, and may restrict the ability of the Group to access funding
and liquidity. In particular, should the scope and severity of the adverse
economic conditions currently experienced by some EU member states
and elsewhere worsen, the risks faced by the Group would be
exacerbated. Developments relating to the current economic conditions
and unfavourable financial environment, including those discussed
above, could have a material adverse effect on the Group’s business,
results of operations, financial condition and prospects and could have a
negative impact on the value of any securities issued by the Group.
In Europe, countries such as Ireland, Italy, Greece, Portugal and Spain
have been particularly affected by the recent financial and economic
conditions. The perceived risk of default on the sovereign debt of those
countries intensified in the latter part of 2011 particularly in relation to
Greece and has continued into 2012. This raised concerns about the
contagion effect such a default would have on other EU economies as
well as the ongoing viability of the euro currency and the EMU. Yields on
the sovereign debt of most EU member states have recently been volatile
and trended upward. The EU, the European Central Bank and the
International Monetary Fund have prepared rescue packages for some of
the affected countries and a number of European states, including
Ireland, Italy and Spain, are taking actions to stabilise their economies
and reduce their debt burdens. The EU has also taken policy initiatives
intended to address systemic stresses in the eurozone. Despite these
actions, the long-term ratings of a majority of eurozone countries have
recently been downgraded and further downgrades are possible.
Furthermore, the effectiveness of these actions is not assured and the
possibility remains that the euro could be abandoned as a currency by
countries that have already adopted its use, or in an extreme scenario,
abandonment of the euro could result in the dissolution of the EMU. This
would lead to the re-introduction of individual currencies in one or more
EMU member states.
The effects on the European and global economies of the potential
dissolution of the EMU, exit of one or more EU member states from the
EMU and the redenomination of financial instruments from the euro to a
different currency, are impossible to predict fully. However, if any such
events were to occur they would likely:
xresult in significant market dislocation;
xheighten counterparty risk;
xaffect adversely the management of market risk and in particular
asset and liability management due, in part, to redenomination of
financial assets and liabilities; and
xhave a material adverse effect on the Group’s financial condition,
results of operations and prospects.
By virtue of the Group’s global presence, the Group is also exposed to
risks arising out of geopolitical events, such as the existence of trade
barriers, the implementation of exchange controls and other measures
taken by sovereign governments that can hinder economic or financial
activity levels. Furthermore, unfavourable political, military or diplomatic
events, armed conflict, pandemics and terrorist acts and threats, and the
response to them by governments could also adversely affect levels of
economic activity and have an adverse effect upon the Group’s business,
financial condition and results of operations.