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Annual Report and

Accounts 2012

Page 1
Annual Report and Accounts 2012 rbs.com

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... of products and services to personal, commercial and large corporate and institutional customers through its two main subsidiaries, The Royal Bank of Scotland and NatWest, as well as through a number of other well-known brands including Citizens, Charter One, Ulster Bank, Coutts, Direct Line and...

Page 3
...Group Chief Executive's review Q&As Our key targets Progress on our Strategic Plan The economic environment Our approach to risk management 21 22 23 24 25 26 27 28 29 30 31 32 Divisional review UK Retail UK Corporate Wealth International Banking Ulster Bank US Retail & Commercial Markets Direct Line...

Page 4
...Group Chief Executive 2012 Financial Results Â£6,341m Core operating profit (1) Â£3,462m Group operating profit (1) (Â£5,165m) 9.8% Loss before tax Core return on equity (2) 59% Core cost:income ratio (3) 10.3% Core Tier 1 ratio 100% Loan:deposit ratio (4) Â£42bn Short-term wholesale funding...

Page 5
...to help customers further 95%+ employees received Anti-Money Laundering training Â£200m Carbon Reduction Fund launched 340,000+ young people received a MoneySense lesson for the first time 184k+ hours given to employees to volunteer in the community 104k+ start-up businesses in the UK supported...

Page 6
... to multi-national corporates and financial institutions by providing debt financing, risk management and transaction services. We work with clients to find the best product mix to execute their strategy. Performance highlights Return on equity (%) Cost:income ratio (%) Loan:deposit ratio (%) see...

Page 7
... financial services primarily in the Northeastern, Mid-Atlantic and Midwest United States through the Citizens Bank, Charter One and RBS Citizens brands. We are engaged in retail and corporate banking activities. Performance highlights Return on equity (%) Cost:income ratio (%) Loan:deposit ratio...

Page 8
.... In 2012: we increased our Core Tier 1 capital ratio to 10.3% and were able to exit the Asset Protection Scheme (APS); we have reached our target of sustainable funding, with a loan to deposit ratio of 100%; and we now have an excess of liquidity which we are keen to lend to our customers, if loan...

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... member of the community We conduct our business in a sustainable manner We deliver essential customer services and critical business processes at all times Security We operate in a secure environment We protect access to our premises, systems and data We operate our processes, systems and controls...

Page 10
... Committee have made it clear that customers come first - but actions are more powerful. In Business & Commercial, 'Working with You' is our commitment that all of our relationship managers will spend time working in customers' businesses. Chris Sullivan, Chief Executive of Corporate Banking, helped...

Page 11
... to have a passion for client service. Our new UK Retail Chief Executive, Ross McEwan, has said that his business is going to obsess about the customer experience, delivering a consistently high level of service. On their first day in the job, new starts in Corporate Banking Division hear from Chris...

Page 12
...we first planned. Our funding is more stable too, with the Group loan to deposit ratio at 100% or 90% in our Core business and our liquidity portfolio is 3.5x times short-term wholesale funding. We have achieved all of this in the most testing economic environment for many decades. The UK economy is...

Page 13
... need to improve our risk and control systems, they at times had a deeper cause. Some employees put their own interests well ahead of customers' and shareholders', ignoring the difference between right and wrong. Your Board expects our people to demonstrate the highest standards of personal...

Page 14
...a really good bank and serve our stakeholders and society well. 2009-2012 Report Card RBS has: Sustained its 33 million customer franchise in the face of substantial restructuring and other pressures. Lending balances to Core UK businesses and homeowners (excluding commercial real estate) were grown...

Page 15
...2009 and a local public listing will help to highlight its growing value. This provides a positive opportunity for Citizens and its 14,700 employees, as well as being a sensible move for RBS as a whole. People The banking industry has come down to earth hard. While a more balanced global economy has...

Page 16
..., the Group's operating environment and profitability; uncertainty around regulatory capital adequacy requirements, most notably the impact of Basel III; and the Dividend Access Share held by the UK Government The UK Government created UK Financial Investments (UKFI) to manage its shareholdings in...

Page 17
... than we calculate

Page 18
... cost of capital was Ulster Bank, although a number of our other businesses have some work to do to improve their returns. Core return on equity in 2012 was 9.8%, reflecting protracted economic challenges in the areas in which we operate. The Group's funded balance sheet was further managed down to...

Page 19
... this in our quarterly results. Further details can be found on page 13. We provide detailed financial information, including disclosures on risk and balance sheet management, to the market each quarter. Improving support for our customers was the top goal of our 2009 strategic plan. We track, and...

Page 20
... England and HM Treasury launched the Funding for Lending Scheme (FLS). It is designed to boost lending to households and non-financial firms. Early indications from the Bank's Credit Conditions Survey suggested that the supply of credit had expanded towards the end of the year. In the United States...

Page 21
... of developments in 2012 in the 'Risk and balance sheet management' section of the Annual Report and Accounts. Day-to-day risk management Key frameworks and limits Key risk appetite measures Strategic risk objectives This is how we bring the Strategic Plan to life in our management of risk. 19

Page 22
... and industry risks. Funding position can be volatile due to the uncertainty of future investment returns and the projected value of schemes' liabilities. Conduct risk The risk that the conduct of the Group and its staff towards its customers, or within the markets in which it operates, leads to...

Page 23
RBS GROUP 2012 Divisional review Contents UK Retail 22 UK Corporate 23 Wealth 24 International Banking 25 Ulster Bank 26 US Retail & Commercial 27 Markets 28 Direct Line Group 29 Business Services 30 Central Functions 31 Non-Core Division 32 21 1

Page 24
... of 2012, we welcomed Ross McEwan, our new Chief Executive. Coming from Commonwealth Bank with an abundance of energy and experience, Ross has listened to our customers and people and has set a clear direction for 2013 with a focus on making it simple and easy for our customers to do business with...

Page 25
... strategy to support young people as they move from school to work. UK Corporate Chris Sullivan Chief Executive, UK Corporate Watch or listen to Chris Sullivan www.rbs.com/AnnualReview Operating profit of Â£1,796 million was seven per cent lower than in 2011. That reflected a decline in income...

Page 26
... currencies and lending values were also agreed for renminbi cash and bonds. In the UK, we launched the Coutts multi-asset funds comprising a range of seven UK and global RDR-compliant funds. These aim to deliver attractive long-term returns by investing in a broad range of asset classes including...

Page 27
... 34 per cent. Return on equity was lower than in 2011 at 9.2 per cent. The loan to deposit ratio improved to 85 per cent. Building a better bank that serves customers well Others recognised our success in serving customers. In the Euromoney Cash Management Survey clients voted us number one cash...

Page 28
...; make transfers between your Ulster Bank accounts; pay your friends, family, credit card, or utility bills; and locate your nearest Ulster Bank branch or cash machine. Customers used the service almost 18 million times making 1.2 million payments worth Â£282 million. Changing our culture...

Page 29
... quarters of operating profit and improving annual returns on equity. Our capital position is among the strongest in our peer group. For the first time since 2008, we were able to return capital to RBS Group. We strengthened our balance sheet. Our loan to deposit ratio was 86% at year end and...

Page 30
... and equity risk trading businesses that had made losses. We transferred a substantial part of RBS N.V. to RBS plc. That made our structure simpler and reduced the capital we need to hold. Improvements we made to internal controls make clear to our leaders that it is important to manage their...

Page 31
... our IGD coverage ratio was 279.4%. Direct Line Group manages its capital levels with the objective of maintaining a credit rating in the "A" range. Building a better bank that serves customers well Direct Line Group made dividend payments of Â£1 billion to RBS Group in 2012. We enhanced efficiency...

Page 32
... REVIEW Business Services are the people who keep RBS running. We put money in the ATMs, keep the Bank's technology systems operating, help keep our customers safe from fraud, process billions of pounds worth of payments across the world, and provide call centre and on-line services to customers...

Page 33
... Funding for Lending Scheme in 2012. Our Strategy and Corporate Finance function helps ensure RBS has the right portfolio of businesses, developing the Group's strategy and executing acquisitions and disposals. The team was instrumental in the successful Initial Public Offering of Direct Line Group...

Page 34
...such as RBS Aviation Capital. Building a better bank that serves customers well Non-Core releases capital back to the Group that can be used to support new Core lending and generate better returns on equity. Changing our culture We are helping to change the culture of RBS by addressing transparently...

Page 35
Sustainability Contents Governance 34 Stakeholder engagement 34 Sustainability policy development 34 Sustainable Business Principles 35 33

Page 36
... the company. In 2012, the GSC focused on reviewing the Group's overall sustainability strategy, values and policies and aligning the Group's approach to ethical, social and environmental issues. In 2013, the scope will widen to include sustainability and reputational issues related to customer and...

Page 37
... of work-life balance We continue to promote diversity through internal employee networks and the number of female executives and senior managers have both increased by 1% We have reformed our remuneration policies to reflect a more appropriate approach to pay. Since 2009, the investment banking...

Page 38
... Risk factors Key financials Summary consolidated income statement Results summary Analysis of results Divisional performance Consolidated balance sheet Cash flow Capital resources Reconciliations of managed to statutory income statements Analysis of balance sheet pre and post disposal groups Risk...

Page 39
... The Royal Bank of Scotland N.V. ("RBS N.V."). Certain assets of RBS N.V. continue to be shared by the Consortium Members. In October 2011, the Group completed the transfer of a substantial part of the UK activities of RBS N.V. to the Royal Bank pursuant to Part VII of the UK Financial Services and...

Page 40
... income statement. Reconciliations between managed and statutory results are detailed on pages 102 to 104. Disposal groups Since 2011, the assets and liabilities relating to the RBS England and Wales and NatWest Scotland branch-based businesses, along with certain SME and corporate activities across...

Page 41
...looking statements relating, but not limited to: the Group's restructuring plans, divestments, capitalisation, portfolios, net interest margin, capital ratios, liquidity, risk weighted assets (RWAs), return on equity (ROE), profitability, cost:income ratios, leverage and loan:deposit ratios, funding...

Page 42
..., which provides loan and deposit products through a network of branches and direct channels, and its Corporate Banking division, which provides services to businesses and corporate customers. US Retail & Commercial provides financial services primarily through the Citizens and Charter One brands...

Page 43
...Markets' sales and research teams build strong ongoing client partnerships, provide market perspective and access, and work with the division's trading and structuring teams to meet the client's objectives across financing, risk management, investment, securitisation and liquidity. Direct Line Group...

Page 44
...United States, RBS Citizens competes in the New England, MidAtlantic and Mid-West retail and mid-corporate banking markets with local and regional banks and other financial institutions. The Group also competes in the US in large corporate lending and specialised finance markets, and in fixed-income...

Page 45
... senior management, which may include members of the Group Board, or other key employees, and it may suffer if it does not maintain good employee relations. Operational and reputational risks are inherent in the Group's businesses. The value of certain financial instruments recorded at fair value is...

Page 46
...non-controlling interests. Legal separation of ABN AMRO Bank N.V. took place on 1 April 2010. As a result, RBS presents the interests of the Consortium Members in ABN AMRO as discontinued operations. The financial information on a managed basis, prepared using the Group's accounting policies, shows...

Page 47
...for the year ended 31 December 2012 In the income statement set out below, own credit adjustments, Asset Protection Scheme, PPI costs, Interest Rate Hedging Products redress and related costs, regulatory fines, sovereign debt impairment, interest rate hedge adjustments on impaired available-for-sale...

Page 48
... consolidated income statement for the year ended 31 December 2012 continued Managed 2011 Â£m Statutory 2011 Â£m 2012 Â£m 2010 Â£m 2012 Â£m 2010 Â£m Basic loss per ordinary and B share from continuing operations (1) Own credit adjustments Asset Protection Scheme Payment Protection Insurance...

Page 49
... in the balance sheet at the end of a chargeable period. The cost of the levy to the Group for 2012 was Â£175 million compared with Â£300 million in 2011. Interest Rate Hedging Products redress and related costs Following an industry-wide review conducted in conjunction with the Financial Services...

Page 50
...return to profit of Direct Line Group. Ulster Bank and Markets faced more difficult conditions, leaving total Core operating profit at Â£6,045 million. Non-Core operating loss in 2011 was 26% lower compared with 2010, despite the acceleration of disposals in the second half of the year. Total income...

Page 51
...in 2010 on a liability management exercise to redeem a number of Tier 1 and upper Tier 2 securities. The Finance Act 2011 introduced an annual bank levy in the UK. The levy is based on the total chargeable equity and liabilities as reported in the balance sheet at the end of a chargeable period. The...

Page 52
...discontinued operations of Direct Line Group. Related interest-earning assets and interest-bearing liabilities have also been adjusted. (8) Interest income includes Â£565 million (2011 - Â£627 million; 2010 - Â£588 million) in respect of loan fees forming part of the effective interest rate of loans...

Page 53
... by banks - UK - Overseas Customer accounts: demand deposits - UK - Overseas Customer accounts: savings deposits - UK - Overseas Customer accounts: other time deposits - UK - Overseas Debt securities in issue - UK - Overseas Subordinated liabilities - UK - Overseas - UK Internal funding of trading...

Page 54
... by banks - UK - Overseas Customer accounts: demand deposits - UK - Overseas Customer accounts: savings deposits - UK - Overseas Customer accounts: other time deposits - UK - Overseas Debt securities in issue - UK - Overseas Subordinated liabilities - UK - Overseas - UK Internal funding of trading...

Page 55
... banks - UK - Overseas Customer accounts: demand deposits - UK - Overseas Customer accounts: savings deposits - UK - Overseas Customer accounts: other time deposits - UK - Overseas Debt securities in issue - UK - Overseas Subordinated liabilities - UK - Overseas Internal funding of trading business...

Page 56
... assets (1,2) Total assets Percentage of assets applicable to overseas operations Liabilities Deposits by banks Customer accounts: demand deposits Customer accounts: savings deposits Customer accounts: other time deposits Debt securities in issue Subordinated liabilities Internal funding of trading...

Page 57
... Deposits by banks UK Overseas Customer accounts: demand deposits UK Overseas Customer accounts: savings deposits UK Overseas Customer accounts: other time deposits UK Overseas Debt securities in issue UK Overseas Subordinated liabilities UK Overseas Internal funding of trading business UK...

Page 58
... Deposits by banks UK Overseas Customer accounts: demand deposits UK Overseas Customer accounts: savings deposits UK Overseas Customer accounts: other time deposits UK Overseas Debt securities in issue UK Overseas Subordinated liabilities UK Overseas Internal funding of trading business UK...

Page 59
... in relation to own credit adjustment versus a gain of Â£1,914 million in 2011. This reflected a tightening of more than 340 basis points in the Group's cash market credit spreads over the year. APS is accounted for as a derivative and the movements in fair value are recorded each quarter. The fair...

Page 60
Business review continued Non-interest income continued 2011 compared with 2010 - managed Non-interest income decreased by Â£3,374 million in 2011 principally driven by lower trading income in Markets and Non-Core and a fall in insurance net premium income. Volatile market conditions led to a ...

Page 61
.... Business Services costs were down 6% in the year, reflecting increased benefits from earlier cost saving programmes as a number of initiatives reached their full run rate. Technology Services costs were 8% lower and Corporate Services costs 6% lower. Headcount was 2% down on 2011. Insurance net...

Page 62
Business review continued Operating expenses and insurance claims continued 2011 compared with 2010 - managed Group expenses were 7% lower in 2011, driven by cost savings achieved as a result of the cost reduction programme and Non-Core run-off, largely reflecting the disposal of RBS Sempra and ...

Page 63
... costs incurred in relation to the strategic restructuring of Markets and International Banking announced in January 2012. 2011 compared with 2010 Restructuring costs were Â£788 million compared with Â£574 million in 2010. The increase is due to the number of Group restructuring projects increasing...

Page 64
...-Core loan impairments, despite continuing challenges in Ulster Bank and corporate real estate portfolios. This was partially offset by impairments taken on the Group's availablefor-sale bond portfolio, as a result of the decline in the value of Greek sovereign bonds. Retail & Commercial impairment...

Page 65
... and write-downs - UK bank levy - regulatory fines - employee share schemes - other disallowable items Non-taxable items - gain on sale of RBS Aviation Capital - gain on sale of Global Merchant Services - gain on redemption of own debt - other non-taxable items Taxable foreign exchange movements...

Page 66
... division UK Retail UK Corporate Wealth International Banking Ulster Bank US Retail & Commercial Retail & Commercial Markets Direct Line Group Central items Core Non-Core Operating profit Own credit adjustments Asset Protection Scheme Payment Protection Insurance costs Interest Rate Hedging Products...

Page 67
... UK Corporate Wealth International Banking Ulster Bank US Retail & Commercial Retail & Commercial Markets Other Core Non-Core Group before benefit of Asset Protection Scheme Benefit of Asset Protection Scheme Group before RFS Holdings minority interest RFS Holdings minority interest Group 2012...

Page 68
Business review continued Divisional performance continued Employee numbers at 31 December (full time equivalents rounded to the nearest hundred) 2012 2011 2010 UK Retail UK Corporate Wealth International Banking Ulster Bank US Retail & Commercial Retail & Commercial Markets Direct Line Group ...

Page 69
... Other non-interest income (net of insurance claims) Non-interest income Total income Direct expenses - staff - other Indirect expenses Operating profit before impairment losses Impairment losses Operating profit Analysis of income by product Personal advances Personal deposits Mortgages Cards Other...

Page 70
.... The business is actively working to ensure its products set and sales practices are appropriate. Ross McEwan joined UK Retail as its new Chief Executive in September 2012 and spent considerable time engaging with customers and employees around the country and reviewing business processes and...

Page 71
... growing secured lending while at the same time building customer deposits, thereby reducing the Group's reliance on wholesale funding. Loans and advances to customers grew 2%, with a change in mix from unsecured to secured as the Group actively sought to improve its risk profile. Mortgage balances...

Page 72
... Direct expenses - staff - other Indirect expenses Operating profit before impairment losses Impairment losses Operating profit Analysis of income by business Corporate and commercial lending Asset and invoice finance Corporate deposits Other Total income Analysis of impairments by sector Financial...

Page 73
... in lending. During 2012, UK Corporate continued to support its customers and the UK economy and further demonstrated a commitment to the communities it operates in. RBS was the first bank to support the Government's Funding for Lending Scheme (FLS). The division is using the FLS to stimulate loan...

Page 74
...Core lending balances were up Â£200 million, excluding the property, housebuilding and construction sectors. The loan:deposit ratio decreased by 400 basis points, principally reflecting deposit growth and portfolio derisking, particularly in commercial real estate. The Group took part in a number of...

Page 75
... 71% Â£bn Capital and balance sheet Loans and advances to customers (gross) - mortgages - personal - other Loan impairment provisions Net loans and advances to customers Risk elements in lending Provision coverage (2) Assets under management (excluding deposits) Customer deposits Loan:deposit ratio...

Page 76
... UK. Expenses also increased as a result of client redress following a past business review into the sale of the ALICO Enhanced Variable Rate Fund announced in November 2011 and a Financial Services Authority fine of Â£8.75 million relating to Anti Money Laundering control processes. Client assets...

Page 77
RBS GROUP 2012 International Banking 2012 Â£m 2011 Â£m 2010 Â£m Net interest income Non-interest income Total income Direct expenses - staff - other Indirect expenses Operating profit before impairment losses Impairment losses Operating profit Of which: Ongoing businesses Run-off businesses ...

Page 78
...Run-off businesses (1) Total income Direct expenses Operating loss Notes: (1) Excludes disposal groups. (2) Provision coverage percentage represents loan impairment provisions as a percentage of risk elements in lending. (3) Run-off businesses consist of the exited corporate finance businesses. 23...

Page 79
...'s credit rating downgrade and the Group technology incident in June 2012 outweighed economic pressures. This, coupled with the managed reduction in loans and advances to customers, improved the loan:deposit ratio to 85%. Bank deposits were down 51%, mainly as a result of lower short-term balances...

Page 80
Business review continued Ulster Bank 2012 Â£m 2011 Â£m 2010 Â£m Net interest income Net fees and commissions Other non-interest income Non-interest income Total income Direct expenses - staff - other Indirect expenses Operating profit before impairment losses Impairment losses Operating loss ...

Page 81
RBS GROUP 2012 2012 Â£bn 2011 Â£bn 2010 Â£bn Capital and balance sheet Loans and advances to customers (gross) - mortgages - corporate - property - other corporate - other lending Loan impairment provisions Net loans and advances to customers Risk elements in lending - mortgages - corporate - ...

Page 82
... driven by a combination of new defaulting customers and deteriorating security values. Risk elements in lending increased by Â£2 billion during the year reflecting continued difficult conditions in both the commercial and residential property sectors. The loan to deposit ratio improved from 143% to...

Page 83
... Operating profit Average exchange rate - US$/Â£ Analysis of income by product Mortgages and home equity Personal lending and cards Retail deposits Commercial lending Commercial deposits Other Total income Analysis of impairments by sector Residential mortgages Home equity Corporate and commercial...

Page 84
... service and product offering by integrating the Treasury Solutions, Foreign Exchange and Interest Rate Derivatives functions into Commercial Banking. The business made good progress towards expanding its capital markets capabilities. At the end of 2012, RBS Citizens ranked #4 in the new capital...

Page 85
... Points rewards programme for consumer debit card customers, partially offset by higher operational losses. During the year, RBS Citizens offered former employees a one-time opportunity to receive the value of future pension benefits as a single lump sum payment. The transaction allowed RBS Citizens...

Page 86
Business review continued Markets 2012 Â£m 2011 Â£m 2010 Â£m Net interest income from banking activities Net fees and commissions receivable Income from trading activities Other operating income (net of related funding costs) Non-interest income Total income Direct expenses - staff - other Indirect...

Page 87
... repos) Bank deposits (excluding repos) Risk-weighted assets Run-off businesses (2) Total income Direct expenses Operating loss Balance sheet - run-off businesses (2) Total third party assets (excluding derivatives mark-to-market) Notes: (1) Provision coverage percentage represents loan impairment...

Page 88
Business review continued Markets continued 2012 compared with 2011 Operating profit increased by 68% reflecting 2% growth in income and 20% decrease in direct expenses, most notably through a reduction in staff costs. Rates benefited from a strong trading performance, while losses incurred in ...

Page 89
...' share Net premium income Fees and commissions Instalment income Other income Total income Net claims Underwriting profit Staff expenses Other expenses Total direct expenses Indirect expenses Technical result Investment income Operating profit/(loss) Analysis of income by product Personal lines...

Page 90
... Gold Account, and creditor policies sold with bank products including mortgage, loan and card payment protection. (3) Return on tangible equity is based on annualised operating profit after tax divided by average tangible equity adjusted for dividend payments. (4) Loss ratio is based on net claims...

Page 91
... Direct Line Group at 31 December 2012 to 216 pence per share, the market value on that date, which resulted in a Â£394 million goodwill write-down. A full year preliminary statement of results for Direct Line Insurance Group plc is available on the company website. A full Annual Report and Accounts...

Page 92
...realised gains. At the end of 2011, Direct Line Group's investment portfolios comprised primarily cash, gilts and investment grade bonds. Within the UK portfolio, Â£8.9 billion, and the International portfolio, Â£827 million, there was no exposure to sovereign debt issued by Portugal, Ireland, Italy...

Page 93
... not repeated. Offsetting these costs, profits on Group Treasury available-for-sale bond disposals totalled Â£880 million compared with Â£516 million in 2011, as active management of the liquid assets portfolio as well as favourable market conditions enabled the Group to crystallise gains on some...

Page 94
... Insurance net claims Impairment losses Operating loss Analysis of income/(loss) by business Banking & portfolios International businesses Markets Total income Loss from trading activities Monoline exposures Credit derivative product companies Asset-backed products (2) Other credit exotics Equities...

Page 95
... portfolios International businesses Markets 51.1 1.2 5.1 57.4 81.3 2.9 9.5 93.7 113.9 4.4 19.6 137.9 Third party assets (excluding derivatives) Commercial real estate Corporate SME Retail Other Markets Total (excluding derivatives) Markets - RBS Sempra Commodities JV Total (4) 31 December 2011...

Page 96
... UK Corporate Ulster Bank Mortgages Commercial real estate - investment - development Other corporate Other EMEA Total Ulster Bank US Retail & Commercial Auto and consumer Cards SBO/home equity Residential mortgages Commercial real estate Commercial and other Total US Retail & Commercial Markets...

Page 97
... UK Corporate Ulster Bank Commercial real estate - investment - development Other corporate Other EMEA Total Ulster Bank US Retail & Commercial Auto and consumer Cards SBO/home equity Residential mortgages Commercial real estate Commercial and other Total US Retail & Commercial Markets Manufacturing...

Page 98
... balance sheet was under 7% of the Group's funded balance sheet compared with 21% when the division was created. Non-Core remains on target to reach its third party asset target of c.Â£40 billion, a reduction of approximately 85% of its original portfolio, by the end of 2013. 2012 compared with 2011...

Page 99
... and stock lending Deposits by banks Customers deposits Repurchase agreements and stock lending Customer accounts Debt securities in issue Settlement balances Short positions Derivatives Accruals, deferred income and other liabilities Retirement benefit liabilities Deferred tax Insurance liabilities...

Page 100
...of the UK branch-based businesses from disposal groups following Santander's withdrawal from the purchase, together with the disposal of RBS Aviation Capital in the second quarter. These were partly offset by the transfer to disposal groups of Direct Line Group at 31 December 2012. Deposits by banks...

Page 101
..., Â£2.9 billion. Debt securities in issue were down Â£55.8billion, 26% to Â£162.6 billion driven by reductions in the level of certificates of deposit and commercial paper in Markets and Group Treasury. Settlement balances declined Â£3.5 billion, 32%, to Â£7.5 billion and short positions were down...

Page 102
Business review continued Cash flow 2012 Â£m 2011 Â£m 2010 Â£m Net cash flows from operating activities Net cash flows from investing activities Net cash flows from financing activities Effects of exchange rate changes on cash and cash equivalents Net (decrease)/increase in cash and cash ...

Page 103
... other risks); by international agreement, the RAR should be not less than 8% with a Tier 1 component of not less than 4%. At 31 December 2012, the Group's total RAR was 14.5% (2011 - 13.8%) and the Tier 1 RAR was 12.4% (2011 13.0%). For further information refer to Balance sheet management: Capital...

Page 104
... information is provided to give a better understanding of the results of the Group's operations. Income statement for the year ended 31 December 2012 Managed Â£m Reallocation of one-off items Â£m Direct Line Group Â£m Statutory Â£m Net interest income Non-interest income (excluding insurance net...

Page 105
...statement for the year ended 31 December 2011 Reallocation of one-off items Â£m Managed Â£m Direct Line Group Â£m Statutory Â£m Net interest income Non-interest income (excluding insurance net premium income) Insurance net premium income Non-interest income Total income Operating expenses Profit...

Page 106
Business review continued Income statement for the year ended 31 December 2010 Managed Â£m Reallocation of one-off items Â£m Direct Line Group Â£m Statutory Â£m Net interest income Non-interest income (excluding insurance net premium income) Insurance net premium income Non-interest income Total ...

Page 107
... and stock lending Deposits by banks Customer deposits Repurchase agreements and stock lending Customer accounts Debt securities in issue Settlement balances Short positions Derivatives Accruals, deferred income and other liabilities Retirement benefit liabilities Deferred tax Insurance liabilities...

Page 108
... 145 38,651 2,595 (4,097) Notes: (1) Primarily Direct Line Group. (2) Primarily UK branch-based businesses, RBS Aviation Capital, sold in 2012, and remainder of RBS Sempra Commodities JV. (3) Primarily RBS Sempra Commodities JV, Non-Core project finance assets and certain interests in Latin America...

Page 109
Business review Risk and balance sheet management Contents Our business and our strategy Strategic risk objectives Risk appetite and risk governance Capital management Liquidity, funding and related risks Credit risk Balance sheet analysis Market risk Country risk Other risks 109 109 113 127 137 ...

Page 110
Business review Risk and balance sheet management Contents Strategic risk objectives Our business and our strategy Strategic risk objectives Key developments Top and emerging risk scenarios 109 109 109 110 108

Page 111
... auditor's report. In the balance sheet, all assets and liabilities of disposal groups are presented as a single line. In the risk and balance sheet management section, balances and exposures relating to disposal groups are included within risk measures for all periods presented. Refer to pages...

Page 112
Business review Risk and balance sheet management continued Strategic risk objectives* continued Top and emerging risk scenarios* As part of its risk management process, the Group identifies and monitors its top and emerging risk scenarios. Such risk scenarios are those the materialisation of which ...

Page 113
...order to mitigate these risks, the Group has taken a number of steps: x x If the value of the pension scheme assets is not adequate to fund pension scheme liabilities, the Group may be required to set aside additional capital in support of the schemes. The amount of additional capital that may be...

Page 114
Business review Risk and balance sheet management continued Strategic risk objectives*: Top and emerging risk scenarios continued Mitigants x The Group is in the process of installing a new global client screening program, the objective of which is to prevent the inadvertent provision of products ...

Page 115
Business review Risk and balance sheet management Contents Risk appetite and risk governance Risk appetite Risk organisation Risk governance Stress testing Risk coverage 114 116 117 121 122 113

Page 116
... - RBS has set sustainable business goals over a medium-term horizon (refer to page 15, including a target for the capital ratio, leverage ratio, loan:deposit ratio, liquidity portfolio and use of wholesale funding. These effectively set the broad boundaries within which the Group operates. The...

Page 117
...four policy standards - employee conduct, corporate conduct, market conduct; and conduct towards our customers - each is designed to provide high level direction to the Group and is supported by the Group's Code of Conduct (refer to page 347 for more detail). The Group's key credit risk policies and...

Page 118
...setting and execution of its responsibilities. The Head of Restructuring and Risk reports to the Group Chief Executive and the Board Risk Committee, with a right of access to the Chairman. RBS Risk Management is designed to align as closely as possible with the customer-facing businesses and support...

Page 119
... Testing Committee, Pension Risk Committee, Balance Sheet Management Committee. (2) The following sub-committees report directly to the Group Risk Committee: Global Market Risk Committee, Group Country Risk Committee, Group Models Committee, Group Credit Risk Committee and Operational Risk Executive...

Page 120
... commercial imperative for the Group; customers, clients and counterparties demand it as a precursor to building trust. For more information on conduct risk and the Group's management of this risk type, refer to page 290. Membership The Board of directors Executive Committee Group Chief Executive...

Page 121
... Marketing, UK Retail Chief Executive Officer, Corporate Banking Vice Chairman, RBS Citizens Financial Group Co-Head, M&IB Americas Director, Group Operations, Business Services Chief Operating Officer, Ulster Bank Group Chief Executive Officer, RBS England & Wales and NatWest Scotland Head of Group...

Page 122
... is referred for final decision. Group A members (1) Head of Restructuring and Risk Deputy Chief Risk Officer Group Chief Credit Officer/Chief Credit Officer N.V. Head of Global Restructuring Group Chief Risk Officer, Corporate Banking Group B members (1) Group Chief Executive Group Finance Director...

Page 123
.... The Board Risk Committee receives reports detailing stress tests undertaken as part of the financial planning process. It reviews and challenges the stress scenarios and considers their impact on the Group's financial position. These reports outline relevant management actions as well as the...

Page 124
... to make progress in reducing key credit concentration risks, with exposure to commercial real estate declining 16% during 2012. Refer to pages 157 to 241. How the Group managed risk and the focus in 2012 Core Tier 1 ratio was 10.3%, a sixty basis point improvement on 2011 (excluding the effect of...

Page 125
... Direct Line Insurance Group plc (DLG), which is listed on the London Stock Exchange. DLG ensures that it prices its policies and invests its resources appropriately to minimise the risk of potential loss. The risks are mitigated by agreeing policies and minimum standards that are regularly reviewed...

Page 126
... market risk. The Group limit metrics through interest rate risk and capture, in broad terms, the full range of market risk foreign exchange risk on its exposures, ensuring the risk is appropriately defined and non-trading activities in the communicated. retail and commercial businesses. During 2012...

Page 127
RBS GROUP 2012 Risk type Regulatory risk Definition The risk arising from noncompliance with regulatory requirements, regulatory change or regulator expectations. Features Adverse impacts on strategy, capital structure, business models and operational effectiveness. Financial cost of adapting to ...

Page 128
... their operations. The Board's oversight is supported by executive risk committees (including a new Conduct Risk Committee) and by the Group Sustainability Committee. In 2012, the Group strengthened the alignment of reputational risk management with its strategic objective of serving customers well...

Page 129
Business review Risk and balance sheet management Contents Capital management Introduction 2012 achievements Governance and approach Capital ratios Pillar 3 Capital resources Flow statement (Basel 2.5) Reconciliation between accounting and regulatory consolidation Reconciliation between accounting ...

Page 130
...test key vulnerabilities. The divisions use return on capital metrics when making pricing decisions on products and transactions to ensure customer activity is appropriately aligned with Group and divisional targets and allocations. The Financial Services Authority (FSA) uses the risk asset ratio as...

Page 131
RBS GROUP 2012 Capital ratios* The Group's capital, RWAs and risk asset ratios, calculated in accordance with FSA definitions, are set out below. Capital Core Tier 1 Core Tier 1 (excluding Asset Protection Scheme (APS)) Tier 1 Total 2012 Â£bn 2011 Â£bn 2010 Â£bn 47.3 47.3 57.1 66.8 46.3 49.1 57.0...

Page 132
... 1 and Tier 2 capital during the year. Core Tier 1 capital At 1 January 2012 Attributable loss net of movements in fair value of own credit Ordinary shares issued Share capital and reserve movements in respect of employee share schemes Foreign exchange reserve movements Decrease in non-controlling...

Page 133
...469 1,305,486 Liabilities Deposits by banks Customer accounts Debt securities in issue Settlement balances Short positions Derivatives Accruals, deferred income and other liabilities Retirement benefit liabilities Deferred tax Subordinated liabilities Liabilities of disposal groups 101,405 521,279...

Page 134
Business review Risk and balance sheet management continued Capital management: Capital resources continued Reconciliation between accounting equity and regulatory capital* The table below provides a reconciliation of shareholders' equity per accounting balance sheet to the regulatory capital. 2012 ...

Page 135
... Unconsolidated Investments - Direct Line Group - Other investments Other deductions Total regulatory capital (2,081) (162) (244) (2,487) 66,800 (4,354) (239) (235) (4,828) 60,708 (3,962) (318) (452) (4,732) 65,289 Key points x Core Tier 1 capital increased by Â£1 billion during 2012. Excluding...

Page 136
Business review Risk and balance sheet management continued Capital management continued Risk-weighted assets* Divisional analysis Risk-weighted assets by risk category and division were as follows: Credit risk Counterparty Non-counterparty Â£bn Â£bn Market risk Â£bn Operational risk Â£bn Gross RWAs...

Page 137
...Changes to credit metrics applying to corporate, bank and sovereign exposures as models were updated to reflect more recent experience, Â£30 billion; and - Application, of slotting approach to UK commercial real estate exposures, Â£12 billion. x x Notes: (1) The capital conservation buffer is set...

Page 138
...the business focuses on the most productive returns on capital. Markets RWAs decreased by Â£19 billion in 2012 which also lessens the increases driven by the counterparty risk changes in CRD IV. European Banking Authority (EBA) recommendation The EBA issued a recommendation in 2011 that the national...

Page 139
...Funding sources - Notes issued - Deposit and repo funding - Divisional loan:deposit ratios and funding gaps - Long-term debt issuance Liquidity - Liquidity portfolio - Net stable funding ratio Maturity analysis Encumbrance Non-traded interest rate risk - Introduction and methodology - Analyses Value...

Page 140
...customer deposits and a corresponding reduction in more volatile short-term wholesale funding. The Group has taken advantage of market conditions through the course of the year to further supplement its capital base. RBS Group plc, RBS plc, RBS Citizens Financial Group Inc. and Direct Line Insurance...

Page 141
... also what other adjustments to the Group's balance sheet could be undertaken to manage these risks within Group appetite. These policies are reviewed at least annually or sooner if the Group's own liquidity position changes or if market conditions and/or regulatory rules warrant further amendment...

Page 142
...and regulatory liquidity risk policies that are currently being debated at an international level and adjusts its policies and processes where appropriate. Finally, external stakeholders such as market counterparties, debt and equity investors and credit rating agencies actively review and challenge...

Page 143
... December 2012, the Group's holding of liquid assets was 128% of the worst case stress requirements. The results of stress testing are an active part of management and strategy in balance sheet management and inform allocation, target and limit discussions. In short, limits in the business-as-usual...

Page 144
... Bank of Scotland plc, National Westminster Bank Plc, Ulster Bank Limited, Coutts & Co and Adam & Company. Certain of the Group's significant operating subsidiaries - RBS N.V., RBS Citizens Financial Group Inc. (CFG) and Ulster Bank Ireland Limited hold locally managed portfolios of liquid assets...

Page 145
... money markets and term debt investors through its secured and unsecured funding programmes. These sources of funding are complementary to the Group's customer deposit gathering activities. Diversity in funding is provided by its active role in the money markets, along with access to global capital...

Page 146
...Group's principal funding sources excluding repurchase agreements. 2012 Â£m 2011 Â£m 2010 Â£m Deposits by banks derivative cash collateral other deposits Debt securities in issue conduit asset-backed commercial paper (ABCP) other commercial paper (CP) certificates of deposit (CDs) medium-term notes...

Page 147
...:deposit ratios and customer funding gaps. Loans (1) Â£m Deposits (2) Â£m Loan:deposit ratio (3) % Funding surplus /(gap) (3) Â£m 2012 UK Retail UK Corporate Wealth International Banking (4) Ulster Bank US Retail & Commercial Conduits (4) Retail & Commercial Markets Other Core Non-Core Group 2011...

Page 148
... customer deposits as shown. (4) All conduits relate to International Banking and have been extracted and shown separately as they were funded by commercial paper issuance until the end of the third quarter of 2012. Long-term debt issuance The table below shows debt securities issued by the Group...

Page 149
... between the UK Defined Liquidity Group (UK DLG), RBS Citizens Financial Group Inc. (CFG) and other subsidiaries, by liquidity value. Liquidity value is lower than carrying value principally as it is stated after the discounts applied by the Bank of England and other central banks to loans, within...

Page 150
...of Scotland plc, National W estminster Bank Plc, Ulster Bank Limited, Coutts & Co and Adam & Company. In addition, certain of the Group's significant operating subsidiaries - RBS N.V., RBS Citizens Financial Group Inc. (CFG) and Ulster Bank Ireland Limited (UBIL) - hold locally managed portfolios of...

Page 151
... income, deferred tax, settlement balances and other assets. Key point x NSFR improved from 111% at 31 December 2011 to 117% at the end of 2012. Long-term wholesale funding declined by Â£15 billion in line with Markets' strategy, and funding requirement relating to long-term lending decreased...

Page 152
... Customer reverse repos Loans to banks (1) Loans to customers (1) Debt securities Equity shares Settlement balances Derivatives Other assets Total financial assets Bank repos Customer repos Deposits by banks Customer accounts Debt securities in issue Settlement balances Short positions Derivatives...

Page 153
... balances relating to derivative and securities financing transactions 2012 % 2011 % 18 22 13 19 26 19 Own-asset securitisations The Group has a programme of own-asset securitisations where assets are transferred to bankruptcy remote special purpose entities (SPEs) funded by the issue of debt...

Page 154
... to banks (1) Loans and advances to customers (1) - UK residential mortgages - Irish residential mortgages - US residential mortgages - UK credit cards - UK personal loans - other Debt securities Equity shares Own asset securitisations Total liquidity portfolio Liabilities secured Intra-Group - used...

Page 155
...Residual risk positions are reported on a regular basis to divisional ALCOs and monthly to the Group Balance Sheet Management Committee, GALCO, the Executive Risk Forum and the Group Board. The Group uses a variety of approaches to quantify its interest rate risk encompassing both earnings and value...

Page 156
... of structural hedges. The year on year change reflected a change to a longer term hedging programme implemented in 2010. The reported sensitivities will vary over time due to a number of factors such as market conditions and strategic changes to the balance sheet mix and should not therefore...

Page 157
...527 941 17,725 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 x The Group's structural foreign currency exposure at 31 December 2012 was Â£24.0 billion and...

Page 158
... controls and identification of risk prior to investing. Valuation At Group level, positions are monitored by and reported quarterly to GALCO. Equity positions are measured at fair value. Fair value calculations are based on available market prices where possible. In the event that market prices...

Page 159
...Asset quality Credit risk mitigation - Approaches and methodologies - Secured portfolios Corporate exposures Commercial real estate Other corporate - Wholesale market exposures - Retail Residential mortgages Early problem identification and problem debt management - Wholesale customers Early problem...

Page 160
... securities financing transactions entered into with customers. Other material risks covered by the Group's credit risk management framework are: Commercial real estate While progress has been made in reducing the overall exposure and rebalancing the portfolio, commercial real estate remains a key...

Page 161
...'s business divisions. The divisional credit risk management functions work together with GCR to ensure that the risk appetite set by the Group Board is met, within a clearly defined and managed control environment. The credit risk function within each division is managed by a Chief Credit Officer...

Page 162
...build trust with its stakeholders (for more information on reputational risk management, refer to page 291). Product/asset class x Retail - A formal framework establishes Group-level statements and thresholds that are cascaded through all retail franchises in the Group and to granular business lines...

Page 163
... strengthening portfolio controls on key metrics and lending parameters, and the ongoing development of sectorspecific lending policies. As a result of the reviews carried out in 2012, the Group has reduced its risk appetite in the most material corporate sectors of commercial real estate and...

Page 164
Business review Risk and balance sheet management continued Credit risk management framework continued Credit risk measurement* The Group uses credit risk models to support quantitative risk assessments element within the credit approval process, ongoing credit risk management, monitoring and ...

Page 165
... leases; and individuals, comprising mortgages, personal loans and credit card balances. x Credit risk assets exclude issuer risk (primarily debt securities) and reverse repurchase arrangements. They take account of legal netting arrangements that provide a right of legal set-off, but do not meet...

Page 166
Business review Risk and balance sheet management continued Credit risk assets* continued Sector and geographical regional analyses The table below details credit risk assets by sector and geographical region. Sectors are based on the Group's sector concentration framework. Geographical region is ...

Page 167
RBS GROUP 2012 Key points Financial markets and the Group's focus on risk appetite and sector concentration had a direct impact on the portfolio during the year with the following key trends observed: x x x Total credit risk assets fell 7%, with reductions in all wholesale sectors. Exposure to ...

Page 168
... its transactional controls and policies during the year. Core personal lending continued to rise, driven by UK mortgages. This expansion is in line with Group strategy and has no detrimental impact on credit quality (for more commentary refer to Key credit portfolios: Residential mortgages on page...

Page 169
RBS GROUP 2012 2012 AQ10 credit risk assets by division UK Retail UK Corporate International Banking Ulster Bank US Retail & Commercial Retail & Commercial Markets Core Non-Core AQ10 Â£m Divisional credit risk assets % 2011 Divisional credit AQ10 risk assets Â£m % 2010 Divisional credit AQ10 ...

Page 170
...required levels; Management of the risk of correlation between changes in the credit risk of the customer and the value of credit risk mitigation; Management of concentration risks, for example, by setting thresholds and controls on the acceptability of credit risk mitigants and on lines of business...

Page 171
RBS GROUP 2012 Commercial real estate The table below analyses commercial real estate (Core and Non-Core) lending by loan-to-value (LTV) which represents loan value before provisions. Due to market conditions in Ireland and to a lesser extent in the UK, there is a shortage of market-based data. In ...

Page 172
Business review Risk and balance sheet management continued Credit risk mitigation continued Wholesale market exposures As set out in the table below, the Group receives collateral for reverse repurchase transactions and for derivatives, typically in the form of cash, quoted debt securities or ...

Page 173
... equity loans and lines (refer to page 188 for a breakdown of balances). (2) Where no indexed LTV is held. (3) Average LTV weighted by value is arrived at by calculating the LTV on each individual mortgage and applying a weighting based on the value of each mortgage. (4) Excludes mortgage lending...

Page 174
... and comprise both internal parameters (such as account level information) and external parameters (such as the share price of publicly listed customers). Customers identified through either the EWIs or annual review are assessed by portfolio management and/or credit officers within the division...

Page 175
... limited to a customer's current or potential credit deterioration. Where the contractual payment terms of a loan have been changed because of the customer's financial difficulties, it is classified as 'renegotiated' in the wholesale portfolio. Loans modified in the normal course of business where...

Page 176
...renegotiations continues at a high level as difficult economic conditions persist in the UK and Ireland, particularly in real estate markets and the Group continues its active problem debt management. Renegotiations are likely to remain significant: at 31 December 2012 loans totalling Â£13.7 billion...

Page 177
RBS GROUP 2012 Key points continued x In 2012 renegotiations were more prevalent in the Group's most significant corporate sectors and in those industries experiencing difficult markets, notably property and transport as the Group seeks to support viable customers. The majority of renegotiations ...

Page 178
...time, as well as the proportion of customers A number of forbearance options are utilised by the Group's retail who return to a performing state with no arrears. businesses. These include, but are not limited to, payment concessions, capitalisations of arrears over the remaining term of the mortgage...

Page 179
...relating to the customer's lifestyle changes or financial difficulty. (2) Includes the current stock position of forbearance deals agreed since early 2008 for UK Retail and early 2009 for Ulster Bank. (3) Forbearance stock reported at 31 December 2012 now includes home equity loans and lines as well...

Page 180
Business review Risk and balance sheet management continued Early problem identification and problem debt management: Retail customers continued Key points Ulster Bank UK Retail x The reported numbers for forbearance in Ulster Bank Group capture x The reported numbers for forbearance in UK Retail ...

Page 181
... by value) of the population was subject to forbearance at 31 December 2012. x Within RBS Citizens, granting of forbearance is significantly less extensive for non real-estate portfolios, as it is predominantly restricted to the granting of short-term (1-3 months) loan extensions to customers to...

Page 182
... the assets. The Group segments impaired credits in its collectively assessed portfolios according to Emergence periods are estimated at a portfolio level and reflect the asset type, such as credit cards, personal loans, mortgages and portfolio product characteristics such as the repayment terms and...

Page 183
...of lending utilisations below excludes rate risk management and contingent obligations. 2012 Development Â£m 2011 Development Â£m 2010 Development Â£m By division (1) Core UK Corporate Ulster Bank US Retail & Commercial International Banking Markets Investment Â£m Total Â£m Investment Â£m Total...

Page 184
Business review Risk and balance sheet management continued Key credit portfolios*: Commercial real estate continued Ireland UK (excl NI) (2) (ROI and NI) (2) Â£m Â£m Western Europe (other) Â£m By sub-sector (1) 2012 US Â£m RoW (2) Â£m Total Â£m Residential Office Retail Industrial Mixed/other...

Page 185
RBS GROUP 2012 Maturity profile of portfolio 2012 UK Corporate Â£m Ulster Bank Â£m US Retail & Commercial Â£m International Banking Â£m Markets Â£m Total Â£m Core < 1 year (1) 1-2 years 2-3 years > 3 years Not classified (2) Total Non-Core < 1 year (1) 1-2 years 2-3 years > 3 years Not ...

Page 186
... review Risk and balance sheet management continued Key credit portfolios*: Commercial real estate continued Key points x The overall maturity profile has remained relatively unchanged over the last 12 months. x x Non-Core exposure maturing in under 1 year has reduced from Â£21.7 billion in 2011...

Page 187
... to review at least quarterly. Significant levels of provisions have been taken against these portfolios. Provisions as a percentage of REIL for the Ulster Bank Group commercial real estate portfolio were 58% at 31 December 2012 (2011 - 53%). x The average interest coverage ratios for UK Corporate...

Page 188
... and balance sheet management continued Key credit portfolios* continued Residential mortgages The majority of the Group's secured lending exposures were in the UK, Ireland and the US. The analysis below includes both Core and Non-Core. 2012 Â£m 2011 Â£m 2010 Â£m UK Retail Ulster Bank RBS Citizens...

Page 189
...and capital repayments (2011 - 9.6%). UK Retail withdrew interest only repayment products from sale to residential owner occupied customers with effect from 1 December 2012. Interest only repayment remains an option on buy-to-let mortgages. At 1.6%, the percentage of accounts more than 3 payments in...

Page 190
...) of home equity loans and lines. Home equity Core consists of 47% in first lien position while Non-Core consists of 95% in second lien position. RBS Citizens' lending originates predominantly in the 'footprint states' of New England, Mid Atlantic and Mid West regions. At 31 December 2012, Â£17...

Page 191
... (1) The ratio for UK Retail assets refers to the impairment charge for the year. (2) The ratio for RBS Citizens refers to the impairment charge in the year, net of recoveries realised in the year. Key points UK Retail x The UK personal lending portfolio, comprises credit cards, unsecured loans and...

Page 192
Business review Risk and balance sheet management continued Key credit portfolios* continued Ulster Bank Group (Core and Non-Core) Overview At 31 December 2012, Ulster Bank Group accounted for 10% of the Group's total gross loans to customers (2011 and 2010 - 10%) and 8% of the Group's Core gross ...

Page 193
RBS GROUP 2012 Sector analysis 2011 Gross loans Â£m REIL Â£m Provisions Â£m REIL as a % of gross loans % Credit metrics Provisions as a % of REIL % Provisions as a % of gross loans % Impairment charge Â£m Amounts written-off Â£m Core Mortgages Commercial real estate - investment - ...

Page 194
Business review Risk and balance sheet management continued Key credit portfolios*: Ulster Bank Group (Core and Non-Core) continued Key points x Core REIL increased by Â£2.0 billion during the year, which reflects continued difficult conditions in both the commercial and residential property sectors...

Page 195
RBS GROUP 2012 Key points x Commercial real estate continues to be the primary sector driving the Ulster Bank Group non-performing loan book. A reduction over the year of Â£1.8 billion primarily reflects Ulster Bank's continuing strategy to reduce concentration risk to this sector. x x The ...

Page 196
Business review Risk and balance sheet management Contents Balance sheet analysis Financial assets - Exposure summary - Sector and geographic concentration Asset quality Debt securities IFRS measurement classification and issuer Ratings - Asset-backed securities Introduction Product, geography and ...

Page 197
... offset (1) Â£m Carrying value Â£m Non-IFRS offset (2) Â£m Exposure post offset Â£m 2012 Cash and balances at central banks Reverse repos Lending (3) Debt securities Equity shares Derivatives (4) Settlement balances Other financial assets Total Short positions Net of short positions 2011 79,308...

Page 198
... repos Â£m Lending Non-Core Â£m Securities Debt Â£m Balance sheet value Â£m Non-IFRS offset (1) Â£m Exposure post offset Â£m 2012 Core Â£m Total Â£m Equity Â£m Derivatives Â£m Other Â£m Government (2) Financial institutions - banks (3) - other (4) Personal - mortgages - unsecured Property...

Page 199
... balance sheet categories: lending (Â£54 billion), debt securities (Â£44 billion) and derivatives (Â£88 billion). Conditions in the financial markets and the Group's focus on risk appetite and sector concentration had a direct impact on the composition of its portfolio during the year. Exposures...

Page 200
... review Risk and balance sheet management continued Balance sheet analysis: Financial assets: Sector and geographic concentration continued x Key points continued The Group's exposure to property and construction sector decreased by Â£11 billion, principally in commercial real estate lending...

Page 201
... repos Â£m Lending Non-Core Â£m Securities Debt Equity Â£m Â£m Balance sheet value Â£m Non-IFRS Exposure offset (1) post offset Â£m Â£m 2012 Core Â£m Total Â£m Derivatives Â£m Other Â£m UK Government (2) Financial institutions - banks (3) - other (4) Personal - mortgages - unsecured Property...

Page 202
Business review Risk and balance sheet management continued Balance sheet analysis: Financial assets: Sector and geographic concentration continued Reverse repos Â£m Core Â£m Lending Non-Core Â£m Total Â£m Securities Debt Â£m Equity Â£m Derivatives Â£m Other Â£m Balance sheet value Â£m Non-IFRS ...

Page 203
RBS GROUP 2012 2011 Reverse repos Â£m Core Â£m Lending Non-Core Â£m Total Â£m Securities Debt Â£m Equity Â£m Derivatives Â£m Other Â£m Balance sheet value Â£m Non-IFRS Exposure offset (1) post offset Â£m Â£m UK Government (2) Financial institutions - banks (3) - other (4) Personal - ...

Page 204
Business review Risk and balance sheet management continued Balance sheet analysis: Financial assets: Sector and geographic concentration continued Reverse repos Â£m Core Â£m Lending Non-Core Â£m Total Â£m Securities Debt Â£m Equity Â£m Derivatives Â£m Other Â£m Balance sheet value Â£m Non-IFRS ...

Page 205
RBS GROUP 2012 2010 Reverse repos Â£m Core Â£m Lending Non-Core Â£m Total Â£m Securities Debt Â£m Equity Â£m Derivatives Â£m Other Â£m Balance sheet value Â£m Non-IFRS Exposure offset (1) post offset Â£m Â£m UK Government (2) Financial institutions - banks (3) - other (4) Personal - ...

Page 206
Business review Risk and balance sheet management continued Balance sheet analysis: Financial assets: Sector and geographic concentration continued Reverse repos Â£m Core Â£m Lending Non-Core Â£m Total Â£m Securities Debt Â£m Equity Â£m Derivatives Â£m Other Â£m Balance sheet value Â£m Non-IFRS ...

Page 207
... the key drivers of default for the customer type. All credit grades across the Group map to both a Group level asset quality scale, used for external financial reporting, and a master grading scale for wholesale exposures used for internal management reporting across portfolios. Debt securities are...

Page 208
Business review Risk and balance sheet management continued Balance sheet analysis: Asset quality continued Loans and advances Cash and balances at central banks Â£m Banks Derivative Reverse cash repos collateral Other Â£m Â£m Â£m Customers Derivative cash collateral Other Â£m Â£m Settlement ...

Page 209
RBS GROUP 2012 2011 Cash and balances at central banks Â£m Loans and advances Banks (1) Â£m Customers Â£m Settlement balances and other financial assets Â£m Derivatives Â£m Commitments Â£m Contingent liabilities...376 13,886 (7,895) 1,322,853 For the note to these tables refer to page 208. 207

Page 210
...are planned for 2013. The AQ composition of the corporate portfolio has not changed materially during the year. x Loans and advances to customers: Lower internal ratings due to model changes resulted in balances shifting from AQ1 to lower bands. The decrease in AQ5 and AQ6 balances is in line with...

Page 211
... UK US Â£m Â£m Other financial institutions Â£m Of which ABS (1) Â£m 2012 Other Â£m Banks Â£m Corporate Â£m Total Â£m Held-for-trading (HFT) Designated as at fair value Available-for-sale Loans and receivables Long positions Of which US agencies Short positions (HFT) Available-for-sale...

Page 212
... Key points Debt securities decreased by Â£44.5 billion or 21% during the year, principally due to a reduction of Â£26.4 billion in available-for-sale (AFS) across the Group and Â£16.7 billion of HFT positions within Markets reflecting a combination of de-risking strategies and active balance sheet...

Page 213
RBS GROUP 2012 2011 Central and local government UK US Â£m Â£m Other Â£m Banks Â£m Other financial institutions Â£m Corporate Â£m Total Â£m Total % Of which ABS (1) Â£m Total AAA AA to AA+ A to AABBB- to ANon-investment... 1,940 450 10,196 For the note to these tables refer to page 212. 211

Page 214
Business review Risk and balance sheet management continued Balance sheet analysis: Debt securities continued Central and local government UK US Â£m Â£m Other Â£m Banks Â£m Other financial institutions Â£m Corporate Â£m Total Â£m Total (2) % Of which ABS (1) Â£m 2010 Total AAA AA to AA+ A to AABBB...

Page 215
... and trades debt in the form of loan, bond and derivative instruments in all major currencies and debt capital markets in North America, Western Europe, Asia and major emerging markets. The carrying value of the Group's debt securities is detailed below. The Group's credit market activities gave...

Page 216
Business review Risk and balance sheet management continued Balance sheet analysis: Debt securities continued Product, geography and IFRS measurement classification 2012 US Â£m UK Â£m Europe Â£m RoW Â£m Total Â£m HFT Â£m DFV Â£m AFS Â£m LAR Â£m Gross exposure RMBS: government sponsored or similar ...

Page 217
RBS GROUP 2012 2011 US Â£m UK Â£m Europe Â£m RoW Â£m Total Â£m HFT Â£m DFV Â£m AFS Â£m LAR Â£m Gross exposure RMBS: government sponsored or similar RMBS: prime RMBS: non-conforming RMBS: sub-prime MBS: covered bond CMBS CDOs CLOs ABS covered bond Other ABS 27,549 1,201 1,220 1,847 133 1,...

Page 218
Business review Risk and balance sheet management continued Balance sheet analysis: Debt securities continued 2010 US Â£m UK ... 6,365 Carrying value RMBS: government sponsored or similar RMBS: prime RMBS: non-conforming RMBS: sub-prime MBS: covered bond CMBS CDOs CLOs ABS covered bond Other ABS 24...

Page 219
RBS GROUP 2012 Ratings The table below summarises the rating levels of ABS carrying values. RMBS Government sponsored or similar (1) Â£m Nonconforming Â£m MBS covered bond Â£m ABS covered bond Â£m Other ABS Â£m 2012 Prime Â£m Sub-prime Â£m CMBS Â£m CDOs Â£m CLOs Â£m Total Â£m AAA AA to AA+ ...

Page 220
... comprise positions in the Markets Derivative Products Solutions business primarily for economic hedging of liabilities including debt issuances and equity derivatives. The AFS portfolios include capital stock in the Federal Home Loans Bank (a government sponsored entity, included in Other financial...

Page 221
... - - (158) (1,980) Notes: (1) Designated as at fair value through profit or loss (DFV) balances are Â£533 million (2011 - Â£774 million) of which nil banks (2011 - nil), Â£61 million other financial institutions (2011 - Â£81 million) and Â£472 million corporate (2011 - Â£693 million). (2) Includes...

Page 222
... swaps has increased. This net asset position mirrored by the net liability position relating to the difference between the fair value and carrying value on fixed rate loans and current accounts. Within Markets the hedging of issued notes, more exotic derivatives and long dated zero coupon inflation...

Page 223
RBS GROUP 2012 Credit derivatives The Group trades credit derivatives as part of its client led business and to mitigate credit risk. The Group's credit derivative exposures relating to proprietary trading are minimal. The table below analyses the Group's bought and sold protection. 2012 2011 Fair ...

Page 224
Business review Risk and balance sheet management continued Balance sheet analysis: Derivatives continued Monoline insurers The table below summarises the Group's exposure to monolines, all of which are in Non-Core. 2012 Â£m 2011 Â£m 2010 Â£m Gross exposure to monolines Hedges with financial ...

Page 225
...1,244 (490) 754 39% Â£7.2bn Â£280m The table below details CDPC exposures by rating. Notional: protected assets Â£m Fair value: reference protected assets Â£m Gross exposure Â£m Valuation adjustment Â£m Net exposure Â£m 2012 AAA A to AANon-investment grade Unrated 43 619 16,254 4,073 20,989 43...

Page 226
... % % 2012 Gross loans to Banks Customers Â£m Â£m REIL Â£m Provisions Â£m Impairment charge Â£m Amounts written-off Â£m UK Retail UK Corporate Wealth International Banking Ulster Bank US Retail & Commercial Retail & Commercial Markets Direct Line Group and other Core Non-Core Group 2011 695...

Page 227
... Credit metrics REIL as a % Provisions of gross loans as a % to customers of REIL % % Impairment charge Â£m Amounts written-off Â£m UK Retail UK Corporate Wealth International Banking Ulster Bank US Retail & Commercial Retail & Commercial Markets Direct Line Group and other Core Non-Core Group...

Page 228
Business review Risk and balance sheet management continued Balance sheet analysis: REIL, provisions and AFS reserves continued Sector and geographical regional analyses: Group The following tables analyse gross loans and advances to banks and customers (excluding reverse repos) and the related debt...

Page 229
RBS GROUP 2012 2011 Gross loans Â£m REIL Â£m Provisions Â£m REIL as a % of gross loans % Credit metrics Provisions Provisions as a % as a % of of REIL gross loans % % Impairment charge Â£m Amounts written-off Â£m Government (1) Finance Personal - mortgages - unsecured Property Construction ...

Page 230
Business review Risk and balance sheet management continued Balance sheet analysis: REIL, provisions and AFS reserves continued Sector and geographical regional analyses: Group continued Credit metrics Provisions Provisions as a % as a % of of REIL gross loans % % 2010 Gross loans Â£m REIL Â£m ...

Page 231
... Europe - residential mortgages - personal lending - property - construction - other US - residential mortgages - personal lending - property - construction - other RoW - residential mortgages - personal lending - property - construction - other Group Banks For the notes to this table refer to page...

Page 232
Business review Risk and balance sheet management continued Balance sheet analysis: REIL, provisions and AFS reserves continued Sector and geographical regional analyses: Core continued Credit metrics Provisions Provisions as a % as a % of of REIL gross loans % % 2011 Gross loans Â£m REIL Â£m ...

Page 233
RBS GROUP 2012 2010 Gross loans Â£m REIL Â£m Provisions Â£m REIL as a % of gross loans % Credit metrics Provisions Provisions as a % as a % of of REIL gross loans % % Impairment charge Â£m Amounts written-off Â£m Government (1) Finance Personal - mortgages - unsecured Property Construction ...

Page 234
Business review Risk and balance sheet management continued Balance sheet analysis: REIL, provisions and AFS reserves continued Sector and geographical regional analyses: Non-Core Credit metrics Provisions Provisions as a % as a % of of REIL gross loans % % 2012 Gross loans Â£m REIL Â£m ...

Page 235
RBS GROUP 2012 2011 Gross loans Â£m REIL Â£m Provisions Â£m REIL as a % of gross loans % Credit metrics Provisions Provisions as a % as a % of of REIL gross loans % % Impairment charge Â£m Amounts written-off Â£m Government (1) Finance Personal - mortgages - unsecured Property Construction ...

Page 236
Business review Risk and balance sheet management continued Balance sheet analysis: REIL, provisions and AFS reserves continued Sector and geographical regional analyses: Non-Core continued Credit metrics Provisions Provisions as a % as a % of of REIL gross loans % % 2010 Gross loans Â£m REIL Â£m...

Page 237
.... Analyses of provisions are set out on pages 236 to 238. Available-for-sale financial assets are initially recognised at fair value plus directly related transaction costs and are subsequently measured at fair value with changes in fair value reported in owners' equity until disposal, at which...

Page 238
Business review Risk and balance sheet management continued Balance sheet analysis: REIL, provisions and AFS reserves continued REIL and PPLs summary The table below analyses REIL between UK and overseas, based on the location of the lending office. 2012 Non-Core Â£m 2011 Non-Core Â£m 2010 Non-Core ...

Page 239
...28 1 9,805 757 637 11,200 UK Retail Â£m UK Corporate Â£m Wealth Â£m International Banking Â£m Ulster Bank Â£m US R&C (1) Â£m Total R&C (1) Â£m Markets Â£m Total Core Â£m Non-Core Â£m RFS MI Â£m Group Â£m At 1 January 2011 Intra-group transfers Currency translation and other adjustments...

Page 240
... review Risk and balance sheet management continued Balance sheet analysis: REIL, provisions and AFS reserves continued UK Retail Â£m UK Corporate Â£m Wealth Â£m International Banking Â£m Ulster Bank Â£m US R&C (1) Â£m Total R&C (1) Â£m Markets Â£m Total Core Â£m Non-Core Â£m RFS MI Â£m Group...

Page 241
... related interest rate hedge instruments. Non-Core (by donating division) Ulster US Bank R&C (1) Â£m Â£m 2012 UK Corporate Â£m International Banking Â£m Other Â£m Total Â£m Individually assessed Collectively assessed Latent loss Loans to customers Securities Charge to income statement 2011...

Page 242
... are highly collateralised, such as mortgages, will have a low coverage ratio of provisions held against the reported impaired balance. AFS reserves The table below analyses available-for-sale debt securities and related reserves, gross of tax. UK Â£m 2012 US Other (1) Â£m Â£m Total Â£m UK Â£m 2011...

Page 243
RBS GROUP 2012 AFS gross unrealised losses The table below shows the fair value of available-for-sale debt securities that were in an unrealised loss position at 31 December and the related gross unrealised losses. Less than 12 months Gross unrealised Fair value losses Â£m Â£m More than 12 months ...

Page 244
Business review Risk and balance sheet management Contents Market risk Introduction Governance Risk measurement Key principles Risk appetite Risk models Stress testing Pricing models Market risk analyses Trading revenues Daily VaR graph Trading book VaR non-trading portfolios VaR Structured credit ...

Page 245
...business lines: money markets; rates flow trading; currencies and commodities; equities; credit markets; and portfolio management and origination. Financial instruments held in the Group's trading portfolios include, but are not limited to: debt securities; loans; deposits; equities; securities sale...

Page 246
... are The Royal Bank of Scotland plc; National Westminster Bank Plc; RBS Financial Products Inc; and RBS Securities Inc. Regulatory VaR differs from the internal VaR as it is based on a tenday holding period. The approval covers general market risk in interest rate, foreign exchange, equity and...

Page 247
... RNIVs. Incremental risk charge (IRC) - The IRC model aims to quantify the impact of defaults and rating changes on the market value of bonds, credit derivatives, and other related positions held in the trading book. It is calculated over a one year horizon to a 99.9% confidence level, and therefore...

Page 248
...-to-market To ensure that the risks associated with trading activity are reflected in the financial and management statements, assets and liabilities in the trading book are measured at their fair value. Any profits or losses on the revaluation of positions are recognised in the income statement on...

Page 249
...policy. Each compliance statement requires review and sign-off from the relevant financial controller, market risk manager and front office management every six months at least. For more information on independent price verification, refer to Valuation of financial instruments carried at fair value...

Page 250
... various financial instrument types, currencies and markets. The extent of diversification benefit depends on the correlation between the assets and risk factors in the portfolio at a particular time. Key points x The Group's average and maximum credit spread VaR for 2012 was lower than for 2011...

Page 251
... across various financial instrument types, currencies and markets. The extent of diversification benefit depends on the correlation between the assets and risk factors in the portfolio at a particular time. Key points x The average and period end total and credit spread VaR were lower in 2012, due...

Page 252
... securities. Key point x The structured credit portfolio drawn notional and fair values declined across all asset classes from 31 December 2011 to 31 December 2012. Key drivers were: (i) during the first half of 2012, the liquidation of legacy trust preferred securities and commercial real estate...

Page 253
... general de-risking in sovereign and agency positions in Markets. The APR decreased significantly due to the disposal of assets and unwinding of trades. x IRC by rating and product category The following table analyses the IRC by rating and product. 2012 AAA Â£m AA Â£m A Â£m Internal ratings BBB...

Page 254
Business review Risk and balance sheet management Contents Country risk Introduction External environment Governance, monitoring and management Country risk exposure Definitions Summary Total eurozone Eurozone periphery - total Eurozone periphery - by country Eurozone non-periphery - total Eurozone...

Page 255
RBS GROUP 2012 Business review Risk and balance sheet management continued Country risk Introduction* Country risk is the risk of material losses arising from significant countryspecific events such as sovereign events (default or restructuring); economic events (contagion of sovereign default to ...

Page 256
Business review Risk and balance sheet management continued Country risk continued Governance, monitoring and management* The Group's country risk framework is set by the Executive Risk Forum (ERF), which has delegated authority to the Group Country Risk Committee (GCRC) to manage exposures within ...

Page 257
... as gross long positions (including DFV securities) and short positions per country. Impairment losses and exchange differences relating to AFS debt securities, together with interest, are recognised in the income statement. Other changes in the fair value of AFS securities are reported within AFS...

Page 258
... review Risk and balance sheet management continued Country risk: Country risk exposure continued Summary Lending Other FI Corporate Personal Â£m Â£m Â£m CDS notional Gross less fair value Derivatives Repos Â£m Â£m Â£m 2012 Govt Â£m Central banks Â£m Other banks Â£m Total Of which Net Debt...

Page 259
RBS GROUP 2012 2011 Govt Â£m Central banks Â£m Other banks Â£m Lending Other FI Corporate Personal Â£m Â£m Â£m Total Of which Net Debt lending Non-Core securities Derivatives Repos Â£m Â£m Â£m Â£m Â£m Balance sheet Â£m Offbalance sheet Â£m Total Â£m CDS notional less fair value Â£m Gross ...

Page 260
... review Risk and balance sheet management continued Country risk: Country risk exposure: Summary continued Lending Other FI Corporate Personal Â£m Â£m Â£m CDS notional Gross less fair Repos value Derivatives Â£m Â£m Â£m 2010 Govt Â£m Central banks Â£m Other banks Â£m Total Of which Net Debt...

Page 261
... in International Banking (primarily lending and off-balance sheet exposure to corporates), Markets (mostly derivatives and repos with financial institutions), Ulster Bank (mostly lending exposure to corporates and consumers in Ireland) and Group Treasury (largely AFS debt securities and liquidity...

Page 262
Business review Risk and balance sheet management continued Country risk: Country risk exposure continued Total eurozone AFS and LAR debt AFS securities reserves Â£m Â£m HFT debt securities Long Short Â£m Â£m Total debt securities Â£m Net Derivatives Â£m Balance sheet Â£m Offbalance sheet Â£m Gross ...

Page 263
... debt securities Long Short Â£m Â£m Total debt securities Â£m Net Derivatives Repos Â£m Â£m Balance sheet Â£m Offbalance sheet Â£m Gross Derivatives Repos Â£m Â£m 2012 Lending Â£m REIL Provisions Â£m Â£m AFS reserves Â£m Total Â£m Government Central bank Other banks Other FI Corporate Personal...

Page 264
... Â£m HFT debt securities Long Short Â£m Â£m Total debt securities Â£m Net Derivatives Â£m Balance sheet Â£m Offbalance sheet Â£m Gross Derivatives Repos Â£m Â£m 2012 Lending Â£m REIL Provisions Â£m Â£m Repos Â£m Total Â£m Government Central bank Other banks Other FI Corporate Personal 2011 42...

Page 265
.... Corporate x Lending exposure fell by Â£1.1 billion during 2012, driven by exchange rate movements and write-offs. Commercial real estate lending amounted to Â£10.4 billion at 31 December 2012, down Â£0.5 billion from 31 December 2011 amid continuing adverse market conditions. The commercial real...

Page 266
... Â£m Â£m HFT debt securities Long Short Â£m Â£m Total debt securities Â£m Net Derivatives Â£m Balance sheet Â£m Offbalance sheet Â£m Gross Derivatives Repos Â£m Â£m 2012 Lending Â£m REIL Provisions Â£m Â£m Repos Â£m Total Â£m Government Central bank Other banks Other FI Corporate Personal 2011...

Page 267
... bond portfolio and a decline in corporate lending, as a result of steps taken to de-risk the portfolio. x Government x The Group has an active portfolio of Spanish government debt and CDS exposures that can result in fluctuations between long and short positions for HFT debt securities. Financial...

Page 268
... HFT debt securities Long Short Â£m Â£m Total debt securities Â£m Net Derivatives Â£m Balance sheet Â£m Offbalance sheet Â£m Gross Derivatives Repos Â£m Â£m 2012 Lending Â£m REIL Provisions Â£m Â£m Repos Â£m Total Â£m Government Central bank Other banks Other FI Corporate Personal 2011 9 21...

Page 269
... Â£1.2 billion during 2012, to Â£1.9 billion. Government and central bank x The Group is an active market-maker in Italian government bonds and has an active CDS portfolio, resulting in large and fluctuating gross long and short positions in HFT debt securities. Financial institutions x The majority...

Page 270
... Â£m Â£m HFT debt securities Long Short Â£m Â£m Total debt securities Â£m Net Derivatives Â£m Balance sheet Â£m Offbalance sheet Â£m Gross Derivatives Repos Â£m Â£m 2012 Lending Â£m REIL Provisions Â£m Â£m Repos Â£m Total Â£m Government Other banks Other FI Corporate Personal 2011 - - - 336...

Page 271
RBS GROUP 2012 Key points* x The Portuguese portfolio, which is managed out of Spain, mainly consists of corporate lending and derivative trading with the largest local banks. Medium-term activity has ceased with the exception of collateralised business. Financial institutions x The remaining ...

Page 272
... Â£m Â£m HFT debt securities Long Short Â£m Â£m Total debt securities Â£m Net Derivatives Â£m Balance sheet Â£m Offbalance sheet Â£m Gross Derivatives Repos Â£m Â£m 2012 Lending Â£m REIL Provisions Â£m Â£m Repos Â£m Total Â£m Government Central bank Other banks Other FI Corporate Personal 2011...

Page 273
... under close scrutiny. Corporate x Lending exposure fell by Â£0.2 billion to Â£0.2 billion, largely due to a single name write-off in the first half of 2012. x The Group's focus is on short-term trade facilities to the domestic subsidiaries of international clients, increasingly supported by...

Page 274
... Â£m Â£m HFT debt securities Long Short Â£m Â£m Total debt securities Â£m Net Derivatives Â£m Balance sheet Â£m Offbalance sheet Â£m Gross Derivatives Repos Â£m Â£m 2012 Lending Â£m REIL Provisions Â£m Â£m Repos Â£m Total Â£m Government Other banks Other FI Corporate Personal 2011 - - 2 274...

Page 275
...Â£m HFT debt securities Long Short Â£m Â£m Total debt securities Â£m Net Derivatives Â£m Balance sheet Â£m Offbalance sheet Â£m Gross Derivatives Repos Â£m Â£m 2012 Lending Â£m REIL Provisions Â£m Â£m Repos Â£m Total Â£m Government Central bank Other banks Other FI Corporate Personal 2011 627...

Page 276
... HFT debt securities Long Short Â£m Â£m Total debt securities Â£m Net Derivatives Â£m Balance sheet Â£m Offbalance sheet Â£m Gross Derivatives Repos Â£m Â£m 2012 Lending Â£m REIL Provisions Â£m Â£m Repos Â£m Total Â£m Government Central bank Other banks Other FI Corporate Personal 2011 - 20...

Page 277
...HFT debt securities Long Short Â£m Â£m Total debt securities Â£m Net Derivatives Â£m Balance sheet Â£m Offbalance sheet Â£m Gross Derivatives Repos Â£m Â£m 2012 Lending Â£m REIL Provisions Â£m Â£m Repos Â£m Total Â£m Government Central bank Other banks Other FI Corporate Personal 2011 7 1,822...

Page 278
...Â£m HFT debt securities Long Short Â£m Â£m Total debt securities Â£m Net Derivatives Â£m Balance sheet Â£m Offbalance sheet Â£m Gross Derivatives Repos Â£m Â£m 2012 Lending Â£m REIL Provisions Â£m Â£m Repos Â£m Total Â£m Government Central bank Other banks Other FI Corporate Personal 2011 494...

Page 279
... Â£m Â£m HFT debt securities Long Short Â£m Â£m Total debt securities Â£m Net Derivatives Â£m Balance sheet Â£m Offbalance sheet Â£m Gross Derivatives Repos Â£m Â£m 2012 Lending Â£m REIL Provisions Â£m Â£m Repos Â£m Total Â£m Government Other banks Other FI Corporate Personal 2011 - 186 249...

Page 280
... Â£m Â£m HFT debt securities Long Short Â£m Â£m Total debt securities Â£m Net Derivatives Â£m Balance sheet Â£m Offbalance sheet Â£m Gross Derivatives Repos Â£m Â£m 2012 Lending Â£m REIL Provisions Â£m Â£m Repos Â£m Total Â£m Central bank Other banks Other FI Corporate Personal 2011 13 99 717...

Page 281
...LAR debt AFS securities reserves Â£m Â£m HFT debt securities Long Short Â£m Â£m Total debt securities Â£m Net Derivatives Â£m Repos Â£m Balance sheet Â£m Offbalance sheet Â£m Total Â£m Gross Derivatives R epos Â£m Â£m Government Central bank Other banks Other FI Corporate Personal 2011 126...

Page 282
..., credit risk and capital considerations as well as due to limited alternative investment opportunities. This exposure also fluctuates as part of the Group's asset and liability management. In the third quarter of 2012 the Group transferred part of its euro payment activity from the RBS N.V. account...

Page 283
Business review Risk and balance sheet management Contents Other risks Operational risk Regulatory risk Conduct risk Reputational risk Business risk Pension risk 282 285 290 291 291 292 281

Page 284
... Executive Committee acts upon all operational risk matters, and reviews and monitors the operational risk profile across the Group, in line with risk appetite. It oversees, manages and monitors operational risk strategies and frameworks, and reviews operational risk policy. It escalates and reports...

Page 285
... timely basis. Exposures for each division are reported through monthly risk and control reports, which provide detail on the risk exposures and action plans. Enhancements made during 2012 include single-source extraction and publication of operational risk data across the Group, such as operational...

Page 286
...of increased Payment Protection Insurance provisions, and new provisions in respect of Interest Rate Hedging Products and LIBOR. 2012 Â£70m Â£101m Â£2.4bn Â£138m Â£172m Â£11m 2011 Â£73m Â£13m Â£921m Clients, products and business practices Execution, delivery and process management Fraud Technology...

Page 287
... Group, namely: Key developments during 2012 included the following: Basel III Following publication by the Basel Committee on Banking Supervision in December 2010 of rules for the new Basel III capital and liquidity framework, work during 2012 focused on finalising the remaining elements of policy...

Page 288
Business review Risk and balance sheet management continued Other risks: Regulatory risk* continued Shadow banking Work in this area, which broadly refers to entities and financial transactions that fall outside the scope of existing financial (banking) regulation, such as hedge funds, money market ...

Page 289
...had not agreed its final position by the end of 2012. The new Irish Presidency of the Council plans to finalise the proposals before the end of its term in June 2013. Financial Transaction Tax - the EU Commission has previously published proposals, which would see trades in bonds and shares taxed at...

Page 290
... Credit, a review into the personal current account market and continuing work on the Retail Distribution Review ahead of its implementation on 31 December 2012. Work also continues on the Mortgage Market Review, Packaged Accounts and Simple Financial Products. Preparation for the new Financial...

Page 291
...there is a divisional Heads of Regulatory Developments forum and an RBS Americas regional forum. Reporting and internal communications activity expanded in 2012 in response to the growing regulatory change agenda. This included: Quarterly reporting to the Group Audit Committee captures all material...

Page 292
... conduct risk management is not only a commercial imperative for the Group. Customers, clients and counterparties demand it as a precursor to building trust. It also reflects the changing regulatory environment in the UK, with the establishment of the Financial Services Conduct Business Unit...

Page 293
...the execution of its Strategic Plan in restructuring its balance sheet and improving its capital and funding position. Major reforms have also been made to strengthen its risk identification, evaluation and management processes. Further work remains, but the Group is now in a much stronger financial...

Page 294
Business review Risk and balance sheet management continued Other risks continued Pension risk* The Group is exposed to risk from its defined benefit pension schemes to the extent that the assets of the schemes do not fully match the timing and amount of the schemes' liabilities. Pension scheme ...

Page 295
RBS GROUP 2012 The table below shows the sensitivity of the Main scheme's assets and liabilities (measured according to IAS 19 'Employee Benefits') to changes in interest rates and equity values at the year end, taking account of the current asset allocation and hedging arrangements. Change in ...

Page 296
...Our governance structure Our Board Executive Committee Corporate governance Report of the Group Audit Committee Report of the Board Risk Committee Directors' remuneration report Other remuneration disclosures Compliance report Report of the directors Statement of directors' responsibilities 295 297...

Page 297
... non-executive directors is extremely onerous and I am grateful for their support. The remit of the Group Remuneration Committee was reviewed during the year in light of the Group's Purpose, Vision and Values programme. Whilst the Committee already takes into account wider issues relating to people...

Page 298
...good understanding of the Group's business and can support the executive team in delivering the Group's Strategic Plan. Directors' knowledge is enhanced through site visits, in-depth board presentations and, for new directors, their induction programme. I actively encourage a culture and environment...

Page 299
... affairs of the Group. It reviews the accounting policies, financial reporting and regulatory compliance practices of the Group and the Group's system and standards of internal controls, and monitors the Group's processes for internal audit and external audit. Board Risk Committee provides oversight...

Page 300
... and chief financial officer and before that was responsible for Asset Management and Market Related businesses. Prior to that he held senior positions with Deutsche Bank, Wasserstein Perella Group and Kidder Peabody & Co. He has served on several corporate boards as a non-executive director and...

Page 301
... of Scotland Previously group chief executive of Standard Life plc. He x President of the Cockburn Association was also previously a director of the Association of British Insurers, a member of the former Chancellor of the Exchequer's High Level Group on Financial Services Board Committee membership...

Page 302
...) x Board Risk Committee x Group Nominations Committee Baroness Noakes, DBE (age 63) Date of appointment: 1 August 2011 An experienced director on UK listed company boards with extensive and varied political and public sector experience. A qualified chartered accountant, she previously headed KPMG...

Page 303
... of financial services and risk management, including previous responsibility for Aviva's continental European and International life and long-term savings businesses. He held a number of senior executive positions during his career at Aviva including his role as group finance director until...

Page 304
...main board director responsible for Products & Marketing, HR, Insurance and Cards. Before joining Abbey in 2001, Nathan spent ten years with RBS in a number of roles, including Chief Operating Officer of Treasury and Capital Markets and Group Risk Director. A Chartered Accountant, Nathan worked with...

Page 305
... to management, including to the Group Chief Executive and the Group Finance Director. These include responsibility for the operational management of the Group's businesses as well as reviewing high level strategic issues and considering risk appetite, risk policies and risk management strategies in...

Page 306
... programme of divisional presentations is agreed by the Board each year. During 2012, the Board received in-depth presentations from Direct Line Group, Wealth, Global Restructuring Group, UK Corporate, Non-Core, Ulster Bank Group, RBS Citizens Financial Group, UK Retail, Markets and International...

Page 307
... remuneration and shareholder voting rights and the draft proposals under the Capital Requirements Directive IV, as well as other regulatory consultations. Business visits are also arranged as part of the Group Audit Committee and Board Risk Committee schedule and all non-executive directors...

Page 308
... below sets out the tenure of non-executive directors. 0-2 years 2-4 years 4+ years 0-2 years 2-4 years 4+ years x The Group Nominations Committee engages with external consultants, considers potential candidates and recommends appointments of new directors to the Board. The terms of reference of...

Page 309
.... The company communicates with shareholders through the Annual Report and Accounts and by providing information in advance of the Annual General Meeting. Individual shareholders can raise matters relating to their shareholdings and the business of the Group at any time throughout the year by letter...

Page 310
.... x Throughout the year, the Chairman, Group Chief Executive, Group Finance Director and Chair of the Group Performance and Remuneration Committee communicate shareholder feedback to the Board and the directors receive independent analyst notes and reports reviewing share price movements and the...

Page 311
... certain UK branch-based businesses. x x x x the directors' going concern disclosure including the Group's capital, liquidity and funding position; the adequacy of the Group's loan impairment provisions, focusing particularly on the Ulster Bank loan portfolio and commercial real estate exposures...

Page 312
...in 2012 on ensuring that the Group had articulated an appropriate three lines of defence model that clearly stated individuals' responsibility and accountability for risk and control at all levels. This model is expected to be fully embedded in 2013 and the Group Audit Committee will closely monitor...

Page 313
... of six visits - to Risk Management (2), Internal Audit (2), Group Finance and Business Services to review the Group Change portfolio. Membership of the Group Audit Committee The Group Audit Committee is made up of at least three independent non-executive directors. The Chairman and members of the...

Page 314
...and policy The Group Audit Committee focused on a number of salient judgments and reporting issues in the preparation of the 2012 accounts, and considered: x adequacy of the Group's provision held for the mis-selling of payment protection insurance and interest rate hedging products. The Group has...

Page 315
RBS GROUP 2012 The Committee also reviewed the effectiveness of the Group New Product Approval Process and received quarterly reports from the Credit Quality Assurance function. It considered the Group's compliance with the requirements of the Sarbanes-Oxley Act of 2002 and was regularly advised of...

Page 316
... assurance to the Group in relation to a third party company where the Group is acting as equity/ debt underwriter in a transaction, in the ordinary course of business. x x bookkeeping or other services related to the accounting records or financial statements; financial information systems design...

Page 317
... control, these engagements are subject to the ad hoc approval process. Information on fees paid in respect of audit and non-audit services carried out by the External Auditors can be found in Note 5 to the consolidated accounts on page 385. Brendan Nelson Chairman of the Group Audit Committee...

Page 318
...and capital management tool. The Board Risk Committee has supported the articulation of a conduct risk appetite statement which is being embedded strategically within the Group's Policy Framework. Conduct Risk standards are being communicated to staff using the four pillars of conduct risk, employee...

Page 319
... RBS Risk Management; and To approve the RBS Risk Management annual operational plan with reference to the appropriateness of the scope and timing of proposed coverage in relation to risk. Philip Scott, Tony Di Iorio, Brendan Nelson and Baroness Noakes are also members of the Group Audit Committee...

Page 320
...The key considerations of the Committee during 2012 are explained more fully below. Risk strategy and policy The RBS Group has a clear risk strategy supported by well defined strategic risk objectives. The members of the Board Risk Committee provide input to the overarching strategy for the Group on...

Page 321
... The Committee reviewed the capital and liquidity position of the Group regularly in light of external conditions. The difficulties being experienced in Europe and the US necessitated a continued focus on market and sovereign risk over the course of 2012 and a number of additional reports in...

Page 322
... positions remain robust with key performance indicators (KPIs) on short-term wholesale funding, liquidity portfolio, leverage ratio, Core Tier 1 capital ratio and loan:deposit ratio all exceeding or in line with medium-term targets; Core Return on Equity (ROE) was 10%, with Retail & Commercial...

Page 323
...supporting the Group's purpose, vision and values aspirations. During 2012, the Committee has worked closely with the Board Risk Committee and Group Audit Committee, both of which have provided valuable input on key risk and control issues. Changes have been made to this report in line with a number...

Page 324
...end performance reviews included input from the Board Risk Committee on the risk management performance of Executive and Management Committee members; Second quarter x Outcomes of the first quarter accountability reviews; x x x x Review of remuneration proposals for Direct Line Insurance Group plc...

Page 325
... and Board Risk Committee confirmed that, for some divisions, a number of risk-related events needed to be taken account of when determining variable pay pools, including regulatory, compliance and credit and market risk issues. The Board Risk Committee has concluded that the accountability review...

Page 326
... review of the financial performance of the Divisions and Group and reports on the Group's capital position. Group Human Resources Supports the Group Performance and Remuneration Committee as they develop reward philosophy, strategy and policies across the RBS Group. Provides input on market...

Page 327
... from UNITE. The National Living Wage and London Living Wage are important benchmarks that we monitor each year as part of the annual pay review process. An annual Group-wide employee opinion survey takes place which includes a number of pay related questions. The remuneration policy applies...

Page 328
... 328 for further details Performance conditions measured over three financial years. Performance measures and relative weightings are: x Core Bank Economic Profit - 25% No change. x Total Shareholder Return (TSR) relative to comparator group of international banks - 25% Balance sheet and risk - 25...

Page 329
... payments earned in relation to 2013 performance will be deferred and will vest, subject to satisfactory performance. The actual value of the long term incentive awards will depend on performance over the period 2013 to 2015 and the share price at the time the awards vest. Group Chief Executive...

Page 330
... Director role to the business through strategic planning, budgeting, forecasting and reporting. Monitor and control Group budget. Ensure a robust capital and funding planning framework. Drive efficiency. Successful further Direct Line Insurance Group plc 'selldown' and re-plan of EU mandated branch...

Page 331
... Tax is Core Operating Profit taxed at a standard tax rate. Attributed Equity is defined as equity allocated to the Core businesses, calculated as a function of the Core businesses risk-weighted asset base. Current Cost of Equity is 11.5%, which is subject to review at least annually. Details of the...

Page 332
...value sharing between investors and employees remains a key concern for shareholders. The Committee and the Board have considered carefully their responsibilities and have applied judgement to achieve a balance whereby our remuneration policy supports business goals without causing unacceptably high...

Page 333
...only (i.e. no annual incentive or benefits). The company has agreed that, provided certain conditions are met, on leaving employment, Bruce Van Saun will not forfeit awards under the rules of the Group's share plans. Chairman and non-executive directors Information regarding the terms of appointment...

Page 334
... of Lloyd's of London Franchise Board during 2012 for which he received a pro rated fee of Â£19,450. He is also a non-executive director of Direct Line Insurance Group plc , the fees for which are paid direct to the Group and is a non-executive director of Worldpay (Ship Midco Limited) for which no...

Page 335
... first time buyers. The new Funding business. for Lending Scheme allowed RBS to cut interest rates on loans to small businesses and the cost of borrowing for first time homebuyers. Branch disposal did not proceed due to unexpected withdrawal of Santander; in contrast, Direct Line Insurance Group plc...

Page 336
... of the Finance function through changes to operating model, ways of working and systems solutions. Direct Line Insurance Group plc divestment well received by investors and the market, and is widely viewed as a "textbook" execution due to the uptake and price behaviour; branch disposal did...

Page 337
RBS GROUP 2012 Executive directors long-term incentive plan (LTIP) awards granted in 2009 and 2010 - assessment of performance outcome Awards to executive directors under the Executive Share Option Plan and Medium-term Performance Plan in 2009 did not vest in 2012 as a result of the relative and ...

Page 338
...capital, leverage and funding measures, risk appetite embedded. x x Good progress on brand franchises (e.g. 'Helpful Banking' in UK), sustainability and Two-thirds of objectives met: employee engagement 62.5%; and measures. Further work needed on cost:income Objectives met or exceeded in all ratio...

Page 339
...the company during 2012. 120 100 RBS FTSE Banks FTSE 100 80 Implementation of the Group's recovery plan started in January 2009 with the publication of the preliminary 2008 losses. The share price reached a closing low point of 10.3p per share (103p per share on a post share consolidation basis...

Page 340
... is independent. As well as receiving advice from PwC during 2012, the Committee took account at meetings of the views of the Group Chairman, Group Chief Executive, Group Finance Director, Group Human Resources Director, Group Head of Reward, Group Secretary and the Group Chief Risk Officer. 47,690...

Page 341
... under the Group's share plans The tables and explanatory notes below and on page 340 have been audited by the company's auditors, Deloitte LLP. Long-Term Incentive Plan (LTIP) No variation was made to any of the terms of the plan during the year. Awards to executive directors under the LTIP...

Page 342
... and conditions varied during the year ended 31 December 2012. No payment is required on the award of an option. The market price of the company's ordinary shares on 31 December 2012 was 324.5p and the range during the year ended 31 December 2012 was 196.6p to 325.0p. Medium-Term Performance Plan...

Page 343
...* Members of Group Executive Committee plus Group HR Director Notes: (1) Differs to 2011 disclosure with exclusion of prior year Long Term Incentive Awards which vested during 2012. (2) The Long Term Incentive Award (subject to future performance) is made following the end of the 2012 financial year...

Page 344
... for banks, building societies and investment firms (BIPRU) 11.5.18 (6) and (7). 1. Aggregate remuneration expenditure During the year, there were 368 Code Staff. Aggregate remuneration expenditure was as follows: Markets Â£m Rest of RBS Group Â£m Long term incentives Long term incentive awards...

Page 345
... risks faced by the Group, which operated throughout the year ended 31 December 2012 and to 27 February 2013, the date the directors approved the Report and Accounts. This is confirmed by a semi-annual Control Environment Certification process which requires senior members of the executive...

Page 346
... Group Board to be independent. The NYSE corporate governance listing standards also require that a compensation committee has direct responsibility to review and approve the Group Chief Executive's remuneration. As stated at the start of this Compliance report, in the case of the company, the Group...

Page 347
RBS GROUP 2012 Report of the directors The directors present their report together with the audited accounts for the year ended 31 December 2012. Group structure The company is a holding company owning the entire issued ordinary share capital of The Royal Bank of Scotland plc, the principal direct ...

Page 348
... by the end of 2014. Employees As at 31 December 2012, the Group employed 137,200 employees (fulltime equivalent basis) throughout the world. Details of employee related costs are included in Note 3 on the consolidated accounts. The Group operates certain employee share plans in which eligible...

Page 349
... relating to all stakeholder groups and reports to the Board. For more information on the Committee, see page 307. Going concern The Group's business activities and financial position, the factors likely to affect its future development and performance and its objectives and policies in managing...

Page 350
...form part of this Report of the directors. Share capital Details of the ordinary and preference share capital at 31 December 2012 and movements during the year are shown in Note 26 on the consolidated accounts. Following approval at the Group's Annual General Meeting on 30 May 2012, the sub-division...

Page 351
... issued by the company to directors, members of the Group's Executive and Management Committees and FSA Approved Persons. In terms of section 236 of the Companies Act, Qualifying Pension Scheme Indemnity Provisions have been issued to all trustees of the Group's pension schemes. Post balance sheet...

Page 352
...give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole; and x the Business review, which is incorporated into the Directors' report, includes a fair review of the development and...

Page 353
... maturity analysis Financial assets - impairments Derivatives Debt securities Equity shares Intangible assets Property, plant and equipment Prepayments, accrued income and other assets Discontinued operations and assets and liabilities of disposal groups Short positions Accruals, deferred income and...

Page 354
... financial statements of The Royal Bank of Scotland Group plc (the "company") and its subsidiaries (together the "Group") for the year ended 31 December 2012 which comprise the accounting policies, the consolidated and company balance sheets as at 31 December 2012, the consolidated income statement...

Page 355
... income statement for the year ended 31 December 2012 2012 Â£m 2011 Â£m 2010 Â£m Note Interest receivable Interest payable Net interest income Fees and commissions receivable Fees and commissions payable Income from trading activities Gain on redemption of own debt Other operating income Insurance...

Page 356
Consolidated statement of comprehensive income for the year ended 31 December 2012 2012 Â£m 2011 Â£m 2010 Â£m Note Loss for the year Other comprehensive income/(loss) Available-for-sale financial assets Cash flow hedges Currency translation Actuarial (losses)/gains on defined benefit plans Other ...

Page 357
... income and other assets Assets of disposal groups Total assets Liabilities Deposits by banks Customer accounts Debt securities in issue Settlement balances Short positions Derivatives Accruals, deferred income and other liabilities Retirement benefit liabilities Deferred tax Insurance liabilities...

Page 358
Consolidated statement of changes in equity for the year ended 31 December 2012 2012 Â£m 2011 Â£m 2010 Â£m Called-up share capital At 1 January Ordinary shares issued Share capital sub-division and consolidation Preference shares redeemed Cancellation of non-voting deferred shares At 31 December...

Page 359
RBS GROUP 2012 2012 Â£m 2011 Â£m 2010 Â£m Foreign exchange reserve At 1 January Retranslation of net assets Foreign currency gains/(losses) on hedges of net assets Tax Transfer to retained earnings Recycled to profit or loss on disposal of businesses At 31 December Capital redemption reserve At ...

Page 360
... (year ended 31 December 2010 - Â£340 million charge). The accompanying notes on pages 373 to 474, the accounting policies on pages 360 to 371 and the audited sections of the Business review: Risk and balance sheet management on pages 107 to 293 form an integral part of these financial statements...

Page 361
RBS GROUP 2012 Consolidated cash ï¬,ow statement for the year ended 31 December 2012 Note 2012 Â£m 2011 Â£m 2010 Â£m Operating activities Operating loss before tax Operating (loss)/profit before tax on discontinued operations Adjustments for: Depreciation and amortisation Write-down of ...

Page 362
... for payment services are usually debited to the customer's account monthly or quarterly in arrears. Income is accrued at period end for services provided but not yet charged. Card related services - fees from credit card business include: x Commission received from retailers for processing credit...

Page 363
...to eligible employees. For defined benefit schemes, scheme liabilities are measured on an actuarial basis using the projected unit credit method and discounted at a rate determined by reference to market yields at the end of the reporting period on high quality corporate bonds of equivalent term and...

Page 364
...on current prices for similar properties in the same location and condition. Any gain or loss arising from a change in fair value is recognised in profit or loss. Rental income from investment property is recognised on a straight-line basis over the term of the lease in Other operating income. Lease...

Page 365
... yet reported at that date. Outstanding claims provisions are not discounted for the time value of money except for claims to be settled by periodical payments. Claims handling expenses are also included. Deferred acquisition costs - acquisition costs relating to new and renewing insurance policies...

Page 366
... assets that are hedged items in fair value hedges (see Accounting policy 24). Other changes in the fair value of available-for-sale financial assets and any related tax are reported in other comprehensive income until disposal, when the cumulative gain or loss is reclassified from equity to profit...

Page 367
... accounted for as the sale of the loan and the acquisition of equity securities or investment property. Where the Group's interest in equity shares following the exchange is such that the Group controls an entity, that entity is consolidated. Impairment losses are assessed individually for financial...

Page 368
... the effective interest method (see Accounting policy 3). Fair value - fair value for a net open position in a financial liability that is quoted in an active market is the current offer price times the number of units of the instrument issued. Fair values for financial liabilities not quoted in an...

Page 369
... to equity, net of any directly attributable incremental costs and related tax. 24. Derivatives and hedging Derivative financial instruments are initially recognised, and subsequently measured, at fair value. Derivative fair values are determined from quoted prices in active markets where available...

Page 370
... affect its reported results. Pensions The Group operates a number of defined benefit pension schemes as described in Note 4 on the accounts. The assets of the schemes are measured at their fair value at the balance sheet date. Scheme liabilities are measured using the projected unit credit method...

Page 371
... rate appropriate to the business; estimation of the fair value of cashgenerating units; and the valuation of the separable assets of each business whose goodwill is being reviewed. Sensitivity to changes in assumptions is discussed in Note 17 on pages 423 and 424. General insurance claims The Group...

Page 372
... the difference between the carrying value of the loan and the discounted value of management's best estimate of future cash repayments and proceeds from any security held. These estimates take into account the customer's debt capacity and financial flexibility; the level and quality of its earnings...

Page 373
.... Equity securities (held-for-trading, designated as at fair value though profit or loss and available-for-sale) - comprise equity shares of companies or corporations both listed and unlisted. Deposits by banks and customer accounts (held-for-trading and designated as at fair value though profit or...

Page 374
... those that provide services related to the entity's investment activities) at fair value through profit or loss, rather than consolidate them. The amendments are effective from 1 January 2014. In December 2011, the IASB issued 'Offsetting Financial Assets and Financial Liabilities (Amendments to...

Page 375
RBS GROUP 2012 Notes on the consolidated accounts 1 Net interest income 2012 Â£m 2011 Â£m 2010 Â£m Loans and advances to customers Loans and advances to banks Debt securities Interest receivable Customer accounts: demand deposits Customer accounts: savings deposits Customer accounts: other time ...

Page 376
Notes on the consolidated accounts continued 2 Non-interest income 2012 Â£m 2011 Â£m 2010 Â£m Fees and commissions receivable Payment services Credit and debit card fees Lending (credit facilities) Brokerage Trade finance Investment management Other 1,368 1,088 1,480 548 314 471 440 5,709 1,498 ...

Page 377
...in 2012 in respect of Direct Line Group. Refer to Note 20 for further information. Bank levy The Finance Act 2011 introduced an annual bank levy in the UK. The levy is collected through the existing quarterly Corporation Tax collection mechanism. The levy is based on the total chargeable equity and...

Page 378
...number of persons employed in the continuing operations of the Group at 31 December, excluding temporary staff, were as follows: 2012 2011 2010 UK Retail UK Corporate Wealth International Banking Ulster Bank US Retail & Commercial Retail & Commercial Markets Central items Non-Core Business Services...

Page 379
... the Executive Share Option Plan, the Long-Term Incentive Plan and the Medium-Term Performance Plan. (4) The strike price of options and the fair value on granting awards of fully paid shares is the average market price over the five trading days preceding grant date. The number of shares and...

Page 380
Notes on the consolidated accounts continued 3 Operating expenses continued Deferred performance awards 2012 Value at grant Â£m Shares awarded (million) 2011 Value at grant Â£m Shares awarded (1) (million) 2010 Value at grant Â£m Shares awarded (1) (million) At 1 January Granted Forfeited Vested At...

Page 381
...addition 2011 has been restated to include sales incentive and long-term incentive plan expense of Â£12 million which has been reclassified in 2012, as well as Â£6 million for the UK branch-based businesses which was included in disposal groups in 2011. (2) Cash payments to all employees are limited...

Page 382
... The Group sponsors a number of pension schemes in the UK and overseas, predominantly defined benefit schemes, whose assets are independent of the Group's finances. The principal defined benefit scheme is The Royal Bank of Scotland Group Pension Fund (the "Main scheme") which accounts for 85% (2011...

Page 383
... Main scheme, which represents 85% of plan assets at 31 December 2012 (2011 and 2010 - 84%), is invested in a diversified portfolio of quoted and private equity, government and corporate fixed-interest and index-linked bonds, and other assets including property and hedge funds. The Main scheme also...

Page 384
... of the Main scheme liabilities. They have been executed at prevailing market rates and within standard market bid/offer spreads. The majority of swaps are with The Royal Bank of Scotland plc and National Westminster Bank Plc (the "banks"). At 31 December 2012, the gross notional value of the swaps...

Page 385
RBS GROUP 2012 Changes in value of net pension deficit At 1 January 2011 Currency translation and other adjustments Income statement Expected return Interest cost Current service cost Past service cost Statement of comprehensive income - Actuarial gains and losses Contributions by employer ...

Page 386
... statement of comprehensive income, of which Â£5,367 million losses (2011 Â£3,589 million; 2010 - Â£3,252 million) relate to the Main scheme. History of defined benefit schemes Fair value of plan assets Present value of defined benefit obligations Net deficit 2012 Â£m 2011 Â£m Main scheme 2010...

Page 387
...Notes: (1) Includes fees of Â£1.0 million (2011 - Â£0.8 million) in relation to reviews of interim financial information, Â£2.9 million (2011 - Â£2.4 million) in respect of reports to the Group's regulators in the UK and overseas, Â£0.5 million (2011 - Â£1.0 million) in respect of internal controls...

Page 388
... and write-downs - UK bank levy - regulatory fines - employee share schemes - other disallowable items Non-taxable items - gain on sale of RBS Aviation Capital - gain on sale of Global Merchant Services - gain on redemption of own debt - other non-taxable items Taxable foreign exchange movements...

Page 389
... in respect of equity preference shares for payment on 28 March 2013. 8 Ordinary dividends The company did not pay an ordinary dividend in 2012, 2011 or 2010. 9 Earnings per ordinary and B share Earnings per ordinary and B share have been calculated based on the following: 2012 Â£m 2011 Â£m 2010...

Page 390
...Deposits by banks - repos - other (3) Customer accounts - repos - other (4) Debt securities in issue (5) Settlement balances Short positions Derivatives Accruals, deferred income and other liabilities Retirement benefit liabilities Deferred tax Subordinated liabilities Liabilities of disposal groups...

Page 391
...506,867 Liabilities Deposits by banks - repos - other (3) Customer accounts - repos - other (4) Debt securities in issue (5) Settlement balances Short positions Derivatives Accruals, deferred income and other liabilities Retirement benefit liabilities Deferred tax Insurance liabilities Subordinated...

Page 392
...453,576 Liabilities Deposits by banks - repos - other (3) Customer accounts - repos - other (4) Debt securities in issue (5) Settlement balances Short positions Derivatives Accruals, deferred income and other liabilities Retirement benefit liabilities Deferred tax Insurance liabilities Subordinated...

Page 393
... GROUP 2012 Amounts included in the consolidated income statement: 2012 Â£m 2011 Â£m 2010 Â£m (Losses)/gains on financial assets/liabilities designated as at fair value through profit or loss (Losses)/gains on disposal or settlement of loans and receivables (2,612) (76) 1,761 59 279 267 Notes...

Page 394
... income statement would have been Impairment recognised had releases/ reclassification Income (losses) not occurred Â£m Â£m Â£m (Increase)/ reduction in profit or loss as a result of reclassification Â£m 2011 Carrying value Â£m Fair value Â£m Reclassified from HFT to LAR Loans Debt securities...

Page 395
... the trading businesses and provides a ratification to the appropriateness of areas with high levels of residual valuation uncertainty. Committee members include the Group Finance Director, the Group Chief Accountant, the Group Head of Market and Insurance Risk, the Markets Chief Financial Officer...

Page 396
... readily available for equity shares listed on the world's major stock exchanges and for major indices on such shares. Commodity prices - many commodities are actively traded in spot and forward contracts and futures on exchanges in London, New York and other commercial centres. Price volatilities...

Page 397
... the revised risk mitigation strategy that is now in place. There were no other changes to valuation methodologies. 2012 Â£m 2011 Â£m 2010 Â£m Credit valuation adjustments (CVA) - monoline insurers - credit derivative product companies - other counterparties Bid-offer, liquidity, funding, valuation...

Page 398
... Fair value positions are adjusted to bid or offer levels, by marking individual cash based positions directly to bid or offer or by taking bidoffer reserves calculated on a portfolio basis for derivatives exposures. The bid-offer approach is based on current market spreads and standard market...

Page 399
... in the income statement. Own credit The Group takes into account the effect of its own credit standing when valuing financial liabilities recorded at fair value in accordance with IFRS. Own credit spread adjustments are made to issued debt held at fair value, including issued structured notes, and...

Page 400
... equate to the reported profit or loss for own credit. The balance sheet reserves are stated by conversion of underlying currency balances at spot rates for each period, whereas the income statement includes intra-period foreign exchange sell-offs. Key points x The own credit adjustment decreased...

Page 401
... collateral Other Loans and advances to customers Reverse repos Derivative collateral Other Debt securities UK government US government Other government Corporate Financial institutions Of which ABS RMBS CMBS CDO CLO Other Equity shares Derivatives Foreign exchange Interest rate Credit Equities and...

Page 402
...most government agency securities, investment-grade corporate bonds, certain mortgage products, including CLOs, most bank loans, repos and reverse repos, less liquid listed equities, state and municipal obligations, most notes issued, and certain money market securities and loan commitments and most...

Page 403
... Of which AFS debt securities Corporate Financial institutions Of which AFS ABS RMBS CMBS CDO CLO Other Equity shares Total AFS assets Liabilities Deposits by bank Customer accounts Debt securities in issue Short positions Derivatives Foreign exchange Interest rate Credit Equities and commodities...

Page 404
... correlation, volatility correlation, long dated volatility, dividends correlation, counterparty credit risk, volatility Liabilities Customer accounts Debt securities in issue Short positions Derivatives Foreign exchange Interest rate Equities and commodities Credit Proprietary model Proprietary...

Page 405
...level. For example, a single name corporate credit default swap could be in level 2 or level 3 depending on whether the reference counterparty is liquid or illiquid. As part of the Group's IPV process, data is gathered at a trade level from market trading activity, trading systems, pricing services...

Page 406
...the 2008 financial crisis. Factors that affect the value, or liquidation level, of these loans are geographic location, current loan-to-value, condition of the home, and availability of eligible buyers. The loans are serviced by various mortgage servicers. Operations and the Front Office monitor the...

Page 407
... in corporate private equity funds, debt funds and fund of hedge funds. Externally managed funds are valued using recent prices where available. Where not available, the fair value of investments in externally managed funds is generally determined using statements or other information provided...

Page 408
Notes on the consolidated accounts continued 11 Financial instruments - valuation continued Credit derivatives The Group's other credit derivatives include vanilla and bespoke portfolio tranches, gap risk products and certain other unique trades. Valuation of single name credit derivatives is ...

Page 409
RBS GROUP 2012 Other considerations Valuation adjustments CVA applied to derivative exposures to other counterparties and own credit adjustments applied to derivative liabilities (DVA) are calculated on a portfolio basis. Whilst the methodology used to calculate each of these adjustments references...

Page 410
... relating to instruments held at year end Changes in fair value Other Â£m Â£m Level 3 transfers In Â£m Out Issuances Purchases Settlements Â£m Â£m Â£m Â£m Foreign Sales exchange Â£m Â£m At 31 December Â£m 2012 Assets FVTPL (3) Loans and advances - banks - customers Debt securities Equity shares...

Page 411
...Level 3 transfers In Â£m Out Â£m Issuances Purchases Settlements Â£m Â£m Â£m At Foreign Sales exchange 31 December Â£m Â£m Â£m Amounts recorded in the income statement relating to instruments held at year end Â£m Assets FVTPL (3) Loans and advances - banks - customers Debt securities Equity shares...

Page 412
...of level 3 Â£m Issuances Â£m Purchases Â£m Settlements Â£m Sales Â£m Foreign exchange Â£m At 31 December Â£m Amounts recorded in the income statement relating to instruments held at year end Â£m Assets FVTPL (3) Loans and advances - banks - customers Debt securities Equity shares Derivatives...

Page 413
... reflects stressed markets for commercial real estate loans, in both Non-Core and Core as well as high loan to value tracker mortgages. Debt securities Fair values are determined using discounted cash flow valuation techniques. Deposits by banks and customer accounts Fair values of deposits are...

Page 414
... months Â£m Total Â£m Assets Cash and balances at central banks Loans and advances to banks Loans and advances to customers Debt securities Equity shares Settlement balances Derivatives Liabilities Deposits by banks Customer accounts Debt securities in issue Settlement balances and short positions...

Page 415
... GROUP 2012 2012 0-3 months Â£m 3-12 months Â£m 1-3 years Â£m 3-5 years Â£m 5-10 years Â£m 10-20 years Â£m Assets by contractual maturity Cash and balances at central banks Loans and advances to banks Debt securities Settlement balances Total maturing assets Loans and advances to customers...

Page 416
... on the consolidated accounts continued 12 Financial instruments - maturity analysis continued 2011 0-3 months Â£m 3-12 months Â£m 1-3 years Â£m 3-5 years Â£m 5-10 years Â£m 10-20 years Â£m Assets by contractual maturity Cash and balances at central banks Loans and advances to banks Debt securities...

Page 417
RBS GROUP 2012 2010 0-3 months Â£m 3-12 months Â£m 1-3 years Â£m 3-5 years Â£m 5-10 years Â£m 10-20 years Â£m Assets by contractual maturity Cash and balances at central banks Loans and advances to banks Debt securities Settlement balances Other financial assets Total maturing assets Loans ...

Page 418
Notes on the consolidated accounts continued 13 Financial assets - impairments continued Impairment losses charged to the income statement Loans and advances to customers Loans and advances to banks Debt securities Equity shares 2012 Â£m 2011 Â£m 2010 Â£m 5,292 23 5,315 (67) 31 (36) 5,279 7,241 - ...

Page 419
... value hedge relationships of interest rate risk, the hedged items are typically government bonds, large corporate fixed-rate loans, fixed rate finance leases, fixed rate medium-term notes or preference shares classified as debt. At 31 December 2012, fixed rate financial assets of Â£25 billion (2011...

Page 420
... follows: 2012 Assets Â£m 2011 Assets Â£m 2010 Assets Â£m Liabilities Â£m Liabilities Â£m Liabilities Â£m Fair value hedging Interest rate contracts Cash flow hedging Interest rate contracts Net investment hedging Exchange rate contracts Hedge ineffectiveness recognised in other operating income...

Page 421
RBS GROUP 2012 15 Debt securities Central and local government 2012 UK Â£m US Â£m Other Â£m Banks Â£m Other financial institutions Â£m Corporate Â£m Total Â£m Of which ABS (1) Â£m Held-for-trading Designated as at fair value through profit or loss Available-for-sale Loans and receivables 7,692...

Page 422
... shares in discontinued operations. Dividend income from available-for-sale equity shares was Â£59 million (2011 - Â£54 million; 2010 - Â£59 million). Unquoted equity investments whose fair value cannot be reliably measured are carried at cost and classified as available-for-sale financial assets...

Page 423
RBS GROUP 2012 17 Intangible assets Goodwill Â£m Core deposit intangibles Â£m Other purchased intangibles Â£m Internally generated software Â£m Total Â£m 2012 Cost At 1 January Transfers to disposal groups Currency translation and other adjustments Acquisition of subsidiaries Additions Disposals ...

Page 424
..., ABN AMRO, Charter One and Churchill and are as follows: Goodwill at 30 September UK Retail UK Corporate Wealth International Banking US Retail & Commercial Direct Line Group (1) Goodwill at 30 September UK Retail UK Corporate Wealth Global Transaction Services US Retail & Commercial Direct Line...

Page 425
... strategies for its investment in Citizens Financial Group (CFG). The Group has announced plans for a partial IPO of CFG over the medium term, likely two years. Notwithstanding this planned course of action, the recoverable amount of the US Retail & Commercial CGU remains its value in use. Direct...

Page 426
... Short leasehold premises Â£m Computers and other equipment Â£m Operating lease assets Â£m 2012 Total Â£m Cost or valuation At 1 January Transfers (to)/from disposal groups Currency translation and other adjustments Reclassifications Additions Expenditure on investment properties Change in fair...

Page 427
RBS GROUP 2012 2011 Investment properties Â£m Freehold premises Â£m Long leasehold premises Â£m Short leasehold premises Â£m Computers and other equipment Â£m Operating lease assets Â£m Total Â£m Cost or valuation At 1 January Transfers to disposal groups Currency translation and other ...

Page 428
Notes on the consolidated accounts continued 18 Property, plant and equipment continued Investment properties are valued to reflect fair value, that is, the market value of the Group's interest at the reporting date excluding any special terms or circumstances relating to the use or financing of the...

Page 429
RBS GROUP 2012 20 Discontinued operations and assets and liabilities of disposal groups In October 2012, the Group completed the successful initial public offering of Direct Line Insurance Group plc ('DLG'), selling 34.7% of its interest. The Group's plan is to cede control by 31 December 2013 and ...

Page 430
... disposal groups 2012 Direct Line Group Â£m Other Â£m Total Â£m 2011 Â£m 2010 Â£m Assets of disposal groups Cash and balances at central banks Loans and advances to banks Loans and advances to customers Debt securities and equity shares Derivatives Intangible assets Settlement balances Property...

Page 431
... income before tax Tax credit/(charge) 20 (11) (3) 6 2 8 129 (4) (1) 124 (35) 89 87 (3) 11 95 (27) 68 (e) Direct Line Group assets and liabilities General insurance business assets and liabilities Loans and advances to banks Loans and advances to customers Debt securities and equity shares...

Page 432
... and the Financial Ombudsman Service on the handling of Payment Protection Insurance (PPI) complaints in accordance with FSA Policy Statement PS 10/12. The statement sets out the framework for reviewing individual complaints. It also requires firms to undertake root cause analysis; proactive contact...

Page 433
... Note 32. (6) Arising out of its normal business operations, the Group is party to legal proceedings in the United Kingdom, the United States and other jurisdictions. Litigation provisions at 31 December 2012 related to numerous proceedings; no individual provision is material. Detailed descriptions...

Page 434
.... 2012 Â£m 2011 Â£m 2010 Â£m UK tax losses carried forward - The Royal Bank of Scotland plc - UK branch of RBS N.V. - National Westminster Bank Plc - RBS Management Services (UK) Ltd Overseas tax losses carried forward - Ulster Bank Ireland - RBS Citizens Financial Group - RBS N.V. Australia - RBS...

Page 435
... once the remaining activities have been transferred. The UK Branch tax losses attributable to credit market write-downs during the financial crisis were principally incurred between 2007 and 2009. The Royal Bank of Scotland plc reported a taxable profit in 2011 and a tax loss in 2012. The tax loss...

Page 436
... of two years from 1 April 2011, unless in any such case there is a legal obligation to do so. RBS Holdings N.V. and its group companies are also subject to restrictions on the exercise of call rights in relation to their other hybrid capital instruments. Certain preference shares issued by the...

Page 437
RBS GROUP 2012 The following tables analyse the remaining contractual maturity of subordinated liabilities by the final redemption date; and by the next call date. 2013 Â£m 2014 Â£m 2015-2017 Â£m 2018-2022 Â£m Thereafter Â£m Perpetual Â£m Total Â£m 2012 - final redemption Sterling US dollar Euro ...

Page 438
Notes on the consolidated accounts continued 24 Subordinated liabilities continued Dated loan capital Capital treatment 2012 Â£m 2011 Â£m 2010 Â£m The Royal Bank of Scotland Group plc US$300 million 6.375% subordinated notes 2011 (1) US$750 million 5% subordinated notes 2013 (1) US$750 million 5% ...

Page 439
... by the Royal Bank of Scotland. (3) Partially repurchased following completion of an exchange offer in March 2012. (4) Issuing entity transferred from being a subsidiary of RBS N.V. to RBS Group in October 2012. (5) In the event of certain changes in tax laws, dated loan capital issues may be...

Page 440
... on the consolidated accounts continued 24 Subordinated liabilities continued Undated loan capital Capital treatment 2012 Â£m 2011 Â£m 2010 Â£m The Royal Bank of Scotland Group plc US$106 million undated floating rate primary capital notes (callable semi-annually from December 1990) (1,2) US$762...

Page 441
RBS GROUP 2012 Preference shares Capital treatment 2012 Â£m 2011 Â£m 2010 Â£m The Royal Bank of Scotland Group plc (1) Non-cumulative preference shares of US$0.01 Series F US$156 million 7.65% (callable any time from March 2007) (2) Series H US$242 million 7.25% (callable any time from March 2004)...

Page 442
Notes on the consolidated accounts continued 25 Non-controlling interests Direct Line Insurance Group plc Â£m ABN AMRO Â£m Other interests Â£m Total Â£m At 1 January 2011 Currency translation and other adjustments (Loss)/profit attributable to non-controlling interests - continuing operations - ...

Page 443
RBS GROUP 2012 26 Share capital 1 January 2012 Â£m Allotted, called up and fully paid Issued Share during sub-division and the year consolidation Â£m Â£m 31 December 2012 Â£m Ordinary shares of 25p (1) Ordinary shares of Â£1 (1) B shares of Â£0.01 Dividend access share of Â£0.01 Non-cumulative ...

Page 444
... than 75% of the company's issued ordinary share capital. The dividend access share entitles the holder to dividends equal to the greater of 7% of the aggregate issue price of B shares issued to HM Treasury and 250% of the ordinary dividend rate multiplied by the number of B shares issued, less any...

Page 445
...Group has an obligation to pay dividends are classified as debt; those where distributions are discretionary are classified as equity. The conversion rights attaching to the convertible preference shares may result in the Group delivering a variable number of equity shares to preference shareholders...

Page 446
... any of its direct or indirect subsidiaries (excluding companies in the RBS Holdings N.V. Group, which are subject to different restrictions) would pay external investors any dividends or coupons on existing hybrid capital instruments (including preference shares, B shares and upper and lower tier...

Page 447
...763) (3,867) (20) (245) (263) (528) 3,230 6,793 4,817 14,840 997 2,388 998 4,383 2012 Â£m 2011 Â£m 2010 Â£m Nature of operating lease assets on the balance sheet Transportation Cars and light commercial vehicles Other 1,432 606 165 2,203 1,549 995 161 2,705 6,162 1,016 208 7,386 Amounts...

Page 448
Notes on the consolidated accounts continued 28 Leases continued Residual value exposures The table below gives details of the unguaranteed residual values included in the carrying value of finance lease receivables (see pages 388 to 391) and operating lease assets (see pages 424 to 426). Year in ...

Page 449
.... Asset type (1) Mortgages - UK (RMBS) - UK (covered bonds) - Irish UK credit cards UK personal loans Other loans (4) Cash deposits (5) Assets Â£m 2012 Debt securities in issue Held by third Held by the parties (2) Group (3) Â£m Â£m Total Â£m Assets Â£m 2011 Debt securities in issue Held...

Page 450
... repurchase transactions included on the balance sheet, are set out below. All of these securities could be sold or repledged by the holder. Assets subject to securities repurchase agreements or security lending transactions Debt securities Equity shares 2012 Â£m 2011 Â£m 2010 Â£m 91,173 6,772...

Page 451
... to the SPE, but credit derivatives are used to transfer the credit risk of the assets to an SPE. Securities may then be issued by the SPE to investors, on the back of the credit protection sold to the Group by the SPE. Residential and commercial mortgages and credit card receivables form the types...

Page 452
... and other aspects relating to the Group's consolidated conduits are set out below. 2012 Non-Core Â£m Total Â£m 2011 Non-Core Â£m Total Â£m 2010 Non-Core Â£m Total Â£m Core Â£m Core Â£m Core Â£m Total assets held by the conduits Commercial paper issued (1) Liquidity and credit enhancements Deal...

Page 453
RBS GROUP 2012 31 Capital resources The Group's regulatory capital resources in accordance with Financial Services Authority (FSA) definitions were as follows: Shareholders' equity (excluding non-controlling interests) Shareholders' equity per balance sheet Preference shares - equity Other equity ...

Page 454
Notes on the consolidated accounts continued 31 Capital resources continued Qualifying Tier 2 capital Undated subordinated debt Dated subordinated debt, net of amortisation Unrealised gains on AFS equity shares Collectively assessed impairment provisions Non-controlling Tier 2 capital 2012 Â£m 2011 ...

Page 455
... of credit, supporting customer debt issues and contingent liabilities relating to customer trading activities such as those arising from performance and customs bonds, warranties and indemnities. Commitments Commitments to lend - under a loan commitment the Group agrees to make funds available to...

Page 456
... companies, pension schemes and others. The assets and their income are not included in the Group's financial statements. The Group earned fee income of Â£476 million (2011 - Â£502 million; 2010 - Â£629 million) from these activities. The Financial Services Compensation Scheme The Financial Services...

Page 457
...Kingdom. Other securitisation and securities related litigation in the United States There continues to be a high level of litigation activity in the financial services industry focused on residential mortgage and credit crisis related matters. As a result, the Group has become the subject of claims...

Page 458
Notes on the consolidated accounts continued 32 Memorandum items continued Group companies have been named as defendants in their various roles as issuer, depositor and/or underwriter in a number of claims in the United States that relate to the securitisation and securities underwriting businesses....

Page 459
... Financial Services Authority in the United Kingdom, the United States Commodity Futures Trading Commission and the United States Department of Justice (DOJ) in relation to investigations into submissions, communications and procedures around the setting of the London Interbank Offered Rate (LIBOR...

Page 460
Notes on the consolidated accounts continued 32 Memorandum items continued Interest rate hedging products In June 2012, following an industry wide review, the FSA announced that the Group and other UK banks had agreed to a redress exercise and past business review in relation to the sale of interest...

Page 461
... secured agreement from the banks on four industry-wide initiatives designed to address its concerns, namely minimum standards on the operation of opt-outs from unarranged overdrafts, new working groups on information sharing with customers, best practice for PCA customers in financial difficulties...

Page 462
... challenge and rebuttal by RBS Citizens. Although there has been disruption in the ability of certain financial institutions operating in the United States to complete foreclosure proceedings in respect of US mortgage loans in a timely manner (or at all) over the last year (including as a result of...

Page 463
... limitations and/or conditions. In March 2008, the Group was advised by the SEC that it had commenced a non-public, formal investigation relating to the Group's United States sub-prime securities exposures and United States residential mortgage exposures. In September 2012, SEC staff communicated...

Page 464
...by banks and customers (Decrease)/increase in insurance liabilities Decrease in debt securities in issue (Decrease)/increase in other liabilities (Decrease)/increase in derivative liabilities (Decrease)/increase in settlement balances and short positions Changes in operating liabilities Income taxes...

Page 465
... of subordinated liabilities Net cash inflow/(outflow) from financing Transfer to retained earnings Share capital sub-division and consolidation Ordinary shares issued in respect of employee share schemes Other adjustments including foreign exchange (1) At 31 December 52,972 120 - - - - - 120...

Page 466
... financial services primarily through the Citizens and Charter One brands. US Retail & Commercial is engaged in retail and corporate banking activities through its branch network in 12 states in the United States and through non-branch offices in other states. Markets is a leading origination, sales...

Page 467
... UK Corporate Wealth International Banking Ulster Bank US Retail & Commercial Markets Direct Line Group (1) Central items Core Non-Core Managed basis Reconciling items Own credit adjustments Asset Protection Scheme Payment Protection Insurance costs Interest Rate Hedging Products redress and related...

Page 468
... losses Â£m Operating profit/(loss) Â£m UK Retail UK Corporate Wealth International Banking Ulster Bank US Retail & Commercial Markets Direct Line Group (1) Central items Core Non-Core Managed basis Reconciling items Own credit adjustments Asset Protection Scheme Payment Protection Insurance costs...

Page 469
... expenses and insurance Total income claims Â£m Â£m Depreciation and amortisation Â£m Impairment losses Â£m Operating profit/(loss) Â£m UK Retail UK Corporate Wealth International Banking Ulster Bank US Retail & Commercial Markets Direct Line Group (1) Central items Core Non-Core Managed basis...

Page 470
... Â£m 2011 Inter segment Â£m 2010 Inter segment Â£m Total income UK Retail UK Corporate Wealth International Banking Ulster Bank US Retail & Commercial Markets Direct Line Group (1) Central items Core Non-Core Managed basis Reconciling items Own credit adjustments Asset Protection Scheme Integration...

Page 471
...segment Â£m Total Â£m Total revenue UK Retail UK Corporate Wealth International Banking Ulster Bank US Retail & Commercial Markets Direct Line Group Central items Core Non-Core Managed basis Reconciling items Own credit adjustments Asset Protection Scheme Integration and restructuring costs Gain on...

Page 472
... consolidated accounts continued 38 Segmental analysis continued Segmental analysis of assets and liabilities included in disposal groups: 2012 Assets Â£m Liabilities Â£m 2011 Assets Â£m Liabilities Â£m 2010 Assets Â£m Liabilities Â£m UK Retail UK Corporate International Banking Markets Direct Line...

Page 473
... from trading activities Other operating income/(loss) Insurance premium income (net of reinsurers' share) Total income Operating profit/(loss) before tax Total assets Of which total assets held for sale Total liabilities Of which total liabilities held for sale Net assets attributable to equity...

Page 474
...No directors are accruing benefits under defined benefit schemes (2011 - nil). One director is accruing benefits under a money purchase scheme (2011 - one). The executive directors may participate in the company's long-term incentive plans, executive share option and sharesave schemes and details of...

Page 475
... personal current accounts in the UK. These commitments ran for two years and were completed by the end of February 2011. Bank of England facilities The Group also participates in a number of schemes operated by the Bank of England available to eligible banks and building societies. x Open market...

Page 476
...As at 31 December 2012, the Group had borrowed UK treasury bills with a fair value Â£749.million under the scheme. Other related parties (a) In their roles as providers of finance, Group companies provide development and other types of capital support to businesses. These investments are made in the...

Page 477
... 2012 Note 2012 Â£m 2011 Â£m 2010 Â£m Assets Loans and advances to banks Loans and advances to customers Debt securities Investments in Group undertakings Derivatives Prepayments, accrued income and other assets Total assets Liabilities Deposits by banks Customer accounts Debt securities in issue...

Page 478
Parent company ï¬nancial statements and notes continued Statement of changes in equity for the year ended 31 December 2012 2012 Â£m 2011 Â£m 2010 Â£m Called-up share capital At 1 January Ordinary shares issued Share capital sub-division and consolidation Preference shares redeemed Cancellation of ...

Page 479
RBS GROUP 2012 2012 Â£m 2011 Â£m 2010 Â£m Retained earnings At 1 January Loss attributable to ordinary and B shareholders and other equity owners Equity preference dividends paid Paid-in equity dividends paid, net of tax Transfer from paid-in equity - gross - tax Redemption of equity preference ...

Page 480
... statement for the year ended 31 December 2012 Note 2012 Â£m 2011 Â£m 2010 Â£m Operating activities Operating loss before tax Profit on disposal of investment in subsidiaries Adjustments for: Write-down of investment in subsidiaries Interest on subordinated liabilities Impairment of loans to Group...

Page 481
...changes in fair value in respect of the risk that is hedged. The accounting policies that are applicable to the company are included in the Group accounting polices which are set out on pages 360 to 371 of the Group financial statements, except that it has no policy regarding 'Basis of consolidation...

Page 482
... the balance sheet. 2012 Carrying value Â£bn Fair value Â£bn 2011 Carrying value Â£bn Fair value Â£bn 2010 Carrying value Â£bn Fair value Â£bn Assets Loans and advances to banks Loans and advances to customers Debt securities Liabilities Deposits by banks Customer accounts Debt securities in issue...

Page 483
... payable up to a period of 20 years from the balance sheet date, including future payments of interest. 2012 0-3 months Â£m 3-12 months Â£m 1-3 years Â£m 3-5 years Â£m 5-10 years Â£m 10-20 years Â£m Deposits by banks Customer accounts Debt securities in issue Subordinated liabilities 6 18 1,975 85...

Page 484
... an accounting reference date of 31 December. Nature of business Country of incorporation and principal area of operation Group interest The Royal Bank of Scotland plc National Westminster Bank Plc (1) RBS Citizens Financial Group, Inc. Coutts & Company (2) RBS Securities Inc. Direct Line Insurance...

Page 485
... 485 548 417 435 621 354 291 413 6,459 198 485 488 162 444 2 30 - 1,111 483 546 4 16 449 619 353 290 411 6,685 Notes: (1) On-lent to The Royal Bank of Scotland plc on a subordinated basis. (2) The call is on the underlying security in the partnership, rather than the internal issued debt. 483

Page 486
... terms of the preference shares are given in Note 26 on the consolidated accounts. (2) Partially repurchased following completion of the exchange and tender offers in May 2010. (3) Partially converted into ordinary shares in the company in 2010. 11 Share capital Details of the company's share...

Page 487
... deposits by banks and customers Increase/(decrease) in debt securities in issue Decrease in other liabilities Decrease in derivative liabilities Increase in settlement balances and short positions Changes in operating liabilities Income taxes paid Net cash (outflow)/inflow from operating activities...

Page 488
...16 Directors' and key management remuneration The directors' and key management of the Group and company are the same. Note 39 on the consolidated accounts on page 472 provides detailed disclosures. 17 Related parties Key management had no reportable transactions or balances with the company. 486

Page 489
Additional information Contents Financial summary Exchange rates Economic and monetary environment Supervision Description of property and equipment Major shareholders Material contracts Risk factors 488 498 499 500 501 501 501 503 487

Page 490
... in 2011. Summary consolidated balance sheet Loans and advances Debt securities and equity shares Derivatives and settlement balances Other assets Total assets Owners' equity Non-controlling interests Subordinated liabilities Deposits Derivatives, settlement balances and short positions Other...

Page 491
... year end - Â£ Market capitalisation at year end - Â£bn Net asset value per ordinary and B share - Â£ Return on average total assets (3) Return on average ordinary and B shareholders' equity (4) Average owners' equity as a percentage of average total assets Risk asset ratio - Tier 1 Risk asset ratio...

Page 492
..., the Group has a portfolio of interest only loans including mortgages linked to endowment policies and to personal equity plans, individual savings accounts and personal pension arrangements. From December 2012, the Royal Bank and NatWest no longer offer interest only residential mortgages: buy-to...

Page 493
... accounting policies and key sources of estimation uncertainty' on page 368. The following table shows the movements in loan impairment provisions. 2012 Â£m 2011 Â£m 2010 Â£m 2009 Â£m 2008 Â£m Provisions at the beginning of the year Domestic Foreign Transfer from/(to) disposal groups Domestic...

Page 494
... ratios, closing customer provisions and customer charge relating to loans and advances to banks are excluded. The following table shows additional information in respect of loan impairment provisions. 2012 Â£m 2011 Â£m 2010 Â£m 2009 Â£m 2008 Â£m Loan impairment provisions at end of year Customers...

Page 495
... area and type of domestic customer. 2012 Â£m 2011 Â£m 2010 Â£m 2009 Â£m 2008 Â£m Domestic Manufacturing Construction Finance Service industries and business activities Property Residential mortgages Personal lending Finance leases and instalment credit Total domestic Foreign Total recoveries...

Page 496
... of the United Kingdom domestic transactions of the Group. 'Foreign' comprises the Group's transactions conducted through offices outside the UK and through those offices in the UK specifically organised to service international banking transactions. (2) The write-off of impaired loans affects the...

Page 497
... than 0.5% of the Group's total assets. None of these countries have experienced repayment difficulties that have required restructuring of outstanding debt. Government Â£m Banks Â£m Other Â£m Total Â£m Short positions Â£m Net of short positions Â£m 2012 United States France Germany Netherlands...

Page 498
Additional information continued Financial summary continued Analysis of deposits - product analysis The following table analyses the Group's deposits by type and geographical area. 2012 Â£m 2011 Â£m 2010 Â£m UK Domestic Demand deposits - interest-free - interest-bearing Time deposits - savings - ...

Page 499
... shows details of the Group's certificates of deposit and other time deposits over $100,000 or equivalent by remaining maturity. Over 3 months but within 6 months Â£m Over 6 months but within 12 months Â£m 2012 Within 3 months Â£m Over 12 months Â£m Total Â£m UK based companies and branches...

Page 500
...year (1) Consolidation rate (2) Period end rate Average rate for the year Notes: (1) The average of the Noon Buying Rates on the last US business day of each month during the year. (2) The rates used by the Group for translating US dollars into sterling in the preparation of its financial statements...

Page 501
... rooted in high levels of debt and stresses in the financial system, growth is slower than in the typical recovery. That was the experience again in 2012 in the major markets in which the Group operates. In the UK, growth weakened. Total economic activity, as measured by gross domestic product (GDP...

Page 502
...Coutts & Co, Adam & Company Investment Management Limited, and in the Markets and International Banking divisions, through RBS Asset Management Limited and The Royal Bank of Scotland plc. General insurance business is principally undertaken by U K Insurance Limited. The Group is subject to extensive...

Page 503
... The Group operates from a number of locations worldwide, principally in the UK. At 31 December 2012, the Royal Bank and NatWest had 617 and 1,452 retail branches, respectively, in the UK. Ulster Bank has a foot print of 236 branches and an extensive network of business banking offices across...

Page 504
... to which the Royal Bank agreed to sell its aircraft leasing business, RBS Aviation Capital, to SMBC, acting on behalf of a consortium comprising its parent, Sumitomo Mitsui Financial Group, and Sumitomo Corporation. The sale completed on 1 June 2012 following satisfaction of various conditions. As...

Page 505
... and third quarters of 2012, continuing risk of sovereign default relating to certain EU member states had a negative impact on capital and credit markets. These challenging economic and market conditions create a difficult operating environment for the Group's businesses, which is characterised...

Page 506
... changes to the competitive landscape could adversely affect the Group's business, margins, profitability, financial condition and prospects. The Group is subject to political risks The Group and the Royal Bank, its principal operating subsidiary, are both headquartered and incorporated in Scotland...

Page 507
... 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. Market and credit related risks The Group's earnings and financial condition have been, and its future earnings and...

Page 508
... income statement as a profit or loss. The performance of financial markets affects bond, equity and commodity prices, which has caused, and may in the future cause, changes in the value of the Group's investment and trading portfolios. As part of its ongoing derivatives operations, the Group also...

Page 509
... of pension fund assets is not sufficient to cover potential obligations The Group maintains a number of defined benefit pension schemes for past and a number of current employees. Pension risk is the risk that the assets of the Group's various defined benefit pension schemes which are long-term in...

Page 510
... a result of such payment. At 31 December 2012, the Group's Tier 1 and Core Tier 1 capital ratios were 12.4% and 10.3%, respectively, calculated in accordance with FSA requirements. Any change that limits the Group's ability to manage effectively its balance sheet and capital resources going forward...

Page 511
...loss of customer deposits, and may also limit the Group's access to capital and money markets and trigger additional collateral requirements in derivatives contracts and other secured funding arrangements. At 31 December 2012, a simultaneous one notch long-term and associated short-term downgrade in...

Page 512
...) as well as the disposal of all or a controlling portion of Direct Line Group (DLG, formerly known as RBS Insurance) (with disposal of its entire interest in DLG required by 31 December 2014), and the Royal Bank branch-based business in England and Wales and the NatWest branches in Scotland, along...

Page 513
... to lending to the UK SME market and larger commercial and corporate entities and residential mortgage lending; requirements to operate in a way that prioritises objectives other than shareholder value creation; changes to financial reporting standards (including accounting standards), corporate...

Page 514
...point of entry at the holding company or at various levels of the corporate structure of a GSIFI. The potential impacts of these resolution and recovery powers may include the total loss of value of securities issued by the Group and, in addition for debt holders, the possible conversion into equity...

Page 515
...fair value through profit or loss; (ii) financial assets classified as available-for-sale; and (iii) derivatives. Generally, to establish the fair value of these instruments, the Group relies on quoted market prices or, where the market for a financial instrument is not sufficiently active, internal...

Page 516
... where it does business. The proper functioning of the Group's payment systems, financial and sanctions controls, risk management, credit analysis and reporting, accounting, customer service and other information technology systems, as well as the communication networks between its branches and main...

Page 517
...'s financial condition, results of operations and prospects. The Group could fail to attract or retain senior management, which may include members of the Board, or other key employees, and it may suffer if it does not maintain good employee relations The Group's ability to implement its strategy...

Page 518
Shareholder information Contents Financial calendar Shareholder enquiries Analyses of ordinary shareholders Trading market Dividend history Taxation for US Holders Exchange controls Memorandum and Articles of Association Incorporation and registration Abbreviations and acronyms Glossary of terms ...

Page 519
... www.rbs.com/managing_shareholding. You will need the shareholder reference number printed on your share certificate or tax voucher to gain access to this information. Listed below are the most commonly used features on the website: Braille and audio Annual Review and Summary Financial Statement...

Page 520
... in the UK each year. Protect yourself If you are offered unsolicited investment advice, discounted shares, a premium price for shares you own, or free company or research reports, you should take these steps before handing over any money; x x x x use the details on the FSA Register to contact the...

Page 521
... Exchange, a subsidiary of NYSE Euronext (NYSE). The ADRs evidencing the ADSs above were issued pursuant to Deposit Agreements, among the company, The Bank of New York, as depository, and all holders from time-to-time of ADRs issued thereunder. Currently, there is no non-United States trading market...

Page 522
Shareholder information continued Trading market continued The following table shows, for the periods indicated, the high and low sales prices for each of the outstanding ADSs representing non-cumulative dollar preference shares and PROs, as reported on the NYSE or NASDAQ. Series F ADSs Series H ...

Page 523
... GROUP 2012 Ordinary shares The following table shows, for the periods indicated, the high and low sales prices for the company's ordinary shares, as derived from the Daily Official List of the London Stock Exchange. All prices have been restated for the sub-division and one-for-ten consolidation...

Page 524
... terms of the relevant instruments. For further information, see Note 7 on the consolidated accounts. Ordinary dividends The company has not paid an ordinary dividend since 2007. In 2008, the company issued new ordinary shares by way of a capitalisation issue rather than paying an interim dividend...

Page 525
..., controls, directly or indirectly, 10% or more of the voting stock of the company, nor does this summary address the tax consequences to US Holders subject to special rules, such as certain financial institutions, dealers or traders in securities who use a mark-to-market method of tax accounting...

Page 526
... United States and was not a national of the UK); (ii) is part of the business property of a UK permanent establishment of an enterprise; or (iii) pertains to a UK fixed base of an individual used for the performance of independent personal services. The Estate Tax Treaty generally provides a credit...

Page 527
... market of the New York Stock Exchange. In all other cases, an amount must be withheld on account of UK income tax at the basic rate (currently 20%) subject to any direction to the contrary by HM Revenue & Customs under the Treaty and except that the withholding obligation does not apply to payments...

Page 528
... (www.rbs.com). Incorporation and registration The company was incorporated and registered in Scotland under the Companies Act 1948 as a limited company on 25 March 1968 under the name National and Commercial Banking Group Limited, and changed its name to The Royal Bank of Scotland Group Limited on...

Page 529
... Long Term Incentive Plan Loan-to-value Markets & International Banking Mortgage-backed Securities Medium-term Notes Northern Ireland New York Stock Exchange Office of Fair Trading Over-the-counter Payment Protection Insurance Potential Problem Loans Retail & Commercial The Royal Bank of Scotland...

Page 530
..., credit scores and defaults based on portfolio trends. Commercial mortgage backed securities (CMBS) - asset-backed securities for which the underlying asset portfolios are loans secured on commercial real estate. Commercial paper (CP) - unsecured obligations issued by a corporate or a bank directly...

Page 531
... by reference to a market factor (e.g. interest rate, exchange rate, asset price). Coverage ratio - impairment provisions as a percentage of impaired loans. Covered bonds - debt securities backed by a portfolio of mortgages that are segregated from the issuer's other assets solely for the benefit of...

Page 532
... debt securities issued by the Group. They include commercial paper, certificates of deposit, bonds and medium-term notes. Debit valuation adjustment (DVA) - an adjustment made by an entity to the valuation of OTC derivative liabilities to reflect within fair value the entity's own credit risk...

Page 533
..., financial oversight or national security. A number of agencies, including Ginnie Mae, issue or guarantee publicly traded debt securities. Federal Home Loan Mortgage Corporation - see Freddie Mac. Federal National Mortgage Association - see Fannie Mae. FICO score - a credit score calculated using...

Page 534
... at the balance sheet date. Level 1: quoted price - level 1 financial instruments are valued using unadjusted quoted prices in active markets, for identical financial instruments. Examples include G10 government securities, listed equity shares, certain exchange-traded derivatives and certain...

Page 535
...the cost of debt collection activities and the delay in cash recovery. Market risk - the risk that the value of an asset or liability will change as a result of market factors such as foreign exchange rates, commodity prices, interest rates, credit spreads and equity prices. Master netting agreement...

Page 536
...generating assets (ranging from credit card receivables to residential mortgage loans). Liability securitisations typically involve issuing bonds that assume the risk of a potential insurance liability (ranging from a catastrophic natural event to an unexpected claims level on a certain product type...

Page 537
...-purpose operating company that undertakes arbitrage activities by purchasing highly rated medium and long-term, fixed-income assets and funding itself with shortterm, highly rated commercial paper and medium-term notes. Structured notes - securities that pay a return linked to the value or level of...

Page 538
...Group Audit Committee Report of the Group Audit Committee Auditors Auditor's remuneration Independent auditor's report Available-for-sale financial assets Accounting policies Notes on the consolidated accounts Average balance sheet Balance sheet Business review Consolidated Parent company Board Risk...

Page 539
... Notes on the consolidated accounts Parent company notes Financial Services Compensation Scheme Financial summary Forward-looking statements Glossary of terms Going concern Report of the directors Goodwill Critical accounting policies Notes on the consolidated accounts Group Chief Executive's review...

Page 540
... accounts Segmental reporting Business review Description of business Notes on the consolidated accounts Share-based payments Accounting policies Notes on the consolidated accounts Share capital Notes on the consolidated accounts Shareholder information Analysis of ordinary shareholders Annual...

Page 541
... BT1 5UB George's Quay Dublin 2 Direct Line Group Churchill Court Westmoreland Road Bromley Kent BR1 1DP RBS Holdings USA Inc. 600 Washington Blvd Stamford CT 06901 USA Coutts Group 440 Strand London WC2R 0QS The Royal Bank of Scotland International Limited Royal Bank House 71 Bath Street St Helier...

Page 542
Published by The Royal Bank of Scotland Group plc Printed at Anton Group Ltd, ISO14001. This report is printed on Edixion uncoated paper. This paper has been independently certified according to the rules of the FSC. Please remove the front cover of this report if you are recycling it. It has a ...

Page 543
The Royal Bank of Scotland Group plc Group Headquarters PO Box 1000 Gogarburn Edinburgh EH12 1HQ

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