RBS 2012 Annual Report Download - page 140

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Business review Risk and balance sheet management continued
Liquidity, funding and related risks
Introduction
Liquidity risk is the risk that the Group is unable to meet its financial
obligations, including financing wholesale maturities or customer deposit
withdrawals, as and when they fall due. Liquidity risk is highly dependent
on company specific characteristics such as the maturity profile and
composition of the Group’s assets and liabilities, the quality and
marketable value of its liquidity buffer and broader market factors, such
as wholesale market conditions alongside depositor and investor
behaviour.
Safety and soundness of the balance sheet is one of the central pillars of
the Group’s restructuring strategy. Effective management of liquidity risk
is central to the safety and soundness agenda. The Group’s experiences
in 2008 have heavily influenced both the Group’s and other stakeholders’
approach to this area.
2012 achievements and looking forward*
The Group continued to make solid progress in pursuit of its safety and
soundness agenda throughout 2012, with the majority of its medium-term
balance sheet targets now met or exceeded. This is despite particularly
volatile wholesale market conditions during most of the year due to
ongoing stresses emanating from the eurozone.
The Group has actively reduced short-term wholesale funding and has a
lower wholesale funding need compared to earlier years. Progress has
largely been due to the continued success in executing the Group’s
restructuring efforts, as well as by attracting deposits and continuing to
deleverage via the run down of Non-Core and risk reductions in Markets.
The Group has a smaller balance sheet that is funded by a diverse and
stable deposit base.
The Group is expected to have a lower wholesale funding requirement
going forward. The Group will continue to look at accessing the market
opportunistically from time to time to further support the Group’s overall
funding strategy.
Highlights of 2012 include:
x The Group’s credit profile improved markedly during the year
reflecting the success of its restructuring efforts. Credit default
swaps spreads fell by 60% from their 2011 peak and secondary
bond spreads on five year maturity have narrowed from c.450 basis
points to c.100 basis points.
x The Group repaid all the remaining emergency UK Government
funding and liquidity support that was provided to it during 2008-
2009 under the Credit Guarantee Scheme and Special Liquidity
Scheme.
x The Group resumed coupon payments on hybrid capital securities
following the end of the two year coupon payment ban imposed by
the European Commission as part of its 2009 State Aid ruling.
Coupons remain suspended on Tier 1 instruments issued by RBS
Holdings N.V. until the end of April 2013.
x The Group and RBS plc issued a combined £1.0 billion in term debt
net of buy-backs, a fraction of the £20.9 billion issued in 2011.
Short-term wholesale funding was actively managed down to £41.6
billion from £102.4 billion.
x The overall size of the liquidity buffer reduced modestly to £147.2
billion from £155.3 billion reflecting the lower levels of short-term
wholesale funding and a smaller balance sheet. This also allowed
the Group to alter the ratio of primary to secondary liquid assets
within the liquidity buffer to 62%:38% from 77%:23%. This re-
weighting, by reducing the holdings of the lowest yielding liquid
assets, benefited the Group’s net interest margin, whilst maintaining
a higher quality buffer.
x Retail & Commercial deposits grew by £8 billion to £401 billion, with
particularly strong growth in UK Retail following successful savings
campaigns. Wholesale deposits were allowed to run-off, declining by
£11 billion to leave Group deposits £3 billion lower at £434 billion.
x The Group’s loan:deposit ratio improved from 108% in 2011 to reach
management’s medium-term target of 100% at 31 December 2012,
with lending fully funded by customer deposits and a corresponding
reduction in more volatile short-term wholesale funding.
x The Group has taken advantage of market conditions through the
course of the year to further supplement its capital base.
x RBS Group plc, RBS plc, RBS Citizens Financial Group Inc. and
Direct Line Insurance Group plc in aggregate issued £4.8 billion of
subordinated liabilities in 2012.
x The Group successfully undertook two public liability management
exercises targeting Lower Tier 2 and senior unsecured debt in
support of ongoing balance sheet restructuring initiatives.
*unaudited