RBS 2012 Annual Report Download - page 167

RBS GROUP 2012
165
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 Total credit risk assets fell 7%, with reductions in all wholesale
sectors. Exposure to the personal sector remained broadly flat.
x Credit risk assets fell in all geographic regions, except the UK. This
was driven by the Group’s continued focus on reducing exposures to
the peripheral eurozone countries and appropriate management of
liquidity requirements reflected in the reduced exposures to Western
European and US central banks.
x UK exposure, as a proportion of the total portfolio, increased during
the year and now comprises 51% of credit risk assets, driven by
continued growth in UK personal sector assets and increased UK
sovereign risk exposure.
x Exposure to the property sector fell by 11% during the year driven
by tighter portfolio controls in all regions and a £9.5 billion reduction
in Non-Core resulting from focussed action on early and contractual
repayments.
x Exposure to banks and financial institutions declined by 5% as a
result of subdued borrowing activity and a reduction in lending and
derivatives to finance companies, financial services companies,
funds, monoline insurers and Credit Derivative Product Companies
(CDPCs).
x Reported exposures are affected by currency movements. During
2012, sterling appreciated 4.4% against the US dollar and 2.6%
against the euro resulting in a decrease in sterling terms of
exposures denominated in these currencies (and in other currencies
linked to the US dollar or euro).
x The Group’s sovereign portfolio comprises exposures to central
governments, central banks and sub-sovereigns such as local
authorities, primarily in the Group’s key markets of the UK, Western
Europe and the USA. The asset quality is high as exposures are
largely cash balances placed with central banks such as the Bank of
England, the Federal Reserve and the Eurosystem (including the
European Central Bank and central banks in the eurozone).
Exposure to sovereigns fluctuates according to Group liquidity
requirements and cash positions. These are driven by inflows and
outflows of deposits which determine the level of cash placed with
central banks and have contributed to higher exposures at the Bank
of England and lower exposures at European and US central banks.
Information on the Group’s exposure to governments, including
peripheral eurozone sovereigns, can be found in the Risk
management section on Country risk.
x Exposure to the banking sector is one of the largest in the Group’s
portfolio. The sector is well diversified geographically with derivative
exposures being largely collateralised. Exposures are tightly
controlled through the combination of the single name concentration
framework, bespoke credit policies and country limits. Exposures to
the banking sector decreased by £3 billion in 2012 as a result of
reduced interbank lending and derivative activity, and a reduction in
limits to banks in countries under stress, such as the peripheral
eurozone countries.
x Exposure to other financial institutions comprising traded and non-
traded products is spread across a range of financial companies
including insurance, securitisation vehicles, financial intermediaries
including broker dealers and CCPs, financial guarantors - monolines
and CDPCs - and funds comprising unleveraged, hedge and
leveraged funds. The size and asset quality of the Core portfolio
have not changed materially since 2011. However, entities in this
sector remain vulnerable to market shocks or contagion from the
banking sector. Credit risk is managed through the single name
concentration, sector concentration and asset and product class
frameworks, with specific sector and product caps in place where
there is a perception of heightened credit risk. The Group is also
actively managing down its exposures to monolines and CDPCs
with a view to exiting these portfolios. Exposures to CDPCs and
monolines have decreased materially during 2012 as trades are
commuted and exposures reduce due to tightening credit spread of
the assets protected by CDPCs and monolines.
x The Group’s exposure to the property sector was £91 billion (a fall of
11% during the year), the majority of which was commercial real
estate in Ireland and the UK (see section on commercial real estate
on pages 181 and 182 for further details). The remainder comprised
lending to construction companies and building materials groups,
which fell by £1.9 billion (15%), and housing associations, which
remained stable. Most of the Group’s Core property exposure is
within UK Corporate (73%).
x The 22% decline in exposure to the retail and leisure sectors, was
driven by the de-leveraging by customers and refinements in sector
classifications within the Wealth division. Excluding the impact of
sector reclassifications, the reduction in the retail and leisure
portfolios was 15% in 2012. While the market outlook for this sector
remains challenging and despite some high-profile failures among
UK high street retailers, losses on the Group’s retail portfolio
remained low during 2012. The sector continues to show wide
variation in performance, however, credit metrics overall remained
broadly stable. The leisure sector displayed weaker credit metrics
than the wider corporate portfolio, in line with the industry trend. The
Group’s risk appetite is driven by the importance of the leisure
sector to the UK franchise, especially for the UK Corporate division,
but is mitigated through tighter origination policies and a reduction in
exposure to high risk sub-sectors. Leisure sector exposure fell by
8% in 2012 driven predominantly by Non-Core. The gambling sub-
sector is subject to specific controls due to its high credit and
reputational risk profile.