RBS 2012 Annual Report Download - page 174

Early problem identification and problem debt management
While the principles of identifying, managing and providing for problem
debts are broadly similar for wholesale and retail customers, the
procedures differ based on the nature of the assets, as discussed below.
Wholesale customers
The controls and processes for managing wholesale problem debts are
embedded within the divisions’ credit approval frameworks and form an
essential part of the ongoing credit assessment of customers. Any
necessary approvals will be required in accordance with the delegated
authority grid governing the extension of credit.
Early problem recognition
Each division has established Early Warning Indicators (EWIs) designed
to identify those performing exposures that require close attention due to
financial stress or heightened operational issues. Such identification may
also take place as part of the annual review cycle. EWIs vary from
division to division 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 to determine whether or not the customer’s circumstances
warrant placing the exposure on the Watchlist (detailed below).
Watchlist *
There are three Watchlist ratings - amber, red and black - reflecting
progressively deteriorating conditions. Watchlist Amber loans are
performing loans where the counterparty or sector shows early signs of
potential stress or has other characteristics such that they warrant closer
monitoring. Watchlist Red loans are performing loans where indications
of the borrower’s declining creditworthiness are such that the exposure
requires active management, usually by the Global Restructuring Group
(GRG). Watchlist Black loans comprise risk elements in lending and
potential problem loans.
Once on the Watchlist process, customers come under heightened
scrutiny. The relationship strategy is reassessed by a forum of
experienced credit, portfolio management and remedial management
professionals within the division. In accordance with Group-wide policies,
a number of mandatory actions are taken, including a review of the
customer’s credit grade and facility security documentation. Other
appropriate corrective action is taken when circumstances emerge that
may affect the customer’s ability to service its debt. Such circumstances
include deteriorating trading performance, an imminent breach of
covenant, challenging macroeconomic conditions, a late payment or the
expectation of a missed payment.
For all Watchlist Red cases, the division is required to consult with GRG
on whether the relationship should be transferred to GRG (see more on
GRG below). Relationships managed by the divisions tend to be with
companies operating in niche sectors, such as airlines or products such
as securitisation special purpose vehicles. The divisions may also
manage those exposures when subject matter expertise is available in
the divisions rather than within GRG.
At 31 December 2012, exposures to customers reported as Watchlist
Red and managed within the divisions totalled £4.3 billion (2011 - £4.9
billion).
Strategies that are available within divisions include granting a customer
various types of concessions. Any decision to approve a concession will
be a function of the division’s specific country and sector appetite, the key
credit metrics of the customer, the market environment and the loan
structure/security. Refer to the section below on Wholesale
renegotiations.
Other potential outcomes of the review of the relationship are to: take the
customer off the Watchlist and return them to the mainstream loan book;
offer further lending and maintain ongoing reviews; transfer the
relationship to GRG for those customers requiring such stewardship; or
exit the relationship altogether.
The following table shows a sector breakdown of credit risk assets of Watchlist Red counterparties under GRG management:
2012 2011
Watchlist Red credit risk assets under GRG management Core
£m
Non-Core
£m
Total
£m
Core
£m
Non-Core
£m
Total
£m
Property 5,605 4,377 9,982 6,561 6,011 12,572
Transport 2,238 478 2,716 1,159 2,252 3,411
Retail and leisure 1,542 432 1,974 1,528 669 2,197
Services 870 84 954 808 141 949
Other 3,087 1,177 4,264 1,952 916 2,868
Total 13,342 6,548 19,890 12,008 9,989 21,997
Global Restructuring Group (GRG)
In cases where the Group’s exposure to the customer exceeds £1 million,
the relationship may be transferred to GRG following consultation with
the originating division. The primary function of GRG is active
management of the exposures to minimise loss for the Group and where
feasible return the exposure to the Group’s mainstream loan book
following an assessment by GRG that no further losses are expected.
At 31 December 2012, credit risk assets relating to exposures under
GRG management (excluding those placed under GRG stewardship for
operational reasons rather than concerns over credit quality and those in
the AQ10 internal asset quality (AQ) band) totalled £19.9 billion. Credit
risk assets are defined on page 163. The internal asset quality bands are
defined on page 166.
172
Business review Risk and balance sheet management continued
*unaudited