RBS 2012 Annual Report Download - page 177

RBS GROUP 2012
175
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 granted
to borrowers in the property sector were payment concessions and
loan rescheduling. During 2012 there has been an increase in the
number of renegotiations in the shipping sector as poor economic
conditions persist.
x 84% of ‘completed’ and 93% of ‘in progress’ renegotiated cases
were managed by GRG.
x Provisions for the non-performing loans disclosed above are
individually assessed and renegotiations are taken into account
when determining the level of provision. The provision coverage is
affected by the timing of write-offs and provisions. In some cases
loans are fully or partially written off on the completion of a
renegotiation. Non-performing renegotiated loans also include loans
against which no provision is held and where these cases are large
they can have a significant impact on the provision coverage within
a specific sector.
Provisioning for wholesale renegotiated customers
Wholesale renegotiations are predominantly individually assessed and
are not therefore segregated into a separate risk pool.
Provisions for renegotiated wholesale loans are assessed in accordance
with the Group’s normal provisioning policies (refer to Impairment loss
provision methodology on page 179). For the non-performing population,
provisions on exposures greater than £1 million are individually assessed
by GRG. The provision required is calculated based on the difference
between the debt outstanding and the present value of the estimated
future cash flows. Exposures smaller than £1 million are deemed not to
be individually significant and are assessed collectively by the originating
division. Within the performing book, latent loss provisions are held for
those losses that are incurred, but not yet identified.
Any one of the above types of renegotiation may result in the value of the
outstanding debt exceeding the present value of the estimated future
cash flows from the renegotiated loan resulting in the recognition of an
impairment loss. Renegotiations that include forgiveness of all or part of
the outstanding debt account for the majority of such cases.
The customer’s financial position, anticipated prospects and the likely
effect of the renegotiation, including any concessions granted, are
considered in order to establish whether an impairment provision is
required.
In the case of non-performing loans that are renegotiated, the loan
impairment provision assessment almost invariably takes place prior to
the renegotiation. The quantum of the loan impairment provision may
change once the terms of the renegotiation are known, resulting in an
additional provision charge or a release of the provision in the period the
renegotiation takes place.
The transfer of renegotiated wholesale loans from impaired to performing
status follows assessment by relationship managers in GRG. When no
further losses are anticipated and the customer is expected to meet the
loan’s revised terms, any provision is written off and the balance of the
loan returned to performing status.
Performing loans that are renegotiated will be included in the calculation
of the latent loss provisions. To the extent that the renegotiation event
has affected the customer’s estimated probably of default or loss given
default, this will be reflected in the underlying calculation.
Recoveries and active insolvency management
The ultimate outcome of a renegotiation strategy is unknown at the time
of execution. It is highly dependent on the cooperation of the borrower
and the continued existence of a viable business. The following are
generally considered to be options of last resort:
x Enforcement of security or otherwise taking control of assets -
Where the Group holds collateral or other security interest and is
entitled to enforce its rights, it may take ownership or control of the
assets. The Group’s preferred strategy is to consider other possible
options prior to exercising these rights.
x Insolvency - Where there is no suitable renegotiation option or the
business is no longer regarded as sustainable, insolvency will be
considered. Insolvency may be the only option that ensures that the
assets of the business are properly and efficiently distributed to
relevant creditors.