RBS 2012 Annual Report Download - page 210

208
Business review Risk and balance sheet management continued
Balance sheet analysis: Asset quality continued
Loans and advances
Cash and
balances at
central banks Banks (1)Customers
Settlement
balances and other
financial assets Derivatives Commitments
Contingent
liabilities Total
2010 £m £m £m £m £m £m £m £m
Non-Core
AQ1 18 1,196 25,172 577 14,956 7,637 94 49,650
AQ2 — 48 2,748 137 1,461 1,205 252 5,851
AQ3 — 32 3,130 1 185 2,185 69 5,602
AQ4 362 209 9,998 — 374 4,118 1,452 16,513
AQ5 — 75 15,931 180 1,411 3,310 245 21,152
AQ6 — 2113,185 — 265 1,941 90 15,502
AQ7 — 24 7,634 80 869 1,147 147 9,901
AQ8 — — 3,283 — 146 672 111 4,212
AQ9 — 8 4,365 33 284 447 46 5,183
AQ10 — 55 2,867 — 1,213 1,329 157 5,621
Past due — 7 2,686 46 — — — 2,739
Impaired — 122,242 — — — — 22,243
Impairment provision — (1)(10,351) — — — — (10,352)
Group before RFS MI 380 1,675 102,890 1,054 21,164 23,991 2,663 153,817
RFS MI — 2 — — — — 32 34
Group 380 1,677 102,890 1,054 21,164 23,991 2,695 153,851
Note:
(1) Excludes items in the course of collection from other banks (2011 - £1,470 million; 2010 - £1,958 million).
Key points
x In 2012, the Group implemented updates to certain models,
including those used for sovereign and financial institution
counterparties, to incorporate more recent data and reflect new
regulatory requirements applicable to wholesale internal ratings
based modelling. This has resulted in ratings migration from AQ1,
primarily to AQ2-AQ5. However, it is not practicable to quantify the
impact of model updates on individual asset quality bands. The
Group had modified various risk frameworks, including risk appetite
framework and latent loss assessment in anticipation of these
changes. Further updates, primarily of models used for the
corporate counterparties, are planned for 2013. The AQ composition
of the corporate portfolio has not changed materially during the year.
x Loans and advances to banks: AQ1 balances decreased by
£41.8 billion reflecting the balance sheet reduction, mainly in
Markets and also the impact of model changes which resulted in
certain counterparties moving to lower AQ bands, primarily to AQ2-
AQ4, which increased by £6.8 billion, £8.7 billion and £9.1 billion
respectively.
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 the
overall balance sheet reduction.
x Derivatives: Balance sheet reductions in Markets and model
updates resulted in decrease in AQ1 balances. Increase in AQ2-
AQ4 balances reflects the re-grading of counterparties previously
included in AQ1.
x Impaired and past due assets, net of impairment provisions,
comprise 37% of Non-Core balances. Continued weakness in
commercial real estate market overall and difficult conditions in
Ireland are significant contributors to this.