RBS 2012 Annual Report Download - page 261

RBS GROUP 2012
259
Reported exposures are affected by currency movements. Over 2012, sterling appreciated 4.4% against the US dollar and 2.6% against the euro,
resulting in exposures denominated in these currencies (and in other currencies linked to the same) decreasing in sterling terms.
Key points*
x Balance sheet and off-balance sheet exposures to nearly all
countries shown in the table declined during 2012, as the Group
maintained a cautious stance and many clients reduced debt levels.
The reductions were seen in all broad product categories and in all
client groups. Non-Core lending exposure declined as the strategy
for disposal progressed, particularly in Germany, Spain and Ireland.
Most of the Group’s country risk exposure was in International
Banking (primarily lending and off-balance sheet exposure to
corporates), Markets (mostly derivatives and repos with financial
institutions), Ulster Bank (mostly lending exposure to corporates and
consumers in Ireland) and Group Treasury (largely AFS debt
securities and liquidity with central banks).
x Total eurozone - Balance sheet exposure declined by £27.5 billion
or 14% during 2012 to £165.8 billion, with reductions seen primarily
in periphery countries but also in the Netherlands, Germany, France
and Luxembourg. This reflected exchange rate movements, sales of
Greek, Spanish and Portuguese AFS bonds, write-offs, active
exposure management and debt reduction efforts by bank clients.
x Eurozone periphery - Balance sheet exposure decreased across all
countries to a combined £59.1 billion, a reduction of £8.8 billion or
13%, caused in part by reductions in AFS bonds in Spain, Italy and
Greece. Most of the Group’s exposure arises from the activities of
Markets, International Banking, Group Treasury and Ulster Bank
(with respect to Ireland). Group Treasury has a portfolio of Spanish
bank and financial institution securities. International Banking
provides trade finance facilities to clients across Europe, including
the eurozone periphery. Balance sheet exposure to Cyprus
amounted to £0.3 billion at 31 December 2012, comprising mainly
lending exposure to special purpose vehicles incorporated in Cyprus,
but with assets and cash flows largely elsewhere.
x Japan - Exposure decreased during 2012, principally in the first half
of the year, reflecting a reduction in International Banking’s cash
management business and a change in Japanese yen clearing
status from direct (self-clearing) membership to agency. The Group
no longer needs to hold positions resulting in a £2.2 billion reduction
in AFS Japanese government bonds.
x China - Lending exposure and off-balance sheet exposure to banks
decreased by £0.4 billion and £0.8 billion respectively, as a result of
a slowdown in economic growth, changes in local regulations and
risk/return considerations. Derivatives exposure to public sector
entities increased by £0.7 billion, reflecting fluctuations in short-term
hedging by bank clients.
CDS protection bought and sold
x The Group uses CDS contracts to service customer activity as well
as manage counterparty and country exposure. During 2012,
eurozone gross notional CDS contracts, bought and sold, decreased
significantly. This was caused by maturing contracts and by efforts
to reduce counterparty credit exposures and risk-weighted assets
mainly through derivative compression trades. The fair value of
bought and sold CDS contracts also decreased due to the reduction
in gross notional CDS positions and a narrowing of CDS spreads
over the year for a number of eurozone countries, including Portugal
and Ireland. All in all, net bought CDS protection referencing entities
in eurozone countries taken by the Group in terms of CDS notional
less fair value, decreased to £6.8 billion, from £8.4 billion at 31
December 2011.
x Greek sovereign CDS positions were fully closed out in April 2012,
as the use of the collective action clause in the Greek debt swap
resulted in a credit event occurring, which triggered Greek sovereign
CDS contracts.
x Outside the eurozone, the Group also has net bought CDS
protection on most countries shown in the table. A £0.4 billion net
sold CDS position on Brazil was primarily hedging bought nth-to-
default CDS contracts with Brazilian reference entities (these latter
contracts are not included in the reported numbers by country - refer
to the Definitions section on page 255).
x During 2012 the credit quality of CDS bought protection
counterparties shown in the individual country tables, deteriorated
primarily reflecting rating model changes in the fourth quarter of the
year resulting in more conservative internal ratings (refer to
Changes to wholesale credit risk models on page 162). There was
also a downgrading of some of these counterparties during the year.
For more specific analysis and commentary on the Group’s exposure to
Ireland, Spain, Italy, Portugal and Greece, refer to pages 262 to 271. For
commentary on the Group’s exposure to eurozone non-periphery
countries, refer to page 280.
*unaudited