RBS 2012 Annual Report Download - page 505

RBS GROUP 2012
503
Risk factors
Set out below are certain risk factors which could adversely affect the
Group's future results, its financial condition and prospects and cause
them to be materially different from what is expected. The factors
discussed below and elsewhere in this report should not be regarded as
a complete and comprehensive statement of all potential risks and
uncertainties facing the Group.
Macro-economic and geopolitical risks
The Group’s businesses and performance can be negatively affected by
actual or perceived global economic and financial market conditions
The Group’s businesses and performance are affected by local and
global economic conditions, perceptions of those conditions and future
economic prospects. The outlook for the global economy over the near to
medium-term remains challenging and many forecasts predict at best
only stagnant or modest levels of gross domestic product (GDP) growth
across a number of the Group’s key markets over that period, including,
in particular, the UK, Ireland and the US. Stagnant or weak GDP growth
is also expected in the European Monetary Union (EMU) where a
relatively robust German economy has been offset by austerity measures
in many EMU countries, initiated in response to increased sovereign debt
risk, which have resulted in weak economic and GDP growth, particularly
in Spain, Italy and France.
The Group’s businesses and performance are also affected by financial
market conditions. Although capital and credit markets around the world
were more stable during 2012, they remained volatile and subject to
intermittent and prolonged disruptions. In particular, increasingly during
the second and third quarters of 2012, continuing risk of sovereign default
relating to certain EU member states had a negative impact on capital
and credit markets.
These challenging economic and market conditions create a difficult
operating environment for the Group’s businesses, which is characterised
by:
x downward pressure on asset prices and on credit availability and
upward pressure on funding costs, and such conditions continue to
impact asset recovery rates and the credit quality of the Group’s
businesses, customers and counterparties, including sovereigns;
x alone or in combination with regulatory changes or actions of market
participants, reduced activity levels, additional write-downs and
impairment charges and lower profitability, and may restrict the
ability of the Group to access funding and liquidity; and
x central bank actions to engender economic growth which have
resulted in a prolonged period of low interest rates constraining,
through margin compression and low returns on assets, the interest
income earned on the Group’s interest earning assets.
In particular, should the scope and severity of the adverse economic
conditions currently experienced by a number of EU member states and
elsewhere worsen or economic recovery remain stagnant for an extended
period, particularly in the Group’s key markets, the risks faced by the
Group would be exacerbated. Developments relating to the current
economic conditions and unfavourable financial environment, including
those discussed above, could have a material adverse effect on the
Group’s business, financial condition, results of operations and
prospects.
The Group has significant exposure to the continuing economic crisis in
Europe
In Europe, countries such as Ireland, Italy, Greece, Portugal and Spain
have been particularly affected by the recent macroeconomic and
financial conditions. Although the risk of sovereign default reduced in
2012 due to actions of the European Central Bank (ECB) and the EU, the
risk of default remains. This default risk raises concerns, particularly
about the contagion effect such a default would have on other EU
economies, including the UK economy, as well as the ongoing viability of
the euro currency and the EMU. As a result, yields on the sovereign debt
of many EU member states have remained volatile. The EU, the ECB, the
International Monetary Fund and various national authorities have
implemented measures intended to address systemic stresses in the
Eurozone. The effectiveness of these actions is not assured and the
possibility remains that the contagion effect spreads to the UK, that the
euro could be abandoned as a currency by one or more countries that
have already adopted its use, or in an extreme scenario, that the
abandonment of the euro could result in the dissolution of the EMU. This
would lead to the re-introduction of individual currencies in one or more
EMU member states.
The effects on the UK, European and global economies of the potential
dissolution of the EMU, exit of one or more EU member states from the
EMU and the redenomination of financial instruments from the euro to a
different currency, are impossible to predict fully. However, if any such
events were to occur they would likely:
x result in significant market dislocation;
x heighten counterparty risk;
x result in downgrades of credit ratings for European borrowers, giving
rise to increases in credit spreads and decreases in security values;
x disrupt and adversely affect the economic activity of the UK and
other European markets; and
x adversely affect the management of market risk and in particular
asset and liability management due, in part, to redenomination of
financial assets and liabilities and the potential for mismatch.