RBS 2012 Annual Report Download - page 506

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Additional information continued
Risk factors continued
The occurrence of any of these events may have a material adverse
effect on the Group’s financial condition, results of operations and
prospects.
In particular, the Group has significant exposure to customers and
counterparties in the Eurozone (at 31 December 2012 principally
Germany (£48 billion), The Netherlands (£26 billion), Ireland (£40 billion),
France (£19 billion) and Spain (£12 billion)) which includes sovereign
debt exposures that have been, and may in the future be, affected by
restructuring of their terms, principal, interest and maturity. The Group’s
Eurozone sovereign debt exposures resulted in the Group recognising an
impairment loss of £1,099 million in 2011 in respect of its holding of
Greek government bonds. Similar write downs may occur in future
periods. At 31 December 2012, the Group’s Eurozone sovereign debt
exposure amounted to £678 million including aggregate exposure of
£51 million to Greece, Ireland, Italy, Spain and Portugal.
The Group operates in markets that are highly competitive and its
business and results of operations may be adversely affected
The competitive landscape for banks and other financial institutions in the
UK, the US and throughout the rest of Europe is subject to rapid change
and recent regulatory and legal changes are likely to result in new market
participants and changed competitive dynamics in certain key areas,
such as in retail banking in the UK. The competitive landscape in the UK
will be particularly influenced by the recommendations on competition
included in the final report of the Independent Commission on Banking
(ICB), and the UK Government’s implementation of the
recommendations. In order to compete effectively, certain financial
institutions may seek to consolidate their businesses or assets with other
parties. This consolidation, in combination with the introduction of new
entrants into the markets in which the Group operates is likely to increase
competitive pressures on the Group.
In addition, certain competitors may have access to lower cost funding
and/or be able to attract deposits on more favourable terms than the
Group and may have stronger and more efficient operations.
Furthermore, the Group’s competitors may be better able to attract and
retain clients and key employees, which may have a negative impact on
the Group’s relative performance and future prospects. In addition, future
disposals and restructurings by the Group and the compensation
structure and restrictions imposed on the Group may also have an impact
on its ability to compete effectively. These and other changes to the
competitive landscape could adversely affect the Group’s business,
margins, profitability, financial condition and prospects.
The Group is subject to political risks
The Group and the Royal Bank, its principal operating subsidiary, are
both headquartered and incorporated in Scotland. The Scottish
Government intends to hold a referendum in 2014 on the issue of
Scottish independence from the UK. Although the outcome of such
referendum is uncertain, Scottish independence could affect Scotland’s
status in the EU and significantly impact the fiscal, monetary and
regulatory landscape to which the Group is subject. In addition, in
January 2013, the UK Government announced the possibility of a
referendum on the UK’s membership of the EU, which would only take
place some time after 2015. Although the effect of either Scottish
independence or any referendum on the UK’s EU membership, if either
were to occur, is not possible to predict fully, it could have a material
adverse effect on the Group’s business, financial condition, results of
operations and prospects.
The Group and its UK bank subsidiaries may face the risk of full
nationalisation
Under the Banking Act 2009, substantial powers have been granted to
HM Treasury, the Bank of England and the FSA (together, the
“Authorities”) as part of a special resolution regime. These powers enable
the Authorities to deal with and stabilise certain deposit-taking UK
incorporated institutions that are failing, or are likely to fail, to satisfy the
threshold conditions (within the meaning of section 41 of the FSMA,
which are the conditions that a relevant entity must satisfy in order to
obtain its authorisation to perform regulated activities). The special
resolution regime consists of three stabilisation options: (i) transfer of all
or part of the business of the relevant entity and/or the securities of the
relevant entity to a private sector purchaser, (ii) transfer of all or part of
the business of the relevant entity to a ‘bridge bank’ wholly owned by the
Bank of England and (iii) temporary public ownership (nationalisation) of
the relevant entity. If HM Treasury decides to take the Group into
temporary public ownership pursuant to the powers granted under the
Banking Act, it may take various actions in relation to any securities
without the consent of holders of the securities.
HM Treasury (or UK Financial Investments Limited (UKFI) on its behalf)
may be able to exercise a significant degree of influence over the Group
and any proposed offer or sale of its interests may affect the price of
securities issued by the Group
The UK Government, through HM Treasury, currently holds 65.3% of the
issued ordinary share capital of the Group. On 22 December 2009, the
Group issued £25.5 billion of B Shares to the UK Government. The B
Shares are convertible, at the option of the holder at any time, into
ordinary shares. The UK Government has agreed that it shall not
exercise the rights of conversion in respect of the B Shares if and to the
extent that following any such conversion it would hold more than 75% of
the total issued shares in the Group. Any breach of this agreement could
result in the delisting of the Group from the Official List of the UK Listing
Authority and potentially other exchanges where its securities are
currently listed and traded. HM Treasury (or the UKFI on its behalf) may
sell all or a part of the ordinary shares that it owns at any time. Any offers
or sale of a substantial number of ordinary shares or securities
convertible or exchangeable into ordinary shares by or on behalf of HM
Treasury, or an expectation that it may undertake such an offer or sale,
could negatively affect prevailing market prices for securities issued by
the Group.