RBS 2012 Annual Report Download - page 511

RBS GROUP 2012
509
The Group’s borrowing costs, its access to the debt capital markets and
its liquidity depend significantly on its and the UK Government’s credit
ratings
The credit ratings of RBSG, the Royal Bank and other Group members
have been subject to change and may change in the future, which could
impact their cost of, access to and sources of financing and liquidity. A
number of UK and other European financial institutions, including RBSG,
the Royal Bank and other Group members, were downgraded during the
course of 2011 and 2012 in connection with a review of systemic support
assumptions incorporated into bank ratings and the likelihood, in the case
of UK banks, that the UK Government is more likely in the future to make
greater use of its resolution tools to allow burden sharing with
bondholders, and in connection with a general review of rating agencies’
methodologies. Rating agencies continue to evaluate the rating
methodologies applicable to UK and European financial institutions and
any change in such rating agencies’ methodologies could materially
adversely affect the credit ratings of Group companies. Any further
reductions in the long-term or short-term credit ratings of RBSG or one of
its principal subsidiaries (particularly the Royal Bank) would increase its
borrowing costs, require the Group to replace funding lost due to the
downgrade, which may include the loss of customer deposits, and may
also limit the Group’s access to capital and money markets and trigger
additional collateral requirements in derivatives contracts and other
secured funding arrangements. At 31 December 2012, a simultaneous
one notch long-term and associated short-term downgrade in the credit
ratings of RBSG and the Royal Bank by the three main ratings agencies
would have required the Group to post estimated additional collateral of
£9 billion, without taking account of mitigating action by management.
Any downgrade in the UK Government’s credit ratings could adversely
affect the credit ratings of Group companies and may have the effects
noted above. In December 2012, Standard & Poor’s placed the UK’s AAA
credit rating on credit watch, with negative outlook and, in February 2013,
Moody’s downgraded the UK’s credit rating one notch to Aa1. Credit
ratings of RBSG, the Royal Bank, RBS N.V., Ulster Bank Limited and
RBS Citizens Financial Group, Inc. are also important to the Group when
competing in certain markets, such as over-the-counter derivatives. As a
result, any further reductions in the Group’s long-term or short-term credit
ratings or those of its principal subsidiaries could adversely affect the
Group’s access to liquidity and its competitive position, increase its
funding costs and have a material adverse impact on the Group’s
earnings, cash flow and financial condition.
If the Group is unable to issue the Contingent B Shares to HM Treasury,
it may have a material adverse impact on the Group’s capital position,
liquidity, operating results and future prospects
In the event that the Group’s Core Tier 1 capital ratio declines to below 5
per cent., until December 2014 HM Treasury is committed to subscribe
for up to an additional £8 billion of Contingent B Shares if certain
conditions are met. If such conditions are not met and are not waived by
HM Treasury, and the Group is unable to issue the Contingent B Shares,
the Group will be required to find alternative methods for achieving the
requisite capital ratios. There can be no assurance that any of these
alternative methods will be available or would be successful in increasing
the Group’s capital ratios to the desired or requisite levels. If the Group is
unable to issue the Contingent B Shares, the Group’s capital position,
liquidity, operating results and future prospects will suffer, its credit
ratings may drop, its ability to lend and access funding will be further
limited and its cost of funding may increase.
The regulatory capital treatment of certain deferred tax assets recognised
by the Group depends on there being no adverse changes to regulatory
requirements
There is currently no restriction in respect of deferred tax assets
recognised by the Group for regulatory purposes. Changes in regulatory
capital rules may restrict the amount of deferred tax assets that can be
recognised and such changes could lead to a reduction in the Group’s
Core Tier 1 capital ratio. In particular, on 16 December 2010, the Basel
Committee published the Basel III rules setting out certain changes to
capital requirements which include provisions limiting the ability of certain
deferred tax assets to be recognised when calculating the common equity
component of Tier 1 capital. CRD IV which will implement Basel III in the
EU includes similar limitations. The implementation of the Basel III
restrictions on recognition of deferred tax assets within the common
equity component of Tier 1 are subject to a phased-in deduction starting
on 1 January 2014, to be fully effective by 1 January 2018.
Risks to implementation of Group strategy
The Group’s ability to implement its strategic plan depends on the
success of the Group’s refocus on its core strengths and its balance
sheet reduction programme
As a result of the global economic and financial crisis that began in 2008
and the changed global economic outlook, the Group is engaged in a
financial and core business restructuring which is focused on achieving
appropriate risk-adjusted returns under these changed circumstances,
reducing reliance on wholesale funding and lowering exposure to capital-
intensive businesses. A key part of this restructuring is the programme
announced in February 2009 to run-down and sell the Group’s non-core
assets and businesses and the continued review of the Group’s portfolio
to identify further disposals of certain non-core assets and businesses.
Assets identified for this purpose and allocated to the Group’s Non-Core
division totalled £258 billion, excluding derivatives, at 31 December 2008.
At 31 December 2012, this total had reduced to £57.4 billion
(31 December 2011 - £93.7 billion), excluding derivatives, as further
progress was made in business disposals and portfolio sales during the
course of 2012. This balance sheet reduction programme continues
alongside the disposals under the State Aid restructuring plan approved
by the European Commission. As part of its core business restructuring,
during 2012 the Group implemented changes to its wholesale banking
operations, including the reorganisation of its wholesale businesses and
the exit and downsizing of selected existing activities (including cash
equities, corporate banking, equity capital markets, and mergers and
acquisitions).
Because the ability to dispose of assets and the price achieved for such
disposals will be dependent on prevailing economic and market
conditions, which remain challenging, there is no assurance that the
Group will be able to sell or run-down (as applicable) those remaining
businesses it is seeking to exit or asset portfolios it is seeking to sell
either on favourable economic terms to the Group or at all. Material tax or
other contingent liabilities could arise on the disposal of assets and there
is no assurance that any conditions precedent agreed will be satisfied, or
consents and approvals required will be obtained in a timely manner, or
at all. There is consequently a risk that the Group may fail to complete
such disposals by any agreed longstop date.