RBS 2012 Annual Report Download - page 512

Risk factors continued
The Group may be liable for any deterioration in businesses or portfolios
being sold between the announcement of the disposal and its completion,
which period may be lengthy and may span many months. In addition,
the Group may be exposed to certain risks, including risks arising out of
ongoing liabilities and obligations, breaches of covenants,
representations and warranties, indemnity claims, transitional services
arrangements and redundancy or other transaction related costs.
The occurrence of any of the risks described above could negatively
affect the Group’s ability to implement its strategic plan and could have a
material adverse effect on the Group’s business, results of operations,
financial condition, capital ratios and liquidity.
The Group is subject to a variety of risks as a result of implementing the
State Aid restructuring plan
The Group was required to obtain State Aid approval for the aid given to
the Group by HM Treasury as part of the placing and open offer
undertaken by the Group in December 2008, the issuance to HM
Treasury of £25.5 billion of B shares in the capital of the Group which are,
subject to certain terms and conditions, convertible into ordinary shares in
the share capital of the Group and a contingent commitment by HM
Treasury to subscribe for up to an additional £8 billion of B Shares if
certain conditions are met in addition to the Group’s participation in the
Asset Protection Scheme (APS) (which has now been terminated). In that
context, as part of the terms of the State Aid approval, the Group,
together with HM Treasury, agreed the terms of a restructuring plan.
The Group is subject to a variety of risks as a result of implementing the
State Aid restructuring plan, including required asset disposals. In
particular, the Group agreed to undertake a series of measures to be
implemented over a four year period from December 2009, including the
disposal of a number of businesses now completed (or substantially
completed) as well as the disposal of all or a controlling portion of Direct
Line Group (DLG, formerly known as RBS Insurance) (with disposal of its
entire interest in DLG required by 31 December 2014), and the Royal
Bank branch-based business in England and Wales and the NatWest
branches in Scotland, along with the direct and other small and medium-
size enterprise (SME) customers and certain mid-corporate customers
across the UK. While the initial sale of 34.7% of DLG through an IPO was
completed in October 2012, in respect of the Royal Bank and NatWest
branch-based business, the sale process continues to progress following
the withdrawal of its original buyer in October 2012.
There is no assurance that the price that the Group receives or has
received for any assets sold pursuant to the State Aid restructuring plan
will be or has been at a level the Group considers adequate or which it
could obtain in circumstances in which the Group was not required to sell
such assets in order to implement the State Aid restructuring plan or if
such sale were not subject to the restrictions contained in the terms
thereof. Further, if the Group fails to complete any of the required
disposals within the agreed timeframes for such disposals, under the
terms of the State Aid approval, a divestiture trustee may be empowered
to conduct the disposals, with the mandate to complete the disposal at no
minimum price.
Furthermore, if the Group is unable to comply with the terms of the State
Aid approval, it could constitute a misuse of aid. In circumstances where
the European Commission doubts that the Group is complying with the
terms of the State Aid approval, it may open a formal investigation. At the
conclusion of any such investigation, if the European Commission
decided that there had been misuse of aid, it could issue a decision
requiring HM Treasury to recover the misused aid, which could have a
material adverse impact on the Group.
In implementing the State Aid restructuring plan, the Group has lost, and
will continue to lose, existing customers, deposits and other assets (both
directly through sale and potentially through the impact on the rest of the
Group’s business arising from implementing the State Aid restructuring
plan) and the potential for realising additional associated revenues and
margins that it otherwise might have achieved in the absence of such
disposals.
The disposal of Global Merchant Services and RBS Sempra
Commodities reduced the Group’s assets by approximately £13.0 billion
and £2.4 billion, respectively (based on total assets immediately prior to
disposal). The quantum of assets and deposits that would be included in
a divestment of the Royal Bank branch-based business in England and
Wales and the NatWest branches in Scotland is not certain. However, at
31 December 2012, this business included approximately £18.8 billion of
assets, £21.5 billion of deposits and two million customers.
The implementation of the State Aid restructuring plan may also result in
disruption to the retained business and give rise to significant strain on
management, employee, operational and financial resources, impacting
customers and employees and giving rise to separation costs which could
be substantial.
The implementation of the State Aid restructuring plan may result in the
emergence of one or more new viable competitors or a material
strengthening of one or more of the Group’s existing competitors in the
Group’s markets. The effect of this on the Group’s future competitive
position, revenues and margins is uncertain and there could be an
adverse effect on the Group’s operations and financial condition and its
business generally.
The occurrence of any of the risks described above could have a material
adverse effect on the Group’s business, results of operations, financial
condition, capital position and competitive position.
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Additional information continued