RBS 2013 Annual Report Download - page 109
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Business review
107
Risk factors
Summary of our Principal Risks and Uncertainties
Set out below is a summary of certain risks which could adversely affect
the Group; it should be read in conjunction with the Risk and Balance
Sheet management section on pages 174 to 364. This summary should
not be regarded as a complete and comprehensive statement of all
potential risks and uncertainties. A fuller description of these and other
risk factors is included on pages 523 to 536.
• The Group’s ability to implement its new strategic plan and achieve
its capital goals depends on the success of its efforts to refocus on
its core strengths and the timely divestment of RBS Citizens. The
Group has undertaken since 2009 an extensive restructuring,
including the disposal of non-core assets as well as businesses as
part of the State Aid restructuring plan approved by the EC. The
Group recently created RBS CRG to manage the run down of
problem assets with the goal of removing such assets from the
balance sheet over the next three years. The Group has also taken
steps to strengthen its capital position and established medium term
targets which will require the timely divestment of RBS Citizens to
achieve. The Group is also undertaking a new strategic direction
which will result in a significant downsizing of the Group, including
simplifying the Group by replacing the current divisional structure
with three customer segments. The level of structural change
required to implement the Group’s strategic and capital goals
together with other regulatory requirements such as ring fencing are
likely to be disruptive and increase operational risks for the Group.
There is no assurance that the Group will be able to successfully
implement its new strategy on which its capital plan depends or
achieve its goals within the time frames contemplated or at all.
• Despite the improved outlook for the global economy over the near
to medium-term, actual or perceived difficult global economic
conditions and increased competition, particularly in the UK, create
challenging economic and market conditions and a difficult operating
environment for the Group’s businesses. Uncertainties surrounding
the referendum on Scottish independence and the implications of an
affirmative outcome for independence are also likely to affect the
Group. These factors, together with additional uncertainty relating to
the recovery of the Eurozone economy where the Group has
significant exposure and the risk of a return of volatile financial
markets, in part due to the monetary policies and measures carried
out by central banks, have been and will continue to adversely affect
the Group’s businesses, earnings, financial condition and prospects.
• The Group is subject to substantial regulation and oversight, and
any significant regulatory or legal developments such as that which
has occurred over the past several years could have an adverse
effect on how the Group conducts its business and on its results of
operations and financial condition. Certain regulatory measures
introduced in the UK and in Europe relating to ring-fencing of bank
activities may affect the Group’s borrowing costs, may impact
product offerings and the viability of certain business models and
require significant restructuring with the possible transfer of a large
number of customers between legal entities.
• The Group could fail to attract or retain senior management, which
may include members of the Group Board, or other key employees,
and it may suffer if it does not maintain good employee relations.
• The Group is subject to a number of regulatory initiatives which may
adversely affect its business, including the UK Government’s
adoption of the Financial Services (Banking Reform) Act 2013, the
US Federal Reserve’s new rules for applying US capital, liquidity
and enhanced prudential standards to certain of the Group’s US
operations and ongoing reforms in the European Union with respect
to capital requirements, stability and resolution of financial
institutions, including CRD IV and other currently debated proposals
such as the Resolution and Recovery Directive.
• The Group’s ability to meet its obligations including its funding
commitments depends on the Group’s ability to access sources of
liquidity and funding. The inability to access liquidity and funding due
to market conditions or otherwise or to do so at a reasonable cost
due to increased regulatory constraints, could adversely affect the
Group’s financial condition and results of operations. Furthermore,
the Group’s borrowing costs and its access to the debt capital
markets and other sources of liquidity depend significantly on its and
the UK Government’s credit ratings which would be likely to be
negatively impacted by political events, such as an affirmative
outcome of the referendum for the independence of Scotland.
• The Group’s business performance, financial condition and capital
and liquidity ratios could be adversely affected if its capital is not
managed effectively or as a result of changes to capital adequacy
and liquidity requirements, including those arising out of Basel III
implementation (globally or by European, UK or US authorities) as
well as structural changes that may result from the implementation
of ring-fencing under the Financial Services (Banking Reform) Act
2013 or proposed changes of the US Federal Reserve with respect
to the Group’s US operations. The Group’s ability to reach its target
capital ratios in the medium term will turn on a number of factors
including a significant downsizing of the Group in part through the
sale of RBS Citizens.
• The Group is, and may be, subject to litigation and regulatory and
governmental investigations that may impact its business,
reputation, results of operations and financial condition. Although the
Group settled a number of legal proceedings and regulatory
investigations during 2013, the Group is expected to continue to
have a material exposure to legacy litigation and regulatory matter
proceedings in the medium term. The Group also expects greater
regulatory and governmental scrutiny for the foreseeable future
particularly as it relates to compliance with new and existing laws
and regulations such as anti-money laundering and anti-terrorism
laws.
• Operational and reputational risks are inherent in the Group’s
businesses.