RBS 2013 Annual Report Download - page 244
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Business review Risk and balance sheet management
242
Credit risk continued
Early problem identification and problem debt management
Wholesale
Early problem identification
Each division has defined early warning indicators (EWIs) to identify
customers experiencing financial difficulty, and to increase monitoring if
needed. EWIs may be internal, such as a customer’s bank account
activity, or external, such as a publicly-listed customer’s share price. If
EWIs show a customer is experiencing potential or actual difficulty,
divisional credit officers may decide to place it on the Watchlist.
Watchlist*
There are three Watch classifications - Amber, Red and Black - reflecting
progressively deteriorating conditions. Watch Amber customers are
performing customers who show early signs of potential financial
difficulty, or have other characteristics that warrant closer monitoring.
Watch Red customers are performing customers who show signs of
declining creditworthiness which requires active management usually by
the Global Restructuring Group (GRG). Watch Black customers include
risk elements in lending and potential problem loans.
Once on the Watchlist, customers are subject to heightened scrutiny.
Depending on the severity of the financial difficulty and the size of the
exposure, the customer relationship strategy is reassessed by credit
officers, by specialist units in divisions or by GRG. In more material
cases, a forum of experienced credit, portfolio management and remedial
management specialists in the divisions or GRG may reassess the
customer relationship strategy. In accordance with Group-wide policies, a
number of mandatory actions are taken, including a review of the
customer’s credit grade and facility and security documentation.
Other appropriate corrective action is taken when circumstances emerge
that may affect the customer’s ability to service its debt. Such
circumstances include deteriorating trading performance, imminent
breach of covenant, challenging macroeconomic conditions, a late
payment or the expectation of a missed payment.
For all Watch Red cases, the division is required to consult with GRG on
whether the relationship should be transferred to GRG (for more
information on GRG, refer to below). Watch Red customers that continue
to be managed by the divisions tend to be those requiring subject matter
expertise that is available in the divisions rather than in GRG.
At 31 December 2013, exposures to customers reported as Watchlist
Red and managed in the divisions totalled £3.2 billion (2012 - £4.3
billion).
Remediation strategies available in the divisions include granting a
customer various types of concessions. Any decision to approve a
concession will be a function of the division’s specific country and sector
appetite, the key metrics of the customer, the market environment and
the loan structure and security. For further information, refer to the
Wholesale forbearance section below.
Other potential outcomes of the relationship review are to: take the
customer off the Watchlist; offer additional lending and continue
monitoring; transfer the relationship to GRG if appropriate; or exit the
relationship altogether.
The following table shows a sector breakdown of CRA of Watch Red customers under GRG management:
2013 2012 2011
Core Non-Core Total Core Non-Core Total Core Non-Core Total
Watch Red CRA by current exposure £m £m £m £m £m £m £m £m £m
Property 3,178 1,841 5,019 5,605 4,377 9,982 6,561 6,011 12,572
Transport 1,791 456 2,247 2,238 478 2,716 1,159 2,252 3,411
Retail and leisure 1,092 237 1,329 1,542 432 1,974 1,528 669 2,197
Services 955 40 995 870 84 954 808 141 949
Other 2,312 804 3,116 3,087 1,177 4,264 1,952 916 2,868
Total 9,328 3,378 12,706 13,342 6,548 19,890 12,008 9,989 21,997
The decrease in Watch Red cases was driven predominantly by a lower
flow of cases into GRG, repayments and movement of cases into Watch
Black. The overall value of customers in default has however reduced
during the year. For further information regarding the asset quality of the
Group's portfolio refer to the Asset quality section on page 236.
Global Restructuring Group
GRG manages the Group’s wholesale problem debt portfolio in cases
where its exposure to the customer exceeds £1 million. In addition, GRG
provides a specialist credit function, the Strategy Management Unit, for
distressed bilateral lending where the exposure is between £250,000 and
£1 million. The primary function of GRG is to restore customers to an
acceptable credit condition and minimise losses to the Group.
*unaudited
The factor common to all customers managed by GRG is that the
Group’s exposure is outside risk appetite. Customers transferred to GRG
typically show symptoms of significant financial difficulty, such as cash
flow pressures, or show evidence that the management team has limited
experience of managing a business in difficulty. In addition, a customer
may be transferred to GRG if the Group is not provided with sufficient or
reliable information on which to make decisions.
GRG relationship managers use their skill, experience and judgement to
support customers through these difficulties while seeking to minimise
losses to protect the Group’s capital.