RBS 2013 Annual Report Download - page 366
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Business review Risk and balance sheet management
364
Other risks* continued
Strategic risk continued
Strategic plans are developed by each division on an annual cycle
managed centrally, and are aggregated into a Group plan reviewed and
challenged by the Group Chief Executive, Group Finance Director and
Group Director of Strategy and Corporate Finance before presentation to
the Group Board. The Board has ultimate responsibility for approving
strategic plans, initiatives and changes to strategic direction. In addition
to the annual cycle, each division presents a more detailed individual
“Deep Dive” review of key dimensions of its strategy at a Group Board
meeting at different points during the year.
Risk management and measurement
The Group seeks to reduce strategic risk by employing a disciplined
strategic framework based on five enduring tests (leading customer
franchises, returns, risk, sustainable growth, connectivity) and by
assigning responsibility for strategy development to line management.
Key strategies are scrutinised and approved by the Group Board. This is
intended to maximise the capture of market and customer insight while
providing independent scrutiny and challenge. Strategic plans contain
analysis of current and expected operating conditions, current and
targeted competitive and market positioning, key strategic initiatives,
financial and customer targets and milestones. Upside and downside
risks to the strategic plans are identified.
In 2013, the Group began to focus on reducing strategic risk through a
wide-ranging review to analyse core activities and formulate an
appropriate plan, including rationalisation where necessary, to address
the business challenges of the next five years
Responsibility for the management of the bank’s strategic risks resides
mainly with the individual divisions. Divisional management tracks
progress on the initiatives and action plans to deliver the strategy through
a range of key performance indicators such as financial performance, risk
metrics, market shares and numbers of customers, satisfaction scores.
Strategic progress is also monitored through quarterly performance
review meetings between divisional CEOs and the Group Chief
Executive, Group Finance Director and Group Director of Strategy and
Corporate Finance. While there is no formal Group statement on
Strategic Risk appetite, the Group’s strategy is approved by the Group
Board with consideration of the risks in pursuing that strategy.
A wide variety of financial, risk, customer and market metrics are used to
monitor business performance and thus, inter alia, the effectiveness of
chosen strategies. Any deviations from the expected values are analysed
to determine drivers which could be strategic, environmental or
management.
Risk mitigation
A full sensitivity analysis of the strategic plan is undertaken at the end of
the strategic and financial planning process, to assess the robustness of
the plan under stressed conditions represented by a variety of scenarios.
In certain cases, following consideration of an opportunity, the Group may
decide not to pursue that opportunity as a result of a perceived strategic
risk.
Developments in 2014
In November 2013, the Group announced its intention to undertake a
comprehensive business review. Over the remainder of 2013 and into the
early months of 2014, it completed the review and developed a strategic
plan, the objective of which is to position the Group as a UK-focused
retail and corporate bank that earns its customers’ trust by serving them
better than any other bank. Key to achieving this is combining customer
groups with similar needs into three new businesses and reducing
significantly the Group’s costs and complexity. While the Group is
confident that the plan is appropriate, it may have underestimated the
risks arising from concentrating its activities in the UK or misunderstood
the needs of its customers or the strength of its competitive position.
Even if the strategy proves to be appropriate, the Group may not succeed
in implementing it, particularly as doing so will make additional demands
on management at a time of significant regulatory change. Finally, given
the rapidity with which technology is changing its competitive
environment, the Group may find that its strategy does not go far enough
to enable it to compete effectively.
*unaudited