RBS 2013 Annual Report Download - page 525
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Additional information
523
Risk factors
Set out below are certain risk factors which could adversely affect the
Group's future results, its financial condition and prospects and cause
them to be materially different from what is expected. The factors
discussed below and elsewhere in this report should not be regarded as
a complete and comprehensive statement of all potential risks and
uncertainties facing the Group.
The Group’s ability to implement its new strategic plan and achieve its
capital goals depends on the success of the Group's plans to refocus on
its core strengths and the timely divestment of RBS Citizens
Since the beginning of the global economic and financial crisis in 2008
and as a result of the changed global economic outlook, the Group has
been engaged in a financial and core business restructuring which has
been 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 the
restructuring programme announced in February 2009 was to run down
and sell the Group’s non-core assets and businesses with a 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. By 31 December 2013, this total had
reduced to £28.0 billion (31 December 2012 - £57.4 billion), excluding
derivatives, as further progress was made in business disposals and
portfolio sales during the course of 2013. This balance sheet reduction
programme has been implemented alongside the disposals under the
State Aid restructuring plan approved by the EC. 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).
During Q3 2013, the Group worked with HM Treasury as part of its
assessment of the merits of creating an external “bad bank” to hold
certain assets of the Group. Although the review concluded that the
establishment of an external “bad bank” was not in the best interests of
all stakeholders, the Group committed to take a series of actions to
further de-risk its business and strengthen its capital position.
These actions include:
• The formation of the Capital Resolution Group (CRG), which is
made up of four pillars: exiting the assets in RBS Capital Resolution
(RCR), delivering the initial public offerings (IPO) for both RBS
Citizens and Williams & Glyn and optimising the Group’s shipping
business;
• The creation of RCR to manage the run-down of problem assets,
which totalled £29 billion at the end of 2013, with the goal of
removing 55-70% of these assets over the next two years with a
clear aspiration to remove all these assets from the balance sheet in
three years; and
• Lifting the Group’s capital targets including by:
° accelerating the divestment of RBS Citizens, the Group’s US
banking subsidiary, with a partial IPO now planned for 2014, and
full divestment of the business intended by the end of 2016; and
° intensifying management actions to reduce risk weighted assets.
Since the end of Q3 2013, the Group has been conducting a review of its
activities which has resulted in additional changes to the Group’s
strategic goals. It is now intended to further simplify and downsize the
Group with an increased focus on service to its customers. As part of
simplifying the Group, the current divisional structure will be replaced by
three new customer segments, covering Personal & Business,
Commercial & Private Banking and Corporate & Institutional Banking. As
part of this reorganisation of the business, the intention will be to remain
in businesses where the Group can be number one for its customers. For
those businesses where that is not the case, the Group will either fix,
close or dispose of such businesses. This reorganisation, together with
investment in technology and more efficient support functions are
intended to deliver significant improvements in the Group’s Return on
Equity and costs: income ratio in the longer term.
Implementation of the Group’s new strategic plan will require significant
restructuring of the Group at the same time that it will also be
implementing structural changes to comply with the Financial Services
(Banking Reform) Act 2013 (the “Banking Reform Act” 2013) and its ring-
fencing requirements. The level of structural change intended to be
implemented within the Group over the medium term taken together with
the overall scale of change to make the Group a smaller, more focused
financial institution, are likely to be disruptive and increase operational
risks for the Group. There can be no assurance that the Group will be
able to successfully implement this new strategy together with other
changes required of the Group in the time frames contemplated or at all.
The Group’s ability to dispose of businesses, including RBS Citizens and
the EC mandated branch divestment now known as Williams & Glyn, and
assets and the price achieved for such disposals will be dependent on
prevailing economic and market conditions, which remain volatile. As a
result there is no assurance that the Group will be able to sell or run
down (as applicable) the businesses it has planned to sell or 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 or run-down of assets or businesses 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 within time frames envisaged by the Group, its regulators
and the EC.
The Group may be exposed to deteriorations 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 new strategic plan and achieve
its capital targets and could have a material adverse effect on the
Group’s business, results of operations, financial condition and cash
flows. There can also be no assurance that if the Group is able to
execute its strategic plan that the new strategy will ultimately be
successful or beneficial to the Group.