RBS 2014 Annual Report Download - page 174

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RBS – Interim Results 2015
Appendix 1 Capital and risk management
Non-trading portfolios (continued)
Foreign exchange risk
The only material non-traded open currency positions are the structural foreign exchange exposures arising
from investments in foreign subsidiaries, branches and associates and their related currency funding. These
exposures are assessed and managed by Treasury to predefined risk appetite levels under delegated
authority from the ALCo. Treasury seeks to limit the potential volatility impact on RBS’s CET1 ratio from
exchange rate movements by maintaining a structural open currency position. Gains or losses arising from
the retranslation of net investments in overseas operations are recognised in equity and reduce the
sensitivity of capital ratios to foreign exchange rate movements primarily arising from the retranslation of
non-sterling-denominated RWAs. Sensitivity is minimised where, for a given currency, the ratio of the
structural open position to RWAs equals RBS’s CET1 ratio. The sensitivity of the CET1 capital ratio to
exchange rates is monitored monthly and reported to the ALCo at least quarterly.
Foreign exchange exposures arising from customer transactions are sold down by businesses on a regular
basis in line with RBS policy.
Structural
Net assets foreign currency Residual
Net assets of overseas Net exposures structural
of overseas operations investment pre-economic Economic foreign currency
operations NCI (1) excluding NCI hedges hedges hedges (2) exposures
30 June 2015 £m £m £m £m £m £m £m
US dollar 11,302 (4,968) 6,334 (1,910) 4,424 (3,605) 819
Euro 5,210 (56) 5,154 (205) 4,949 (1,894) 3,055
Other non-sterling 3,962 (483) 3,479 (2,777) 702 - 702
20,474 (5,507) 14,967 (4,892) 10,075 (5,499) 4,576
31 December 2014
US dollar 11,402 (2,321) 9,081 (3,683) 5,398 (4,034) 1,364
Euro 6,076 (39) 6,037 (192) 5,845 (2,081) 3,764
Other non-sterling 4,178 (456) 3,722 (2,930) 792 - 792
21,656 (2,816) 18,840 (6,805) 12,035 (6,115) 5,920
Notes:
(1) Non-controlling interests (NCI) represents the structural foreign exchange exposure not attributable to owners’ equity, which consisted mainly of CFG in US dollar.
(2) Economic hedges mainly represent US dollar and euro preference shares in issue that are treated as equity under IFRS and do not qualify as hedges for accounting
purposes.
Key points
• Structural foreign currency exposures before and after economic hedges were £2.0 billion and £1.3
billion respectively lower, mainly due to changes below:
○ Net assets of overseas operations declined by £1.2 billion, largely due to the strength of sterling
against other currencies, especially the euro, which depreciated significantly during the period.
○ Non-controlling interests increased by £2.7 billion, mainly as a result of the partial disposal o
f
Citizens during Q1 2015.
○ Net investment hedges decreased by £1.9 billion, mainly due to the partial disposal of Citizens,
partly offset by an increase in the hedging of the remaining Citizens holdings.
• Economic hedges, which consist of equity capital securities in issue, decreased by £0.6 billion
reflecting redemptions of certain equity securities during Q1 2015.
• A 5% strengthening in foreign currencies against sterling would result in a gain or loss of £0.5 billion in
equity (2014 - £0.6 billion).