Half Year Report - Part 2

RNS Number : 3371G
Royal Bank of Scotland Group PLC
05 August 2016
 



Independent review report to The Royal Bank of Scotland Group plc

 

Introduction

We have been engaged by The Royal Bank of Scotland Group plc (the 'Company' or the 'Group') to review the Condensed consolidated financial statements in the half-yearly financial report for the six months ended 30 June 2016, which comprise the Condensed consolidated income statement, the Condensed consolidated statement of comprehensive income, the Condensed consolidated balance sheet, the Condensed consolidated statement of changes in equity, the Condensed consolidated cash flow statement, related Notes 1 to 19, the financial information in the segment results on page 26 to 59, and the Capital and risk management disclosures set out in Appendix 1 except for those indicated as not reviewed (together 'the Condensed consolidated financial statements').We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the Condensed consolidated financial statements.

 

This report is made solely to the Company in accordance with guidance contained in International Standard on Review Engagements (UK and Ireland) 2410 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our work, for this report, or for the conclusions we have formed.

 

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

 

As disclosed in Note 1, the annual financial statements of the Group are prepared in accordance with International Financial Reporting Standards ('IFRSs') as adopted by the European Union. The Condensed consolidated financial statements included in this half-yearly financial report have been prepared in accordance with International Accounting Standard 34, ''Interim Financial Reporting,'' as adopted by the European Union.

 

Our responsibility

Our responsibility is to express to the Company a conclusion on the Condensed consolidated financial statements in the half-yearly financial report based on our review.

 

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, ''Review of Interim Financial Information Performed by the Independent Auditor of the Entity'' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.



Independent review report to The Royal Bank of Scotland Group plc

 

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the Condensed consolidated financial statements in the half-yearly financial report for the six months ended 30 June 2016 are not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

 

 

 

Ernst & Young LLP

Statutory Auditor

London, United Kingdom

4 August 2016


Risk factors

 

The Group is subject to the following new risk factors:

 

Economic, regulatory and political uncertainty arising from the outcome of the recent referendum on the UK's membership of the European Union ("EU Referendum") could adversely impact the Group's business, results of operations, financial condition and prospects.

In a referendum held on 23 June 2016, a majority voted for the UK to leave the EU. Immediately following the EU Referendum result, the UK and global stock and foreign exchange markets commenced a period of significant volatility, in addition to which there is now prevailing uncertainty relating to the process, timing and negotiation of the UK's relationships with the EU and other multilateral organisations, as well as individual countries.

 

Once the exit process is triggered by the UK government, a two year period of negotiation will begin to determine the new terms of the UK's relationship with the EU, after which period its EU membership will cease. These negotiations will run in parallel to standalone bilateral negotiations with many individual countries and multilateral counterparties with which the UK currently has trading arrangements by virtue of its membership of the EU. The timing of, and process for, such negotiations and the resulting terms of the UK's future economic, trading and legal relationships are uncertain.  See also "The result of the EU Referendum has revived political uncertainty regarding Scottish independence resulting in additional risks to the Group."

 

The longer term effects of the EU Referendum are difficult to predict but are likely to include further financial instability and slower economic growth, in the UK in particular, but also in Republic of Ireland ("ROI"), Europe and the global economy, at least in the short to medium term.

 

As part of its revised strategy, the Group has been refocusing its business in the UK and ROI and, accordingly is more exposed to a slow-down of the British and Irish economies. Further decreases in interest rates by the Bank of England or sustained low or negative interest rates will put further pressure on the Group's interest margins and adversely affect the Group's profitability and prospects. Furthermore, such market conditions may also result in an increase in the Group's pension deficit.



Risk factors

 

A challenging macroeconomic environment, reduced profitability and greater market uncertainty could negatively impact the Group's performance and potentially lead to credit ratings downgrades which could adversely impact the Group's ability and cost of funding.  The Group's ability to access capital markets on acceptable terms and hence its ability to raise the amount of capital and funding required to meet its regulatory requirements and targets, including those relating to loss-absorbing instruments to be issued by the Group, could be effected. The major credit rating agencies have downgraded and changed their outlook to negative on the UK's sovereign credit rating following the results of the EU Referendum, resulting in the loss of its last remaining AAA rating.

 

The Group is in the process of implementing a large number of key restructuring and strategic initiatives, including the restructuring of its CIB business, the implementation of the UK ring-fencing regime, a significant cost reduction programme, and the divestment of Williams & Glyn, all of which will be carried out throughout this period of significant uncertainty which may impact the prospects for successful execution and impose additional pressure on management. In addition, the uncertainty resulting from the impact of the EU Referendum on foreign nationals' long term residency permissions in the UK may make it challenging for the Group to retain and recruit adequate staff, which may adversely impact the execution of these restructuring activities and business strategy.

 

The Group and its subsidiaries are subject to substantial EU-derived regulation and oversight. There is now significant uncertainty as to the respective legal and regulatory environments in which the Group and its subsidiaries will operate when the UK is no longer a member of the EU. In particular, the Group and its counterparties may no longer be able to rely on the European passporting framework for financial services and could be required to apply for authorisation in multiple EU jurisdictions, the costs, timing and viability of which is uncertain. This uncertainty and any actions taken as a result of this uncertainty, as well as new or amended rules may have a significant impact on the Group's operations, profitability and business model.

 

These risks and uncertainties are in addition to the pre-existing discussed in the Group's 2015 Annual Report & Accounts, also as filed on Form 20-F, which could individually or collectively have a material adverse effect on the Group's financial condition and results of operations.

 

The result of the EU Referendum has revived political uncertainty regarding Scottish independence resulting in additional risks to the Group. 

The Royal Bank of Scotland Group plc and The Royal Bank of Scotland plc ("RBS plc"), its principal operating subsidiary, are both headquartered and incorporated in Scotland. A referendum on Scottish independence took place on 18 September 2014, the outcome of which was a vote in favour of Scotland remaining part of the UK. However, the outcome of the EU Referendum was not supported by the majority of voters in Scotland who voted in favour of remaining in the EU. This has revived the political debate on a second referendum on Scottish independence creating further uncertainty as to whether such a referendum may be held and as to how the Scottish parliamentary process may impact the negotiations relating to the UK's exit from the EU and its future economic, trading and legal relationship with the EU.



Risk factors

 

Although the fact of, the timing and outcome of any further referendum on Scottish independence is very uncertain, such a referendum would greatly increase the risks the Group currently faces as a result of the EU Referendum. An affirmative result would result in significant additional constitutional, political, regulatory and economic uncertainty and would likely significantly impact the Group's credit ratings and funding and other costs and the fiscal, monetary, legal and regulatory landscape in which the Group operates.

 

In addition to the above, set out below is a summary of certain risks which could adversely affect the Group. This summary updates, and should be read in conjunction with, the fuller description of these and other risk factors included on pages 390 to 414 of the 2015 R&A and on pages 384 to 408 of the Group's Form 20-F filed with the US Securities and Exchange Commission on 24 March 2016. This summary should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties.

 

On 28 April 2016, the Group announced that there was a significant risk that the separation and divestment of Williams & Glyn would not be achieved by 31 December 2017. The Board has determined that it would not be prudent to continue with the current plan of record for separating and divesting Williams & Glyn and is actively exploring various alternative divestment structures including asset or business sales to third parties. However, there is no certainty any will be viable and each entails significant structural, execution, regulatory and cost risks.

While RBS remains committed to meeting the deadline for achieving a divestment, there is a significant risk it will be unable to do so. Challenging market conditions, Williams & Glyn's high cost base and the complexity of the business previously known as Williams & Glyn (and attendant integration/transfer challenges for any potential counterparty), transfer costs and accounting impacts may inhibit interest in its assets or business and/or result in RBS only being able to achieve a price materially below the book value of those assets, which may result in a significant loss on any divestment transaction and have an adverse effect on the Group's capital position.

The Group is subject to a number of legal, regulatory and governmental actions and investigations. Unfavourable outcomes in such actions and investigations could have a material adverse effect on the Group's operations, operating results, reputation, financial position and future prospects. For more details on certain of the Group's ongoing legal, governmental and regulatory proceedings, see pages 95 to 105.

The Group has been, and will remain, in a period of major restructuring through to 2019, which carries significant execution and operational risks, and there can be no assurance that the final results will be successful and that the Group will be a viable, competitive, customer-focused and profitable bank.

Implementation of the ring-fencing regime in the UK which began in 2015 and must be completed before 1 January 2019 will result in material structural changes to the Group's business. These changes could have a material adverse effect on the Group.

Operational risks are inherent in the Group's businesses and these risks could increase as a result of a number of factors including, as the Group implements its strategic programme, the UK ring-fencing regime, its cost reduction programme and the divestment of Williams & Glyn.



Risk factors

 

The Group's businesses and performance can be negatively affected by actual or perceived global economic and financial market conditions and other global risks and the Group will be increasingly impacted by developments in the UK as its operations become increasingly concentrated in the UK.

Changes in interest rates, foreign exchange rates, credit spreads, bond, equity and commodity prices, basis, volatility and correlation risks and other market factors have significantly affected and will continue to affect the Group's business and results of operations.

The Group's business performance and financial position could be adversely affected if its capital is not managed effectively or if it is unable to meet its capital targets.

Failure by the Group to comply with regulatory capital, liquidity and leverage requirements, including as a result of,  international, EU or UK changes or a requirement by the Group's regulators to increase the levels of capital the Group should hold or the manner in which it calculates its risk weighted assets and risk exposure may result in intervention by its regulators and loss of investor confidence, and may have a material adverse effect on its results of operations, financial condition and reputation and may result in distribution restrictions and adversely impact existing shareholders and other security holders.

Failure by the Group to comply with its capital requirements or to maintain sufficient distributable profits in the Royal Bank of Scotland Group plc, (RBSG) may restrict its ability to make discretionary distributions, including the payment of coupons on certain capital instruments and dividends to its ordinary shareholders. RBSG distributable profits are sensitive to the accounting impact of factors including the redemption of preference shares, restructuring costs and impairment charges and the carrying value of its investments in subsidiaries which are carried at the lower of cost and their prevailing recoverable amount. Recoverable amounts depend on discounted future cash flows which can be affected by restructurings, such as the requirement to create a ring fenced and non ring-fenced bank or banks, or unforeseen events. The RBSG distributable reserves also depend on the receipt of income from subsidiaries, principally as dividends. The ability of subsidiaries to pay dividends is subject to their performance and applicable local laws and other restrictions, including their respective regulatory requirements. Any of these factors, including restructuring costs, impairment charges and a reduction in the carrying value of RBSG subsidiaries or a shortage of dividends from them could limit the Group's ability to maintain sufficient distributable profits to be able to the pay coupons on certain capital instruments and dividends to its ordinary shareholders.

The Group is subject to stress tests mandated by its regulators in the UK and in Europe which may result in additional capital requirements or management actions which, in turn, may impact the Group's financial condition, results of operations and investor confidence or result in restrictions on distributions.

As a result of extensive reforms being implemented within the EU and the UK relating to the resolution of financial institutions, material additional requirements will arise to ensure that financial institutions maintain sufficient loss-absorbing capacity. Such changes to the funding and regulatory capital framework may require the Group to meet higher funding levels than the Group anticipated within its strategic plans and affect the Group's funding costs.

The Group's borrowing costs, its access to the debt capital markets and its liquidity depend significantly on its credit ratings and, to a lesser extent, on the rating of the UK Government.

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 Group's businesses are subject to substantial regulation and oversight. Significant regulatory developments and increased scrutiny by the Group's key regulators are likely to continue to increase compliance and conduct risks and could have a material adverse effect on how the Group conducts its business and on its results of operations and financial condition.



Risk factors

 

The Group is currently implementing a number of significant investment and rationalisation initiatives as part of the Group's IT investment programme. Should such investment and rationalisation initiatives fail to achieve the expected results, it could have a material adverse impact on the Group's operations and its ability to retain or grow its customer business and could require the Group to recognise impairment charges.

The Group's operations are highly dependent on its IT systems. A failure of the Group's IT systems could adversely affect its operations and investor and customer confidence and expose the Group to regulatory sanctions.

The Group is exposed to cyber attacks and a failure to prevent or defend against such attacks could have a material adverse effect on the Group's operations, results of operations or reputation.

The Group's operations entail inherent reputational risk.

The Group is exposed to conduct risk which may adversely impact the Group or its employees and may result in conduct having a detrimental impact on the Group's customers or counterparties.

The Group may be adversely impacted if its risk management is not effective and there may be significant challenges in maintaining the effectiveness of the Group's risk management framework as a result of the number of strategic and restructuring initiatives being carried out by the Group simultaneously.

The Group is currently in the process of implementing a strong risk culture across the organisation and a failure by the Group to do so could adversely affect the Group's ability to achieve its strategic objectives.

The Group is subject to pension risks and may be required to make additional contributions to cover pension funding deficits. In addition, it may be required to restructure its pension schemes as a result of the implementation of the UK ring-fencing which may result in additional or increased cash contributions.

Pension risk and changes to the Group's funding of its pension schemes may have a significant impact on the Group's capital position.

The impact of the Group's pension obligations on its results and operations are also dependent on the regulatory environment in which it operates.

The Group's business and results of operations may be adversely affected by increasing competitive pressures and technology disruption in the markets in which it operates.

The Group operates in markets that are subject to intense scrutiny by the competition authorities and its business and results of operations could be materially affected by competition rulings and other government measures.

As a result of the commercial and regulatory environment in which it operates, the Group may be unable to attract or retain senior management (including members of the board) and other skilled personnel of the appropriate qualification and competence. The Group may also suffer if it does not maintain good employee relations.

HM Treasury (or UKFI on its behalf) may be able to exercise a significant degree of influence over the Group and any further offer or sale of its interests may affect the price of securities issued by the Group.

The Group's earnings and financial condition have been, and its future earnings and financial condition may continue to be, materially affected by depressed asset valuations resulting from poor market conditions.

The financial performance of the Group has been, and may continue to be, materially affected by customer and counterparty credit quality and deterioration in credit quality could arise due to prevailing economic and market conditions and legal and regulatory developments.



Risk factors

 

The Group is committed to executing the run-down and sale of certain businesses, portfolios and assets forming part of the businesses and activities being exited by the Group. Failure by the Group to do so on commercially favourable terms could have a material adverse effect on the Group's operations, operating results, financial position and reputation.

The value or effectiveness of any credit protection that the Group has purchased depends on the value of the underlying assets and the financial condition of the insurers and counterparties.

The Group relies on valuation, capital and stress test models to conduct its business, assess its risk exposure and anticipate capital and funding requirements. Failure of these models to provide accurate results or accurately reflect changes in the micro- and macroeconomic environment in which the Group operates could have a material adverse effect on the Group's business, capital and results. If found deficient by the Group's regulators, the Group may be required to make changes to such models or may be precluded from using such models, which could result in the Group maintaining additional capital.

The reported results of the Group are sensitive to the accounting policies, assumptions and estimates that underlie the preparation of its financial statements. Its results in future periods may be affected by changes to applicable accounting rules and standards.

The Group and its subsidiaries are subject to a new and evolving framework on recovery and resolution, the impact of which remains uncertain, and which may result in additional compliance challenges and costs.

The Group may become subject to the application of stabilisation or resolution powers in certain significant stress situations, which may result in various actions being taken in relation to the Group and any securities of the Group, including the write-off, write-down or conversion of the Group's securities.

In the UK and in other jurisdictions, the Group is responsible for contributing to compensation schemes in respect of banks and other authorised financial services firms that are unable to meet their obligations to customers.

The Group's results could be adversely affected in the event of goodwill impairment.

Recent and anticipated changes in the tax legislation in the UK are likely to result in increased tax payments by the Group and may impact the recoverability of certain deferred tax assets recognised by the Group (including the timing for the recoverability of such deferred tax assets).


Statement of directors' responsibilities

 

We, the directors listed below, confirm that to the best of our knowledge:

 

·

the condensed financial statements have been prepared in accordance with IAS 34 'Interim Financial Reporting';



·

the interim management report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and



·

the interim management report includes a fair review of the information required by DTR 4.2.8R (disclosure of related parties' transactions and changes therein).

 

By order of the Board

 

 

 

 

Howard Davies

Ross McEwan

Ewen Stevenson

Chairman

Chief Executive

Chief Financial Officer

 

4 August 2016

 

 

 

Board of directors

 

Chairman

Executive directors

Non-executive directors

Howard Davies

Ross McEwan

Ewen Stevenson

 

 

Sandy Crombie

Frank Dangeard

Alison Davis

Morten Friis

Robert Gillespie
Penny Hughes
Brendan Nelson

Baroness Noakes

Mike Rodgers

 


Additional information

 

Share information


30 June 

2016 

31 March 

2016 

31 December 

2015 





Ordinary share price

171.60p

222.70p

302.00p





Number of ordinary shares in issue

11,755m

11,661m

11,625m

 

Financial calendar



2016 third quarter interim management statement

28 October 2016

 


Forward-looking statements

 

Certain sections in this document contain 'forward-looking statements' as that term is defined in the United States Private Securities Litigation Reform Act of 1995, such as statements that include the words 'expect', 'estimate', 'project', 'anticipate', 'believe', 'should', 'intend', 'plan', 'could', 'probability', 'risk', 'Value-at-Risk (VaR)', 'target', 'goal', 'objective', 'may', 'endeavour', 'outlook', 'optimistic', 'prospects' and similar expressions or variations on these expressions.

 

In particular, this document includes forward-looking statements relating, but not limited to: The Royal Bank of Scotland Group's (RBS) restructuring which includes divestment of Williams & Glyn, litigation, government and regulatory investigations, the proposed restructuring of RBS's CIB business, the implementation of the UK ring-fencing regime, the implementation of a major development program to update RBS's IT infrastructure and the continuation of its balance sheet reduction programme, as well as capital and strategic plans, divestments, capitalisation, portfolios, net interest margin, capital and leverage ratios and requirements liquidity, risk-weighted assets (RWAs), RWA equivalents (RWAe), Pillar 2A, return on equity (ROE), profitability, cost:income ratios, loan:deposit ratios, AT1 and other funding plans, funding and credit risk profile; RBS's future financial performance; the level and extent of future impairments and write-downs; including with respect to Goodwill; future pension contributions and RBS's exposure to political risks, operational risk, conduct risk and credit rating risk and to various types of market risks, such as interest rate risk, foreign exchange rate risk and commodity and equity price risk. These statements are based on current plans, estimates, targets and projections, and are subject to inherent risks, uncertainties and other factors which could cause actual results to differ materially from the future results expressed or implied by such forward-looking statements. For example, certain market risk disclosures are dependent on choices relying on key model characteristics and assumptions and are subject to various limitations. By their nature, certain of the market risk disclosures are only estimates and, as a result, actual future gains and losses could differ materially from those that have been estimated.

 

Other factors that could adversely affect our results and the accuracy of forward-looking statements in this document include the risk factors and other uncertainties discussed in the Annual Report and Accounts 2015. These include the significant risks for RBS presented by the outcomes of the legal, regulatory and governmental actions and investigations that RBS is subject to (including active civil and criminal investigations) and any resulting material adverse effect on RBS of unfavourable outcomes (including where resolved by settlement); the economic, regulatory and political uncertainty arising from the majority vote to leave in the referendum on the UK's membership in the European Union and the revived political uncertainty regarding Scottish independence; the divestment of Williams & Glyn; RBS's ability to successfully implement the various initiatives that are comprised in its restructuring plan, particularly the proposed restructuring of its CIB business and the balance sheet reduction programme as well as the significant restructuring required to be undertaken by RBS in order to implement the UK ring fencing regime; the significant changes, complexity and costs relating to the implementation of its restructuring, the separation and divestment of Williams & Glyn and the UK ring-fencing regime; whether RBS will emerge from its restructuring and the UK ring-fencing regime as a viable, competitive, customer focused and profitable bank; RBS's ability to achieve its capital and leverage requirements or targets which will depend on RBS's success in reducing the size of its business and future profitability; ineffective management of capital or changes to regulatory requirements relating to capital adequacy and liquidity or failure to pass mandatory stress tests; the ability to access sufficient sources of capital, liquidity and funding when required; changes in the credit ratings of RBS or the UK government; declining revenues resulting from lower customer retention and revenue generation in light of RBS's strategic refocus on the UK the impact of global economic and financial market conditions (including low or negative interest rates) as well as increasing competition. In addition, there are other risks and uncertainties. These include operational risks that are inherent to RBS's business and will increase as a result of RBS's significant restructuring; the potential negative impact on RBS's business of actual or perceived global economic and financial market conditions and other global risks; the impact of unanticipated turbulence in interest rates, yield curves, foreign currency exchange rates, credit spreads, bond prices, commodity prices, equity prices; basis, volatility and correlation risks; heightened regulatory and governmental scrutiny and the increasingly regulated environment in which RBS operates; the risk of failure to realise the benefit of RBS's substantial investments in its information technology and systems, the risk of failing to preventing a failure of RBS's IT systems or to protect itself and its customers against cyber threats, reputational risks; risks relating to the failure to embed and maintain a robust conduct and risk culture across the organisation or if its risk management framework is ineffective; risks relating to increased pension liabilities and the impact of pension risk on RBS's capital position; increased competitive pressures resulting from new incumbents and disruptive technologies; RBS's ability to attract and retain qualified personnel; HM Treasury exercising influence over the operations of RBS; limitations on, or additional requirements imposed on, RBS's activities as a result of HM Treasury's investment in RBS; the extent of future write-downs and impairment charges caused by depressed asset valuations; deteriorations in borrower and counterparty credit quality; the value and effectiveness of any credit protection purchased by RBS; risks relating to the reliance on valuation, capital and stress test models and any inaccuracies resulting therefrom or failure to accurately reflect changes in the micro and macroeconomic environment in which RBS operates, risks relating to changes in applicable accounting policies or rules which may impact the preparation of RBS's financial statements; the impact of the recovery and resolution framework and other prudential rules to which RBS is subject; the recoverability of deferred tax assets by the Group; and the success of RBS in managing the risks involved in the foregoing.

 

The forward-looking statements contained in this document speak only as at the date hereof, and RBS does not assume or undertake any obligation or responsibility to update any forward-looking statement to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

 

The information, statements and opinions contained in this document do not constitute a public offer under any applicable legislation or an offer to sell or solicit of any offer to buy any securities or financial instruments or any advice or recommendation with respect to such securities or other financial instruments.


 

 

 

 

 

 

 

 

 

Appendix 1

 

Capital and risk management


Appendix 1 Capital and risk management

 

 


Page

Presentation of information

2

General overview

2

 

Capital management

Pillar 2A and MDA

6

Capital resources

8

Capital flow statement

9

Loss absorbing capital

10

Risk-weighted assets

11

 

Liquidity and funding risk

Liquidity risk

13

Funding risk

15

 

Credit risk

Key developments: Exposure measure

16

Management basis:

18

  Key loan portfolios     

18

  Country risk              

37

Balance sheet analysis:

39

  Loans and related credit metrics

39

  Debt securities

43

  Derivatives

44

  Valuation reserves

45

Regulatory basis:

46

  EAD and RWA density

46

 

Market risk


Trading portfolios

50

Non-trading portfolios

52

Net interest income and foreign exchange risk

55

 

 

 

 



 

Appendix 1 Capital and risk management

 

Presentation of information

Except as otherwise indicated by an asterisk (*), information in the Capital and risk management appendix is within the scope of the Independent review report by Ernst & Young LLP. Unless otherwise indicated, disclosures in this section include disposal groups in the relevant exposures.

 

General overview*

RBS's main risks are described in Capital and risk management - Risk coverage in the 2015 Annual Report and Accounts. The table below is an overview of these risks, including any developments during H1 2016.

 

Risk type

Overview

Capital and

leverage

·

The CET1 ratio decreased by 100 basis points in H1 2016 to 14.5% primarily reflecting management actions to normalise the ownership structure and improve the long-term resilience of RBS. These included the final DAS payment of £1.2 billion and the accelerated payment of £4.2 billion relating to the outstanding deficit on the pension Main Scheme. Additional litigation and conduct charges contributed to a £2.0 billion reduction in CET1 capital.


·

RWAs increased by £2.6 billion to £245.2 billion during H1 2016 reflecting lending growth in UK PBB and Commercial Banking and the adverse impact of exchange rate movements being partially offset by Capital Resolution disposals and run-off.


·

There was a 10 basis points decrease in the CET1 ratio in Q2 2016 driven by a £0.7 billion decrease in CET 1 capital in Q2 2016, offset by £4.3 billion reduction in RWAs. The reduction in RWAs related to disposals and run-off in Capital Resolution, and removal of that element of operational risk RWAs relating to Citizens, following regulatory approval (£3.9 billion); these were partly off-set by the weakening of sterling mainly due to the EU Referendum (£4.4 billion).


·

Leverage ratio reduced by 40 basis points in H1 2016 to 5.2%, reflecting lower CET1 capital and loan growth.


·

Under current total loss absorbing capital (TLAC) guidance, RBS will be required to hold a minimum loss absorbing capital of 16% of RWAs by the beginning of 2019 and 18% by the beginning of 2022. This estimate is subject to final guidance from the Bank of England's proposed approach to MREL. Estimated loss absorbing capital at 30 June 2016 was £59.9 billion (31 December 2015 - £60.3 billion) which was 24.4% of RWAs and 8.3% of leverage exposure.


·

The current estimated headroom to fully phased MDA trigger in 2019 is 2.2%. This is based on our target CET1 ratio of 13% versus 10.8% MDA requirement, which remains subject to change, comprising: 4.5% Pillar 1 minimum, the capital conservation buffer of 2.5%, 2.8% of Pillar 2A ratio and 1.0% GSIB buffer.


·

RBS continued to strengthen its balance sheet and RBSG plc issued €1.5 billion 7 year 2.5% senior notes and $1.5 billion 10 year 4.8% senior notes in Q1 2016;  both of which are expected to be MREL-eligible, subject to regulatory finalisation.


·

There has been significant volatility in the capital markets during the year, most notably in the AT1 market. We continue to target up to £2 billion of AT1 issuance in 2016, subject to market conditions.


·

The EBA announced the results of its 2016 EU-wide stress test in July 2016, RBS's CET1 ratio was 8.1% and leverage ratio was 3.6%. There was no pass / fail threshold for this test.


·

We remain actively engaged with regulators in the UK and beyond on upcoming regulatory developments, including those relating to Basel Committee proposals on RWAs and the Bank of England's proposed approach to MREL for UK banks; our capital plans will evolve accordingly.

*Not within the scope of Ernst & Young LLP's review report.



Appendix 1 Capital and risk management

 

General overview* (continued)

 

Risk type

Overview

Liquidity and funding

·

RBS has not experienced any significant impact to its liquidity position as a result of the EU Referendum. All key liquidity risk metrics met minimum requirements at 30 June 2016.

·

The liquidity position remains strong with the liquidity portfolio of £153 billion covering total wholesale funding, including derivative collateral, by 1.9 times.


·

The liquidity portfolio decreased by £2.9 billion in H1 2016, and by £3.7 billion in Q2, with payments totalling £5.4 billion in March 2016 relating to the pension fund and the final DAS dividend. The second quarter decrease comprised a £7 billion reduction in cash at central banks being partially offset by an increase in  loans (secondary liquidity) in the central Treasury portfolio as well as lower liquidity requirements in RBS N.V. as rundown of the balance sheet continued.


·

Liquidity coverage ratio (LCR) reduced from 136% at the year end to 121% at the end of the first quarter and 116% at 30 June 2016. The trend reflected the pension fund and DAS dividend payments and lending growth in UK PBB and Commercial Banking. These factors reduced RBS's excess liquidity.


·

Net stable funding ratio (NSFR) was 119%, comfortably above the minimum target of 100%, reflecting RBS's funding strategy of relying on stable customer deposits.


·

The loan:deposit ratio was 92%, up from 90% at Q1 and 89% at the year end. Mortgage growth in UK PBB and higher corporate lending in Commercial Banking outweighed deposit increases. Deposit growth in UK PBB, Private Banking and RBSI was partially offset by Capital Resolution exits and run-off.


·

RBS has continued to manage down its overall wholesale funding, which has reduced from £83.5 billion at 31 December 2014 to £55.1 billion at 30 June 2016. The primary drivers have been calls and buybacks (£12.0 billion) and maturities (£19.3 billion), partially offset by new issuances (£2.9 billion). The H1 2016 reduction of £3.6 billion from £58.7 billion at December 2015 is largely due to calls and buybacks (£5.3 billion) and maturities (£6.1 billion), offset by new issuances (£2.3 billion) and the effect of changes in market values (£5.4 billion).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*Not within the scope of Ernst & Young LLP's review report.



Appendix 1 Capital and risk management

 

General overview* (continued)

 

Risk type

Overview

Conduct and regulatory

·

Conduct and litigation costs were £1.3 billion in both H1 2016 and in H1 2015. H1 2016 included provisions in respect of the UK 2008 rights issue shareholder litigation and additional charge for PPI. RBS continued to remediate historical conduct issues and to work on a number of regulatory change programmes. The UK's Senior Managers and Certification regime was successfully implemented, and work continues on the UK's ring-fencing requirements.

Credit risk

·

The growth in UK mortgage lending continued in line with UK PBB strategy.

·

Risk appetite limits for sector, product and asset class frameworks were reduced to take account of the revised risk appetite associated with restructured CIB.


·

Impairment provisions were £6.5 billion and covered REIL by 55% compared with £7.1 billion and 59% at 31 December 2015. REIL of £11.8 billion were 3.5% of customer loans and advances, down from 3.6% at Q1 2016 and 4.8% a year ago.


·

Challenging market conditions have persisted in the Shipping sector, resulting in customers being subject to heightened credit monitoring. Impairment provisions were £445 million on REIL of £1,023 million at 30 June 2016 (31 March 2016 - £374 million on £827 million; 31 December 2015 - £181 million on £434 million). Forbearance has also increased. Q2 2016 also saw impairment charges in the Oil & Gas and Metals & Mining sectors of £97 million and £29 million respectively.


·

Impairment provisions relating to the Property sector reduced from £2.3 billion to £1.5 billion, driven predominantly by the reduction in CRE exposures managed by Capital Resolution. The run-down in lower quality assets in Capital Resolution has improved the overall credit quality.

Market risk

·

Traded VaR continued to decline despite the increased volatility and reduced liquidity resulting from macroeconomic and political factors including the economic slowdown in China, the reduction in US quantitative easing, the low interest rate environment in Europe and the EU Referendum. Average internal traded VaR was £15.4 million (FY 2015 - £18.9 million). The EU Referendum had no significant impact on traded VaR during H1 2016.


·

Non-traded credit spread VaR was £57.7 million at 30 June 2016 (31 December 2015 - £30.6 million). The rise largely reflected an increase in longer-dated bonds within Treasury's liquidity portfolio and greater credit spread volatility, primarily affecting US dollar bond swap spreads with tenors of over ten years.


·

Non-traded interest rate VaR, capturing the risk arising from earnings from retail and commercial banking activities, was £21 million and was broadly stable during the period, with fluctuations well within risk appetite.


·

The sensitivity of net interest income to an immediate upward 25 basis point shift in interest rates from the base-case forecast was broadly unchanged at £68 million, but the impact of a downward shift increased from £96 million to £140 million.


·

The equity structural hedge fell to £35 billion from £42 billion, primarily reflecting the £4.2 billion pension fund payment and the £1.2 billion final DAS dividend payment.

 

 

 

*Not within the scope of Ernst & Young LLP's review report.



Appendix 1 Capital and risk management

 

General overview* (continued)

 

Risk type

Overview

Operational

·

Development of the operational risk framework continued, including: (i) the cascade of RBS-wide risk appetite statements for the most material risks; and (ii) the embedding of the enhanced Risk & Control Assessment approach developed in 2015. The effects on the bank's risk profile of the wide-ranging change portfolio, especially the divestment of Williams & Glyn, continued to be closely monitored.

Reputational

·

The importance of managing reputational risk is reinforced through an overarching risk appetite statement. This addresses the internal risk of RBS making decisions without taking reputational risk into account.


·

The most material threats to RBS's reputation continued to originate from conduct issues, both historical and more recent.

Pension

·

RBS made a £4.2 billion payment to the RBS Group Pension Fund in March 2016. This removed an element of pension risk. RBS and the Trustee also agreed that the next valuation of the RBS Group Pension Fund will take place as at 31 December 2018, providing greater certainty to pension funding commitments until at least 2019, an important period running up to the implementation of UK ring-fencing legislation.

Business

·

RBS continued to reduce its business risk profile by implementing its strategic plan to shift the business mix towards the UK and retail and commercial banking segments, with higher risk activities in CIB and Capital Resolution curtailed through disposals and run-downs. RBS also continued with its simplification and cost reduction programmes.


·

Market conditions have become more volatile following the EU Referendum result, and RBS continues closely to monitor and assess the operating environment and its impact on business risk.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*Not within the scope of Ernst & Young LLP's review report.


Appendix 1 Capital and risk management

 

Capital management*

RBS aims to maintain an appropriate level of capital to meet its business needs and regulatory requirements, and operates within an agreed risk appetite. The appropriate level of capital is determined based on the aims of: (i) meeting minimum regulatory capital requirements; and (ii) ensuring RBS maintains sufficient capital to uphold customer, investor and rating agency confidence in the organisation, thereby supporting its business franchises and funding capacity. For a description of the capital management framework, governance and basis of preparation refer to Capital management in the 2015 Annual Report and Accounts.

 

Pillar 2A and MDA

RBS's current total Pillar 2A requirement is 5.0% of RWAs (31 December 2015 - 5.0%). From 1 January 2015, 56% of the total Pillar 2A or 2.8% of RWAs is required to be met from CET1 capital. Pillar 2A is a point in time regulatory assessment of the amount of capital required to meet the overall financial adequacy rules. This PRA assessment may change over time, including as a result of an at least annual assessment and supervisory review of RBS's Internal Capital Adequacy Assessment Process (ICAAP); the latest ICAAP based on the end of 2015 data was submitted to the PRA for supervisory review in May 2016.

 

RBS's capital risk appetite framework, which informs its capital targets, includes consideration of the maximum distributable amount (MDA) requirements. These requirements are expected to be phased in from 2016, with full implementation by 2019.

 

Based on current capital requirements, on the illustrative assumption that current estimates of Pillar 2A remain constant, RBS estimates that its 'fully phased' CET1 MDA requirement would be 10.8% in 2019, assuming RBS's current risk profile is unchanged. It should be noted that this estimate does not reflect the anticipated impact of RBS's planned restructuring, changes in the regulatory framework or other factors that could impact target CET 1 ratio. The estimated 2019 MDA requirement comprises:

 

4.5% Pillar 1 minimum CET1 ratio;

2.5% Capital conservation buffer;

2.8% Pillar 2A CET1 ratio; and

1.0% Global Systemically Important Institution buffer.

 

Based on the assumptions above, assuming a 13% steady state CET1 capital ratio is achieved, RBS currently estimates that it would have headroom of 2.2% to fully phased MDA trigger in 2019. This headroom will be subject to ongoing review to reflect our risk appetite and accommodate regulatory and other changes.

 

Developments in prudential regulation

Following the EU Referendum, a period of uncertainty is expected regarding the regulatory landscape that will apply at the point in time that the UK leaves the EU. EU regulation will continue to apply during the intervening period, expected to be two years or longer, whilst the UK remains a member of the EU. RBS remains actively engaged and continues to monitor developments with the regulatory bodies in the UK and beyond regarding the scope of regulation that may apply to RBS in the future. In its July 2016 Financial Stability Report, the FPC reduced the countercyclical buffer rate to UK bank's exposures from 0.5% to 0%.

 

 

 

 

 

 

 

 

 

*Not within the scope of Ernst & Young LLP's review report.



Appendix 1 Capital and risk management

 

Pillar 2A and MDA* (continued)

In the first half of 2016 the Basel Committee of Banking Supervision (BCBS) framework has continued to evolve, additionally there have been revisions to Capital Requirements Regulations (CRR) and additional local rules for UK banks from the PRA. The BCBS developments were:

 

Credit risk: the proposals on Standardised and Internal Ratings Based approaches to calculating credit risk (including counterparty) restrict both portfolios where internal models are permitted to be used, and modelling approaches where modelling persists. Whist the final requirements are not expected until end 2016, capital requirements are expected to increase.

Market risk:


The Interest Rate Risk in the Banking Book (IRRBB) standard issued in April 2016 maintains the Pillar 2 approach with enhanced market disclosure (Pillar 3), allowing local supervisors to take account of individual circumstances when setting capital requirements.


The Fundamental Review of the Trading Book final standard was issued in January 2016. The major changes include: revisions to the approach for banking book/trading book boundary, the replacement of VaR with an expected shortfall model and new, more risk sensitive standardised methodologies which will need to be calculated for the entire book, regardless of whether a firm has permission to use a modelled approach. Capital requirements are expected to increase.

Operational risk: The consultation published in March 2016 addresses perceived weakness in the current framework by revising the calculation methodology to include a firm's past operational losses, including conduct and litigation; capital requirements are expected to increase under these proposals.

Pillar 3 disclosures: The 'Phase 2' proposal was issued in March 2016 and focused on the consolidation of separate disclosure requirements and initiatives currently in development. A number of initiatives are subject to substantial debate or industry interpretation.

Leverage: The comprehensive review is likely to result in changes of approach for leverage exposure, including but not limited to: settlement balances, derivative exposures and off-balance sheet items.

MREL: The EBA launched a consultation in July 2016 on the implementation and design of MREL, the EU equivalent of TLAC, but the scope is not limited to G-SIBs.  The requirement will be set on a case- by-case basis by the resolution authorities. We currently anticipate initial guidance from the Bank of England on its proposed approach to MREL in the second half of 2016.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*Not within the scope of Ernst & Young LLP's review report.



Appendix 1 Capital and risk management

 

Capital management disclosures

 

Refer to Analysis of results - Capital and leverage for information on Capital, RWAs and leverage and the Pillar 3 supplement for capital and leverage relating to significant subsidiaries and also CRR templates.

 

Capital resources









End-point CRR basis (1)


PRA transitional basis (1)


30 June

31 March

31 December


30 June

31 March

31 December

2016 

2016 

2015 


2016 

2016 

2015 


£m 

£m 

£m 


£m 

£m 

£m 









Shareholders' equity (excluding








  non-controlling interests)








 Shareholders' equity

52,907 

53,377 

53,431 


52,907 

53,377 

53,431 

 Preference shares - equity

(3,305)

(3,305)

(3,305)


(3,305)

(3,305)

(3,305)

 Other equity instruments

(2,536)

(2,646)

(2,646)


(2,536)

(2,646)

(2,646)










47,066 

47,426 

47,480 


47,066 

47,426 

47,480 

Regulatory adjustments and deductions








 Own credit

(587)

(371)

(104)


(587)

(371)

(104)

 Defined benefit pension fund adjustment

(209)

(458)

(161)


(209)

(458)

(161)

 Cash flow hedging reserve

(1,603)

(1,141)

(458)


(1,603)

(1,141)

(458)

 Deferred tax assets

(1,040)

(1,075)

(1,110)


(1,040)

(1,075)

(1,110)

 Prudential valuation adjustments

(603)

(408)

(381)


(603)

(408)

(381)

 Goodwill and other intangible assets

(6,525)

(6,534)

(6,537)


(6,525)

(6,534)

(6,537)

 Expected losses less impairments

(831)

(936)

(1,035)


(831)

(936)

(1,035)

 Other regulatory adjustments

(14)

(73)

(86)


(14)

(73)

(64)










(11,412)

(10,996)

(9,872)


(11,412)

(10,996)

(9,850)









CET1 capital

35,654 

36,430 

37,608 


35,654 

36,430 

37,630 









Additional Tier 1 (AT1) capital








 Eligible AT1

1,997 

1,997 

1,997 


1,997 

1,997 

1,997 

 Qualifying instruments and related








   share premium subject to phase out


4,365 

4,365 

5,092 

 Qualifying instruments issued by








   subsidiaries and held by third parties


1,394 

1,394 

1,627 









AT1 capital

1,997 

1,997 

1,997 


7,756 

7,756 

8,716 









Tier 1 capital

37,651 

38,427 

39,605 


43,410 

44,186 

46,346 









Qualifying Tier 2 capital








 Qualifying instruments and related








   share premium

6,443 

5,960 

5,745 


7,188 

6,406 

6,265 

 Qualifying instruments issued by








   subsidiaries and held by third parties

2,585 

2,462 

2,257 


5,855 

6,622 

7,354 









Tier 2 capital

9,028 

8,422 

8,002 


13,043 

13,028 

13,619 









Total regulatory capital

46,679 

46,849 

47,607 


56,453 

57,214 

59,965 

 

Note:

(1)

Capital Requirements Regulation (CRR) as implemented by the Prudential Regulation Authority in the UK, with effect from 1 January 2014. All regulatory adjustments and deductions to CET1 have been applied in full for the end-point CRR basis with the exception of unrealised gains on available-for-sale (AFS) securities which has been included from 2015 for the PRA transitional basis.

 



 

Appendix 1 Capital and risk management

 

Capital flow statement*

The table below analyses the movement in end-point CRR CET1, AT1 and Tier 2 capital during the half year ended 30 June 2016.

 


CET1

AT1

Tier 2

Total


£m

£m

£m

£m






At 1 January 2016

37,608 

1,997 

8,002 

47,607 

Loss for the period

(2,045)

(2,045)

Own credit

(483)

(483)

Share capital and reserve movements in respect of employee share schemes

187 

187 

Ordinary shares issued

85 

85 

Foreign exchange reserve

1,032 

1,032 

AFS reserves

(75)

(75)

Goodwill and intangibles deduction

12 

12 

Deferred tax assets

70 

70 

Prudential valuation adjustments

(222)

(222)

Expected loss over impairment provisions

204 

204 

Net dated subordinated debt/grandfathered instruments

(364)

(364)

Foreign exchange movements

1,390 

1,390 

Other movements

(719)

(719)






At 30 June 2016

35,654 

1,997 

9,028 

46,679 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*Not within the scope of Ernst & Young LLP's review report.


Appendix 1 Capital and risk management

 

Loss absorbing capital*

The following table illustrates the components of estimated loss absorbing capital (LAC) in RBSG plc and operating subsidiaries.

 


At 30 June 2016


31 December 2015



Balance





Balance




Par

sheet

Regulatory

LAC


Par

sheet

Regulatory

LAC


value (1)

 value

value (2)

value (3)


value (1)

 value

value (2)

value (3)


£bn

£bn

£bn

£bn


£bn

£bn

£bn

£bn

CET1 capital (4)

35.7 

35.7 

35.7 

35.7 


37.6 

37.6 

37.6 

37.6 











Tier 1 capital: end point CRR compliant AT1










of which: RBSG plc (holdco)

2.0 

2.0 

2.0 

2.0 


2.0 

2.0 

2.0 

2.0 

of which: RBSG operating subsidiaries (opcos)



2.0 

2.0 

2.0 

2.0 


2.0 

2.0 

2.0 

2.0 











Tier 1 capital: non-end point CRR compliant










of which: holdco

6.1 

6.4 

6.0 

4.7 


6.0 

6.0 

5.9 

4.6 

of which: opcos

0.3 

0.3 

0.3 

0.3 


2.5 

2.5 

2.5 

0.3 


6.4 

6.7 

6.3 

5.0 


8.5 

8.5 

8.4 

4.9 











Tier 2 capital: end point CRR compliant










of which: holdco

6.5 

7.0 

6.4 

5.2 


5.8 

5.9 

5.7 

4.4 

of which: opcos

5.8 

6.0 

4.0 

5.4 


5.1 

5.5 

3.8 

5.5 


12.3 

13.0 

10.4 

10.6 


10.9 

11.4 

9.5 

9.9 











Tier 2 capital: non-end point CRR compliant










of which: holdco

0.3 

0.3 

0.2 

0.1 


0.3 

0.3 

0.2 

0.1 

of which: opcos

3.6 

3.9 

2.7 

3.2 


3.3 

3.6 

3.0 

2.9 


3.9 

4.2 

2.9 

3.3 


3.6 

3.9 

3.2 

3.0 











Senior unsecured debt securities issued by:










RBSG holdco

5.9 

6.0 

3.3 


4.9 

5.0 

2.9 

RBSG opcos

13.7 

14.3 


17.7 

18.1 


19.6 

20.3 

3.3 


22.6 

23.1 

2.9 

Total

79.9 

81.9 

57.3 

59.9 


85.2 

86.5 

60.7 

60.3 











RWAs




245.2 





242.6 

Leverage exposure




720.7 





702.5 











LAC as a ratio of RWAs




24.4%





24.9%

LAC as a ratio of leverage exposure




8.3%





8.6%

 

Notes:

(1)

Par value reflects the nominal value of securities issued.

(2)

Regulatory capital instruments issued from operating companies are included in the transitional LAC calculation, to the extent they meet the TLAC/MREL criteria.

(3)

LAC value reflects RBS's interpretation of the 9 November 2015 FSB Term Sheet on TLAC and the Bank of England's consultation on their approach to setting MREL, published on 11 December 2015. MREL policy and requirements remain subject to further consultation, as such RBS estimated position remains subject to potential change. Liabilities excluded from LAC include instruments with less than one year remaining to maturity, structured debt, operating company senior debt, and other instruments that do not meet the TLAC/MREL criteria.

(4)

Corresponding shareholders' equity was £52.9 billion (31 December 2015 - £53.4 billion).

(5)

Regulatory amounts reported for AT1, Tier 1 and Tier 2 instruments are before grandfathering restrictions imposed by CRR.

 

 

 

 

 

 

 

*Not within the scope of Ernst & Young LLP's review report.


Appendix 1 Capital and risk management

 

Risk-weighted assets*

The tables below analyse the movement in RWAs on the end-point CRR basis during the half year, by key drivers.


Credit risk RWAs


Non-counterparty 

Counterparty 

Total


£bn 

£bn 

£bn





At 1 January 2016

166.4 

23.4 

189.8 

Foreign exchange movement

7.5 

7.5 

Business movements

(3.5)

3.1 

(0.4)

Risk parameter changes

2.3 

(1.2)

1.1 

Methodology changes

(0.2)

(0.2)

Model updates

0.7 

1.1 

1.8 

Other changes

(0.7)

(0.3)

(1.0)





At 30 June 2016

172.5 

26.1 

198.6 





Modelled (1)

135.3 

23.0 

158.3 

Non-modelled

37.2 

3.1 

40.3 






172.5 

26.1 

198.6 

 


Market risk RWAs

Operational



CIB

Other

Total

risk RWAs

Total


£bn

£bn

£bn

£bn

£bn







At 1 January 2016

13.8 

7.4 

21.2 

31.6 

52.8 

Business and market movements

(0.4)

0.1 

(0.3)

(5.9)

(6.2)







At 30 June 2016

13.4 

7.5 

20.9 

25.7 

46.6 







Modelled (1)

11.5 

5.0 

16.5 

16.5 

Non-modelled

1.9 

2.5 

4.4 

25.7 

30.1 








13.4 

7.5 

20.9 

25.7 

46.6 

 

Note:

(1)

Modelled refers to advanced internal ratings (AIRB) basis for non-counterparty credit risk, internal model method (IMM) for counterparty credit risk, and value-at-risk and related models for market risk. These principally relate to Commercial Banking (£62.5 billion).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*Not within the scope of Ernst & Young LLP's review report.



Appendix 1 Capital and risk management

 

Risk-weighted assets* (continued)

The table below analyses the movement in end-point CRR RWAs by segment during the half year.














Ulster







Central




Bank

Commercial

Private



Capital


items



UK PBB

RoI

Banking

Banking

RBSI

CIB

Resolution

W&G

& other

Total

Total RWAs

£bn

£bn

£bn

£bn

£bn

£bn

£bn

£bn

£bn

£bn












At 1 January 2016

33.3 

19.4 

72.3 

8.7 

8.3 

33.1 

49.0 

9.9 

8.6 

242.6 

Foreign exchange movement

2.3 

1.5 

0.5 

0.3 

2.5 

0.4 

7.5 

Business movements

0.5 

(0.2)

2.7 

0.2 

0.8 

2.6 

(6.4)

(0.2)

(6.6)

(6.6)

Risk parameter changes (1)

3.9 

(0.8)

(0.1)

0.1 

(2.1)

0.2 

(0.1)

1.1 

Methodology changes

(0.1)

(0.1)

(0.2)

Model updates (2)

0.1 

0.2 

0.6 

0.5 

0.4 

1.8 

Other changes

(0.8)

0.2 

0.9 

(0.7)

(1.1)

0.5 

(1.0)












At 30 June 2016

37.0 

20.9 

77.5 

8.1 

9.6 

36.7 

42.3 

9.9 

3.2 

245.2 












Credit risk











  - non-counterparty

29.1 

19.7 

71.0 

7.0 

8.9 

4.6 

22.7 

8.5 

1.0 

172.5 

  - counterparty

0.1 

14.7 

11.2 

0.1 

26.1 

Market risk

13.4 

5.6 

1.9 

20.9 

Operational risk

7.9 

1.1 

6.5 

1.1 

0.7 

4.0 

2.8 

1.4 

0.2 

25.7 












Total RWAs

37.0 

20.9 

77.5 

8.1 

9.6 

36.7 

42.3 

9.9 

3.2 

245.2 

 

Notes:

(1)

Risk parameter changes relate to changes in credit quality metrics of customers and counterparties such as probability of default (PD) and loss given default (LGD).

(2)

Credit risk models were updated during the year including:

  - UK PBB: non standard LGD model for mortgages and business banking EAD model.

  - CIB: large corporate PD model.

 

Key points

·

The CET1 ratio of 14.5% decreased by 100 basis points which reflected a decrease in CET1 capital (£2.0 billion) and higher RWAs (£2.6 billion).

·

RWAs increased by £2.6 billion to £245.2 billion in H1 2016, primarily as a result of adverse exchange rate movements (£7.5 billion) and risk parameter recalibrations (£1.1 billion) negating the improvements in operational risk RWAs (£5.9 billion).

·

The foreign exchange movement occurred primarily in Capital Resolution (£2.5 billion), Ulster Bank RoI (£2.3 billion) and Commercial Banking (£1.5 billion) as sterling weakened against major currencies following the EU Referendum.

·

The annual operational risk recalculation resulted in a decrease of £2.0 billion and a further £3.9 billion reduction relating to the removal of the element relating to Citizens, following PRA approval.

·

UK PBB RWAs increased by £3.7 billion following ongoing UK mortgage PD calibration and loan growth. This was partially offset by the transfer of Northern Ireland loans to Commercial Banking.

·

Growth in both new and existing lending and the transfer of Northern Ireland loans from UK PBB were the key contributors to the £5.2 billion increase in Commercial Banking.   

·

RWAs in CIB increased by £3.6 billion reflecting market volatility, foreign exchange movements alongside implementation of new risk metric models.

·

Private Banking RWAs decreased by £0.6 billion primarily due to mortgage calibration improvements relating to buy-to-let mortgages.

·

Capital Resolution RWAs continued to decrease in line with risk reduction strategy with RWAs falling by £6.7 billion. Reductions were across portfolios, the largest in Markets (£3.1 billion) relating to derivative restructuring, Global Transaction Services exits and run-off (£1.4 billion) and some of the Shipping portfolio being impaired following difficult market conditions and a fall in vessel values (£1 billion).

·

The Central items decrease of £5.4 billion is significantly driven by the operational risk reduction relating to Citizens. 

 

 

 

*Not within the scope of Ernst & Young LLP's review report.


Appendix 1 Capital and risk management

 

Liquidity and funding risk

Liquidity and funding risk is the risk that RBS is unable to meet its financial obligations, including financing wholesale maturities or customer deposit withdrawals, as and when they fall due. The risk arises through the maturity transformation role that banks perform. It is dependent on RBS specific factors such as maturity profile, composition of sources and uses of funding, the quality and size of the liquidity portfolio as well as broader market factors, such as wholesale market conditions alongside depositor and investor behaviour. For a description of the liquidity and funding risk framework, governance and basis of preparation refer to Capital and risk management - Liquidity and funding risk in the 2015 Annual Report and Accounts.

 

Regulatory developments

The UK liquidity regime follows the EU CRD IV framework which is expected to remain in force within the UK legal framework for the foreseeable future. RBS will continue to monitor the regulatory landscape with respect to liquidity as it evolves following the result of the EU Referendum.

 

Liquidity risk

Key metrics*

The table below sets out the key liquidity and related metrics monitored by RBS.






30 June

31 March

31 December

2016 

2016 

2015 





Liquidity portfolio

£153bn

£157bn

£156bn

Stressed outflow coverage (SCR) (1)

213%

218%

227%

LCR (2)

116%

121%

136%

NSFR (3)

119%

119%

121%

Loan:deposit ratio

92%

90%

89%

 

Notes:

(1)

RBS's liquidity risk appetite is measured by reference to the liquidity portfolio as a percentage of stressed contractual and behavioural outflows under the worst of three severe stress scenarios of a market-wide stress, an idiosyncratic stress and a combination of both in RBS' ILAA. This assessment is performed in accordance with PRA guidance.

(2)

On 1 October 2015 the LCR became the PRA's primary regulatory liquidity standard. It is a Pillar 1 metric to which the PRA apply Pillar 2 add-ons. UK banks are required to meet a minimum standard of 80% initially rising to 100% by 1 January 2018. The published LCR excludes Pillar 2 add-ons. RBS calculates the LCR using its own interpretations of the EU LCR Delegated Act, which may change over time and may not be fully comparable with those of other financial institutions.

(3)

BCBS issued its final recommendations for the implementation of the net stable funding ratio in October 2014, proposing an implementation date of 1 January 2018. Pending further guidelines from the EU and the PRA, RBS uses the definitions and proposals from the BCBS paper and internal interpretations, to calculate the NSFR. Consequently RBS's ratio may change over time and may not be comparable with those of other financial institutions.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*Not within the scope of Ernst & Young LLP's review report.



 

Appendix 1 Capital and risk management

 

Liquidity portfolio

The table below shows the liquidity portfolio by product, liquidity value and by carrying value. Liquidity value is lower than carrying value as it is stated after discounts applied by the Bank of England and other central banks to instruments, within the secondary liquidity portfolio, eligible for discounting.

 


Liquidity value

 


Period end


Average 

 


UK DoLSub (1)

Other 

Total 


Quarter

H1 2016

 

30 June 2016

£m 

£m 

£m 


£m 

£m 

 








 

Cash and balances at central banks

52,758 

2,873 

55,631 


57,380 

61,037 

 

Central and local government bonds







 

  AAA rated governments

4,712 

644 

5,356 


4,362 

4,144 

 

  AA- to AA+ rated governments and US agencies

19,781 

1,293 

21,074 


22,059 

23,172 

 








 


24,493 

1,937 

26,430 


26,421 

27,316 

 








 

Primary liquidity

77,251 

4,810 

82,061 


83,801 

88,353 

 

Secondary liquidity (2)

69,456 

1,261 

70,717 


66,083 

65,642 

 








 

Total liquidity value

146,707 

6,071 

152,778 


149,884 

153,995 

 








 

Total carrying value

173,235 

6,274 

179,509 




 








31 December 2015






FY 2015








Cash and balances at central banks

67,790 

1,611 

69,401 


70,978 

69,736 

Central and local government bonds







  AAA rated governments

3,201 

1,098 

4,299 


4,254 

5,263 

  AA- to AA+ rated governments and US agencies

18,238 

3,216 

21,454 


23,597 

22,546 

  Below AA rated governments


46 

  Local government


12 









21,439 

4,314 

25,753 


27,851 

27,867 








Primary liquidity

89,229 

5,925 

95,154 


98,829 

97,603 

Secondary liquidity (2)

59,201 

1,369 

60,570 


57,841 

57,654 








Total liquidity value

148,430 

7,294 

155,724 


156,670 

155,257 








Total carrying value

181,240 

7,494 

188,734 




 

Notes:

(1)

The PRA regulated UK Domestic Liquidity Subgroup (UK DoLSub) comprising RBS's five licensed deposit-taking UK banks: The Royal Bank of Scotland plc, National Westminster Bank Plc, Ulster Bank Limited, Coutts & Co and Adam & Company plc. In addition, certain of RBS's significant operating subsidiaries - RBS N.V. and Ulster Bank Ireland DAC - hold managed portfolios that comply with local regulations that may differ from PRA rules.

(2)

Comprises assets eligible for discounting at the Bank of England and other central banks.

(3)

FY 2015 average includes Citizens up to the date of deconsolidation; excluding Citizens: £143,945 million.

 



 

Appendix 1 Capital and risk management

 

Funding risk

The composition of RBS's balance sheet is a function of the broad array of product offerings and diverse markets served by its core businesses. The structural composition of the balance sheet is augmented as needed through active management of both asset and liability portfolios. The objective of these activities is to optimise the liquidity profile, while ensuring adequate coverage of all cash requirements under extreme stress conditions.

 

The table below summarises the key funding metrics.












Short-term wholesale


Total wholesale


Net inter-bank

funding (1)

funding

funding (2)


Excluding

Including


Excluding

Including


Deposits

Loans (3)

Net

 derivative

 derivative

 derivative

 derivative

 inter-bank

collateral

 collateral

collateral

 collateral

 funding


£bn

£bn


£bn

£bn


£bn

£bn

£bn











30 June 2016

14.7 

38.3 


55.1 

78.6 


7.8 

(8.3)

(0.5)

31 March 2016

16.6 

39.9 


58.9 

82.3 


8.4 

(8.9)

(0.5)

31 December 2015

17.2 

37.6 


58.7 

79.1 


7.7 

(7.3)

0.4 

30 September 2015

16.8 

39.0 


65.9 

88.1 


8.4 

(10.2)

(1.8)

30 June 2015 (4)

25.0 

47.0 


76.4 

98.4 


13.5 

(12.3)

1.2 

 

Notes:

(1)

Short-term wholesale funding is funding with a residual maturity of less than one year.

(2)

Excludes derivative cash collateral.

(3)

Principally short-term balances.

(4)

Incorporating Citizens short-term and total wholesale funding including and excluding derivative collateral of £4.5 billion and £5.9 billion respectively.

 

The table below shows the carrying values of the principal funding sources.










30 June 2016


31 December 2015


Short-term 

Long-term 



Short-term 

Long-term 



less than 

more than 

Total 


less than 

more than 

Total 

1 year 

1 year 

1 year 

1 year 


£m 

£m 

£m 


£m 

£m 

£m 









Deposits by banks








 derivative cash collateral

23,576 

23,576 


20,367 

20,367 

 other deposits (1)

7,576 

236 

7,812 


7,336 

359 

7,695 










31,152 

236 

31,388 


27,703 

359 

28,062 

Debt securities in issue








 certificates of deposit

271 

58 

329 


742 

202 

944 

 medium-term notes

5,042 

14,994 

20,036 


6,639 

15,540 

22,179 

 covered bonds

737 

3,840 

4,577 


2,171 

3,414 

5,585 

 securitisations

2,203 

2,206 


2,438 

2,442 










6,053 

21,095 

27,148 


9,556 

21,594 

31,150 

Subordinated liabilities

1,066 

19,047 

20,113 


323 

19,524 

19,847 









Notes issued

7,119 

40,142 

47,261 


9,879 

41,118 

50,997 









Wholesale funding

38,271 

40,378 

78,649 


37,582 

41,477 

79,059 









Customer deposits








 derivative cash collateral (2)

13,005 

13,005 


10,373 

10,373 

 financial institution deposits

50,479 

984 

51,463 


45,134 

1,226 

46,360 

 personal deposits

158,239 

2,449 

160,688 


154,066 

3,212 

157,278 

 corporate deposits

129,511 

1,182 

130,693 


130,514 

1,466 

131,980 









Total customer deposits

351,234 

4,615 

355,849 


340,087 

5,904 

345,991 









Total funding excluding repos

389,505 

44,993 

434,498 


377,669 

47,381 

425,050 

Total repos



40,881 




37,378 

Total funding including repos



475,379 




462,428 

 

Notes:

(1)

Includes £0.8 billion relating to RBS's participation in central bank financing operations under the European Central Bank's Targeted Long Term Refinancing Operations.

(2)

Cash collateral includes £10,948 million (31 December 2015 - £9,504 million) from financial institutions.

 


Appendix 1 Capital and risk management

 

Credit risk

Credit risk is the risk of financial loss due to the failure of a customer or counterparty to meet its obligation to settle outstanding amounts. For a description of RBS's credit risk framework, governance, policies and methodologies refer to Capital and risk management - Credit risk in the 2015 Annual Report and Accounts.

 

Key developments: Exposure measure

RBS has changed its measure of credit risk exposure from Credit Risk Assets (CRA) to current exposure and potential exposure. The table below summarises the differences between these measures.

 


CRA

Current exposure

Potential exposure

Lending exposure  Comprises cash balances at central banks

as well as loans and advances to banks and customers.

Drawn balances (gross of impairment provisions). 

 

Drawn balances.

Legally committed limits. (1)

 

Measured net of individual, collective and latent provisions unless otherwise stated.

Counterparty exposure

 

Measured using the mark-to-market value of derivatives after the effect of enforceable netting agreements and regulator-approved models but before the effect of collateral. Calculations are gross of credit value adjustments.

Measured using the mark-to-market value of derivatives after the effect of enforceable netting agreements and net of legally enforceable financial collateral. (2)

Measured using scaled credit limit utilisation, which takes into account mark-to-market movements, any collateral held and expected market movements over a specified horizon. (1,2)

Current and potential exposure are measured net of credit valuation adjustments (CVA) unless otherwise stated.

Contingent obligations  

Primarily letters of credit and guarantees.

 

Drawn balance

Drawn balance.

Legally-committed amount. (1)

 

Exclusions

·

Trading book bonds

·

Trading book bonds.


·

Equity securities

·

Equity securities.


·

Settlement risk

 

·

Settlement risk.


·

Intra-group credit exposures

 

·

Suretyships.


·

Securities financing transactions (repos)

 

·

Intra-group credit exposures.


·

Banking book debt securities

 



Other



·

Net of cash and gold collateral.




·

Current exposure and potential exposure are reported against the guarantor of a transaction to reflect the transfer of risk.

 

 

Notes:

(1)

Cannot be less than current exposure.

(2)

Current exposure and potential exposure for exchange-traded derivatives are defined as Exposure At Default (EAD).



Appendix 1 Capital and risk management

 

Key developments: Exposure measure (continued)

The disclosures that follow use the current exposure or potential exposure measure as indicated. Comparatives have been restated.

 

Comparing the current exposure measure to the previous CRA measure, the following changes are noted:

Exposures to the Sovereign sector are higher. This is primarily due to the inclusion of government bond exposure held in the banking book and managed in Treasury and Capital Resolution. The increased current exposure value, compared to CRA, is also a result of risk transfer related to guarantees (pledged by sovereign customers) for obligors active in other sectors.

In the Banks & Other Financial Institutions sector, the netting of financial collateral reduced the current exposure value compared to CRA. Risk transfer also reduced current exposure compared to CRA.

Outside these sectors, the impact of risk transfer is less material. However, the impact of netting impairment provisions means that for most other wholesale sectors current exposure is less than CRA.

 


Appendix 1 Capital and risk management

 

Credit risk: Management basis

Key loan portfolios*

The table below summarises current exposure, net of provisions and after risk transfer, by sector and geographic region(1).

 

30 June 2016


Wholesale



Banks &



Natural

Retail &



Personal

Other FIs

Sovereign(6)

Property

Resources

Leisure

Other

Total

£m

£m

£m

£m

£m

£m

£m

£m










UK

 142,737 

21,531 

49,970 

38,928 

8,136 

15,694 

39,309 

316,305 

RoI (2)

 15,064 

582 

2,339 

987 

511 

1,008 

2,243 

22,734 

Other Western Europe

 519 

9,510 

34,218 

2,512 

2,580 

1,254 

5,189 

55,782 

US

 307 

9,067 

19,973 

536 

809 

633 

2,676 

34,001 

RoW (3)

 1,434 

6,863 

5,429 

833 

799 

330 

6,435 

22,123 










Total

 160,061 

47,553 

111,929 

43,796 

12,835 

18,919 

55,852 

450,945 










Flow into forbearance (4)

829 

621 

472 

307 

876 

3,109 

Provisions

2,637 

69 

1,541 

269 

618 

1,321 

6,456 

 - Individual & Collective

2,191 

61 

1,501 

260 

567 

1,244 

5,824 

 - Latent

446 

40 

51 

77 

632 

AQ10 (5)

4,277 

628 

1,916 

370 

144 

1,235 

8,570 










 

31 December 2015**


















UK

136,024 

21,187 

60,068 

37,328 

7,386 

14,857 

37,929 

314,779 

RoI (2)

13,440 

433 

1,624 

692 

436 

1,125 

1,635 

19,385 

Other Western Europe

548 

9,481 

33,942 

2,408 

2,144 

899 

6,002 

55,424 

US

301 

8,121 

21,819 

622 

864 

767 

2,530 

35,024 

RoW (3)

2,806 

7,050 

6,141 

808 

952 

469 

7,974 

26,200 










Total

153,119 

46,272 

123,594 

41,858 

11,782 

18,117 

56,070 

450,812 










Flow into forbearance (4)

1,829 

85 

1,035 

643 

368 

1,044 

5,004 

Provisions

3,003 

73 

2,282 

133 

661 

987 

7,140 

 - Individual & Collective

2,613 

60 

2,232 

124 

601 

924 

6,554 

 - Latent

390 

13 

50 

60 

63 

586 

AQ10 (5)

3,765 

769 

2,284 

149 

223 

1,062 

8,253 










Notes:

(1)

Within the Credit Risk key loan portfolios section, unless otherwise stated, geographic region is based on country of operation.

(2)

RoI: Republic of Ireland

(3)

Rest of World comprises Asia Pacific, Central and Eastern Europe, the Middle East, Central Asia and Africa, and supranationals such as the World Bank.

(4)

Completed during the period.

(5)

(6)

Net of provisions.

Includes exposures to central governments, central banks and sub-sovereigns such as local authorities.

 

 

 

 

 

 

 

 

 

 

 

*Not within the scope of Ernst & Young LLP's review report.

**Restated - refer to page 17 for further details.



 

Appendix 1 Capital and risk management

 

Key loan portfolios* (continued)

A breakdown of asset quality (AQ) on a current exposure basis, net of provisions and after risk transfer, is set out below.**

 

http://www.rns-pdf.londonstockexchange.com/rns/3368G_1-2016-8-5.pdf 

 

Note:

(1)

AQ10 represents exposure with a 100% probability of default. For further information regarding AQ band classifications refer to the Capital and risk management section on page 188 of the 2015 Annual Report and Accounts.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*Not within the scope of Ernst & Young LLP's review report.

**Restated - refer to page 17 for further details.



Appendix 1 Capital and risk management

 

Key loan portfolios* (continued)

Key points

The following commentary refers to current exposure, net of provisions and after risk transfer. In this section, the following key portfolios are discussed in more detail:


Commercial Real Estate (CRE) (in Property);

 


Oil & Gas (in Natural Resources);

 


Shipping (in Other); and

 


Mortgages (in Personal).

 


·

The increase in the overall portfolio reflected  the significant appreciation of both the euro and US dollar against sterling, primarily following the EU Referendum. 

·

Excluding the impact of foreign exchange movements overall current exposure decreased by 3%.  This was driven by a risk reduction and disposal strategy, particularly outside the UK and Western Europe. Current exposure to UK customers and counterparties represents 70% of the total, an increase from 68% at 31 December 2015 on a constant currency basis.

 

·

Portfolio asset quality has slightly weakened due to challenging market conditions in the Oil & Gas, Mining & Metals and Shipping sectors. Asset quality was also affected by recalibrations in the PD models for Banks, Local Authorities, Property, Housing Associations, Housebuilders and Mortgages.

·

The decrease in exposure to Sovereigns reflected liquidity management activities.

·

In the Property portfolio, 35% of exposure is not related to CRE. This comprises exposure of £9.3 billion (31 December 2015 - £8.9 billion) to Housing Associations, £4.5 billion to Construction (31 December 2015 - £4.7 billion) and £1.8 billion to the Building Materials sub-sector (31 December 2015 - £1.6 billion).

·

In Other, exposure to the Automotive sector decreased from £5.5 billion to £5.0 billion. AQ10 exposure net of provisions totalled £30 million (31 December 2015 - £39 million). Total provisions excluding latent provisions were £52 million (31 December 2015 - £32 million).

·

The composition of the Retail & Leisure portfolio remained broadly unchanged from 31 December 2015. Forbearance increased during the period driven by a number of individually material cases, while the volume of customers receiving forbearance decreased. Total provisions excluding latent provisions were £561 million (31 December 2015 - £601 million). Credit quality improved with AQ10 exposure, net of provisions, totalling £150 million (31 December 2015 - £223 million).



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*Not within the scope of Ernst & Young LLP's review report.



Appendix 1 Capital and risk management

 


Key loan portfolios* (continued)

Commercial Real Estate (CRE)

The CRE portfolio comprises exposures to entities involved in the development of, or investment in, commercial and residential properties (including house builders but excluding, housing associations, construction and building materials). For more information, refer to the CRE section on page 195 of the 2015 Annual Report and Accounts.

 

A dedicated CRE portfolio controls team is responsible for portfolio strategy, credit risk appetite and policies, as well as oversight of valuations and environmental frameworks. The sector is reviewed regularly at senior executive committees. Reviews include portfolio credit quality, capital consumption and control frameworks.

 

The table below provides a breakdown of the lending exposure within the CRE portfolio on a current exposure basis, net of provisions and after risk transfer.

 


Investment


Development



Commercial

Residential

Total


Commercial

Residential

Total

Total

By geography (1)

£m

£m

£m


£m

£m

£m

£m










30 June 2016









UK

16,768 

4,011 

20,779 


484 

3,350 

3,834 

24,613 

RoI

446 

203 

649 


28 

89 

117 

766 

Other Western Europe

685 

25 

710 


34 

34 

744 

US

182 

183 


183 

Rest of World

58 

67 


56 

58 

125 











18,139 

4,249 

22,388 


514 

3,529 

4,043 

26,431 










Of which: Capital Resolution

1,099 

45 

1,144 


95 

96 

1,240 

                 Williams & Glyn

2,047 

608 

2,655 


106 

563 

669 

3,324 










31 December 2015**


















UK

15,825 

4,173 

19,998 


613 

3,251 

3,864 

23,862 

RoI

342 

95 

437 


24 

80 

104 

541 

Other Western Europe

597 

605 


15 

16 

621 

US

241 

242 


242 

Rest of World

211 

12 

223 


13 

18 

241 











17,216 

4,289 

21,505 


657 

3,345 

4,002 

25,507 










Of which: Capital Resolution

1,318 

47 

1,365 


50 

104 

154 

1,519 

                 Williams & Glyn

2,080 

644 

2,724 


82 

483 

565 

3,289 

 

Note:

(1)

Geography splits are based on country of collateral risk.

 

 

 

 

 

 

 

 

 

 

 

*Not within the scope of Ernst & Young LLP's review report.

**Restated - refer to page 17 for further details.

 

Appendix 1 Capital and risk management

 

Key loan portfolios* (continued)




Other







Western





UK

ROI

Europe

US

RoW

Total

By sub-sector

£m

£m

£m

£m

£m

£m








30 June 2016







Residential

7,361 

292 

59 

65 

7,778 

Office

3,213 

131 

500 

53 

13 

3,910 

Retail

4,658 

101 

47 

4,811 

Industrial

2,898 

38 

2,936 

Mixed/other

6,483 

204 

138 

129 

42 

6,996 









24,613 

766 

744 

183 

125 

26,431 








31 December 2015**














Residential

7,424 

175 

25 

7,634 

Office

2,938 

76 

398 

85 

62 

3,559 

Retail

4,497 

93 

85 

19 

22 

4,716 

Industrial

2,600 

36 

39 

2,682 

Mixed/other

6,403 

161 

90 

137 

125 

6,916 









23,862 

541 

621 

242 

241 

25,507 

A breakdown of the Commercial Banking UK investment portfolio by UK region at 30 June 2016 is set out below.

UK Region (1)

Proportion

Greater London

25%

Portfolio (2)

25%

Midlands

12%

South East

12%

North

11%

Scotland

8%

Rest of UK

7%

 

Notes:

(1)

Based on management estimates using the postcode of the security. Percentages are based on current exposure gross of provisions.

(2)

Portfolio includes lending secured against property portfolios comprising numerous properties across multiple UK locations.

 

Key points

The following commentary refers to current exposure, net of provisions and after risk transfer.

·

Lending to the CRE sector in the UK increased to £24.6 billion at 30 June 2016 compared to £23.9 billion at 31 December 2015. However, the growth slowed significantly in the second quarter of 2016. CPB and PBB businesses have appetite to support activity in the sector. Credit underwriting standards have been tightened and appetite for certain sub-sectors moderated. There were no single-name concentration breaches.

·

New business is monitored and controlled against agreed underwriting standards. Agreed bank-wide and business franchise portfolio sector limits are in place, with Sub-sector and asset class limits being used to restrict exposure to emerging risks when appropriate. This activity is reviewed and monitored on a regular basis. In addition, market indices are monitored and risk appetite is adjusted if considered appropriate.

·

The majority of non-legacy CRE exposure is within Commercial Banking (£18.5 billion, 31 December 2015 - £17.9 billion). Lending applications are reviewed by specialist CRE transactional credit teams, including a dedicated development team. Lending guidelines and policy are informed by lessons learned from the 2008 financial crisis.

·

In the commercial investment sub-sector, new business activity in H1 2016 (including refinancings and increases) in Commercial Banking had a weighted average LTV of 46%.

·

The increase in exposure in RoI and Western Europe was primarily due to foreign exchange movements.

*Not within the scope of Ernst & Young LLP's review report.

**Restated - refer to page 17 for further details.

 

Appendix 1 Capital and risk management

 

Key loan portfolios* (continued)

CRE exposure by LTV band

The table below provides a breakdown of the CRE investment portfolio by LTV band on a current exposure basis, net of provisions and after risk transfer.


UK


RoI


Total (3)


AQ1-AQ9

AQ10

Total


AQ1-AQ9

AQ10

Total


AQ1-AQ9

AQ10

Total

£m

 £m

£m

£m

 £m

£m


£m

 £m

£m













30 June 2016












<= 50%

10,180 

50 

10,230 


73 

75 


10,406 

52 

10,458 

> 50% and <= 70%

5,962 

131 

6,093 


100 

102 


6,096 

133 

6,229 

> 70% and <= 80%

565 

100 

665 


78 

80 


643 

102 

745 

> 80% and <= 90%

248 

156 

404 


23 

23 


275 

156 

431 

> 90% and <= 100%

209 

47 

256 


23 

23 


232 

48 

280 

> 100% and <= 110%

159 

61 

220 


12 

13 


172 

65 

237 

> 110% and <= 130%

62 

77 

139 


31 

37 


93 

381 

474 

> 130% and <= 150%

57 

32 

89 


10 

18 


67 

52 

119 

> 150%

113 

79 

192 


42 

18 

60 


156 

99 

255 













Total with LTVs

17,555 

733 

18,288 


392 

39 

431 


18,140 

1,088 

19,228 

Total portfolio average LTV (1)

49%

120%

53%


95%

335%

165%


50%

143%

58%

Minimal security (2)

10 



10 

Other

2,366 

115 

2,481 


178 

40 

218 


2,710 

440 

3,150 

Development (4)

3,617 

217 

3,834 


67 

50 

117 


3,759 

284 

4,043 


23,547 

1,066 

24,613 


637 

129 

766 


24,618 

1,813 

26,431 













31 December 2015**












<= 50%

9,558 

70 

9,628 


60 

62 


9,896 

72 

9,968 

> 50% and <= 70%

5,691 

114 

5,805 


103 

105 


5,964 

116 

6,080 

> 70% and <= 80%

639 

124 

763 


35 

36 


685 

125 

810 

> 80% and <= 90%

323 

115 

438 


26 

28 


353 

376 

729 

> 90% and <= 100%

134 

149 

283 


10 


143 

150 

293 

> 100% and <= 110%

127 

74 

201 


22 

23 


149 

75 

224 

> 110% and <= 130%

187 

108 

295 


34 

39 


221 

122 

343 

> 130% and <= 150%

30 

44 

74 


13 

19 


44 

65 

109 

> 150%

216 

173 

389 


37 

19 

56 


253 

199 

452 













Total with LTVs

16,905 

971 

17,876 


339 

39 

378 


17,708 

1,300 

19,008 

Total portfolio average LTV (1)

51%

167%

60%


94%

315%

164%


52%

167%

63%

Minimal security (2)



Other

2,002 

116 

2,118 


34 

24 

58 


2,253 

238 

2,491 

Development (4)

3,551 

313 

3,864 


67 

37 

104 


3,641 

361 

4,002 


22,459 

1,403 

23,862 


440 

101 

541 


23,604 

1,903 

25,507 

 

Notes:

(1)

Weighted average by current exposure gross of provisions.

(2)

Total portfolio average LTV is quoted net of loans with minimal security given that the anticipated recovery rate is less than 10%. Provisions are marked against these loans where required to reflect the relevant asset quality and recovery profile.

(3)

Total includes regions other than UK and RoI.

(4)

The exposure in Development relates to the development of commercial and residential properties. LTV is not a meaningful measure for this type of lending activity.

 

Key points

·

The reduction in portfolio average LTV is primarily the result of reductions through repayments, asset sales and write-offs of legacy non-performing assets from Ulster Bank RoI, Commercial Banking and CIB. Remaining exposures with LTVs greater than 100% are predominantly legacy exposures originated before the 2008 financial crisis. 

·

The exposure in Other relates predominantly to lending to large corporate entities. It is not asset-backed but lent against corporate balance sheets.

·

Interest payable on outstanding loans was covered 3.4x and 1.6x in Commercial Banking UK and Capital Resolution respectively (unchanged since 31 December 2015). 

*Not within scope of Ernst & Young LLP's review report.

**Restated - refer to page 17 for further details.



Appendix 1 Capital and risk management

 

Key loan portfolios* (continued)

A breakdown of the asset quality of the CRE portfolio is provided below, on a current exposure basis, net of provisions and after risk transfer.**

 

http://www.rns-pdf.londonstockexchange.com/rns/3368G_2-2016-8-5.pdf 

 

 

Note:

(1)

PE represents the amount by which potential exposure is larger than current exposure.  The total of each column represents the total potential exposure for that AQ band

 

Key point

·

Probability of default models for the Property and Housebuilders sectors have been updated.  This recalibration, rather than deterioration in underlying risk, has resulted in downward ratings migrations across asset quality bands.

 

A breakdown of CRE portfolio lending, gross of provision and after risk transfer, risk elements in lending (REIL) and provisions is provided below.

 


Total


Commercial Banking


Capital Resolution


30 June

31 December


30 June

31 December


30 June

31 December


2016 

2015 


2016 

2015 


2016 

2015 

CRE loans, REIL and provisions

£m

£m


£m

£m


£m

£m










Lending (gross of provisions)

27,695 

27,561 


19,075 

18,178 


1,487 

2,842 

Of which REIL

2,479 

3,560 


1,032 

1,050 


756 

1,951 

Provisions

1,264 

2,054 


422 

305 


247 

1,323 

REIL as a % of gross loans to customers

9.0%

12.9%


5.4%

5.8%


50.8%

68.6%

Provisions as a % of REIL

51%

58%


41%

29%


33%

68%

 

Key points

·

While lending has increased, non-performing legacy exposure (mostly managed in Capital Resolution) continued to reduce through run-off, divestment and write-offs. 

·

The non-performing assets in Commercial Banking are predominantly legacy deals originated before the financial crisis.

 

*Not within the scope of Ernst & Young LLP's review report.

**Restated - refer to page 17 for further details.


Appendix 1 Capital and risk management

 

Key loan portfolios* (continued)

Natural Resources

Exposure to the Natural Resources sector, on both a current exposure and potential exposure basis, is summarised below, net of provisions and after risk transfer. 


30 June 2016


31 December 2015**



Of which:


Of which:



Of which:


Of which:



Capital


Capital



Capital


Capital


CE

Resolution

PE

Resolution


CE

Resolution

PE

Resolution


£m

£m

£m

£m


£m

£m

£m

£m











Oil & Gas

3,298 

902 

6,356 

1,213 


3,544 

1,539 

6,798 

2,117 

Mining & Metals

816 

188 

1,941 

299 


729 

237 

1,823 

391 

Electricity

3,374 

1,135 

8,583 

1,522 


2,851 

1,128 

7,683 

1,773 

Water & Waste

5,347 

3,407 

8,665 

5,661 


4,657 

1,648 

8,261 

3,039 












12,835 

5,632 

25,545 

8,695 


11,781 

4,552 

24,565 

7,320 











Commodity Traders

564 

65 

1,080 

71 


900 

444 

1,320 

452 

Of which: Natural Resources

427 

41 

759 

48 


521 

212 

752 

212 

 

Oil & Gas

Exposure to the Oil & Gas sector, measured on a potential exposure basis net of provisions and after risk transfer, is summarised in the tables below.

 




Other







Western





UK

RoI

Europe

US

RoW (1)

Total

30 June 2016

£m

£m

£m

£m

£m

£m








Producers (incl. integrated oil companies)

882 

63 

1,350 

44 

225 

2,564 

Oilfield service providers

746 

10 

675 

265 

82 

1,778 

Other wholesale and trading activities

432 

90 

554 

52 

281 

1,409 

Refineries

22 

357 

383 

Pipelines

98 

103 

222 


2,180 

167 

2,682 

727 

600 

6,356 















Of which:







National oil companies

58 

58 

Integrated oil companies

389 

812 

146 

50 

1,397 

Exploration & Production

274 

143 

43 

131 

591 








31 December 2015**














Producers (incl. integrated oil companies)

1,177 

51 

1,028 

275 

256 

2,787 

Oilfield service providers

700 

10 

678 

279 

51 

1,718 

Other wholesale and trading activities

450 

76 

475 

45 

432 

1,478 

Refineries

21 

327 

18 

368 

Pipelines

98 

310 

31 

447 


2,446 

139 

2,491 

957 

765 

6,798 








Of which:







National oil companies

21 

70 

91 

Integrated oil companies

654 

868 

273 

10 

1,805 

Exploration & Production

338 

38 

130 

118 

624 

 

Note:

(1)

Rest of world comprises Asia Pacific, Central and Eastern Europe, the Middle East, Central Asia and Africa.

 

 

 

 

*Not within the scope of Ernst & Young LLP's review report.

**Restated - refer to page 17 for further details.

 

Appendix 1 Capital and risk management

 

Key loan portfolios* (continued)

 

A breakdown of asset quality (AQ) for the Oil & Gas portfolio, on a current exposure and potential exposure basis, net of provisions and after risk transfer. is set out below**.

 

http://www.rns-pdf.londonstockexchange.com/rns/3368G_3-2016-8-5.pdf 

 

 

 

Note:

(1)

PE represents the amount by which potential exposure is larger than current exposure.  The total of each column represents the total potential exposure for that AQ band.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*Not within the scope of Ernst & Young LLP's review report.

**Restated - refer to page 17 for further details.



 

Appendix 1 Capital and risk management

 

Key loan portfolios* (continued)

 

Key points

·

The composition of the Oil & Gas portfolio remained broadly unchanged from 31 December 2015.  Exposure decreased by 6.5% due to active credit management and the continued run-off of the North American and APAC portfolios.

·

Credit quality for the portfolio deteriorated slightly, consistent with broader sector trends. At 30 June 2016, 69% of the exposure (31 December 2015 - 76%) was investment grade (AQ1-AQ4 or equivalent to BBB- and above). As well as exposure reduction in the AQ1-AQ4 bands during the normal course of business - and the continued run-off of the North American and APAC portfolios - the change in credit profile was the result of migration from investment grade to sub-investment grade for certain exposures.

·

RBS had no high-yield bond or loan underwriting positions as at 30 June 2016.

·

There were a number of forbearance arrangements totalling £554 million. These predominantly involved the relaxation of financial covenants to give customers more financial flexibility given the current environment. Most of the forbearance related to customers in the Exploration & Production and Oilfield Services sub-sectors where earnings have been more immediately and materially affected by the downturn in the Oil & Gas sector.

·

At 30 June 2016, total provisions excluding latent provisions were £153 million (31 December 2015 - £49 million). New provisions were due to the credit deterioration of a small number of material exposures, primarily in the Exploration & Production sub-sector.

·

AQ10 exposure net of provisions was £207 million (31 December 2015 - £47 million). In addition, exposures not transferred to AQ10 but classified as Risk of Credit Loss (1) totalled £30 million. These were managed by Restructuring.

 

Note:

(1)

In accordance with the revised problem debt management framework, these are non-defaulted exposures that present a potential credit loss in the next 12 months, should mitigating action not be successful or not taken at all.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*Not within the scope of Ernst & Young LLP's review report.

 

Appendix 1 Capital and risk management

 

Key loan portfolios* (continued)

 

Mining & Metals

A breakdown of asset quality for the Mining & Metals portfolio, on a current exposure and potential exposure basis, net of provisions and after risk transfer is set out below**.

 

http://www.rns-pdf.londonstockexchange.com/rns/3368G_4-2016-8-5.pdf 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note:

(1)

PE represents the amount by which potential exposure is larger than current exposure.  The total of each column represents the total potential exposure for that AQ band.

 

Key points

·

Overall exposure to Mining & Metals increased by £87 million to £816 million on a current exposure basis and by £118 million to £1.9 billion on a potential exposure basis.  The increase mainly driven by foreign exchange movements (64% of the portfolio is denominated in US dollars). Excluding the impact of foreign exchange movements, exposure decreased by 2.5%.

·

Market conditions in the Mining & Metals sector continued to be challenging, resulting in a deterioration in credit quality. Companies in the Mining & Metals sector have reported lower revenues as a result of lower commodity prices. This has had an adverse impact on EBITDA and leverage. At 30 June 2016, 49% (31 December 2015 - 64%) of the portfolio exposure was investment grade (AQ1-AQ4 or equivalent to BBB- and above). Most of the exposure is to market leaders in the sector with globally diversified operations and revenues. 

·

Exposures in the Mining & Metals portfolio classified as Risk of Credit Loss totalled £0.4 million.

·

Provisions (excluding latent provisions) increased by £13.0 million to £35.6 million (31 December 2015 - £22.6 million).

·

At 30 June 2016, AQ10 exposure on a potential exposure basis, net of provisions was £82.0 million (31 December 2015 - £20.8 million). The rise in AQ10 exposure and the increase in provisions mainly resulted from a single material exposure.

 



 

Appendix 1 Capital and risk management

 

Shipping

Exposure to the Shipping sector, on a current exposure and potential exposure basis, is summarised in the table below.

 


30 June 2016


31 December 2015**



Of which:


Of which:



Of which:


Of which:


Current

Capital

Potential

Capital


Current

Capital

Potential

Capital


Exposure

Resolution

Exposure

Resolution


Exposure

Resolution

Exposure

Resolution


£m

£m

£m

£m


£m

£m

£m

£m

Shipping

6,765 

5,945 

7,246 

6,049 


6,776 

6,162 

7,301 

6,309 

 

Exposure secured by ocean-going vessels and managed by Capital Resolution is summarised in the table below on a current exposure basis.

 


30 June 2016


31 December 2015**


Current




Current




Exposure

AQ10

Provisions (1)


Exposure

AQ10

Provisions (1)

Vessel type

£m (2)

£m (2)

£m


£m (2)

£m (2)

£m









Container

1,291 

54 

21 


1,164 

49 

10 

Dry bulk

2,040 

896 

379 


2,076 

275 

153 

Tanker

1,290 

30 


1,306 

Gas

1,075 


1,160 

Other

376 

62 

33 


362 

25 

Total

6,072 

1,042 

433 


6,068 

349 

169 

 

Notes:

(1)

Excluding latent provisions.

(2)

To allow identification of underlying vessel types, this exposure is shown prior to the impact of the risk transfer and gross of provisions.

 

 

 

*Not within the scope of Ernst & Young LLP's review report.

**Restated - refer to page 17 for further details.



Appendix 1 Capital and risk management

 

Key loan portfolios* (continued)

Asset quality for the Shipping sector, on a current exposure and potential exposure basis, net of provisions and after risk transfer is summarised below.**

 

http://www.rns-pdf.londonstockexchange.com/rns/3368G_5-2016-8-5.pdf

 

 

Note:

(1)

PE represents the amount by which potential exposure is larger than current exposure. The total of each stacked column represents the total potential exposure for that AQ band.

 

Key points

·

Exposure has remained relatively stable at £6.8 billion (current exposure) and £7.3 billion (potential exposure).  Excluding the impact of foreign exchange movements, exposure fell by 10%.

Most of the Shipping portfolio related to exposure secured by ocean-going vessels. This was managed in Capital Resolution. The remainder of the exposure related to the Shipbuilders and Inland Water Transport sub-sectors. Excluding the impact of foreign exchange movements exposure decreased due to scheduled loan repayments, secondary sales and prepayments.

·

Conditions remained depressed in the dry bulk market as a result of the continuing oversupply of available tonnage and the slowdown in Chinese commodity imports. Tanker rates fell during H1 2016 and remained profitable but asset values were affected. Employment rates for container vessels continued to deteriorate.

·

The LTV position across the portfolio for ocean-going vessels increased to 93% (31 December 2015 - 85%) primarily as a result of deteriorating asset values in dry bulk, which fell by up to 15% in H1 2016.

·

Continuing challenging market conditions led to an increase in forbearance granted. This mostly related to the relaxation of minimum security covenants due to deteriorating asset prices and totalled £220 million in H1 2016. In addition there was £191 million of forbearance in process, which has not yet reached legal completion.

·

At 30 June 2016, exposures classified as Risk of Credit Loss totalled £78 million. As part of standard credit stewardship, a number of customers were classified as Risk of Credit Loss in July 2016. The majority of these cases were in the dry bulk sector.

·

Total provisions, excluding latent provisions, increased from £169 million to £433 million during the six months to 30 June 2016. This is the result of prolonged poor market conditions, as described above.

·

At 30 June 2016, AQ10 exposure, net of provisions, was £579 million (31 December 2015 - £210 million).

*Not within the scope of Ernst & Young LLP's review report.

**Restated - refer to page 17 for further details.


Appendix 1 Capital and risk management

 

Key loan portfolios* (continued)

Personal portfolios

This section summarises personal portfolios by type, segment and related credit metrics, on a current exposure basis net of provisions.

Overview of personal portfolios split by product type and segment


30 June 2016


31 December 2015**



Ulster







Ulster






UK

Bank

Private

RBS




UK

Bank

Private

RBS




PBB

RoI

Banking

International

W&G

Total


PBB

RoI

Banking

International

W&G

Total


£m

£m

£m

£m

£m

£m


£m

£m

£m

£m

£m

£m















Mortgages

111,248 

14,376 

6,865 

2,599 

10,716 

145,804 


104,599 

12,713 

6,552 

2,525 

10,430 

136,819 

Of which:














Interest only variable rate

11,887 

416 

3,100 

711 

1,291 

17,405 


13,252 

407 

3,025 

730 

1,388 

18,802 

Interest only fixed rate

11,088 

2,578 

64 

1,227 

14,964 


9,112 

2,431 

49 

1,076 

12,674 

Mixed (capital and interest only)

5,297 

78 

27 

709 

6,116 


5,380 

76 

29 

745 

6,237 















Buy-to-let

15,916 

2,020 

622 

866 

1,362 

20,786 


14,098 

1,762 

476 

835 

1,150 

18,321 















Forbearance stock: arrears status

3,312 

3,217 

80 

42 

474 

7,125 


3,592 

2,930 

64 

43 

514 

7,143 

  - Current

2,824 

2,051 

76 

27 

408 

5,386 


3,089 

1,869 

64 

31 

437 

5,490 

  - 1-3 months in arrears

259 

601 

39 

903 


266 

538 

44 

854 

  - >3 months in arrears

229 

565 

11 

27 

836 


237 

523 

33 

799 















Provisions against forbearance population

22 

609 

639 


29 

585 

622 

Provisions

177 

1,185 

28 

24 

1,417 


180 

1,062 

18 

26 

1,290 















REIL

793 

2,875 

21 

91 

97 

3,877 


878 

2,550 

19 

63 

123 

3,633 















Other lending (1)

8,942 

273 

1,817 

67 

1,056 

12,155 


8,795 

233 

3,458 

62 

958 

13,506 

Provisions

896 

52 

27 

119 

1,095 


1,028 

48 

22 

129 

1,228 

REIL

943 

53 

50 

125 

1,180 


1,028 

49 

53 

140 

1,275 















Total lending

120,190 

14,649 

8,682 

2,666 

11,772 

157,959 


113,394 

12,946 

10,010 

2,587 

11,388 

150,325 

Mortgage LTV ratios (2)














  - Total portfolio

56%

82%

56%

56%

53%

59%


56%

83%

54%

57%

54%

59%

  - New business

69%

74%

58%

67%

69%

68%


69%

77%

57%

66%

68%

68%

  - Buy-to-let

56%

90%

55%

48%

56%

59%


57%

95%

58%

51%

57%

60%

  - Performing

56%

77%

55%

55%

53%

58%


56%

80%

54%

57%

54%

58%

  - Non-performing

61%

103%

66%

97%

57%

86%


63%

106%

92%

96%

60%

83%

Notes:

(1)

Other personal lending excludes loans guaranteed by a company and commercial real estate lending to personal customers.

(2)

Weighted by current exposure gross of provisions.

 

*Not within the scope of Ernst & Young LLP's review report.

**Restated - refer to page 17 for further details.


Appendix 1 Capital and risk management

 

Key loan portfolios* (continued)










Mortgage LTV distribution













50%

70%

80%

90%

100%

110%

130%


Total with



LTV ratio value

<=50%

<=70%

<=80%

<=90%

<=100%

<=110%

<=130%

<=150%

>150%

LTVs

Other

Total

30 June 2016

£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

UK PBB













AQ1-AQ9

42,346 

39,526 

14,569 

9,397 

2,689 

246 

174 

88 

23 

109,058 

501 

109,559 

AQ10

541 

676 

219 

131 

64 

24 

11 

1,676 

13 

1,689 


42,887 

40,202 

14,788 

9,528 

2,753 

270 

185 

94 

27 

110,734 

514 

111,248 

of which: Buy-to-let

5,498 

7,586 

2,213 

415 

123 

35 

30 

14 

15,915 

15,916 














Ulster Bank RoI













AQ1-AQ9

2,671 

2,474 

1,490 

1,345 

1,138 

1,068 

1,706 

345 

43 

12,280 

12,280 

AQ10

250 

282 

167 

184 

201 

202 

421 

267 

122 

2,096 

2,096 


2,921 

2,756 

1,657 

1,529 

1,339 

1,270 

2,127 

612 

165 

14,376 

14,376 

Private Banking













AQ1-AQ9

2,381 

2,947 

757 

167 

58 

30 

70 

48 

20 

6,478 

267 

6,745 

AQ10

21 

51 

16 

112 

120 


2,402 

2,998 

773 

175 

67 

33 

71 

50 

21 

6,590 

275 

6,865 

RBS International













AQ1-AQ9

1,126 

798 

348 

213 

53 

10 

18 

2,572 

2,572 

AQ10

27 

27 


1,132 

807 

352 

214 

57 

10 

20 

2,599 

2,599 

W&G













AQ1-AQ9

4,507 

3,765 

1,231 

780 

174 

10,467 

65 

10,532 

AQ10

74 

79 

18 

10 

183 

184 


4,581 

3,844 

1,249 

790 

176 

10,650 

66 

10,716 














31 December 2015**













UK PBB













AQ1-AQ9

38,430 

38,645 

14,372 

7,985 

2,646 

255 

174 

90 

18 

102,615 

251 

102,866 

AQ10

483 

713 

250 

152 

77 

26 

12 

1,723 

10 

1,733 


38,913 

39,358 

14,622 

8,137 

2,723 

281 

186 

97 

21 

104,338 

261 

104,599 

Of which: Buy-to-let

4,374 

6,879 

2,202 

431 

131 

34 

30 

14 

14,096 

14,098 














Ulster Bank RoI













AQ1-AQ9

2,276 

2,075 

1,222 

1,155 

1,004 

964 

1,633 

410 

49 

10,788 

10,788 

AQ10

226 

258 

153 

163 

179 

178 

385 

264 

119 

1,925 

1,925 


2,502 

2,333 

1,375 

1,318 

1,183 

1,142 

2,018 

674 

168 

12,713 

12,713 

Private Banking













AQ1-AQ9

2,431 

2,846 

707 

147 

30 

15 

12 

20 

6,209 

323 

6,532 

AQ10

20 

20 


2,434 

2,847 

710 

148 

39 

16 

12 

21 

6,229 

323 

6,552 

RBS International













AQ1-AQ9

985 

873 

339 

190 

40 

27 

19 

14 

2,489 

2,489 

AQ10

11 

36 

36 


990 

884 

341 

193 

45 

28 

22 

19 

2,525 

2,525 

W&G













AQ1-AQ9

4,113 

3,738 

1,216 

648 

174 

11 

9,901 

297 

10,198 

AQ10

71 

100 

27 

18 

225 

232 


4,184 

3,838 

1,243 

666 

182 

12 

10,126 

304 

10,430 

 

 

 

 

 

 

 

 

 

* Not within the scope of Ernst & Young LLP's review report.

**Restated - refer to page 17 for further details.



Appendix 1 Capital and risk management

 

Key loan portfolios* (continued)

 

UK PBB 

Key points

·

Gross new mortgage lending amounted to £14.3 billion (excluding £0.4 billion additional lending to existing customers) in H1 2016. New buy-to-let lending was £2.4 billion (31 December 2015 - £3.8 billion). The concentration to buy-to-let lending increased from 13% to 14%. New lending to owner-occupiers during this period was £11.9 billion (31 December 2015 - £18.9 billion). The growth in mortgage lending in H1 2016 was consistent with UK PBB's growth strategy and risk appetite.

·

The overall credit quality of new business has remained stable in H1 2016.  Average LTV for new mortgage lending, weighted by value, was 69%, (31 December 2015 - 69%) and weighted by volume 68% (31 December 2015 - 68%). New buy to let lending had an average LTV weighted by value and volume of 63% (31 December 2015 - 64%).  New lending to owner-occupiers had an average LTV weighted by value of 71% (31 December 2015 - 71%) and 69% weighted by volume (31 December 2015 - 69%)

·

Of the total portfolio £28.2 billion related to properties in the south east of England, while £21.4 billion related to properties in Greater London.

 

The table below summarises UK mortgage exposure by region and LTV.

 

Mortgage LTV distribution















50%

70%

80%

90%

100%

110%

130%


Total with

WA




LTV ratio value

<=50%

<=70%

<=80%

<=90%

<=100%

<=110%

<=130%

<=150%

>150%

LTVs

LTV


Other

Total

30 June 2016

£m

£m

£m

£m

£m

£m

£m

£m

£m

£m



£m

£m

South East

12,068 

11,150 

3,161 

1,430 

219 

28,042 

52%


112 

28,154 

Greater London

13,275 

6,503 

1,015 

407 

71 

21,275 

45%


124 

21,399 

Scotland

3,047 

3,652 

1,622 

1,106 

412 

40 

9,882 

59%


46 

9,928 

North West

2,775 

3,795 

1,681 

1,287 

282 

12 

9,837 

60%


53 

9,890 

South West

3,110 

3,795 

1,564 

929 

174 

9,585 

57%


44 

9,629 

West Midlands

1,779 

2,685 

1,382 

991 

296 

12 

7,149 

62%


37 

7,186 

Other

6,833 

8,622 

4,363 

3,378 

1,299 

196 

164 

82 

27 

24,964 

63%


98 

25,062 

Total

42,887 

40,202 

14,788 

9,528 

2,753 

270 

185 

94 

27 

110,734 

56%


514 

111,248 
















31 December 2015**















South East

10,402 

10,668 

3,279 

1,410 

318 

26,098 

54%


45 

26,143 

Greater London

11,402 

6,426 

1,252 

418 

90 

19,592 

47%


68 

19,660 

Scotland

3,198 

3,775 

1,497 

840 

323 

34 

9,669 

58%


25 

9,694 

North West

2,475 

3,548 

1,662 

1,162 

476 

47 

9,375 

61%


31 

9,406 

South West

2,850 

3,549 

1,581 

851 

217 

9,067 

58%


23 

9,090 

West Midlands

1,728 

2,601 

1,301 

737 

324 

17 

6,713 

61%


23 

6,736 

Other

6,858 

8,791 

4,050 

2,719 

975 

166 

162 

82 

21 

23,824 

62%


46 

23,870 

Total

38,913 

39,358 

14,622 

8,137 

2,723 

281 

186 

97 

21 

104,338 

56%


261 

104,599 

 

 

 

 

 

 

 

 

 

*Not within the scope of Ernst & Young LLP's review report.

**Restated - refer to page 17 for further details.



Appendix 1 Capital and risk management

 

Key loan portfolios* (continued)

Key points

·

Based on the Halifax House Price Index at March 2016, the portfolio average indexed LTV by volume was 50% (31 December 2015 - 50%) and 56% by weighted value of debt outstanding (31 December 2015 - 57%). (The £2.2 billion of Northern Ireland mortgages are indexed against the house price index published by the Office of National Statistics).

·

Fixed interest rate products of varying time durations accounted for approximately 70% of the mortgage portfolio with 2% a combination of fixed and variable rates and the remainder variable rate.

·

Approximately 13% of owner-occupied mortgages were on interest-only terms with a bullet repayment and 5% were on a combination of interest-only and capital and interest. 65% of the buy-to-let mortgages were on interest-only terms and 3% on a combination of interest only and capital and interest.

·

The arrears rate (more than three payments in arrears, excluding repossessions and shortfalls after property sale) reduced from 0.83% at 31 December 2015 to 0.79% at the end of June 2016

·

The flow of new forbearance was £269 million in H1 2016 compared with £285 million) in H1 2015. The value of mortgages subject to forbearance has decreased by 8% since 31 December 2015 to £3.32 billion (equivalent to 3.0% of the total mortgage book) as a result of improved market conditions and methodology changes.

·

The impairment charge was £18 million in H1 2016, compared to a release of £4 million in H2 2015. On an annualised basis the H1 2016 impairment charge represents 0.03% of the mortgage portfolio.  The charge for newly defaulting debt was stable period on period. The overall increase from the prior period was driven by updated model calibrations for provisions on the non-defaulted book, and reduced provision releases associated with lower house price inflation during the period.

·

Other lending relates to credit cards (£3.7 billion), unsecured loans (£3.5 billion) and overdrafts (£1.7 billion).  Credit quality of this portfolio remained stable during H1 2016 with an impairment charge of £21 million (H1 2015: £52 million).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*Not within the scope of Ernst & Young LLP's review report.

 

Appendix 1 Capital and risk management

 

Key loan portfolios* (continued)

 

Ulster Bank RoI

Key points

·

Although the total mortgage portfolio increased by £1.7 billion (13%) from £12.7 billion to £14.4 billion, this was the result of foreign exchange movements. Excluding the impact of exchange rate movements, the portfolio decreased by £0.1 billion (0.9%) from 31 December 2015.

·

Market demand continued to grow, new business in H1 2016 was £363 million which was a 47% increase compared to H1 2015.

·

The interest-rate product mix remained stable with approximately 66% of the mortgage portfolio on tracker-rate products (31 December 2015 - 67%), 21% on variable-rate products (31 December 2015 - 20%) and 13% on fixed rate (31 December 2015 - 13%).

·

The decrease in portfolio average indexed LTV from 83% to 82% reflected positive house price index trends over the last six months. 

·

At 30 June 2016, 22% of total mortgage assets (£3.2 billion) were subject to a forbearance arrangement, an increase of 10% from 31 December 2015. Excluding the impact of exchange rate movements, the value of mortgage assets subject to a forbearance arrangement decreased by £109 million (4%). The majority (82%) of forbearance arrangements were less than 90 days in arrears.

·

In H1 2016, 411 customers approached Ulster Bank RoI for the first time for forbearance assistance.  This was a decrease of 73% compared to H1 2015.

·

At 30 June 2016, 15% (£2.1 billion) of total mortgage assets were classified as AQ10 (31 December 2015 - 15%, £1.9 billion). Excluding the impact of exchange rate movements, the value of mortgage assets classified as AQ 10 decreased by £87 million (4%).

·

There was an overall release of impairment provisions of £1 million for personal mortgages in H1 2016.

 

Private Banking

Key points

·

The majority of the Private Banking personal lending portfolio relates to mortgage lending. On a like-for-like basis, the Private Banking mortgage portfolio increased by 5% during H1 2016.

·

Gross new mortgage lending amounted to £1.5 billion in H1 2016. Lending to owner-occupiers during this period was £1.3 billion (31 December 2015 - £2.2 billion) and had an average LTV by weighted value of 57% (31 December 2015 - 54%). Buy-to-let lending was £0.2 billion (31 December 2015 - £0.2 billion) with an average LTV by weighted value of 56% (31 December 2015 - 64%).

·

The number of customers with mortgages in forbearance at 30 June 2016 decreased from 46 to 40 compared to 30 June 2015. In value terms, however, the exposure increased from £49 million to £80 million - although this increase was primarily seen in the offshore business.

·

A total of 97% (£78 million) of forbearance loans were subject to a long-term arrangement (capitalisations, term extensions, economic concessions) at 30 June 2016 (31 December 2015 - 79% or £39 million). Short-term forbearance comprised payment concessions, amortising payments of outstanding balances, payment holidays and temporary interest-only arrangements.

·

The reduction in other personal lending was driven by the disposal of the international private banking business.

 

 

 

 

*Not within the scope of Ernst & Young LLP's review report.

 

Appendix 1 Capital and risk management

 

Key loan portfolios* (continued)

 

RBSI

Key points

·

Gross new mortgage lending amounted to £206 million in H1 2016. Lending to owner-occupiers during this period was £127 million (2015 - £63 million) and had an average LTV by weighted value of 70% (2015 - 66%). Buy-to-let lending was £79 million (2015 - £32 million) with an average LTV by weighted value of 62% (2015 - 57%).

·

The number of customers granted forbearance in H1 2016 decreased by 36% compared to H1 2015. A total of £15 million of forborne loans were subject to a long-term arrangement (term extensions) at 30 June 2016 (2015 - £13 million). Short term forbearance comprises covenant breaches, payment suspensions and reduced payments.

 

 

Williams & Glyn

Key points

·

Gross new mortgage lending amounted to £1.1 billion in H1 2016. Lending to owner-occupiers during H1 2016 was £0.9 billion (2015 - £1.4 billion) and had an average LTV by weighted value of 71% (31 December 2015 - 70%). Buy-to-let lending was £0.2 billion (2015 - £0.3 billion) with an average LTV by weighted value of 62% (2015 - 64%).

·

Fixed interest rate products of varying time durations accounted for approximately 63% (£6.8 billion) of the mortgage portfolio with 6% (£0.7 billion) a combination of fixed and variable rates and the remainder (£3.3 billion) variable rate.

·

The flow of new forbearance was £35 million in H1 2016 compared £ 30 million in H1 2015. The value of mortgages subject to forbearance decreased by 8% in H1 2016 to £481 million (equivalent to 4% of the total mortgage portfolio) as a result of improved market conditions and methodology changes.

·

Impairment trends were stable. The impairment charge for personal mortgages was £0.5 million in H1 2016 (H1 2015 - £0.6 million).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*Not within the scope of Ernst & Young LLP's review report.


Appendix 1 Capital and risk management

 

Country risk

Country risk is the risk of loss occurring as a result of either a country event or unfavourable country operating conditions. As country events may simultaneously affect all, or many, individual exposures related to a country, country event risk is a concentration risk. Refer to Capital and risk management - Credit risk in the 2015 Annual Report and Accounts for other types of concentration risk such as product, sector or single-name concentration and Country risk for governance, monitoring, management and definitions.


 

Country exposures

Countries shown below are those which had ratings of A+ or below from Standard and Poor's, Moody's or Fitch at 30 June 2016, and in which current exposure to counterparties operating (or individuals residing) in them exceeded £1 billion. Selected eurozone countries are also included. Figures shown are on a current exposure basis, net of provisions and after risk transfer.


Personal

Banks &



Natural

Retail &



other FI

Sovereigns

Property

Resources

Leisure

Other

Total

30 June 2016

£m

£m

£m

£m

£m

£m

£m

£m










Southern Europe









Spain

77 

112 

790 

494 

152 

318 

1,951 

Italy

25 

500 

71 

111 

170 

16 

142 

1,035 

Portugal

102 

10 

14 

159 

294 

Cyprus

11 

43 

54 

Greece

16 

32 










Southern Europe total

135 

714 

89 

921 

823 

171 

513 

3,366 










Eurozone other


















Germany

68 

1,745 

20,211 

73 

217 

346 

1,211 

23,871 

Ireland

15,064 

582 

2,339 

987 

511 

1,008 

2,243 

22,734 

Netherlands

29 

2,168 

5,650 

344 

141 

194 

964 

9,490 

France

68 

2,312 

3,340 

434 

506 

209 

1,111 

7,980 

Belgium

20 

301 

755 

134 

136 

198 

1,544 

Luxembourg

11 

474 

30 

339 

29 

133 

1,022 

Other

14 

268 

707 

70 

28 

84 

145 

1,316 










Eurozone

15,409 

8,564 

33,121 

3,302 

2,368 

2,041 

6,518 

71,323 










Japan

28 

577 

1,819 

336 

2,761 

India

12 

149 

776 

13 

140 

237 

1,330 

 


Personal

Banks &



Natural

Retail &



other FI

Sovereigns

Property

Resources

Leisure

Other

Total

31 December 2015**

£m

£m

£m

£m

£m

£m

£m

£m










Southern Europe









Spain

79 

58 

671 

526 

129 

272 

1,741 

Italy

27 

428 

52 

62 

175 

18 

108 

870 

Portugal

87 

10 

26 

139 

63 

332 

Cyprus

12 

38 

50 

Greece

15 

35 










Southern Europe total

139 

574 

68 

767 

840 

150 

490 

3,028 










Eurozone other


















Germany

63 

1,533 

23,801 

91 

150 

172 

1,701 

27,511 

Ireland

13,440 

433 

1,624 

756 

437 

921 

1,788 

19,399 

Netherlands

30 

1,966 

4,176 

451 

94 

127 

1,137 

7,981 

France

76 

2,309 

2,402 

357 

447 

200 

1,306 

7,097 

Belgium

22 

702 

537 

158 

44 

198 

1,662 

Luxembourg

625 

21 

346 

32 

28 

119 

1,177 

Other

14 

382 

609 

55 

84 

11 

146 

1,301 










Eurozone

13,790 

8,524 

33,238 

2,981 

2,128 

1,610 

6,885 

69,156 










Japan

31 

249 

1,417 

114 

1,814 

India

11 

227 

824 

92 

27 

452 

1,634 










**Restated - refer to page 17 for further details.








 

Appendix 1 Capital and risk management

 

Country risk (continued)

 

Key points*

·

Total eurozone exposure increased by £2.2 billion or 3% to £71.3 billion. Exposures to Spain, Italy, Ireland, the Netherlands and France increased while exposures to Portugal, Germany, Luxembourg and Belgium decreased. Increases were partly due to volatility in the currency markets as the euro and the US dollar both appreciated against sterling.

·

Spain - exposure increased by £0.2 billion to £2.0 billion. This was largely the result of the appreciation of the euro against sterling. Excluding the impact of foreign exchange movements, exposure in Spain increased by £28 million. 

·

Italy - exposure increased by £0.2 billion to £1.0 billion. This was mostly due to the rise in the value of the euro against sterling. Excluding the impact of foreign exchange movements, exposure in Italy increased by £76 million. Around 9% of this is exposure to banks, of which the majority is collateralised derivatives.

·

Germany - exposure decreased by £3.6 billion to £23.9 billion. This was largely the result of a decrease in cash deposits with the central bank, driven by liquidity management. Excluding the impact of foreign exchange movements, exposure would have decreased by £7.3 billion.

·

Ireland - exposure increased by £3.3 billion to £22.7 billion. The increase was largely the result of the appreciation of the euro, and, to a lesser extent, of liquidity management, and increased mortgage lending. Excluding the impact of foreign exchange movements, exposure would have increased by £0.7 billion.

·

Netherlands - exposure increased by £1.5 billion to £9.5 billion, owing to the appreciation of the euro and to liquidity management. Excluding the impact of foreign exchange movements, exposure increased by £0.5 billion.

·

Japan - exposure increased by £0.9 billion to £2.8 billion. Half of this increase was driven by a 24% decrease in the value of the sterling against yen and most of the remainder was attributable to liquidity management.

·

India - exposure decreased by £0.3 billion to £1.3 billion, with reductions in lending both to corporates and to banks owing to RBS's UK-centred strategy.

·

China - exposure decreased by £0.2 billion to £0.7 billion. The reductions were predominantly driven by a decrease in lending to banks.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*Not within the scope of Ernst & Young LLP's review report.


Appendix 1 Capital and risk management

 

Credit risk: balance sheet analysis

Loans and related credit metrics

The tables below analyse gross loans and advances (excluding reverse repos) and related credit metrics and; movements in risk elements in lending (REIL) and impairment provisions by  reportable segment. REIL comprises impaired loans and accruing loans past due 90 days or more as to principal or interest. Impaired loans are all loans (including loans subject to forbearance) which carries an impairment provision. For collectively-assessed loans, impairment loss provisions are not allocated to individual loans and the entire portfolio is included in impaired loans. Accruing loans past due 90 days or more comprise loans past due 90 days where no impairment loss is expected.





Credit metrics




Gross loans to

REIL

Provisions

REIL as a %


Provisions

YTD


of gross

Provisions

as a % of

Impairment

YTD

loans to

as a %

gross loans

losses/

Amounts

Banks

Customers

customers

of REIL

to customers

(releases)

written-off

30 June 2016

£m

£m

£m

£m

%

%

%

£m

£m











UK PBB

845 

127,469 

2,273 

1,502 

1.8 

66 

1.2 

40 

205 

Ulster Bank RoI

2,664 

21,421 

4,329 

2,474 

20.2 

57 

11.5 

(27)

860 

Commercial Banking

1,000 

100,236 

2,150 

994 

2.1 

46 

1.0 

104 

306 

Private Banking

103 

11,829 

93 

39 

0.8 

42 

0.3 

RBS International

17 

8,501 

118 

39 

1.4 

33 

0.5 

11 

CIB

6,280 

21,560 

nm

Capital Resolution

9,130 

21,076 

2,406 

1,122 

11.4 

47 

5.3 

266 

125 

W&G

20,558 

397 

262 

1.9 

66 

1.3 

17 

29 

Central items & other

1,925 

367 

23 

23 

6.3 

100 

6.3 

(1)












21,964 

333,017 

11,789 

6,456 

3.5 

55 

1.9 

412 

1,532 











31 December 2015




















UK PBB

965 

121,552 

2,682 

1,847 

2.2 

69 

1.5 

(6)

695 

Ulster Bank RoI

1,971 

18,584 

3,503 

1,911 

18.8 

55 

10.3 

(142)

168 

Commercial Banking

665 

92,002 

1,911 

749 

2.1 

39 

0.8 

69 

263 

Private Banking

54 

11,230 

115 

37 

1.0 

32 

0.3 

13 

RBS International

7,401 

92 

31 

1.2 

34 

0.4 

32 

CIB

5,696 

16,076 

nm

(7)

Capital Resolution

7,097 

25,898 

3,372 

2,266 

13.0 

67 

8.7 

(794)

7,689 

W&G

20,291 

461 

275 

2.3 

60 

1.4 

15 

110 

Central items & other

2,550 

2,077 

21 

22 

1.0 

105 

1.1 

(1)












19,004 

315,111 

12,157 

7,139 

3.9 

59 

2.3 

(853)

8,964 

 

Key points 

·

Loans to banks increased by £3.0 billion, mainly reflecting higher derivative cash collateral in CIB (£0.6 billion) and Capital Resolution (£2.0 billion) - also refer to Derivatives.

·

Customer loans, excluding derivative cash collateral grew by £12.7 billion. Strong organic growth in UK PBB mortgages (£6.6 billion) and Commercial Banking mid and large corporate lending (£6.7 billion) was partially offset by Capital Resolution disposals and run-off - also refer to Key loan portfolios.

·

REIL decreased by £0.4 billion to £11.8 billion and was 3.5% of customer loans. Impairment coverage on REIL is now 55% compared with 59% at year end, The lower coverage principally reflects Shipping REIL of £1,023 million with provisions of £445 million, coverage of 43% (31 December 2015 - £434 million, £181 million and 42%).  

·

Impairment provisions were lower at £6.5 billion. Significant write offs were seen in Ulster Bank RoI (£860 million, more than 50% of total £1.5 billion) but these were materially offset by the impact of the post EU Referendum depreciation of sterling (£0.2 billion).

·

The impairment charge of £412 million includes £267 million (Q1 2016 - £228 million) in the Shipping portfolio in Capital Resolution, £97 million in the Commercial Banking Oil & Gas portfolio, principally a single name and £29 million in the Mining & Metals portfolio.

 


Appendix 1 Capital and risk management

 

Loans and related credit metrics (continued)













Ulster







Central



UK

Bank

Commercial

Private

RBS


Capital


items



PBB

RoI

Banking

Banking

International

CIB

Resolution

W&G

& Other

Total

REIL

£m

£m

£m

£m

£m

£m

£m

£m

£m

£m












At 1 January 2016

2,682 

3,503 

1,911 

115 

92 

3,372 

461 

21 

12,157 

Inter segment transfers

(191)

1,338 

453 

(1,600)

Currency translation and other adjustments

18 

516 

31 

267 

(31)

812 

Additions

409 

320 

567 

35 

770 

85 

2,193 

Transfers between REIL and potential problem loans

(86)

(23)

(13)

(108)

Transfer to performing book

(145)

(250)

(96)

(5)

(4)

(19)

(519)

Repayments and disposals

(209)

(238)

(417)

(5)

(13)

(274)

(57)

(1)

(1,214)

Amounts written-off

(205)

(860)

(306)

(1)

(5)

(125)

(29)

(1)

(1,532)












30 June 2016

2,273 

4,329 

2,150 

93 

118 

2,406 

397 

23 

11,789 












 



Ulster







Central



UK

Bank

Commercial

Private

RBS


Capital


items



PBB

RoI

Banking

Banking

International

CIB

Resolution

W&G

& Other

Total

Provisions

£m 

£m 

£m 

£m 

£m 

£m 

£m 

£m 

£m 

£m 












At 1 January 2016

1,847 

1,911 

749 

37 

31 

2,266 

275 

22 

7,139 

Inter segment transfers

(173)

1,198 

439 

(1,464)

Currency translation and other adjustments

260 

169 

438 

Amounts written-off

(205)

(860)

(306)

(1)

(5)

(125)

(29)

(1)

(1,532)

Recoveries of amounts previously written-off

14 

14 

12 

16 

57 

Charges/(releases) to income statement from continuing operations

40 

(27)

104 

11 

266 

17 

(1)

412 

Unwind of discount

(21)

(22)

(6)

(1)

(6)

(2)

(58)












30 June 2016

1,502 

2,474 

994 

39 

39 

1,122 

262 

23 

6,456 













Appendix 1 Capital and risk management

 

Loans and related credit metrics: (continued)

The tables below show gross loans and advances to banks and customers (excluding reverse repos) and related credit metrics by sector and geography based on the location of lending office.















Credit metrics



30 June 2016




REIL as a

Provisions

Provisions

Impairment


Gross



% of gross

as a %

as a % of

losses/

Amounts

loans

REIL

Provisions

loans

of REIL

gross loans

(releases)

written-off

£m

£m

£m

%

%

%

£m

£m










Central and local government

6,668 

100 

Finance

38,342 

60 

57 

0.2 

95 

0.1 

(14)

Personal

- mortgages (1)

147,115 

3,881 

1,097 

2.6 

28 

0.7 

19 

22 


- unsecured

14,373 

1,216 

1,007 

8.5 

83 

7.0 

35 

189 

Property

35,736 

2,434 

1,206 

6.8 

50 

3.4 

(47)

854 

Construction

4,710 

276 

212 

5.9 

77 

4.5 

15 

83 

of which: CRE

27,695 

2,479 

1,264 

9.0 

51 

4.6 

(40)

840 

Manufacturing

11,062 

225 

130 

2.0 

58 

1.2 

39 

Finance leases (2)

11,828 

98 

77 

0.8 

79 

0.7 

Retail, wholesale and repairs

12,863 

380 

251 

3.0 

66 

2.0 

65 

Transport and storage

8,965 

1,136 

513 

12.7 

45 

5.7 

265 

58 

Health, education and leisure

11,364 

364 

172 

3.2 

47 

1.5 

25 

Hotels and restaurants

5,820 

287 

159 

4.9 

55 

2.7 

52 

Utilities

4,322 

128 

83 

3.0 

65 

1.9 

15 

Other

19,849 

1,303 

860 

6.6 

66 

4.3 

96 

126 

Latent

631 

11 










Total customers

333,017 

11,789 

6,456 

3.5 

55 

1.9 

412 

1,532 










Of which








UK









Personal - mortgages

131,212 

1,001 

158 

0.8 

16 

0.1 

22 

18 

               - unsecured

13,942 

1,139 

934 

8.2 

82 

6.7 

33 

184 

Property and construction

38,822 

2,100 

846 

5.4 

40 

2.2 

(32)

413 

Other


124,174 

2,940 

1,473 

2.4 

50 

1.2 

408 

177 

Latent


342 

12 













308,150 

7,180 

3,753 

2.3 

52 

1.2 

443 

792 











Of which








Europe









Personal - mortgages

15,864 

2,876 

936 

18.1 

33 

5.9 

(3)

               - unsecured

364 

54 

50 

14.8 

93 

13.7 

Property and construction

1,562 

590 

560 

37.8 

95 

35.9 

501 

Other


5,650 

855 

719 

15.1 

84 

12.7 

(70)

192 

Latent


289 

(1)













23,440 

4,375 

2,554 

18.7 

58 

10.9 

(71)

702 











Banks

21,964 

 

For the notes to this table refer to the following page.



 

Appendix 1 Capital and risk management

 

Loans and related credit metrics: Loans, REIL, provisions and impairments (continued)















Credit metrics



31 December 2015




REIL as a

Provisions

Provisions

Impairment


Gross



% of gross

as a %

as a % of

losses/

Amounts

loans

REIL

Provisions

loans

of REIL

gross loans

(releases)

written-off

£m

£m

£m

%

%

%

£m

£m










Central and local government

6,707 

100 

Finance

31,981 

87 

61 

0.3 

70 

0.2 

(10)

165 

Personal

- mortgages (1)

137,601 

3,637 

1,006 

2.6 

28 

0.7 

(82)

171 


- unsecured

16,654 

1,331 

1,151 

8.0 

86 

6.9 

122 

513 

Property

35,744 

3,505 

2,012 

9.8 

57 

5.6 

(557)

5,999 

Construction

4,421 

357 

269 

8.1 

75 

6.1 

(14)

313 

of which: CRE

27,630 

3,560 

2,054 

12.9 

58 

7.4 

(811)

6,151 

Manufacturing

9,861 

263 

154 

2.7 

59 

1.6 

154 

Finance leases (2)

11,443 

107 

79 

0.9 

74 

0.7 

(8)

37 

Retail, wholesale and repairs

12,096 

434 

299 

3.6 

69 

2.5 

325 

Transport and storage

8,909 

563 

258 

6.3 

46 

2.9 

115 

370 

Health, education and leisure

10,960 

394 

190 

3.6 

48 

1.7 

14 

171 

Hotels and restaurants

5,372 

336 

201 

6.3 

60 

3.7 

346 

Utilities

3,463 

131 

63 

3.8 

48 

1.8 

27 

Other

19,899 

1,010 

810 

5.1 

80 

4.1 

(37)

340 

Latent

584 

(408)










Total customers

315,111 

12,156 

7,138 

3.9 

59 

2.3 

(849)

8,931 










Of which








UK









Personal - mortgages

123,653 

1,083 

158 

0.9 

15 

0.1 

17 

36 

               - unsecured

14,348 

1,262 

1,085 

8.8 

86 

7.6 

126 

501 

Property and construction

38,006 

2,814 

1,282 

7.4 

46 

3.4 

27 

2,773 

Other


110,193 

2,198 

1,182 

2.0 

54 

1.1 

125 

800 

Latent


330 

(303)













286,200 

7,357 

4,037 

2.6 

55 

1.4 

(8)

4,110 











Of which








Europe









Personal - mortgages

13,908 

2,550 

844 

18.3 

33 

6.1 

(101)

135 

               - unsecured

775 

49 

45 

6.3 

92 

5.8 

(5)

12 

Property and construction

1,993 

1,008 

966 

50.6 

96 

48.5 

(593)

3,539 

Other


7,148 

1,011 

864 

14.1 

85 

12.1 

(8)

1,014 

Latent


255 

(103)













23,824 

4,618 

2,974 

19.4 

64 

12.5 

(810)

4,700 











Banks

19,004 

100 

(4)

33 

 

Notes:

(1)

Mortgages are reported in sectors other than personal mortgages by certain businesses based on the nature of the relationship with the customer.

(2)

Includes instalment credit.

 


Appendix 1 Capital and risk management

 

Debt securities

The table below analyses debt securities by issuer and IFRS measurement classifications. The other financial institutions category includes US government sponsored agencies and securitisation entities, the latter principally relating to asset-backed securities (ABS). Ratings are based on the lowest of Standard & Poor's, Moody's and Fitch.


Central and local government

Banks

Other

Corporate

Total



financial


Of which

UK

US

Other

institutions


ABS

30 June 2016

£m

£m

£m

£m

£m

£m

£m


£m











Held-for-trading (HFT)

3,147 

5,733 

24,141 

910 

2,324 

346 

36,601 


827 

Designated as at fair value

122 

122 


Available-for-sale (AFS)

8,978 

8,622 

14,762 

2,112 

5,013 

102 

39,589 


2,467 

Loans and receivables

210 

2,564 

155 

2,929 


2,568 

Held-to-maturity (HTM)

4,890 

4,890 












Debt securities

17,015 

14,355 

39,025 

3,232 

9,901 

603 

84,131 


5,862 











Of which US agencies

299 

299 












Short positions (HFT)

(2,495)

(2,927)

(15,513)

(273)

(373)

(212)

(21,793)












Ratings




















AAA

13,333 

1,947 

4,442 

18 

19,740 


3,684 

AA to AA+

17,015 

14,355 

8,105 

588 

1,345 

10 

41,418 


355 

A to AA-

10,746 

186 

1,977 

157 

13,066 


438 

BBB- to A-

6,321 

391 

1,257 

205 

8,174 


778 

Non-investment grade

520 

17 

493 

112 

1,142 


420 

Unrated

103 

387 

101 

591 


187 












17,015 

14,355 

39,025 

3,232 

9,901 

603 

84,131 


5,862 











Available-for-sale










AFS reserves (gross of tax)

26 

(99)

221 

11 

188 

(17)

330 


78 











Gross unrealised gains

908 

452 

662 

12 

253 

2,287 


186 

Gross unrealised losses

(3)

(1)

(129)

(7)

(140)


(119)











31 December 2015




















Held-for-trading

4,107 

4,627 

22,222 

576 

3,689 

636 

35,857 


707 

Designated as at fair value

111 

111 


Available-for-sale

9,124 

10,359 

12,259 

1,801 

5,599 

108 

39,250 


2,501 

Loans and receivables

2,242 

144 

2,387 


2,222 

Held-to-maturity

4,911 

4,911 












Debt securities

18,142 

14,986 

34,592 

2,378 

11,530 

888 

82,516 


5,430 











Of which US agencies

806 

806 












Short positions (HFT)

(4,697)

(3,347)

(11,796)

(391)

(411)

(165)

(20,807)












Ratings




















AAA

11,696 

1,696 

5,234 

18,629 


3,366 

AA to AA+

18,142 

14,986 

6,879 

119 

1,611 

66 

41,803 


261 

A to AA-

8,880 

420 

1,991 

147 

11,438 


445 

BBB- to A-

6,785 

79 

1,460 

301 

8,625 


363 

Non-investment grade

352 

32 

526 

200 

1,110 


446 

Unrated

32 

708 

171 

911 


549 












18,142 

14,986 

34,592 

2,378 

11,530 

888 

82,516 


5,430 











Available-for-sale










AFS reserves (gross of tax)

12 

(78)

90 

114 

146 


60 











Gross unrealised gains

383 

104 

270 

110 

880 


90 

Gross unrealised losses

(7)

(62)

(9)

(1)

(58)

(3)

(140)


(42)



 

Appendix 1 Capital and risk management

 

Debt securities (continued)

 

Key points

·

Held-for-trading: CIB portfolio increased marginally overall principally auction participation in EMEA and higher trading activity, particularly in the US.



·

Available-for-sale: The overall size of the AFS portfolio, predominantly Treasury liquidity portfolio, is broadly unchanged as maturing securities have been offset by new fixed income investments and FX movements.

 


Derivatives

The table below analyses derivatives by type of contract. The master netting agreements and collateral shown below do not result in a net presentation on the balance sheet under IFRS.











30 June 2016


31 December 2015



Notional

Assets

Liabilities


Notional

Assets

Liabilities



£bn

£m

£m


£bn

£m

£m











Interest rate

22,663 

250,850 

242,055 


19,783 

206,138 

194,854 


Exchange rate

4,181 

73,700 

79,036 


3,702 

54,938 

58,243 


Credit

52 

859 

748 


67 

909 

840 


Equity and commodity

15 

630 

629 


18 

559 

796 











Balance sheet


326,039 

322,468 



262,544 

254,733 


Counterparty mark-to-market netting


(267,287)

(267,287)



(214,800)

(214,800)


Cash collateral


(33,593)

(32,636)



(27,629)

(25,729)


Securities collateral


(9,153)

(13,551)



(7,535)

(8,213)











Net exposure


16,006 

8,994 



12,580 

5,991 











Banks (1)


1,340 

1,324 



1,011 

1,311 


Other financial institutions (2)


4,630 

2,646 



2,864 

1,468 


Corporate (3)


8,568 

4,385 



7,816 

3,108 


Government (4)


1,468 

639 



889 

104 











Net exposure by sector


16,006 

8,994 



12,580 

5,991 











UK


9,146 

2,636 



6,270 

1,199 


Europe


4,809 

3,679 



4,069 

2,408 


US


1,164 

1,529 



639 

714 


RoW


887 

1,150 



1,602 

1,670 











Net exposure by region of counterparty


16,006 

8,994 



12,580 

5,991 


 

Notes:

(1)

Transactions with certain counterparties with whom RBS has netting arrangements but collateral is not posted on a daily basis; certain transactions with specific terms that may not fall within netting and collateral arrangements; derivative positions in certain jurisdictions for example China where the collateral agreements are not deemed to be legally enforceable.

(2)

Transactions with securitisation vehicles and funds where collateral posting is contingent on RBS's external rating.

(3)

Predominantly large corporate with whom RBS may have netting arrangements in place, but operational capability does not support collateral posting.

(4)

Sovereigns and supranational entities with one way collateral agreements in their favour.

(5)

The notional amount of interest rate derivatives include £13,940 billion (2015 - £11,555 billion) in respect of contracts cleared through central clearing counterparties. The associated derivatives assets and liabilities including variation margin reflect  IFRS offset of £243 billion (2015 - £124 billion and £232 billion (2015 - £118 billion) respectively.

 

Key points

·

Derivative exposures, both balance sheet positions as well as net exposures increased principally as a result of market factors in the lead up to and following the EU Referendum, including the impact of volatility leading to higher trading volumes in the foreign exchange and interest rate market, sterling weakening against all major currencies and downward shift in yield curves.

·

Overall net exposure increased from a net asset position of £6.6 billion to £7.0 billion.

·

Bank exposures increased by £0.3 billion to a broadly flat net position at H1 2016, from a net derivative liability of £0.3 billion at the year end, largely reflecting derivative asset contracts that do not have a nettable liability exposure, augmented by the impact of foreign exchange movements, as well as the timing of collateral settlement.

 


Appendix 1 Capital and risk management

 

Valuation reserves

Valuation reserves reflect adjustments to mid-market valuations to cover bid-offer spread, liquidity and credit risk.


30 June

31 December

2016

2015


£m

£m




Funding valuation adjustment (FVA)

1,084 

752 

Credit valuation adjustments (CVA)

839 

774 

Bid-offer reserves

340 

304 

Product and deal specific

702 

660 




Valuation reserves

2,965 

2,490 

 

Key point

 

·

The FVA at 30 June 2016 included additional reserves (Q2 2016 - £220 million; Q1 2016 - £110 million) in Capital Resolution following the estimated widening in implied funding spreads; the Q2 movement reflected the impact of the EU Referendum.

·

The increase in other reserves mainly reflected sterling weakening against all major currencies following the EU Referendum and widening credit spreads.


Appendix 1 Capital and risk management

 

Credit risk: Regulatory basis

EAD and RWA density* 

The tables below show exposure at default (EAD) after credit risk mitigation (CRM), RWAs, and related RWA density by sector cluster.


EAD post CRM


RWAs


RWA density


IRB

STD

Total


IRB

STD

Total


IRB

STD

Total

30 June 2016

£m

£m

£m


£m

£m

£m


%

%

%













Sector cluster












Sovereign












Central banks

43,529 

37,613 

81,142 


1,602 

1,602 


Central government

23,316 

14,128 

37,444 


2,382 

30 

2,412 


10 

Other sovereign

4,279 

1,037 

5,316 


1,230 

209 

1,439 


29 

20 

27 













Total sovereign

71,124 

52,778 

123,902 


5,214 

239 

5,453 














Financial institutions (FI)












Banks

26,415 

520 

26,935 


13,791 

129 

13,920 


52 

25 

52 

Non-bank FI (1)

32,777 

21,945 

54,722 


16,291 

14,557 

30,848 


50 

66 

56 

SSPEs (2)

10,446 

1,001 

11,447 


3,738 

703 

4,441 


36 

70 

39 













Total FI

69,638 

23,466 

93,104 


33,820 

15,389 

49,209 


49 

66 

53 













Corporates












Property












  - UK

42,623 

4,187 

46,810 


21,047 

3,971 

25,018 


49 

95 

53 

  - RoI

1,714 

38 

1,752 


1,085 

38 

1,123 


63 

100 

64 

  - Western Europe

3,286 

357 

3,643 


1,642 

350 

1,992 


50 

98 

55 

  - US

468 

18 

486 


260 

18 

278 


56 

100 

57 

  - RoW

797 

245 

1,042 


587 

189 

776 


74 

77 

74 













Total property

48,888 

4,845 

53,733 


24,621 

4,566 

29,187 


50 

94 

54 

Natural resources












  - Oil & Gas

4,874 

165 

5,039 


2,432 

150 

2,582 


50 

91 

51 

  - Mining & Metals

1,596 

12 

1,608 


861 

870 


54 

75 

54 

  - Electricity

5,880 

60 

5,940 


3,026 

61 

3,087 


51 

102 

52 

  - Water & Waste

6,606 

73 

6,679 


1,616 

60 

1,676 


24 

82 

25 

Total natural resources

18,956 

310 

19,266 


7,935 

280 

8,215 


42 

90 

43 

Of which: commodity traders

602 

602 


346 

346 


57 

57 

Transport












  - Shipping

5,994 

1,502 

7,496 


3,299 

1,504 

4,803 


55 

100 

64 

  - Automotive

8,045 

100 

8,145 


3,277 

92 

3,369 


41 

92 

41 

  - Other

8,897 

431 

9,328 


4,129 

148 

4,277 


46 

34 

46 

Total transport

22,936 

2,033 

24,969 


10,705 

1,744 

12,449 


47 

86 

50 

Manufacturing

21,760 

699 

22,459 


9,270 

609 

9,879 


43 

87 

44 

Retail & leisure

20,720 

2,165 

22,885 


12,560 

2,091 

14,651 


61 

97 

64 

Services

22,148 

1,063 

23,211 


13,231 

996 

14,227 


60 

94 

61 

TMT (3)

6,866 

377 

7,243 


4,152 

370 

4,522 


60 

98 

62 













Total corporates

162,274 

11,492 

173,766 


82,474 

10,656 

93,130 


51 

93 

54 

Of which: commodity traders

837 

837 


476 

476 


57 

57 













Personal












Mortgages












  - UK

134,434 

8,202 

142,636 


14,271 

3,158 

17,429 


11 

39 

12 

  - RoI

15,952 

18 

15,970 


12,149 

13 

12,162 


76 

72 

76 

  - Western Europe

224 

224 


94 

94 


42 

42 

  - US

116 

116 


45 

45 


39 

39 

  - RoW

803 

803 


295 

295 


37 

37 













Total mortgages

150,386 

9,363 

159,749 


26,420 

3,605 

30,025 


18 

39 

19 

Other personal

29,396 

3,573 

32,969 


11,333 

2,547 

13,880 


39 

71 

42 













Total personal

179,782 

12,936 

192,718 


37,753 

6,152 

43,905 


21 

48 

23 

Other items

8,137 

8,137 


6,834 

6,834 


84 

84 













Total

482,818 

108,809 

591,627 


159,261 

39,270 

198,531 


33 

36 

34 













For the notes to this table refer to page 48.







*Not within the scope of Ernst & Young LLP's review report.








 

Appendix 1 Capital and risk management

 

EAD and RWA density* (continued)

 


EAD post CRM


RWAs


RWA density


IRB

STD

Total 


IRB

STD

Total 


IRB

STD

Total 

31 December 2015

£m 

£m 

£m 


£m 

£m 

£m 


%

%

%













Sector cluster












Sovereign












Central banks

46,879 

48,451 

95,330 


1,730 

1,730 


Central government

22,561 

14,295 

36,856 


2,028 

28 

2,056 


Other sovereign

4,109 

442 

4,551 


963 

225 

1,188 


23 

51 

26 













Total sovereign

73,549 

63,188 

136,737 


4,721 

253 

4,974 














Financial institutions (FI)












Banks

25,629 

893 

26,522 


11,941 

226 

12,167 


47 

25 

46 

Non-bank FI (1)

30,898 

19,121 

50,019 


15,366 

12,504 

27,870 


50 

65 

56 

SSPEs (2)

10,971 

1,232 

12,203 


4,140 

747 

4,887 


38 

61 

40 













Total FI

67,498 

21,246 

88,744 


31,447 

13,477 

44,924 


47 

63 

51 













Corporates












Property












  - UK

41,992 

3,472 

45,464 


20,827 

3,487 

24,314 


50 

100 

53 

  - RoI

1,836 

17 

1,853 


814 

15 

829 


44 

88 

45 

  - Western Europe

2,992 

378 

3,370 


1,587 

374 

1,961 


53 

99 

58 

  - US

688 

19 

707 


325 

19 

344 


47 

100 

49 

  - RoW

930 

266 

1,196 


792 

245 

1,037 


85 

92 

87 













Total property

48,438 

4,152 

52,590 


24,345 

4,140 

28,485 


50 

100 

54 

Natural resources












  - Oil & Gas

5,467 

139 

5,606 


2,481 

133 

2,614 


45 

96 

47 

  - Mining & Metals

1,497 

58 

1,555 


690 

60 

750 


46 

103 

48 

  - Electricity

5,133 

72 

5,205 


2,586 

49 

2,635 


50 

68 

51 

  - Water & Waste

5,805 

68 

5,873 


1,511 

53 

1,564 


26 

78 

27 

Total natural resources

17,902 

337 

18,239 


7,268 

295 

7,563 


41 

88 

41 

Of which: commodity traders

776 

776 


365 

365 


47 

100 

47 

Transport












  - Shipping

5,811 

1,698 

7,509 


3,790 

1,698 

5,488 


65 

100 

73 

  - Automotive

8,580 

87 

8,667 


3,222 

80 

3,302 


38 

92 

38 

  - Other

8,890 

440 

9,330 


3,964 

162 

4,126 


45 

37 

44 

Total transport

23,281 

2,225 

25,506 


10,976 

1,940 

12,916 


47 

87 

51 

Manufacturing

22,811 

661 

23,472 


9,430 

566 

9,996 


41 

86 

43 

Retail & leisure

20,071 

1,972 

22,043 


12,207 

1,936 

14,143 


61 

98 

64 

Services

22,080 

973 

23,053 


12,884 

903 

13,787 


58 

93 

60 

TMT (3)

7,424 

370 

7,794 


4,495 

338 

4,833 


61 

91 

62 













Total corporates

162,007 

10,690 

172,697 


81,605 

10,118 

91,723 


50 

95 

53 

Of which: commodity traders

1,350 

1,350 


623 

623 


46 

100 

46 













Personal












Mortgages












  - UK

126,295 

8,087 

134,382 


9,397 

3,336 

12,733 


41 

  - RoI

14,048 

18 

14,066 


11,564 

12 

11,576 


82 

67 

82 

  - Western Europe

228 

228 


97 

97 


43 

43 

  - US

111 

111 


45 

45 


41 

41 

  - RoW

716 

716 


285 

285 


40 

40 













Total mortgages

140,343 

9,160 

149,503 


20,961 

3,775 

24,736 


15 

41 

17 

Other personal

29,659 

4,731 

34,390 


11,276 

3,468 

14,744 


38 

73 

43 













Total personal

170,002 

13,891 

183,893 


32,237 

7,243 

39,480 


19 

52 

21 

Other items

9,359 

9,359 


8,677 

8,677 


93 

93 













Total

473,056 

118,374 

591,430 


150,010 

39,768 

189,778 


32 

34 

32 













*Not within the scope of Ernst & Young LLP's review report.









 

Appendix 1 Capital and risk management

 

EAD and RWA density* (continued)

 

Notes:

(1)

Non-bank financial institutions, such as US agencies, insurance companies, pension funds, hedge and leverage funds, broker-dealers and non-bank subsidiaries of banks.

(2)

Securitisation structured purpose entities (SSPEs) primarily relate to securitisation related vehicles.

(3)

Telecommunications, media and technology.

 

Key points

Total credit risk exposures remained broadly stable, with EAD post CRM of £592 billion at 30 June 2016. Notable movements during H1 2016 were:

·

An increase due to exchange rate movements following the EU Referendum.

·

Exposure reductions in line with business strategy including disposals, limit reductions and early repayments.

·

Growth in the UK mortgage book in line with business strategy.

·

Exchange rate movements accounted for a £14 billion increase in the underlying exposure. Excluding this impact, EAD post CRM fell by 2% reflecting a reduction in placements with central banks as part of ongoing liquidity management as well as strategic exposure reductions. This was offset by an increase in mortgage lending in the UK as part of strategy to increase market share. 

·

RWAs increased 5% to £199 billion. RWA movements during the period were partly driven by recalibrations of the following models: the PD models for banks, local authorities, housing associations and mortgages; and the LGD models for banks and quasi-governmental organisations.


IRB approach

Overall RWA density under the IRB approach rose marginally from 32% to 33% while RWAs increased by 6%, driven in part by the impact of model changes as well as deteriorating credit quality in some sectors during the period. Overall EAD post CRM increased 2% to £483 billion.

·

Sovereign: RWA density rose slightly from 6% to 7% as RWAs increased by 10%, predominantly due to the implementation of a more conservative LGD model for quasi-governmental organisations. EAD post CRM fell 3% to £71.1 billion, reflecting ongoing liquidity management by Treasury.

·

Financial Institutions: RWA density rose from 47% to 49% as RWAs increased by 8%, primarily due to the implementation of the new PD model for banks. EAD post CRM increased 3%, driven by sterling's depreciation against the euro and the US dollar.

·

Property: Overall RWA density, RWAs and EAD post CRM remained broadly stable for this sector in H1 2016. For the RoI, the increase in RWA density from 44% to 63% reflected write-offs of defaulted exposure during the period.

·

Oil & Gas: RWA density rose from 45% to 50%, reflecting a further deterioration in credit quality. RWAs fell by 2% due to some assets moving into default, while EAD post CRM fell 11% mainly due to exposure reductions in the normal course of business.

·

Mining & Metals: RWA density rose from 46% to 54%, reflecting a further deterioration in the credit quality of this sector. EAD post CRM increased by 7%, while RWAs increased by 25%.

·

Shipping: RWA density fell from 65% to 55% and RWAs fell by 13%, reflecting some customers moving into default in H1 2016. EAD post CRM increased by 3%, predominantly driven by exchange rate movements, partly offset by scheduled loan repayments, prepayments and secondary sales.

·

Personal Mortgages: RWA density rose from 15% to 18% while RWAs increased by 26% following quarterly PD recalibrations to reflect observed default rates during the period. EAD post CRM increased by 7%, mainly driven by business strategy to increase UK mortgage lending on the back of the improving UK housing and mortgage market and sustained house price growth. The exposure movements in the RoI were predominantly driven by exchange rate movements.

*Not within the scope of Ernst & Young LLP's review report.



Appendix 1 Capital and risk management

 

EAD and RWA density* (continued)

STD approach

RWA density for the STD approach deteriorated slightly while RWAs remained largely unchanged. EAD post CRM fell by 8%.

·

Sovereign: RWAs and RWA density remained broadly stable during the period. EAD post CRM decreased by 16% due to exposure reduction as a result of ongoing liquidity management.

 

.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

*Not within the scope of Ernst & Young LLP's review report.


Appendix 1 Capital and risk management

 

Market risk

Market risk is the risk of losses arising from fluctuations in interest rates, credit spreads, foreign currency rates, equity prices, commodity prices and other factors, such as market-implied volatilities, that may lead to a reduction in earnings, economic value or both. For a description of market risk framework, governance, policies and methodologies, refer to Capital and risk management - Market risk in the 2015 Annual Report and Accounts.

 

Trading portfolios

Value-at-risk

The table below presents the internal value-at-risk (VaR) for trading portfolios split by type of market risk exposure. The internal traded 99% one-day VaR captures all trading book positions. By contrast, the regulatory VaR-based charges take into account only regulator-approved products, locations and legal entities and are based on a ten-day, rather than a one-day, holding period for market risk capital calculations.

















Half year ended


Year ended


30 June 2016


30 June 2015


31 December 2015


Average 

Period end 

Maximum 

Minimum 


Average 

Period end 

Maximum 

Minimum 


Average 

Period end 

Maximum 

Minimum 

Traded VaR (1-day 99%)

£m 

£m 

£m 

£m 


£m 

£m 

£m 

£m 


£m 

£m 

£m 

£m 
















Interest rate

12.3 

10.2 

22.3 

7.8 


16.0 

11.7 

29.8 

10.8 


14.5 

12.8 

29.8 

9.5 

Credit spread

8.4 

9.7 

12.5 

5.8 


12.5 

7.6 

16.4 

7.5 


10.1 

7.1 

16.4 

6.5 

Currency

4.0 

4.3 

9.0 

1.0 


5.3 

5.4 

7.8 

3.3 


4.9 

5.0 

8.9 

1.9 

Equity

0.5 

0.5 

2.1 

0.2 


2.4 

1.2 

6.1 

1.0 


1.6 

0.8 

6.1 

0.4 

Commodity

0.6 

0.8 

1.7 

0.2 


0.5 

0.7 

2.2 

0.2 


0.4 

0.5 

2.2 

0.2 

Diversification (1)


(9.6)





(11.6)





(9.1)


















Total

15.4 

15.9 

27.3 

9.9 


21.8 

15.0 

30.1 

15.0 


18.9 

17.1 

30.1 

12.1 

 

Note:

(1)

RBS benefits from diversification as it reduces risk by allocating positions across various financial instrument types, currencies and markets. The extent of the diversification benefit depends on the correlation between the assets and risk factors in the portfolio at a particular time. The diversification factor is the sum of the VaR on individual risk types less the total portfolio VaR.

 

Key points

·

Internal traded VaR continued to decline in H1 2016 following a reduction in positions, despite the increased volatility and reduced liquidity resulting from macroeconomic and political factors, notably the economic slowdown in China, the US Federal Reserve's decision to reduce its quantitative easing programme and the low interest rate environment in Europe. The uncertainty in advance of the EU Referendum was one of the main drivers of the reduction in positions.

·

Average total internal traded VaR fell, compared to both H1 2015 and 2015 as a whole, primarily driven by interest rate and credit spread VaR resulting from a reduction in fixed income securities.

 


Appendix 1 Capital and risk management

 

Trading portfolios (continued)

Capital charges*

The total market risk minimum capital requirement calculated in accordance with the Capital Requirements Regulation (CRR) was £1,675 million at 30 June 2016 (31 December 2015 - £1,700 million); this represents 8% of the corresponding RWA amount, £20.9 billion. It comprises a number of regulatory capital requirements split into two categories: (i) the non-modelled position risk requirement (PRR) of £351 million, which has several components; and (ii) the Pillar 1 model-based PRR of £1,324 million, which comprises several modelled charges.

 

The following table analyses the principal contributors to the Pillar 1 model-based PRR.












31 December



2015 


Average

Maximum

Minimum

Period end

Period end

30 June 2016

£m

£m

£m

£m

£m







Value-at-risk

329 

352 

305 

305 

377 

Stressed VaR  (SVaR)

462 

480 

446 

448 

477 

Incremental risk charge (IRC)

278 

297 

253 

270 

248 

Risk not in VaR (RNIV)

259 

301 

212 

301 

221 











1,324 

1,323 

 

Key points

·

The VaR and SVaR charges together decreased by 12%, mainly driven by the euro and US dollar interest rate portfolios as a result of overall risk reduction in Q2 2016 ahead of the EU Referendum.

·

The RNIV charge increased by 36% as new RNIVs were introduced to supplement the capitalisation of risks against unreliable market data.

·

The IRC increased by 9%, mainly driven by US government bond positions in RBS Securities Inc. The methodology for calculating the IRC was refined during H1 2016, which had a moderate offsetting downward impact (£14 million in RWA terms).

·

The non-modelled PRR decreased by 7%, largely driven by a reduction in the specific interest rate risk and trading book securitisation components, reflecting disposals in Capital Resolution.

 

 

 

 

 

 

 

 

 

 

*Not within the scope of Ernst & Young LLP's review report.


Appendix 1 Capital and risk management

 

Non-trading portfolios

 

Non-traded credit spread risk

The main component of total non-traded VaR is credit spread VaR, which captures the risk in Treasury arising primarily from portfolios held for liquidity and collateral management purposes. Non-traded credit spread VaR was £57.7 million (31 December 2015 - £30.6 million). The rise largely reflected an increase in longer-dated bonds within Treasury's liquidity portfolio and greater credit spread volatility, primarily affecting US dollar bond swap spreads with tenors of over ten years.

 

Non-traded interest rate risk

Interest rate risk arises from two main sources in the non-trading portfolios.

 

The VaR relating to interest rate risk arising from earnings from retail and commercial banking activities at a 99% confidence level is presented below, together with a currency analysis at the period-end. This excludes positions in financial instruments which are classified as held-for-trading.









Average 

Period end 

Maximum 

Minimum 

Six months ended


£m 

£m 

£m 

£m 







30 June 2016


21 

21 

28 

10 

30 June 2015 - excluding Citizens


16 

17 

22 

30 June 2015 - Citizens


16 

30 June 2015 - Total


17 

13 

25 

11 

31 December 2015 - excluding Citizens


17 

10 

25 

31 December 2015 - Citizens


16 

31 December 2015 - total


18 

10 

25 

10 








30 June

30 June 2015

31 December


2016 

excl. Citizens

Citizens

Total

2015 

Period end VaR

£m 

£m 

£m 

£m 

£m 







Euro

Sterling

22 

13 

13 

US dollar

15 

14 

Other

 

Key points

·

VaR remained stable during H1 2016, with fluctuations well within risk appetite.

·

As the VaR includes pipeline fixed-rate mortgage hedges but not the underlying mortgages, sterling VaR is relatively high, reflecting this mismatch. At 31 December 2015, there were offsetting risk exposures mainly relating to the pension fund contribution. Including the expected mortgage pipeline, sterling VaR would be £5.5 million and total VaR would be £5.6 million.

 

The VaR relating to interest rate risk arising from money-market portfolios was £3.7 million at 30 June 2016 (31 December 2015 - £2.5 million).



 

Appendix 1 Capital and risk management

 

Non-trading portfolios (continued)

Sensitivity of net interest income*

Earnings sensitivity to rate movements is derived from a central forecast over a 12 month period. A simplified scenario is shown based on the period-end balance sheet assuming that non-interest rate variables remain constant. Market implied forward rates are used to generate a base case earnings forecast, which is then subjected to interest rate shocks. The variance between the central forecast and the shock gives an indication of underlying sensitivity to interest rate movements.

 

The following table shows the sensitivity of net interest income, over the next 12 months, to an immediate upward or downward change of 25 and 100 basis points to all interest rates. All yield curves are expected to move in parallel with the exception that interest rates are assumed to floor at zero per cent or, for euro rates, at the current negative rate.

 

The main driver of earnings sensitivity relates to interest rate pass-through assumptions on customer products. The scenario also captures the impact of the reinvestment of maturing structural hedges at higher or lower rates than the base case earnings sensitivity and mismatches in the re-pricing dates of loans and deposits.

 

Multi-year forward projections would increase the negative impact of a downward change in rates or, conversely, the benefit of an immediate upward change in interest rates to current market rates. This is because, over time a greater proportion of maturing structural hedges will be reinvested at prevailing rates which may be higher or lower. Also, in the absence of dynamic assumptions relating to further management actions, the variance to the base case income forecast arising from margin compression or expansion on managed rate products will continue to accrue.

 

However, reported sensitivities should not be considered predictive of future performance. They do not capture potential management action in response to sudden changes in the interest rate environment. Actions that could reduce the net interest income sensitivity and mitigate adverse impacts are changes in pricing strategies on both customer loans and deposits as well as hedging. Management action may also be targeted at stabilising total income taking into account non-interest income in addition to net interest income.








Euro 

Sterling 

US dollar 

Other 

Total 

30 June 2016

£m 

£m 

£m 

£m 

£m 







+ 25 basis point shift in yield curves

49 

16 

68 

- 25 basis point shift in yield curves

(125)

(16)

(140)

+ 100 basis point shift in yield curves

(20)

393 

65 

11 

449 

- 100 basis point shift in yield curves

(298)

(46)

(341)







31 December 2015












+ 25 basis point shift in yield curves

(6)

48 

25 

68 

- 25 basis point shift in yield curves

(7)

(66)

(24)

(96)

+ 100 basis point shift in yield curves

(17)

385 

94 

469 

- 100 basis point shift in yield curves

(7)

(345)

(79)

(429)



















*Not within the scope of Ernst & Young LLP's review report.








 

Appendix 1 Capital and risk management

 

Non-trading portfolios (continued)

 

Key points

·

Implied forward rates fell between December 2015 and June 2016, so that the June 2016 base-case forecast incorporated a 25-basis-point cut in the UK base rate within the 12-month forecast horizon whereas the December 2015 base-case forecast incorporated a 25-basis-point rate rise.

·

The largest change in net interest income sensitivity in H1 2016 relates to the negative impact of an immediate 25-basis-point downward change in interest rates from the base-case forecast. This sensitivity increased from £96 million to £140 million, primarily due to the decline in interest rates during the period as customer deposit pricing is assumed to floor at or close to zero interest rates. Any further falls in market rates therefore reduce income. Maturing structural hedges are also reinvested at lower rates.

 

Structural hedging*

RBS has the benefit of a significant pool of stable, non and low interest bearing liabilities, principally comprising equity and money transmission accounts. These balances are usually hedged, either by investing directly in longer-term fixed rate assets or by the use of interest rate swaps, in order to provide a consistent and predictable revenue stream.

 

After hedging the net interest rate exposure of the bank externally, Treasury allocates income to products or equity in structural hedges by reference to the relevant interest rate swap curve. Over time, the hedging programme has built up a portfolio of interest rate swaps that provide a basis for stable income attribution to the product and equity hedges.

 

Product hedging*

Product structural hedges are used to minimise the volatility on earnings related to specific products, primarily customer deposits. The balances are primarily hedged with medium-term interest rate swaps, so that reported income is less sensitive to movements in short-term interest rates. The size and term of the hedge are based on the stability of the underlying portfolio.

 

The table below shows the impact on net interest income associated with product hedges managed by Treasury. These relate to the main UK banking businesses except Private Banking and RBS International. Treasury allocates income to products or equity in structural hedges by reference to the relevant interest rate swap curve after hedging the net interest rate exposure of the bank externally. This internal allocation has been developed over time alongside the bank's external hedging programme and provides a basis for stable income attribution to the product and equity hedges.

 

 

 

 

 

 

 

 

 

 

 

*Not within the scope of Ernst & Young LLP's review report.



Appendix 1 Capital and risk management


Six months ended

Net interest income - impact of structural hedging

30 June

30 June

31 December

2016 

2015 

2015 

£m 

£m 

£m 





UK Personal & Business Banking

170 

187 

186 

Commercial Banking

118 

127 

129 

Capital Resolution

14 

Williams & Glyn

21 

22 

23 





Total product hedges

315 

350 

345 

 

Key points

·

The incremental impact on net interest income above LIBOR from structural hedging was positive in H1 2016 as short-term interest rates remained low. Swap rates continued to fall, resulting in the average book yield falling to 1.28% in H1 2016 from 1.51% in H1 2015 and 1.44% in H2 2015. This was due to maturing hedges being reinvested at lower rates and new hedges being added at prevailing market rates. At 30 June 2016, the equivalent yield available in the market was 0.44% compared to 1.45% at 31 December 2015. If market rates and the volume hedged were to remain unchanged for the remainder of 2016, the average book yield would decline by a further 0.06% to 1.22%.

·

The notional size of the hedge increased from £74 billion in H2 2015 to £87 billion in H1 2016. The split by business was broadly in line with the proportion of income shown above. The yield will broadly track medium-term swap rates. However, as the hedge notional increases, the profile is adjusted to incorporate short-term hedging instruments so that the weighted average life of the hedge is not increased. The yield will fall until the short-term hedges are rolled into longer-term instruments on maturity. If the hedged notional were to remain stable, the yield would eventually replicate a time series of medium-term swap rates. Additional hedging activity is not captured in the product hedging yield.

·

At 30 June 2016, the five-year sterling swap rate was 0.44% compared to 1.45% at 31 December 2015. If market rates and the volume hedged were to remain unchanged for the remainder of 2016, the average book yield would decline by a further 0.06% to 1.22%.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



Appendix 1 Capital and risk management

 

Equity hedging*

Equity structural hedges are also used to minimise the volatility on earnings arising from returns on equity. The hedges managed by Treasury relate mainly to the UK banking businesses and contributed £0.3 billion to these businesses in H1 2016 (H1 2015 - £0.4 billion; H2 2015 - £0.3 billion), which is an incremental benefit relative to short-term wholesale cash rates. The size of the hedge in H1 2016 was £35 billion, lower than H12015 (£42 billion) and H2 2015 (£42 billion), primarily reflecting the payment of £4.2 billion into the pension fund and the £1.2 billion payment of the final DAS dividend.

 

The equity hedge also aims broadly to track a time series of medium-to-longer-term swap rates although the yield will be affected by changes in the capital composition of the bank. Other factors, such as the impact of the sale of risk-free securities or additional hedging activity, are not captured in the equity yield. The yield of the equity and product hedge combined was 1.59% at 30 June 2016. 

 

Foreign exchange risk

Treasury seeks to limit the potential volatility impact on RBS's CET1 capital 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 the CET1 ratio. The sensitivity of the CET1 ratio to exchange rates is monitored monthly and reported to the ALCo at least quarterly.






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 2016

£m

£m

£m

£m

£m

£m

£m









US dollar

989 

989 

(24)

965 

(965)

Euro

7,662 

(123)

7,539 

(677)

6,862 

(2,238)

4,624 

Other non-sterling

3,686 

(633)

3,053 

(2,576)

477 

477 










12,337 

(756)

11,581 

(3,277)

8,304 

(3,203)

5,101 









31 December 2015















US dollar

1,172 

1,172 

(134)

1,038 

(1,038)

Euro

6,562 

(127)

6,435 

(573)

5,862 

(1,963)

3,899 

Other non-sterling

3,599 

(524)

3,075 

(2,364)

711 

711 










11,333 

(651)

10,682 

(3,071)

7,611 

(3,001)

4,610 

 

Notes:

(1)

Non-controlling interests (NCI) represents the structural foreign exchange exposure not attributable to owners' equity.

(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. They provide an offset to structural foreign exchange exposures to the extent that there are net assets in overseas operations available.

 

Key points

·

Sterling's depreciation against all currencies following the EU Referendum increased residual structural foreign currency exposures by £0.6 billion; this was partially offset by lower underlying residual exposures.

·

Changes in foreign currency exchange rates affect equity in proportion to structural foreign currency exposure. For example, a 5% strengthening or weakening in foreign currencies against sterling would result in a gain or loss of £0.4 billion in equity, respectively (2015 - £0.4 billion).

 

*Not within the scope of Ernst & Young LLP's review report.


 

 

 

 

 

 

 

 

 

Appendix 2

 

Williams & Glyn

 


 

Williams & Glyn financial information

In the main body of this results document, W&G is presented as a segment within RBS, reflecting the contribution made by W&G's ongoing business to RBS. This does not reflect the allocation of separation costs or the financial impact of any disposal transaction. The segmental performance of W&G has been extracted from the 2016 Interim results, which are subject to the independent review performed by EY.

 

In this appendix, W&G's financial information is shown on two different bases:

·

A non-statutory 'carve out' internally managed basis for the half years ended 30 June 2016, 30 June 2015 together with the year ended 31 December 2015 which reflects the adjustments to the W&G segmental information, relating to a) the full allocation of additional costs for the services W&G received from RBS during these periods and b) the inclusion of certain customer portfolios that are currently reported through other segments in RBS.

·

An illustrative standalone basis of presentation which provides an indicative view of W&G's standalone profile for the period ended 30 June 2016.

 

During the periods presented, W&G has been an integral part of RBS and has not operated as a separate legal entity. As such, the non-statutory carve out basis of presentation does not fully reflect the actual cost base, funding, liquidity and capital profile of a standalone bank.

 

In respect of the illustrative standalone basis, W&G's actual cost base, funding, liquidity and capital requirements as a separated bank may ultimately differ materially from those implied by this illustrative financial information. The illustrative financial information presented herein is based on certain assumptions, which may prove to be incorrect.  As such, this illustrative financial information should be treated as solely indicative of currently modelled parameters and should not be construed as an indication or projection of W&G's actual or future results or financial position on a standalone basis. When considering this information, readers should take this and the risks inherent in preparing such financial information into consideration. For a description of the risks and uncertainties relating to the W&G separation and divestment see the risk factors on page 391 in the RBS 2015 Annual Report and Accounts.

 

The illustrative standalone financial information presented in this appendix does not comply with the UK rules relating to the preparation of proforma financial information under the Prospectus Directive rules or Regulation S-X in the United States, and if presented in accordance with these rules, such presentation would be different than that presented herein.

 

The illustrative standalone financial information presented in this appendix has not been audited or reviewed by EY.



 





Non-statutory carve out financial statements









Half year


Half year


ended

Year ended

ended


30 June

31 December

30 June


2016

2015 

2015 

Income statement

£m

£m

£m

Net interest income

335 

679 

338 





Net fees and commissions

85 

173 

85 

Other operating income

16 





Non-interest income

94 

189 

94 





Total income

429 

868 

432 





Administrative expenses

(278)

(522)

(244)

Restructuring expenses

(45)

(28)

Depreciation

(5)

(11)

(5)





Total operating expenses

(328)

(561)

(249)

Operating profit before impairment (losses)/releases

101 

307 

183 

Impairment (losses)/releases

(13)

(15)

11 





Operating profit before taxation

88 

292 

194 

Tax charge

(25)

(60)

(40)





Profit for the year

63 

232 

154 





Performance ratios








Loan impairment charge as a % of gross customer loans and advances

0.1%

0.1%

(0.1%)

Net interest margin excluding central IEAs

3.32%

3.42%

3.47%

Cost:income ratio

76%

65%

58%

Cost:income ratio - adjusted (1)

66%

61%

58%

 



30 June

31 December


2016 

2015 

Balance sheet


£m

£m

Assets




Cash and balances at central banks


39  

94  

Loans and advances to customers


20,653  

20,325  

Derivatives


193  

102  

Property, plant and equipment


88  

90  

Prepayments, accrued income and other assets


11  

11  





Total assets


20,984  

20,622  





Liabilities




Deposits by banks


14  

14  

Customer deposits


25,239  

25,209  

Derivatives


90  

17  

Amounts due to related undertakings


3,020  

3,174  

Other liabilities


18  

28  

Provisions


50  

50  





Total liabilities


28,431  

28,492  

Net investment from RBS Group


(7,447)

(7,870)





Net investment from RBS Group and liabilities


20,984  

20,622  





Ratios








Loan:deposit ratio (excluding repos)


82%

81%

Risk-weighted assets £bn


10.4  

10.0  

 

Note:

(1)    Excluding restructuring costs.



 

 

Income statement on a non-statutory carve out basis

W&G's net interest income remained relatively flat as the growth in the balance sheet was offset by the reduction in the net interest margin.

 

Operating expenses increased by £79 million compared with H1 2015 as W&G continued to develop its capability to operate as a standalone bank. This included the investment of £45 million in restructuring costs principally associated with the development of the W&G future IT platform.

 

Net impairment losses were £13 million compared to a net release of £11 million in H1 2015. The H1 2015 impairments benefited from a number of releases in the Commercial business.

 

Balance sheet on a non-statutory carve out basis

Customer net lending grew by £328 million, or 2%, to £20.7 billion in H1 2016 driven by growth in mortgage lending.

 

Customer deposits were stable at £25.2 billion in H1 2016 with current accounts representing £7.3 billion, or 29% of total customer deposits.

 

Williams & Glyn illustrative standalone results

An illustration of W&G's standalone income statement and balance sheet for H1 2016 prepared as though it operated independently of the RBS Group is presented below based on certain assumptions.

 

The major adjustments made in preparing this illustrative standalone information compared to W&G's financial information presented on a "carve out" basis are in respect of:

·

Costs - W&G is assumed to have a fully developed cost base, reflecting the people and infrastructure required to operate on a standalone basis

·

Capital - Illustrative levels of equity and capital securities have been included on the balance sheet

·

Liquidity - W&G is assumed to manage its own funding and liquidity position which, combined with the assumed addition of capital, drives a high level of liquid assets

 

See page 1 above with respect to important disclosures relating to the preparation of this information.



 







Williams & Glyn Standalone Financial information






Non-statutory


Illustrative




carve

Illustrative

Williams & Glyn

Segmental

Adjustments

out financial

adjustments

standalone financial

performance

(1)

statements

(2)

statements

Half year ended 30 June 2016

£m

£m

£m

£m

£m

Income statement






Net interest income

324  

11  

335  

(14)

321  







Net fee and commission income

79  

6  

85  

85  

Other operating income

8  

1  

9  

9  

Non interest income

87  

7  

94  

94  







Total income

411  

18  

429  

(14)

415  







Administrative expenses

(197)

(81)

(278)

(23)

(301)

Restructuring expenses

(45)

(45)

45  

Depreciation

(5)

(5)

(5)







Total operating expenses

(242)

(86)

(328)

22  

(306)







Operating profit before impairment losses

169  

(68)

101  

8  

109  

Impairment losses

(17)

4  

(13)

(13)

Operating profit before taxation

152  

(64)

88  

8  

96  







Tax charge (3)

(25)

(25)

(2)

(27)







Profit for the year

152  

(89)

63  

6  

69  







Performance ratios






Loan impairment charge as a % gross






  customer loans and advances

0.2%


0.1%


0.1%

Net interest margin excluding central IEAs

3.30%


3.32%


3.17%

Cost:income ratio

59%


76%


74%

Cost:income ratio - adjusted (4)

48%


66%


74%







Assets






Cash and balances at central banks

36  

3  

39  

3,384  

3,423  

Loans and advances to customers

20,297  

356  

20,653  

20,653  

Available-for-sale financial assets

3,477  

3,477  

Derivatives

193  

193  

193  

Property, plant and equipment

88  

88  

88  

Prepayments, accrued income and other

10  

1  

11  

9  

20  

  assets












Total assets

20,343  

641  

20,984  

6,870  

27,854  







Liabilities






Deposits by banks

12  

2  

14  

14  

Customer deposits

23,909  

1,330  

25,239  

25,239  

Derivatives

90  

90  

90  

Debt securities in issue

415  

415  

Amounts due to related undertakings

3,020  

3,020  

(3,020)

Other liabilities

18  

18  

18  

Provisions

50  

50  

50  







Total liabilities

23,989  

4,442  

28,431  

(2,605)

25,826  







Net Investment






Net investment from RBS Group (5)

(3,646)

(3,801)

(7,447)

9,200  

1,753  

AT1 Instruments

275  

275  







Net investment from RBS Group

(3,646)

(3,801)

(7,447)

9,475  

2,028  







Total equity and liabilities

20,343  

641  

20,984  

6,870  

27,854  







Balance sheet metrics






Loan:deposit ratio (excluding repos)

85%


82%


82%

Risk-weighted assets £bn (6)

9.9  


10.4  


14.2  

 

Notes:

(1)

Adjustments made in respect of RBS recharges and perimeter (e.g. inclusion of customers currently within the NatWest brand) as set out on page 1 of this appendix.

(2)

The illustrative adjustments include assumptions with respect to W&G's fully developed cost base, and capitalisation and liquidity adjustments illustrative of a standalone entity. These are management estimates based on a number of assumptions and as a result should not be considered as an indication of W&G's actual or future results as a standalone bank which may be materially different.

(3)

Indicative tax charge at 28.5%.

(4)

Excluding restructuring costs

(5)

W&G is not a separate legal entity and a number of items on the balance sheet are presented as allocations of transactions of the wider RBS Group.  The net funding/capital position with RBS Group represents a combination of the overall receivables and payables with W&G and the funding balances with RBS Group, which cannot be separately identified or allocated.

(6)

The segmental performance and non-statutory carve out financial information RWAs have been presented on an Advanced Internal Rating Basis (AIRB), while the "illustrative standalone" Williams & Glyn financial information RWAs have been presented on a standardised basis.

 

 


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