FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549

 
 
Report of Foreign Private Issuer
 
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934
 
For August 5, 2016
 
Commission File Number: 001-10306

 
The Royal Bank of Scotland Group plc

 
RBS, Gogarburn, PO Box 1000
Edinburgh EH12 1HQ

 
(Address of principal executive offices)
 
 
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
 
Form 20-F X
 
Form 40-F ___
 
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):_________

 
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):_________


Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.


Yes
  ___
No X
 
 
If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82- ________

 
 
 
The following information was issued as a Company announcement in London, England and is furnished pursuant to General Instruction B to the General Instructions to Form 6-K:

 
 


 
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
 
RBS – Interim Results 2016
 
 
 
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
 
 
 
 
 
-92
 
RBS – Interim Results 2016
 
 
 
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.
 
-92
 
RBS – Interim Results 2016
 
 
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.
 
-92
 
RBS – Interim Results 2016
 
 
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.
 
-92
 
RBS – Interim Results 2016
 
 
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.
-92
 
RBS – Interim Results 2016
 
 
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.
 
-92
 
RBS – Interim Results 2016
 
 
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.
 
-92
 
RBS – Interim Results 2016
 
 
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.
 
 
-92
 
RBS – Interim Results 2016
 
 
 
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.
-92
 
RBS – Interim Results 2016
 
 
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.
-92
 
RBS – Interim Results 2016
 
 
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.
 
-92
 
RBS – Interim Results 2016
 
 
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.
-92
 
RBS – Interim Results 2016
 
 
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.
 
-92
 
RBS – Interim Results 2016
 
 
 
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.
 
 
-92
 
RBS – Interim Results 2016
 
 
 
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
3 
2,203 
2,206 
 
4 
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.
 
-92
 
RBS – Interim Results 2016
 
 
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).
 
-92
 
RBS – Interim Results 2016
 
 
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.
 
-92
 
RBS – Interim Results 2016
 
 
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 
4 
- 
621 
472 
307 
876 
3,109 
Provisions
2,637 
69 
1 
1,541 
269 
618 
1,321 
6,456 
 - Individual & Collective
2,191 
61 
- 
1,501 
260 
567 
1,244 
5,824 
 - Latent
446 
8 
1 
40 
9 
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 
1 
2,282 
133 
661 
987 
7,140 
 - Individual & Collective
2,613 
60 
- 
2,232 
124 
601 
924 
6,554 
 - Latent
390 
13 
1 
50 
9 
60 
63 
586 
AQ10 (5)
3,765 
769 
1 
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.
 
-92
 
RBS – Interim Results 2016
 
 
 
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.
 
-92
 
RBS – Interim Results 2016
 
 
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.
 
-92
 
RBS – Interim Results 2016
 
 
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 
1 
183 
 
- 
- 
- 
183 
Rest of World
58 
9 
67 
 
2 
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 
 
1 
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 
8 
605 
 
15 
1 
16 
621 
US
241 
1 
242 
 
- 
- 
- 
242 
Rest of World
211 
12 
223 
 
5 
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 
1 
65 
7,778 
Office
3,213 
131 
500 
53 
13 
3,910 
Retail
4,658 
101 
47 
- 
5 
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 
9 
1 
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 
- 
7 
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 
2 
75 
 
10,406 
52 
10,458 
> 50% and <= 70%
5,962 
131 
6,093 
 
100 
2 
102 
 
6,096 
133 
6,229 
> 70% and <= 80%
565 
100 
665 
 
78 
2 
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 
1 
13 
 
172 
65 
237 
> 110% and <= 130%
62 
77 
139 
 
31 
6 
37 
 
93 
381 
474 
> 130% and <= 150%
57 
32 
89 
 
10 
8 
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)
9 
1 
10 
 
- 
- 
- 
 
9 
1 
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 
2 
62 
 
9,896 
72 
9,968 
> 50% and <= 70%
5,691 
114 
5,805 
 
103 
2 
105 
 
5,964 
116 
6,080 
> 70% and <= 80%
639 
124 
763 
 
35 
1 
36 
 
685 
125 
810 
> 80% and <= 90%
323 
115 
438 
 
26 
2 
28 
 
353 
376 
729 
> 90% and <= 100%
134 
149 
283 
 
9 
1 
10 
 
143 
150 
293 
> 100% and <= 110%
127 
74 
201 
 
22 
1 
23 
 
149 
75 
224 
> 110% and <= 130%
187 
108 
295 
 
34 
5 
39 
 
221 
122 
343 
> 130% and <= 150%
30 
44 
74 
 
13 
6 
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)
1 
3 
4 
 
- 
1 
1 
 
2 
4 
6 
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.
 
-92
 
RBS – Interim Results 2016
 
 
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.
-92
 
RBS – Interim Results 2016
 
 
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 
4 
383 
Pipelines
98 
4 
103 
9 
8 
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 
2 
- 
327 
18 
368 
Pipelines
98 
- 
310 
31 
8 
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.
 
-92
 
RBS – Interim Results 2016
 
 
 
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.
 
-92
 
RBS – Interim Results 2016
 
 
 
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 
6 
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.
 
-92
 
RBS – Interim Results 2016
 
 
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.
-92
 
RBS – Interim Results 2016
 
 
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 
7 
2,578 
64 
1,227 
14,964 
 
9,112 
6 
2,431 
49 
1,076 
12,674 
Mixed (capital and interest only)
5,297 
78 
5 
27 
709 
6,116 
 
5,380 
76 
7 
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 
- 
4 
39 
903 
 
266 
538 
- 
6 
44 
854 
  - >3 months in arrears
229 
565 
4 
11 
27 
836 
 
237 
523 
- 
6 
33 
799 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Provisions against forbearance population
22 
609 
1 
1 
6 
639 
 
29 
585 
- 
1 
7 
622 
Provisions
177 
1,185 
3 
28 
24 
1,417 
 
180 
1,062 
4 
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 
1 
119 
1,095 
 
1,028 
48 
22 
1 
129 
1,228 
REIL
943 
53 
50 
9 
125 
1,180 
 
1,028 
49 
53 
5 
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.
-92
 
RBS – Interim Results 2016
 
 
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 
6 
4 
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 
1 
15,915 
1 
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 
8 
9 
3 
1 
2 
1 
112 
8 
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 
6 
10 
- 
18 
2,572 
- 
2,572 
AQ10
6 
9 
4 
1 
4 
1 
- 
- 
2 
27 
- 
27 
 
1,132 
807 
352 
214 
57 
7 
10 
- 
20 
2,599 
- 
2,599 
W&G
 
 
 
 
 
 
 
 
 
 
 
 
AQ1-AQ9
4,507 
3,765 
1,231 
780 
174 
9 
1 
- 
- 
10,467 
65 
10,532 
AQ10
74 
79 
18 
10 
2 
- 
- 
- 
- 
183 
1 
184 
 
4,581 
3,844 
1,249 
790 
176 
9 
1 
- 
- 
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 
7 
3 
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 
1 
14,096 
2 
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 
1 
12 
20 
6,209 
323 
6,532 
AQ10
3 
1 
3 
1 
9 
1 
1 
- 
1 
20 
- 
20 
 
2,434 
2,847 
710 
148 
39 
16 
2 
12 
21 
6,229 
323 
6,552 
RBS International
 
 
 
 
 
 
 
 
 
 
 
 
AQ1-AQ9
985 
873 
339 
190 
40 
27 
19 
2 
14 
2,489 
- 
2,489 
AQ10
5 
11 
2 
3 
5 
1 
3 
1 
5 
36 
- 
36 
 
990 
884 
341 
193 
45 
28 
22 
3 
19 
2,525 
- 
2,525 
W&G
 
 
 
 
 
 
 
 
 
 
 
 
AQ1-AQ9
4,113 
3,738 
1,216 
648 
174 
11 
1 
- 
- 
9,901 
297 
10,198 
AQ10
71 
100 
27 
18 
8 
1 
- 
- 
- 
225 
7 
232 
 
4,184 
3,838 
1,243 
666 
182 
12 
1 
- 
- 
10,126 
304 
10,430 
 
 
 
 
* Not within the scope of Ernst & Young LLP’s review report.
**Restated - refer to page 17 for further details.
 
-92
 
RBS – Interim Results 2016
 
 
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 
4 
7 
3 
- 
28,042 
52%
 
112 
28,154 
Greater London
13,275 
6,503 
1,015 
407 
71 
1 
2 
1 
- 
21,275 
45%
 
124 
21,399 
Scotland
3,047 
3,652 
1,622 
1,106 
412 
40 
3 
- 
- 
9,882 
59%
 
46 
9,928 
North West
2,775 
3,795 
1,681 
1,287 
282 
12 
3 
2 
- 
9,837 
60%
 
53 
9,890 
South West
3,110 
3,795 
1,564 
929 
174 
5 
4 
4 
- 
9,585 
57%
 
44 
9,629 
West Midlands
1,779 
2,685 
1,382 
991 
296 
12 
2 
2 
- 
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 
8 
7 
6 
- 
26,098 
54%
 
45 
26,143 
Greater London
11,402 
6,426 
1,252 
418 
90 
1 
2 
1 
- 
19,592 
47%
 
68 
19,660 
Scotland
3,198 
3,775 
1,497 
840 
323 
34 
2 
- 
- 
9,669 
58%
 
25 
9,694 
North West
2,475 
3,548 
1,662 
1,162 
476 
47 
5 
- 
- 
9,375 
61%
 
31 
9,406 
South West
2,850 
3,549 
1,581 
851 
217 
8 
6 
5 
- 
9,067 
58%
 
23 
9,090 
West Midlands
1,728 
2,601 
1,301 
737 
324 
17 
2 
3 
- 
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.
 
-92
 
RBS – Interim Results 2016
 
 
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.
-92
 
RBS – Interim Results 2016
 
 
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 
8 
790 
494 
152 
318 
1,951 
Italy
25 
500 
71 
111 
170 
16 
142 
1,035 
Portugal
6 
102 
10 
14 
159 
1 
2 
294 
Cyprus
11 
- 
- 
- 
- 
- 
43 
54 
Greece
16 
- 
- 
6 
- 
2 
8 
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 
6 
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 
- 
- 
1 
336 
2,761 
India
12 
149 
776 
13 
140 
3 
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 
6 
671 
526 
129 
272 
1,741 
Italy
27 
428 
52 
62 
175 
18 
108 
870 
Portugal
6 
87 
10 
26 
139 
1 
63 
332 
Cyprus
12 
- 
- 
- 
- 
- 
38 
50 
Greece
15 
1 
- 
8 
- 
2 
9 
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 
1 
198 
1,662 
Luxembourg
6 
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 
2 
- 
1 
114 
1,814 
India
11 
227 
824 
1 
92 
27 
452 
1,634 
 
 
 
 
 
 
 
 
 
**Restated - refer to page 17 for further details.
 
 
 
 
 
 
-92
 
RBS – Interim Results 2016
 
 
 
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.
-92
 
RBS – Interim Results 2016
 
 
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 
2 
1 
RBS International
17 
8,501 
118 
39 
1.4 
33 
0.5 
11 
5 
CIB
6,280 
21,560 
- 
1 
- 
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)
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 
7 
RBS International
6 
7,401 
92 
31 
1.2 
34 
0.4 
- 
32 
CIB
5,696 
16,076 
- 
1 
- 
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.
 
-92
 
RBS – Interim Results 2016
 
 
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 
- 
7 
- 
267 
(31)
4 
812 
Additions
409 
320 
567 
7 
35 
- 
770 
85 
- 
2,193 
Transfers between REIL and potential problem loans
(86)
- 
7 
(23)
7 
- 
- 
(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 
1 
2,266 
275 
22 
7,139 
Inter segment transfers
(173)
1,198 
439 
- 
- 
- 
(1,464)
- 
- 
- 
Currency translation and other adjustments
- 
260 
2 
2 
2 
- 
169 
- 
3 
438 
Amounts written-off
(205)
(860)
(306)
(1)
(5)
- 
(125)
(29)
(1)
(1,532)
Recoveries of amounts previously written-off
14 
14 
12 
- 
- 
- 
16 
1 
- 
57 
Charges/(releases) to income statement from continuing operations
40 
(27)
104 
2 
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 
1,122 
262 
23 
6,456 
 
 
 
 
 
 
 
 
 
 
 
-92
 
RBS – Interim Results 2016
 
 
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 
1 
1 
- 
100 
- 
2 
1 
Finance
38,342 
60 
57 
0.2 
95 
0.1 
(14)
8 
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 
6 
39 
Finance leases (2)
11,828 
98 
77 
0.8 
79 
0.7 
2 
6 
Retail, wholesale and repairs
12,863 
380 
251 
3.0 
66 
2.0 
4 
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 
1 
25 
Hotels and restaurants
5,820 
287 
159 
4.9 
55 
2.7 
2 
52 
Utilities
4,322 
128 
83 
3.0 
65 
1.9 
15 
4 
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)
4 
               - unsecured
364 
54 
50 
14.8 
93 
13.7 
3 
5 
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.
 
-92
 
RBS – Interim Results 2016
 
 
 
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 
1 
1 
- 
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 
7 
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 
1 
346 
Utilities
3,463 
131 
63 
3.8 
48 
1.8 
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 
1 
1 
- 
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.
 
-92
 
RBS – Interim Results 2016
 
 
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
- 
- 
- 
1 
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 
3 
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 
4 
114 
4 
146 
 
60 
 
 
 
 
 
 
 
 
 
 
Gross unrealised gains
383 
104 
270 
6 
110 
7 
880 
 
90 
Gross unrealised losses
(7)
(62)
(9)
(1)
(58)
(3)
(140)
 
(42)
 
-92
 
RBS – Interim Results 2016
 
 
 
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.
 
-92
 
RBS – Interim Results 2016
 
 
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.
-92
 
RBS – Interim Results 2016
 
 
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 
 
4 
- 
2 
Central government
23,316 
14,128 
37,444 
 
2,382 
30 
2,412 
 
10 
- 
6 
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 
 
7 
- 
4 
 
 
 
 
 
 
 
 
 
 
 
 
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 
9 
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.
 
 
 
 
 
 
-92
 
RBS – Interim Results 2016
 
 
 
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 
 
4 
- 
2 
Central government
22,561 
14,295 
36,856 
 
2,028 
28 
2,056 
 
9 
- 
6 
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 
 
6 
- 
4 
 
 
 
 
 
 
 
 
 
 
 
 
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 
 
7 
41 
9 
  - 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.
 
 
 
 
 
 
 
-92
 
RBS – Interim Results 2016
 
 
 
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.
 
-92
 
RBS – Interim Results 2016
 
 
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.
-92
 
RBS – Interim Results 2016
 
 
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.
 
-92
 
RBS – Interim Results 2016
 
 
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.
-92
 
RBS – Interim Results 2016
 
 
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 
9 
30 June 2015 - Citizens
 
9 
6 
16 
3 
30 June 2015 - Total
 
17 
13 
25 
11 
31 December 2015 - excluding Citizens
 
17 
10 
25 
9 
31 December 2015 - Citizens
 
5 
- 
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
3 
2 
- 
2 
3 
Sterling
22 
13 
- 
13 
5 
US dollar
1 
15 
6 
14 
5 
Other
3 
4 
- 
4 
4 
 
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).
 
-92
 
RBS – Interim Results 2016
 
 
 
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 
3 
68 
- 25 basis point shift in yield curves
- 
(125)
(16)
1 
(140)
+ 100 basis point shift in yield curves
(20)
393 
65 
11 
449 
- 100 basis point shift in yield curves
- 
(298)
(46)
3 
(341)
 
 
 
 
 
 
31 December 2015
 
 
 
 
 
 
 
 
 
 
 
+ 25 basis point shift in yield curves
(6)
48 
25 
1 
68 
- 25 basis point shift in yield curves
(7)
(66)
(24)
1 
(96)
+ 100 basis point shift in yield curves
(17)
385 
94 
7 
469 
- 100 basis point shift in yield curves
(7)
(345)
(79)
2 
(429)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
*Not within the scope of Ernst & Young LLP’s review report.
 
 
 
 
 
 
-92
 
RBS – Interim Results 2016
 
 
 
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.
 
-92
 
RBS – Interim Results 2016
 
 
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
6 
14 
7 
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%.
 
 
 
 
 
-92
 
RBS – Interim Results 2016
 
 
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.
-92
 
RBS – Interim Results 2016
 
 
 
 
 
 
Appendix 2
 
Williams & Glyn
 
 
RBS – Interim Results 2016
 
 
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.
 
-103
 
RBS – Interim Results 2016
 
 
Appendix 2 Williams & Glyn
 
 
 
 
 
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
9 
16 
9 
 
 
 
 
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.
 
-103
 
RBS – Interim Results 2016
 
 
Appendix 2 Williams & Glyn
 
 
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.
 
-103
 
RBS – Interim Results 2016
 
 
Appendix 2 Williams & Glyn
 
 
 
 
 
 
 
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.
 
 
-103
 
RBS – Interim Results 2016
 
Signatures

 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
 
Date: 5 August 2016
 
 
THE ROYAL BANK OF SCOTLAND GROUP plc (Registrant)
 
 
By:
/s/ Jan Cargill
 
 
Name:
Title:
Jan Cargill
Deputy Secretary