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 February 24, 2017
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 Company announcements in London, England and is furnished pursuant to General Instruction B to the General Instructions to Form 6-K: 
 
 
 
 
 
The Royal Bank of Scotland Group plc
Annual results 2016
 
Contents
Page
 
 
Introduction
2
Highlights
3
Chief Executive’s message
16
Summary consolidated results
19
Analysis of results
21
Segment performance
30
Statutory results
48
Notes
55
Statement of directors' responsibilities
63
Forward-looking statements
64
Appendix 1 – Segmental income statement reconciliations
 
 
Contacts
 
For analyst enquiries:
 
 
Alexander Holcroft
Investor Relations
+44 (0) 20 7672 1758
 
 
 
For media enquiries:
 
 
RBS Press Office
 
+44 (0) 131 523 4205
 
Analysts and investors conference call
RBS will host a presentation for analysts and investors on the results for the year ended 31 December 2016. Details are as follows:
 
Date:
Friday 24 February 2017
Time:
9.30 am UK time
Conference ID:
62910737
Webcast:
www.rbs.com/results
Dial in details:
International – +44 (0) 1452 568 172
UK Free Call – 0800 694 8082
US Toll Free – 1 866 966 8024
 
There will also be a call for fixed income analysts and investors. The details are as follows:
 
Date:
Friday 24 February 2017
Time:
1.30 pm UK time
Conference ID
57346988
Webcast:
www.rbs.com/results
Dial in details:
International – +44 (0) 1452 568 172
UK Free Call – 0800 694 8082
US Toll Free – 1 866 966 8024
 
Available on www.rbs.com/results
 
Announcements and slides
Annual Report and Account 2016
A financial supplement containing income statement, balance sheet and segment performance information for the nine quarters ended 31 December 2016
Pillar 3 Report 2016
Pillar 3 Capital instruments annex
 
 
Introduction
 
In this document, ‘RBSG plc’ or the ‘parent company’ refers to The Royal Bank of Scotland Group plc, and ‘RBS’ or the ‘Group’ refers to RBSG plc and its subsidiaries.
 
Financial information contained in this document does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006 (‘the Act’). The statutory accounts for the year ended 31 December 2015 have been filed with the Registrar of Companies and those for the year ended 31 December 2016 will be filed with the Registrar of Companies following the company’s Annual General Meeting. The report of the auditor on those statutory accounts was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under section 498(2) or (3) of the Act.
 
The condensed consolidated income statement, condensed consolidated statement of comprehensive income, condensed consolidated balance sheet, condensed consolidated statement of changes in equity, condensed consolidated cash flow statement and related notes presented on pages 48 to 62 inclusive are presented on a statutory basis as described in Note 1.
 
Key operating indicators
As described in Note 1 on page 55, RBS prepares its financial statements in accordance with IFRS as issued by the IASB which constitutes a body of generally accepted accounting principles (‘GAAP’). This document contains a number of adjusted or alternative performance measures, also known as non-GAAP financial measures. These measure exclude certain items which management believe are not representative of the underlying performance of the business and which distort period-on-period comparison. These measures include:
‘Adjusted’ measures of financial performance, principally operating performance before: own credit adjustments; gain or loss on redemption of own debt; strategic disposals; restructuring costs; litigation and conduct costs and write down of goodwill (refer to Appendix 1 for reconciliations of the statutory to adjusted basis);
Performance, funding and credit metrics such as ‘Return on tangible equity’, ‘adjusted return on tangible equity’ and related RWA equivalents incorporating the effect of capital deductions (RWAes), total assets excluding derivatives (funded assets), net interest margin (NIM) adjusted for items designated at fair value through profit or loss (non-statutory NIM), cost:income ratio, loan:deposit ratio and REIL/Impairment provision ratios. These are internal metrics used to measure business performance;
Personal & Business Banking (PBB) franchise, combining the reportable segments of UK Personal & Business Banking (UK PBB) and Ulster Bank RoI; and Commercial & Private Banking (CPB) franchise, combining the reportable segments of Commercial Banking, Private Banking and RBS International (RBSI); and
Cost savings progress and 2016 target calculated using operating expenses excluding litigation and conduct costs, restructuring costs, write down of goodwill, the impairment of other intangible assets, the operating costs of Williams & Glyn and the VAT recovery.
 
 
Highlights
 
RBS reported an operating loss before tax of £4,082 million for 2016 and an attributable loss(1) of £6,955 million, which included litigation and conduct costs of £5,868 million, restructuring costs of £2,106 million, the final Dividend Access Share (DAS) dividend of £1,193 million and Capital Resolution disposal losses and impairments of £825 million. Restructuring costs included a £750 million provision in respect of the 17 February 2017 update on RBS’s remaining State Aid obligation regarding Williams & Glyn. An operating loss before tax of £4,063 million and an attributable loss of £4,441 million were reported in Q4 2016.   
 
Across our Personal & Business Banking (PBB), Commercial & Private Banking (CPB) and NatWest Markets (NWM) franchises, RBS reported a £163 million, or 4%, increase in adjusted operating profits to £4,249 million for 2016, and an adjusted return on equity of 11.1%, compared with 11.2% in 2015. Q4 2016 adjusted operating profit of £848 million was £320 million, or 61%, higher than Q4 2015.
 
In 2016 RBS delivered against all of its operating financial targets; PBB and CPB had combined income growth of 2%, adjusting for transfers, underpinned by 10% net lending growth, expenses have been reduced by around £1 billion for the third year in succession as the bank continues to focus on digital channels and on simplification of its processes, and Capital Resolution RWAs have reduced by a further £14.5 billion, or 30%, to £34.5 billion, with 80% of RWAs now relating to PBB, CPB and NatWest Markets compared with 72% at the end of 2015. RBS is committed to achieving its sub 50% cost:income ratio and 12% return on tangible equity targets by 2020.
 
Common Equity Tier 1 ratio of 13.4% reduced by 210 basis points during 2016, but remains ahead of our target despite recognising significant charges relating to remaining legacy issues.
 
 
Year ended
 
Quarter ended
 
31 December
31 December
 
31 December
30 September
31 December
Key metrics and ratios
2016
2015
 
2016
2016
2015
 
 
 
 
 
 
 
Attributable loss
(£6,955m)
(£1,979m)
 
(£4,441m)
(£469m)
(£2,740m)
Operating (loss)/profit
(£4,082m)
(£2,703m)
 
(£4,063m)
£255m
(£2,950m)
Operating profit - adjusted (2)
£3,674m
£4,405m
 
£1,185m
£1,333m
£686m
Net interest margin
2.18%
2.12%
 
2.19%
2.17%
2.10%
Cost:income ratio
129%
127%
 
229%
88%
232%
Cost:income ratio - adjusted (3,4)
66%
72%
 
67%
58%
88%
(Loss)/earnings per share from continuing operations
 
 
 
 
 
 
  - basic
(59.5p)
(27.7p)
 
(37.7p)
(3.9p)
(24.5p)
  - adjusted (3,4)
5.2p
29.2p
 
7.0p
3.9p
5.1p
Return on tangible equity (5,6)
(17.9%)
(4.7%)
 
(48.2%)
(4.8%)
(26.5%)
Return on tangible equity - adjusted (3,4,6)
1.6%
11.0%
 
8.6%
4.6%
6.6%
Average tangible equity (6)
£38,791m
£41,821m
 
£36,855m
£38,696m
£41,319m
Average number of ordinary shares
 
 
 
 
 
 
  outstanding during the period (millions)
11,692 
11,516 
 
11,766 
11,724 
11,554 
 
PBB, CPB & NWM
 
 
 
 
 
 
Total income - adjusted (3)
£11,830m
£11,422m
 
£2,914m
£3,115m
£2,672m
Operating profit - adjusted (2)
£4,249m
£4,086m
 
£848m
£1,331m
£528m
Return on tangible equity - adjusted (3,4,6)
11.1%
11.2%
 
8.5%
14.2%
5.3%
 
 
 
 
 
 
 
Refer to following page for footnotes.
 
 
 
 
 
 
 
 
Highlights
 
 
 
 
 
 
31 December
30 September
31 December
Balance sheet related key metrics and ratios
2016 
2016 
2015 
 
 
 
 
Tangible net asset value (TNAV) per ordinary share (6)
296p
338p
352p
Loan:deposit ratio (7,8)
91%
91%
89%
Short-term wholesale funding (7,9)
£14bn
£14bn
£17bn
Wholesale funding (7,9)
£59bn
£56bn
£59bn
Liquidity portfolio
£164bn
£149bn
£156bn
Liquidity coverage ratio (LCR) (10)
123%
112%
136%
Net stable funding ratio (NSFR) (11)
121%
119%
121%
Common Equity Tier 1 (CET1) ratio
13.4%
15.0%
15.5%
Risk-weighted assets (RWAs)
£228.2bn
£235.2bn
£242.6bn
Leverage ratio (12)
5.1%
5.6%
5.6%
Tangible equity (6)
£34,982m
£39,822m
£40,943m
Number of ordinary shares in issue (millions) (13)
11,823 
11,792 
11,625 
 
Notes:
(1)
Attributable to ordinary shareholders.
(2)
Operating profit before tax excluding own credit adjustments, (loss)/gain on redemption of own debt, strategic disposals, restructuring costs, litigation and conduct costs and write down of goodwill.
(3)
Excluding own credit adjustments, (loss)/gain on redemption of own debt and strategic disposals.
(4)
Excluding restructuring costs, litigation and conduct costs and write down of goodwill.
(5)
Calculated using loss for the period attributable to ordinary shareholders.
(6)
Tangible equity is equity attributable to ordinary shareholders less intangible assets. The dilutive impact was 2p (30 September 2016 - 1p; 31 December 2015 - 1p).
(7)
Excludes repurchase agreements and stock lending.
(8)
Includes disposal groups.
(9)
Excludes derivative collateral.
(10)
On 1 October 2015 the LCR became the Prudential Regulation Authority’s (PRA) primary regulatory liquidity standard; UK banks are required to meet a minimum standard of 80% initally, rising to 100% by 1 January 2018. The published LCR excludes Pillar 2 add-ons. RBS calculates the LCR using its own interpretation of the EU LCR Delegated Act, which may change over time and may not be fully comparable with that of other institutions.
(11)
NSFR for all periods have been calculated using RBS’s current interpretations of the revised BCBS guidance on NSFR issued in late 2014. Therefore, reported NSFR will change over time with regulatory developments. Due to differences in interpretation, RBS’s ratio may not be comparable with those of other financial institutions.
(12)
Based on end-point Capital Requirements Regulation (CRR) Tier 1 capital and leverage exposure under the CRR Delegated Act.
(13)
Includes 39 million treasury shares (30 September 2016 - 41 million; 31 December 2015 - 26 million).
 
2016 RBS performance summary
RBS reported an attributable loss of £6,955 million compared with £1,979 million in 2015. The loss for the year included; litigation and conduct costs of £5,868 million, restructuring costs of £2,106 million, payment of the final DAS dividend of £1,193 million, Capital Resolution disposal losses and impairments of £825 million and a £300 million deferred tax asset impairment.
The 2016 operating loss of £4,082 million compared with an operating loss of £2,703 million in 2015. The adjusted operating profit of £3,674 million was £731 million, or 17%, lower than 2015.
The net interest margin (NIM) of 2.18% for 2016 was 6 basis points higher than 2015, as the benefit associated with the reduction in low yielding assets more than offset modest asset margin pressure and mix impacts across the core franchises.
Excluding expenses associated with Williams & Glyn(1), write-down of intangible assets and the VAT recovery in Q2, adjusted operating expenses have reduced by £985 million, or 11%, compared with 2015, exceeding our target of £800 million. RBS has reduced adjusted operating expenses by over £3 billion in the last three years.
Adjusted cost income ratio for 2016 was 66% compared with 72% in 2015.
Risk elements in lending (REIL) as a % of gross customer loans was 3.1%, 80 basis points lower than 31 December 2015 as RBS continues to de-risk its balance sheet.
Tangible net asset value (TNAV) per share decreased by 56p to 296p compared with 2015 principally reflecting the attributable loss for the year.
 
Highlights
 
PBB, CPB and NatWest Markets delivered increased profits and strong lending growth
RBS reported an adjusted operating profit of £4,249 million across PBB, CPB and NatWest Markets, 4% higher than 2015 and an average of over £1 billion a quarter.
Income across PBB and CPB increased by 2% in 2016 compared with 2015, adjusting for transfers(2), as increased lending volumes more than offset reduced margins. NatWest Markets adjusted income of £1,521 million increased by 16% compared with 2015, adjusting for transfers(2), driven by Rates and Currencies.
PBB and CPB net loans and advances of £272.1 billion have increased by 10% in 2016, compared with a target of 4%, reflecting strong growth across both residential mortgages and commercial lending.
Adjusted cost income ratio improved to 63% compared with 65% in 2015 as we continue to deliver efficiencies across PBB, CPB and NatWest Markets.
 
RBS continues to address its remaining legacy issues and drive forward its restructuring programme
Restructuring costs were £2,106 million for 2016, compared with £2,931 million in 2015, and included a £750 million provision in respect of the plan by the Commissioner responsible for EU competition policy to propose to the College of Commissioners to open proceedings to gather evidence on an alternative plan for RBS to meet its remaining State Aid obligations in respect of Williams & Glyn. If adopted, this alternative plan would replace the existing requirement to achieve separation and divestment by 31 December 2017. In addition, £706 million of the remaining restructuring costs related to Williams & Glyn, including £146 million of termination costs associated with the decision to discontinue the programme to create a cloned banking platform.
Litigation and conduct costs of £5,868 million included; a £3,107 million provision in relation to various investigations and litigation matters relating to RBS’s issuance and underwriting of residential mortgage-backed securities (RMBS), an additional charge in respect of the settlement with the National Credit Union Administration Board to resolve two outstanding RMBS lawsuits, a provision in respect of the UK 2008 rights issue shareholder litigation, additional PPI provisions, a provision in respect of the FCA review of RBS’s treatment of SMEs and a provision in Ulster Bank RoI in respect of an industry wide examination of tracker mortgages.
A net strategic disposal gain of £164 million includes a £246 million gain on disposal of RBS’s stake in Visa Europe partially offset by losses associated with the sale of our Russian subsidiary and exit of Kazakhstan.
 
 
Highlights
 
PBB, CPB and NatWest Markets operating performance
Across our three customer facing franchises, PBB, CPB and NatWest Markets, adjusted operating profit of £4,249 million, was £163 million, or 4% higher than 2015.
 
UK PBB adjusted operating profit of £2,202 million was £33 million, or 2%, higher than 2015 as increased income and reduced costs were partially offset by increased impairments. Total income increased by £90 million, or 2%, to £5,290 million compared with 2015 as the benefit of increased lending more than offset reduced margins, down 17 basis points to 3.01%, and lower fee income, reflecting reduced credit card interchange fees and increased cash back payments following the launch of the Reward account. Net loans and advances increased by 10% to £132.1 billion in 2016 principally driven by mortgage growth.
 
Ulster Bank RoI adjusted operating profit of £229 million was £35 million lower than 2015 principally reflecting a £28 million reduction in net impairments releases. REIL decreased by £1.3 billion in Q4 2016 largely driven by the sale of a portfolio of distressed loans.
 
Commercial Banking adjusted operating profit of £1,273 million was £111 million, or 8%, lower than 2015 primarily reflecting a £137 million increase in net impairment losses, largely driven by a single name charge in respect of the oil and gas portfolio. Adjusting for business transfers, total income increased by £21 million, or 1%, reflecting higher asset and deposit volumes partially offset by asset margin pressure. Net loans and advances increased by 10% in 2016 to £100.1 billion.
 
Private Banking(3) adjusted operating profit of £149 million increased by £36 million, or 32%, compared with 2015 as increased asset volumes drove a £13 million, or 2%, uplift in income and cost efficiencies resulted in a £7 million, or 1%, reduction in adjusted operating expenses. In addition, net impairment losses reduced by £16 million.
 
RBS International adjusted operating profit of £195 million was £16 million, or 8%, lower than 2015 largely reflecting a £13 million, or 8%, increase in adjusted operating expenses, driven by a number of one-off charges, and a £10 million net impairment loss in 2016. Partially offsetting, total income increased by £7 million, or 2%, driven by increased asset volumes.
 
NatWest Markets adjusted income of £1,521 million was 16% higher than 2015, adjusting for transfers, driven by Rates and Currencies, which benefited from sustained customer activity and favourable market conditions following the EU referendum and subsequent central bank actions. An adjusted operating profit of £201 million compared with a loss of £55 million in 2015.
 
Capital Resolution & Central items operating performance
Capital Resolution adjusted operating loss of £1,432 million compared with a loss of £412 million in 2015 and included disposal losses and impairments of £825 million, of which £683 million related to the shipping portfolio. RWAs reduced by £14.5 billion in 2016 to £34.5 billion.
Central items adjusted operating profit of £455 million compared with £272 million in 2015 and included a £349 million FX gain, principally associated with the weakening of sterling against the US dollar, a £227 million VAT recovery, a £97 million foreign exchange reserve recycling gain and other gains, partially offset by a £510 million loss in respect of IFRS volatility(4) due to reductions in long term interest rates (2015 - £15 million profit).
 
 
Highlights
 
Q4 2016 RBS performance summary
An attributable loss of £4,441 million compared with a loss of £2,740 million in Q4 2015 and a loss of £469 million in Q3 2016. The Q4 2016 loss included a litigation and conduct charge of £4,128 million and restructuring costs of £1,007 million.
Q4 2016 adjusted operating profit of £1,185 million was £499 million, or 73%, higher than Q4 2015 but was £148 million lower than Q3 2016 largely reflecting the £190 million UK bank levy charge.
Across our three customer facing businesses, PBB, CPB and NatWest Markets, adjusted operating profit of £848 million was £320 million, or 61%, higher than Q4 2015. Adjusted RoTE was 8.5% compared with 5.3% in Q4 2015.
Q4 2016 NIM of 2.19% was 9 basis points higher than Q4 2015 as the benefit associated with the reduction in low yielding assets more than offset modest asset margin pressure and mix impacts across the core franchises. Compared with Q3 2016, NIM increased by 2 basis points.
Net loans and advances across PBB and CPB increased by £2.7 billion in Q4 2016 to £272.1 billion principally driven by increased mortgage lending in UK PBB.
TNAV per share reduced by 42p in the quarter to 296p principally reflecting the attributable loss.
 
Delivery against our 2016 targets
Strategy goal
2016 target
2016
Strength and sustainability
Maintain Bank CET1 ratio of 13%
CET1 ratio of 13.4%
£2 billion AT1 issuance
£2 billion equivalent AT1 issued in Q3 2016
Capital Resolution RWAs around £30-35 billion
RWAs down £14.5 billion to £34.5 billion
Customer experience
Narrow the gap to No.1 in NPS in every primary UK brand
Year on year Commercial Banking have narrowed the gap. NatWest Personal, Ulster Business & Commercial in Northern Ireland and Ulster Business Direct in Republic of Ireland, have seen improvements in NPS.
Simplifying the bank
Reduce operating expenses by £800 million
Operating expenses down £985 million(5)
Supporting growth
Net 4% growth in PBB and CPB customer loans
Net lending in PBB and CPB up 10%
Employee engagement
Raise employee engagement to within two points of the GFS norm
Down 3 points to be 6 points adverse to GFS norm
 
Notes:
(1)
Williams & Glyn refers to the business formerly intended to be divested as a separate legal entity and comprises RBS England and Wales branch-based businesses, along with certain small and medium enterprises and corporate activities across the UK. During the period presented Williams & Glyn has not operated as a separate legal entity.
(2)
NatWest Markets’ results include the following financials for businesses subsequently transferred to Commercial Banking: total income of £98 million for the year ended 2015.
(3)
Private Banking serves high net worth individuals through Coutts and Adam & Co.
(4)
IFRS volatility arises from the changes to fair value of hedges of loans which do not qualify for hedge accounting under IFRS.
(5)
Cost saving target and progress 2016 calculated using operating expenses excluding restructuring costs £2,106 million (2015 - £2,931 million), litigation and conduct costs £5,868 (2015 - £3,568 million), write down of goodwill nil (2015 - £498 million), write down of other intangible assets of £117 million (2015 - £75 million), the operating costs of Williams and Glyn £393 million (2015 - £359 million) and the VAT recovery £227 million.
 
Highlights
 
Building a stronger RBS
RBS is progressing with its plan to build a strong, simple, fair bank for customers and shareholders. During 2016, RBS narrowed the range of uncertainty around its capital position by addressing a number of legacy issues, and continued to strengthen its capital base.
CET1 ratio remains ahead of our 13.0% target at 13.4%, a 210 basis points reduction compared with Q4 2015 principally reflecting the attributable loss, c.300 basis points, partially offset by a £14.4 billion reduction in RWAs, c.100 basis points. During Q4 2016, CET1 ratio reduced by 160 basis points as the benefit of the reduction in RWAs was more than offset by the attributable loss.
RWAs reduced by £14.4 billion, or 6%, during 2016 to £228.2 billion driven by £14.5 billion of disposals and run-off in Capital Resolution and a £3.9 billion reduction associated with the removal of Citizens operational risk RWAs, partially offset by an increase associated with the weakening of sterling and lending growth across our core franchises.
On 10 August 2016 RBS announced that it had successfully completed the pricing of $2.65 billion 8.625% AT1 capital notes, with £4.0 billion equivalent issued since August 2015. (1.8% of Q4 2016 RWAs)
Leverage ratio reduced by 50 basis points during 2016 to 5.1% reflecting the attributable loss for the year partially offset by the AT1 issuance and reduction in leverage exposure.
RBS issued £4.2 billion equivalent senior debt, which it expects to be eligible to meet its ‘Minimum Requirement for Own Funds and Eligible Liabilities’ (MREL), in line with our targeted £3-5 billion senior debt issuance for the year. €1.5 billion seven year 2.5% notes and $1.5 billion ten year 4.8% notes were issued in Q1 2016 and $2.65 billion seven year 3.875% notes were issued in Q3 2016.
In addition, RBS successfully completed the cash tender of £2.3 billion of certain US dollar, sterling and euro senior debt securities. The tender offers were part of the ongoing transition to a holding company capital and term funding model in line with regulatory requirements and included securities that RBS considers non-compliant for MREL purposes. In total, during 2016, £10 billion has matured across our funding pools and we have redeemed £8.2 billion though calls and repurchase. 
As part of the 2016 Bank of England stress testing exercise RBS submitted a revised capital plan, incorporating further capital strengthening actions, which was accepted by the PRA Board.
RBS has successfully addressed a number of the remaining legacy issues and continues to de-risk its balance sheet
During Q1 2016 RBS made the final dividend payment in respect of the DAS, £1,193 million, an action that was taken to normalise the ownership structure of the Bank.
In June 2016, the triennial funding valuation of the Main scheme of The Royal Bank of Scotland Group Pension Fund was agreed which showed that as at 31 December 2015 the value of liabilities exceeded the value of assets by £5.8 billion. In March 2016, to mitigate this anticipated deficit, RBS made a cash payment of £4.2 billion. The next triennial valuation is due to occur at the end of 2018 with agreement on any additional contributions by the end of March 2020. As at 31 December 2016, the Main Scheme had an unrecognised surplus reflected by a ratio of assets to liabilities of c.115% under IAS 19 valuation principles. 
On 11 April 2016, RBS completed the successful transfer of the Coutts International businesses in Asia and the Middle East to Union Bancaire Privée, the final milestone in the sale of our International Private Bank. During 2016 we also completed the sale of our Russia and Kazakhstan subsidiaries.
Risk elements in lending (REIL) of £10.3 billion were £1.8 billion lower than 31 December 2015 and represented 3.1% of gross customer loans, compared with 3.9% as at 31 December 2015 and 3.8% at 30 September 2016.
In line with the progress to de-risk the balance sheet, exposures to the shipping and oil and gas sectors continued to reduce during 2016, with potential exposures declining by 29% to £5.2 billion and by 22% to £5.3 billion respectively. As at the end of 2016, our total exposure to the coal mining, oil and gas and power generation sectors represented 1.4% of our total lending.
 
Highlights
 
Building the number one bank for customer service, trust and advocacy in the UK
 
Supporting households and business customers
RBS continued to deliver strong support for both household and business customers. Within UK PBB, gross new mortgage lending of £29.8 billion was 29% higher than 2015. Across 2016, our market share of new mortgages was 12%, supporting a growth in stock share to 8.8% at end 2016 from 8.2% at end 2015. As a result, total UK PBB net loans and advances increased by 10% compared with 2015. Commercial Banking net loans and advances have also grown by 10% over the course of 2016 reflecting increased borrowing across a number of sectors.
The Reward account continued to show positive momentum and now has 1,149,000 fee-paying customers compared with 202,000 at 31 December 2015. We have seen positive evidence of increased levels of engagement, with overall current account attrition levels falling by 7% in the year. This is particularly evident across our Private and Premium customer, with attrition 12% lower. We continue to embed the product across our population of valuable main bank customers.
RBS continues to support UK business growth through the launch of 6 new business accelerator hubs in 2016, bringing the total to 12. This included the opening of an Entrepreneurial Centre in our Edinburgh headquarters. In addition, NatWest launched a £1 billion lending fund to support small businesses.
 
Investing in our operational capabilities and enhancing digital channels
RBS continued to make better use of our digital channels to make it simpler to serve our customers and easier for them to do business with us. We now have 4.2 million customers regularly using our mobile app in the UK, 19% higher than the end of 2015, and around 60% of our personal customers used a digital channel within the last 90 days. In 2016, we more than doubled the number of customers who purchased a product through our mobile channel compared with 2015. NatWest customers can now apply for personal loans, credit cards and overdrafts via the mobile app, facilitating approximately 8% of total applications. Our new business banking ‘Online Account Opening’ service now allows start up business customers to submit an application online in just ten minutes and get a sort code and account number in under an hour.
Nearly 80% of our commercial customers’ interaction with us is via digital channels, with around 270,000 payments processed every day.
In addition to our digital channels, RBS continues to provide multiple physical channels for serving customers, including access to a network of c.11,500 Post Office branches in the UK, c.1,000 An Post branches in the Republic of Ireland, and 41 mobile banking vans, alongside our existing network of 1,425 branches and 4,646 ATMs across PBB.
RBS became the first UK Bank to be accredited by the Royal National Institute for Blind People for having an accessible mobile app for blind and partially sighted customers. In addition, we launched a new service for British Sign Language (BSL) customers, making it possible to instantly chat with an advisor through a BSL interpreter.
Coutts won the best private bank in the UK for the fifth year running, best private bank for philanthropy services and best initiative of the year in client facing technology at the Global Private Banking Awards, and was highly commended for innovation for its ‘Coutts Concierge Online’.
 
Highlights
 
Investing in our people
In 2016, RBS was one of only two banks to achieve formal recognition from the Chartered Banker Professional Standards Board for excellence in implementing, monitoring, reporting and commitment to the Foundation Standard for Professional Bankers.
Delivered leadership training to almost 16,000 leaders through a comprehensive ‘Determined to Lead’ programme.
We continue to work towards our goal of having at least 30% senior women in our top three leadership layers across each business by 2020 and to be fully gender balanced (50/50) by 2030. As at 31 December 2016, in aggregate terms 34% of our top three leadership layers were female.
RBS has attained silver status in the Business Disability Forum’s Disability Standard, scoring 88% in its assessment of accessibility and inclusion in the workplace.
RBS has moved up to 13th place, from 32nd last year, in Stonewall's annual Top 100 employers for lesbian, gay, bi and trans (LGBT) staff, the highest position it has achieved in the index to date.
 
Customer
RBS remains committed to achieving its target of being number one bank for customer service, trust and advocacy by 2020.
 
We use independent surveys to measure our customers’ experience and track our progress against our goal in each of our markets.
 
Net Promoter Score (NPS)
Customers are asked how likely they would be to recommend their bank to a friend or colleague, and respond based on a 0-10 scale with 10 indicating ‘extremely likely’ and 0 indicating ‘not at all likely’. Customers scoring 0 to 6 are termed detractors and customers scoring 9 to 10 are termed promoters. NPS is established by subtracting the proportion of detractors from the proportion of promoters.
 
The table below lists all of the businesses for which we have an NPS for 2016. Year-on-year, NatWest Personal and Commercial Banking have improved, along with Ulster Bank Business and Commercial in Northern Ireland and Ulster Bank Business Direct in the Republic of Ireland. In Great Britain, we have also narrowed the gap to number one in Commercial Banking. We do, however, acknowledge that there is still work to do, with four brands missing their year end targets.
 
In recent years, RBS has launched a number of initiatives to make it simpler, fairer and easier for customers to do business with the bank.
 
 
 
Q4 2015
Q3 2016
Q4 2016
Year end 2016 target
Personal Banking
NatWest (England & Wales)(1)
9
11
13
15
Royal Bank of Scotland (Scotland)(1)
-9
-2
-4
-5
Ulster Bank (Northern Ireland)(2)
-9
-16
-16
-3
Ulster Bank (Republic of Ireland)(2)
-14
-8
-7
-10
Business Banking
NatWest (England & Wales)(3)
9
4
-2
13
Royal Bank of Scotland (Scotland)(3)
-7
-4
-5
2
Business Direct
Ulster Bank (Republic of Ireland)(5)
-21
n/a
-2
-15
Business & Commercial
Ulster Bank (Northern Ireland) (4)
-19
0
0
-4
Commercial Banking(6)
9
21
20
17
 
Highlights
 
Customer Trust
We also use independent experts to measure our customers’ trust in the bank. Each quarter we ask customers to what extent they trust or distrust their bank to do the right thing. The score is a net measure of those customers that trust their bank (a lot or somewhat) minus those that distrust their bank (a lot or somewhat).
 
Customer trust in NatWest in England & Wales has exceeded its 2016 target, improving from 48% at Q4 2015 to 55% at Q4 2016. Trust in RBS in Scotland has fallen year on year (from 14% in Q4 2015 to 13% in Q4 2016) and has fallen behind its target for 2016. This is primarily due to ongoing reputational and legacy issues that the bank continues to work to resolve.
 
 
 
Q4 2015
Q3 2016
Q4 2016
Year end 2016 target
Customer trust(7)
NatWest (England & Wales)
48%
48%
55%
51%
Royal Bank of Scotland (Scotland)
14%
13%
13%
26%
 
Notes:
(1)
Source: GfK FRS 6 month rolling data. Latest base sizes: NatWest (England & Wales) (3313) Royal Bank of Scotland (Scotland) (527). Based on the question: "How likely is it that you would recommend (brand) to a relative, friend or colleague in the next 12 months for current account banking?“
(2)
Source: Coyne Research 12 month rolling data. Latest base sizes: Ulster Bank NI (375) Ulster Bank RoI (322) Question: “Please indicate to what extent you would be likely to recommend (brand) to your friends or family using a scale of 0 to 10 where 0 is not at all likely and 10 is extremely likely”.
(3)
Source: Charterhouse Research Business Banking Survey (GB), based on interviews with businesses with an annual turnover up to £2 million. Quarterly rolling data. Latest base sizes: NatWest England & Wales (1258), RBS Scotland (422). Weighted by region and turnover to be representative of businesses in England & Wales/Scotland, 4 quarter rolling data.
(4)
Source: Charterhouse Research Business Banking Survey (NI), based on interviews with businesses with an annual turnover up to £1 billion. Latest base size: Ulster (399) Weighted by turnover and industry sector to be representative of businesses in Northern Ireland, 4 quarter rolling data.
(5)
Source: PWC ROI Business Banking Tracker 2016 (annual study only). Latest sample size: Ulster Bank (218)
In 2017 we will be switching the source of advocacy measurement for Ulster Bank Business in RoI to Red C.  Red C is a recognised research agency that will provide more frequent reporting of NPS, as well as additional diagnostic customer feedback to help us improve the customer experience
(6)
Source: Charterhouse Research Business Banking Survey (GB), based on interviews with businesses with annual turnover between £2 million and £1 billion. Latest base size: RBSG Great Britain (935). Weighted by region and turnover to be representative of businesses in Great Britain, 4 quarter rolling data.
(7)
Source: Populus. Latest quarter’s data. Measured as a net of those that trust RBS/NatWest to do the right thing, less those that do not. Latest base sizes: NatWest, England & Wales (871), RBS Scotland (226).
 
Capital reorganisation
It is our intention to implement a capital reorganisation in 2017 in order to increase the distributable reserves of the parent company, RBSG plc, providing greater flexibility for future distributions and preference share redemptions. We intend to seek shareholder approval to reduce the share premium account by around £25 billion and to cancel the capital redemption reserve, around £5 billion. This will, subject to approval by shareholders and regulators, and confirmation by the Court of Session in Edinburgh, increase RBSG plc distributable reserves by around £30 billion.
 
Ring-fenced structure
As previously announced, on 1 January 2017, RBS made a number of changes to its legal entity structure to support the move towards a ring-fenced structure, with further changes planned prior to 1 January 2019. Our new brand strategy is designed to align with our business strategy and future ring-fenced structure. NatWest will be our main customer facing brand in England, Wales and Western Europe, and in Scotland, Royal Bank of Scotland will be our core brand. In addition, our Corporate & Institutional Banking business has been rebranded as NatWest Markets in readiness for our future ring-fenced structure. The ring-fenced banking group is expected to comprise of 80% of RBS risk-weighted assets.(1)
 
Note:
(1)
Based on RBS future business profile business and excludes Capital Resolution.
 
Highlights
 
IFRS9
RBS continues to develop its processes to enable IFRS 9 Financial Instruments to be implemented on 1 January 2018; an estimate of the initial impact will be included in 2017 H1 interim reporting.
 
Williams & Glyn
On 17 February 2017, RBS announced that it had been informed by HM Treasury ("HMT") that the Commissioner responsible for EU competition policy plans to propose to the College of Commissioners to open proceedings to gather evidence on an alternative plan for RBS to meet its remaining State Aid obligations. If adopted, this alternative plan would replace the existing requirement to achieve separation and divestment by 31 December 2017 of Williams & Glyn. As previously disclosed, none of the proposals to acquire the business received by RBS can deliver a full separation and divestment before the 31 December 2017 deadline.
RBS has agreed that HMT will now seek formal amendment to RBS's State Aid commitments to pave the way for the Commissioner to propose to open proceedings, as described above. In addition to the Commission's proceedings, HMT will carry out a market testing exercise in parallel. The opening of the Commission's proceedings does not prejudge the outcome of the investigation.
The plan envisages that RBS will deliver the following revised package of remedies to promote competition in the market for banking services to small and medium enterprises ("SMEs") in the UK:
 
A fund, administered by an independent body, that eligible challenger banks can access to increase their business banking capabilities;
 
 
Funding for eligible challenger banks to help them incentivise SMEs to switch their accounts from RBS paid in the form of "dowries" to eligible challenger banks;
 
 
RBS granting business customers of eligible challenger banks access to its branch network for cash and cheque handling, to support the measures above; and
 
 
An independent fund to invest in fintech to support the business banking of the future.
 
The 2016 Annual Results include a £750 million restructuring provision as a consequence of this proposal.
 
 
Highlights
 
2017 outlook(1)
 
Subject to providing fully for the remaining legacy issues, RMBS exposures in particular, RBS currently expects that 2017 will be its final year of substantive legacy clean up with significant one-off costs. Consequently, we anticipate that the bank will be profitable in 2018.
 
We are targeting net loans and advances growth of 3% across PBB and CPB, including taking into account the impact of balance sheet reductions associated with the RWA reduction target. We anticipate that this growth will be largely within PBB as we expect to see moderate growth in some segments in CPB, whilst at the same time selectively reducing exposures with weak returns and continuing to actively manage certain legacy loan exposures.
 
We expect that income in 2017 will continue to be supported by balance sheet growth across PBB and CPB. Within UK PBB, we anticipate that income will increase in 2017 compared with 2016, as we have already absorbed significant margin pressure from the changing mortgage mix and the impact of the sharp fall in interchange rates. Across CPB, we expect income to be broadly stable with continued competitive pressure on margins, given the interest rate environment. NatWest Markets is expected to continue to benefit from increased market volatility and customer activity and we anticipate that 2017 income will be above previously indicated targets of £1.3 - £1.4 billion.
 
RBS plans to reduce adjusted operating expenses by a further £750 million in 2017, in addition to the £3.1 billion achieved across 2014 to 2016, and we expect that the adjusted cost:income ratio will improve across our combined PBB, CPB and NatWest Markets franchises in 2017 compared with 2016.
 
Net impairment charges should remain meaningfully below normalised levels in 2017. However, we expect the level of net impairment charges to be driven by a combination of increased gross charges and a materially reduced benefit from releases. Recent UK economic performance has been better than previous forecasts leading to improved expectations for the 2017 economic outlook. However, the medium term outlook remains less certain, and together with the increased volatility expected with the introduction of IFRS 9, quantification of future credit losses is more challenging beyond 2017 at this point. We continue to remain mindful of potential downside risks including from single name/sector driven events and lower releases of provisions.
 
We continue to expect that cumulative Capital Resolution disposal losses will total approximately £2.0 billion since the beginning of 2015, with £1,192 million of losses incurred to date (2016;£825 million, 2015;£367 million) with most of the balance expected to be incurred during 2017. Excluding RBS's stake in Alawwal Bank (previously Saudi Hollandi Bank, £7.9 billion at 31 December 2016), we expect Capital Resolution RWAs to be in the range £15-£20 billion by the end of 2017, at which point we plan to wind up Capital Resolution and transfer the assets back into the rest of the bank.
 
Excluding restructuring costs associated with the State Aid obligations relating to Williams & Glyn, we expect to incur restructuring costs of approximately £1 billion in 2017 and approximately a further £1 billion in aggregate during 2018 and 2019. Approximately 40% of this cost is expected to relate to the optimisation of our property portfolio.
 
Further to the update on 17 February 2017 in respect of the remaining State Aid obligations regarding the business known as Williams & Glyn, and subject to the alternative plan being finalised and adopted by the European Commission (EC) and further discussions with the EC and HMT, RBS will assess the timing and manner in which it would reincorporate the business into the RBS franchises. This reintegration would likely create some additional restructuring charges during 2017 and 2018.
 
 
Highlights
 
We are targeting a CET1 ratio of at least 13% at the end of 2017. As part of the 2016 Bank of England stress testing exercise, RBS submitted a revised capital plan, incorporating further capital strengthening actions, which was accepted by the PRA Board.
RBS issuance plans for 2017 focus on issuing £3-£5 billion MREL-compliant Senior holding company (RBSG) securities. We do not currently anticipate the need for either AT1 or Tier 2 issuances. In addition, and reflecting our strategic progress, we also target a progressive return to other funding markets to support our lending growth.
RBS continues to deal with a range of significant risks and uncertainties in the external economic, political and regulatory environment and manage conduct-related investigations and litigation, including RMBS. Substantial additional charges and costs may be recognised in the coming quarters which would have an impact on the RBS’s level of capital and financial performance and condition.
 
Medium term outlook(1)
We now target achieving our sub 50% cost:income ratio and 12% return on tangible equity targets in 2020, one year later than originally planned. Our confidence in achieving the targets is underpinned by our ability to protect income and drive cost reductions whilst managing credit and market risk and driving further capital efficiency.
We expect to be able to grow volumes faster than market growth rates over the coming years in chosen segments across PBB and CPB.
We plan to reduce adjusted operating expenses in the order of £2 billion in the next four years with around two thirds of this from the core bank.
We are targeting a gross RWA reduction of approximately £20 billion across PBB, CPB and NatWest Markets by the end of 2018, with some offsetting volume growth. We expect that the reduction will be largely achieved through improvements in the quality of our risk models, exiting low return, non strategic and risk intensive asset pools, improved risk metrics in certain portfolios and benefits from data clean-up. We estimate that the income loss associated with this reduction will be in the range £250 million - £300 million on an annualised, pre tax, basis.
We continue to monitor the ongoing discussions around the potential further tightening of regulatory capital rules and recognise that this could result in RWA inflation in the medium term.
In view of the significant risks and uncertainties in the external economic, political and regulatory environment, including uncertainties around the resolution of RMBS, the timing of returning excess capital to shareholders through dividends or buybacks remains uncertain.
 
Note:
(1)
The targets, expectations and trends discussed in this section represent management’s current expectations and are subject to change, including as a result of the factors described in this document and in the “Risk Factors” on pages 432 to 463 of the Annual Report and Accounts 2016. These statements constitute forward looking statements, please see Forward Looking Statements on pages 64 and 65 of this announcement.
 
Highlights
 
2017 targets
As we works towards our long-term goals, we have set the following targets for 2017.
 
Strategy goal
Our long-term targets
Our 2017 goals
Strength and sustainability
CET1 ratio of 13%
RoTE(1,2) ≥ 12%
Maintain bank CET1 ratio of 13%
Customer experience
Number 1 for service, trust and advocacy
Significantly increase NPS or maintain No.1 in chosen customer segments
Simplifying the bank
Headline cost:income ratio <50%
Reduce operating expenses by at least £750 million (3)
Supporting growth
Leading market positions in every franchise
Net 3% growth in total PBB and CPB loans to customers (4)
Employee engagement
Employee engagement in upper quartile of Global Financial Services (GFS) norm
Improve employee engagement
 
Notes:
(1)
Calculated using (loss)/profit for the period attributable to ordinary shareholders.
(2)
Tangible equity is equity attributable to ordinary shareholders less intangible assets.
(3)
Cost saving target and progress 2017 calculated using operating expenses excluding restructuring costs, litigation and conduct costs, write down of goodwill and the 2016 VAT recovery.
(4)
Lending growth target is after including the impact of balance sheet reductions associated with the RWA reduction target across PBB, CPB and NatWest Markets as outlined in the outlook statement.
 
Chief Executive’s message
 
Introduction
 
In 2016 RBS made an attributable loss of £7.0 billion, mostly reflecting charges for outstanding litigation and conduct, and costs associated with restructuring of the bank. The financial impact of these issues is a difficult but necessary step in working through the bank’s legacy issues. These costs are a stark reminder of what happens to a bank when things go wrong and you lose focus on the customer, as this bank did before the financial crisis. The more progress we have made on clearing these past issues, enables us to sharpen our focus on the core go forward bank.
 
Our service level and product improvements are already delivering benefits for both customers and the core bank. In 2017 our focus will turn to going even further on reducing costs and faster on digital transformation in order to deliver a more simple, safe and customer-focused bank.
 
The bank we were
I joined RBS because I could see that underneath all the troubles it faced, there was a strong bank, with excellent brands and great colleagues, doing outstanding things for customers each day. This underlying strength is still evident today.
 
In 2014 I announced a three phase strategy. We are moving to the final phase of this, after delivering much during the first two phases, which were about building a platform of strength and stripping away unnecessary complexity. Our CET1 ratio has now materially improved to 13.4% from 8.6% at the start of 2014. We have thoroughly reshaped our investment banking business, now rebranded NatWest Markets. We have sold Citizens in the US, completing the largest bank IPO in US history in the process, and also sold our international private banking business. We have ended active operations in 26 countries, decommissioned 30% of our IT systems and applications, and almost halved the number of legal entities. We have also completed the run-down or sale of over three quarters of Capital Resolution legacy and non-core assets. We have reduced our cost base by over £3 billion, exceeding our target for the third consecutive year, with an operating cost reduction of £985 million.
 
The past is not completely behind us, with our dealings on Residential Mortgage Backed Securities (RMBS) and Williams & Glyn, our residual European Commission State Aid obligations, two significant issues that we still need to resolve. The recent proposal by HM Treasury on an alternative way to increase competition to allow us to meet our State Aid commitments would deliver an outcome more quickly, and with more certainty than undertaking a complex sale. We have been able to provide for both of these in our accounts, though there may still be substantial additional provisions on RMBS.
 
The bank we are today
We are now in a much better position to focus on our long term aspiration – to transform the bank into the number one for customer service, trust, and advocacy. While the signs of this transformation have at times been masked by our wider organisational changes, the core bank has already evolved materially since 2014.
Our decision to refocus on the UK has seen our balance sheet shrink by £229 billon since the start of our plan. This is net of the continued growth in our Personal and Business Banking and Commercial and Private Banking franchises. We are seeing the benefits of our service-led strategy in the financial performance of the core bank, generating £4.2 billion in adjusted pre-tax operating profit for the year, an average of £1 billion per quarter for the last eight quarters and 4% up on 2015.
 
Chief Executive’s message
 
While Q4 was down from the levels seen earlier this year, our Net Promoter Scores for Commercial and NatWest Personal in 2016 were the highest they have ever been.
 
With £30 billion of gross new mortgage lending in UK PBB, we helped 320,000 customers with their mortgage in 2016, growing our market share for the fourth consecutive year without leading on price or risk. We are the largest commercial bank in the UK, and are ranked joint number one by Net Promoter Score. Our ability to generate value here is shown by the scale of support we have provided to the economy in the past year, with almost £9 billion of new net commercial lending.
 
The bank we are becoming
We still have more work to do. In part, that means finishing the restructuring of RBS, resolving the remaining legacy issues, and preparing the bank for ring-fencing. In the main, however, it is about adapting to the changing nature of the UK and Irish banking sectors, and investing to meet our customers’ evolving needs.
 
Digital innovation means customers are doing more of their transactions online. We interact with our customers over 20 times more through digital channels than physical ones. 35% of all new products were taken out digitally in UK PBB, and this is rising steadily. A fifth of our customers now solely use mobile and digital to interact with us. As customers change the way they bank with us, we must change the way we serve them. This means continuing to simplify for our customers, and accelerating our deployment of digital and mobile capabilities. The role of the branch is fast moving to an advice and service centre, away from transactions. While the branch will still be a core part of our offering to customers, inevitably some branches will have to close.
 
We’re working to blur the line between traditional and digital banking channels. We are investing in a video sales and service proposition that will connect customers, no matter where they are, to the right specialist.
 
This shift isn’t only in personal banking. We are aiming to service 95% of our commercial customers’ needs through mobile and online by 2020, up from nearly 80% today, by introducing a new digital banking service that will greatly improve experience. We’re also responding to customer preferences for more innovative lending platforms and products.
 
We are investing heavily in technology in our NatWest Markets business. Hundreds of separate product databases will be replaced with a single, scalable platform, which will help reduce costs significantly and dramatically increase the speed at which we can deploy new capabilities for our customers. We are also introducing a single dealer platform, an electronic front door, through which we can provide FX and Rates solutions to our clients. These are the kind of changes that will lower costs while protecting revenue and delivering even better customer service at the same time.
 
We are committed to running the bank as a more sustainable and responsible business, serving today’s customers in a way that also helps future generations, generating long term value for all of our stakeholders and society. In 2016, we improved on our position in a number of rankings, including achieving our highest ever score in the Dow Jones Sustainability Index. We continued with our commitment to manage our impacts on climate change and support our customers to move towards the transition to a low-carbon economy. We continue to support financial education and our goal is to help a further one million more young people understand all about money by the end of 2018.
 
Chief Executive’s message
 
Our commitment to sustainability is also evident in our annual results, where we have replaced our annual Sustainability Report with a more integrated approach. You will see a number of new elements in the Strategic Report that explain the key influences on our operating environment, and some of the impact we have had over the past year. This is an important step towards fully integrated reporting over the coming years.
 
Delivering our strategy
The decision last summer by UK voters to leave the EU will have wide-reaching consequences. In light of this, we reviewed our plan to ensure that it remained valid in a changed macro and political environment. Following that review, I want to re-iterate our commitment to the strategy we have been pursuing since I became CEO – we firmly believe that our aspiration to reach no.1 for customer service, trust and advocacy will maximise value for our shareholders.
 
This year we have met all our operating financial targets, though the results of some of our customer NPS and employee engagement surveys show we still have work to do. After the EU referendum result, we promised an update on our targets. We are targeting an unadjusted 12% or greater return on tangible equity, and a below 50% cost to income ratio by 2020, one year later than envisaged when we first set out our plan in 2014.
 
Our service levels are improving and we believe we can meet our 2020 aspirational customer and colleague targets. Our focus on capital strength remains a cornerstone of our plan. In 2017, we will continue to reduce legacy RWAs, and we will target a CET1 ratio of at least 13%.
 
This has also been another tough year for our colleagues. I am grateful for their determination in serving our millions of customers every day, despite many negative headlines. Our colleagues are the face of the bank for our customers, and their engagement is critical to our success. One of our five key targets in 2017 is to improve employee engagement.
 
We no longer have global aspirations and we need to go further still on our operating costs. We expect to take out an additional £750 million of operating costs in 2017 through our focus on simplification and digital transformation.
A simpler bank is a more profitable bank and a bank that delivers a better customer experience. Where we can make it easy for our customers, the more business they will do with us and the more sustainable our earnings will become.
 
Looking ahead
The progress of the last three years positions us well to achieve our vision for the future. We have the right strategy, and it is starting to deliver results. Now, we need to go further on cost reduction and faster on digital transformation.
 
We aren’t alone in searching for efficiency gains and investing in digital capability, but the unique strength of this bank lies in the fact that we have a diverse business profile, with scale in all of our chosen markets. Investment in our market leading brands and better customer service will deliver steadier, higher quality earnings. Our focus on service rather than price has also shown that we can continue to grow in areas of strategic opportunity, such as mortgages, without compromising on risk. All of this will deliver a sustainable competitive advantage and a compelling investment case in the longer term.
 
This is a bank that has been on a remarkable journey. We still have further to go. But the next three years will not be the same as the past three. Legacy issues will take up a decreasing amount of our time and focus. Our customers, our cost base and the measures we plan to implement to return the bank to sustainable headline profits will be where we focus our efforts. Assuming we can conclude our issues on RMBS this year and resolve our residual State Aid obligations, we aim to have RBS back into profit in 2018 representing a significant step towards being able to start repaying UK taxpayers for their support.
 
 
Summary consolidated income statement for the period ended 31 December 2016
 
 
Year ended
 
Quarter ended
 
31 December
31 December
 
31 December
30 September
31 December
 
2016
2015
 
2016
2016
2015
 
£m
£m
 
£m
£m
£m
Net interest income
8,708 
8,767 
 
2,208 
2,167 
2,162 
 
 
 
 
 
 
 
Own credit adjustments
180 
309 
 
(114)
(156)
(115)
(Loss)/gain on redemption of own debt
(126)
(263)
 
(263)
Strategic disposals
164 
(157)
 
(31)
(22)
Other operating income
3,664 
4,267 
 
1,121 
1,327 
722 
 
 
 
 
 
 
 
Non-interest income
3,882 
4,156 
 
1,008 
1,143 
322 
 
 
 
 
 
 
 
Total income
12,590 
12,923 
 
3,216 
3,310 
2,484 
 
 
 
 
 
 
 
Restructuring costs
(2,106)
(2,931)
 
(1,007)
(469)
(614)
Litigation and conduct costs
(5,868)
(3,568)
 
(4,128)
(425)
(2,124)
Write down of goodwill
(498)
 
(498)
Other costs
(8,220)
(9,356)
 
(2,219)
(2,017)
(2,525)
 
 
 
 
 
 
 
Operating expenses
(16,194)
(16,353)
 
(7,354)
(2,911)
(5,761)
 
 
 
 
 
 
 
(Loss)/profit before impairment (losses)/releases
(3,604)
(3,430)
 
(4,138)
399 
(3,277)
Impairment (losses)/releases
(478)
727 
 
75 
(144)
327 
 
 
 
 
 
 
 
Operating (loss)/profit before tax
(4,082)
(2,703)
 
(4,063)
255 
(2,950)
Tax (charge)/credit
(1,166)
(23)
 
(244)
(582)
261 
 
 
 
 
 
 
 
Loss from continuing operations
(5,248)
(2,726)
 
(4,307)
(327)
(2,689)
Profit from discontinued operations, net of tax
1,541 
 
90 
 
 
 
 
 
 
 
Loss for the period
(5,248)
(1,185)
 
(4,307)
(327)
(2,599)
 
 
 
 
 
 
 
Attributable to:
 
 
 
 
 
 
Non-controlling interests
10 
409 
 
(27)
20 
Other owners
504 
385 
 
161 
135 
121 
Dividend access share
1,193 
 
Ordinary shareholders
(6,955)
(1,979)
 
(4,441)
(469)
(2,740)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Memo:
 
 
 
 
 
 
 
 
 
 
 
 
 
Total income - adjusted (1)
12,372 
13,034 
 
3,329 
3,494 
2,884 
Operating expenses - adjusted (2)
(8,220)
(9,356)
 
(2,219)
(2,017)
(2,525)
Operating profit - adjusted (1,2)
3,674 
4,405 
 
1,185 
1,333 
686 
 
Notes:
(1)
Excluding own credit adjustments, (loss)/gain on redemption of own debt and strategic disposals.
(2)
Excluding restructuring costs, litigation and conduct costs and write down of goodwill.
 
Details of other comprehensive income are provided on page 49.
 
 
Summary consolidated balance sheet as at 31 December 2016
 
 
31 December
30 September 
31 December 
 
2016
2016
2015
 
£m
£m
£m
 
 
 
 
Cash and balances at central banks
74,250 
69,254 
79,404 
Net loans and advances to banks (1)
17,278 
19,741 
18,361 
Net loans and advances to customers (1)
323,023 
326,736 
306,334 
Reverse repurchase agreements and stock borrowing
41,787 
45,955 
39,843 
Debt securities and equity shares
73,225 
80,512 
83,458 
Assets of disposal groups (2)
13 
13 
3,486 
Other assets
22,099 
27,118 
22,008 
 
 
 
 
Funded assets
551,675 
569,329 
552,894 
Derivatives
246,981 
283,049 
262,514 
 
 
 
 
Total assets
798,656 
852,378 
815,408 
 
 
 
 
Bank deposits (3)
33,317 
32,172 
28,030 
Customer deposits (3)
353,872 
358,844 
343,186 
Repurchase agreements and stock lending
32,335 
36,408 
37,378 
Debt securities in issue
27,245 
28,357 
31,150 
Subordinated liabilities
19,419 
19,162 
19,847 
Derivatives
236,475 
275,364 
254,705 
Provisions for liabilities and charges
12,836 
9,021 
7,366 
Liabilities of disposal groups (2)
15 
15 
2,980 
Other liabilities
33,738 
38,707 
36,619 
 
 
 
 
Total liabilities
749,252 
798,050 
761,261 
Non-controlling interests
795 
853 
716 
Owners’ equity
48,609 
53,475 
53,431 
 
 
 
 
Total liabilities and equity
798,656 
852,378 
815,408 
 
 
 
 
Contingent liabilities and commitments
150,691 
151,394 
153,752 
 
Notes:
(1)
Excludes reverse repurchase agreements and stock borrowing.
(2)
Primarily consists of international private banking business at 31 December 2015.
(3)
Excludes repurchase agreements and stock lending.
 
 
 
Analysis of results
 
 
Year ended
 
Quarter ended
 
31 December
31 December
 
31 December
30 September
31 December
2016
2015
 
2016
2016
2015
Net interest income
£m
£m
 
£m
£m
£m
 
 
 
 
 
 
 
Net interest income (1)
 
 
 
 
 
 
RBS
8,708 
8,767 
 
2,208 
2,167 
2,162 
 
 
 
 
 
 
 
  - UK Personal & Business Banking
4,287 
4,152 
 
1,093 
1,085 
1,030 
  - Ulster Bank RoI
409 
365 
 
105 
106 
85 
  - Commercial Banking
2,143 
1,997 
 
542 
534 
512 
  - Private Banking
449 
436 
 
111 
112 
108 
  - RBS International
303 
303 
 
77 
75 
78 
  - NatWest Markets
104 
87 
 
29 
32 
28 
  - Capital Resolution
239 
365 
 
44 
27 
  - Williams & Glyn
658 
658 
 
170 
164 
165 
  - Central items & other
116 
404 
 
37 
32 
150 
 
 
 
 
 
 
 
Average interest-earning assets (IEA)
 
 
 
 
 
 
RBS
399,598 
413,345 
 
401,548 
397,345 
407,061 
 
 
 
 
 
 
 
  - UK Personal & Business Banking
142,458 
130,702 
 
147,703 
145,649 
134,687 
  - Ulster Bank RoI
25,193 
23,232 
 
26,259 
26,026 
23,195 
  - Commercial Banking
121,677 
106,429 
 
128,174 
123,817 
111,600 
  - Private Banking
16,887 
15,835 
 
17,679 
16,978 
16,025 
  - RBS International
22,254 
20,518 
 
22,793 
23,332 
20,773 
  - NatWest Markets
12,387 
16,552 
 
14,085 
11,960 
10,190 
  - Capital Resolution
25,468 
60,656 
 
19,696 
22,352 
39,875 
  - Williams & Glyn
24,321 
22,940 
 
25,145 
24,597 
23,327 
  - Central items & other
8,953 
16,482 
 
14 
2,634 
27,389 
 
 
 
 
 
 
 
Yields, spreads and margins of the banking business
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross yield on interest-earning assets
 
 
 
 
 
 
  of the banking business (2,3)
2.80%
2.88%
 
2.72%
2.78%
2.78%
Cost of interest-bearing liabilities of banking business (2)
(0.94%)
(1.11%)
 
(0.82%)
(0.92%)
(1.00%)
 
 
 
 
 
 
 
Interest spread of the banking business (2,4)
1.86%
1.77%
 
1.90%
1.86%
1.78%
Benefit from interest-free funds
0.32%
0.35%
 
0.29%
0.31%
0.32%
 
 
 
 
 
 
 
Net interest margin (1,5)
 
 
 
 
 
 
RBS
2.18%
2.12%
 
2.19%
2.17%
2.10%
 
 
 
 
 
 
 
  - UK Personal & Business Banking (6)
3.01%
3.18%
 
2.94%
2.96%
3.03%
  - Ulster Bank RoI (6)
1.62%
1.57%
 
1.59%
1.62%
1.45%
  - Commercial Banking (6)
1.76%
1.88%
 
1.68%
1.72%
1.82%
  - Private Banking (6)
2.66%
2.75%
 
2.50%
2.62%
2.67%
  - RBS International (6)
1.36%
1.48%
 
1.34%
1.28%
1.49%
  - NatWest Markets
0.84%
0.53%
 
0.82%
1.06%
1.09%
  - Capital Resolution
0.94%
0.60%
 
0.89%
0.48%
0.06%
  - Williams & Glyn
2.71%
2.87%
 
2.69%
2.65%
2.81%
 
Third party customer rates (7)
 
 
 
 
 
 
Third party customer asset rate
 
 
 
 
 
 
  - UK Personal & Business Banking
3.83%
4.13%
 
3.64%
3.79%
4.00%
  - Ulster Bank RoI (8)
2.19%
2.27%
 
2.20%
2.17%
2.19%
  - Commercial Banking
2.77%
2.93%
 
2.65%
2.74%
2.84%
  - Private Banking
2.90%
3.13%
 
2.76%
2.86%
3.06%
  - RBS International
3.04%
3.10%
 
2.93%
2.95%
3.09%
Third party customer funding rate
 
 
 
 
 
 
  - UK Personal & Business Banking
(0.45%)
(0.66%)
 
(0.28%)
(0.44%)
(0.63%)
  - Ulster Bank RoI (8)
(0.50%)
(0.88%)
 
(0.42%)
(0.46%)
(0.74%)
  - Commercial Banking
(0.33%)
(0.38%)
 
(0.27%)
(0.32%)
(0.36%)
  - Private Banking
(0.18%)
(0.26%)
 
(0.12%)
(0.18%)
(0.25%)
  - RBS International
(0.14%)
(0.31%)
 
(0.08%)
(0.10%)
(0.24%)
 
 
 
 
 
 
 
Refer to the following page for footnotes.
 
 
 
 
 
 
 
 
Analysis of results
 
Notes:
(1)
For the purpose of net interest margin (NIM) calculations, no decrease for 2016 (2015 - £15 million) and no decrease for Q4 2016 (Q3 2016 – nil; Q4 2015 - £3 million) was made in respect of interest on financial assets and liabilities designated as at fair value through profit or loss. Related average interest-earning assets and average interest-bearing liabilities have also been adjusted.
(2)
For the purpose of calculating gross yields and interest spread, interest receivable and interest payable have both been decreased by £76 million in respect of negative interest relating to financial assets that attracted negative interest.
(3)
Gross yield is the interest earned on average interest-earning assets as a percentage of average interest-earning assets.
(4)
Interest spread is the difference between the gross yield and interest paid on average interest-bearing liabilities as a percentage of average interest-bearing liabilities.
(5)
Net interest margin is net interest income as a percentage of average interest-earning assets.
(6)
PBB NIM for the year ended 2016 was 2.80% (year ended 2015 - 2.93%; Q4 2016 - 2.74%; Q3 2016 - 2.76%; Q4 2015 - 2.80%). CPB NIM for the year ended 2016 was 1.80% (year ended 2015 - 1.92%; Q4 2016 - 1.72%; Q3 2016 - 1.75%; Q4 2015 - 1.87%).
(7)
Net interest margin includes Treasury allocations and interest on intercompany borrowings, which are excluded from third party customer rates.
(8)
Ulster Bank Ireland DAC manages its funding and liquidity requirements locally. Its liquid asset portfolios and non-customer related funding sources are included within its net interest margin, but excluded from its third party asset and liability rates.
 
Key points
2016 compared with 2015
● 
Net interest income of £8,708 million reduced by £59 million compared with 2015 principally driven by a £126 million reduction in Capital Resolution, in line with the planned shrinkage of the balance sheet.
NIM was 2.18% for 2016, 6 basis points higher than 2015 as the benefit associated with reductions in low yielding ‘non-core’ assets has been partially offset by modest asset margin pressure and mix impacts across PBB and CPB.
Average interest earning assets across the combined PBB and CPB increased by 11% on 2015, compared with a 3% decline for RBS total, and represented 82% of total average interest earning assets (2015 - 72%). NIM across PBB and CPB was 2.31%, 13 basis points lower than 2015.
UK PBB NIM decreased by 17 basis points to 3.01% reflecting the impact of the overall portfolio mix being increasingly weighted towards secured lending and mortgage customers switching from standard variable rate (SVR) to lower rate products. During the second half of 2016 SVR balances stabilised at approximately 12% of mortgage balances.
Ulster Bank RoI NIM increased by 5 basis points to 1.62% driven by a continued reduction in the cost of deposits and a reduced volume of low yielding liquid assets, partly offset by reduced income on free funds.
● 
Commercial Banking NIM fell by 12 basis points to 1.76% driven by asset margin pressure in a competitive market and low rate environment.
● 
Private Banking NIM reduced by 9 basis points to 2.66% principally driven by asset margin pressure.
● 
RBSI NIM fell by 12 basis points to 1.36% reflecting asset and liability margin pressures, partially offset by mitigating pricing actions.
● 
Structural hedges of £123 billion generated a benefit of £1.3 billion through net interest income for the year. Around 73% of these hedges are part of a five year rolling hedge programme (with around 27% as part of a ten year hedge) that will progressively roll-off over the coming years.
 
Q4 2016 compared with Q3 2016
● 
Net interest income of £2,208 million increased by £41 million compared with Q3 2016 principally driven by a £16 million increase across PBB and CPB and a £17 million increase in Capital Resolution.
NIM for Q4 2016 was 2.19%, 2 basis points higher than Q3 2016. NIM for the combined PBB and CPB franchises was 2.24%, 3 basis points lower than Q3 2016.
UK PBB NIM reduced by 2 basis points to 2.94% and Commercial Banking NIM reduced by 4 basis points to 1.68% driven by asset margin pressure.
 
Q4 2016 compared with Q4 2015
● 
Net interest income of £2,208 million increased by £46 million compared with Q4 2015 principally driven by a £115 million increase across PBB and CPB.
NIM was 2.19% for Q4 2016, 9 basis points higher than Q4 2015 as the benefit associated with reductions in low yielding ‘non-core’ assets has been partially offset by modest asset margin pressure and mix impacts across PBB and CPB.
 
Analysis of results
 
 
Year ended
 
Quarter ended
 
31 December
31 December
 
31 December
30 September
31 December
2016
2015
 
2016
2016
2015
Non-interest income
£m
£m
 
£m
£m
£m
 
 
 
 
 
 
 
Net fees and commissions
2,535 
2,933 
 
608 
643 
653 
Income from trading activities
820 
806 
 
622 
465 
59 
Own credit adjustments
180 
309 
 
(114)
(156)
(115)
(Loss)/gain on redemption of own debt
(126)
(263)
 
(263)
Strategic disposals
164 
(157)
 
(31)
(22)
Other operating income
309 
528 
 
(109)
219 
10 
 
 
 
 
 
 
 
Total non-interest income
3,882 
4,156 
 
1,008 
1,143 
322 
 
 
 
 
 
 
 
Of which:
 
 
 
 
 
 
Capital Resolution
(601)
174 
 
(337)
76 
(268)
IFRS volatility in Treasury
(510)
15 
 
308 
(150)
59 
 
Key points
2016 compared with 2015
● 
Non-interest income was £3,882 million, a reduction of £274 million, or 7%, compared with 2015. Capital Resolution non-interest income reduced by £775 million reflecting planned asset disposal, including £572 million of disposal losses compared with £367 million in 2015, and a funding valuation adjustment of £170 million. In addition, we recognised a charge of £510 million for volatile items under IFRS compared with a £15 million gain in 2015. Partially offsetting, we reported a strategic disposal gain of £164 million, compared with a loss of £157 million in 2015, a loss on redemption of own debt of £126 million, compared with £263 million in 2015, an FX gain of £349 million following the significant weakening of sterling against the dollar and a £97 million foreign exchange reserve recycling gain.
Net fees and commissions decreased by £398 million, or 14%, compared with 2015 reflecting the planned Capital Resolution asset run-down, £168 million, a reduction in NatWest Markets, £175 million, and a £36 million reduction in UK PBB, driven by lower credit card interchange fees and increased cash back payments following the launch of the Rewards account.
Income from trading activities increased by £14 million to £820 million as a £219 million increase in NatWest Markets income has been partially offset by Capital Resolution, £133 million, and an increased charge for volatile items under IFRS.
● 
Other operating income reduced by £219 million principally reflecting planned asset disposals in Capital Resolution.
 
 
Q4 2016 compared with Q3 2016
● 
Non-interest income of £1,008 million was £135 million, or 12%, lower than Q3 2016. Capital Resolution decreased by £413 million reflecting planned disposal activity, including disposal losses of £325 million compared with £143 million in Q3 2016, and NatWest Markets reduced by £183 million. Partially offsetting, we recognised a £308 million gain for volatile items under IFRS compared with a loss of £150 million in Q3 2016.
 
Q4 2016 compared with Q4 2015
● 
Non-interest income was £686 million higher than Q4 2015. A gain of £308 million was recognised for volatile items under IFRS, compared with £59 million in Q4 2015, and Q4 2015 included a £263 million loss on redemption of own debt. In addition, NatWest Markets non-interest income increased by £98 million to £256 million.
 
 
Analysis of results
 
 
 
 
 
 
 
 
 
Year ended
Quarter ended
 
31 December
31 December
 
31 December
30 September
31 December
2016
2015
 
2016
2016
2015
Operating expenses
£m
£m
 
£m
£m
£m
 
 
 
 
 
 
 
Staff costs
4,482 
4,896 
 
1,025 
1,128 
1,072 
Premises and equipment
1,297 
1,483 
 
346 
321 
422 
Other administrative expenses
1,619 
2,124 
 
601 
393 
786 
Restructuring costs (see below)
2,106 
2,931 
 
1,007 
469 
614 
Litigation and conduct costs
5,868 
3,568 
 
4,128 
425 
2,124 
 
 
 
 
 
 
 
Administrative expenses
15,372 
15,002 
 
7,107 
2,736 
5,018 
Depreciation and amortisation
705 
778 
 
178 
175 
170 
Write down of goodwill
498 
 
498 
Write down of intangible assets
117 
75 
 
69 
75 
 
 
 
 
 
 
 
Operating expenses
16,194 
16,353 
 
7,354 
2,911 
5,761 
 
 
 
 
 
 
 
Adjusted operating expenses (1)
8,220 
9,356 
 
2,219 
2,017 
2,525 
 
 
 
 
 
 
 
Restructuring costs comprise:
 
 
 
 
 
 
  - staff expenses
642 
830 
 
117 
159 
205 
  - premises, equipment, depreciation and amortisation
164 
746 
 
107 
33 
41 
  - other
1,300 
1,355 
 
783 
277 
368 
 
 
 
 
 
 
 
 
2,106 
2,931 
 
1,007 
469 
614 
Of which: Williams & Glyn
1,456 
658 
 
810 
301 
209 
 
 
 
 
 
 
 
Staff costs as a % of total income
36%
38%
 
32%
34%
43%
Cost:income ratio
129%
127%
 
229%
88%
232%
Cost:income ratio - adjusted (2)
66%
72%
 
67%
58%
88%
Employee numbers (FTE - thousands)
77.8 
91.5 
 
77.8 
82.5 
91.5 
 
 
 
Year ended
 
31 December
31 December
 
2016 
2015 
UK Bank levy segmental allocations
£m
£m
 
 
 
UK Personal & Business Banking
34 
45 
Ulster Bank RoI
Commercial Banking
90 
103 
Private Banking
19 
22 
RBS International Banking
19 
18 
NatWest Markets
13 
24 
Capital Resolution
22 
43 
Central items
(10)
(34)
 
 
 
Total UK Bank levy
190 
230 
 
Notes:
(1)
Excluding restructuring costs, litigation and conduct costs and write down of goodwill.
(2)
Excluding own credit adjustments, (loss)/gain on redemption of own debt, strategic disposals, restructuring costs, litigation and conduct costs and write down of goodwill.
 
Analysis of results
 
Key points
2016 compared with 2015
● 
Operating expenses of £16,194 million were £159 million, or 1%, lower than 2015 reflecting a £1,136 million, or 12%, reduction in adjusted operating expenses and a £825 million, or 28%, reduction in restructuring costs. In addition, 2015 included a £498 million write down of goodwill relating to Private Banking. Partially offsetting the above, litigation and conduct costs increased by £2,300 million.
● 
Adjusted operating expenses reduced by £1,136 million, or 12%, compared with 2015 to £8,220 million. Excluding expenses associated with Williams & Glyn, write down of intangibles and a £227 million VAT recovery, adjusted expenses reduced by £985(1) million, or 11%, in excess of our £800 million target. RBS has achieved a cumulative cost reduction of £3.1 billion across 2014 – 2016.
● 
Staff costs of £4,482 million were £414 million, or 8%, lower than 2015 underpinned by a 13,700, or 15%, reduction in FTEs.
● 
Restructuring costs were £2,106 million for 2016, compared with £2,931 million in 2015, and included a £750 million provision in respect of the 17 February 2017 update on RBS’s remaining State Aid obligation regarding Williams & Glyn. In addition, £706 million of the remaining restructuring costs relate to Williams & Glyn, including £146 million of termination costs associated with the decision to discontinue the programme to create a cloned banking platform.
● 
Litigation and conduct costs of £5,868 million included; a £3,107 million provision in relation to various investigations and litigation matters relating to RBS’s issuance and underwriting of residential mortgage-backed securities (RMBS), £601 million of additional PPI provisions, a £400 million provision in respect of the FCA review of RBS’s treatment of SMEs, an additional £169 million charge in respect of the settlement with the National Credit Union Administration Board to resolve two outstanding RMBS lawsuits in the United States relating to residential mortgage backed securities, a £172 million provision in Ulster Bank RoI, principally in respect of remediation and programme costs associated with an industry wide examination of tracker mortgages, and a provision in respect of the UK 2008 rights issue shareholder litigation.
 
Q4 2016 compared with Q3 2016
● 
Operating expenses of £7,354 million were £4,443 million higher than Q3 2016 driven by a £3,703 million increase in litigation and conduct costs, a £538 million increase in restructuring costs and a £202 million increase in adjusted operating expenses.
● 
Adjusted operating expenses of £2,219 million were £202 million higher than Q3 2016 principally reflecting the UK bank levy charge of £190 million.
Restructuring costs of £1,007 million, compared with £469 million in Q3 2016, and included a £750 million provision in respect of the 17 February 2017 update on RBS’s remaining State Aid obligation regarding Williams & Glyn. In addition, £60 million of the remaining cost related to Williams & Glyn, £241 million, or 80%, lower than Q3 2016 following the decision to discontinue the programme to create a cloned banking platform.
● 
Litigation and conduct costs of £4,128 million included; a £3,107 million provision in relation to various investigations and litigation matters relating to RBS’s issuance and underwriting of RMBS, a £400 million provision in respect of the FCA review of RBS’s treatment of SMEs, £201 million of additional PPI provisions and a £77 million provision in Ulster Bank RoI, principally in respect of remediation and programme costs associated with an industry wide examination of tracker mortgages.
 
Q4 2016 compared with Q4 2015
● 
Operating expenses of £7,354 million were £1,593 million higher than Q4 2015 reflecting a £2,004 million increase in litigation and conduct costs and a £393 million increase in restructuring costs, partially offset by a £498 million write down of goodwill in Q4 2015 and a £306 million reduction in adjusted operating expenses, principally driven by a £218 million reduction in Capital Resolution.
 
Note:
(1)
Operating expenses excluding restructuring costs £2,106 million (2015 - £2,931 million), litigation and conduct costs £5,868 million (2015 - £3,568 million), write down of goodwill nil (2015 - £498 million), write down of other intangible assets of £117 million (2015 - £75 million), the operating costs of Williams and Glyn £393 million (2015 - £359 million) and the VAT recovery £227 million in 2016.
 
 
Analysis of results
 
 
Year ended
 
Quarter ended
 
31 December
31 December
 
31 December
30 September
31 December
2016
2015
 
2016
2016
2015
Impairment (releases)/losses
£m
£m
 
£m
£m
£m
 
 
 
 
 
 
 
Loan impairment (releases)/losses
 
 
 
 
 
 
  - individually assessed
535 
(406)
 
(40)
217 
(271)
  - collectively assessed
218 
(35)
 
(1)
176 
(27)
  - latent
(216)
(408)
 
(25)
(202)
(28)
 
 
 
 
 
 
 
Customer loans
537 
(849)
 
(66)
191 
(326)
Bank loans
(4)
 
 
 
 
 
 
 
 
Total loan impairment (releases)/losses
537 
(853)
 
(66)
191 
(326)
Securities
(59)
126 
 
(9)
(47)
(1)
 
 
 
 
 
 
 
Total impairment (releases)/losses
478 
(727)
 
(75)
144 
(327)
 
 
 
 
 
 
31 December 
30 September 
31 December 
Credit metrics (1)
2016 
2016 
2015 
 
 
 
 
Gross customer loans
£327,478m
£332,917m
£315,111m
Loan impairment provisions
£4,455m
£6,181m
£7,139m
Risk elements in lending (REIL)
£10,310m
£12,625m
£12,157m
Provisions as a % of REIL
43%
49%
59%
REIL as a % of gross customer loans
3.1%
3.8%
3.9%
Provisions as a % of gross customer loans
1.4%
1.9%
2.3%
 
Note:
(1)
Includes disposal groups and excludes reverse repos.
 
Key points
2016 compared with 2015
● 
A net impairment loss of £478 million, 15 basis points of gross customer loans, compared with a net impairment release of £727 million in 2015.
● 
Capital Resolution reported a net impairment loss of £253 million in 2016 compared with a release of £725 million in 2015. The loss for the year included a charge of £424 million in respect of the shipping portfolio reflecting difficult conditions in some parts of the sector.
Commercial Banking net impairment loss of £206 million was £137 million higher than 2015 principally reflecting a single name charge in respect of the oil and gas portfolio.
UK PBB reported a net impairment loss of £83 million compared with a net release of £7 million in 2015.
Ulster Bank RoI reported a net impairment release of €138 million compared with €194 million in 2015. The 2016 impairment release included a write back associated with the sale of a portfolio of loans. REIL reduced by €0.6 billion driven by the portfolio sale, partially offset by a widening of the definition of loans which are considered to be impaired.
REIL reduced by £1,847 million during 2016 to £10,310 million reflecting Capital Resolution run-down and a portfolio sale in Ulster Bank RoI partially offset by an increase in the shipping portfolio, foreign exchange movements and the implementation of a revised mortgage methodology in Ulster Bank RoI. REIL represented 3.1% of gross customer loans compared with 3.9% at 31 December 2015. Provision coverage was 43% compared with 59% at 31 December 2015, with the reduction largely driven by Ulster Bank RoI and Capital Resolution.
Excluding Ulster Bank RoI and Capital Resolution, REIL represented 1.5% of gross customer loans, compared with 2.0% at end 2015, and provision coverage was 54% compared with 56% in 2015.
 
 
Analysis of results
 
Key points (continued)
Q4 2016 compared with Q3 2016
● 
A net impairment release of £75 million compared with a net impairment charge of £144 million in Q3 2016.
● 
Capital Resolution reported a net impairment release of £130 million compared with a net impairment charge of £120 million in Q3 2016.
Commercial Banking reported a net impairment loss of £83 million compared with £20 million in Q3 2016, with the uplift reflecting single name charges in the quarter.
REIL of £10,310 million were 3.1% of gross customer loans compared with 3.8% as at 30 September 2016, with the reduction largely reflecting the loan portfolio sale in Ulster Bank RoI.
 
Q4 2016 compared with Q4 2015
● 
A net impairment release of £75 million compared with £327 million in Q4 2015. Capital Resolution reported a net impairment release of £130 million compared with £356 million in Q4 2015.
 
 
Selected credit risk portfolios
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
31 December 2016
 
30 September 2016
 
31 December 2015
 
 CE (1)
PE (1)
EAD (2)
 
 CE (1)
PE (1)
EAD (2)
 
 CE (1)
PE (1)
EAD (2)
Natural resources
£m
£m
£m
 
£m
£m
£m
 
£m
£m
£m
 
 
 
 
 
 
 
 
 
 
 
 
Oil and gas
2,911 
5,286 
4,278 
 
2,989 
6,000 
4,739 
 
3,544 
6,798 
5,606 
Mining and metals
623 
1,887 
1,344 
 
652 
1,782 
1,375 
 
729 
1,823 
1,555 
Electricity
3,430 
9,076 
6,143 
 
3,256 
8,466 
5,782 
 
2,851 
7,683 
5,205 
Water and waste
5,436 
9,176 
6,779 
 
5,875 
8,772 
7,381 
 
4,657 
8,261 
5,873 
 
12,400 
25,425 
18,544 
 
12,772 
25,020 
19,277 
 
11,781 
24,565 
18,239 
Shipping
4,553 
5,173 
5,035 
 
5,514 
6,043 
6,154 
 
6,776 
7,301 
7,509 
 
Notes:
(1)
Current Exposure (CE) and Potential Exposure (PE) are both net of impairment provisions and credit valuation adjustments and after the effect of risk transfer. For a full description of what is included and excluded from Current and Potential Exposure refer to page 209 of the 2016 Annual Report and Accounts.
(2)
Exposure at default (EAD) reflects an estimate of the extent to which a bank will be exposed under a specific facility on the default of a customer or counterparty.
Uncommitted undrawn facilities are excluded from CE but included within EAD; therefore EAD can exceed CE.
 
Key points
● 
Oil and gas - Exposures to the oil and gas sector further reduced by £1.5 billion on a PE basis during 2016. Regulated gas distribution companies are no longer reported under the oil and gas sector and this reclassification reduced sector exposure by £724 million. There were also reductions due to the continued run-off of the US and APAC portfolios. Credit quality remained stable with the majority of the portfolio being investment grade. AQ10 potential exposure, net of provisions, was £182 million (31 December 2015 - £38 million).
● 
Mining and metals - The sector remained largely stable during 2016. The sector was subject to continued tight credit monitoring and ongoing risk appetite review, although concerns have reduced. AQ10 potential exposure, net of provisions was £3 million (31 December 2015 - £21 million).
● 
Shipping - RBS has decided to wind down its shipping finance portfolio and has also sold some assets. This contributed to the reduction in exposure, which has seen challenging market conditions affect vessel values and contribute to high levels of forbearance and impairments. Impairment charges of £424 million partially offset by write offs in 2016, increasing provisions by £206 million to £387 million (30 September 2016 - £565 million; 31 December 2015 - £181 million). AQ10 exposure, net of provisions, was £952 million (30 September 2016 - £1,031 million; 31 December 2015 - £239 million). In addition £363 million of current exposure was classified as at risk of credit loss (30 September 2016 - £775 million).
 
 
 
Analysis of results
 
Capital and leverage ratios
 
 
 
 
 
 
 
 
End-point CRR basis (1)
 
PRA transitional basis
 
31 December 
30 September 
31 December 
 
31 December 
30 September 
31 December 
 
2016 
2016 
2015 
 
2016 
2016 
2015 
Risk asset ratios
 
 
 
 
 
 
 
 
 
CET1
13.4 
15.0 
15.5 
 
13.4 
15.0 
15.5 
Tier 1
15.2 
16.7 
16.3 
 
17.7 
19.1 
19.1 
Total
19.2 
20.6 
19.6 
 
22.9 
24.1 
24.7 
 
 
 
 
 
 
 
 
Capital
£m
£m
£m
 
£m
£m
£m
 
 
 
 
 
 
 
 
Tangible equity
34,982 
39,822 
40,943 
 
34,982 
39,822 
40,943 
 
 
 
 
 
 
 
 
Expected loss less impairment provisions
(1,371)
(862)
(1,035)
 
(1,371)
(862)
(1,035)
Prudential valuation adjustment
(532)
(734)
(381)
 
(532)
(734)
(381)
Deferred tax assets
(906)
(838)
(1,110)
 
(906)
(838)
(1,110)
Own credit adjustments
(304)
(435)
(104)
 
(304)
(435)
(104)
Pension fund assets
(208)
(209)
(161)
 
(208)
(209)
(161)
Cash flow hedging reserve
(1,030)
(1,565)
(458)
 
(1,030)
(1,565)
(458)
Other deductions
(8)
(9)
(86)
 
(8)
(9)
(64)
 
 
 
 
 
 
 
 
Total deductions
(4,359)
(4,652)
(3,335)
 
(4,359)
(4,652)
(3,313)
 
 
 
 
 
 
 
 
CET1 capital
30,623 
35,170 
37,608 
 
30,623 
35,170 
37,630 
AT1 capital
4,041 
4,041 
1,997 
 
9,796 
9,662 
8,716 
Tier 1 capital
34,664 
39,211 
39,605 
 
40,419 
44,832 
46,346 
Tier 2 capital
9,161 
9,181 
8,002 
 
11,884 
11,773 
13,619 
 
 
 
 
 
 
 
 
Total regulatory capital
43,825 
48,392 
47,607 
 
52,303 
56,605 
59,965 
 
 
 
 
 
 
 
 
Risk-weighted assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Credit risk
 
 
 
 
 
 
 
  - non-counterparty
162,200 
166,600 
166,400 
 
 
 
 
  - counterparty
22,900 
25,100 
23,400 
 
 
 
 
Market risk
17,400 
17,800 
21,200 
 
 
 
 
Operational risk
25,700 
25,700 
31,600 
 
 
 
 
 
 
 
 
 
 
 
 
Total RWAs
228,200 
235,200 
242,600 
 
 
 
 
 
 
 
 
 
 
 
 
Leverage (2)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives
247,000 
283,000 
262,500 
 
 
 
 
Loans and advances
340,300 
346,500 
327,000 
 
 
 
 
Reverse repos
41,800 
46,000 
39,900 
 
 
 
 
Other assets
169,600 
176,900 
186,000 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
798,700 
852,400 
815,400 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
  - netting and variation margin
(241,700)
(281,700)
(258,600)
 
 
 
 
  - potential future exposures
65,300 
64,100 
75,600 
 
 
 
 
Securities financing transactions gross up
2,300 
2,200 
5,100 
 
 
 
 
Undrawn commitments
58,600 
62,100 
63,500 
 
 
 
 
Regulatory deductions and other
 
 
 
 
 
 
 
  adjustments
100 
4,100 
1,500 
 
 
 
 
 
 
 
 
 
 
 
 
Leverage exposure
683,300 
703,200 
702,500 
 
 
 
 
 
 
 
 
 
 
 
 
Tier 1 capital
34,664 
39,211 
39,605 
 
 
 
 
 
 
 
 
 
 
 
 
Leverage ratio %
5.1 
5.6 
5.6 
 
 
 
 
 
 
 
 
 
 
 
 
Average leverage exposure (3)
712,145 
717,056 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average Tier 1 capital (3)
37,959 
38,919 
 
 
 
 
 
 
 
 
 
 
 
 
 
Average leverage ratio % (3)
5.3 
5.4 
 
 
 
 
 
 
Notes:
(1)
CRR as implemented by the PRA in the UK, with effect from 1 January 2014. All regulatory adjustments and deductions to CET1 have been applied in full for both bases with the exception of unrealised gains on available-for-sale securities which have been included from 2015 under the PRA transitional basis.
(2)
Based on end-point CRR Tier 1 capital and leverage exposure under the CRR Delegated Act.
(3)
Based on 3 month average of month end leverage exposure and Tier 1 Capital.
 
Analysis of results
 
Key points
The CET1 ratio decreased by 210 basis points to 13.4% in 2016, reflecting lower CET1 capital partially offset by a reduction in RWAs.
Litigation and conduct charges of £5.9 billion in 2016 contributed to a significant reduction in the CET1 capital. Management actions to normalise the ownership structure and improve the long-term resilience of RBS also contributed to the reduction. These actions included the final Dividend Access Share payment of £1.2 billion and the impact of the accelerated pension payment of £4.2 billion.
Tier 1 capital benefitted from the successful issuance of £2 billion of Additional Tier 1 (AT1) capital notes in August 2016. Total end-point CRR compliant AT1 capital now stands at £4.0 billion.
RWAs decreased by £14.4 billion in the year to £228.2 billion consisting of reductions across all risk types predominantly driven by the run down activity within Capital Resolution which resulted in an RWA decrease of £14.5 billion.
 
o Non-counterparty credit risk RWAs have decreased by £4.2 billion reflecting disposal activity in Capital Resolution partly offset by the adverse impact of foreign exchange movements.
 
o The impact of sterling weakening and the implementation of a new risk model for banks in the first half of the year, led to an increase of £2.8 billion in counterparty credit risk RWAs in NatWest Markets. This was offset by a reduction of £3.3 billion in Capital Resolution to result in an overall decrease of £0.5 billion.
 
o Market risk RWAs reduced by £3.8 billion driven by disposals in Capital Resolution, business mitigation activity in NatWest Markets and lower US dollar position risk in Treasury.
 
o Operational risk RWAs decreased by £5.9 billion as a result of the annual recalculation and the removal of the element relating to Citizens following regulatory approval.
The leverage ratio reduced by 50 basis points to 5.1% at 31 December 2016, primarily reflecting CET1 capital erosion partially offset by additional AT1 issuance.
The leverage exposure decreased by £19.2 billion to £683.3 billion. Growth in PBB and CPB lending has been more than offset by lower undrawn commitments and derivative potential future exposures. During 2016, approximately half the interest rate trades cleared through London Clearing House have been settled-to-market each day rather than being collateralised, reducing potential future exposures by £10.3 billion.
The UK leverage ratio reflecting the post EU referendum measures announced by the Bank of England in Q3 2016 was estimated at 5.6%.
 
Segment performance
 
Year ended 31 December 2016
 
PBB
 
CPB
 
 
 
 
Central
 
 
 
Ulster
 
Commercial
Private
RBS
 
NatWest
Capital
Williams
 items &
Total
 
UK PBB
Bank RoI
 
Banking
Banking
International
 
Markets
Resolution
& Glyn (1)
other (2)
RBS
 
£m
£m
 
£m
£m
£m
 
£m
£m
£m
£m
£m
Income statement
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
4,287 
409 
 
2,143 
449 
303 
 
104 
239 
658 
116 
8,708 
Other non-interest income
1,003 
164 
 
1,272 
208 
71 
 
1,417 
(654)
179 
3,664 
Total income - adjusted (3)
5,290 
573 
 
3,415 
657 
374 
 
1,521 
(415)
837 
120 
12,372 
Own credit adjustments
 
 
53 
134 
(10)
180 
Loss on redemption of own debt
 
 
(126)
(126)
Strategic disposals
 
 
(81)
245 
164 
Total income
5,290 
576 
 
3,415 
657 
374 
 
1,574 
(362)
837 
229 
12,590 
Direct expenses - staff costs
(690)
(207)
 
(522)
(154)
(45)
 
(256)
(102)
(250)
(2,256)
(4,482)
                           - other costs
(293)
(55)
 
(235)
(44)
(17)
 
(35)
(84)
(59)
(2,916)
(3,738)
Indirect expenses
(2,022)
(195)
 
(1,179)
(313)
(107)
 
(1,029)
(578)
(84)
5,507 
Operating expenses - adjusted (4)
(3,005)
(457)
 
(1,936)
(511)
(169)
 
(1,320)
(764)
(393)
335 
(8,220)
Restructuring costs - direct
(51)
(38)
 
(25)
(7)
(2)
 
(19)
(56)
(57)
(1,851)
(2,106)
                                  - indirect
(136)
(2)
 
(83)
(30)
(3)
 
(93)
(22)
369 
Litigation and conduct costs
(634)
(172)
 
(423)
(1)
 
(528)
(3,413)
(697)
(5,868)
Operating expenses
(3,826)
(669)
 
(2,467)
(549)
(174)
 
(1,960)
(4,255)
(450)
(1,844)
(16,194)
Profit/(loss) before impairment (losses)/releases
1,464 
(93)
 
948 
108 
200 
 
(386)
(4,617)
387 
(1,615)
(3,604)
Impairment (losses)/releases
(83)
113 
 
(206)
(10)
 
(253)
(42)
(478)
Operating profit/(loss)
1,381 
20 
 
742 
111 
190 
 
(386)
(4,870)
345 
(1,615)
(4,082)
Operating profit/(loss) - adjusted (3,4)
2,202 
229 
 
1,273 
149 
195 
 
201 
(1,432)
402 
455 
3,674 
Additional information
 
 
 
 
 
 
 
 
 
 
 
 
Return on equity (5)
16.2%
0.7%
 
4.1%
5.6%
13.8%
 
(6.6%)
nm
nm
nm
(17.9%)
Return on equity - adjusted (3,4,5)
26.8%
8.4%
 
8.4%
7.8%
14.2%
 
1.1%
nm
nm
nm
1.6%
Cost:income ratio
72%
116%
 
72%
84%
47%
 
125%
nm
54%
nm
129%
Cost:income ratio - adjusted (3,4)
57%
80%
 
57%
78%
45%
 
87%
nm
47%
nm
66%
Total assets (£bn)
155.6 
24.1 
 
150.5 
18.6 
23.4 
 
240.0 
132.5 
25.8 
28.2 
798.7 
Funded assets (£bn) (6)
155.6 
24.0 
 
150.5 
18.5 
23.4 
 
100.9 
27.6 
25.8 
25.4 
551.7 
Net loans and advances to customers (£bn)
132.1 
18.9 
 
100.1 
12.2 
8.8 
 
17.4 
12.8 
20.6 
0.1 
323.0 
Risk elements in lending (£bn)
2.0 
3.5 
 
1.9 
0.1 
0.1 
 
-  
2.3 
0.4 
-  
10.3 
Impairment provisions (£bn)
(1.3)
(1.2)
 
(0.8)
-  
-  
 
-  
(0.8)
(0.2)
(0.2)
(4.5)
Customer deposits (£bn)
145.8 
16.1 
 
97.9 
26.6 
25.2 
 
8.4 
9.5 
24.2 
0.2  
353.9 
Risk-weighted assets (RWAs) (£bn)
32.7 
18.1 
 
78.5 
8.6 
9.5 
 
35.2 
34.5 
9.6 
1.5  
228.2 
RWA equivalent (£bn) (5)
35.7 
19.5 
 
82.6 
8.6 
9.5 
 
37.2 
37.5 
10.1 
1.7  
242.4 
Employee numbers (FTEs - thousands)
18.3 
3.1 
 
5.5 
1.7 
0.8 
 
1.2 
0.4 
4.5 
42.3  
77.8 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the notes to this table refer to page 34. nm = not meaningful
 
 
 
 
 
 
 
 
 
 
 
 
 
Segment performance
 
Quarter ended 31 December 2016
 
PBB
 
CPB
 
 
 
 
Central
 
 
 
Ulster
 
Commercial
Private
RBS
 
NatWest
Capital
Williams
 items &
Total
 
UK PBB
Bank RoI
 
Banking
Banking
International
 
Markets
Resolution
& Glyn (1)
other (2)
RBS
 
£m
£m
 
£m
£m
£m
 
£m
£m
£m
£m
£m
Income statement
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
1,093 
105 
 
542 
111 
77 
 
29 
44 
170 
37 
2,208 
Other non-interest income
246 
32 
 
325 
50 
19 
 
285 
(329)
47 
446 
1,121 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total income adjusted (3)
1,339 
137 
 
867 
161 
96 
 
314 
(285)
217 
483 
3,329 
Own credit adjustments
 
 
(29)
(8)
(77)
(114)
Gain on redemption of own debt
 
 
Total income
1,339 
137 
 
867 
161 
96 
 
285 
(293)
217 
407 
3,216 
Direct expenses - staff costs
(161)
(57)
 
(130)
(39)
(12)
 
(64)
(23)
(60)
(479)
(1,025)
                           - other costs
(72)
(23)
 
(69)
(12)
(4)
 
(7)
(3)
(13)
(991)
(1,194)
Indirect expenses
(544)
(65)
 
(357)
(95)
(45)
 
(267)
(150)
(24)
1,547 
Operating expenses - adjusted (4)
(777)
(145)
 
(556)
(146)
(61)
 
(338)
(176)
(97)
77 
(2,219)
Restructuring costs - direct
(1)
(6)
 
(12)
(6)
(1)
 
(3)
(21)
(957)
(1,007)
                                  - indirect
(50)
 
(34)
(8)
(1)
 
(43)
13 
121 
Litigation and conduct costs
(214)
(77)
 
(407)
(1)
 
(466)
(3,156)
192 
(4,128)
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
(1,042)
(226)
 
(1,009)
(159)
(64)
 
(850)
(3,340)
(97)
(567)
(7,354)
 
 
 
 
 
 
 
 
 
 
 
 
 
Profit/(loss) before impairment (losses)/releases
297 
(89)
 
(142)
32 
 
(565)
(3,633)
120 
(160)
(4,138)
Impairment (losses)/releases
(16)
47 
 
(83)
 
130 
(11)
(1)
75 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating profit/(loss)
281 
(42)
 
(225)
10 
33 
 
(565)
(3,503)
109 
(161)
(4,063)
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating profit/(loss) - adjusted (3,4)
546 
39 
 
228 
23 
36 
 
(24)
(331)
109 
559 
1,185 
Additional information
 
 
 
 
 
 
 
 
 
 
 
 
Return on equity (5)
13.5%
(5.8%)
 
(9.1%)
1.6%
8.8%
 
(30.2%)
nm
nm
nm
(48.2%)
Return on equity - adjusted (3,4,5)
27.8%
5.4%
 
5.3%
4.5%
9.8%
 
(2.7%)
nm
nm
nm
8.6%
Cost:income ratio
78%
165%
 
116%
99%
67%
 
nm
nm
45%
nm
229%
Cost:income ratio - adjusted (3,4)
58%
106%
 
64%
91%
64%
 
108%
nm
45%
nm
67%
Total assets (£bn)
155.6 
24.1 
 
150.5 
18.6 
23.4 
 
240.0 
132.5 
25.8 
28.2 
798.7 
Funded assets (£bn) (6)
155.6 
24.0 
 
150.5 
18.5 
23.4 
 
100.9 
27.6 
25.8 
25.4 
551.7 
Net loans and advances to customers (£bn)
132.1 
18.9 
 
100.1 
12.2 
8.8 
 
17.4 
12.8 
20.6 
0.1 
323.0 
Risk elements in lending (£bn)
2.0 
3.5 
 
1.9 
0.1 
0.1 
 
2.3 
0.4 
10.3 
Impairment provisions (£bn)
(1.3)
(1.2)
 
(0.8)