Blueprint
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 15th, 2019
Commission
File Number: 001-09266
National
Westminster Bank PLC
135
Bishopsgate
London
EC2M 3UR
(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):_________
National Westminster Bank Plc
2018 Annual Results
Financial Review
|
|
Page
|
|
Financial
review
|
2
|
|
Statement
of director's responsibility
|
8
|
|
Consolidated
income statement
|
9
|
|
Consolidated
statement of comprehensive income
|
9
|
|
Balance
Sheet
|
10
|
|
Statement
of changes in equity
|
11
|
|
Cash
flow statement
|
13
|
|
Notes
on the accounts
|
14
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|
Risk
factors
|
27
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Forward
looking statements
|
39
|
Presentation of information
National Westminster Bank Plc ('NatWest' or the 'Bank') is a
wholly-owned subsidiary of NatWest Holdings Limited ('NatWest
Holdings', 'NWH' or 'the intermediate holding company. The ultimate
holding company is The Royal Bank of Scotland Group plc (the
'ultimate holding company' or 'RBSG'). The 'Group' or 'NatWest
Group' comprises NatWest and its subsidiary and associated
undertakings. 'RBS Group' comprises the ultimate holding company
and its subsidiary and associated undertakings.
The Bank publishes its financial statements in pounds sterling
('£' or 'sterling'). The abbreviations '£m' and
'£bn' represent millions and thousands of millions of pounds
sterling, respectively, and references to 'pence' represent pence
in the United Kingdom ('UK'). Reference to 'dollars' or '$' are to
United States of America ('US') dollars. The abbreviations '$m' and
'$bn' represent millions and thousands of millions of dollars,
respectively, and references to 'cents' represent cents in the US.
The abbreviation '€' represents the 'euro', and the
abbreviations '€m' and '€bn' represent millions and
thousands of millions of euros, respectively.
RBS Group ring-fencing
The UK ring-fencing legislation requires the separation of
essential banking services from investment banking services from 1
January 2019. RBS Group has placed the majority of the UK and
Western European banking business in ring-fenced banking entities,
including the Bank, under an intermediate holding company, NatWest
Holdings. NatWest Markets Plc (NWM Plc) and RBS International
(RBSI) are separate banks outside the ring-fence, both as
subsidiaries of RBSG. Key activities in 2018 included:
NatWest Holdings
Certain parts of NWM Plc's (formerly RBS plc), Central items to be
included in the ring-fenced bank, were transferred to the Group in
2018. This included certain property portfolios and treasury
balances including the covered bond programme.
This was followed by the transfer of NatWest Holdings, the Bank's
intermediate parent company, to RBSG on 2 July 2018 to create a
separate ring-fenced bank (RFB). The second phase of ring-fencing
related transfers, involving the transfer of certain markets
products from NatWest to NWM Plc, was completed in the third
quarter of 2018.
RBS Netherlands Holdings B.V. was sold by National Westminster
International Holdings B.V. (a direct subsidiary of NatWest) to NWM
Plc as part of the ring-fencing related transfers.
NatWest Group Holdings Corporation.
During 2018, NatWest Group Holdings Corporation (NWGH) which wholly
owns NatWest Markets Securities Inc. (NWMSI) (formerly RBS
Securities Inc.) was transferred to NatWest Markets Plc. NWGH was
previously a direct subsidiary of NatWest.
Principal activities and operating segments
The Group serves customers across the UK and Western Europe with a
range of retail and commercial banking products. A wide range of
personal products are offered including current accounts, credit
cards, personal loans and mortgages. Personal & Business
Banking (PBB) serves individuals and mass affluent customers
together with small businesses through the Group's network of
branches and direct channels, including the internet, mobile and
telephony. Commercial & Private Banking (CPB) provides services
to private, corporate and commercial customers. NatWest is the main
provider of shared service activities for the RBS Group. This
includes the provision of Treasury services on behalf of the RFB
and RBS Group.
The reportable operating segments are as follows:
Personal & Business Banking comprises one reportable segment: UK Personal
& Business Banking (UK PBB). UK PBB serves individuals and mass
affluent customers in the UK together with small businesses
(generally up to £2 million turnover). UK PBB includes Ulster
Bank customers in Northern Ireland.
Commercial & Private Banking comprises two reportable segments: Commercial
Banking and Private Banking. Commercial Banking serves commercial
and corporate customers in the UK and Western Europe. Private
Banking serves UK connected high net worth
individuals.
Central items & other includes corporate functions, such as treasury,
finance, risk management, compliance, legal, communications and
human resources. Central functions manages RBS Group capital
resources and RBS Group-wide regulatory projects and provides
services to the reportable segments. Balances in relation to legacy
litigation issues are included in Central items in the relevant
periods.
Preparations for Brexit
As part of Brexit preparations, NatWest plans to migrate an
estimated £2.1 billion of loans and receivables relating to
part of the Commercial Banking Western European Large Corporate
portfolio to NatWest Markets N.V., when the loan re-financing
becomes due over the next five years.
Financial Review
Performance overview
Income resilient in a competitive market:
Across Personal & Business Banking and Commercial & Private
Banking income increased by £474 million, 6%, compared with
2017. The Group's total income increased by £1,385 million, or
17% to £9,532 million.
Lower costs through continued transformation and increased
digitisation offset by the transfer of shared service related
activities:
As a result of the Ring-Fenced Transfer Scheme (RFTS) completed on
30 April 2018 NatWest has become the main provider of shared
services activities for the RBS Group. Principally as a result of
the transfer of these shared services activities, operating
expenses increased by £1,274 million, 30%, to £5,594
million. Underlying costs continue to reduce through digitisation
initiatives.
Legacy issues diminishing:
Entered in to a Memorandum of Understanding with the Trustees of
the Main scheme of the RBS Group Pension Fund to address the
historical funding weakness of the pension scheme, recognising a
pre-tax £2.0 billion contribution against
reserves.
Capital adequacy:
The PRA transitional CET1 ratio decreased by 610 basis points to
17.4% mainly due to increased RWAs resulting from the
RFTS.
RWAs increased by £18.9 billion, mainly resulting from RFTS.
These transfers into NatWest included treasury services, including
a significant proportion of the RBS Group liquidity
portfolio.
Summary consolidated income statement for the year ended 31
December 2018
|
|
2018
|
2017
|
Variance
|
|
|
£m
|
£m
|
£m
|
%
|
|
Net interest income
|
5,814
|
5,481
|
333
|
6.1
|
|
Fees and commissions receivable
|
2,113
|
2,054
|
59
|
2.9
|
|
Fees and commissions payable
|
(462)
|
(499)
|
37
|
(7.4)
|
|
Other operating income
|
2,067
|
1,111
|
956
|
86.0
|
|
Non-interest income
|
3,718
|
2,666
|
1,052
|
39.5
|
|
Total income
|
9,532
|
8,147
|
1,385
|
17.0
|
|
Operating expenses
|
(5,594)
|
(4,320)
|
(1,274)
|
29.5
|
|
Profit before impairment losses
|
3,938
|
3,827
|
111
|
2.9
|
|
Impairment losses
|
(428)
|
(311)
|
(117)
|
37.6
|
|
Operating profit before tax
|
3,510
|
3,516
|
(6)
|
(0.2)
|
|
Tax charge
|
(771)
|
(812)
|
41
|
(5.0)
|
|
Profit from continuing operations
|
2,739
|
2,704
|
35
|
1.3
|
|
Loss from discontinued operations net of tax for the
year
|
(3)
|
(635)
|
632
|
(99.5)
|
|
Profit for the year
|
2,736
|
2,069
|
667
|
32.2
|
|
|
|
|
|
|
|
Attributable to:
|
|
|
|
|
|
Ordinary shareholders
|
2,619
|
2,065
|
554
|
26.8
|
|
Paid-in equity holders
|
111
|
-
|
111
|
nm
|
|
Non-controlling interests
|
6
|
4
|
2
|
50.0
|
|
|
2,736
|
2,069
|
667
|
32.2
|
|
|
|
|
|
|
|
Key metrics and ratios
|
|
|
|
|
|
Cost:income ratio (%)
|
58.7
|
53.0
|
5.7
|
|
|
CET 1 ratio (%)
|
17.4
|
23.5
|
(6.1)
|
|
|
Leverage ratio (%)
|
5.2
|
6.2
|
(1.0)
|
|
|
Risk weighted assets (£bn)
|
75.6
|
56.7
|
18.9
|
|
Financial Review
Performance overview continued
The Group reported a profit of £2,736 million compared with
£2,069 million in 2017, primarily due to the non repeat of
losses from discontinued operations of £635 million in 2017.
An increase in total income of £1,385 million was primarily
offset by increases in operating expenses of £1,274 million
and impairment losses of £117 million.
ICB related transfers
The income statement movements in the year are materially impacted
by transfers to set up the ring-fenced bank during the year. These
include the transfer to the Group of treasury management from NWM
and the Group becoming the main provider of shared services to the
RBS Group in Q2 2018. Following the transfer of services, functions
and certain segment related direct costs incurred are recovered
through legal entity recharging and recorded in other operating
income. For the period prior to the transfers, the Group was a
receiver of shared services from NWM Plc and consequently had
comparatively lower direct costs and received higher legal entity
recharges which were booked in other administrative
expenses.
Total income increased by £1,385 million,
17%, to £ 9,532 million compared with £8,147 million in
2017.
Net interest income increased by £333 million,
6%, to £5,814 million, compared with £5,481 million in
2017, reflecting increases in:
● UK PBB, £52 million to
£3,773 million driven mainly by mortgage balance growth of
£4.7 billion and deposit margin benefits offset by lower
mortgage new business margins. Interest receivable increased by
£102 million which was partially offset by a £50 million
increase in interest payable as a result of higher savings balances
and increased interest rates for customers following increases in
the Bank of England base rate;
● Commercial Banking, £39
million to £1,605 million primarily driven by £168
million increase in interest receivable due to the transfer in of
the Western Europe loan portfolio from NWM Plc, and corporate
lending portfolio growth, offset by lower lending volumes due to
active capital management. This was partially offset by a £130
million increase in interest payable partly due to the transfer in
of the Western Europe loan portfolio and an increase in savings and
time deposits as a result of increased balance and interest rate
growth;
● Private Banking, £58 million
to £444 million, due to increases in interest income from
growth in mortgage and business term lending, as well as
deposits.
● Central & other items,
£184 million, primarily reflecting the transfer of treasury
related money market and debt securities instruments. Treasury
positions have also benefited from an increase in the Bank of
England base rate by 25 basis points.
Non-interest income increased by £1,052 million,
40%, to £3,718 million, compared with £2,666 million in
2017.
● Fees and commissions receivable
increased by £59 million to £2,113 million, mainly
reflecting increase in fees related to mortgage balance growth and
commission received on FX transactions, partly offset by reductions
in facility arrangement and overdraft fees.
● Fees and commissions payable
decreased by £37 million to £462 million, as a result of
lower ATM charges due to a reduction in transaction
volumes.
● Other operating income increased
by £956 million to £2,067 million, compared with
£1,111 million in 2017.
o The
majority of the increase, £590 million, represents income from
legal entity cost recharging.
o The
cost of economic hedging increased by £87 million to £112
million.
o The
remainder of the increase, £277 million, primarily reflects
£822 million of FX reserves recycling to income as part of the
disposal of NWGH and RBS Netherlands Holdings B.V., offset by the
net impact of the non-repeat in 2017 of income generated by the
sale of RBS International, £444 million and Ulster Bank
Ireland Holdings, £132 million, together with the sale of
Vocalink, £63 million.
Operating expenses increased by £1,274 million,
30%, to £5,594 million, compared with £4,320 million in
2017.
● The increase in operating
expenses primarily reflects the Group becoming the main service
provider for the RBS Group, resulting in an overall increase of
£2,972 million in direct costs. This was partially offset by a
decrease of £1,698 million of costs recharged from other
entities.
● Staff costs increased by
£1,340 million to £2,184 million, compared with
£844 million in 2017, primarily in relation to staff transfers
from NWM Plc, partly offset by cost reduction initiatives. Premises
and equipment costs increased by £484 million to £757
million, compared with £273 million in 2017, in line with the
Group becoming the main shared service provider for the RBS Group
which included the transfer of shared properties and intangibles.
Related depreciation and amortisation costs increased by £239
million to £521 million.
● Other administrative expenses
decreased by £789 million to £2,132 million, compared
with £2,921 million in 2017. The reduction in legal entity
recharges more than offset the increase in administrative costs
following the RFTS transfers. The Bank, on behalf of the RBS Group,
is the responsible member for the UK bank levy and recorded the
charge of £179 million with £95 million being recovered
from other RBS Group entities. An additional charge was made in
respect of PPI provision, £125 million.
Impairment losses increased by £117 million, 38%, to £428
million, compared with £311 million in 2017. The net
impairment loss of £428 million represents 20 basis points of
gross customer loans. This increase of £117 million included a
charge of £63 million reflecting the more uncertain economic
and political outlook. There were also fewer provision releases and
lower recoveries following debt sales in prior years. Underlying
credit conditions remained benign during 2018.
Loss from discontinued operations was £3 million compared with
£635 million in 2017 which represented the results of NWGH
classified as a discontinued operation at 31 December 2017 and UBIH
which was sold to NatWest Holdings on 1 January
2017.
Financial Review
Performance overview continued
|
Summary consolidated balance sheet as at 31 December
2018
|
|
|
|
|
|
2018
|
2017
|
Variance
|
|
£m
|
£m
|
£m
|
%
|
|
Assets
|
|
|
|
|
|
Cash and balances at central banks
|
45,032
|
35,799
|
9,233
|
26
|
|
Derivatives
|
1,253
|
2,315
|
(1,062)
|
(46)
|
|
Loans to banks - amortised cost
|
6,406
|
1,919
|
4,487
|
234
|
|
Loans to customers - amortised cost
|
203,647
|
191,882
|
11,765
|
6
|
|
Amounts due from holding companies and fellow
subsidiaries
|
5,206
|
77,930
|
(72,724)
|
(93)
|
|
Other financial assets
|
41,226
|
1,665
|
39,561
|
2,376
|
|
Other assets
|
7,168
|
29,333
|
(22,165)
|
(76)
|
|
Total assets
|
309,938
|
340,843
|
(30,905)
|
(9)
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
Bank deposits
|
17,563
|
20,544
|
(2,981)
|
(15)
|
|
Customer deposits
|
237,770
|
226,423
|
11,347
|
5
|
|
Amounts due to holding companies and fellow
subsidiaries
|
22,542
|
44,599
|
(22,057)
|
(49)
|
|
Derivatives
|
779
|
3,178
|
(2,399)
|
(75)
|
|
Other financial liabilities
|
6,497
|
575
|
5,922
|
1,030
|
|
Subordinated liabilities
|
1,275
|
1,240
|
35
|
3
|
|
Other liabilities
|
3,638
|
27,917
|
(24,279)
|
(87)
|
|
Total liabilities
|
290,064
|
324,476
|
(34,412)
|
(11)
|
|
Total equity
|
19,874
|
16,367
|
3,507
|
21
|
|
Total liabilities and equity
|
309,938
|
340,843
|
(30,905)
|
(9)
|
The balance sheet movements in the year are materially impacted by
transfers to set up the ring-fenced bank. These are described where
relevant below; further analysis of the impact is also presented on
page 7 of this document.
Total assets decreased by
£30.9 billion to £309.9 billion at 31 December 2018,
compared with £340.8 billion at 31 December
2017.
Cash and balances at central banks increased by £9.2 billion to £45.0
billion, compared with £35.8 billion at 31 December 2017. The
increase primarily reflects the transfer of Group treasury. The
Group now manages the funding and liquidity requirements of the RBS
Group and funds are placed directly with central banks. This
increase was partially offset by a reduction in Term Funding Scheme
borrowings of £5 billion during Q4 2018 reflecting the gradual
repayments under the terms of the scheme. A pension liability of
£2.0 billion was also paid during the year, following a
commitment made in April 2018 to provide additional funding to the
Main Pension Scheme.
Derivative assets decreased by £1.1 billion to £1.3
billion, compared with £2.3 billion at 31 December 2017, due
to transfers of certain markets products to NWM
Plc.
Loans to banks - amortised cost increased by £4.5
billion to £6.4 billion, compared with £1.9 billion at 31
December 2017, mainly representing increased reverse repos of
£3.5 billion and other loans from banks, in relation to
treasury funding activities transferred to the Group from NWM
Plc.
Loans to customers - amortised cost increased by £11.8 billion to
£203.6 billion, compared with £191.9 billion at 31
December 2017, reflecting increases in UK PBB, Commercial and
Private Banking:
●
UK PBB lending to
customers increased by £5.3 billion to £128.9 billion,
driven by mortgage lending growth of £4.7 billion to
£115.2 billion. The impact of intense competition has been
mitigated as a result of management actions to maintain customer
retention levels.
●
Commercial Banking
lending to customers increased by £5.8 billion to £61.1
billion, mainly due to the migration of Western Europe customer
loans, £2.7 billion and an increase in corporate lending
portfolios of £2.4 billion
●
The increase of
£0.8 billion in Private Banking was primarily in relation to
growth in personal mortgage lending as a result of competitive
pricing initiatives.
Amounts due from holding companies and fellow
subsidiaries decreased by
£72.7 billion to £5.2 billion, compared with £77.9
billion at 31 December 2017, primarily due to the transfer of the
Group treasury function to NatWest. Surplus funds previously placed
with NWM Plc are now being placed directly with the Bank of England
leading to the associated reduction of inter-company balances with
NWM Plc.
Other financial assets increased by £39.6 billion
to £41.2 billion, primarily reflecting the transfer of
£41.9 million debt securities which form part of the treasury
liquidity portfolio, together with the purchase of mortgage backed
securities in April 2018, £0.6 billion, partially offset by
decreases in other bonds as a result of optimising the liquidity
portfolio.
Other assets decreased by
£22.2 billion to £7.2 billion, primarily reflecting the
decrease in assets of disposal groups of £24.5 billion to
£0.1 billion, due to the transfer of NWGH to NWM Plc. This was
partially offset by the increase of assets as a result of shared
services assets being transferred.
Bank deposits decreased by £3.0 billion to
£17.6 billion, compared with £20.5 billion at 31 December
2017, primarily due to the Term Funding Scheme repayment of £5
billion in November 2018, partially offset by increase in third
party deposits.
Financial Review
Performance overview continued
Customer deposits increased by £11.3 billion
to £237.8 billion, mainly reflecting an increase of £4.6
billion in repos and treasury time deposits as part of
ring-fencing.
●
UK PBB
customer deposits increased by £3.6 billion, driven by
growth across current account and saving
products.
●
Commercial Banking customer
deposits increased by £1.1 billion as a result of improved
customer rates.
●
Private
Banking customer deposits increased by £1.8 billion mainly as
a result an increase in customers switching from investment funds
in to cash of £0.5 billion and improved customer
rates.
Amounts due to holding companies and fellow
subsidiaries decreased by £22.1 billion
to £22.5 billion, compared with £44.6 billion at 31
December 2017, due to the transfer of the treasury
function.
Derivative liabilities decreased by £2.4 billion to
£0.8 billion, compared with £3.2 billion at 31 December
2017, due to transfers of certain markets products to NWM
Plc.
Other financial liabilities increased by £5.9 billion to
£6.5 billion, compared with £0.6 billion at the 31
December 2017, reflecting the migration of the covered bond
programme from NWM Plc as part of the treasury
transfer.
Other liabilities decreased by £24.3 billion
to £3.6 billion, compared with £27.9 billion at the 31
December 2017, mainly reflecting a decrease in disposal group
liabilities of £23.8 billion to nil, reflecting the transfer
of NWGH to NWM Plc.
Owners' equity increased by £3.5 billion to
£19.9 billion, compared with £16.4 billion at 31 December
2017. The increase reflects:
●
the attributable
profit for the period, £2.7 billion;
●
an equity debt
issuance to NatWest Holdings limited, $3.3 billion (£2.4
billion), as part of capitalising NatWest in preparation for
ring-fencing;
●
a net decrease of
£0.3 billion for changes to pension arrangements. NatWest
agreed it would make a pension contribution to strengthen funding
of the Main section of £1.5 billion (net of tax). This was
offset by a £1.2 billion capital contribution, paid by NWM Plc
to NatWest Holdings and then to the Bank;
●
a reduction of
£0.8 billion in FX reserves primarily as a result of equity
recycling on the disposal of NWGH and RBS Netherlands Holdings
B.V.; and a
●
£0.3 billion
reduction on adoption of IFRS 9.
Financial Review
Performance overview continued
Key balance sheet movements in the year
The following table summarises the impact of the balance sheet
movements relating to ring-fencing transfers in the
year.
|
|
|
Transfers
|
Business
|
|
|
|
31 December
|
Business
|
Other
|
|
movements
|
31 December
|
|
2017
|
acquired (9)
|
transfers (10)
|
Disposal (11)
|
and intercompany
|
2018
|
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
£bn
|
|
Assets
|
|
|
|
|
|
|
|
Cash and balances at central banks (1)
|
35.8
|
15.4
|
-
|
-
|
(6.2)
|
45.0
|
|
Derivatives (2)
|
2.3
|
2.1
|
(1.2)
|
-
|
(1.9)
|
1.3
|
|
Loans to banks - amortised cost
|
1.9
|
0.7
|
-
|
-
|
3.8
|
6.4
|
|
Loans to customers - amortised cost (3)
|
191.9
|
4.5
|
-
|
-
|
7.2
|
203.6
|
|
Amounts due from holding companies and fellow
subsidiaries (4)
|
77.9
|
-
|
-
|
-
|
(72.7)
|
5.2
|
|
Other financial assets (5)
|
1.7
|
41.9
|
-
|
-
|
(2.4)
|
41.2
|
|
Other assets
|
29.3
|
-
|
1.9
|
(24.7)
|
0.7
|
7.2
|
|
Total assets
|
340.8
|
64.6
|
0.7
|
(24.7)
|
(71.5)
|
309.9
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Bank deposits
|
20.5
|
1.6
|
-
|
-
|
(4.5)
|
17.6
|
|
Customer deposits (6)
|
226.4
|
3.2
|
-
|
-
|
8.2
|
237.8
|
|
Amounts due to holding companies and fellow
|
|
|
|
|
|
|
|
subsidiaries (4)
|
44.6
|
-
|
-
|
-
|
(22.1)
|
22.5
|
|
Derivatives (2)
|
3.2
|
1.8
|
(1.4)
|
-
|
(2.8)
|
0.8
|
|
Other financial liabilities (7)
|
0.6
|
5.1
|
-
|
-
|
0.8
|
6.5
|
|
Subordinated liabilities
|
1.2
|
-
|
-
|
-
|
0.1
|
1.3
|
|
Other liabilities
|
27.9
|
-
|
1.2
|
(23.8)
|
(1.8)
|
3.5
|
|
Equity (8)
|
16.4
|
-
|
-
|
(0.9)
|
4.4
|
19.9
|
|
Total liabilities and equity
|
340.8
|
11.7
|
(0.2)
|
(24.7)
|
(17.7)
|
309.9
|
Notes:
(1) Transfers include the migration of Treasury cash on
deposit with central banks
(2)
Transfers in are all in relation to derivatives with fellow
subsidiaries. Transfers out related to customer derivatives moved
to the non ring-fenced bank (NWM Plc).
(3)
Transfers include the Western Europe loan portfolio (£3.0
billion) from NWM Plc, along with finance lease lending (£1.5
billion).
(4)
Movement in the year includes the net impact of the Treasury
funding activities transferred to the Group, in addition to the
other transfers completed in preparation for ring- fencing and
consideration for the transfers satisfied by reductions in the
amounts due from transferring entities
(5)
Transfers mainly relate to debt securities held as part of the
Treasury liquidity portfolio.
(6)
Transfers include Treasury repurchase agreements.
(7)
Transfers relate to the covered bond debt securities in
issue.
(8)
Movements in the year include the issue of £2.4 billion AT1
capital notes which are held by NWH and a £1.2 billion capital
contribution that was received from NWH. Refer to the Statement of
changes in equity for details of the other movements in
equity.
(9)
Includes the RBS Group Treasury function that was transferred to
the Group in the year. The net asset value transferred was
£52.9 billion. The consideration was substantially satisfied
by reductions in the amounts due from NWM Plc.
(10)
Includes amounts relating to the transfer of derivatives to NWM
Plc, and the shared services activity from NWM Plc to the Group.
The shared services transfers mainly relate to property, plant and
equipment and accruals and other liabilities.
(11)
Comprises of assets and liabilities of disposal groups, principally
in relation to NatWest Group Holdings Corp (NWGH). NWGH was a
direct subsidiary of the Group, and wholly owns NatWest Markets
Securities Inc. (NWSSI) (formerly RBSSI), which was transferred to
NWM Plc in Q1 2018.
Statement of directors' responsibilities
The responsibility statement below has been prepared in connection
with the Group's full Annual Report and Accounts for the year ended
31 December 2018.
The directors confirm that to the best of their
knowledge:
● the financial statements,
prepared in accordance with International Financial Reporting
Standards, give a true and fair view of the assets, liabilities,
financial position and profit or loss of the Bank and the
undertakings included in the consolidation taken as a whole;
and
● the Strategic Report and
Directors' report (incorporating the Financial review) includes a
fair review of the development and performance of the business and
the position of the Bank and the undertakings included in the
consolidation taken as a whole, together with a description of the
principal risks and uncertainties that they
face.
By
order of the Board
|
Howard
Davies
|
Ross
McEwan
|
Katie
Murray
|
|
Chairman
|
Chief
Executive
|
Chief
Financial Officer
|
14 February 2019
Board of directors
|
Chairman
|
Executive directors
|
Non-executive directors
|
|
Howard
Davies
|
Ross
McEwanKatie Murray
Alison
Rose-Slade
|
Francesca
Barnes
Graham
Beale
Ian
Cormack
Alison
Davis
Patrick
Flynn
Morten
Friis
Robert
GillespieYasmin JethaBaroness Noakes
Mike
Rogers
Mark
Seligman
Dr Lena
Wilson
|
Consolidated income statement for the year ended 31 December
2018
|
|
|
|
|
|
|
|
2018
|
2017
|
|
£m
|
£m
|
|
Interest receivable
|
|
6,968
|
6,271
|
|
Interest payable
|
|
(1,154)
|
(790)
|
|
Net interest income
|
|
5,814
|
5,481
|
|
Fees and commissions receivable
|
|
2,113
|
2,054
|
|
Fees and commissions payable
|
|
(462)
|
(499)
|
|
Other operating income
|
|
2,067
|
1,111
|
|
Non-interest income
|
|
3,718
|
2,666
|
|
Total income
|
|
9,532
|
8,147
|
|
Staff costs
|
|
(2,184)
|
(844)
|
|
Premises and equipment
|
|
(757)
|
(273)
|
|
Other administrative expenses
|
|
(2,132)
|
(2,921)
|
|
Depreciation and amortisation
|
|
(521)
|
(282)
|
|
Operating expenses
|
|
(5,594)
|
(4,320)
|
|
Profit before impairment losses
|
|
3,938
|
3,827
|
|
Impairment losses
|
|
(428)
|
(311)
|
|
Operating profit before tax
|
|
3,510
|
3,516
|
|
Tax charge
|
|
(771)
|
(812)
|
|
Profit from continuing operations
|
|
2,739
|
2,704
|
|
Loss from discontinued operations net of tax
|
|
(3)
|
(635)
|
|
Profit for the year
|
|
2,736
|
2,069
|
|
|
|
|
|
|
Attributable to:
|
|
|
|
|
Ordinary shareholders
|
|
2,619
|
2,065
|
|
Paid-in equity holders
|
|
111
|
-
|
|
Non-controlling interests
|
|
6
|
4
|
|
|
|
2,736
|
2,069
|
Consolidated statement of comprehensive income for the year ended
31 December 2018
|
|
|
2018
|
2017
|
|
|
|
£m
|
£m
|
|
Profit for the year
|
|
2,736
|
2,069
|
|
Items that do not qualify for reclassification
|
|
|
|
|
Remeasurement of retirement benefit schemes
|
|
|
|
|
- contribution in preparation for
ring-fencing (1)
|
|
(2,000)
|
-
|
|
- other movements
|
|
47
|
(22)
|
|
Fair value through other comprehensive income (FVOCI) financial
assets (2)
|
|
(44)
|
-
|
|
Tax
|
|
530
|
8
|
|
|
|
(1,467)
|
(14)
|
|
Items that do qualify for reclassification
|
|
|
|
|
Fair value through other comprehensive income (FVOCI) financial
assets (2)
|
|
(115)
|
(312)
|
|
Currency translation
|
|
(811)
|
(805)
|
|
Tax
|
|
32
|
5
|
|
|
|
(894)
|
(1,112)
|
|
Other comprehensive loss after tax
|
|
(2,361)
|
(1,126)
|
|
Total comprehensive income for the year
|
|
375
|
943
|
|
|
|
|
|
|
Attributable to:
|
|
|
|
|
Ordinary shareholders
|
|
259
|
939
|
|
Paid-in equity holders
|
|
111
|
-
|
|
Non-controlling interests
|
|
5
|
4
|
|
|
|
375
|
943
|
Notes:
(1)
On 17 April 2018 the RBS Group agreed a Memorandum of Understanding
(MoU) with the Trustees of the RBS Group Pension Fund in connection
with the requirements of ring-fencing. NatWest Markets Plc cannot
continue to be a participant in the Main section and separate
arrangements are required for its employees and agreed to
contribute £1.2 billion to the ring-fenced bank. Under
the MoU NatWest made a contribution of £2 billion on 9 October
2018 to strengthen funding of the Main section in recognition of
the changes in covenant.
(2)
Refer to Note 10 of this document for further information on the
impact of IFRS 9 on classification and basis of preparation, year
ended 31 December 2018 prepared under IFRS 9 and year ended 31
December 2017 under IAS 39.
(3)
A loss of £3 million in 2018 (2017 - £635 million loss)
from discontinued operations was attributable to ordinary
shareholders.
Balance sheet as at 31 December 2018
|
|
|
Group
|
|
Bank
|
|
|
|
2018
|
2017
|
|
2018
|
2017
|
|
|
|
£m
|
£m
|
|
£m
|
£m
|
|
Assets
|
|
|
|
|
|
|
|
Cash and balances at central banks
|
|
45,032
|
35,799
|
|
43,966
|
34,763
|
|
Derivatives
|
|
1,253
|
2,315
|
|
1,277
|
2,277
|
|
Loans to banks - amortised cost
|
|
6,406
|
1,919
|
|
5,875
|
1,635
|
|
Loans to customers - amortised cost
|
|
203,647
|
191,882
|
|
171,433
|
160,614
|
|
Amounts due from holding companies and fellow
subsidiaries
|
|
5,206
|
77,930
|
|
30,780
|
54,211
|
|
Securities subject to repurchase agreements
|
|
9,890
|
-
|
|
9,890
|
-
|
|
Other financial assets excluding securities subject to repurchase
agreements
|
31,336
|
1,665
|
|
30,944
|
1,073
|
|
Other financial assets
|
|
41,226
|
1,665
|
|
40,834
|
1,073
|
|
Investment in group undertakings
|
|
-
|
-
|
|
2,466
|
2,546
|
|
Other assets
|
|
7,168
|
29,333
|
|
4,993
|
2,598
|
|
Total assets
|
|
309,938
|
340,843
|
|
301,624
|
259,717
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Bank deposits
|
|
17,563
|
20,544
|
|
17,557
|
20,528
|
|
Customer deposits
|
|
237,770
|
226,423
|
|
204,279
|
194,055
|
|
Amounts due to holding companies and fellow
subsidiaries
|
|
22,542
|
44,599
|
|
50,958
|
23,311
|
|
Derivatives
|
|
779
|
3,178
|
|
1,185
|
3,117
|
|
Other financial liabilities
|
|
6,497
|
575
|
|
5,889
|
139
|
|
Subordinated liabilities
|
|
1,275
|
1,240
|
|
1,267
|
1,231
|
|
Other liabilities
|
|
3,638
|
27,917
|
|
2,213
|
1,981
|
|
Total liabilities
|
|
290,064
|
324,476
|
|
283,348
|
244,362
|
|
|
|
|
|
|
|
|
|
Owners' equity
|
|
19,867
|
16,286
|
|
18,276
|
15,355
|
|
Non-controlling interests
|
|
7
|
81
|
|
-
|
-
|
|
Total equity
|
|
19,874
|
16,367
|
|
18,276
|
15,355
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity
|
|
309,938
|
340,843
|
|
301,624
|
259,717
|
|
|
|
|
|
|
|
|
Owners' equity of the Bank as at 31 December 2018 includes the
profit for the year of £1,611 million (2017 - £26
million).
Statement of changes in equity for the year ended 31 December
2018
|
|
Group
|
|
Bank
|
|
|
2018
|
2017
|
|
2018
|
2017
|
|
£m
|
£m
|
|
£m
|
£m
|
|
Called-up share capital - at 1 January and 31 December
|
1,678
|
1,678
|
|
1,678
|
1,678
|
|
|
|
|
|
|
|
|
Paid-in equity at 1 January
|
-
|
-
|
|
-
|
-
|
|
Securities issued during the year (1)
|
2,370
|
-
|
|
2,370
|
-
|
|
At end of period
|
2,370
|
-
|
|
2,370
|
-
|
|
|
|
|
|
|
|
|
Share premium - at 1 January and 31 December
|
2,225
|
2,225
|
|
2,225
|
2,225
|
|
|
|
|
|
|
|
|
Merger reserve - at 1 January
|
-
|
-
|
|
-
|
-
|
|
Transfer from fellow subsidiary (2)
|
|
|
|
|
|
|
- gross
|
473
|
-
|
|
(460)
|
-
|
|
- tax
|
124
|
-
|
|
124
|
-
|
|
Amortisation
|
(185)
|
-
|
|
42
|
-
|
|
At 31 December
|
412
|
-
|
|
(294)
|
-
|
|
|
|
|
|
|
|
|
FVOCI reserve - at 1 January (3)
|
(5)
|
307
|
|
1
|
1
|
|
Implementation of IFRS 9 on 1 January 2018
|
46
|
-
|
|
-
|
-
|
|
Unrealised (losses)/gains
|
(85)
|
128
|
|
(86)
|
-
|
|
Realised gains
|
(74)
|
(440)
|
|
(34)
|
-
|
|
Tax
|
32
|
-
|
|
32
|
-
|
|
Transfer from fellow subsidiary (2)
|
|
|
|
|
|
|
- gross
|
460
|
-
|
|
460
|
-
|
|
- tax
|
(124)
|
-
|
|
(124)
|
-
|
|
At 31 December
|
250
|
(5)
|
|
249
|
1
|
|
|
|
|
|
|
|
|
Cash flow hedging reserve - at 1 January
|
-
|
-
|
|
-
|
-
|
|
Amount recognised in equity
|
-
|
-
|
|
-
|
(55)
|
|
Amount transferred from equity to earnings
|
-
|
-
|
|
-
|
55
|
|
At 31 December
|
-
|
-
|
|
-
|
-
|
|
|
|
|
|
|
|
|
Foreign exchange reserve - at 1 January
|
826
|
1,626
|
|
(10)
|
(10)
|
|
Retranslation of net assets
|
45
|
(35)
|
|
2
|
-
|
|
Foreign currency losses on hedges of net assets
|
(9)
|
(77)
|
|
-
|
-
|
|
Tax
|
-
|
5
|
|
-
|
-
|
|
Recycled to profit or loss on transfer of businesses
|
(847)
|
(693)
|
|
(5)
|
-
|
|
At 31 December (4)
|
15
|
826
|
|
(13)
|
(10)
|
|
|
|
|
|
|
|
|
Capital redemption reserve - at 1 January
|
796
|
647
|
|
796
|
647
|
|
Redemption of debt preference shares
|
-
|
149
|
|
-
|
149
|
|
At 31 December
|
796
|
796
|
|
796
|
796
|
|
|
|
|
|
|
|
|
Retained earnings - at 1 January
|
10,766
|
9,097
|
|
10,665
|
10,756
|
|
Implementation of IFRS 9 on 1 January 2018 (3)
|
(317)
|
-
|
|
(270)
|
-
|
|
Profit/(loss) attributable to ordinary shareholders
|
|
|
|
|
|
|
- continuing operations
|
2,622
|
2,700
|
|
1,500
|
26
|
|
- discontinued operations
|
(3)
|
(635)
|
|
-
|
-
|
|
Tax on paid-in equity dividends
|
30
|
-
|
|
30
|
-
|
|
Distribution of subsidiary (5)
|
(902)
|
-
|
|
(292)
|
-
|
|
Redemption of debt preference shares
|
-
|
(157)
|
|
-
|
(157)
|
|
Capital contribution (6)
|
1,200
|
51
|
|
1,200
|
51
|
|
Realised losses in period on FVOCI equity shares
|
(6)
|
-
|
|
-
|
-
|
|
Remeasurement of the retirement benefit schemes
|
|
|
|
|
|
|
- contribution in preparation for
ring-fencing (6)
|
(2,000)
|
-
|
|
(2,000)
|
-
|
|
- other movements
|
47
|
(22)
|
|
(25)
|
(19)
|
|
- tax
|
530
|
8
|
|
530
|
8
|
|
Share-based payments
|
(31)
|
-
|
|
(31)
|
-
|
|
Amortisation of merger reserve
|
185
|
-
|
|
(42)
|
-
|
|
Loss on transfer of fellow subsidiary (7)
|
-
|
(276)
|
|
-
|
-
|
|
At 31 December
|
12,121
|
10,766
|
|
11,265
|
10,665
|
|
|
|
|
|
|
|
|
Owners' equity at 31 December
|
19,867
|
16,286
|
|
18,276
|
15,355
|
|
|
|
|
|
|
|
Statement of changes in equity for the year ended 31 December
2018
|
|
Group
|
|
Bank
|
|
|
2018
|
2017
|
|
2018
|
2017
|
|
£m
|
£m
|
|
£m
|
£m
|
|
|
|
|
|
|
|
|
Non-controlling interests - at 1 January
|
81
|
420
|
|
-
|
-
|
|
Currency translation adjustments and other movements
|
(1)
|
-
|
|
-
|
-
|
|
Profit attributable to non-controlling interests
|
6
|
4
|
|
-
|
-
|
|
Dividends paid
|
(5)
|
(5)
|
|
-
|
-
|
|
Acquisition of business
|
-
|
8
|
|
-
|
-
|
|
Equity withdrawn and disposals (5,8)
|
(74)
|
(346)
|
|
-
|
-
|
|
At 31 December
|
7
|
81
|
|
-
|
-
|
|
|
|
|
|
|
|
|
Total equity at 31 December
|
19,874
|
16,367
|
|
18,276
|
15,355
|
|
|
|
|
|
|
|
|
Total equity is attributable to:
|
|
|
|
|
|
|
Ordinary shareholders
|
17,497
|
16,286
|
|
15,906
|
15,355
|
|
Paid-in equity holders
|
2,370
|
-
|
|
2,370
|
-
|
|
Non-controlling interests
|
7
|
81
|
|
-
|
|
|
|
19,874
|
16,367
|
|
18,276
|
15,355
|
Notes:
(1) AT1 capital notes totalling £2.4
billion issued in April 2018 in preparation for
ring-fencing.
(2) During 2018 the RBS Treasury and shared
service activities transferred to the Bank from NWM Plc at net
asset value. As described in accounting policy 3, the assets,
liabilities and IFRS reserves were recognised at inherited values.
The difference has been recognised in the merger
reserve.
(3) Refer to Note 10 of this document for
further information on the impact of IFRS 9 on classification and
basis of preparation, year ended 31 December 2018 prepared under
IFRS 9 and prior years under IAS 39.
(4) The hedging element of the foreign
exchange reserve relates to continuing hedges.
(5) On 2 March 2018, in preparation for
ring-fencing, NatWest Group Holdings Corp, parent of NatWest
Markets Securities Inc., was distributed to NatWest Markets
Plc.
(6) On 17 April 2018 the RBS Group agreed a
Memorandum of Understanding (MoU) with the Trustees of the RBS
Group Pension Fund in connection with the requirements of
ring-fencing. NatWest Markets Plc cannot continue to be a
participant in the Main section and separate arrangements are
required for its employees and agreed to contribute £1.2
billion to the ring-fenced bank. Under the MoU NatWest made a
contribution of £2 billion on 9 October 2018 to strengthen
funding of the Main section in recognition of the changes in
covenant.
(7) Loss in 2017 relates to the legal entity
transfer of Lombard North Central Plc in preparation for
ring-fencing.
(8) Ulster Bank (Ireland) Holdings Unlimited
Company was sold to NatWest Holdings Limited on 1 January 2017 in
preparation for ring-fencing under ICB.
Cash flow statement for the year ended 31 December
2018
|
|
|
Group
|
|
Bank
|
|
|
|
2018
|
2017
|
|
2018
|
2017
|
|
£m
|
£m
|
|
£m
|
£m
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
Operating profit before tax from continuing operations
|
|
3,510
|
3,516
|
|
2,238
|
665
|
|
Loss before tax from discontinued operations
|
|
(3)
|
(642)
|
|
-
|
-
|
|
Interest on subordinated liabilities
|
|
177
|
218
|
|
175
|
55
|
|
Impairment losses on loans to banks and customers
|
|
(232)
|
(224)
|
|
(278)
|
(215)
|
|
(Profit)/loss on sale of subsidiaries and associates
|
|
(7)
|
420
|
|
-
|
67
|
|
Profit on sale of securities
|
|
(32)
|
(440)
|
|
(36)
|
-
|
|
Defined benefit pension schemes
|
|
(1,959)
|
(26)
|
|
(2,025)
|
(17)
|
|
Provisions: expenditure in excess of charges
|
|
(579)
|
(3,238)
|
|
(500)
|
(340)
|
|
Depreciation, amortisation and impairment of property,
plant,
|
|
|
|
|
|
|
|
equipment, goodwill and intangibles
|
|
494
|
164
|
|
399
|
107
|
|
Write back of investment in subsidiaries
|
|
-
|
-
|
|
481
|
7,838
|
|
Elimination of foreign exchange differences
|
|
(642)
|
22
|
|
(654)
|
79
|
|
Other non-cash items
|
|
(86)
|
(908)
|
|
(2,015)
|
65
|
|
Net cash inflow/(outflow) from trading activities
|
|
595
|
(1,138)
|
|
(2,215)
|
8,304
|
|
Decrease/(increase) in net loans to banks and
customers
|
|
5,328
|
(16,894)
|
|
(33,284)
|
(13,777)
|
|
(Increase)/decrease in securities
|
|
(232)
|
4,112
|
|
-
|
7
|
|
(Increase)/decrease in other assets
|
|
(6,466)
|
(7,631)
|
|
417
|
(162)
|
|
(Increase)/decrease in derivative assets and
liabilities
|
|
(855)
|
112
|
|
(750)
|
(16)
|
|
(Decrease)/increase in settlement balance assets and liabilities
and short positions
|
|
-
|
(573)
|
|
-
|
33
|
|
(Decrease)/increase in banks and customers deposits
|
|
(18,585)
|
19,085
|
|
29,925
|
31,916
|
|
Increase in debt securities in issue
|
|
2,349
|
95
|
|
2,102
|
-
|
|
Increase/(decrease) in other liabilities
|
|
3,784
|
18,485
|
|
(122)
|
12
|
|
Changes in operating assets and liabilities
|
|
(14,677)
|
16,791
|
|
(1,712)
|
18,013
|
|
Income taxes paid
|
|
(360)
|
(190)
|
|
(108)
|
(35)
|
|
Net cash flows from operating activities (1)
|
|
(14,442)
|
15,463
|
|
(4,035)
|
26,282
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
Sale and maturity of securities
|
|
6,171
|
469
|
|
5,742
|
3
|
|
Purchase of securities
|
|
(3,219)
|
(1,567)
|
|
(2,791)
|
(1,064)
|
|
Sale of property, plant and equipment
|
|
288
|
319
|
|
59
|
81
|
|
Purchase of property, plant and equipment
|
|
(516)
|
(283)
|
|
(262)
|
(65)
|
|
Net investment in business interests and intangible
assets
|
|
(36,949)
|
5,543
|
|
(33,651)
|
(3,622)
|
|
Net cash flows from investing activities
|
|
(34,225)
|
4,481
|
|
(30,903)
|
(4,667)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
Issue of other equity instruments: Additional Tier 1 capital
notes
|
|
2,370
|
-
|
|
2,370
|
-
|
|
Issue of subordinated liabilities
|
|
1,531
|
507
|
|
1,486
|
-
|
|
Capital contribution
|
|
1,200
|
51
|
|
1,200
|
51
|
|
Redemption of non-controlling interests
|
|
-
|
(346)
|
|
-
|
-
|
|
Redemption of subordinated liabilities
|
|
(3,000)
|
(936)
|
|
(3,000)
|
-
|
|
Redemption of preference shares
|
|
-
|
(178)
|
|
-
|
(178)
|
|
Service cost of other equity instruments
|
|
(116)
|
(5)
|
|
(111)
|
-
|
|
Interest on subordinated liabilities
|
|
(182)
|
(222)
|
|
(179)
|
(57)
|
|
Net cash flows from financing activities
|
|
1,803
|
(1,129)
|
|
1,766
|
(184)
|
|
Effects of exchange rate changes on cash and cash
equivalents
|
|
241
|
(639)
|
|
220
|
(138)
|
|
|
|
|
|
|
|
|
|
Net (decrease)/increase in cash and cash equivalents
|
|
(46,623)
|
18,176
|
|
(32,952)
|
21,293
|
|
Cash and cash equivalents at 1 January
|
|
97,940
|
79,764
|
|
82,444
|
61,151
|
|
Cash and cash equivalents at 31 December
|
|
51,317
|
97,940
|
|
49,492
|
82,444
|
|
|
|
|
|
|
|
|
Note:
(1)
Includes interest received for Group of £6,637 million (2017 -
£6,263 million) and interest paid of £1,083 million (2017
- £798 million), and for Bank interest received of £5,866
million (2017 - £5,154 million) and interest paid of
£1,165 million (2017 - £567 million).
Notes on the accounts
1 Basis of Preparation
The Group's consolidated financial statements should be read in
conjunction with the 2018 Annual Report and Accounts which were
prepared in accordance with International Financial Reporting
Standards issued by the International Accounting Standards Board
(IASB) and interpretations issued by the IFRS Interpretations
Committee of the IASB as adopted by the European Union (EU)
(together IFRS).
Going concern
Having reviewed the Group's forecasts, projections and other
relevant evidence, the directors have a reasonable expectation that
the Group will continue in operational existence for the
foreseeable future. Accordingly, the results for the year ended 31
December 2018 have been prepared on a going concern
basis.
2 Acquisitions
Acquisitions
As part of the preparations for ring-fencing that takes effect from
1 January 2019, the Group acquired the RBS Group Treasury and other
business during 2018 for a consideration of net asset value. In
accordance with RBS Group policy, the Group paid book value and
recognised the assets and liabilities at inherited values.
Inherited values were those recognised by RBS Group and included
the accounting history since initial recognition by RBS Group. It
also included the inheritance of the IFRS reserve of £480
million in respect of instruments recognised at fair value through
other comprehensive income. The merger reserve arising as a result
of the transfers will be transferred to retained earnings as the
underlying instruments are released.
3 Accounting Policies
Principle accounting policies
The Group's principle accounting policies are set out on pages 77
to 81 of the 2018 Annual Report and Accounts.
The Group's accounting policies have significantly changed on the
adoption of IFRS 9 'Financial Instruments' with effect from 1
January 2018. Prior years are re-presented but there has been no
restatement of prior year data.
Other amendments to IFRS effective for 2018 include IFRS 2
'Share-based payments' and IAS 40 'Investment Property', neither of
which have had a material effect on the Group's financial
statements; and IFRS 15 'Revenue from Contracts with Customers,
which has had no effect on financial information reported in the
current or comparative periods.
Critical accounting policies and key sources of estimation
uncertainty
The judgements and assumptions that are considered to be the most
important to the portrayal of the Group's financial conditions are
those relating to fair value; financial instruments, loan
impairment provisions, goodwill, provisions for liabilities and
charges and deferred tax. These critical accounting policies and
judgements are described on pages 77 to 81 of the 2018 Annual
Report and Accounts.
|
|
|
|
|
4 Operating expenses
|
|
|
|
2018
|
2017
|
|
|
£m
|
£m
|
|
Wages, salaries and other staff costs (1)
|
1,735
|
647
|
|
Social security costs
|
168
|
52
|
|
Pension costs
|
281
|
145
|
|
Staff costs
|
2,184
|
844
|
|
|
|
|
|
Premises and equipment
|
757
|
273
|
|
Depreciation and amortisation
|
521
|
282
|
|
Other administrative expenses
|
2,119
|
2,921
|
|
Administrative expenses
|
3,397
|
3,476
|
|
|
|
|
|
Write down of other intangible assets ( see Note 18 of the 2018
Annual Report and Accounts)
|
13
|
-
|
|
|
5,594
|
4,320
|
Notes:
(1)
The increase in 2018 compared to 2017 mainly includes the impact of
the Group becoming the provider of shared services to the RBS Group
Q2 2018 in preparation for ring-fencing, direct costs incurred are
recovered through legal entity recharging and recorded in Other
income. For the period before the transfer the Group was a net
receiver of shared services from NatWest Markets Plc.
(2)
Includes litigation and conduct costs. Further details are provided
in Note 8 of this document.
Notes on the accounts
5 Segmental analysis
Reportable operating segments
The reportable operating segments are as follows:
Personal & Business Banking (PBB) comprises one reportable segment, UK Personal
& Business Banking (UK PBB). UK PBB serves individuals and mass
affluent customers in the UK together with small businesses
(generally up to £2 million turnover). UK PBB includes Ulster
Bank customers in Northern Ireland.
Commercial & Private Banking (CPB) comprises two reportable segments, Commercial
Banking and Private Banking. Commercial Banking serves commercial
and corporate customers in the UK and Western Europe. Private
Banking serves UK connected high net worth
individuals.
Central items & other includes corporate functions, such as RBS
Treasury, finance, risk management, compliance, legal,
communications and human resources. Central functions manages RBS
Group capital resources and RBS Group-wide regulatory projects and
provides services to the reportable segments. Balances in relation
to legacy litigation issues and the business are included in
Central items in the relevant periods.
|
2018
|
|
|
Net
|
Net fees
|
Other non-
|
|
|
Depreciation
|
Impairment
|
|
|
interest
|
and
|
interest
|
Total
|
Operating
|
and
|
(losses)/
|
Operating
|
|
income
|
commissions
|
income
|
income
|
expenses
|
amortisation
|
releases
|
profit
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
UK Personal & Business Banking
|
3,773
|
793
|
185
|
4,751
|
(2,721)
|
-
|
(251)
|
1,779
|
|
Commercial Banking
|
1,605
|
655
|
241
|
2,501
|
(1,310)
|
(122)
|
(204)
|
865
|
|
Private Banking
|
444
|
213
|
27
|
684
|
(451)
|
(2)
|
8
|
239
|
|
Commercial & Private Banking
|
2,049
|
868
|
268
|
3,185
|
(1,761)
|
(124)
|
(196)
|
1,104
|
|
Central items & other
|
(8)
|
(10)
|
1,614
|
1,596
|
(591)
|
(397)
|
19
|
627
|
|
Total
|
5,814
|
1,651
|
2,067
|
9,532
|
(5,073)
|
(521)
|
(428)
|
3,510
|
|
2017
|
|
|
|
|
|
|
|
|
|
UK Personal & Business Banking
|
3,721
|
802
|
(28)
|
4,495
|
(2,490)
|
-
|
(186)
|
1,819
|
|
Commercial Banking
|
1,566
|
603
|
228
|
2,397
|
(888)
|
(152)
|
(119)
|
1,238
|
|
Private Banking
|
386
|
159
|
25
|
570
|
(388)
|
-
|
(5)
|
177
|
|
Commercial & Private Banking
|
1,952
|
762
|
253
|
2,967
|
(1,276)
|
(152)
|
(124)
|
1,415
|
|
Central items & other
|
(192)
|
(9)
|
886
|
685
|
(272)
|
(130)
|
(1)
|
282
|
|
Total
|
5,481
|
1,555
|
1,111
|
8,147
|
(4,038)
|
(282)
|
(311)
|
3,516
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
Total revenue
|
|
Inter
|
|
|
|
Inter
|
|
|
External
|
segment
|
Total
|
External
|
segment
|
Total
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
UK Personal & Business Banking
|
5,511
|
66
|
5,577
|
|
5,291
|
-
|
5,291
|
|
Commercial Banking
|
2,525
|
46
|
2,571
|
|
2,313
|
24
|
2,337
|
|
Private Banking
|
645
|
181
|
826
|
|
647
|
20
|
667
|
|
Commercial & Private Banking
|
3,170
|
227
|
3,397
|
|
2,960
|
44
|
3,004
|
|
Central items & other
|
2,467
|
(293)
|
2,174
|
|
1,185
|
(44)
|
1,141
|
|
Total
|
11,148
|
-
|
11,148
|
|
9,436
|
-
|
9,436
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
|
|
Inter
|
|
|
|
Inter
|
|
|
|
External
|
segment
|
Total
|
External
|
segment
|
Total
|
|
Total income
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
UK Personal & Business Banking
|
4,699
|
52
|
4,751
|
|
4,493
|
2
|
4,495
|
|
Commercial Banking
|
2,731
|
(230)
|
2,501
|
|
2,455
|
(58)
|
2,397
|
|
Private Banking
|
556
|
128
|
684
|
|
573
|
(3)
|
570
|
|
Commercial & Private Banking
|
3,287
|
(102)
|
3,185
|
|
3,028
|
(61)
|
2,967
|
|
Central items & other
|
1,546
|
50
|
1,596
|
|
626
|
59
|
685
|
|
Total
|
9,532
|
-
|
9,532
|
|
8,147
|
-
|
8,147
|
|
|
|
|
|
|
|
|
|
Notes on the
accounts
5 Segmental analysis continued
|
Analysis of net fees and commissions
|
UK
|
Commercial
|
Private
|
Central items
|
|
|
|
PBB
|
Banking
|
Banking
|
& other
|
Total
|
|
2018
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
Fees and commissions receivable
|
|
|
|
|
|
|
- Payment services
|
343
|
257
|
31
|
-
|
631
|
|
- Credit and debit card fees
|
361
|
63
|
12
|
-
|
436
|
|
- Lending (credit facilities)
|
379
|
195
|
2
|
-
|
576
|
|
- Brokerage
|
48
|
-
|
5
|
-
|
53
|
|
- Investment management, trustee and fiduciary
services
|
42
|
26
|
179
|
-
|
247
|
|
- Trade finance
|
-
|
101
|
1
|
-
|
102
|
|
- Underwriting fees
|
20
|
1
|
-
|
-
|
21
|
|
- Other
|
8
|
43
|
15
|
(19)
|
47
|
|
Total
|
1,201
|
686
|
245
|
(19)
|
2,113
|
|
Fees and commissions payable
|
(408)
|
(31)
|
(32)
|
9
|
(462)
|
|
Net fees and commissions
|
793
|
655
|
213
|
(10)
|
1,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
Fees and commissions receivable
|
|
|
|
|
|
|
- Payment services
|
316
|
243
|
34
|
-
|
593
|
|
- Credit and debit card fees
|
397
|
66
|
12
|
-
|
475
|
|
- Lending (credit facilities)
|
401
|
134
|
2
|
-
|
537
|
|
- Brokerage
|
48
|
-
|
4
|
-
|
52
|
|
- Investment management, trustee and fiduciary
services
|
65
|
35
|
118
|
-
|
218
|
|
- Trade finance
|
-
|
135
|
1
|
-
|
136
|
|
- Other
|
4
|
21
|
15
|
3
|
43
|
|
Total
|
1,231
|
634
|
186
|
3
|
2,054
|
|
Fees and commissions payable
|
(429)
|
(31)
|
(27)
|
(12)
|
(499)
|
|
Net fees and commissions
|
802
|
603
|
159
|
(9)
|
1,555
|
|
|
2018
|
|
2017
|
|
|
|
|
Cost to acquire
|
|
|
|
Cost to acquire
|
|
|
|
|
fixed assets
|
|
|
fixed assets
|
|
|
|
|
and intangible
|
|
|
and intangible
|
|
Assets
|
Liabilities
|
assets
|
Assets
|
Liabilities
|
assets
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
UK Personal & Business Banking
|
137,017
|
141,108
|
-
|
|
133,688
|
140,505
|
-
|
|
Commercial Banking
|
65,500
|
76,537
|
277
|
|
59,870
|
87,787
|
208
|
|
Private Banking
|
14,110
|
26,626
|
11
|
|
29,244
|
28,115
|
-
|
|
Commercial & Private Banking
|
79,610
|
103,163
|
288
|
|
89,114
|
115,902
|
208
|
|
Central items & other
|
93,311
|
45,793
|
539
|
|
118,041
|
68,069
|
92
|
|
Total
|
309,938
|
290,064
|
827
|
|
340,843
|
324,476
|
300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes on the accounts
|
|
|
|
|
6 Tax
|
|
|
|
2018
|
2017
|
|
|
£m
|
£m
|
|
Current tax
|
|
|
|
Charge for the year
|
(758)
|
(781)
|
|
(Under)/over provision in respect of prior years
|
(63)
|
19
|
|
|
(821)
|
(762)
|
|
Deferred tax
|
|
|
|
Credit/(charge) for the year
|
18
|
(12)
|
|
Increase in the carrying value of deferred tax assets
|
7
|
-
|
|
Over/(under) provision in respect of prior years
|
25
|
(38)
|
|
Tax charge for the year
|
(771)
|
(812)
|
|
|
|
|
The actual tax charge differs from the expected tax charge computed
by applying the standard rate of UK corporation tax of 19% (2017 -
19.25%) as follows:
|
|
2018
|
2017
|
|
|
£m
|
£m
|
|
Expected tax charge
|
(667)
|
(677)
|
|
Losses and temporary differences in year where no deferred tax
asset recognised
|
(13)
|
(2)
|
|
Foreign profits taxed at other rates
|
(7)
|
(2)
|
|
UK tax rate change impact (1)
|
(5)
|
-
|
|
Items not allowed for tax
|
|
|
|
- losses on disposal and write-downs
|
(24)
|
(77)
|
|
- UK bank levy
|
(20)
|
-
|
|
- regulatory and legal actions
|
(18)
|
(29)
|
|
- other disallowable items
|
(27)
|
(31)
|
|
Non-taxable items (2)
|
243
|
228
|
|
Taxable foreign exchange movements
|
-
|
3
|
|
Losses brought forward and utilised
|
-
|
3
|
|
Increase carrying value of deferred tax assets in respect
of:
|
|
|
|
- UK losses
|
7
|
-
|
|
Banking surcharge
|
(202)
|
(209)
|
|
Adjustments in respect of prior years (3)
|
(38)
|
(19)
|
|
Actual tax charge
|
(771)
|
(812)
|
Notes:
(1)
In recent years, the UK government has steadily reduced the rate of
UK corporation tax, with the latest enacted rates standing at 19%
with effect from 1 April 2017 and 17% from 1 April
2020.
(2)
Principally relates to non-taxable transfers to the wider RBS
Group, under UK ring- fencing regime restructuring.
(3) Prior year
tax adjustments incorporate refinements to tax computations made on
submission and agreement with the tax authorities. Current taxation
balances include provisions in respect of uncertain tax positions,
in particular in relation to restructuring and other costs where
the taxation treatment remains subject to agreement with the
relevant tax authorities.
Judgment: Tax contingencies
The Group's income tax charge and its provisions for income taxes
necessarily involves a significant degree of estimation and
judgement. The tax treatment of some transactions is uncertain and
tax computations are yet to be agreed with the tax authorities in a
number of jurisdictions. The Group recognises anticipated tax
liabilities based on all available evidence and, where appropriate,
in the light of external advice. Any difference between the final
outcome and the amounts provided will affect current and deferred
income tax assets and charges in the period when the matter is
resolved.
Notes on the accounts
7 Loan impairment provisions
Loan exposure and impairment metrics
The table below summarises loans and related credit impairment
measures on an IFRS 9 basis at 31 December 2018 and 1 January 2018
and on an IAS 39 basis at 31 December 2017.
|
|
31 December
|
1 January
|
31 December
|
|
|
2018
|
2018
|
2017
|
|
|
£m
|
£m
|
£m
|
|
Loans - amortised cost
|
|
|
|
|
Stage 1
|
191,478
|
178,078
|
|
|
Stage 2
|
16,732
|
14,288
|
|
|
Stage 3
|
3,005
|
2,605
|
|
|
Inter-Group
|
5,046
|
77,772
|
|
|
|
216,261
|
272,743
|
193,801
|
|
ECL provisions (1)
|
|
|
|
|
- Stage 1
|
179
|
150
|
|
|
- Stage 2
|
449
|
323
|
|
|
- Stage 3
|
1,043
|
1,293
|
|
|
- Inter-Group
|
1
|
17
|
|
|
|
1,672
|
1,783
|
1,439
|
|
ECL provision coverage (2,3)
|
|
|
|
|
- Stage 1 %
|
0.09
|
0.08
|
|
|
- Stage 2 %
|
2.68
|
2.26
|
|
|
- Stage 3 %
|
34.71
|
49.63
|
|
|
- Inter-Group
|
0.01
|
0.02
|
|
|
|
0.77
|
0.91
|
0.74
|
|
ECL charge (4)
|
|
|
|
|
- Third party
|
445
|
|
|
|
- Inter-Group
|
(17)
|
|
|
|
|
428
|
|
311
|
|
Impairment losses
|
|
|
|
|
ECL loss rate - annualised (basis points)
|
21.07
|
|
16.05
|
|
Amounts written off
|
612
|
|
577
|
Notes:
(1)
ECL provisions in the above table are provisions on loan assets
only. Other ECL provisions, not included above, relate to cash,
debt securities and contingent liabilities, and amount to £7
million, of which FVOCI is £2 million.
(2)
ECL provisions coverage is ECL provisions divided by loans -
amortised cost.
(3)
ECL provisions coverage and ECL loss rates are calculated on third
party loans and related ECL provision and charge
respectively.
(4)
ECL charge balances include a £2 millions charge relating to
other financial assets, of which £2 million charge relates to
assets at FVOCI, and £17 million release relating to
contingent liabilities.
Credit risk enhancement and mitigation
For information on credit risk enhancement and mitigation, refer to
capital and risk management - credit risk on page 40 of the 2018
Annual Report and Accounts.
Critical accounting policy: Loan impairment provisions
The Group's 2017 loan impairment provisions were established in
accordance with IAS 39 in respect of incurred losses. They
comprised individual and collective components as more fully
explained in the 2017 Annual Report and Accounts. In 2018 the loan
impairment provisions have been established in accordance with IFRS
9. Accounting policy 16 sets out how the expected loss approach is
applied. At 31 December 2018, customer loan impairment provisions
amounted to £1,672 million (2017 - £1,439 million). A
loan is impaired when there is objective evidence that the cash
flows will not occur in the manner expected when the loan was
advanced.
Such evidence includes changes in the credit rating of a borrower,
the failure to make payments in accordance with the loan agreement;
significant reduction in the value of any security; breach of
limits or covenants; and observable data about relevant
macroeconomic measures.
The impairment loss is the difference between the carrying value of
the loan and the present value of estimated future cash flows at
the loan's original effective interest rate.
The measurement of credit impairment under the IFRS expected loss
model depends on management's assessment of any potential
deterioration in the creditworthiness of the borrower, its
modelling of expected performance and the application of economic
forecasts. All three elements require judgments that are
potentially significant to the estimate of impairment losses.
Further information and sensitivity analysis in accordance with
IFRS 7 are on page 33 of the 2018 Annual Report and
Accounts.
Notes on the
accounts
7 Loan impairment provisions continued
IFRS 9 ECL model design principles
To meet IFRS 9 requirements for ECL estimation, PD, LGD and EAD
used in the calculations must be:
●
Unbiased - material regulatory
conservatism has been removed to produce unbiased model
estimates;
●
Point-in-time - recognise current
economic conditions;
●
Forward-looking - incorporated
into PD estimates and, where appropriate, EAD and LGD estimates;
and
●
For the
life of the loan - all models produce a term structure to allow a
lifetime calculation for assets in Stage 2 and Stage
3.
IFRS 9 requires that at each reporting date, an entity shall assess
whether the credit risk on an account has increased significantly
since initial recognition. Part of this assessment requires a
comparison to be made between the current lifetime PD (i.e. the
current probability of default over the remaining lifetime) with
the equivalent lifetime PD as determined at the date of initial
recognition.
The general approach for the IFRS 9 LGD models has been to leverage
the Basel LGD models with bespoke IFRS 9 adjustments to ensure
unbiased estimates, i.e. use of effective interest rate as the
discount rate and the removal of: downturn calibration, indirect
costs, other conservatism and regulatory floors. For Wholesale,
while conversion ratios in the historical data show temporal
variations, these cannot (unlike in the case of PD and some LGD
models) be sufficiently explained by the CCI measure and are
presumed to be driven to a larger extent by exposure management
practices. Therefore point-in-time best estimates measures for EAD
are derived by estimating the regulatory model specification on a
rolling five year window.
Approach for multiple economic scenarios (MES)
The base scenario plays a greater part in the calculation of ECL
than the approach to MES.
8 Provisions for liabilities and charges
|
|
Group
|
|
|
|
|
|
|
|
Provisions for liabilities and charges
|
Payment
|
Other
|
Litigation and
|
|
Total
|
|
protection
|
customer
|
other
|
|
|
insurance
|
redress
|
regulatory
|
Other (2)
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
At 1 January 2018
|
632
|
386
|
65
|
315
|
1,398
|
|
Implementation of IFRS 9 on 1 January 2018 (1)
|
-
|
-
|
-
|
44
|
44
|
|
ECL impairment charge
|
-
|
-
|
-
|
(7)
|
(7)
|
|
Transfer from accruals and other liabilities
|
-
|
3
|
-
|
-
|
3
|
|
Currency translation and other movements
|
-
|
-
|
-
|
9
|
9
|
|
Transfers in preparation for ring-fencing
|
-
|
(9)
|
(20)
|
304
|
275
|
|
Charge to income statement
|
125
|
92
|
6
|
167
|
390
|
|
Releases to income statement
|
(17)
|
(59)
|
(5)
|
(133)
|
(214)
|
|
Provisions utilised
|
(329)
|
(197)
|
(8)
|
(221)
|
(755)
|
|
At 31 December 2018
|
411
|
216
|
38
|
478
|
1,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank
|
|
|
|
|
|
|
|
|
Payment
|
Other
|
Litigation
|
|
Total
|
|
|
protection
|
customer
|
and other
|
Property
|
|
|
insurance
|
redress
|
regulatory
|
and other (2)
|
|
Provisions for liabilities and charges
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
At 1 January 2018
|
622
|
326
|
2
|
242
|
1,192
|
|
Implementation of IFRS 9 on 1 January 2018 (1)
|
-
|
-
|
-
|
40
|
40
|
|
ECL impairment charge
|
-
|
-
|
-
|
(6)
|
(6)
|
|
Transfer from accruals and other liabilities
|
-
|
4
|
-
|
-
|
4
|
|
Transfers in preparation for ring-fencing
|
-
|
(10)
|
-
|
325
|
315
|
|
Charge to income statement
|
124
|
86
|
1
|
160
|
371
|
|
Releases to income statement
|
(17)
|
(25)
|
-
|
(128)
|
(170)
|
|
Provisions utilised
|
(324)
|
(184)
|
(3)
|
(190)
|
(701)
|
|
At 31 December 2018
|
405
|
197
|
-
|
443
|
1,045
|
|
|
|
|
|
|
|
Notes:
(1)
Refer to note 35 for further details on the impact of IFRS 9 on
classification and basis of preparation.
(2)
Materially comprises provisions relating to property closures and
restructuring costs.
Payment protection insurance
To reflect the increased volume of complaints following the FCA's
introduction of an August 2019 PPI timebar, as outlined in FCA
announcement CP17/3 and the introduction of new Plevin (unfair
commission) complaint handling rules, the Group increased its
provision for PPI by £125 million in 2018 (2017 - £107
million, 2016 - £362 ,million) bringing the cumulative charge
to £3.2 billion, of which £2.5 billion (78%) in redress
and £0.3 billion in administrative expenses had been paid by
31 December 2018. Of the £3.2 billion cumulative charge,
£2.9 billion relates to redress and £0.3 billion to
administrative expenses. The Bank increased its provision by
£124 million (2017 - £107 million, 2016 - £362
million) bringing the cumulative charge to £3.1 billion, of
which £2.4 billion (77%) in redress and £0.3 billion in
administrative expenses had been paid by 31 December 2018. Of the
£3.1 billion cumulative charge, £2.8 billion relates to
redress and £0.3 billion to administrative
expenses.
Notes on the accounts
8 Provisions for liabilities and charges continued
The principal assumptions underlying the Group's provision in
respect of PPI sales are: assessment of the total number of
complaints that the Group will receive; the proportion of these
that will result in redress; and the average cost of such redress.
The number of complaints has been estimated from an analysis of the
Group's portfolio of PPI policies sold by vintage and by product.
Estimates of the percentage of policyholders that will lodge
complaints (the take up rate) and of the number of these that will
be upheld (the uphold rate) have been established based on recent
experience, guidance in FCA policy statements and the expected rate
of responses from proactive customer contact. The average redress
assumption is based on recent experience and FCA calculation
rules.
The table below shows the sensitivity of the provision to changes
in the principle assumptions (all other assumptions remaining the
same).
|
|
|
Sensitivity
|
|
Assumptions
|
Actual
to
date
|
Future
expected
|
Change
in
assumption
%
|
Consequential
change
in provision
£m
|
|
Customer
initiated complaints (1)
|
1,630k
|
152k
|
+/-5
|
+/-10
|
|
Uphold
rate (2)
|
89%
|
90%
|
+/-1
|
+/-2
|
|
Average
redress (3)
|
£1,664
|
£1,512
|
+/-5
|
+/-10
|
|
Processing
costs per claim (4)
|
£152
|
£151
|
+/- 10k claims
|
+/-1.5
|
Notes:
(1)
Claims received directly by the Group to date, including those
received via CMCs and Plevin (commission) only. Excluding those for
proactive mailings and where no PPI policy exists.
(2)
Average uphold rate per customer initiated claims received directly
by the Group to end of timebar for both PPI (mis-sale) and Plevin
(commission), excluding those for which no PPI policy
exists.
(3)
Average redress for PPI (mis-sale) and Plevin (commission)
pay-outs.
(4)
Processing costs per claim on a valid complaints basis, includes
direct staff costs and associated overhead - excluding FOS
fees.
Critical accounting policy: Provisions for liabilities
Judgment is involved in determining whether an obligation exists,
and in estimating the probability, timing and amount of any
outflows. Where the Group can look to another party such as an
insurer to pay some or all of the expenditure required to settle a
provision, any reimbursement is recognised when, and only when, it
is virtually certain that it will be received.
Estimates - Provisions are liabilities of uncertain timing
or amount, and are recognised when there is a present obligation as
a result of a past event, the outflow of economic benefit is
probable and the outflow can be estimated reliably. Any difference
between the final outcome and the amounts provided will affect the
reported results in the period when the matter is
resolved.
Background information on all material provisions is given in Note
29.
9 Memorandum items
Contingent liabilities and commitments
The amounts shown in the table below are intended only to provide
an indication of the volume of business outstanding at 31 December
2018. Although the Group is exposed to credit risk in the event of
non-performance of the obligations undertaken by customers, the
amounts shown do not, and are not intended to, provide any
indication of the Group's expectation of future
losses.
|
|
Group
|
|
Bank
|
|
|
2018
|
2017
|
|
2018
|
2017
|
|
|
£m
|
£m
|
|
£m
|
£m
|
|
Contingent liabilities and commitments
|
|
|
|
|
|
|
Guarantees and assets pledged as collateral security
|
901
|
674
|
|
804
|
562
|
|
Other contingent liabilities
|
1,321
|
871
|
|
1,279
|
823
|
|
Standby facilities, credit lines and other commitments
|
71,946
|
53,416
|
|
66,071
|
47,095
|
|
|
74,168
|
54,961
|
|
68,154
|
48,480
|
Note:
(1)
In the normal course of business, the Bank guarantees specified
third party liabilities of certain subsidiaries; it also gives
undertakings that individual subsidiaries will fulfil their
obligations to third parties under contractual or other
arrangements.
Additional contingent liabilities arise in the normal course of the
Group's business. It is not anticipated that any material loss will
arise from these transactions.
Notes on the accounts
9 Memorandum items continued
Trustee and other fiduciary activities
In its capacity as trustee or other fiduciary role, the Group may
hold or place assets on behalf of individuals, trusts, companies,
pension schemes and others. The assets and their income are not
included in the Group's financial statements. The Group earned fee
income of £218 million (2017 - £213 million) from these
activities.
The Financial Services Compensation Scheme
The Financial Services Compensation Scheme (FSCS), the UK's
statutory fund of last resort for customers of authorised financial
services firms, pays compensation if a firm is unable to meet its
obligations. The FSCS funds compensation for customers by raising
management expenses levies and compensation levies on the industry.
In relation to protected deposits, each deposit-taking institution
contributes towards these levies in proportion to their share of
total protected deposits on 31 December of the year preceding the
scheme year (which runs from 1 April to 31 March), subject to
annual maxima set by the Prudential Regulation Authority. In
addition, the FSCS has the power to raise levies on a firm that has
ceased to participate in the scheme and is in the process of
ceasing to be authorised for the costs that it would have been
liable to pay had the FSCS made a levy in the financial year it
ceased to be a participant in the scheme.
The FSCS had borrowed from HM Treasury to fund compensation costs
associated with the failure of Bradford & Bingley, Heritable
Bank, Kaupthing Singer & Friedlander, Landsbanki 'Icesave' and
London Scottish Bank plc. The industry has now repaid all
outstanding loans with the final £4.7 billion being repaid in
June 2018. The loan was interest bearing with the reference rate
being the higher of 12 month LIBOR plus 111 basis points or the
relevant gilt rate for the equivalent cost of borrowing from
HMT.
The Group has accrued £1.4 million for its share of estimated
FSCS levies.
Litigation, investigations and reviews
NatWest and its subsidiary and associated undertakings ("NatWest
Group") are party to legal proceedings and the subject of
investigation and other regulatory and governmental action
('Matters') in the United Kingdom (UK), the United States (US), the
European Union (EU) and other jurisdictions.
NatWest Group recognises a provision for a liability in relation to
these Matters when it is probable that an outflow of economic
benefits will be required to settle an obligation resulting from
past events, and a reliable estimate can be made of the amount of
the obligation.
In many proceedings and investigations, it is not possible to
determine whether any loss is probable or to estimate reliably the
amount of any loss, either as a direct consequence of the relevant
proceedings and investigations or as a result of adverse impacts or
restrictions on NatWest Group's reputation, businesses and
operations. Numerous legal and factual issues may need to be
resolved, including through potentially lengthy discovery and
document production exercises and determination of important
factual matters, and by addressing novel or unsettled legal
questions relevant to the proceedings in question, before a
liability can reasonably be estimated for any claim. NatWest Group
cannot predict if, how, or when such claims will be resolved or
what the eventual settlement, damages, fine, penalty or other
relief, if any, may be, particularly for claims that are at an
early stage in their development or where claimants seek
substantial or indeterminate damages.
There are situations where NatWest Group may pursue an approach
that in some instances leads to a settlement agreement. This may
occur in order to avoid the expense, management distraction or
reputational implications of continuing to contest liability, or in
order to take account of the risks inherent in defending claims or
investigations, even for those Matters for which NatWest Group
believes it has credible defences and should prevail on the
merits.
The uncertainties inherent in all such Matters affect the amount
and timing of any potential outflows for both Matters with respect
to which provisions have been established and other contingent
liabilities. The future outflow of resources in respect of any
Matter may ultimately prove to be substantially greater than or
less than the aggregate provision that NatWest Group has
recognised. Where (and as far as) liability cannot be reasonably
estimated, no provision has been recognised.
Other than those discussed below, NatWest Group is not involved in
governmental, legal or regulatory proceedings (including those
which are pending or threatened) that are expected to be material,
individually or in aggregate. NatWest Group expects that in future
periods, additional provisions, settlement amounts and customer
redress payments will be necessary, in amounts that are expected to
be substantial in some instances.
For a discussion of certain risks associated with NatWest Group's
litigation, investigations and reviews, see the Risk Factor
relating to legal, regulatory and governmental actions and
investigations set out on page 36 of this
document.
Litigation
London Interbank Offered Rate (LIBOR) and other rates
litigation
In January 2019, a class action antitrust complaint was filed in
the United States District Court for the Southern District of New
York alleging that the defendants (USD ICE LIBOR panel banks and
affiliates) have conspired to suppress USD ICE LIBOR from 2014 to
the present by submitting incorrect information to ICE about their
borrowing costs. The RBS Group defendants are NatWest, RBSG,
NatWest Markets Plc, and NatWest Markets Securities
Inc.
US Anti-Terrorism Act litigation
NatWest is defending lawsuits filed in the United States District
Court for the Eastern District of New York by a number of US
nationals (or their estates, survivors, or heirs) who were victims
of terrorist attacks in Israel. The plaintiffs allege that NatWest
is liable for damages arising from those attacks pursuant to the US
Anti-Terrorism Act because NatWest previously maintained bank
accounts and transferred funds for the Palestine Relief &
Development Fund, an organisation which plaintiffs allege solicited
funds for Hamas, the alleged perpetrator of the
attacks.
Notes on the accounts
9 Memorandum items continued
In October 2017, the trial court dismissed claims against NatWest
with respect to two of the 18 terrorist attacks at issue. On
14 March 2018, the trial court granted a request by NatWest for
leave to file a renewed summary judgment motion in respect of the
remaining claims, which has now been filed. No trial date has
been set.
Investigations and reviews
NatWest Group's businesses and financial condition can be affected
by the actions of various governmental and regulatory authorities
in the UK, the US, the EU and elsewhere. NatWest Group and/or RBS
Group has engaged, and will continue to engage, in discussions with
relevant governmental and regulatory authorities, including in the
UK, the US, the EU and elsewhere, on an ongoing and regular basis,
and in response to informal and formal inquiries or investigations,
regarding operational, systems and control evaluations and issues
including those related to compliance with applicable laws and
regulations, including consumer protection, business conduct,
competition/anti-trust, anti-bribery, anti-money laundering and
sanctions regimes.
Any matters discussed or identified during such discussions and
inquiries may result in, among other things, further inquiry or
investigation, other action being taken by governmental and
regulatory authorities, increased costs being incurred by NatWest
Group, remediation of systems and controls, public or private
censure, restriction of NatWest Group's business activities and/or
fines. Any of the events or circumstances mentioned in this
paragraph or below could have a material adverse effect on NatWest
Group, its business, authorisations and licences, reputation,
results of operations or the price of securities issued by
it.
NatWest Group is co-operating fully with the investigations and
reviews described below.
FCA review of RBS Group's treatment of SMEs
In 2014, the FCA appointed an independent Skilled Person under
section 166 of the Financial Services and Markets Act 2000 to
review RBS' Group's treatment of SME customers whose relationship
was managed by RBS Group's Global Restructuring Group (GRG) in the
period 1 January 2008 to 31 December 2013.
The Skilled Person delivered its final report to the FCA during
September 2016, and the FCA published an update in November 2016.
In response, RBS Group announced redress steps for SME customers in
the UK and the Republic of Ireland that were in GRG between 2008
and 2013. These steps were (i) an automatic refund of certain
complex fees; and (ii) a new complaints process, overseen by an
independent third party. The complaints process closed on 22
October 2018 for new complaints in the UK and, with the exception
of a small cohort of potential complainants for whom there is an
extended deadline, on 31 December 2018 for new complaints in the
Republic of Ireland.
RBS Group made a provision of £400 million in 2016, in respect
of the above redress steps, of which £270 million had been
utilised by 31 December 2018. An additional provision of £50
million was taken at 31 December 2018 reflecting the increased
costs of the complaints process.
The FCA published a summary of the Skilled Person's report in
November 2017. The UK House of Commons Treasury Select
Committee, seeking to rely on Parliamentary powers, published the
full version of the Skilled Person's report on 20 February 2018. On
31 July 2018, the FCA confirmed that it had concluded its
investigation and that it does not intend to take disciplinary or
prohibitory action against any person in relation to these matters.
It has subsequently indicated that it will shortly publish a final
summary of its investigative work.
Investment advice review
As a result of an FSA review in 2013, the FCA required RBS Group to
carry out a past business review and customer contact exercise on a
sample of historic customers who received investment advice on
certain lump sum products, during the period from March 2012 until
December 2012. The review was conducted by an independent
Skilled Person under section 166 of the Financial Services and
Markets Act 2000. Redress was paid to certain customers in that
sample group.
RBS Group later agreed with the FCA that it would carry out a wider
review/remediation exercise relating to certain investment,
insurance and pension sales from 1 January 2011 to 1 April 2015.
That exercise is materially complete. Phase 2 (covering sales in
2010) started in April 2018 and was targeted for completion by the
end of 2018, however the deadline has now been extended to April
2019.
In addition, RBS Group agreed with the FCA that it would carry out
a remediation exercise, for a specific customer segment who were
sold a particular structured product. Redress was paid to certain
customers who took out the structured product.
NatWest Group provisions in relation to these matters totalled
£160 million as at 31 December 2018, of which £106
million had been utilised by that date.
Packaged accounts
RBS Group has had dedicated resources in place since 2013 to
investigate and resolve packaged account complaints on an
individual basis. NatWest Group provisions for this matter totalled
£252 million as at 31 December 2018. The FCA conducted a
thematic review of packaged bank accounts across the UK from
October 2014 to April 2016, the results of which were published in
October 2016. RBS Group made amendments to its sales process and
complaints procedures to address the findings from that
review.
FCA investigation into the RBS Group's compliance with the Money
Laundering Regulations 2007
On 21 July 2017, the FCA notified RBS Group that it was undertaking
an investigation into the RBS Group's compliance with the
Money
Laundering Regulations 2007 in relation to certain customers.
Following amendment to the scope of the investigation, there are
currently two areas under review: (1) compliance with Money
Laundering Regulations in respect of Money Service Business
customers; and (2) the Suspicious Transactions regime in relation
to the events surrounding particular customers. The
investigations in both areas are assessing both criminal and civil
culpability. RBS Group is cooperating with the investigations,
including responding to several information requests from the
FCA.
Notes on the accounts
9 Memorandum items continued
Systematic Anti-Money Laundering Programme assessment
In December 2018, the FCA commenced a Systematic Anti-Money
Laundering Programme assessment of RBS Group. RBS Group is
responding to requests for information from the FCA.
Payment Protection Insurance (PPI)
Since 2011, RBS Group has been implementing the FCA's policy
statement for the handling of complaints about the mis-selling of
PPI (Policy Statement 10/12). In August 2017, the FCA's new rules
and guidance on PPI complaints handling (Policy Statement 17/3)
came into force. The Policy Statement introduced new so called
'Plevin' rules, under which customers may be eligible for redress
if the bank earned a high level of commission from the sale of PPI,
but did not disclose this detail at the point of sale. The Policy
Statement also introduced a two year PPI deadline, due to expire in
August 2019, before which new PPI complaints must be made. NatWest
Group is implementing the Policy Statement.
NatWest Group has made provisions
totalling £3.2 billion to date for PPI claims,
including an additional provision of £125 million
taken at Q3 2018, reflecting greater than predicted complaints
volumes. Of the £3.2 billion cumulative provision,
£2.8 billion had been utilised by 31 December
2018.
FCA mortgages market study
In December 2016, the FCA launched a market study into the
provision of mortgages. On 4 May 2018 the interim report was
published. This found that competition was working well for many
customers but also proposed remedies to help customers shop around
more easily for mortgages. Following a period of consultation, the
final report is due to be published in Q1 2019.
FCA strategic review of retail banking models
On 11 May 2017 the FCA announced a two phase strategic review of
retail banking models. The FCA used the review to understand how
these models operate, including how 'free if in credit' banking is
paid for and the impact of changes such as increased use of digital
channels and reduced branch usage.
On 18 December 2018, the FCA published its final report containing
a number of findings, including that personal current accounts are
an important source of competitive advantage for major banks.
Following the review, the FCA is to continue to monitor retail
banking models, analyse new payments business models and undertake
exploratory work to understand certain aspects of SME
banking.
Notes on the
accounts
10 Adoption of IFRS 9
The Group's accounting policies have significantly changed on the
adoption of IFRS 9 'Financial Instruments' with effect from 1
January 2018. Prior years are re-presented but there has been no
restatement of prior year data.
IFRS 9 changed the classification categories of financial assets
from IAS 39. Held-for-trading assets were classified to mandatory
fair value through profit or loss; loans and receivables were
classified to amortised cost; and available-for-sale assets were
classified as fair value through other comprehensive income unless
they were deemed to be in a fair value business model or failed the
contractual cash flow requirements under IFRS 9. There were no
changes in the classification and measurement of financial
liabilities.
Loans to customers of £437 million were reclassified from
loans and receivables under IAS 39 to fair value through profit or
loss under IFRS 9. As a result, their carrying value decreased by
£9 million.
The net increase to loan impairments under IAS 39 was £364
million under the expected credit loss requirements of IFRS 9,
including £44 million under provisions for contingent
liabilities and commitments.
The impact on the Group's balance sheet at 1 January 2018 and the
key movements in relation to the impact on classification and
measurement expected credit losses and tax are as
follows:
|
|
Group
|
|
|
|
|
|
IFRS 9 impact
|
|
|
|
31 December
|
|
31 December
|
Classification
|
Expected
|
|
1 January
|
|
|
2017
|
New
|
2017
|
&
|
credit
|
|
2018
|
|
|
(IAS 39)
|
presentation
|
re-presented
|
Measurement
|
losses
|
Tax
|
(IFRS 9)
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and balances at central banks
|
35,799
|
-
|
35,799
|
-
|
-
|
-
|
35,799
|
|
Derivatives
|
|
2,315
|
2,315
|
-
|
-
|
-
|
2,315
|
|
Loans and advances to banks
|
79,845
|
(79,845)
|
-
|
|
|
|
|
|
Loans to banks - amortised cost
|
|
1,919
|
1,919
|
-
|
(2)
|
-
|
1,917
|
|
Loans and advances to customers
|
191,889
|
(191,889)
|
-
|
|
|
|
|
|
Loans to customers - amortised cost
|
|
191,882
|
191,882
|
(482)
|
(301)
|
-
|
191,099
|
|
Amounts due from holding companies
|
|
|
|
|
|
|
|
|
and fellow subsidiaries
|
|
77,930
|
77,930
|
-
|
(17)
|
-
|
77,913
|
|
Debt securities
|
1,612
|
(1,612)
|
-
|
|
|
|
|
|
Equity shares
|
43
|
(43)
|
-
|
|
|
|
|
|
Other financial assets
|
|
1,665
|
1,665
|
475
|
-
|
-
|
2,140
|
|
Settlement balances
|
3
|
(3)
|
-
|
|
|
|
|
|
Derivatives
|
2,315
|
(2,315)
|
-
|
|
|
|
|
|
Other assets
|
29,337
|
(4)
|
29,333
|
-
|
-
|
97
|
29,430
|
|
Total assets
|
340,843
|
-
|
340,843
|
(7)
|
(320)
|
97
|
340,613
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Deposits by banks
|
53,847
|
(53,847)
|
-
|
|
|
|
|
|
Bank deposits
|
|
20,544
|
20,544
|
-
|
-
|
-
|
20,544
|
|
Customer accounts
|
233,372
|
(233,372)
|
-
|
|
|
|
|
|
Customer deposits
|
|
226,423
|
226,423
|
-
|
-
|
-
|
226,423
|
|
Amounts due to holding companies
|
|
|
|
|
|
|
|
|
and fellow subsidiaries
|
|
44,599
|
44,599
|
-
|
-
|
-
|
44,599
|
|
Debt securities in issue
|
396
|
(396)
|
-
|
|
|
|
|
|
Settlement balances
|
4
|
(4)
|
-
|
|
|
|
|
|
Derivatives
|
3,178
|
-
|
3,178
|
-
|
-
|
-
|
3,178
|
|
Other financial liabilities
|
|
575
|
575
|
-
|
-
|
-
|
575
|
|
Subordinated liabilities
|
5,755
|
(4,515)
|
1,240
|
-
|
-
|
-
|
1,240
|
|
Other liabilities
|
27,924
|
(7)
|
27,917
|
-
|
44
|
(3)
|
27,958
|
|
Total liabilities
|
324,476
|
-
|
324,476
|
-
|
44
|
(3)
|
324,517
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
16,367
|
-
|
16,367
|
(7)
|
(364)
|
100
|
16,096
|
|
Total liabilities and equity
|
340,843
|
-
|
340,843
|
(7)
|
(320)
|
97
|
340,613
|
Notes on the accounts
10 Adoption of IFRS 9 continued
|
|
Bank
|
|
|
|
|
|
IFRS 9 impact
|
|
|
|
31 December
|
|
31 December
|
Classification
|
Expected
|
|
1 January
|
|
|
2017
|
New
|
2017
|
&
|
credit
|
|
2018
|
|
|
(IAS 39)
|
presentation
|
re-presented
|
Measurement
|
losses
|
Tax
|
(IFRS 9)
|
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
£m
|
|
Assets
|
|
|
|
|
|
|
|
|
Cash and balances at central banks
|
34,763
|
-
|
34,763
|
-
|
-
|
-
|
34,763
|
|
Derivatives
|
|
2,277
|
2,277
|
-
|
-
|
-
|
2,277
|
|
Loans and advances to banks
|
55,788
|
(55,788)
|
-
|
|
|
|
|
|
Loans to banks - amortised cost
|
|
1,635
|
1,635
|
-
|
-
|
-
|
1,635
|
|
Loans and advances to customers
|
160,679
|
(160,679)
|
-
|
|
|
|
|
|
Loans to customers - amortised cost
|
|
160,614
|
160,614
|
(474)
|
(267)
|
-
|
159,873
|
|
Amounts due from holding companies
|
|
|
|
|
|
|
|
|
and fellow subsidiaries
|
|
54,211
|
54,211
|
-
|
(7)
|
-
|
54,204
|
|
Debt securities
|
1,059
|
(1,059)
|
-
|
|
|
|
|
|
Equity shares
|
7
|
(7)
|
-
|
|
|
|
|
|
Investment in group undertakings
|
2,546
|
(2,546)
|
-
|
|
|
|
|
|
Other financial assets
|
|
1,073
|
1,073
|
428
|
-
|
-
|
1,501
|
|
Derivatives
|
2,277
|
(2,277)
|
-
|
|
|
|
|
|
Investment in group undertakings
|
|
2,546
|
2,546
|
-
|
-
|
-
|
2,546
|
|
Other assets
|
2,598
|
-
|
2,598
|
-
|
-
|
90
|
2,688
|
|
Total assets
|
259,717
|
-
|
259,717
|
(46)
|
(274)
|
90
|
259,487
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Deposits by banks
|
32,465
|
(32,465)
|
-
|
|
|
|
|
|
Bank deposits
|
|
20,528
|
20,528
|
-
|
-
|
-
|
20,528
|
|
Customer accounts
|
201,150
|
(201,150)
|
-
|
|
|
|
|
|
Customer deposits
|
|
194,055
|
194,055
|
-
|
-
|
-
|
194,055
|
|
Amounts due to holding companies
|
|
|
|
|
|
|
|
|
and fellow subsidiaries
|
|
23,311
|
23,311
|
-
|
-
|
-
|
23,311
|
|
Derivatives
|
3,117
|
-
|
3,117
|
-
|
-
|
-
|
3,117
|
|
Other financial liabilities
|
|
139
|
139
|
-
|
-
|
-
|
139
|
|
Subordinated liabilities
|
5,640
|
(4,409)
|
1,231
|
-
|
-
|
-
|
1,231
|
|
Other liabilities
|
1,990
|
(9)
|
1,981
|
-
|
40
|
-
|
2,021
|
|
Total liabilities
|
244,362
|
-
|
244,362
|
-
|
40
|
-
|
244,402
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
15,355
|
-
|
15,355
|
(46)
|
(314)
|
90
|
15,085
|
|
Total liabilities and equity
|
259,717
|
-
|
259,717
|
(46)
|
(274)
|
90
|
259,487
|
|
|
|
|
|
|
|
|
|
|
The table below reflects the impact of IFRS 9 on total
equity:
|
|
|
|
|
Group
|
Bank
|
|
£m
|
£m
|
|
At 31 December 2017 - under IAS 39
|
16,367
|
15,355
|
|
Classification & measurement
|
(7)
|
(46)
|
|
- Mandatory fair value through profit or loss assets -
adjustments following business model reviews (SPPI)
|
(9)
|
(9)
|
|
- Equity shares held at cost under IAS 39 - fair value
adjustments through FVOCI reserve
|
46
|
-
|
|
- Additional write-down of amortised cost
assets
|
(44)
|
(37)
|
|
Expected credit losses
|
(364)
|
(314)
|
|
- Amortised cost assets
|
(320)
|
(274)
|
|
- Contingent liabilities and commitments
|
(44)
|
(40)
|
|
Tax
|
100
|
90
|
|
At 1 January 2018 - under IFRS on transition to IFRS 9
|
16,096
|
15,085
|
Notes on the accounts
11 Related parties
UK Government
On 1 December 2008, the UK Government through HM Treasury became
the ultimate controlling party of The Royal Bank of Scotland Group
plc. The UK Government's shareholding is managed by UK Government
Investments Limited, a company wholly owned by the UK Government.
As a result, the UK Government and UK Government controlled bodies
became related parties of the Group. During 2015, all of the B
shares held by the UK Government were converted into ordinary
shares of £1 each.
In 2015, HM Treasury sold 630 million of the company's ordinary
shares. In June 2018 HMT sold a further 925 million of the
company's ordinary shares. At 31 December 2018, HM Treasury's
holding in the company's ordinary shares was 62.3%.
The Group enters into transactions with many of these bodies on an
arm's length basis. Transactions include the payment of: taxes
principally UK corporation tax (see Note 6 of this document) and
value added tax; national insurance contributions; local authority
rates; and regulatory fees and levies; together with banking
transactions such as loans and deposits undertaken in the normal
course of banker-customer relationships.
Bank of England facilities
The Group may participate in a number of schemes operated by the
Bank of England in the normal course of business.
Members of the Group that are UK authorised institutions are
required to maintain non-interest bearing (cash ratio) deposits
with the Bank of England amounting to 0.296% of their average
eligible liabilities in excess of £600 million. They also have
access to Bank of England reserve accounts: sterling current
accounts that earn interest at the Bank of England
Rate.
Service entity
On 30 April 2018, in preparation for ring-fencing, the Bank became
the main provider of shared service activities for the RBS Group.
This includes Treasury services supporting, as well as providing,
services to both the ring-fenced bank (RFB) and non-ring-fenced
bank (NRFB).
Other related parties
(a)
In their roles as providers of finance, Group companies provide
development and other types of capital support to businesses. These
investments are made in the normal course of business and on arm's
length terms. In some instances, the investment may extend to
ownership or control over 20% or more of the voting rights of the
investee company. However, these investments are not considered to
give rise to transactions of a materiality requiring disclosure
under IAS 24.
(b)
The Group recharges The Royal Bank of Scotland Group Pension Fund
with the cost of administration services incurred by it. The
amounts involved are not material to the Group.
(c)
In accordance with IAS 24, transactions or balances between Group
entities that have been eliminated on consolidation are not
reported.
(d)
The captions in the primary financial statements of the parent
company include amounts attributable to subsidiaries. These amounts
have been disclosed in aggregate in the relevant notes to the
financial statements.
|
The table below discloses items included in income and operating
expenses on transactions between the Group and subsidiaries of the
RBS Group.
|
|
|
|
|
|
2018
|
2017
|
|
|
|
£m
|
£m
|
|
|
Income
|
|
|
|
|
Interest receivable
|
321
|
363
|
|
|
Interest payable
|
(286)
|
(396)
|
|
|
Fees and commissions receivable
|
-
|
11
|
|
|
Fees and commissions payable
|
(1)
|
(2)
|
|
|
Other administrative expenses
|
(747)
|
(2,358)
|
|
|
|
(713)
|
(2,382)
|
|
|
Discontinued operations
|
|
|
|
|
Net expenses
|
(1)
|
(29)
|
|
|
|
(1)
|
(29)
|
|
|
|
|
|
|
12 Date of approval
The annual results for the year ended 31 December 2018 were
approved by the board of directors on 14 February
2019.
13 Post balance sheet events
There have been no other significant events between 31 December
2018 and the date of approval of these accounts which would require
a change to or an additional disclosure in the
accounts.
Risk factors
Principal Risks and Uncertainties
Set out below are certain risk factors that could adversely affect
the Group's future results, its financial condition and prospects
and cause them to be materially different from what is forecast or
expected and either directly or indirectly impact the value of its
securities in issue.
These risk factors are broadly categorised and should be read in
conjunction with the forward looking statements section, the
strategic report and the capital and risk management section of
this annual report and should not be regarded as a complete and
comprehensive statement of all potential risks and uncertainties
facing the Group.
Operational and IT resilience risk
The Group is subject to increasingly sophisticated and frequent
cyberattacks.
The Group is experiencing continued cyberattacks across the entire
Group, with an emerging trend of attacks against the Group's supply
chain, re-enforcing the importance of due diligence and close
working with the third parties on which the Group relies. The Group
is reliant on technology, which is vulnerable to attacks, with
cyberattacks increasing in terms of frequency, sophistication,
impact and severity. As cyberattacks evolve and become more
sophisticated, the Group will be required to invest additional
resources to upgrade the security of its systems. In 2018, the
Group was subjected to a small but increasing number of Distributed
Denial of Service ('DDOS') attacks, which are a pervasive and
significant threat to the global financial services industry.
The Group fully mitigated the impact of these attacks whilst
sustaining full availability of services for its customers. Hostile
attempts are made by third parties to gain access to and introduce
malware (including ransomware) into the Group's IT systems, and to
exploit vulnerabilities. The Group has information security
controls in place, which are subject to review on a continuing
basis, but there can be no assurance that such measures will
prevent all DDOS attacks or other cyberattacks in the future.
See also, 'The Group's operations are highly dependent on its
IT systems'.
Any failure in the Group's cybersecurity policies, procedures or
controls, may result in significant financial losses, major
business disruption, inability to deliver customer services, or
loss of data or other sensitive information (including as a result
of an outage) and may cause associated reputational damage. Any of
these factors could increase costs (including costs relating to
notification of, or compensation for customers, credit monitoring
or card reissuance), result in regulatory investigations or
sanctions being imposed, or may affect the Group's ability to
retain and attract customers. Regulators in the UK, US and Europe
continue to recognise cybersecurity as an increasing systemic risk
to the financial sector and have highlighted the need for financial
institutions to improve their monitoring and control of, and
resilience (particularly of critical services) to cyberattacks, and
to provide timely notification of them, as
appropriate.
Additionally, parties may also fraudulently attempt to induce
employees, customers, third party providers or other users who have
access to the Group's systems to disclose sensitive information in
order to gain access to the Group's data or that of the Group's
customers or employees. Cybersecurity and information security
events can derive from human error, fraud or malice on the part of
the Group's employees or third parties, including third party
providers, or may result from accidental technological
failure.
In accordance with the EU General Data Protection Regulation
('GDPR'), the Group is required to ensure it timely implements
appropriate and effective organisational and technological
safeguards against unauthorised or unlawful access to the data of
the Group, its customers and its employees. In order to meet this
requirement, the Group relies on the effectiveness of its internal
policies, controls and procedures to protect the confidentiality,
integrity and availability of information held on its IT systems,
networks and devices as well as with third parties with whom the
Group interacts and a failure to monitor and manage data in
accordance with the GDPR requirements may result in financial
losses, regulatory fines and investigations and associated
reputational damage. In addition, whilst the Group takes
appropriate measures to prevent, detect and minimise attacks, the
Group's systems, and those of third party providers, are subject to
frequent cyberattacks.
The Group expects greater regulatory engagement, supervision and
enforcement in relation to its overall resilience to withstand IT
systems and related disruption, either through a cyberattack or
some other disruptive event. However, due to the Group's reliance
on technology and the increasing sophistication, frequency and
impact of cyberattacks, it is likely that such attacks could have a
material impact on the Group.
Operational risks are inherent in the Group's
businesses.
Operational risk is the risk of loss resulting from inadequate or
failed internal processes, procedures, people or systems, or from
external events, including legal risks. As at 31 December 2018, the
Group offered a diverse range of products and services supported by
55,400 employees; it therefore has complex and diverse operations.
As a result, operational risks or losses can arise from a number of
internal or external factors. These risks are also present when the
Group relies on outside suppliers or vendors to provide services to
it or its customers, as is increasingly the case as the Group
implements new technologies, innovates and responds to regulatory
and market changes.
Operational risks continue to be heightened as a result of the RBS
Group's current cost-reduction measures and conditions affecting
the financial services industry generally (including Brexit and
other geo-political developments) as well as the legal and
regulatory uncertainty resulting therefrom. This may place
significant pressure on the Group's ability to maintain effective
internal controls and governance frameworks. In particular, new
governance frameworks have recently been put into place throughout
the RBS Group for certain RBS Group entities (including the Group)
and certain stand-alone market-facing capabilities have been
established for the Group and Group entities, due to the
implementation of the UK ring-fencing regime and the resulting
legal entity structure. See also, 'The Group, including the Bank,
is required to comply with regulatory requirements in respect of
the implementation of the UK ring-fencing regime'. The Group is
also dependent on the RBS Group for certain shared critical
services. The effective management of operational risks is critical
to meeting customer service expectations and retaining and
attracting customer business.
Although the Group has implemented risk controls and loss
mitigation actions, and significant resources and planning have
been devoted to mitigate operational risk, there is uncertainty as
to whether such actions will be effective in controlling each of
the operational risks faced by the Group.
Risk factors
The Group's operations are highly dependent on its IT
systems.
The Group's operations are highly dependent on the ability to
process a very large number of transactions efficiently and
accurately while complying with applicable laws and regulations.
The proper functioning of the Group's payment systems, financial
and sanctions controls, risk management, credit analysis and
reporting, accounting, customer service and other IT systems, as
well as the communication networks between their branches and main
data processing centres, are critical to the Group's
operations.
Individually or collectively, any critical system failure,
prolonged loss of service availability or material breach of data
security could cause serious damage to the Group's ability to
provide services to its customers, which could result in
significant compensation costs or regulatory sanctions (including
fines resulting from regulatory investigations), or a breach of
applicable regulations. In particular, failures or breaches
resulting in the loss or publication of confidential customer data
could cause long-term damage to the Group's reputation and could
affect its regulatory approvals, competitive position, business and
brands, which could undermine its ability to attract and retain
customers. This risk is heightened as the Group continues to
innovate and offer new digital solutions to its customers as a
result of the trend towards online and mobile banking.
In 2018, the Group upgraded its IT systems and technology and
expects to continue to make considerable investments to further
simplify, upgrade and improve its IT and technology capabilities
(including migration to the Cloud) to make them more
cost-effective, improve controls and procedures, strengthen cyber
security, enhance digital services provided to its customers and
improve its competitive position. Should such investment and
rationalisation initiatives fail to achieve the expected results or
prove to be insufficient due to cost challenges or otherwise, this
could negatively affect the Group's operations, its reputation and
ability to retain or grow its customer business or adversely impact
its competitive position, thereby negatively impacting the Group's
financial position.
The Group, including the Bank, is required to comply with
regulatory requirements in respect of the implementation of the UK
ring-fencing regime.
The UK ring-fencing regime came into force on 1 January 2019. As
part of the transition to become compliant with the UK ring-fencing
regime, the Bank has established stand-alone market-facing
capabilities for derivatives, foreign exchange and fixed income, in
order to manage funding and market risk in the Group. The Bank is
now a direct member of GBP and EUR payment systems and a direct
member of the London Clearing House and the Continuous Linked
Settlement. The Group's ongoing compliance with the UK ring-fencing
regime may entail significant costs, and may also impose
significant operational, legal and execution risk in the Group's
day-to-day activities.
In addition, the implementation of the UK ring-fencing regime may
impact the Group's treasury operations, including internal and
external funding arrangements and the Group's funding strategy as
certain Group entities, including the Bank, will be required to
access the debt capital markets as new stand-alone entities which
may entail increased execution risk for the Group's funding plan
and may increase the cost of funding for certain Group entities,
including the Bank.
The Group relies on attracting, retaining and developing senior
management and skilled personnel, and is required to maintain good
employee relations.
The Group's current and future success depends on its ability to
attract, retain and develop highly skilled and qualified personnel,
including senior management, directors and key employees, in a
highly competitive labour market and under internal cost reduction
pressures. This entails risk, particularly in light of heightened
regulatory oversight of banks and the increasing scrutiny of, and
(in some cases) restrictions placed upon, employee compensation
arrangements, in particular those of banks in receipt of government
support such as the RBS Group, which may have an adverse effect on
the Group's ability to hire, retain and engage well-qualified
employees. The market for skilled personnel is increasingly
competitive, especially for technology-focussed roles, thereby
raising the cost of hiring, training and retaining skilled
personnel. In addition, certain economic, market and regulatory
conditions and political developments (including Brexit) may reduce
the pool of candidates for key management and non-executive roles,
including non-executive directors with the right skills, knowledge
and experience, or increase the number of departures of existing
employees.
Many of the Group's employees in the UK, Republic of Ireland and
continental Europe are represented by employee representative
bodies, including trade unions. Engagement with its employees and
such bodies is important to the Group in maintaining good employee
relations. Any failure to do so could impact the Group's ability to
operate its business effectively.
A failure in the Group's risk management framework could adversely
affect the Group, including its ability to achieve its strategic
objectives.
Risk management is an integral part of all of the Group's
activities and includes the definition and monitoring of the
Group's risk appetite and reporting on its risk exposure and the
potential impact thereof on its financial condition. Financial risk
management is highly dependent on the use and effectiveness of
internal stress tests and models and ineffective risk management
may arise from a wide variety of factors, including lack of
transparency or incomplete risk reporting, unidentified conflicts
or misaligned incentives, lack of accountability control and
governance, lack of consistency in risk monitoring and management
or insufficient challenges or assurance processes. Failure to
manage risks effectively could adversely impact the Group's
reputation or its relationship with its customers, shareholders or
other stakeholders.
The Group's operations are inherently exposed to conduct risks.
These include business decisions, actions or incentives that are
not responsive to or aligned with the Group's customers' needs or
do not reflect the Group's customer-focussed strategy, ineffective
product management, unethical or inappropriate use of data,
outsourcing of customer service and product delivery, the
possibility of alleged mis-selling of financial products and
mishandling of customer complaints. Some of these risks have
materialised in the past and ineffective management and oversight
of conduct risks may lead to further remediation and regulatory
intervention or enforcement. The Group's businesses are also
exposed to risks from employee misconduct including non-compliance
with policies and regulations, negligence or fraud (including
financial crimes), any of which could result in regulatory fines or
sanctions and serious reputational or financial harm to the
Group.
Risk factors
The Group is seeking to embed a strong risk culture across the
organisation and has implemented policies and allocated new
resources across all levels of the organisation to manage and
mitigate conduct risk and expects to continue to invest in its risk
management framework. However, such efforts may not insulate the
Group from future instances of misconduct and no assurance can be
given that the Group's strategy and control framework will be
effective. Any failure in the Group's risk management framework
could negatively affect the Group and its financial condition
through reputational and financial harm and may result in the
inability to achieve its strategic objectives for their customers,
employees and wider stakeholders.
The Group's operations are subject to inherent reputational
risk.
Reputational risk relates to stakeholder and public perceptions of
the Group arising from an actual or perceived failure to meet
stakeholder expectations due to any events, behaviour, action or
inaction by the Group, its employees or those with whom the Group
is associated. This includes brand damage, which may be detrimental
to the Group's business, including its ability to build or sustain
business relationships with customers, and may cause low employee
morale, regulatory censure or reduced access to, or an increase in
the cost of, funding. Reputational risk may arise whenever there is
a material lapse in standards of integrity, compliance, customer or
operating efficiency and may adversely affect the Group's ability
attract and retain customers.
In particular, the Group's ability to attract and retain customers
(and, in particular, corporate and retail depositors) may be
adversely affected by, amongst others: negative public opinion
resulting from the actual or perceived manner in which the Group or
any other member of the RBS Group conducts or modifies its business
activities and operations, media coverage (whether accurate or
otherwise), employee misconduct, the Group's financial performance,
IT systems failures or cyberattacks, the level of direct and
indirect government support, or the actual or perceived practices
in the banking and financial industry in general, or a wide variety
of other factors.
Modern technologies, in particular online social networks and other
broadcast tools which facilitate communication with large audiences
in short time frames and with minimal costs, may also significantly
enhance and accelerate the impact of damaging information and
allegations.
Although the Group has implemented a Reputational Risk Policy to
improve the identification, assessment and management of customers,
transactions, products and issues which represent a reputational
risk, the Group cannot be certain that it will be successful in
avoiding damage to its business from reputational
risk.
Economic and political risk
Uncertainties surrounding the UK's withdrawal from the European
Union may adversely affect the Group.
Following the EU Referendum in June 2016, and pursuant to the exit
process triggered under Article 50 of the Treaty on European Union
in March 2017, the UK is scheduled to leave the EU on 29 March
2019. The terms of a Brexit withdrawal agreement negotiated by the
UK Government were decisively voted against by Parliament on 15
January 2019. The UK Government and Parliament are currently
actively engaged in seeking to determine the terms of this
departure, including any transition period, and the resulting
economic, trading and legal relationships with both the EU and
other counterparties currently remain unclear and subject to
significant uncertainty.
As it currently stands, EU membership and all associated treaties
will cease to apply at 23:00 on 29 March 2019, unless some form of
transitional arrangement encompassing those associated treaties is
agreed or there is unanimous agreement amongst the UK, other EU
member states and the European Commission to extend the negotiation
period.
The direct and indirect effects of the UK's exit from the EU and
the European Economic Area ('EEA') are expected to affect many
aspects of the Group's business and operating environment,
including as described elsewhere in these risk factors, and may be
material and/or cause a near-term impact on impairments. See also
'The Group faces increased political and economic risks and
uncertainty in the UK and global markets'.
The longer term effects of Brexit on the RBS Group's operating
environment are difficult to predict, and are subject to wider
global macro-economic trends and events, but may significantly
impact the Group and its customers and counterparties who are
themselves dependent on trading with the EU or personnel from the
EU and may result in, or be exacerbated by, periodic financial
volatility and slower economic growth, in the UK in particular, but
also in Republic of Ireland, Europe and potentially the global
economy.
Significant uncertainty exists as to the respective legal and
regulatory arrangements under which the Group and its subsidiaries
will operate when the UK is no longer a member of the EU (see 'The
RBS Group is in the process of seeking requisite permissions to
implement its plans for continuity of business impacted by the UK's
departure from the EU'. The legal and political uncertainty and any
actions taken as a result of this uncertainty, as well as new or
amended rules, could have a significant impact on the Group's
operations or legal entity structure, including attendant
restructuring costs, level of impairments, capital requirements,
regulatory environment and tax implications and as a result may
adversely impact the Group's profitability, competitive position,
viability, business model and product offering.
The RBS Group is seeking the requisite permissions to implement its
plans for continuity of business impacted by the UK's departure
from the EU.
The RBS Group is implementing plans designed to continue its
ability to clear euro payments and minimise the impact on the
Group's ability to serve non-UK EEA customers in the event that
there is an immediate loss of access to the European Single Market
on 29 March 2019 (or any alternative date) with no alternative
arrangement for continuation of such activities under current rules
(also known as 'Hard Brexit').
To ensure continued ability to clear Euro denominated payments, the
RBS Group is finalising a third-country licence for the Frankfurt
branch of the Bank. In addition, the RBS Group is working to
satisfy the conditions of the Deutsche Bundesbank (DBB) for access
to TARGET2 clearing and settlement mechanisms. Satisfying these DBB
conditions, which include a country legal opinion, and accessing
SEPA, Euro 1 and TARGET2 will allow the RBS Group (through the
Bank's Frankfurt branch) to continue to clear cross-border payments
in euros. The capacity to process these euro payments is a
fundamental requirement for the daily operations and customers of
all Group franchises, including PBB and CPB.
Risk factors
The value of such payments is typically in excess of €50
billion in any one day with more than 300,000 transactions.
This capacity is also critical for management of the RBS Group's
euro-denominated central bank cash balances of around €23
billion. NatWest Markets Plc ('NWM Plc') will use the Bank's
Frankfurt branch to clear its euro payments and has also applied
for a third country license to maintain liquidity management and
product settlement arrangements.
A draft license has recently been issued for NWB Frankfurt branch
which the Group intends to finalise imminently. Once in place, the
third country licence branch approvals would each become effective
when the UK leaves the EU and the current passporting arrangements
cease to apply. The RBS Group expects to have received the
requisite third country licenses and access to SEPA, Euro 1 and
TARGET2 ahead of the UK's departure from the EU. However, given the
quantum of affected payments and lack of short term contingency
arrangements, in the event that such euro clearing capabilities
were not in place in time for a Hard Brexit or as required in the
future, it could have a material impact on the RBS Group and the
Group and its customers.
Additionally, to continue serving most of the RBS Group's EEA
customers, the RBS Group has repurposed the banking licence of its
Dutch subsidiary, NatWest Markets N.V. ('NWM NV'). As
announced on 6 December 2018, the RBS Group has requested court
permission for a FSMA transfer scheme to replicate the master trade
documentation for NWM Plc's non-UK EEA customers and to transfer
certain existing transactions from NWM Plc to NWM NV. Other
transactions are expected to be transferred to NWM NV during 2019
(for example, certain transactions with Corporate and Sovereign
customers and larger EEA customers from NWM Plc, and certain
Western European corporate business from National Westminster Bank
Plc). The volume and pace of business transfers to NWM NV will
depend on the terms and circumstances of the UK's exit from the EU,
as well as the specific contractual terms of the affected
products.
These changes to the Group's operating model are costly and require
further changes to its business operations and customer engagement.
The regulatory permissions from the Dutch and German authorities
will be conditional in nature and will require on-going compliance
with certain conditions including maintaining minimum capital level
and deposit balances as well as a defined local physical presence
going forward, and may be subject to change in the future.
Maintaining these permissions and the RBS Group's access to the
euro payment infrastructure will be fundamental to its business
going forward and further changes to the Group's business
operations may be required.
The Group faces increased political and economic risks and
uncertainty in the UK and global markets.
In the UK, significant economic and political uncertainty surrounds
the terms of and timing of Brexit. (See also, 'Uncertainties
surrounding the UK's withdrawal from the European Union may
adversely affect the Group'). In addition, were there to be a
change of UK Government as a result of a general election, the
Group may face new risks as a result of a change in government
policy, including more direct intervention by the UK government in
financial markets, the regulation and ownership of public companies
and the extent to which the government exercises its rights as a
shareholder of the RBS Group. This could affect, in particular, the
structure, strategy and operations of the RBS Group (including the
Group) and may negatively impact the Group's operational
performance and financial results.
The Group faces additional political uncertainty as to how the
Scottish parliamentary process (including, as a result of any
second Scottish independence referendum) may impact the Group. RBSG
and a number of other RBS Group entities are headquartered and
incorporated in Scotland. Any changes to Scotland's relationship
with the UK or the EU (as an indirect result of Brexit or other
developments) would impact the environment in which the RBS Group
and its subsidiaries operate, and may require further changes to
the RBS Group's (including the Group's structure), independently or
in conjunction with other mandatory or strategic structural and
organisational changes which could adversely impact the
Group.
Actual or perceived difficult global economic conditions can create
challenging economic and market conditions and a difficult
operating environment for the Group's businesses and its customers
and counterparties, thereby affecting its financial
performance.
The outlook for the global economy over the medium-term remains
uncertain due to a number of factors including: trade barriers and
the increased possibility of trade wars, widespread political
instability, an extended period of low inflation and low interest
rates, and global regional variations in the impact and responses
to these factors. Such conditions could be worsened by a number of
factors including political uncertainty or macro-economic
deterioration in the Eurozone, China or the US, increased
instability in the global financial system and concerns relating to
further financial shocks or contagion (for example, due to economic
concerns in emerging markets), market volatility or fluctuations in
the value of the pound sterling, new or extended economic
sanctions, volatility in commodity prices or concerns regarding
sovereign debt. This may be compounded by the ageing demographics
of the populations in the markets that the Group serves, or rapid
change to the economic environment due to the adoption of
technology and artificial intelligence. Any of the above
developments could impact the Group directly (for example, as a
result of credit losses) or indirectly (for example, by impacting
global economic growth and financial markets and the Group's
customers and their banking needs).
In addition, the Group is exposed to risks arising out of
geopolitical events or political developments, such as trade
barriers, exchange controls, sanctions and other measures taken by
sovereign governments that may hinder economic or financial
activity levels. Furthermore, unfavourable political, military or
diplomatic events, including secession movements or the exit of
other member states from the EU, armed conflict, pandemics and
widespread public health crises, state and privately sponsored
cyber and terrorist acts or threats, and the responses to them by
governments and markets, could negatively affect the business and
performance of the Group.
Continued low interest rates have significantly affected and will
continue to affect the Group's business and results.
Interest rate risk is significant for the Group, as monetary policy
has been accommodative in recent years, including as a result of
certain policies implemented by the Bank of England and HM Treasury
such as the Term Funding Scheme, which have helped to support
demand at a time of pronounced fiscal tightening and balance sheet
repair. However, there remains considerable uncertainty as to the
direction of interest rates and pace of change, as set by the Bank
of England. Continued sustained low or negative interest rates
could put pressure on the Group's interest margins and adversely
affect the Group's profitability and prospects. In addition, a
continued period of low interest rates and flat yield curves has
affected and may continue to affect the Group's interest rate
margin realised between lending and borrowing costs.
Risk factors
Conversely, while increases in interest rates may support Group
income, sharp increases in interest rates could lead to generally
weaker than expected growth, or even contracting GDP, reduced
business confidence, higher levels of unemployment or
underemployment, adverse changes to levels of inflation, and
falling property prices in the markets in which the Group
operates.
The Group expects to face significant risks in connection with
climate change and the transition to a low carbon
economy
The risks associated with climate change are subject to rapidly
increasing prudential and regulatory, political and societal focus,
both in the UK and internationally. Embedding climate risk into the
Group's risk framework in line with expected regulatory
expectations, and adapting the Group's operation and business
strategy to address both the risks of climate change and the
transition to a low carbon economy are likely to have a significant
impact on the Group.
Multilateral and UK Government undertakings to limit increases in
carbon emissions in the near and medium term will require
widespread levels of adjustment across all sectors of the economy,
with some sectors such as property, energy, infrastructure
(including transport) and agriculture likely to be particularly
impacted. The nature and timing of the far-reaching commercial,
technological and regulatory changes that this transition will
entail are currently uncertain but the impact of such changes may
be disruptive, especially if such changes do not occur in an
orderly or timely manner or are not effective in reducing emissions
sufficiently. Furthermore, the nature and timing of the
manifestation of the physical risks of climate change (which
include more extreme specific weather events such as flooding and
heat waves and longer term shifts in climate) are also uncertain,
and their impact on the economy is predicted to be more acute if
carbon emissions are not reduced on a timely basis or to the
requisite extent. The potential impact on the economy includes, but
is not limited to, lower GDP growth, significant changes in asset
prices and profitability of industries, higher unemployment and the
prevailing level of interest rates.
UK and international regulators are actively seeking to develop new
and existing regulations that are directly and indirectly focussed
on climate change and the associated financial risks. Such new
regulations are being developed in parallel with an increasing
market focus on the risks associated with climate
change.
In October 2018, the Group's prudential regulator, the PRA,
published a draft supervisory standard which sets forth an
expectation that regulated entities adopt a Board-level strategic
approach to managing and mitigating the financial risks of climate
change and embed the management of them into their governance
frameworks, subject to existing prudential regulatory supervisory
tools (including stress testing and individual and systemic capital
requirements). Climate risk is also subject to various legislative
actions and proposals by, among others, the European Commission's
Sustainable Finance initiative that focuses on incorporating
climate risk into its financial policy frameworks, including
proposals (e.g. through amendments to MiFID II) for institutional
investors (including pension funds) to consider and disclose
climate risk criteria as part of their investment decision, and
also proposals to consider changes to RWA methodologies.
Furthermore, credit ratings agencies are increasingly taking into
account environmental, social and governance ('ESG') factors,
including climate risk, as part of the credit ratings analysis, as
are investors in their investment decisions.
If the Group does not adequately embed climate risk into its risk
framework to appropriately measure, manage and disclose the various
financial and physical risks it faces associated with climate
change, or fails to adapt its strategy and business model to the
changing regulatory requirements and market expectations on a
timely basis, it may have a material and adverse impact on the
Group's level of business growth, its competitiveness,
profitability, prudential capital requirements, credit ratings,
cost of funding, results of operation and financial
condition.
Changes in foreign currency exchange rates may affect the Group's
results and financial position.
The Group's foreign exchange exposure arises from structural
foreign exchange risk, including capital deployed in the Group's
foreign subsidiaries, branches and joint arrangements, and
non-trading foreign exchange risk, including customer transactions
and profits and losses that are in a currency other than the
functional currency of the transaction entity. The Group is
required to issue instruments in foreign currencies that assist in
meeting the Group's minimum requirements for own funds and eligible
liabilities ('MREL'). The Group maintains policies and procedures
designed to manage the impact of exposures to fluctuations in
currency rates. Nevertheless, changes in currency rates,
particularly in the sterling-US dollar and euro-sterling exchange
rates, can adversely affect the value of assets, liabilities
(including the total amount of MREL eligible instruments), income,
RWAs, capital base and expenses and the reported earnings of the
Bank's UK and non-UK subsidiaries and may affect the Group's
reported consolidated financial condition.
Decisions of major central banks (including by the Bank of England,
the ECB and the US Federal Reserve) and political or market events
(including Brexit), which are outside of the Group's control, may
lead to sharp and sudden variations in foreign exchange
rates.
HM Treasury (or UKGI on its behalf) could exercise a significant
degree of influence over the RBS Group.
In its November 2018 Autumn Budget, the UK Government announced its
intention to continue the process of privatisation of
RBSG
and to carry out a programme of sales of RBSG ordinary shares with
the objective of selling all of its remaining shares in RBSG by
2023-2024. On 5 June 2018, the UK Government (via HM Treasury and
UK
Government Investments Limited ('UKGI')) disposed of approximately
7.7% of its stake in RBSG. As at 31 December 2018, the UK
Government held 62.3% of the issued ordinary share capital of RBSG.
There can be no certainty as to the continuation of the sell-down
process or the timing or extent of such sell-downs.
UKGI manages HM Treasury's shareholder relationship with RBSG and,
although HM Treasury has indicated that it intends to respect the
commercial decisions of the RBS Group and that the RBS Group
entities (including the Group) will continue to have their own
independent board of directors and management team determining
their own strategy, its position as a majority shareholder (and
UKGI's position as manager of this shareholding) means that HM
Treasury or UKGI could exercise a significant degree of influence
over, among other things, the election of directors and appointment
of senior management, the RBS Group's (including the Group's)
capital strategy, dividend policy, remuneration policy or the
conduct of the RBS Group's (including the Group's) operations, and
HM Treasury's approach depends on government policy, which could
change, including as a result of a general election. The exertion
of such influence over RBS Group could in turn have an adverse
effect on the governance or business strategy of the
Group.
Risk
factors
Financial resilience risk
The Group may not meet targets nor generate sustainable
returns.
As part of the RBS Group's strategy, the Group has principally
become a UK-focussed domestic banking group and is included in a
number of financial, capital and operational targets for the RBS
Group including in respect of: cost:income ratios, cost reductions
leverage ratio targets, funding plans and requirements, reductions
in RWAs and the timing thereof, employee engagement, diversity and
inclusion as well as environmental, social and customer
satisfaction targets.
The Group's ability to meet the RBS Group and the Group's
respective targets and to successfully meet its strategy are
subject to various internal and external factors and risks. These
include, but are not limited to, market, regulatory, economic and
political factors, developments relating to litigation,
governmental actions, investigations and regulatory matters, and
operational risks and risks relating to the Group's business model
and strategy (including emerging risks associated with
environmental, social and governance issues). A number of factors
may impact the Bank's ability to maintain its current CET1 ratio,
including impairments, limited organic capital generation or
unanticipated increases in RWAs. In addition, the run-down of RWAs
may be accompanied by the recognition of disposal losses which may
be higher than anticipated.
The Group's ability to meet its respective cost:income ratio
targets and the planned reductions in its annual underlying costs
may vary considerably from year to year. Furthermore, the focus on
meeting cost reduction targets may result in limited investment in
other areas which could affect the Group's long-term product
offering or competitive position and its ability to meet its other
targets, including those related to customer
satisfaction.
There is no certainty that the RBS Group's strategy will be
successfully executed, that the Group will meet its targets and
expectations, or that the Group will be a viable, competitive or
profitable banking business.
The Group has significant exposure to counterparty and borrower
risk.
The Group has exposure to many different industries, customers and
counterparties, and risks arising from actual or perceived changes
in credit quality and the recoverability of monies due from
borrowers and other counterparties are inherent in a wide range of
the Group's businesses. The Group is exposed to credit risk if a
customer, borrower or counterparty defaults, or under IFRS 9,
suffers a sufficiently significant deterioration of credit quality
under SICR ('significant increases in credit risk') rules such that
it moves to Stage 2 for impairment calculation
purposes.
The Group's lending strategy and associated processes may fail to
identify or anticipate weaknesses or risks in a particular sector,
market or borrower category, or fail to adequately value physical
or financial collateral, which may result in an increase in default
rates for loans, which may, in turn, impact the Group's
profitability. See 'Capital and risk management - Credit
Risk'.
The credit quality of the Group's borrowers and other
counterparties is impacted by prevailing economic and market
conditions and by the legal and regulatory landscape in the UK and
any deterioration in such conditions or changes to legal or
regulatory landscapes could worsen borrower and counterparty credit
quality and consequently impact the Group's ability to enforce
contractual security rights. See also, 'The Group faces increased
political and economic risks and uncertainty in the UK and global
markets'. In particular, developments relating to Brexit or the
consequences thereof, may adversely impact credit quality in the
UK, and the resulting negative economic outlook could drive an
increased level of credit impairments reflecting the more
forward-looking nature of IFRS 9.
Within the UK, the level of household indebtedness remains high
although the pace of credit growth has slowed during 2018. The
ability of such households to service their debts could be
challenged by a period of high unemployment or increased interest
rates. In particular, the Group may be affected by volatility in
property prices both in the residential and commercial sectors
(including as a result of Brexit) given that the Group's mortgage
loan portfolio as at 31 December 2018, amounted to £124
billion, representing 59% of the Group's customer loan exposure. If
property prices were to weaken this could lead to higher impairment
charges, particularly if default rates consequently increase. In
addition, the Group's credit risk may be exacerbated if the
collateral that it holds cannot be realised as a result of market
conditions or regulatory intervention or if it is liquidated at
prices not sufficient to recover the full amount of the loan or
derivative exposure that is due to the Group. This is most likely
to occur during periods of illiquidity or depressed asset
valuations.
Concerns about, or a default by, a financial institution could lead
to significant liquidity problems and losses or defaults by other
financial institutions, since the commercial and financial
soundness of many financial institutions is closely related and
inter-dependent as a result of credit, trading, clearing and other
relationships among these financial institutions. Any perceived
lack of creditworthiness of a counterparty may lead to market-wide
liquidity problems and losses for the Group. This systemic risk may
also adversely affect financial intermediaries, such as clearing
agencies, clearing houses, banks, securities firms and exchanges
with which the Group interacts on a daily basis. See also, 'The
Group may not be able to adequately access sources of liquidity and
funding'.
As a result, borrower and counterparty credit quality may cause
accelerated impairment charges under IFRS 9, increased repurchase
demands, higher costs, additional write-downs and losses for the
Group and an inability to engage in routine funding
transactions.
The Group operates in markets that are highly competitive, with
increasing competitive pressures and technology
disruption.
The market for UK financial services is highly competitive, and the
Group expects such competition to continue or intensify in response
to customer behaviour, technological changes (including the growth
of digital banking), competitor behaviour, new entrants to the
market (including non-traditional financial services providers such
as large retail or technology conglomerates), industry trends
resulting in increased disaggregation or unbundling of financial
services or conversely the re-intermediation of traditional banking
services, and the impact of regulatory actions and other factors.
In particular, developments in the financial sector resulting from
new banking, lending and payment solutions offered by rapidly
evolving incumbents, challengers and new entrants, notably with
respect to payment services and products, and the introduction of
disruptive technology may impede the Group's ability to grow or
retain its market share and impact its revenues and profitability,
particularly in its key UK retail banking segment.
Risk factors
These trends may be catalysed by various regulatory and competition
policy interventions, particularly as a result of the UK initiative
on Open Banking and other remedies imposed by the Competition and
Markets Authority ('CMA') which are designed to further promote
competition within retail banking, as well as the
competition-enhancing measures under the RBS Group's Alternative
Remedies Package. See also, 'The cost of implementing the
Alternative Remedies Package could be more onerous than
anticipated'.
Increasingly many of the products and services offered by the Group
are, and will become, technology intensive for example Bό,
Mettle, Esme, FreeAgent, APtimise and Path, some of the Group's
recent fintech ventures. The Group's ability to develop digital
solutions that comply with related regulatory changes has become
increasingly important to retaining and growing the Group's
customer business in the UK. There can be no certainty that the
Group's innovation strategy (which includes investment in its IT
capability intended to address the material increase in customer
use of online and mobile technology for banking as well as
selective acquisitions, which carry associated risks) will be
successful or that it will allow the Group to continue to grow such
services in the future. Certain of the Group's current or future
competitors may be more successful in implementing innovative
technologies for delivering products or services to their
customers. The Group may also fail to identify future opportunities
or derive benefits from disruptive technologies in the context of
rapid technological innovation, changing customer behaviour and
growing regulatory demands, including the UK initiative on Open
Banking (PSD2), resulting in increased competition from both
traditional banking businesses as well as new providers of
financial services, including technology companies with strong
brand recognition, that may be able to develop financial services
at a lower cost base.
Furthermore, the Group's competitors may be better able to attract
and retain customers and key employees and may have access to lower
cost funding and/or be able to attract deposits on more favourable
terms than the Group. Although the Group invests in new
technologies and participates in industry and research led
initiatives aimed at developing new technologies, such investments
may be insufficient or ineffective, especially given the Group's
focus on its cost savings targets, which may limit additional
investment in areas such as financial innovation and therefore
could affect the Group's offering of innovative products or
technologies for delivering products or services to customers and
its competitive position. Furthermore, the development of
innovative products depends on the Group's ability to produce
underlying high quality data, failing which its ability to offer
innovative products may be compromised.
If the Group is unable to offer competitive, attractive and
innovative products that are also profitable, it will lose market
share, incur losses on some or all of its activities and lose
opportunities for growth. In this context, the Group is investing
in the automation of certain solutions and interactions within its
customer-facing businesses, including through artificial
intelligence. Such initiatives may result in operational,
reputational and conduct risks if the technology used is defective,
or is not fully integrated into the Group's current solutions or
does not deliver expected cost savings. The investment in automated
processes will likely also result in increased short-term costs for
the Group.
In addition, recent and future disposals and restructurings by the
Group, cost-cutting measures, as well as employee remuneration
constraints, may also have an impact on the Group's ability to
compete effectively and intensified competition from incumbents,
challengers and new entrants in the Group's core markets could
affect the Group's ability to maintain satisfactory returns.
Furthermore, continued consolidation in certain sectors of the
financial services industry could result in the Group's remaining
competitors gaining greater capital and other resources, including
the ability to offer a broader range of products and services and
geographic diversity, or the emergence of new
competitors.
The Group may not meet the prudential regulatory requirements for
capital or manage its capital effectively, which could trigger
certain management actions or recovery options.
The RBS Group and the Bank (on a standalone basis) are required by
regulators in the UK, the EU and other jurisdictions in which they
undertake regulated activities to maintain adequate financial
resources. Adequate capital also gives the RBS Group (including the
Group) financial flexibility in the face of turbulence and
uncertainty in the global economy and specifically in their core UK
and European markets.
As at 31 December 2018, the Bank's CET1 ratio was 17.4%. The RBS
Group currently targets to maintain its CET1 ratio at circa 14% in
the medium term. The RBS Group's target capital ratio is based on a
combination of its expected regulatory requirements and internal
modelling, including stress scenarios and management's and/or the
PRA's views on appropriate buffers above minimum operating
levels.
The RBS Group's current capital strategy for the Bank is based on:
the expected accumulation of additional capital through the accrual
of profits over time; the planned reduction of its RWAs through
disposals and natural attrition; and other capital management
initiatives which focus on improving capital efficiency through
improved data and upstreaming of dividends from the Bank to
RBSG.
A number of factors may impact the Group's ability to maintain its
current CET1 ratio target and achieve its capital strategy. These
include, amongst other things:
● a depletion of its capital
resources through increased costs or liabilities, reduced profits
or losses (including as a result of extreme one-off incidents such
as cyber, fraud or conduct issues) or, sustained periods of low or
lower interest rates, reduced asset values resulting in
write-downs, impairments, changes in accounting policy, accounting
charges or foreign exchange movements;
● a failure to reduce RWAs in
accordance
● within the timeline contemplated
by the RBS Group's capital plan;
● an increase in the quantum of
RWAs in excess of that expected, including due to regulatory
changes; and
● changes in prudential regulatory
requirements including the Bank's Total Capital Requirement set by
the PRA, including Pillar 2 requirements and regulatory buffers, as
well as any applicable scalars.
In addition to regulatory capital, the Bank is required to maintain
a set quantum of internal MREL set as a percentage of its RWAs,
which comprises loss-absorbing senior funding and regulatory
capital instruments internally issued up to RBSG. The Bank of
England has identified single point-of-entry as the preferred
resolution strategy for RBS Group. As a result, RBSG is the only
RBS Group entity that is able to externally issue securities that
count towards the RBS Group's MREL requirements, the proceeds of
which can then be downstreamed to meet the internal MREL issuance
requirements of its operating entities, including the Bank, as
required. The inability of the Group to reduce its RWAs in
line with assumptions in its funding plans could result in an
increase of its internal MREL requirements.
Risk factors
If, under a stress scenario, the level of capital or MREL falls
outside of risk appetite, there are a range of recovery management
actions (focussed on risk reduction and mitigation) that the Group
could take to manage its capital levels, which may not be
sufficient to restore adequate capital levels. Under the EU Bank
Recovery and Resolution Framework ('BRRD'), as implemented in the
UK, a breach of the Group's applicable capital or leverage
requirements may trigger the application of the RBS Group's
recovery plan to remediate a deficient capital position. The RBS
Group's regulator may request that the Group carry out certain
capital management actions or, if the RBS Group's CET1 ratio falls
below 7%, certain regulatory capital instruments issued by the
RBS Group will be written-down or converted into equity and there
may be an issue of additional equity by the RBS Group, which could
result in the dilution of the RBS Group's existing shareholders.
The success of such issuances will also be dependent on favourable
market conditions and the RBS Group may not be able to raise the
amount of capital required or on acceptable terms or at all.
Separately, the RBS Group may address a shortage of capital by
taking action to reduce leverage exposure and/or RWAs via asset or
business disposals. Such actions may, in turn, affect, among other
things, the Group's product offering, credit ratings, ability to
operate its businesses, pursue its current strategies and pursue
strategic opportunities, any of which may affect the underlying
profitability of the Group and future growth potential. See
also, 'The RBS Group (including the Group) may
become subject to the application of UK statutory stabilisation or
resolution powers which may result in, among other actions, the
write-down or conversion of the Group's Eligible
Liabilities'.
The Group may not be able to adequately access sources of liquidity
and funding.
The Group is required to access sources of liquidity and funding
through retail and wholesale deposits, as well as through the debt
capital markets. As at 31 December 2018, the Group held £255
billion in deposits and the level of deposits may fluctuate due to
factors outside the Group's control, such as a loss of confidence
(including in other RBS Group entities), increasing competitive
pressures for retail customer deposits or the reduction or
cessation of deposits by foreign wholesale depositors, which could
result in a significant outflow of deposits within a short period
of time. See also, 'The Group has significant exposure to
counterparty and borrower risk'. An inability to grow, or any
material decrease in, the Group's deposits could, particularly if
accompanied by one of the other factors described above, materially
affect the Group's ability to satisfy its liquidity
needs.
If the Group's liquidity position were to come under stress, and if
the Group is unable to raise funds through deposits or in the debt
capital markets on acceptable terms or at all, its liquidity
position could be adversely affected and it might be unable to meet
deposit withdrawals on demand or at their contractual maturity, to
repay borrowings as they mature, to meet its obligations under
committed financing facilities, to comply with regulatory funding
requirements, to undertake certain capital and/or debt management
activities, or to fund new loans, investments and businesses. The
Group may need to liquidate unencumbered assets to meet its
liabilities, including disposals of assets not previously
identified for disposal to reduce its funding commitments. In a
time of reduced liquidity, the Group may be unable to sell some of
its assets, or may need to sell assets at depressed prices, which
in either case could negatively affect the Group's
results.
The Group is reliant on the RBS Group for capital and funding
support, and is substantially reliant on RBSG's ability to issue
sufficient amounts of external MREL securities and downstream the
proceeds to the Group.
The Group receives capital and funding support from RBS Group. The
Group will be required to issue instruments that are compliant with
MREL as set forth by the Bank of England. As RBSG is the only
entity that is able to issue securities that count towards the
Group's MREL requirements, the Group's ability to meet its internal
MREL requirements is substantially reliant on RBSG's ability to
issue sufficient amounts of external MREL securities and downstream
the proceeds to the Group. If RBSG is unable to issue adequate
levels of MREL securities such that it is unable to downstream
sufficient amounts to the Group, this could lead to a failure of
the Group to meet its own individual internal MREL requirements as
well as the internal MREL requirements of subsidiaries within the
Group. See also, 'The Group may not meet the prudential regulatory
requirements for capital or manage its capital effectively, which
could trigger certain management actions or recovery
options'.
Any reduction in the credit rating assigned to RBSG, any of its
subsidiaries (including the Bank or other Group subsidiaries) or
any of their respective debt securities could adversely affect the
availability of funding for the Group, reduce its liquidity
position and increase the cost of funding.
Rating agencies regularly review the RBS Group entity credit
ratings, including those of RBSG, the Bank and NWM Plc, which could
be negatively affected by a number of factors, including political
and regulatory developments, changes in rating methodologies,
changes in the relative size of the loss-absorbing buffers
protecting bondholders and depositors, a challenging macroeconomic
environment, the impact of Brexit, a potential second Scottish
independence referendum, further reductions of the UK's sovereign
credit rating, market uncertainty and the inability of the Group to
produce sustained profits.
Any reductions in the long-term or short-term credit ratings of
RBSG or the Bank, including in particular downgrades below
investment grade, may affect the Group's access to money markets,
reduce the size of its deposit base and trigger additional
collateral or other requirements in derivatives contracts and other
secured funding arrangements or the need to amend such
arrangements, which could adversely affect the Group's cost of
funding, its access to capital markets and could limit the range of
counterparties willing to enter into transactions with the Group
and therefore also adversely impact its competitive
position.
The Group may be adversely affected if the RBS Group fails to meet
the requirements of regulatory stress tests.
The RBS Group is subject to annual stress tests by its regulator in
the UK and is also subject to stress tests by European regulators
with respect to RBSG, NWM NV and Ulster Bank Ireland DAC. Stress
tests are designed to assess the resilience of banks to potential
adverse economic or financial developments and ensure that they
have robust, forward-looking capital planning processes that
account for the risks associated with their business profile. If
the stress tests reveal that a bank's existing regulatory capital
buffers are not sufficient to absorb the impact of the stress, then
it is possible that the bank will need to take action to strengthen
its capital position.
Failure by the RBS Group to meet the quantitative and qualitative
requirements of the stress tests carried out by its regulators in
the UK and elsewhere may result in the RBS Group's regulators
requiring the RBS Group to generate additional capital,
reputational damage, increased supervision and/or regulatory
sanctions, restrictions on capital distributions and loss of
investor confidence.
Risk
factors
The Group could incur losses or be required to maintain higher
levels of capital as a result of limitations or failure of various
models.
Given the complexity of the Group's business, strategy and capital
requirements, the Group relies on analytical models for a wide
range of purposes, including to manage its business, assess the
value of its assets and its risk exposure, as well as to anticipate
capital and funding requirements (including to facilitate the RBS
Group's mandated stress testing). In addition, the Group utilises
models for valuation, credit approvals, calculation of loan
impairment charges on an IFRS 9 basis, financial reporting and for
financial crime and fraud risk management. The Group's models, and
the parameters and assumptions on which they are based, are
periodically reviewed and updated to maximise their
accuracy.
Such models are inherently designed to be predictive in nature.
Failure of these models, including due to errors in model design or
inputs, to accurately reflect changes in the micro and
macroeconomic environment in which the Group operates, to capture
risks and exposures at the subsidiary level, to be updated in line
with the RBS Group's or the Group's current business model or
operations, or findings of deficiencies by the RBS Group's (and in
particular, the Group's) regulators (including as part of the RBS
Group's mandated stress testing) may result in increased capital
requirements or require management action. The Group may also face
adverse consequences as a result of actions by management based on
models that are poorly developed, implemented or used, models that
are based on inaccurate or compromised data or as a result of the
modelled outcome being misunderstood, or by such information being
used for purposes for which it was not designed.
The Group's financial statements are sensitive to the underlying
accounting policies, judgements, estimates and
assumptions.
The preparation of financial statements requires management to make
judgements, estimates and assumptions that affect the reported
amounts of assets, liabilities, income, expenses, exposures and
RWAs. Due to the inherent uncertainty in making estimates
(particularly those involving the use of complex models), future
results may differ from those estimates. Estimates, judgements,
assumptions and models take into account historical experience and
other factors, including market practice and expectations of future
events that are believed to be reasonable under the
circumstances.
The accounting policies deemed critical to the Group's results and
financial position, based upon materiality and significant
judgements and estimates, which include loan impairment provisions,
are set out in 'Critical accounting policies and key sources of
estimation uncertainty' on page 81 of the 2018 Annual Report and
Accounts1. New accounting standards and interpretations that have
been issued by the International Accounting Standards Board but
which have not yet been adopted by the Group are discussed in
Accounting developments' on page 81 of the 2018 Annual Report and
Accounts.
Changes in accounting standards may materially impact the Group's
financial results.
Changes in accounting standards or guidance by accounting bodies or
in the timing of their implementation, whether immediate or
foreseeable, could result in the Group having to recognise
additional liabilities on its balance sheet, or in further
write-downs or impairments and could also significantly impact the
financial results, condition and prospects of the
Group.
In January 2018, a new accounting standard for financial
instruments (IFRS 9) became effective, which introduced impairment
based on expected credit losses, rather than the incurred loss
model previously applied under IAS 39. The Group expects IFRS 9 to
create earnings and capital volatility and the Group took a
£60 million impairment charge at 31 December 2018, reflecting
the more uncertain economic outlook.
The valuation of financial instruments, including derivatives,
measured at fair value can be subjective, in particular where
models are used which include unobservable inputs. Generally, to
establish the fair value of these instruments, the Group relies on
quoted market prices or, where the market for a financial
instrument is not sufficiently credible, internal valuation models
that utilise observable market data. In certain circumstances, the
data for individual financial instruments or classes of financial
instruments utilised by such valuation models may not be available
or may become unavailable due to prevailing market conditions. In
such circumstances, the Group's internal valuation models require
the Group to make assumptions, judgements and estimates to
establish fair value, which are complex and often relate to matters
that are inherently uncertain.
The Group will adopt IFRS 16 Leases with effect from 1 January 2019
as disclosed in the Accounting policies. This is expected to
increase Other assets by £0.9 billion and Other liabilities by
£1.5 billion. While adoption of this standard has no effect on
the Group's cash flows, it will impact financial ratios which may
influence investors' perception of the financial condition of the
Group.
The RBS Group (including the Group) may become subject to the
application of UK
statutory stabilisation or resolution powers which may result in,
among other actions, the write-down or conversion of the Group's
Eligible Liabilities.
The Banking Act 2009, as amended ('Banking Act'), implements the
BRRD in the UK and creates a special resolution regime ('SRR').
Under the SRR, HM Treasury, the Bank of England and the PRA and FCA
(together 'Authorities') are granted substantial powers to resolve
and stabilise UK-incorporated financial institutions. Five
stabilisation options exist under the current SRR: (i) transfer of
all of the business of a relevant entity or the shares of the
relevant entity to a private sector purchaser; (ii) transfer of all
or part of the business of the relevant entity to a 'bridge bank'
wholly-owned by the Bank of England; (iii) transfer of part of the
assets, rights or liabilities of the relevant entity to one or more
asset management vehicles for management of the transferor's
assets, rights or liabilities; (iv) the write-down, conversion,
transfer, modification, or suspension of the relevant entity's
equity, capital instruments and liabilities ('Eligible
Liabilities'); and (v) temporary public ownership of the relevant
entity. These tools may be applied to RBSG as the parent
company or to the Group, as an affiliate, where certain conditions
are met (such as, whether the firm is failing or likely to fail, or
whether it is reasonably likely that action will be taken (outside
of resolution) that will result in the firm no longer failing or
being likely to fail). Moreover, the SRR provides for modified
insolvency and administration procedures for relevant entities, and
confers ancillary powers on the Authorities, including the power to
modify or override certain contractual arrangements in certain
circumstances. The Authorities are also empowered by order to amend
the law for the purpose of enabling the powers under the SRR to be
used effectively. Such orders may promulgate provisions with
retrospective applicability.
Risk factors
Under the Banking Act, the Authorities are generally required to
have regard to specified objectives in exercising the powers
provided for by the Banking Act. One of the objectives (which is
required to be balanced as appropriate with the other specified
objectives) refers to the protection and enhancement of the
stability of the financial system of the UK. Moreover, the 'no
creditor worse off' safeguard contained in the Banking Act may not
apply in relation to an application of the separate write-down and
conversion power relating to capital instruments under the Banking
Act, in circumstances where a stabilisation power is not also used;
holders of debt instruments which are subject to the power may,
however, have ordinary shares transferred to or issued to them by
way of compensation.
Uncertainty exists as to how the Authorities may exercise the
powers granted to them under the Banking Act. In addition, the
determination that ordinary shares, securities and other
obligations issued by RBS Group (including the Group) may be
subject to write-down, conversion or 'bail-in' (as applicable) is
unpredictable and may depend on factors outside of the Group's
control. Moreover, the relevant provisions of the Banking Act
remain untested in practice. However, if the Group (or any other
RBS Group entity) is at or is approaching the point of
non-viability such that regulatory intervention is required, any
exercise of the resolution regime powers by the Authorities may
adversely affect holders of the Group's securities that fall within
the scope of 'bail-in' powers. This may result in various actions
being undertaken in relation to the Group and any securities of the
Group, including the write-down of certain of the Group's Eligible
Liabilities which would adversely affect the financial results,
condition and prospects of the Group.
Legal, regulatory and conduct risk
The Group's businesses are subject to substantial regulation and
oversight, which are constantly evolving and may adversely affect
the Group.
The Group is subject to extensive laws, regulations, corporate
governance practice and disclosure requirements, administrative
actions and policies in each jurisdiction in which it operates.
Many of these have been introduced or amended recently and are
subject to further material changes, which may increase compliance
and conduct risks. The Group expects government and regulatory
intervention in the financial services industry to remain high for
the foreseeable future.
In recent years, regulators and governments have focussed on
reforming the prudential regulation of the financial services
industry and the manner in which the business of financial services
is conducted. Among others, measures have included: enhanced
capital, liquidity and funding requirements, implementation of the
UK ring-fencing regime, implementation and strengthening of the
recovery and resolution framework applicable to financial
institutions in the UK, the EU and the US, financial industry
reforms (including in respect of MiFID II), enhanced data privacy
and IT resilience requirements, enhanced regulations in respect of
the provision of 'investment services and activities', and
increased regulatory focus in certain areas, including conduct,
consumer protection regimes, anti-money laundering, anti-bribery,
anti-tax evasion, payment systems, sanctions and anti-terrorism
laws and regulations. This has resulted in the Group facing
greater regulation and scrutiny in the UK and other countries in
which it operates.
Recent regulatory changes, proposed or future developments and
heightened levels of public and regulatory scrutiny in the UK,
Europe and the US have resulted in increased capital, funding and
liquidity requirements, changes in the competitive landscape,
changes in other regulatory requirements and increased operating
costs, and have impacted, and will continue to impact, product
offerings and business models. In particular, the Group is required
to comply with regulatory requirements in respect of the
implementation of the UK ring-fencing regime (See also, 'The Group,
including the Bank, is required to comply with regulatory
requirements in respect of the implementation of the UK
ring-fencing regime') and to ensure operational continuity in
resolution; the steps required to ensure such compliance entail
significant costs, and also impose significant operational, legal
and execution risk. Serious consequences could arise should the
Group be found to be non-compliant with such regulatory
requirements. Such changes may also result in an increased number
of regulatory investigations and proceedings and have increased the
risks relating to the Group's ability to comply with the applicable
body of rules and regulations in the manner and within the time
frames required.
Any of these developments (including any failure to comply with new
rules and regulations) could have a significant impact on the
Group's authorisations and licenses, the products and services that
the Group may offer, its reputation and the value of its assets,
the Group's operations or legal entity structure, and the manner in
which the Group conducts its business. Areas in which, and examples
of where, governmental policies, regulatory and accounting changes
and increased public and regulatory scrutiny could have an adverse
impact (some of which could be material) on the Group include, but
are not limited to, those set out above as well as the
following:
● general changes in government,
central bank, regulatory or competition policy, or changes in
regulatory regimes that may influence investor decisions in the
markets in which the Group operates;
● amendments to the framework or
requirements relating to the quality and quantity of regulatory
capital to be held by the Group as well as liquidity and leverage
requirements, either on a solo, consolidated or subgroup
level;
● changes to the design and
implementation of national or supranational mandated recovery,
resolution or insolvency regimes or the implementation of
additional or conflicting loss-absorption requirements, including
those mandated under UK rules, the BRRD, MREL or by the Financial
Stability Board's ('FSB') recommendations on total loss-absorbing
capacity ('TLAC');
● additional rules and regulatory
initiatives and review relating to customer protection and
resolution of disputes and complaints, including increased focus by
regulators (including the Financial Ombudsman Service) on how
institutions conduct business, particularly with regard to the
delivery of fair outcomes for customers and orderly/transparent
markets;
● rules and regulations relating
to, and enforcement of, anti-corruption, anti-bribery, anti-money
laundering, anti-terrorism, sanctions, anti-tax evasion or other
similar regimes;
● the imposition of additional
restrictions on the Group's ability to compensate
its
● senior management and other
employees and increased responsibility and liability rules
applicable to senior and key employees;
● rules relating to foreign
ownership, expropriation, nationalisation and confiscation of
assets;
● changes to corporate governance
practice and disclosure requirements, senior manager
responsibility, corporate structures and conduct of business
rules;
● financial market infrastructure
reforms establishing new rules applying to investment services,
short selling, market abuse, derivatives markets and investment
funds;
Risk factors
● increased attention to the
protection and resilience of, and competition and innovation in, UK
payment systems and
● developments relating to the UK
initiative on Open Banking and the European directive on payment
services;
● new or increased regulations
relating to customer data and privacy protection as well as IT
controls and resilience, including the GDPR;
● the introduction of, and changes
to, taxes, levies or fees applicable to the Group's operations,
such as the imposition of a financial transaction tax, changes in
tax rates, changes in the scope and administration of the Bank
Levy, increases in the bank corporation tax surcharge in the UK,
restrictions on the tax deductibility of interest payments or
further restrictions imposed on the treatment of carry-forward tax
losses that reduce the value of deferred tax assets and require
increased payments of tax;
● laws and regulations in respect
of climate change and sustainable finance (including ESG)
considerations; and
● other requirements or policies
affecting the Group and its profitability or product offering,
including through the imposition of increased compliance
obligations or obligations which may lead to restrictions on
business growth, product offerings, or pricing.
Changes in laws, rules or regulations, or in their interpretation
or enforcement, or the implementation of new laws, rules or
regulations, including contradictory or conflicting laws, rules or
regulations by key regulators or policymakers in different
jurisdictions, or failure by the Group to comply with such laws,
rules and regulations, may adversely affect the Group's business
and results. In addition, uncertainty and insufficient
international regulatory coordination as enhanced supervisory
standards are developed and implemented may adversely affect the
Group's ability to engage in effective business, capital and risk
management planning.
The Group is subject
to a number of legal, regulatory and governmental actions and
investigations including conduct-related reviews and redress
projects, the outcomes of which are inherently difficult to
predict, and which could have an adverse effect on the
Group.
The Group's operations are diverse and complex and it operates in
legal and regulatory environments that expose it to potentially
significant legal proceedings, and civil and criminal regulatory
and governmental actions. The Group has settled a number of legal
and regulatory actions over the past several years but continues to
be, and may in the future be, involved in such actions in the UK,
the US and other jurisdictions.
The legal and regulatory actions specifically referred to below
are, in the Group's view, the most significant legal and regulatory
actions to which the Group is currently exposed. However, the Group
is also subject to a number of ongoing reviews, investigations and
litigation proceedings relating to, among other matters, the
setting of benchmark rates such as LIBOR and related derivatives
trading, product mis-selling, customer mistreatment, anti-money
laundering, antitrust and various other compliance issues. Legal
and regulatory actions are subject to many uncertainties, and their
outcomes, including the timing, amount of fines or settlements or
the form of any settlements, which may be material and in excess of
any related provisions, are often difficult to predict,
particularly in the early stages of a case or investigation, and
the Group's expectations for resolution may change.
In particular, the Group has for a number of years been involved in
conduct-related reviews and redress projects, including a review of
certain historic customer connections in its former Global
Restructuring Group (GRG), management of claims arising from
historic sales of payment protection insurance. In relation to the
GRG review, the Group established a complaints process in November
2016, overseen by an independent third party. The complaints
process closed on 22 October 2018 for new complaints in the UK and,
with the exception of a small cohort of potential complainants for
whom there is an extended deadline, on 31 December 2018 for new
complaints in the Republic of Ireland. An additional provision
of £50 million was taken in Q4 2018, reflecting greater than
predicted complaints volumes in the week leading up to the closure
of the complaints process. In addition, the Group continues to
handle claims in relation to historic sales of payment protection
insurance and took additional provisions of £125 million in Q3
2018, reflecting increased complaint volumes as the complaint
deadline of 31 August 2019 approaches. See 'Litigation,
investigations and reviews' of Note 9 of this document for
details of these matters. The Group has dedicated resources in
place to manage claims and complaints relating to the above and
other conduct-related matters. Provisions taken in respect of such
matters include the costs involved in administering the various
complaints processes. Any failure to administer such processes
adequately, or to handle individual complaints fairly or
appropriately, could result in further claims as well as the
imposition of additional measures or limitations on the Group's
operations, additional supervision by the Group's regulators, and
loss of investor confidence.
Adverse outcomes or resolution of current or future legal or
regulatory actions, including conduct-related reviews or redress
projects, could result in restrictions or limitations on the
Group's operations, and could adversely impact the Group's capital
position or its ability to meet regulatory capital adequacy
requirements. Failure to comply with undertakings made by the Group
to its regulators may result in additional measures or penalties
being taken against the Group.
The Group may not effectively manage the transition of LIBOR and
other IBOR rates to alternative risk free rates.
UK and international regulators are driving a transition from the
use of interbank offer rates (IBOR's), including LIBOR, to
alternative risk free rates (RFRs). In the UK, the FCA has asserted
that they will not compel LIBOR submissions beyond 2021, thereby
jeopardising its continued availability, and have strongly urged
market participants to transition to RFRs, as the CFTC and other
regulators in the United States. The Group has significant exposure
to IBORs primarily on its commercial lending and legacy securities.
Until there is market acceptance on the form of alternative RFRs
for different products, the legal mechanisms to effect transition
cannot be confirmed, and the impact cannot be determined nor any
associated costs accounted for. The transition and uncertainties
around the timing and manner of transition to RFRs represent a
number of risks for the Group, its customers and the financial
services industry more widely.
These include risks related to: legal risks (as changes may be
required to documentation for new or existing transactions);
financial risks (which may arise from any changes in valuation of
financial instruments linked to benchmarks rates and may impact the
Group's cost of funds and its risk management related financial
models); pricing risks (such as changes to benchmark rates could
impact pricing mechanisms on certain instruments); operational
risks (due to the potential requirement to adapt IT systems, trade
reporting infrastructure and operational processes); and conduct
risks (which may relate to communication regarding the potential
impact on customers, and engagement with customers during the
transition period).
Risk factors
It is therefore currently difficult to determine to what extent the
changes will affect the Group, or the costs of implementing any
relevant remedial action. Uncertainty as to the nature of such
potential changes, alternative reference rates or other reforms and
as to the continuation of LIBOR or EURIBOR may adversely affect
financial instruments using LIBOR or EURIBOR as benchmarks. The
implementation of any alternative RFRs may be impossible or
impracticable under the existing terms of such financial
instruments and could have an adverse effect on the value of,
return on and trading market for such financial
instruments.
The Group operates in markets that are subject to intense scrutiny
by the competition authorities.
There is significant oversight by competition authorities of the
markets which the Group operates in. The competitive landscape for
banks and other financial institutions in the UK and the rest of
Europe is rapidly changing. Recent regulatory and legal changes
have and may continue to result in new market participants and
changed competitive dynamics in certain key areas, such as in
retail and SME banking in the UK where the introduction of new
entrants is being actively encouraged by the UK
Government.
The UK retail banking sector has been subjected to intense scrutiny
by the UK competition authorities and by other bodies, including
the FCA and the Financial Ombudsman Service, in recent years,
including with a number of reviews/inquiries being carried out,
including market reviews conducted by the CMA and its predecessor
the Office of Fair Trading regarding SME banking and personal
banking products and services, the Independent Commission on
Banking and the Parliamentary Commission on Banking
Standards.
These reviews raised significant concerns about the effectiveness
of competition in the retail banking sector. The CMA's Retail
Banking Market Order 2017 imposes remedies primarily intended to
make it easier for consumers and businesses to compare personal
current account ('PCA') and SME bank products, increase the
transparency of price comparison between banks and amend PCA
overdraft charging. These remedies impose additional compliance
requirements on the RBS Group and the Group and could, in
aggregate, adversely impact the Group's competitive position,
product offering and revenues.
Adverse findings resulting from current or future competition
investigations may result in the imposition of reforms or remedies
which may impact the competitive landscape in which the Group
operates or result in restrictions on mergers and consolidations
within the financial sector.
The cost of implementing the Alternative Remedies Package could be
more onerous than anticipated.
In connection with the implementation of the Alternative Remedies
Package (regarding the business previously described as Williams
& Glyn), an independent body ('Independent Body') has been
established to administer the Alternative Remedies Package. The
implementation of the Alternative Remedies Package has involved
costs for the Group, including but not limited to the funding
commitments of £425 million for the Capability and Innovation
Fund and £350 million for the incentivised switching scheme,
both being administered by the Independent Body. Implementation of
the Alternative Remedies Package may involve additional costs for
the Group and may also divert resources from the Group's operations
and jeopardise the delivery and implementation of other significant
plans and initiatives. In addition, under the terms of the
Alternative Remedies Package, the Independent Body may require the
Group to modify certain aspects of the Group's execution of the
incentivised switching scheme, which could increase the cost of
implementation. Furthermore, should the uptake within the
incentivised switching scheme not be sufficient, the Independent
Body has the ability to extend the duration of the scheme by up to
twelve months, impose penalties of up to £50 million, and can
compel the RBS Group to extend the customer base to which the
scheme applies which may result in prolonged periods of disruption
to a wider portion of the Group's business.
As a direct consequence of the incentivised switching scheme (which
comprises part of the Alternative Remedies Package), the Group will
lose existing customers and deposits, which in turn will have
adverse impacts on the Group's business and associated revenues and
margins. Furthermore, the capability and innovation fund (which
also comprises part of the Alternative Remedies Package) is
intended to benefit eligible competitors and negatively impact the
Group's competitive position. To support the incentivised switching
initiative, upon request by an eligible bank, the RBS Group has
agreed to grant those customers which have switched to eligible
banks under the incentivised switching scheme access to its branch
network for cash and cheque handling services, which may impact
customer service quality for the Group's own customers with
consequent competitive, financial and reputational implications.
The implementation of the incentivised switching scheme is also
dependent on the engagement of the eligible banks with the
incentivised switching scheme and the application of the eligible
banks to and approval by the Independent Body. The incentivised
transfer of SME customers to third party banks places reliance on
those third parties to achieve satisfactory customer outcomes which
could give rise to reputational damage to the Group if these are
not forthcoming.
A failure to comply with the terms of the Alternative Remedies
Package could result in the imposition of additional measures or
limitations on the Group's operations, additional supervision by
the Group's regulators, and loss of investor
confidence.
Changes in tax legislation or failure to generate future taxable
profits may impact the recoverability of certain deferred tax
assets recognised by the Group.
In accordance with IFRS, the Group has recognised deferred tax
assets on losses available to relieve future profits from tax only
to the extent it is probable that they will be recovered. The
deferred tax assets are quantified on the basis of current tax
legislation and accounting standards and are subject to change in
respect of the future rates of tax or the rules for computing
taxable profits and offsetting allowable losses.
Failure to generate sufficient future taxable profits or further
changes in tax legislation (including with respect to rates of tax)
or accounting standards may reduce the recoverable amount of the
recognised tax loss deferred tax assets, amounting to £1.4
billion as at 31 December 2018. Changes to the treatment of certain
deferred tax assets may impact the Group's capital position. In
addition, the Group's interpretation or application of relevant tax
laws may differ from those of the relevant tax authorities and
provisions are made for potential tax liabilities that may arise on
the basis of the amounts expected to be paid to tax authorities.
The amounts ultimately paid may differ materially from the amounts
provided depending on the ultimate resolution of such
matters.
Forward-looking statements
Cautionary statement regarding forward-looking
statements
Certain sections in this document contain 'forward-looking
statements' as that term is defined in the United States Private
Securities Litigation Reform Act of 1995, such as statements that
include the words 'expect', 'estimate', 'project', 'anticipate',
'commit', 'believe', 'should', 'intend', 'plan', 'could',
'probability', 'risk', 'Value-at-Risk (VaR)', 'target', 'goal',
'objective', 'may', 'endeavour', 'outlook', 'optimistic',
'prospects' and similar expressions or variations on these
expressions.
In particular, this document includes forward-looking statements
relating, but not limited to: future profitability and performance,
including financial performance targets such as return on tangible
equity; cost savings and targets, including cost:income ratios;
litigation and government and regulatory investigations, including
the timing and financial and other impacts thereof; the
implementation of the Alternative Remedies Package; the
continuation of the Group's balance sheet reduction programme,
including the reduction of risk-weighted assets (RWAs) and the
timing thereof; capital and strategic plans and targets; capital,
liquidity and leverage ratios and requirements, including CET1
Ratio, RWA equivalents (RWAe), Pillar 2 and other regulatory buffer
requirements, minimum requirement for own funds and eligible
liabilities, and other funding plans; funding and credit risk
profile; capitalisation; portfolios; net interest margin; customer
loan and income growth; the level and extent of future impairments
and write-downs, including with respect to restructuring and
remediation costs and charges; and the Group's exposure to
political risk, economic risk, climate change risk, operational
risk, conduct risk, cyber and IT risk and credit rating risk and to
various types of market risks, including interest rate risk,
foreign exchange rate risk and commodity and equity price risk;
customer experience including our Net Promotor Score (NPS);
employee engagement and gender balance in leadership
positions.
Limitations inherent to forward-looking statements
These statements are based on current plans, estimates, targets and
projections, and are subject to significant inherent risks,
uncertainties and other factors, both external and relating to the
Group's strategy or operations, which may result in the Group being
unable to achieve the current targets, predictions, expectations
and other anticipated outcomes expressed or implied by such
forward-looking statements. In addition, certain of these
disclosures are dependent on choices relying on key model
characteristics and assumptions and are subject to various
limitations, including assumptions and estimates made by
management. By their nature, certain of these disclosures are only
estimates and, as a result, actual future gains and losses could
differ materially from those that have been estimated. Accordingly,
undue reliance should not be placed on these statements.
Forward-looking statements speak only as of the date we make them
and we expressly disclaim any obligation or undertaking to release
publicly any updates or revisions to any forward-looking statements
contained herein to reflect any change in the Group's expectations
with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.
Important factors that could affect the actual outcome of the
forward-looking statements
We caution you that a large number of important factors could
adversely affect our results or our ability to implement our
strategy, cause us to fail to meet our targets, predictions,
expectations and other anticipated outcomes or affect the accuracy
of forward-looking statements we describe in this document
including in the risk factors and other uncertainties set out in
the Group's 2018 Annual Report and Accounts and other risk factors
and uncertainties discussed in this document. These include the
significant risks presented by: operational and IT resilience risk
(including in respect of: the Group being subject to cyberattacks;
operational risks inherent in the Group's business; the Group's
operations being highly dependent on its IT systems; the Group
being required to comply with regulatory requirements in respect of
the implementation of the UK ring-fencing regime; the Group relying
on attracting, retaining and developing senior management and
skilled personnel and maintaining good employee relations; the
Group's risk management framework; and reputational risk), economic
and political risk (including in respect of: uncertainties
surrounding the UK's withdrawal from the European Union; increased
political and economic risks and uncertainty in the UK and global
markets; continued low interest rates; climate change and the
transition to a low carbon economy; changes in foreign currency
exchange rates; and HM Treasury's ownership of RBSG and the
possibility that it may exert a significant degree of influence
over the RBS Group), financial resilience risk (including in
respect of: the Group's ability to meet targets and generate
sustainable returns; deteriorations in borrower and counterparty
credit quality; the highly competitive markets in which the Group
operates; the ability of the Group to meet prudential regulatory
requirements for capital or manage its capital effectively; the
ability of the Group to access adequate sources of liquidity and
funding; the Group's reliance on RBS Group for capital and funding
support; changes in the credit ratings of RBSG, any of its
subsidiaries or any of its respective debt securities; the RBS
Group's ability to meet requirements of regulatory stress tests;
possible losses or the requirement to maintain higher levels of
capital as a result of limitations or failure of various models;
sensitivity of the Group's financial statements to underlying
accounting policies, judgements, assumptions and estimates; changes
in applicable accounting policies or rules; and the
application of UK statutory stabilisation or resolution powers) and
legal, regulatory and conduct risk (including in respect of: the
Group's businesses being subject to substantial regulation and
oversight; legal, regulatory and governmental actions and
investigations; the replacement of LIBOR, EURIBOR and other
benchmark rates; heightened regulatory and governmental
scrutiny (including by competition authorities);
implementation of the Alternative Remedies Package and the costs
related thereto; and changes in tax legislation).
The forward-looking statements contained in this document speak
only as at the date hereof, and the Group does not assume or
undertake any obligation or responsibility to update any
forward-looking statement to reflect events or circumstances after
the date hereof or to reflect the occurrence of unanticipated
events.
The information, statements and opinions contained in this document
do not constitute a public offer under any applicable legislation
or an offer to sell or solicit of any offer to buy any securities
or financial instruments or any advice or recommendation with
respect to such securities or other financial
instruments.
Legal Entity Identifier: 213800IBT39XQ9C4CP71
Signatures
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
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Date:
15th
February 2019
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NATIONAL
WESTMINSTER BANK PLC (Registrant)
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By:
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/s/ Jan
Cargill
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Name:
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Jan
Cargill
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Title:
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Deputy
Secretary
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