REG - Royal Bk Scot.Grp. - Final Results - Part 2 <Origin Href="QuoteRef">RBS.L</Origin> - Part 1

NatwestAnnouncement

26/02/2015 07:14

RNS Number : 9136F
Royal Bank of Scotland Group PLC
26 February 2015

Appendix 1
Capital and risk management

Appendix 1 Capital and risk management
Presentation of information
1
General overview and key developments
2
Capital management
Overview 
5
Capital resources
6
Leverage exposure
9
Risk-weighted assets
10
Liquidity and funding risk
Overview 
14
Liquidity risk
15
Funding risk
17
Balance sheet encumbrance
20
Credit risk
Overview 
23
Financial assets
24
Loans and related credit metrics
29
Debt securities
34
Derivatives
36
Key loan portfolios
38
Market risk
Overview 
49
Trading portfolios
50
Non-trading portfolios
52
Country risk
Overview 
56
Summary of country exposures
59
Presentation of information
The assets of disposal groups are presented as a single line in the consolidated balance sheet as required by IFRS. As allowed by IFRS, exposures, measures and ratios in this Appendix include disposal groups, primarily relating to Citizens Financial Group, on a line-by-line basis. A summary of this presentation is set out in Appendix 2. 


Appendix 1 Capital and risk management
General overview and key developments
RBS's main risks are described in 'Risk and balance sheet management - Risk coverage' in the 2014 Annual Report and Accounts. The table below summarises the key developments during 2014 for these risks.
Risk type
Overview
Capital and leverage
Key milestones achieved in 2014 included the sell down of the first tranche of CFG; run down of the RCR and CIB assets; and the sell down of the RBS N.V. AFS portfolio. A 3.1 billion improvement in CET1 capital and a 73 billion reduction in RWAs resulted in the CET1 ratio improving during the year by 260 basis points from 8.6% to 11.2%. Risk reduction strategies contributed to the RWA reduction, 40 billion in CIB and 25 billion in RCR. 
RBS's current Pillar 2A requirement is 3.5% of RWAs at 31 December 2014. From 1 January 2015, 56% of the total Pillar 2A or 2.0% of RWAs will be met from CET1 capital.
Based on capital that is required to be held to meet the overall financial adequacy rule, including holding current estimates of Pillar 2A constant, RBS estimates that its 'fully phased' CET1 maximum distributable amount (MDA) requirement would be 10.5% in 2019. Assuming a 13% a steady state CET1 capital ratio is achieved, RBS currently estimates that it would have a 2.5% headroom to MDA trigger in 2019.
A significant reduction of 142 billion or 13% in the leverage exposure to 940 billion and a year on year increase in Tier 1 capital (100% CET1 currently) contributed to an 80 basis points improvement in leverage ratio from 3.4% to 4.2%. Full implementation of the 2014 Basel III leverage ratio framework, particularly on securities financing transactions, also contributed to the leverage exposure reduction.
Liquidity and funding
Liquidity metrics remained strong reflecting balance sheet and risk reduction as well as growth in UK PBB deposits: the liquidity coverage ratio improved to 112%; the net stable funding ratio was 121%; and the liquidity portfolio of 151 billion covered short-term and total wholesale funding of 28 billion and 90 billion by more than five and 1.5 times respectively. Based on its assessment of the Financial Stability Board's proposals, RBS may issue 3 - 5 billion per annum of qualifying debt between 2015 - 2019 to meet future total loss absorbing capital requirements.
Conduct and legal
RBS continued to remediate historical conduct issues, while also restructuring its customer-facing businesses and support functions around the needs of its customers. Actions taken by RBS to address underlying control deficiencies included strengthening significantly the systems and controls governing RBS's LIBOR submissions, and simplifying RBS's retail product offering and sales processes. The conduct risk framework was also further developed, with the embedding of a new Conduct and Regulatory Affairs (C&RA) operating model, and the orientation of C&RA's assurance coverage and testing towards customer outcomes.
The impact of conduct issues resulted in litigation and conduct costs remaining high at 2.2 billion in 2014, albeit lower than the 3.8 billion recorded in 2013. 


Appendix 1 Capital and risk management
General overview and key developments(continued)
Risk type
Overview
Credit
RBS's credit risk portfolio continued to improve with an overall reduction in exposure, an improvement in credit quality and a material provision release in 2014. These improvements were driven by supportive economic and market conditions in the UK and Ireland, better liquidity and increased collateral values, and also reflected improvements in credit risk measurement. Balance sheet credit exposure after credit mitigation decreased by 9% to 353 billion and credit RWAs fell by 62 billion or 17% to 295 billion primarily reflecting risk reduction and RCR disposal strategy. The wind-down of CIB's US asset-backed products business contributed to a 13 billion decrease in asset-backed securities, now at 25 billion, an 86 billion reduction on the 2008 peak of 111 billion.
Impairment provisions of 18.0 billion, down 7.2 billion, covered risk elements in lending of 28.2 billion, down 11.2 billion, by 64%. Commercial real estate lending fell by 9.3 billion to 43.3 billion, of which 13.3 billion was in REIL with a provision coverage of 68%. Favourable market conditions, particularly in Ireland, resulted in impairment releases of 3.6 billion more than offsetting new impairment charges of 2.4 billion. This lead to a net release of 1.2 billion, of which 1.3 billion was in RCR and 0.4 billion in Ulster Bank, partly offset by net impairment charges of 0.3 billion in UK PBB and 0.2 billion in CFG.
Market
RBS's traded market risk profile decreased significantly, with market risk limits being reduced across all businesses, in some instances by 50-60%. Average trading VaR decreased significantly during the year to 27.8 million, 35% of the 2013 average, reflecting risk reductions in CIB and RCR, as well as the effect of a more comprehensive economic view of risk from the incorporation of credit and funding valuation adjustments in the VaR calculation. Market risk RWAs also decreased by 6.3 billion to 24.0 billion
Country
RBS maintained a cautious stance as many clients continued to reduce debt levels. Total eurozone net balance sheet exposure decreased by 5 billion or 5% to 98 billion. Within this amount, eurozone periphery exposures decreased by 10 billion, or 25%, to 31 billion, primarily in Spain reflecting the disposal of legacy liquidity portfolio bonds, and in Ireland and Italy. Total exposure to Greece was 0.4 billion but 120 million after the effect of collateral and guarantees. Limits for Russia and Ukraine were adjusted, additional credit restrictions were placed on new business and exposures were reviewed against international sanctions.
Pension
The triennial actuarial funding valuation of the Main scheme was agreed in May 2014 and showed an excess in the value of liabilities over the value of assets of 5.6 billion at 31 March 2013; a ratio of 82%. In 2014, various pension stress-testing initiatives were undertaken, both on internally defined scenarios and those to meet integrated PRA and European Banking Authority stress testing requirements.


Appendix 1 Capital and risk management
General overview and key developments(continued)
Risk type
Overview
Operational
RBS's transformation plan is material and complex affecting all business areas and functions simultaneously and so has the potential to increase operational risk profile at least in the short term. Significant investments were made to improve technology resilience for core banking services, operating practices and risk management across the three lines of defence. In particular, enhancements were made to cyber security programmes, mitigating a number of vulnerabilities.
Regulatory
The level of regulatory risk remains high as policymakers and regulators continue to strengthen regulations and supervision in response to the events of 2007 and 2008. RBS will in future focus CIB's business model on its leading positions in UK rates, debt capital markets and foreign exchange; this will leave RBS well-placed to implement the ring-fencing requirements, in 2019.
Reputational
The most material threat to RBS's reputation continued to originate from historical and more recent conduct deficiencies. RBS has been the subject of investigations and review by a number of regulators, some of which have resulted in fines and public censure. 
Business
RBS reduced its business risk profile as it curtailed riskier activities in CIB, made disposals through RCR, and announced an intensified cost management programme.
Strategic
In early 2014, RBS announced the results of a strategic review with a defined plan to shift the business mix towards the UK and the retail and commercial banking segments, with the aim of a lower risk profile. The year saw good progress, with results in general exceeding targets and run-down or sell-off of non-core assets ahead of schedule. Capital ratios increased considerably, a significant step towards targeted levels of financial strength which, when attained, will provide RBS with more strategic options. However, RBS continued to work through the impact of tougher regulatory regime on banks.

Appendix 1 Capital and risk management
Capital management
RBS aims to maintain an appropriate level of capital to meet its business needs and regulatory requirements, and operates within an agreed risk appetite. The appropriate level of capital is determined based on the dual aims of: (i) meeting minimum regulatory capital requirements; and (ii) ensuring RBS maintains sufficient capital to uphold customer, investor and rating agency confidence in the organisation, thereby supporting its business franchises and funding capacity. 
Overview
RBS's CET1 ratio was 11.2% at 31 December 2014, an improvement of 260 basis points compared with 8.6% as at 31 December 2013.
The leverage ratio under 2014 Basel III framework improved from 3.4% to 4.2% at 31 December 2014.
Key milestones achieved in 2014 include:
IPO of CFG;
run down of RCR and CIB assets; and
disposal of 9 billion of higher risk legacy available-for-sale securities, thereby reducing stressed capital and RWAs.

Going forward, RBS is focused on delivering a capital plan in-line with its strategic objectives which includes the divestment of CFG by the end of 2016 and further run down of RCR and CIB assets.
From 2015 RBS will target a c.13% CET1 ratio during the period of CIB restructuring and expects to achieve this by the end of 2016.
RBS plans to issue around 2 billion of CRR-compliant Additional Tier 1 (AT1) capital instruments in 2015.
RBS's current Pillar 2A requirement is 3.5% of RWAs at 31 December 2014. From 1 January 2015, 56% of the total Pillar 2A or 2.0% of RWAs is required to be met from CET1 capital. Pillar 2A is a point in time assessment of the amount of capital that is required to be held to meet the overall financial adequacy rules. The PRA assessment may change over time, including as a result of at least an annual assessment and supervisory review of RBS's Internal Capital Adequacy Assessment Process. 
RBS's capital risk appetite framework, which informs its capital targets, includes consideration of the MDA requirements. These requirements are expected to be phased in from 2016, with full implementation by 2019. 
Based on current capital requirements, including holding current estimates of Pillar 2A constant for illustrative purposes, RBS estimates that its 'fully phased' CET1 MDA requirement would be 10.5% in 2019, assuming RBS's current risk profile. It should be noted that this estimate does not reflect the anticipated impact of RBS's planned restructuring and balance sheet risk reduction programmes, changes in the regulatory framework or other factors that could impact target CET1 ratios. This estimated MDA requirement comprises:
4.5% Pillar 1 minimum CET1 ratio
2.0% Pillar 2A CET1 ratio
2.5% Capital conservation buffer
1.5% Global Systemically Important Institution buffer
Based on the assumptions above, assuming a 13% steady state CET1 capital ratio is achieved, RBS currently estimates that it would have headroom of 2.5% to fully phased MDA trigger in 2019. This headroom will be subject to ongoing review to accommodate regulatory and other changes.


Appendix 1 Capital and risk management
Capital resources








End-point CRR (1)

PRA transitional basis (1)

31 December
30 September
31 December

31 December
30 September
31 December
2014
2014
2013 (2)

2014
2014
2013 (2)

m
m
m

m
m
m








Shareholders' equity (excluding







 non-controlling interests)







Shareholders' equity 
57,246
62,091
58,742

57,246
62,091
58,742
Preference shares - equity
(4,313)
(4,313)
(4,313)

(4,313)
(4,313)
(4,313)
Other equity instruments
(784)
(979)
(979)

(784)
(979)
(979)

52,149
56,799
53,450

52,149
56,799
53,450








Regulatory adjustments and deductions







Own credit
500
616
601

500
616
601
Defined benefit pension fund 







 adjustment 
(238)
(198)
(172)

(238)
(198)
(172)
Cash flow hedging reserve
(1,029)
(291)
84

(1,029)
(291)
84
Deferred tax assets
(1,222)
(1,565)
(2,260)

(1,222)
(1,565)
(2,260)
Prudential valuation adjustments
(384)
(438)
(781)

(384)
(438)
(781)
Goodwill and other intangible assets
(7,781)
(12,454)
(12,368)

(7,781)
(12,454)
(12,368)
Expected losses less impairments
(1,491)
(1,596)
(1,731)

(1,491)
(1,596)
(1,731)
Other regulatory adjustments
(585)
353
(55)

(855)
215
(55)

(12,230)
(15,573)
(16,682)

(12,500)
(15,711)
(16,682)








CET1 capital
39,919
41,226
36,768

39,649
41,088
36,768








Additional Tier 1 (AT1) capital







Qualifying instruments and related 







 share premium subject to phase out
-
-
-

5,820
5,820
5,831
Qualifying instruments issued by







 subsidiaries and held by third parties
-
-
-

1,648
1,665
1,749
AT1 capital
-
-
-

7,468
7,485
7,580
















Tier 1 capital
39,919
41,226
36,768

47,117
48,573
44,348








Qualifying Tier 2 capital







Qualifying instruments and related 







 share premium 
5,542
5,361
3,582

6,136
5,956
4,431
Qualifying instruments issued by







 subsidiaries and held by third parties
3,175
3,454
5,151

7,490
7,705
9,374








Tier 2 capital
8,717
8,815
8,733

13,626
13,661
13,805








Total regulatory capital
48,636
50,041
45,501

60,743
62,234
58,153
Notes:
(1)
Capital Requirements Regulation (CRR) as implemented by the Prudential Regulation Authority in the UK, with effect from 1 January 2014. All regulatory adjustments and deductions to CET1 have been applied in full for the end-point CRR basis with the exception of unrealised gains on AFS securities which has been included from 2015 for the PRA transitional basis.
(2)
Estimated.


Appendix 1 Capital and risk management
Capital resources (continued)
Capital flow statement
The table below analyses the movement in end-point CRR CET1 and Tier 2 capital for the year.

CET1
Tier 2
Total

m
m
m




At 1 January 2014
36,768
8,733
45,501
Loss for the year including reclassification of CFG, net of movements in fair value of own credit
(3,571)
-
(3,571)
Share capital and reserve movements in respect of employee share schemes
205
-
205
Ordinary shares issued
300
-
300
Foreign exchange reserve
(208)
-
(208)
AFS reserves
607
-
607
Decrease in goodwill and intangibles deduction
4,032
-
4,032
Deferred tax assets (DTA)
1,038
-
1,038
Prudential valuation adjustments (PVA)
397
-
397
Excess of expected loss over impairment provisions (EL-P)
240
-
240
Dated subordinated debt issues
-
2,159
2,159
Net dated subordinated debt/grandfathered instruments
-
(1,537)
(1,537)
Foreign exchange movements
-
(638)
(638)
Other movements
111
-
111




At 31 December 2014
39,919
8,717
48,636
Key points
On reclassification of CFG to disposal groups at 31 December 2014, the carrying value exceeded its fair value less costs to sell by 4 billion. The consequential write down has been ascribed to goodwill relating to CFG.


The lower regulatory capital deduction for DTA is due to the reduction in the net DTA balance, reflecting the write down of deferred tax assets during the year.


Tier 2 issuances of 2.2 billion comprised 1 billion 3.625% subordinated notes and $2.25 billion 5.125% subordinated notes, both maturing in 2024.


Appendix 1 Capital and risk management
Capital resources (continued)
Notes:
General:
In accordance with the PRA's Policy Statement PS7/2013 issued in December 2013 on the implementation of CRD IV, all regulatory adjustments and deductions to CET1 have been applied in full (end-point CRR basis) with the exception of unrealised gains on AFS securities which will be included from 2015 (PRA transitional basis).

CRD IV and Basel III impose a minimum CET1 ratio of 4.5%. Further, CET1 requirements will be imposed through buffers in the CRD. There are three buffers that will affect RBS: the capital conservation buffer set at 2.5% of RWAs; the counter-cyclical capital buffer (up to 2.5% of RWAs), which will be calculated as the weighted average of the countercyclical capital buffer rates applied in the countries where RBS has relevant credit exposures; and the highest of Global-Systemically Important Institution (G-SII), Other-Systemically Important Institution (O-SII) or Systemic Risk Buffers set by the supervisory authorities. RBS has been provisionally allocated a G-SII buffer of 1.5%. The regulatory target capital requirements will be phased in through CRR, and are expected to apply in full from 1 January 2019. Until then, using national discretion the PRA can apply a top-up. As set out in the PRA's Supervisory Statement SS3/13, RBS and other major UK banks and building societies are required to maintain a CET1 ratio of 7%, after taking into account certain adjustments set by the PRA.

From 1 January 2015, RBS must meet at least 56% of its Pillar 2A capital requirement with CET1 capital and the balance with Additional Tier 1 and/or Tier 2 capital. The Pillar 2A capital requirement is the additional capital that RBS must hold, in addition to meeting its Pillar 1 requirements in order to comply with the PRA's overall financial adequacy rule.

Measures in relation to end-point CRR basis, including RWAs, are based on the current interpretation, expectations, and understanding, of the CRR requirements, as well as further regulatory clarity and implementation guidance from the UK and EU authorities (end-point CRR basis above). The actual end-point CRR impact may differ when the final technical standards are interpreted and adopted.
Capital base:
(1)
Own funds are based on shareholders' equity.
(2)
Includes the nominal value of B shares (0.5 billion) on the assumption that RBS will be privatised in the future and that they will count as permanent equity in some form by the end of 2017.
(3)
The adjustment, arising from the application of the prudent valuation requirements (PVA) to all assets measured at fair value, has been included in full. The PVA relating to assets under advanced internal ratings approach has been included in impairment provisions in the determination of the deduction from expected losses.
(4)
Where the deductions from AT1 capital exceed AT1 capital, the excess is deducted from CET1 capital. The excess of AT1 deductions over AT1 capital in year one of transition is due to the application of the current rules to the transitional amounts.
(5)
Insignificant investments in equities of other financial entities (net): long cash equity positions are considered to have matched maturity with synthetic short positions if the long position is held for hedging purposes and sufficient liquidity exists in the relevant market. All the trades are managed and monitored together within the equities business.
Risk-weighted assets (RWAs): 
(1)
Current securitisation positions are shown as risk-weighted at 1,250%.
(2)
RWA uplifts include the impact of credit valuation adjustments (CVA) and asset valuation correlation (AVC) on banks and central counterparties.
(3)
RWAs reflect implementation of the full internal model method suite, and include methodology changes that took effect immediately on CRR implementation.
(4)
Non-financial counterparties and sovereigns that meet the eligibility criteria under CRR are exempt from the credit valuation adjustments volatility charges. 
(5)
The CRR final text includes a reduction in the risk-weight relating to small and medium-sized enterprises.


Appendix 1 Capital and risk management
Leverage exposure
Basis of preparation
The leverage exposure set out on page 27 of the main announcement is based on the revised 2014 Basel III leverage ratio framework. The leverage ratio as originally included in the CRR is aligned with the internationally agreed ratio from January 2015.
Additional analysis of derivative notionals and undrawn commitments, two of the major components outside the balance sheet contributing to the leverage exposure is set out below.
Derivative notionals
Derivative potential future exposures (PFE) are calculated based on the notional value of the contracts and is dependent on the type of contract. For contracts other than credit derivatives the PFE is based on the type and maturity of the contract after the effect of netting arrangements. 
The PFE on credit derivatives is based on add-on factors determined by the asset quality of the referenced instrument. Qualifying credit derivatives attract a PFE add-on of 5% and have reference securities issued by public sector entities, multilateral development banks or other investment grade issuers. Non-qualifying credit derivatives attract a PFE add-on of 10%.
The table below analyses the derivative notionals by maturity for contracts other than credit derivatives and credit derivatives by qualifying and not.





Credit derivatives


Derivatives other than credit derivatives


Non-


<1 year 
1-5 years 
>5 years 

Qualifying
qualifying
Total 
31 December 2014
bn 
bn 
bn 

bn 
bn 
bn 








Interest rate
11,069
10,423
5,839



27,331
Exchange rate
3,649
720
306



4,675
Equity 
42
33
2



77
Commodities
1
-
-



1
Credit 




99
26
125








Total
14,761
11,176
6,147

99
26
32,209








31 December 2013















Interest rate
10,582
16,212
8,795



35,589
Exchange rate
3,261
814
480



4,555
Equity 
43
35
1



79
Commodities
-
1
1



2
Credit




189
64
253








Total
13,886
17,062
9,277

189
64
40,478

Appendix 1 Capital and risk management
Leverage exposure (continued)
Weighted undrawn commitments 










Ulster
Commercial
Private 

Central



UK PBB
Bank
Banking
Banking
CIB
items
CFG
RCR
Total
31 December 2014
bn
bn
bn
bn
bn
bn
bn
bn
bn










Unconditionally cancellable items (1)
3.1
0.1
1.0
0.2
2.4
-
1.8
-
8.6
Items with a 20% CCF
0.4
-
0.7
0.1
3.2
-
0.4
-
4.8
Items with a 50% CCF
4.8
1.0
9.8
1.4
36.8
1.6
7.8
0.5
63.7
Items with a 100% CCF
0.1
0.3
2.2
0.8
10.2
3.9
1.5
0.3
19.3











8.4
1.4
13.7
2.5
52.6
5.5
11.5
0.8
96.4










31 December 2013



















Unconditionally cancellable items (1)
3.1
0.2
0.4
0.1
0.7
-
1.7
-
6.2
Items with a 20% CCF
0.4
-
0.6
0.6
1.5
-
0.2
-
3.3
Items with a 50% CCF
5.8
1.0
12.5
1.0
41.9
2.7
7.1
0.7
72.7
Items with a 100% CCF
0.1
0.3
2.4
1.4
12.0
-
1.6
0.2
18.0











9.4
1.5
15.9
3.1
56.1
2.7
10.6
0.9
100.2
Note: 
(1)
Based on a 10% credit conversion factor.

Risk-weighted assets
The table below analyses the movement in credit risk RWAs by key drivers during the year.

Credit risk

Non-counterparty
Counterparty
Total

bn
bn
bn




At 1 January 2014 (Basel 2.5 basis)
291.1
22.3
313.4
CRR impact
26.8
16.8
43.6




At 1 January 2014 (CRR basis)
317.9
39.1
357.0
Foreign exchange movement
1.5
-
1.5
Business movements
(21.6)
(13.9)
(35.5)
Risk parameter changes
(11.7)
-
(11.7)
Methodology changes
(17.9)
5.2
(12.7)
Model updates
(2.7)
-
(2.7)
Other changes
(0.8)
-
(0.8)




At 31 December 2014 (CRR basis)
264.7
30.4
295.1




Modelled (1)
163.2
26.6
189.8
Non-modelled
101.5
3.8
105.3





264.7
30.4
295.1
The table below analyses movements in market and operational risk RWAs during the year.



Market risk
Operational


CIB
Other
Total
risk
Total

bn
bn
bn
bn
bn






At 1 January 2014 (Basel 2.5 and CRR bases)
22.4
7.9
30.3
41.8
72.1
Business and market movements
(15.4)
(2.8)
(18.2)
(5.0)
(23.2)
Methodology changes 
11.9
-
11.9
-
11.9






At 31 December 2014 (CRR basis)
18.9
5.1
24.0
36.8
60.8






Modelled (1)
14.9
3.3
18.2

18.2
Non-modelled
4.0
1.8
5.8
36.8
42.6







18.9
5.1
24.0
36.8
60.8
Note:
(1) 
Modelled refers to advanced internal ratings (AIRB) basis for non-counterparty credit risk, internal model method (IMM) for counterparty credit risk, and value-at-risk and related models for market risk. These principally relate to CIB (83 billion) and Commercial Banking (48 billion).


Appendix 1 Capital and risk management
Risk-weighted assets (continued)
The table below analyses RWA movements by segment during the year.















Ulster
Commercial
Private

Central


Non-


UK PBB
Bank
Banking
Banking
CIB
items
CFG
RCR
Core
Total 
Total RWAs
bn
bn
bn
bn
bn
bn
bn
bn
bn
bn











At 31 December 2013 (Basel 2.5 basis)
51.2
30.7
65.8
12.0
120.4
20.1
56.1
-
29.2
385.5
Impact of dissolution of Non-Core and 










 creation of RCR
-
(1.9)
(2.7)
-
(10.0)
0.1
2.0
41.7
(29.2)
-
CRR impact
(1.5)
(0.6)
(1.6)
-
36.7
3.1
2.5
5.0
-
43.6











At 1 January 2014 (CRR basis)
49.7
28.2
61.5
12.0
147.1
23.3
60.6
46.7
-
429.1
Foreign exchange movement
-
(1.1)
-
-
(1.0)
-
3.6
-
-
1.5
Business movements
(0.3)
0.3
-
-
(36.8)
(6.1)
4.2
(20.0)
-
(58.7)
Risk parameter changes (1)
(5.0)
(3.6)
0.2
-
-
-
-
(3.3)
-
(11.7)
Methodology changes (2)
-
-
1.7
(0.2)
(2.0)
-
-
(0.3)
-
(0.8)
Model updates (3)
(1.6)
-
0.6
-
(0.2)
(0.4)
-
(1.1)
-
(2.7)
Other changes 
-
-
-
(0.3)
-
(0.5)
-
-
-
(0.8)











At 31 December 2014 (CRR basis)
42.8
23.8
64.0
11.5
107.1
16.3
68.4
22.0
-
355.9
Notes:
(1)
Risk parameter changes relate to changes in credit quality metrics of customers and counterparties such as probability of default (PD) and loss given default (LGD). They comprise:
UK PBB and Ulster Bank: primarily reflects recalibration of PD and LGD models reflecting improvements to the UK economy.
RCR: decrease in defaulted assets (1.0 billion) and internal rating upgrades for certain counterparties (0.8 billion).
(2)
Methodology changes included:
Commercial Banking: revisions to both currency netting and maturity dates for securitisation liquidity facilities.
CIB: 2.0 billion primarily represents inclusion of hedges in the CVA calculation. In addition there were offsetting movements of 11.4 billion reflecting transition of trading book securitisations from credit risk to market risk; and 7.5 billion reflecting reclassification of new CRR related charges, primarily asset value correlation and certain exchange traded derivatives from non-counterparty credit risk to counterparty credit risk. 
(3)
The following models were updated during the year:
UK PBB: revised retail LGD model.
Commercial Banking and RCR: new large corporate PD model.
CIB: reduction due to the impact of EAD model 2.6 billion was offset by the new large corporate PD model.
Key points
UK PBB, RWAs reduced due to improvements in credit quality, recovery in the UK economy and lower balances.
In Commercial Banking, credit risk RWAs increased by 5 billion due to growth in loans (2 billion) and methodology changes (2 billion) and model changes (1 billion), offset by a 2 billion decrease in operational risk RWAs.
CIB managed down RWAs by 40 billion, through both balance sheet and risk reductions. The reduction included 15 billion of market risk RWAs due to the wind down of the US asset-backed products business; 6 billion credit risk RWAs in GTS and Portfolio and 10 billion in Rates reflecting counterparty reviews as well as exits, novations and mitigation. Operational risk RWAs decreased by 3 billion.
The RCR disposal strategy and run-off resulted in a 25 billion reduction in RWAs, 9 billion each in real estate finance and corporate, and a further 5 billion and 2 billion in Markets and Ulster Bank respectively.
In relation to RWA density:
The increase in RWA density of bank exposures reflected the impact of credit valuation adjustments and asset valuation correlation and those on structured entities related to revised RWA treatments, both relating to the implementations of CRD IV.
Non-modelled standardised credit risk RWAs principally comprised CFG (63 billion), and Private Banking (10 billion); repo transactions undertaken by RBS Securities Inc, the broker-dealer and certain securitisation exposures.
Total shipping portfolio EAD was 10.9 billion and RWAs of 8.4 billion of which 2.3 billion and 1.7 billion were in RCR.
Oil and gas RWAs were 8.5 billion at a density of 49%. Mining and metals RWAs were 3.3 billion with a density of 74%.

Appendix 1 Capital and risk management
Risk-weighted assets (continued)
EAD and RWA density 
The tables below analyse exposure at default (EAD) after credit risk mitigation (CRM), RWAs, and related RWA density (RWAs as a percentage of EAD) by sector cluster. RWAs at 31 December 2014 are under current rules and 31 December 2013 are on a Basel 2.5 basis.













EAD post CRM (1)

RWAs

RWA density

AIRB
STD
Total

AIRB
STD
Total

AIRB
STD
Total
31 December 2014
m
m
m

m
m
m

%
%
%












Sector cluster











Sovereign











Central banks
44,007
50,539
94,546

1,632
78
1,710

4
-
2
Central government
16,373
9,944
26,317

1,775
61
1,836

11
1
7
Other sovereign
4,936
6,548
11,484

1,250
386
1,636

25
6
14












Total sovereign
65,316
67,031
132,347

4,657
525
5,182

7
1
4












Financial institutions (FI)











Banks
32,777
2,081
34,858

15,089
488
15,577

46
23
45
Other FI (2)
41,420
22,535
63,955

15,585
9,960
25,545

38
44
40
SSPEs (3)
17,504
2,634
20,138

6,216
4,410
10,626

36
167
53












Total FI
91,701
27,250
118,951

36,890
14,858
51,748

40
55
44












Corporates











Property











 - UK
48,081
3,463
51,544

23,736
3,390
27,126

49
98
53
 - Ireland
7,541
31
7,572

1,283
33
1,316

17
106
17
 - Other Western Europe
4,625
431
5,056

2,321
445
2,766

50
103
55
 - US
1,334
7,481
8,815

722
7,551
8,273

54
101
94
 - RoW
2,048
284
2,332

1,296
249
1,545

63
88
66












Total property
63,629
11,690
75,319

29,358
11,668
41,026

46
100
54
Natural resources











 - Oil and gas
15,704
1,876
17,580

6,864
1,665
8,529

44
89
49
 - Mining and metals
3,744
635
4,379

2,602
660
3,262

69
104
74
 - Other
16,173
1,070
17,243

6,367
861
7,228

39
80
42
Transport











 - Shipping
8,332
2,571
10,903

5,790
2,575
8,365

69
100
77
 - Other
21,268
3,297
24,565

9,176
2,865
12,041

43
87
49
Manufacturing
29,450
8,430
37,880

12,673
8,257
20,930

43
98
55
Retail and leisure
24,564
8,262
32,826

14,940
8,027
22,967

61
97
70
Services
23,489
8,426
31,915

13,327
8,350
21,677

57
99
68
TMT(4)
13,555
2,790
16,345

7,079
2,806
9,885

52
101
60












Total corporates
219,908
49,047
268,955

108,176
47,734
155,910

49
97
58












Personal











Mortgages











 - UK
113,884
7,794
121,678

10,651
3,121
13,772

9
40
11
 - Ireland
15,544
37
15,581

13,137
18
13,155

85
49
84
 - Other Western Europe
193
311
504

16
124
140

8
40
28
 - US
131
21,088
21,219

10
10,352
10,362

8
49
49
 - RoW
407
589
996

39
232
271

10
39
27












Total mortgages
130,159
29,819
159,978

23,853
13,847
37,700

18
46
24
Other personal
31,628
15,971
47,599

13,233
11,805
25,038

42
74
53












Total personal
161,787
45,790
207,577

37,086
25,652
62,738

23
56
30
Other items
4,465
18,363
22,828

3,012
16,580
19,592

67
90
86












Total
543,177
207,481
750,658

189,821
105,349
295,170

35
51
39












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








Appendix 1 Capital and risk management
Risk-weighted assets: Exposure at default and RWA density 

EAD post CRM (1)

RWAs

RWA density 

AIRB
STD
Total

AIRB
STD
Total

AIRB
STD
Total
31 December 2013
m
m
m

m
m
m

%
%
%












Sector cluster











Sovereign











Central banks
34,809
59,351
94,160

1,289
180
1,469

4
-
2
Central government
17,940
8,401
26,341

2,418
30
2,448

13
-
9
Other sovereign
5,323
5,525
10,848

1,451
149
1,600

27
3
15












Total sovereign
58,072
73,277
131,349

5,158
359
5,517

9
-
4












Financial institutions (FI)











Banks
37,718
2,769
40,487

11,922
689
12,611

32
25
31
Other FI (2)
43,460
14,033
57,493

16,391
7,940
24,331

38
57
42
SSPEs (3)
21,564
2,523
24,087

5,827
2,189
8,016

27
87
33












Total FI
102,742
19,325
122,067

34,140
10,818
44,958

33
56
37












Corporates











Property











 - UK
50,250
2,771
53,021

27,904
2,461
30,365

56
89
57
 - Ireland
10,338
107
10,445

3,087
136
3,223

30
127
31
 - Other Western Europe
8,764
143
8,907

4,937
130
5,067

56
91
57
 - US
1,126
6,527
7,653

600
6,272
6,872

53
96
90
 - RoW
3,579
317
3,896

2,817
253
3,070

79
80
79












Total property
74,057
9,865
83,922

39,345
9,252
48,597

53
94
58
Natural resources
29,403
2,826
32,229

15,586
2,435
18,021

53
86
56
Transport
31,677
3,024
34,701

21,678
2,709
24,387

68
90
70
Manufacturing
24,649
7,775
32,424

13,607
7,599
21,206

55
98
65
Retail and leisure
23,974
7,744
31,718

18,302
7,591
25,893

76
98
82
Services
22,716
8,757
31,473

15,972
8,382
24,354

70
96
77
TMT(4)
13,550
2,222
15,772

8,470
2,198
10,668

63
99
68












Total corporates
220,026
42,213
262,239

132,960
40,166
173,126

60
95
66












Personal











Mortgages











 - UK
110,470
7,841
118,311

14,412
3,267
17,679

13
42
15
 - Ireland
17,148
33
17,181

16,108
12
16,120

94
36
94
 - Other Western Europe
202
507
709

25
202
227

12
40
32
 - US
121
19,717
19,838

15
9,756
9,771

12
49
49
 - RoW
396
242
638

50
107
157

13
44
25












Total mortgages
128,337
28,340
156,677

30,610
13,344
43,954

24
47
28
Other personal
33,358
14,521
47,879

15,286
10,703
25,989

46
74
54












Total personal
161,695
42,861
204,556

45,896
24,047
69,943

28
56
34
Other items
4,756
19,189
23,945

4,061
15,798
19,859

85
82
83












Total
547,291
196,865
744,156

222,215
91,188
313,403

41
46
42
Notes:
(1)
Exposure at default post credit risk mitigation reflects an estimate of the extent to which a bank will be exposed under a specific facility, in the event of the default of a counterparty; AIRB: advanced internal ratings based; STD: standardised.
(2)
Non-bank financial institutions, such as US agencies, insurance companies, pension funds, hedge and leverage funds, broker-dealers and non-bank subsidiaries of banks.
(3)
Securitisation structured purpose entities primarily relate to securitisation related vehicles.
(4)
Telecommunications, media and technology.

Appendix 1 Capital and risk management
Liquidity and funding risk
Liquidity and funding risk is the risk that RBS is unable to meet its financial obligations, including financing wholesale maturities or customer deposit withdrawals, as and when they fall due. The risk arises through the maturity transformation role that banks perform. It is dependent on RBS specific factors such as maturity profile, composition of sources and uses of funding, the quality and size of the liquidity portfolio as well as broader market factors, such as wholesale market conditions alongside depositor and investor behaviour. For a description of the liquidity and funding risk framework, governance and basis of preparation refer to the Risk and balance sheet management section of the 2014 Annual Report and Accounts.
Overview
The liquidity position strengthened with the liquidity portfolio of 150.7 billion at 31 December 2014 covering short-term wholesale funding (STWF) more than five times. STWF decreased by 4.6 billion to 27.8 billion mainly due to the buy-back and maturity of medium-term notes in CIB.

The liquidity portfolio increased by 7.3 billion in the last quarter and 4.6 billion in the year, primarily reflecting the proceeds from the Citizens IPO and the sale of 9 billion securities from the RBS N.V. bond portfolio. It includes 57 billion of secondary liquidity being assets eligible for discounting at central banks. The costs associated with maintaining the secondary liquidity portfolio are minimal, being largely administrative and operational costs.


The liquidity coverage ratio (LCR) was 112% at 31 December 2014, based on RBS's interpretation of the EU guidelines. The improvement in LCR from 102% at year end 2013 reflects reductions in wholesale funding due to CIB balance sheet and risk reduction and an increase in retail deposits. With effect from 1 October 2015, LCR will replace the PRA's current regime, with an initial minimum requirement of 80% rising to 100% by 2018.


The net stable funding ratio (NSFR) based on RBS's interpretation of the Basel framework was stable at 121% at 31 December 2014.


Liquidity risk appetite is measured by reference to the liquidity portfolio as a proportion of net stressed outflows and the ratio was 186% (2013 - 145%) under the worst case stress scenario. The improvement in 2014 reflected lower stress outflows due to balance sheet reductions in CIB.


During 2014 RBS successfully issued 2.2 billion of Tier 2 subordinated debt, compared with 1.8 billion in 2013. RBSG plc had senior unsecured debt outstanding of 6.9 billion, excluding commercial paper and certificates of deposit, at 31 December 2014. Based on its assessment of the Financial Stability Board's proposals, RBS may issue between 3 - 5 billion per annum during 2015 - 2019 to meet total loss absorbing capital requirements.


The customer loan:deposit ratio remained broadly stable at 95% compared with 94% at the end of 2013 with an increase in the funding surplus in PBB of 4.4 billion (UK PPB: 1.4 billion; Ulster Bank: 3.0 billion) being offset by a decrease in the funding surplus in CPB of 6.6 billion (Commercial Banking: 5.7 billion; Private Banking: 0.9 billion).


Appendix 1 Capital and risk management
Liquidity risk
Liquidity and related metrics
The table below sets out the key liquidity and related metrics monitored by RBS.

31 December
30 September
31 December
2014
2014
2013




Liquidity portfolio
151bn
143bn
146bn
Stressed outflow coverage (1)
186%
182%
145%
Liquidity coverage ratio (LCR) (2)
112%
102%
102%
Net stable funding ratio (NSFR) (3)
121%
111%
120%
Notes:
(1)
RBS's liquidity risk appetite is measured by reference to the liquidity portfolio as a percentage of stressed contractual and behavioural outflows under the worst of three severe stress scenarios of a market-wide stress, an idiosyncratic stress and a combination of both in RBS's Individual Liquidity Adequacy Assessment. This assessment is performed in accordance with PRA guidance.
(2)
In January 2013, the Basel Committee on Banking Supervision (BCBS) issued its revised final guidance for calculating liquidity coverage ratio with a proposed implementation date of 1 January 2015. Within the EU, the LCR is currently expected to come into effect from the later date of 1 October 2015 on a phased basis, subject to the finalisation of the EU Delegated Act, which RBS expects to replace the current PRA regime. Pending guidance from the PRA, RBS monitors the LCR based on the EU Delegated Act and its internal interpretations of the expected final rules. Consequently RBS's ratio may change over time and may not be comparable with those of other financial institutions.
(3)
BCBS issued its final recommendations for the implementation of the net stable funding ratio in October 2014, proposing an implementation date of 1 January 2018. Pending further guidelines from the EU and the PRA, RBS uses the definitions and proposals from the BCBS paper and internal interpretations, to calculate the NSFR. Consequently RBS's ratio may change over time and may not be comparable with those of other financial institutions.
Liquidity portfolio
The table below shows RBS's liquidity portfolio by product, liquidity value and carrying value. Liquidity value is lower than carrying value as it is stated after discounts applied by the Bank of England and other central banks to instruments, within the secondary liquidity portfolio, eligible for discounting.

Liquidity value

Period end

Average

UK DLG(1)
CFG
Other
Total

Quarter
Year
31 December 2014
m
m
m
m

m
m








Cash and balances at central banks 
66,409
1,368
633
68,410

61,777
61,956
Central and local government bonds 







 AAA rated governments
5,609
-
2,289
7,898

8,729
5,935
 AA- to AA+ rated governments and US agencies
6,902
9,281
1,448
17,631

16,589
12,792
 Below AA rated governments
-
-
100
100

-
-
 Local government
-
-
82
82

79
21









12,511
9,281
3,919
25,711

25,397
18,748








Primary liquidity
78,920
10,649
4,552
94,121

87,174
80,704
Secondary liquidity (2)
53,055
2,290
1,189
56,534

57,582
56,017








Total liquidity value
131,975
12,939
5,741
150,655

144,756
136,721








Total carrying value
167,016
13,914
6,055
186,985



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


Appendix 1 Capital and risk management
Liquidity risk (continued)
Liquidity portfolio (continued)

Liquidity value

Period end

Average

UK







DLG (1)
CFG
Other
Total

Quarter
Year
31 December 2013
m
m
m
m

m
m








Cash and balances at central banks 
71,121
824
2,417
74,362

76,242
80,933
Central and local government bonds 







 AAA rated governments and US agencies
3,320
-
-
3,320

3,059
5,149
 AA- to AA+ rated governments
5,822
6,369
96
12,287

13,429
12,423
 Below AA rated governments
-
-
-
-

-
151
 Local government
-
-
-
-

7
148









9,142
6,369
96
15,607

16,495
17,871
Treasury bills
-
-
-
-

6
395








Primary liquidity
80,263
7,193
2,513
89,969

92,743
99,199
Secondary liquidity (2)
48,718
4,968
2,411
56,097

56,869
56,589








Total liquidity value
128,981
12,161
4,924
146,066

149,612
155,788








Total carrying value
159,743
17,520
6,970
184,233



Notes:
(1)
The PRA regulated UK Defined Liquidity Group (UK DLG) comprises the RBS's five licensed deposit taking UK banks: The Royal Bank of Scotland plc, National Westminster Bank Plc, Ulster Bank Limited, Coutts & Company and Adam & Company. In addition, certain of the RBS's significant operating subsidiaries - RBS N.V., Citizens Financial Group Inc. and Ulster Bank Ireland Limited - hold liquidity portfolios of liquid assets that comply with local regulations that may differ from PRA rules.
(2)
Comprises assets eligible for discounting at the Bank of England and other central banks. 






The table below shows the liquidity value of the liquidity portfolio by currency.








Total liquidity portfolio
GBP 
USD 
EUR 
Other 
Total 
m 
m 
m 
m 
m 






31 December 2014
93,861
40,556
16,238
-
150,655
31 December 2013
100,849
33,365
10,364
1,488
146,066


Appendix 1 Capital and risk management
Funding risk
The composition of RBS's balance sheet is a function of the broad array of product offerings and diverse markets served by its businesses. Active management of both asset and liability portfolios is designed to optimise the liquidity profile, while ensuring adequate coverage of all cash requirements under extreme stress conditions.
The table below summarises the key funding metrics.











Short-term wholesale

Total wholesale

Net inter-bank
funding (1)
funding
funding (2)

Excluding
Including

Excluding
Including

Deposits
Loans (3)
Net
derivative
derivative
derivative
derivative
inter-bank
collateral
collateral
collateral
collateral
funding

bn
bn

bn
bn

bn
bn
bn










31 December 2014
27.8
53.3

90.5
116.0

15.4
(13.3)
2.1
30 September 2014
31.4
53.9

94.4
116.9

16.5
(18.2)
(1.7)
30 June 2014
33.6
55.1

101.6
123.1

17.7
(19.3)
(1.6)
31 March 2014
31.0
50.8

101.5
121.3

15.6
(18.1)
(2.5)
31 December 2013
32.4
51.5

108.1
127.2

16.2
(17.3)
(1.1)
Notes:
(1)
Short-term wholesale funding is funding with a residual maturity of less than one year.
(2)
Excludes derivative cash collateral.
(3)
Principally short-term balances.
















The table below shows RBS's principal funding sources excluding repurchase agreements (repos). 









31 December 2014

31 December 2013

Short-term
Long-term


Short-term
Long-term


less than
more than
Total

less than
more than
Total
1 year
1 year
1 year
1 year

m
m
m

m
m
m








Deposits by banks







derivative cash collateral
25,503
-
25,503

19,086
-
19,086
other deposits
13,137
2,294
15,431

14,553
1,690
16,243









38,640
2,294
40,934

33,639
1,690
35,329
Debt securities in issue







commercial paper 
625
-
625

1,583
-
1,583
certificates of deposit 
1,695
149
1,844

2,212
65
2,277
medium-term notes 
7,741
29,007
36,748

10,385
36,779
47,164
covered bonds
1,284
5,830
7,114

1,853
7,188
9,041
securitisations 
10
5,564
5,574

514
7,240
7,754









11,355
40,550
51,905

16,547
51,272
67,819
Subordinated liabilities
3,274
19,857
23,131

1,350
22,662
24,012








Notes issued
14,629
60,407
75,036

17,897
73,934
91,831








Wholesale funding
53,269
62,701
115,970

51,536
75,624
127,160








Customer deposits







derivative cash collateral (1)
13,003
-
13,003

7,082
-
7,082
financial institution deposits
46,359
1,422
47,781

44,621
2,265
46,886
personal deposits
185,781
6,121
191,902

183,799
8,115
191,914
corporate deposits
159,782
2,403
162,185

167,100
4,687
171,787








Total customer deposits 
404,925
9,946
414,871

402,602
15,067
417,669








Total funding excluding repos
458,194
72,647
530,841

454,138
90,691
544,829
Note:
(1)
Cash collateral includes 12,036 million (31 December 2013 - 6,720 million) from financial institutions.


Appendix 1 Capital and risk management
Funding risk (continued)
Total funding by currency

31 December 2014

31 December 2013

GBP 
USD 
EUR 
Other 
Total 

GBP 
USD 
EUR 
Other 
Total 

m 
m 
m 
m 
m 

m 
m 
m 
m 
m 












Deposits by banks
6,501
10,869
20,715
2,849
40,934

7,418
8,337
17,004
2,570
35,329
Debt securities in issue











 - commercial paper 
-
73
525
27
625

4
897
682
-
1,583
 - certificates of deposit 
910
747
185
2
1,844

336
1,411
476
54
2,277
 - medium-term notes 
4,592
11,292
16,672
4,192
36,748

6,353
11,068
23,218
6,525
47,164
 - covered bonds
1,090
-
6,024
-
7,114

984
-
8,057
-
9,041
 - securitisations
1,245
1,895
2,434
-
5,574

1,897
2,748
3,109
-
7,754
Subordinated liabilities
1,718
13,360
6,372
1,681
23,131

1,857
10,502
8,984
2,669
24,012












Wholesale funding
16,056
38,236
52,927
8,751
115,970

18,849
34,963
61,530
11,818
127,160
% of wholesale funding
14%
33%
46%
7%
100%

15%
28%
48%
9%
100%
Customer deposits
276,039
89,068
39,526
10,238
414,871

272,304
86,727
49,116
9,522
417,669












Total funding excluding repos
292,095
127,304
92,453
18,989
530,841

291,153
121,690
110,646
21,340
544,829












% of total funding
55%
24%
17%
4%
100%

54%
22%
20%
4%
100%
Repos 


The table below analyses repos by counterparty type.




31 December
31 December

2014
2013

m
m



Financial institutions


 - central and other banks
26,525
28,650
 - other financial institutions
28,703
52,945
Government and corporate
9,354
3,539




64,582
85,134


Appendix 1 Capital and risk management
Funding risk (continued)
Segment loan:deposit ratios and funding surplus
The table below shows customer loans, deposits, loan:deposit ratios (LDR) and funding surplus/(gap) by reporting segment.

31 December 2014

31 December 2013



Funding




Funding
Loans (1)
Deposits (2)
LDR 
surplus/(gap)

Loans (1)
Deposits (2)
LDR 
surplus/(gap)

m
m
%
m

m
m
%
m










UK PBB
127,244
148,658
86
21,414

124,828
144,841
86
20,013
Ulster Bank
22,008
20,561
107
(1,447)

26,068
21,651
120
(4,417)










PBB
149,252
169,219
88
19,967

150,896
166,492
91
15,596










Commercial Banking
85,053
86,830
98
1,777

83,454
90,883
92
7,429
Private Banking
16,523
36,105
46
19,582

16,644
37,173
45
20,529










CPB
101,576
122,935
83
21,359

100,098
128,056
78
27,958










CIB
72,751
59,402
122
(13,349)

68,148
64,734
105
(3,414)
Central items
613
1,583
39
970

289
1,081
27
792
CFG
59,606
60,550
98
944

50,279
55,118
91
4,839
RCR
11,003
1,182
nm
(9,821)

n/a
n/a
n/a
n/a
Non-Core
n/a
n/a
n/a
n/a

22,880
2,188
nm
(20,692)











394,801
414,871
95
20,070

392,590
417,669
94
25,079










Of which: Personal
176,621
191,902
92
15,281

172,985
191,914
90
18,929
nm = not meaningful
Notes:
(1)
Excludes reverse repo agreements and net of impairment provisions.
(2)
Excludes repo agreements.
Customer deposits insured through deposit guarantee schemes totalled 160 billion (31 December 2013 - 161 billion) the more material of them being Financial Services Compensation Scheme 112 billion; US Federal Deposit Insurance Corporation 37 billion and Republic of Ireland's Deposit Guarantee Scheme 7 billion. 
Encumbrance
RBS's encumbrance ratios are set out below. 
Encumbrance ratios

31 December
31 December

2014
2013

%
%




Total

13
17
Excluding balances relating to derivatives transactions

14
19
Excluding balances relating to derivative and securities financing transactions

11
11

Appendix 1 Capital and risk management
Balance sheet encumbrance


















Encumbered assets relating to:


Encumbered

Unencumbered



Debt securities in issue

Other secured liabilities
Total

assets as a

Readily realisable (3)





Securitisations
Covered



Secured
encumbered

% of related

Liquidity 

Other (4)
Cannot be (5)



and conduits
bonds

Derivatives
Repos
balances (1)
assets (2)

assets

portfolio 
Other
realisable
encumbered

Total
31 December 2014
bn
bn

bn
bn
bn
bn

%

bn
bn
bn
bn

bn

















Cash and balances at central banks
-
-

-
-
2.4
2.4

3

66.7
6.4
-
-

75.5
Loans and advances to banks
4.6
0.3

11.5
-
0.5
16.9

68

1.7
2.1
4.1
-

24.8
Loans and advances to customers
















 - UK residential mortgages
12.0
13.4

-
-
-
25.4

22

69.9
10.2
7.7
0.1

113.3
 - Irish residential mortgages
8.6
-

-
-
-
8.6

62

0.9
4.3
-
0.1

13.9
 - US residential mortgages
-
-

-
-
11.2
11.2

53

2.2
-
0.7
7.0

21.1
 - UK credit cards
2.7
-

-
-
-
2.7

52

-
2.3
0.2
-

5.2
 - UK personal loans
-
-

-
-
-
-

-

-
6.4
2.9
-

9.3
 - other
6.0
-

21.9
-
1.3
29.2

13

8.0
17.2
110.3
67.3

232.0
Reverse repurchase agreements
















 and stock borrowing
-
-

-
-
-
-

-

-
-
-
64.7

64.7
Debt securities
-
-

5.9
25.4
5.7
37.0

36

24.0
39.7
1.2
-

101.9
Equity shares
-
-

0.3
2.6
-
2.9

47

-
2.2
0.2
0.9

6.2
Settlement balances
-
-

-
-
-
-

-

-
-
-
4.7

4.7
Derivatives
-
-

-
-
-
-

-

-
-
-
354.0

354.0
Intangible assets
-
-

-
-
-
-

-

-
-
-
8.4

8.4
Property, plant and equipment
-
-

-
-
0.4
0.4

6

-
-
4.2
2.1

6.7
Deferred tax
-
-

-
-
-
-

-

-
-
-
1.5

1.5
Prepayments, accrued income and other assets
-
-

-
-
-
-

-

-
-
-
7.6

7.6


















33.9
13.7

39.6
28.0
21.5
136.7



173.4
90.8
131.5
518.4

1,050.8
Securities retained










13.6






















Total liquidity portfolio










187.0






















Liabilities secured
















Intra-Group - secondary liquidity
(13.1)
-

-
-
-
(13.1)









Intra-Group - other
(11.6)
-

-
-
-
(11.6)









Third-party (6)
(5.6)
(7.1)

(39.6)
(64.6)
(10.5)
(127.4)



























(30.3)
(7.1)

(39.6)
(64.6)
(10.5)
(152.1)









For the notes to this table refer to page 22.


Appendix 1 Capital and risk management
Balance sheet encumbrance (continued)


















Encumbered assets relating to:


Encumbered

Unencumbered



Debt securities in issue

Other secured liabilities
Total

assets as a

Readily realisable (3)





Securitisations
Covered



Secured
encumbered

% of related

Liquidity 

Other (4)
Cannot be (5)



and conduits
bonds

Derivatives
Repos
balances
assets (2)

assets

portfolio 
Other
realisable
encumbered

Total
31 December 2013
bn
bn

bn
bn
bn
bn

%

bn
bn
bn
bn

bn

















Cash and balances at central banks
-
-

-
-
-
-

-

74.3
8.4
-
-

82.7
Loans and advances to banks
5.8
0.5

10.3
-
-
16.6

60

0.1
10.9
-
-

27.6
Loans and advances to customers
















 - UK residential mortgages
14.6
16.2

-
-
-
30.8

28

60.8
18.6
-
-

110.2
 - Irish residential mortgages
9.3
-

-
-
1.2
10.5

70

0.7
3.8
-
0.1

15.1
 - US residential mortgages
-
-

-
-
3.5
3.5

18

9.5
6.7
-
-

19.7
 - UK credit cards
3.4
-

-
-
-
3.4

52

-
3.1
-
-

6.5
 - UK personal loans
3.4
-

-
-
-
3.4

38

-
5.5
-
-

8.9
 - other
13.5
-

18.1
-
0.8
32.4

14

4.4
9.6
175.6
10.2

232.2
Reverse repurchase agreements
















 and stock borrowing
-
-

-
-
-
-

-

-
-
-
76.5

76.5
Debt securities
0.9
-

5.5
55.6
2.7
64.7

57

17.0
31.9
-
-

113.6
Equity shares
-
-

0.5
5.3
-
5.8

66

-
3.0
-
-

8.8
Settlement balances
-
-

-
-
-
-

-

-
-
-
5.5

5.5
Derivatives
-
-

-
-
-
-

-

-
-
-
288.0

288.0
Intangible assets
-
-

-
-
-
-

-

-
-
-
12.4

12.4
Property, plant and equipment
-
-

-
-
0.4
0.4

5

-
-
7.5
-

7.9
Deferred tax
-
-

-
-
-
-

-

-
-
-
3.5

3.5
Prepayments, accrued income and other assets
-
-

-
-
-
-

-

-
-
-
8.6

8.6
Assets of disposal groups
-
-

-
-
-
-

-

-
-
-
0.2

0.2


















50.9
16.7

34.4
60.9
8.6
171.5



166.8
101.5
183.1
405.0

1,027.9
Securities retained










17.4






















Total liquidity portfolio










184.2






















Liabilities secured
















Intra-Group - secondary liquidity
(19.1)
-

-
-
-
(19.1)









Intra-Group - other
(18.4)
-

-
-
-
(18.4)









Third-party (6)
(7.8)
(9.0)

(42.7)
(85.1)
(6.0)
(150.6)



























(45.3)
(9.0)

(42.7)
(85.1)
(6.0)
(188.1)









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


Appendix 1 Capital and risk management
Balance sheet encumbrance(continued)
Notes:
(1)
Includes cash, coin and nostro balance held with the Bank of England as collateral against deposits and notes in circulation.
(2)
Encumbered assets are those that have been pledged to provide security for the liability shown above and are therefore not available to secure funding or to meet other collateral needs.
(3)
Unencumbered readily realisable assets are those assets on the balance sheet that can be readily used to meet funding or collateral requirements and comprise: 

(a) Liquidity portfolio: cash balances at central banks, high quality debt securities and loans that have been pre-positioned with central banks. In addition, the liquidity portfolio includes securitisations of own assets which has reduced over the years and has been replaced by loans.

(b) Other readily realisable assets: including assets that have been enabled for use with central banks; and unencumbered debt securities.
(4)
Unencumbered other realisable assets are those assets on the balance sheet that are available for funding and collateral purposes but are not readily realisable in their current form. These assets include loans that could be prepositioned with central banks but have not been subject to internal and external documentation review and diligence work.
(5)
Assets that cannot be encumbered include:

(a) derivatives, reverse repurchase agreements and trading related settlement balances.

(b) non-financial assets such as intangibles, prepayments and deferred tax.

(c) loans that cannot be pre-positioned with central banks based on criteria set by the central banks, including those relating to date of origination and level of documentation.

(d) non-recourse invoice financing balances and certain shipping loans whose terms and structure prohibit their use as collateral.
(6)
In accordance with market practice RBS employs securities recognised on the balance sheet, and securities received under reverse repo transactions as collateral for repos. Secured derivative liabilities reflect net positions that are collateralised by balance sheet assets.

Appendix 1 Capital and risk management
Credit risk
Credit risk is the risk of financial loss due to the failure of a customer or counterparty to meet its obligation to settle outstanding amounts. For a description of the bank's credit risk framework, governance, policies and methodologies refer to the Risk and balance sheet management - Credit risk section - of the 2014 Annual Report and Accounts.
Overview
Credit quality and impairment -RBS's credit risk portfolio continued to improve with an overall reduction in exposure, an improvement in credit quality and a material provision release in 2014. These improvements were driven by supportive economic and market conditions in the UK and Ireland, better liquidity and increased collateral values, and also reflected improvements in credit risk measurement.


UK personal lending - The growth in UK PBB gross mortgage lending was within credit risk appetite and against a backdrop of house price increases over most of the year. Due to the withdrawal of products with promotional rates in line with strategy, credit card exposure declined during the year. Refer to Key credit portfolios - residential mortgages.


Ulster Bank - Following the creation of RCR, exposure to personal customers now represents 68% of total Ulster Bank exposure. In the personal portfolio, Ulster Bank's proactive offers of forbearance to help customers through financial difficulties saw significant uptake in the Republic of Ireland with an increasing trend towards customers opting for longer-term solutions (though mortgage recoveries stock remains high). The quality of the Ulster Bank wholesale portfolio improved following the transfer of CRE assets to RCR, with an associated material decrease in impairments. Refer to Segment performance - Ulster Bank.


CFG - 2014 was a year of growth in both the personal and wholesale CFG portfolios. This is in line with business strategy to expand personal mortgage lending and auto finance organically as well as through acquisition. The growth in wholesale exposures has been across a broad range of industry sectors and customer types, reflecting improving economic conditions in the US and specific focus on areas such as asset finance, CRE and franchise finance. Changes to strategy or the risk appetite framework are subject to review in accordance with CFG's and RBS's risk governance frameworks, so that risks are understood and accepted. Refer to Segment performance - Citizens Financial Group.


Oil prices - In the second half of 2014, oil prices reduced significantly, driven by growth in supply from non-OPEC producers, the return of supply from Libya, Iran and Iraq and reduced demand expectations from Europe and China. Exposures to this sector continue to be closely managed through the sector concentration framework as well as ongoing customer and subsector reviews, with stress testing highlighting specific sub sectors or customers particularly vulnerable to sustained low oil prices. Risk appetite to the overall oil and gas sector was reduced during the year, and action continues to mitigate exposure where possible. For further information, Refer to the Key credit portfolios section.
Russia/Ukraine - Ongoing tensions in Russia and Ukraine as well as the imposition of sanctions, particularly in the oil and gas, defence, and financial sectors, have adversely affected the credit risk profile of customers who have exposure to or dealings with Russian or Ukrainian entities. Accordingly RBS reduced limits to customers affected by those developments, including tightening transactional controls to mitigate credit risk while ensuring sanctions compliance. For further information regarding exposure to Russia, refer to the Country risk section.

Appendix 1 Capital and risk management
Financial assets
Exposure summary
The table below analyses financial asset exposures, both gross and net of offset arrangements as well as credit mitigation and enhancement.
















Collateral

Exposure post 

Gross
IFRS
Carrying
Non-IFRS


Real estate and other
Credit 
credit mitigation 
exposure
offset (1) 
value(2)
offset (3)
Cash (4)
Securities (5)
Residential (6)
Commercial (6)
enhancement (7)
and enhancement 
31 December 2014
bn
bn
bn
bn
bn
bn
bn
bn
bn
bn 











Cash and balances at central banks
75.5
-
75.5
-
-
-
-
-
-
75.5
Reverse repos
95.5
(30.8)
64.7
(5.0)
-
(59.7)
-
-
-
-
Lending
423.4
(3.8)
419.6
(40.2)
(1.6)
(4.1)
(149.5)
(57.7)
(5.8)
160.7
Debt securities
101.9
-
101.9
-
-
-
-
-
(0.2)
101.7
Equity shares
6.2
-
6.2
-
-
-
-
-
-
6.2
Derivatives
599.4
(245.4)
354.0
(295.3)
(33.3)
(7.0)
-
-
(14.3)
4.1
Settlement balances
6.7
(2.0)
4.7
-
-
-
-
-
-
4.7











Total
1,308.6
(282.0)
1,026.6
(340.5)
(34.9)
(70.8)
(149.5)
(57.7)
(20.3)
352.9
Short positions
(23.0)
-
(23.0)
-
-
-
-
-
-
(23.0)











Net of short positions
1,285.6
(282.0)
1,003.6
(340.5)
(34.9)
(70.8)
(149.5)
(57.7)
(20.3)
329.9
For the notes to this table refer to the following page.
Key points
Financial assets after credit mitigation and enhancement fell by 35 billion or 9% reflecting lower funded assets (35 billion) as both CIB and RCR implemented strategic balance sheet reductions through wind-down and disposals.
The major components of net exposure are cash and balances at central banks, unsecured commercial, corporate and bank loans and debt securities.
Of the 102 billion of debt securities, 25 billion are asset-backed but underlying collateral is not reflected above as RBS only has access to cashflows from the collateral.


Appendix 1 Capital and risk management
Financial assets (continued)





Collateral

Exposure post 

Gross
IFRS
Carrying
Non-IFRS


Real estate and other
Credit 
credit mitigation 
exposure
offset (1) 
value(2)
offset (3)
Cash (4)
Securities (5)
Residential (6)
Commercial (6)
enhancement (7)
and enhancement 
31 December 2013
bn
bn
bn
bn
bn
bn
bn
bn
bn
bn 











Cash and balances at central banks
82.7
-
82.7
-
-
-
-
-
-
82.7
Reverse repos
117.2
(40.7)
76.5
(11.4)
-
(65.0)
-
-
-
0.1
Lending
423.6
(3.4)
420.2
(37.2)
(1.6)
(2.7)
(145.4)
(60.0)
(3.9)
169.4
Debt securities
113.6
-
113.6
-
-
-
-
-
(1.3)
112.3
Equity shares
8.8
-
8.8
-
-
-
-
-
-
8.8
Derivatives
553.7
(265.7)
288.0
(241.3)
(24.4)
(6.0)
-
-
(7.3)
9.0
Settlement balances
8.2
(2.7)
5.5
(0.3)
-
-
-
-
-
5.2











Total
1,307.8
(312.5)
995.3
(290.2)
(26.0)
(73.7)
(145.4)
(60.0)
(12.5)
387.5
Short positions
(28.0)
-
(28.0)
-
-
-
-
-
-
(28.0)











Net of short positions
1,279.8
(312.5)
967.3
(290.2)
(26.0)
(73.7)
(145.4)
(60.0)
(12.5)
359.5
Notes:
(1)
Relates to offset arrangements that comply with IFRS criteria and transactions cleared through and novated to central clearing houses, primarily London Clearing House and US Government Securities Clearing Corporation.
(2)
The carrying value on the balance sheet represents the exposure to credit risk by class of financial instrument.
(3)
Balance sheet offset reflects the amounts by which RBS's credit risk is reduced through master netting and cash management pooling arrangements. Derivative master netting agreements include cash pledged with counterparties in respect of net derivative liability positions and are included in lending in the table above.
(4)
Includes cash collateral pledged by counterparties based on daily mark-to-market movements of net derivative positions with the counterparty.
(5)
Securities collateral represent the fair value of securities received from counterparties, mainly relating to reverse repo transactions as part of netting arrangements.
(6)
Property valuations are capped at the loan value and reflect the application of haircuts in line with regulatory rules to indexed valuations. Commercial collateral includes ships and plant and equipment collateral.
(7)
Credit enhancement comprises credit derivatives (bought protection) and guarantees and reflects notional amounts less fair value and notional amounts respectively.

Appendix 1 Capital and risk management
Financial assets (continued)
Asset quality
The table below analyses financial assets, excluding debt securities, and contingent liabilities and commitments by internal asset quality (AQ) ratings. Debt securities are analysed by external ratings and are therefore excluded from the table below and are set out on page 34. 


Loans and advances







Cash and 
Banks (1)

Customers
Settlement 






balances 

Derivative 




Derivative 


balances and
 





at central 
Reverse 
cash 
Bank 


Reverse 
cash 
Customer 

other financial


Contingent 



banks 
repos 
collateral 
loans 
Total 

repos 
collateral 
loans 
Total 
assets 
Derivatives 
Commitments 
liabilities 
Total 
Total 
31 December 2014
m 
m 
m 
m 
m 

m 
m 
m 
m 
m 
m 
m 
m 
m 
% 

















Asset quality 
















 band (2)
















AQ1
73,871
2,479
3,765
5,463
11,707

27,007
12,526
33,913
73,446
1,610
65,632
53,246
6,364
285,876
24.7
AQ2
-
4,143
4,625
818
9,586

400
1,602
18,077
20,079
146
100,222
17,483
3,064
150,580
13.0
AQ3
1,433
2,538
1,348
3,047
6,933

8,664
4,335
29,093
42,092
460
123,882
29,768
5,946
210,514
18.1
AQ4
185
8,336
1,391
2,891
12,618

5,124
2,798
122,349
130,271
852
49,929
56,122
5,821
255,798
22.1
AQ5
-
2,076
225
572
2,873

1,902
520
72,994
75,416
438
10,872
35,622
2,505
127,726
11.0
AQ6
-
636
58
106
800

42
45
41,468
41,555
43
1,118
13,268
1,223
58,007
5.0
AQ7
-
500
90
292
882

848
34
26,203
27,085
26
1,146
6,991
930
37,060
3.2
AQ8
5
-
1
40
41

-
6
6,386
6,392
12
533
848
149
7,980
0.7
AQ9
-
-
6
32
38

-
9
4,727
4,736
-
173
404
245
5,596
0.5
AQ10
-
-
-
-
-

-
-
984
984
31
485
1,132
55
2,687
0.2
Past due
-
-
-
-
-

-
-
8,196
8,196
1,049
-
-
-
9,245
0.8
Impaired
-
-
-
42
42

-
-
26,536
26,536
-
-
-
-
26,578
2.3
Impairment provision
-
-
-
(40)
(40)

-
-
(18,000)
(18,000)
-
-
-
-
(18,040)
(1.6)


















75,494
20,708
11,509
13,263
45,480

43,987
21,875
372,926
438,788
4,667
353,992
214,884
26,302
1,159,607
100
For the notes to this table refer to the following page.


Appendix 1 Capital and risk management
Financial assets: Asset quality (continued)


Loans and advances







Cash and 
Banks (1)

Customers
Settlement 






balances 

Derivative 




Derivative 


balances and 
 





at central
Reverse 
cash 
Bank 


Reverse 
cash 
Customer 

other financial 


Contingent 



banks 
repos 
collateral 
loans 
Total 

repos 
collateral 
loans 
Total 
assets 
Derivatives 
Commitments 
liabilities 
Total 
Total 
31 December 2013
m 
m 
m 
m 
m 

m 
m 
m 
m 
m 
m 
m 
m 
m 
% 

















Asset quality band (2)
















AQ1
80,305
5,885
2,043
6,039
13,967

30,233
10,042
34,395
74,670
2,707
71,497
64,453
6,739
314,338
28.2
AQ2
1
4,744
4,930
672
10,346

996
1,899
17,695
20,590
192
69,949
28,717
2,940
132,735
11.9
AQ3
1,873
2,164
1,502
2,347
6,013

1,857
3,796
29,364
35,017
746
94,678
23,126
7,057
168,510
15.1
AQ4
479
9,864
1,451
7,031
18,346

10,642
1,894
99,258
111,794
470
39,157
40,984
4,430
215,660
19.3
AQ5
-
1,776
416
662
2,854

5,403
297
77,045
82,745
717
8,826
33,507
2,087
130,736
11.7
AQ6
-
1,823
1
157
1,981

82
38
39,324
39,444
59
1,487
14,138
1,426
58,535
5.3
AQ7
-
301
-
237
538

684
50
30,279
31,013
22
978
7,437
918
40,906
3.7
AQ8
3
-
-
48
48

-
10
8,482
8,492
58
132
1,183
119
10,035
0.9
AQ9
-
-
-
34
34

-
41
16,944
16,985
-
641
1,020
317
18,997
1.7
AQ10
-
-
-
-
-

-
-
730
730
-
695
1,274
137
2,836
0.3
Past due
-
-
-
-
-

-
-
9,068
9,068
620
-
-
-
9,688
0.9
Impaired
-
-
-
70
70

-
-
37,101
37,101
-
-
-
-
37,171
3.3
Impairment provision
-
-
-
(63)
(63)

-
-
(25,162)
(25,162)
-
-
-
-
(25,225)
(2.3)


















82,661
26,557
10,343
17,234
54,134

49,897
18,067
374,523
442,487
5,591
288,040
215,839
26,170
1,114,922
100
Notes:
(1)
Excludes items in the course of collection from other banks of 995 million (31 December 2013 - 1,454 million).
(2)
The following table details, for illustrative purposes only, the relationship between AQ bands, and external ratings published by S&P. This relationship is established by observing S&P's default study statistics, notably the one year default rates for each S&P rating grade. A degree of judgement is required to relate the PD ranges associated with the master grading scale to these default rates given that, for example, the S&P published default rates do not increase uniformly by grade and the historical default rate is nil for the highest rating categories. 


Asset quality band
Probability of default range

Indicative S&P rating





AQ1
0% - 0.034%
AAA to AA

AQ2
0.034% - 0.048%
AA-

AQ3
0.048% - 0.095%
A+ to A

AQ4
0.095% - 0.381%
A- to BBB-

AQ5
0.381% - 1.076%
BB+ to BB

AQ6
1.076% - 2.153%
BB-

AQ7
2.153% - 6.089%
B+ to B

AQ8
6.089% - 17.222%
B- to CCC+

AQ9
17.222% - 100%
CCC to C

AQ10
100%
D

The mapping to the S&P ratings is used by RBS as one of several benchmarks for its wholesale portfolios, depending on customer type and the purpose of the benchmark. The mapping is based on all issuer types rated by S&P. It should therefore be considered illustrative and does not, for instance, indicate that exposures reported against S&P ratings either have been or would be assigned those ratings if assessed by S&P. In addition, the relationship is not relevant for retail portfolios, smaller corporate exposures or specialist corporate segments given that S&P does not typically assign ratings to such issuers.

Appendix 1 Capital and risk management
Financial assets: Asset quality (continued)
Key points
Improving economic climate and credit conditions and disposals strategy in RCR resulted in the proportion of investment-grade (AQ1-AQ4) increasing from 75% to 78%.


Derivatives increased by 66.0 billion, primarily in AQ 2 - AQ4 bands.


Reverse repos: AQ1 balances decreased by 6.6 billion reflecting reduced overall trading in line with balance sheet management strategies. Also, changes to the large corporate grading models resulted in migrations from higher to lower quality AQ bands this contributed to the 7.2 billion increase in AQ3.


Asset quality of customer lending in AQ1-AQ3 remained stable with higher cash collateral against increased fair value of derivatives, partially offset by a reduction in traded loans in CIB Asset-Backed Products.


The increase of 23 billion in AQ 4 customer loans was primarily due to the recalibration of UK residential mortgage models following improvements in observed default rates and the implementation of the large corporate PD model.


Changes to the residential mortgage model and large corporate PD model also resulted in increase of 6.6 billion and 15.1 billion in AQ3 and AQ4 commitments.


Past due loans decreased by 0.9 billion including 0.5 billion in Ulster Bank reflecting increased work with customers in arrears and improving economic conditions. Past due loans comprise 1.6 billion (2013 - 2.2 billion) of accruing past due 90 days or more loans included within risk elements in lending and 6.5 billion (2013 - 6.8 billion) of loans that are past due less than 90 days. Of the total past due loans, 4.8 billion (2013 - 5.2 billion) relates to personal loans.


Appendix 1 Capital and risk management
Loans and related credit metrics
The tables below analyse gross loans and advances (excluding reverse repos) and the related credit metrics by segment. 




Credit metrics



Gross loans to
REIL
Provisions
REIL as a %

Provisions 


of gross
Provisions
as a % of
Impairment

loans to
as a %
gross loans
charge/
Amounts
Banks
Customers
customers
of REIL
to customers
(releases)
written-off
31 December 2014
m 
m 
m 
m 
%
%
%
m
m










UK PBB
641
129,848
3,778
2,604
2.9
69
2.0
268
728
Ulster Bank
1,381
24,719
4,775
2,711
19.3
57
11.0
(365)
131










PBB
2,022
154,567
8,553
5,315
5.5
62
3.4
(97)
859










Commercial Banking
486
86,008
2,506
955
2.9
38
1.1
77
436
Private Banking
972
16,599
226
76
1.4
34
0.5
(5)
37










CPB
1,458
102,607
2,732
1,031
2.7
38
1.0
72
473










CIB
16,910
72,957
197
206
0.3
105
0.3
(7)
-
Central items
2,178
619
7
6
1.1
86
1.0
(12)
55
CFG
1,728
60,142
1,330
536
2.2
40
0.9
194
300
RCR
516
21,909
15,400
10,946
70.3
71
50.0
(1,320)
3,591











24,812
412,801
28,219
18,040
6.8
64
4.4
(1,170)
5,278










31 December 2013



















UK PBB
760
127,781
4,663
2,957
3.6
63
2.3
497
967
Ulster Bank
591
31,446
8,466
5,378
26.9
64
17.1
1,774
277










PBB
1,351
159,227
13,129
8,335
8.2
63
5.2
2,271
1,244










Commercial Banking
701
85,071
4,276
1,617
5.0
38
1.9
652
587
Private Banking
1,531
16,764
277
120
1.7
43
0.7
29
15










CPB
2,232
101,835
4,553
1,737
4.5
38
1.7
681
602










CIB
20,550
69,080
1,661
976
2.4
59
1.4
598
360
Central items
2,670
341
1
66
0.3
nm
19.4
65
-
CFG
406
50,551
1,034
272
2.0
26
0.5
151
284
Non-Core
431
36,718
19,014
13,839
51.8
73
37.7
4,646
1,856











27,640
417,752
39,392
25,225
9.4
64
6.0
8,412
4,346
The table below analyses segment loan impairment losses/(releases) by new provisions (gross) and releases and provision by components.













Impairment provision at

Impairment losses/(releases) for year ended 31 December 2014

31 December 2014

Individual

Collective

Latent

Total





Gross
Releases

Gross
Releases

Gross
Releases

Gross
Releases

Individual
Collective
Latent

m 
m 

m 
m 

m 
m 

m 
m 

m 
m
m
















UK PBB
13
-

330
(133)

77
(19)

420
(152)

14
2,319
271
Ulster Bank 
8
(18)

221
(251)

103
(428)

332
(697)

42
2,355
314
PBB
21
(18)

551
(384)

180
(447)

752
(849)

56
4,674
585
Commercial Banking
224
(85)

124
(103)

3
(86)

351
(274)

493
366
96
Private Banking
8
(10)

-
-

1
(4)

9
(14)

69
-
7
CPB
232
(95)

124
(103)

4
(90)

360
(288)

562
366
103
















CIB
88
(63)

-
-

1
(33)

89
(96)

110
-
96
Central items
11
(23)

-
-

-
-

11
(23)

1
-
5
CFG
36
-

142
-

16
-

194
-

83
157
296
RCR
761
(1,760)

220
(235)

-
(306)

981
(2,301)

10,565
150
231
Total
1,149
(1,959)

1,037
(722)

201
(876)

2,387
(3,557)

11,377
5,347
1,316


Appendix 1 Capital and risk management
Loans and related credit metrics (continued)
Key points
Loans to banks decreased by 2.8 billion in the year to 24.8 billion. This reflected RWA-focused reductions in trade finance (5.4 billion) being partially offset by derivative collateral increase, both in CIB, as well as Ulster Bank's increased cash deposits with Central Bank of Ireland ahead of new regulatory liquidity requirements.
Overall customer loans fell by 5.0 billion to 412.8 billion reflecting RCR disposal strategy being partly offset by increases in CFG and UK PBB.
There has been a significant increase in CFG lending across a broad range of industry sectors, including residential mortgages, auto loans and commercial loans, in line with business strategy and risk appetite. Exchange rate movements also contributed to the increase.

UK PBB's mortgage book grew strongly by 3.9 billion to 103.2 billion as advisor capacity increased (refer to Key credit portfolios for more details). This was partially offset by lower unsecured lending.

Property and construction lending fell by 11.4 billion, of which 9.3 billion related to commercial real estate lending. Refer to Key loan portfolios for more details.


REIL decreased by 11.2 billion to 28.2 billion, a 28% reduction in the year from 39.4 billion, across all segments except CFG. REIL as a proportion of gross loans improved to 6.8% from 9.4% in 2013 reflecting sales and repayments of 10.2 billion (6.9 billion in RCR), write-offs of 5.3 billion (3.6 billion in RCR), transfers to performing book of 1.5 billion, partially offset by new impaired loans of 7.1 billion (3.0 billion in RCR). The execution of the RCR strategy, resulted in a number of disposals of REIL in the year.


Loan impairment provision coverage of REIL remained stable at 64% and now stands at 18.0 billion, a 7.2 billion reduction in the year. Provision coverage of gross loans has declined steadily during 2014 and is now 4.4% compared with 6.0% at the end of 2013. The reduction in provision reflected write-offs of 5.3 billion (3.6 billion in RCR) and impairment releases of 3.6 billion (2.3 billion in RCR) partially offset by new charges of 2.4 billion (1.0 billion in RCR) and currency and other movements. 


Disposal of assets by RCR, primarily in the second half of the year, at higher than anticipated sale prices together with favourable market conditions in Ireland and the UK resulted in impairment releases. Overall, there was a net loan impairment release of 1.2 billion includes 1.3 billion in RCR, for 2014.


Commercial real estate gross lending reduced by 9.3 billion to 43.3 billion; related REIL is almost half of total REIL and has a provision coverage of 68%. Of the total CRE REIL of 13.3 billion, 11.1 billion is in RCR.


Within the business segments:
RCR REIL decreased by 8.7 billion or 36% to 15.4 billion from 24.1 billion at 1 January 2014, primarily due to a mixture of asset disposals and write-offs. Provision coverage of REIL and REIL as a proportion of loans were both around 70%.
In Ulster Bank, REIL as a proportion of loans decreased to 19% from 27% in 2013 and provision coverage of REILs reduced to 57% from 64% in 2013 mainly reflecting asset transfers to RCR on 1 January 2014, improved market conditions and higher collateral values also contributed.
Commercial Banking REIL as a proportion of loans decreased to 2.9% from 5.0% in 2013, REIL decreased by 41% (1.8 billion) to 2.5 billion, with 0.6 billion of the reduction due to the creation of RCR. REIL reductions in the year were mainly due to lower individual cases, albeit some increases were seen in the fourth quarter, and reductions in collectively assessed provisions due to improved credit conditions.

Appendix 1 Capital and risk management
Loans and related credit metrics: Risk elements in lending
Risk elements in lending (REIL) comprise impaired loans and accruing loans past due 90 days or more as to principal or interest. Impaired loans are all loans (including loans subject to forbearance) for which an impairment provision has been established; for collectively assessed loans, impairment loss provisions are not allocated to individual loans and the entire portfolio is included in impaired loans. Accruing loans past due 90 days or more comprise loans past due 90 days where no impairment loss is expected.








RBS 




UK
Ulster 
Commercial 
Private 

Central 

excluding 




PBB
Bank 
Banking 
Banking 
CIB
items 
CFG
RCR
RCR 
Non-Core
Total

m
m
m
m
m
m
m
m
m
m
m












At 31 December 2013
4,663
8,466
4,276
277
1,661
1
1,034
20,378
-
19,014
39,392
Non-Core dissolution











 and RCR creation 
137
(3,547)
(560)
-
(1,421)
-
289
(5,102)
24,116
(19,014)
-












At 1 January 2014
4,800
4,919
3,716
277
240
1
1,323
15,276
24,116
-
39,392
Currency translation











and other adjustments
-
(250)
-
(3)
1
6
75
(171)
(885)
-
(1,056)
Additions
1,353
555
1,716
58
100
-
335
4,117
2,951
-
7,068
Transfers (1)
(309)
-
31
(15)
4
-
-
(289)
29
-
(260)
Transfers to











 performing book
(326)
(120)
(582)
(3)
(92)
-
-
(1,123)
(337)
-
(1,460)
Repayments











 and disposals
(1,012)
(198)
(1,884)
(51)
(56)
-
(103)
(3,304)
(6,883)
-
(10,187)
Amounts written-off
(728)
(131)
(491)
(37)
-
-
(300)
(1,687)
(3,591)
-
(5,278)












At 31 December 2014
3,778
4,775
2,506
226
197
7
1,330
12,819
15,400
-
28,219
Note:
(1)
Represents transfers between REIL and potential problem loans.
The movement in loan impairment provisions by segment is shown in the table below.








RBS 




UK 
Ulster 
Commercial 
Private 

Central

excluding 




PBB
Bank 
Banking 
Banking 
CIB
items
CFG
RCR 
RCR
Non-Core
Total

m
m
m
m
m
m
m
m
m
m
m












At 31 December 2013
2,957
5,378
1,617
120
976
66
272
11,386
-
13,839
25,225
Non-Core dissolution











 and RCR creation (1)
150
(1,985)
(306)
-
(766)
-
246
(2,661)
16,500
(13,839)
-












At 1 January 2014
3,107
3,393
1,311
120
210
66
518
8,725
16,500
-
25,225
Currency translation











 and other adjustments
-
(172)
10
(1)
1
7
21
(134)
(555)
-
(689)
Disposal of subsidiaries
-
-
-
-
-
-
-
-
(6)
-
(6)
Amounts written-off
(728)
(131)
(436)
(37)
-
(55)
(300)
(1,687)
(3,591)
-
(5,278)
Recoveries of amounts











 previously written-off
24
23
12
2
2
-
103
166
39
-
205
Charged to income











 statement











- continuing operations
268
(365)
77
(5)
(7)
(12)
-
(44)
(1,320)
-
(1,364)
- discontinued operations
-
-
-
-
-
-
194
194
-
-
194
Unwind of discount 
(67)
(37)
(19)
(3)
-
-
-
(126)
(121)
-
(247)












At 31 December 2014
2,604
2,711
955
76
206
6
536
7,094
10,946
-
18,040












Individually assessed











- banks
-
-
-
-
1
-
-
1
39
-
40
- customers
14
42
493
69
109
1
83
811
10,526
-
11,337
Collectively assessed
2,319
2,355
366
-
-
-
157
5,197
150
-
5,347
Latent
271
314
96
7
96
5
296
1,085
231
-
1,316













2,604
2,711
955
76
206
6
536
7,094
10,946
-
18,040
Note:
(1)
Transfers in Non-core dissolution and RCR creation includes amounts in relation to latent.

Appendix 1 Capital and risk management
Loans and related credit metrics:Loans, REIL, provisions and impairments
The tables below analyse gross loans and advances to banks and customers (excluding reverse repos) and related credit metrics by sector and geography (by location of lending office).















Credit metrics


31 December 2014



REIL as a
Provisions
Provisions

Impairment

Gross


% of gross
as a %
as a % of

charge/
Amounts
loans
REIL
Provisions
loans
of REIL
gross loans

(release)
written-off
m
m
m
%
%
%

m
m










Central and local government
9,079
1
1
-
100
-

(1)
-
Finance
39,611
364
234
0.9
64
0.6

(5)
23
Personal 
- mortgages
150,572
5,634
1,521
3.7
27
1.0

36
236

- unsecured
29,155
1,964
1,585
6.7
81
5.4

401
737
Property
51,546
13,021
8,918
25.3
68
17.3

(1,083)
2,625
Construction
5,657
971
612
17.2
63
10.8

76
202
of which: CRE
43,317
13,345
9,027
30.8
68
20.8

(1,067)
2,750
Manufacturing 
22,035
461
322
2.1
70
1.5

(26)
188
Finance leases (1)
14,030
156
113
1.1
72
0.8

-
75
Retail, wholesale and repairs
18,498
956
645
5.2
67
3.5

106
160
Transport and storage
14,299
1,146
500
8.0
44
3.5

37
211
Health, education and leisure
15,932
734
366
4.6
50
2.3

9
349
Hotels and restaurants
7,969
1,094
574
13.7
52
7.2

(40)
109
Utilities 
4,825
156
85
3.2
54
1.8

16
5
Other
29,593
1,519
1,208
5.1
80
4.1

(11)
349
Latent
-
-
1,316
-
-
-

(675)
n/a











412,801
28,177
18,000
6.8
64
4.4

(1,160)
5,269










Geographic regional analysis









UK









- residential mortgages
113,521
1,394
191
1.2
14
0.2

(23)
76
- personal lending
15,923
1,674
1,452
10.5
87
9.1

290
546
- property
37,547
6,026
3,676
16.0
61
9.8

(221)
1,917
- construction
4,098
676
361
16.5
53
8.8

(1)
175
- other
113,782
3,287
2,467
2.9
75
2.2

(146)
847













284,871
13,057
8,147
4.6
62
2.9

(101)
3,561











Europe









- residential mortgages
15,629
3,268
1,178
20.9
36
7.5

(10)
10
- personal lending
1,051
76
66
7.2
87
6.3

9
66
- property
8,021
6,907
5,197
86.1
75
64.8

(862)
699
- construction
1,055
289
245
27.4
85
23.2

78
24
- other
19,104
2,860
2,361
15.0
83
12.4

(440)
561













44,860
13,400
9,047
29.9
68
20.2

(1,225)
1,360











US









- residential mortgages
21,203
957
150
4.5
16
0.7

69
150
- personal lending
11,164
195
49
1.7
25
0.4

102
125
- property
5,332
64
19
1.2
30
0.4

2
7
- construction
413
1
1
0.2
100
0.2

-
1
- other
31,338
200
342
0.6
171
1.1

1
39













69,450
1,417
561
2.0
40
0.8

174
322











RoW










- residential mortgages
219
15
2
6.8
13
0.9

-
-
- personal lending
1,017
19
18
1.9
95
1.8

-
-
- property
646
24
26
3.7
108
4.0

(2)
2
- construction
91
5
5
5.5
100
5.5

(1)
2
- other
11,647
240
194
2.1
81
1.7

(5)
22













13,620
303
245
2.2
81
1.8

(8)
26











Customers
412,801
28,177
18,000
6.8
64
4.4

(1,160)
5,269











Banks
24,812
42
40
0.2
95
0.2

(10)
9


Appendix 1 Capital and risk management
Loans and related credit metrics:Loans, REIL, provisions and impairments














Credit metrics


31 December 2013



REIL as a
Provisions
Provisions
Impairment

Gross


% of gross
as a %
as a % of
charge/
Amounts
loans
REIL
Provisions
loans
of REIL
gross loans
(release)
written-off
m
m
m
%
%
%
m
m









Central and local government
8,643
2
2
-
100
-
2
-
Finance
35,948
593
292
1.6
49
0.8
4
72
Personal 
- mortgages
148,533
6,025
1,799
4.1
30
1.2
392
441

- unsecured
28,160
2,417
1,909
8.6
79
6.8
415
861
Property
62,292
20,283
13,189
32.6
65
21.2
5,130
1,642
Construction
6,331
1,334
774
21.1
58
12.2
291
160
of which: CRE
52,578
20,129
13,209
38.3
66
25.1
5,212
1,749
Manufacturing 
21,377
742
559
3.5
75
2.6
195
104
Finance leases (1)
13,587
263
190
1.9
72
1.4
16
121
Retail, wholesale and repairs
19,574
1,187
783
6.1
66
4.0
268
128
Transport and storage
16,697
1,491
635
8.9
43
3.8
487
229
Health, education and leisure
16,084
1,324
756
8.2
57
4.7
359
119
Hotels and restaurants
6,942
1,427
812
20.6
57
11.7
281
194
Utilities 
4,960
131
80
2.6
61
1.6
54
23
Other
28,624
2,103
1,370
7.3
65
4.8
489
212
Latent
-
-
2,012
-
-
-
44
-










417,752
39,322
25,162
9.4
64
6.0
8,427
4,306









Geographic regional analysis







UK








- residential mortgages
110,515
1,900
319
1.7
17
0.3
39
180
- personal lending
17,098
2,052
1,718
12.0
84
10.0
264
681
- property
44,252
9,797
5,190
22.1
53
11.7
2,014
950
- construction
4,691
941
515
20.1
55
11.0
194
159
- other
110,466
4,684
3,202
4.2
68
2.9
1,091
537












287,022
19,374
10,944
6.8
56
3.8
3,602
2,507










Europe








- residential mortgages
17,540
3,155
1,303
18.0
41
7.4
195
26
- personal lending
1,267
141
129
11.1
91
10.2
19
26
- property
13,177
10,372
7,951
78.7
77
60.3
3,131
659
- construction
979
351
227
35.9
65
23.2
72
-
- other
22,620
4,057
3,498
17.9
86
15.5
1,012
465












55,583
18,076
13,108
32.5
73
23.6
4,429
1,176










US








- residential mortgages
19,901
951
173
4.8
18
0.9
161
233
- personal lending
8,722
207
45
2.4
22
0.5
114
151
- property
4,279
85
19
2.0
22
0.4
(11)
25
- construction
313
34
24
10.9
71
7.7
25
1
- other
27,887
198
589
0.7
297
2.1
65
131












61,102
1,475
850
2.4
58
1.4
354
541










RoW 








- residential mortgages
577
19
4
3.3
21
0.7
(3)
2
- personal lending
1,073
17
17
1.6
100
1.6
18
3
- property
584
29
29
5.0
100
5.0
(4)
8
- construction
348
8
8
2.3
100
2.3
-
-
- other
11,463
324
202
2.8
62
1.8
31
69












14,045
397
260
2.8
65
1.9
42
82









Customers
417,752
39,322
25,162
9.4
64
6.0
8,427
4,306









Banks
27,640
70
63
0.3
90
0.2
(15)
40
Note:
(1)
Includes instalment credit.

Appendix 1 Capital and risk management
Debt securities
The table below analyses debt securities by issuer, IFRS measurement classifications and external rating. Ratings are based on the lowest of Standard and Poor's, Moody's and Fitch. US central and local government includes US federal agencies. Financial institutions category includes US government sponsored agencies and securitisation entities, the latter principally relating to asset-backed securities (ABS).











Central and local government
Banks
Other
Corporate
Total


financial

Of which
UK
US
Other
institutions

ABS 
31 December 2014
m
m
m
m
m
m
m

m










Held-for-trading (HFT)
6,218
7,709
24,451
1,499
7,372
1,977
49,226

3,559
Designated as at fair value
-
-
111
2
4
-
117

-
Available-for-sale (AFS)
4,747
11,011
11,058
3,404
14,585
161
44,966

18,884
Loans and receivables 
-
-
-
185
2,774
137
3,096

2,734
Held-to-maturity (HTM)
4,537
-
-
-
-
-
4,537

-










Long positions
15,502
18,720
35,620
5,090
24,735
2,275
101,942

25,177










AAA
-
6
15,533
1,319
6,086
77
23,021

4,763
AA to AA+
15,502
18,714
9,879
283
12,215
117
56,710

16,955
A to AA-
-
-
4,958
2,670
2,534
340
10,502

688
BBB- to A-
-
-
4,822
277
1,184
772
7,055

853
Non-investment grade
-
-
331
61
1,247
603
2,242

1,060
Unrated
-
-
97
480
1,469
366
2,412

858











15,502
18,720
35,620
5,090
24,735
2,275
101,942

25,177










Of which US agencies
-
6,222
-
-
10,860
-
17,082

16,053










Short positions (HFT)
(4,167)
(6,413)
(10,276)
(557)
(674)
(731)
(22,818)

-










Available-for-sale









Gross unrealised gains
451
210
541
8
361
6
1,577

389
Gross unrealised losses
(1)
(117)
(3)
(1)
(158)
(2)
(282)

(257)










31 December 2013



















Held-for-trading
6,764
10,951
22,818
1,720
12,406
1,947
56,606

10,674
Designated as at fair value
-
-
104
-
17
1
122

15
Available-for-sale 
6,436
12,880
10,303
5,974
17,330
184
53,107

24,174
Loans and receivables
10
1
-
175
3,466
136
3,788

3,423










Long positions
13,210
23,832
33,225
7,869
33,219
2,268
113,623

38,286










AAA
-
18
13,106
1,434
8,155
162
22,875

6,796
AA to AA+
13,210
23,812
7,847
446
16,825
138
62,278

21,054
A to AA-
-
-
4,200
1,657
1,521
290
7,668

1,470
BBB- to A-
-
-
7,572
3,761
2,627
854
14,814

4,941
Non-investment grade
-
-
494
341
2,444
427
3,706

2,571
Unrated
-
2
6
230
1,647
397
2,282

1,454











13,210
23,832
33,225
7,869
33,219
2,268
113,623

38,286










Of which US agencies
-
5,599
-
-
13,132
-
18,731

18,048










Short positions (HFT)
(1,784)
(6,790)
(16,087)
(889)
(1,387)
(826)
(27,763)

(36)










Available-for-sale









Gross unrealised gains
201
428
445
70
386
11
1,541

458
Gross unrealised losses
(69)
(86)
(32)
(205)
(493)
(2)
(887)

(753)


Appendix 1 Capital and risk management
Debt securities (continued)
Key points 
HFT: Holdings of US government and ABS (primarily in the US) decreased reflecting sales and continued focus on balance sheet reduction and capital management in CIB. The increase in other government bonds reflected higher activity and timing of auctions. There was an increase in German, French and Austrian government bonds, partially offset by reductions in Italian, Spanish and Japanese bonds. The decrease in short positions reflects positions settled due to increased prices resulting from low yields due to economic volatility in the Eurozone.


AFS: Treasury took advantage of improved market conditions to reduce legacy banks and other financial institutions positions; consequently RBS no longer has any mortgage-backed covered bonds (31 December 2013 - 4.6 billion).


Gross unrealised losses on AFS debt securities have declined significantly from 1.8 billion in 2012 and 0.9 billion in 2013 to 282 million at the end of 2014. 257 million out of the 282 million was due to asset-backed securities, of which only 128 million related to those that had been in a loss position for more than a year primarily reflecting risk reduction in RCR compared with 0.6 billion and 1.8 billion in 2013 and 2012.



Appendix 1 Capital and risk management
Derivatives
The table below analyses derivatives by type of contract. The master netting agreements and collateral shown below do not result in a net presentation on the balance sheet under IFRS.










31 December 2014

31 December 2013


Notional (1)
Assets
Liabilities

Notional (1)
Assets
Liabilities


bn
m
m

bn
m
m










Interest rate (2)
27,331
269,912
259,971

35,589
218,041
208,698

Exchange rate 
4,675
78,707
83,781

4,555
61,923
65,749

Credit 
125
2,254
2,615

253
5,306
5,388

Equity and commodity
78
3,119
3,582

81
2,770
5,692












353,992
349,949


288,040
285,527

Counterparty mark-to-market netting

(295,315)
(295,315)


(241,265)
(241,265)

Cash collateral

(33,272)
(30,203)


(24,423)
(25,302)

Securities collateral 

(7,013)
(14,437)


(5,990)
(8,257)










Net exposure

18,392
9,994


16,362
10,703










Net exposure by sector








Banks

1,875
1,534


1,524
1,574

Other financial institutions

4,035
3,721


4,619
4,484

Corporate

11,186
4,382


9,352
4,217

Government

1,296
357


868
428












18,392
9,994


16,362
10,703










Net exposure by region of counterparty 







UK

9,037
3,233


8,937
3,681

Europe

5,628
3,521


4,497
3,717

US

1,544
1,280


1,441
1,806

RoW

2,183
1,960


1,487
1,498












18,392
9,994


16,362
10,703

Notes:
(1)
Includes exchange traded contracts of 2,436 billion (31 December 2013 - 2,298 billion) principally interest rate. Trades are generally closed out daily hence carrying values were insignificant; assets 8 million (31 December 2013 - 69 million); liabilities 119 million (31 December 2013 - 299 million).
(2)
Interest rate notional includes 18,452 billion (31 December 2013 - 22,563 billion) in respect of contracts with central clearing counterparties to the extent related assets and liabilities are offset.


Appendix 1 Capital and risk management
Derivatives
Key points
Interest rate contracts: notional balances were 8.3 trillion lower due to increased participation in trade compression cycles in 2014. The fair value increased due to significant downward shifts in major yields following further rate cuts by the European Central Bank, European instability including Germany as well as concerns over falling oil prices. This was partially offset by the impact of strengthening of sterling against the euro and participation in tear ups. 


Credit derivatives: notional and fair value decreased reflecting participation in trade compression cycles and reduction in the US Agency business within CIB. Tightening of credit spreads in Europe and long dated spreads in the US also contributed to decrease in fair values.


Uncollateralised derivatives predominantly comprise:

Corporates: RBS trades under master netting arrangements, but corporate business models generally are not compatible with collateral management due to the liquidity impact. Corporates enter into derivatives to hedge their underlying interest rate and foreign exchange risk exposures

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

Other financial institutions: transactions with securitisation entities and funds where collateral posting may be directional i.e. agreements where only one party is obliged to post collateral to the other but this is not reciprocal. These collateral arrangements are usually contingent on the party's credit rating.

Government: sovereigns and supranational entities with one way collateral agreements in their favour.

Appendix 1 Capital and risk management
Key loan portfolios
Commercial real estate
The commercial real estate sector comprises exposures to entities involved in the development of, or investment in, commercial and residential properties (including house builders). The analysis of lending utilisations below is gross of impairment provisions and excludes rate risk management and contingent obligations.

31 December 2014

31 December 2013

Investment
Development
Total

Investment
Development
Total
By segment
m
m
m

m
m
m








UK PBB
3,757
501
4,258

3,931
510
4,441
Ulster Bank
952
336
1,288

3,419
718
4,137








Personal & Business Banking
4,709
837
5,546

7,350
1,228
8,578








Commercial Banking
15,145
2,775
17,920

16,616
2,957
19,573
Private Banking
1,051
244
1,295

n/a
n/a
n/a








Commercial & Private Banking
16,196
3,019
19,215

16,616
2,957
19,573








Corporate & Institutional Banking
721
255
976

898
183
1,081
Citizens Financial Group
5,017
-
5,017

4,018
-
4,018
RCR 
6,169
6,394
12,563

n/a
n/a
n/a
Non-Core
n/a
n/a
n/a

11,624
7,704
19,328









32,812
10,505
43,317

40,506
12,072
52,578

Investment

Development


Commercial
Residential
Total

Commercial
Residential
Total
Total
By geography (1)
m
m
m

m
m
m
m









31 December 2014








UK (excluding NI (2))
17,327
4,757
22,084

600
3,446
4,046
26,130
Ireland (ROI and NI (2))
2,864
740
3,604

1,499
4,469
5,968
9,572
Western Europe (other)
1,222
53
1,275

189
24
213
1,488
US
4,063
1,358
5,421

-
59
59
5,480
RoW (2)
406
22
428

34
185
219
647










25,882
6,930
32,812

2,322
8,183
10,505
43,317









31 December 2013

















UK (excluding NI (2))
20,861
5,008
25,869

678
3,733
4,411
30,280
Ireland (ROI and NI (2))
4,405
1,028
5,433

1,919
5,532
7,451
12,884
Western Europe (other)
4,068
183
4,251

22
17
39
4,290
US
3,563
1,076
4,639

-
8
8
4,647
RoW (2)
314
-
314

30
133
163
477










33,211
7,295
40,506

2,649
9,423
12,072
52,578









For the notes to these tables refer to the following page. 







Appendix 1 Capital and risk management
Key loan portfolios: Commercial real estate (continued)


Ireland
Western




UK
(ROI and
Europe




(excl NI (2))
NI(2)) 
(other)
US
RoW(2)
Total
By sub-sector (1)
m
m
m
m
m
m







31 December 2014






Residential
8,203
5,209
78
1,417
206
15,113
Office
3,297
504
609
81
137
4,628
Retail
4,909
809
173
157
91
6,139
Industrial
2,588
367
32
2
29
3,018
Mixed/other
7,133
2,683
596
3,823
184
14,419








26,130
9,572
1,488
5,480
647
43,317







31 December 2013








Residential
8,740
6,560
200
1,085
133
16,718
Office
4,557
813
1,439
32
121
6,962
Retail
6,979
1,501
967
84
73
9,604
Industrial
3,078
454
43
30
13
3,618
Mixed/other
6,926
3,556
1,641
3,416
137
15,676








30,280
12,884
4,290
4,647
477
52,578
Notes:
(1)
Data at 31 December 2014 includes CRE lending from Private Banking in CPB of 1.3 billion that was excluded from the tables showing 2013 data. At 31 December 2013 CRE lending in Private Banking totalled 1.4 billion.
(2)
ROI: Republic of Ireland; NI: Northern Ireland; RoW: Rest of World.
Key points 
The overall gross lending exposure to CRE fell by 9.3 billion (18%) to 43.3 billion. Most of the decrease occurred in RCR exposure originated by Ulster Bank, CPB and CIB and was due to repayments, asset sales and write-offs. 


The RCR portfolio of 12.6 billion represented 29% of the RBS CRE portfolio. Geographically, 67% of the RCR portfolio was held in Ireland, 22% in the UK, 10% in Western Europe and 1% in the US and the rest of world. 


The increase in US exposure was predominantly driven by improved economic conditions, which contributed to increased business volumes in CFG, in line with risk appetite and business strategy.

The average LTV for the performing book improved from 65% to 57% over the past year. The LTV for the performing portfolio in the UK was 56%. The reductions in the higher LTV bands occurred mainly in the RCR book originated by Ulster Bank and CIB, reflecting reductions through repayments, asset sales and write-offs.

Interest on performing investment property secured loans was covered 1.6x and 2.9x within RCR and RBS excluding RCR, respectively. Performing loans include general corporate loans, typically unsecured, to CRE companies (including real estate investments trusts), and major UK house builders, in addition to facilities supported by guarantees. The credit quality of these exposures was consistent with that of the performing portfolio overall. Non-performing loans are subject to standard provisioning policies.


Appendix 1 Capital and risk management
Key loan portfolios: Commercial real estate (continued)

RCR

Rest of RBS

Total
LTV ratio by value

Non-



Non-



Non-

Performing
performing
Total
Performing
performing
Total
Performing
performing
Total
m
m
m
m
m
m
m
m
m












31 December 2014











<= 50%
300
45
345

9,833
220
10,053

10,133
265
10,398
> 50% and <= 70%
602
173
775

8,750
301
9,051

9,352
474
9,826
> 70% and <= 90%
220
554
774

2,285
409
2,694

2,505
963
3,468
> 90% and <= 100%
41
116
157

343
134
477

384
250
634
> 100% and <= 110%
56
211
267

168
148
316

224
359
583
> 110% and <= 130%
49
438
487

326
201
527

375
639
1,014
> 130% and <= 150%
6
404
410

135
128
263

141
532
673
> 150%
65
4,160
4,225

305
495
800

370
4,655
5,025












Total with LTVs
1,339
6,101
7,440

22,145
2,036
24,181

23,484
8,137
31,621
Minimal security (1)
-
3,168
3,168

33
38
71

33
3,206
3,239
Other
34
1,921
1,955

5,956
546
6,502

5,990
2,467
8,457












Total
1,373
11,190
12,563

28,134
2,620
30,754

29,507
13,810
43,317












Total portfolio 











 average LTV (2)
75%
338%
291%

56%
133%
62%

57%
287%
116%













Non-Core

Rest of RBS

Total


Non-



Non-



Non-


Performing
performing
Total

Performing
performing
Total

Performing
performing
Total
31 December 2013
m 
m 
m 

m 
m 
m 

m 
m 
m 












<= 50%
419
142
561

7,589
143
7,732

8,008
285
8,293
> 50% and <= 70%
867
299
1,166

9,366
338
9,704

10,233
637
10,870
> 70% and <= 90%
1,349
956
2,305

2,632
405
3,037

3,981
1,361
5,342
> 90% and <= 100%
155
227
382

796
295
1,091

951
522
1,473
> 100% and <= 110%
168
512
680

643
327
970

811
839
1,650
> 110% and <= 130%
127
1,195
1,322

444
505
949

571
1,700
2,271
> 130% and <= 150%
13
703
716

356
896
1,252

369
1,599
1,968
> 150%
69
7,503
7,572

400
1,864
2,264

469
9,367
9,836












Total with LTVs
3,167
11,537
14,704

22,226
4,773
26,999

25,393
16,310
41,703
Minimal security (1)
51
3,069
3,120

9
88
97

60
3,157
3,217
Other
108
1,396
1,504

5,266
888
6,154

5,374
2,284
7,658












Total
3,326
16,002
19,328

27,501
5,749
33,250

30,827
21,751
52,578












Total portfolio 











 average LTV (2)
75%
292%
245%

64%
187%
85%

65%
261%
142%
Notes:
(1)
Total portfolio average LTV is quoted net of loans with minimal security given that the anticipated recovery rate is less than 10%. Provisions are marked against these loans where required to reflect the relevant asset quality and recovery profile. 
(2)
Weighted average by exposure.
Credit quality metrics relating to commercial real estate lending were as follows:










Total

RCR
Non-Core

31 December
31 December

31 December
31 December

2014
2013

2014
2013






Lending (gross)
43,317m
52,578m

12,563m
19,328m
Of which REIL
13,345m
20,129m

11,112m
14,305m
Provisions
9,027m
13,209m

8,067m
10,639m
REIL as a % of gross loans to customers
30.8%
38.3%

88.5%
74.0%
Provisions as a % of REIL
68%
66%

73%
74%
Notes:
(1)
Excludes property related lending to customers in other sectors managed by Real Estate Finance.
(2)
Data at 31 December 2014 includes CRE lending from Private Banking in CPB of 1.3 billion that was excluded from the tables showing 2013 data. At 31 December 2013 CRE lending in Private Banking totalled 1.4 billion.

Appendix 1 Capital and risk management
Key loan portfolios (continued)
Oil and gas
RBS has 10.7 billion of credit risk assets (CRA) (comprising lending, net derivatives and contingent obligations) in the oil and gas sector. Including committed but undrawn facilities, the exposure to the sector is 24.1 billion. 
The price of crude oil is subject to global demand and supply factors and therefore determined globally. It has fallen by more than 50% since June 2014. This steep decline has been driven by excess supply fears resulting from a combination of factors. These include the growth in US shale production and OPEC maintaining current production levels, as well as weaker demand in Europe and slower growth in China. 
The price of natural gas is determined regionally. US natural gas prices have been relatively stable compared with the recent price of crude oil. The price of natural gas is not highly correlated to oil prices.
Exposures to this sector continue to be closely managed through the sector concentration framework and through ongoing customer and sub-sector reviews including stress testing. Risk appetite to the overall oil and gas sector was reduced during 2014. Further action is ongoing to mitigate exposure where possible.
The table below provides a breakdown of oil and gas sector exposure on both a CRA basis and total exposure (including committed but undrawn exposure and contingent obligations) basis by business segment.

31 December 2014

31 December 2013

CRA

Total

CRA

Total

m 
% 

m 
% 

m 
%

 
%












Commercial Banking
671
6

1,035
4

772
8

1,203
5
Corporate and Institutional Banking
8,297
78

20,278
84

8,264
82

20,924
88
Citizens Financial Group
1,251
12

2,134
9

819
8

1,284
5
Others
101
1

243
1

144
1

276
1
RCR
352
3

457
2

145
1

147
1













10,672
100

24,147
100

10,144
100

23,834
100












Of which: Lending exposure
7,744
73

17,695
73

6,996
69

16,693
70
During 2014, CFG's exposure to this sector increased, partly due to the transfer of 0.4 billion (total exposure) of oil and gas exposures from CIB. 
The committed lending exposure included legal commitments to syndicated bank facilities, with tenors up to five years. These committed facilities are for general corporate purposes including funding of operating needs and capital expenditures. These facilities are available as long as counterparties remain compliant with the terms of the credit agreement. Contingent obligations relate to guarantees, letters of credit and suretyships provided to customers.
RBS had no high-yield bond underwriting positions as at 31 December 2014; it had a simple sub investment grade loan underwriting of $86 million in the Americas which, subsequent to the year end, had been syndicated.
At the year end, RBS's exposure to commodities financing was 1.0 billion, predominantly in relation to oil (0.7 billion), metals (0.2 billion) and coal (0.1 billion).


Appendix 1 Capital and risk management
Key loan portfolios: Oil and gas(continued)
CIB oil and gas
Sub-sector and geography
The tables below provide a breakdown of CIB's oil and gas sector exposure which represents 84% of RBS's exposure to this sector (including committed but undrawn exposure) split by sub-sector and geography. The analysis is based on RBS's sector concentration framework.


Western 







Europe 
North 
Asia 
Latin 



UK
(excl. UK)
America 
America 
Pacific 
CEEMA(1)
Total 
31 December 2014
m 
m 
m 
m 
m 
m 
m 








Producers (incl. integrated oil companies)
833
1,101
4,822
263
115
848
7,982
Oilfield service providers
153
675
1,007
742
-
535
3,112
Other wholesale and trading activities
295
794
683
907
-
122
2,801
Refineries
1
177
2,700
591
141
67
3,677
Pipelines
96
48
2,359
49
33
121
2,706









1,378
2,795
11,571
2,552
289
1,693
20,278








Including committed undrawn exposures















Of which: exploration and production (E&P)
145
3
3,118
115
150
37
3,568








31 December 2013















Producers (incl. integrated oil companies)
748
1,065
5,333
459
5
748
8,358
Oilfield service providers
180
835
1,078
507
61
323
2,984
Other wholesale and trading activities
297
915
553
893
-
147
2,805
Refineries
1
135
2,203
993
131
231
3,694
Pipelines
188
95
2,563
41
-
196
3,083









1,414
3,045
11,730
2,893
197
1,645
20,924
Note:
(1)
Includes exposures to Central and Eastern Europe as well as the Middle East and Africa.
The sub-sector within which a customer operates is a primary consideration for assessing the credit risk of a customer. Current areas of focus are towards customers involved in exploration and production principally in producers (E&P) and oilfield service providers (OFS). E&P customers represent approximately 18% of CIB's exposure to the oil and gas sector and OFS customers represent 15%. 
E&P is most immediately exposed to the oil price decline and E&P companies are the primary customers for the service providers and are experiencing an adverse impact on their financial performance from a reduced level of contracts and lower contract rates as well as pressure to re-price existing services. 
The other principal components of RBS's exposure to producers are Integrated Oil Companies (IOC) and National Oil Companies (NOC). IOC and NOC are less vulnerable to the oil price decline due to scale, diversification and in the case of NOC, explicit support from governments. 


Appendix 1 Capital and risk management
Key loan portfolios: CIB oil and gas (continued)
Asset quality
The table below provides a breakdown of the asset quality of CIB's oil and gas sector portfolios. 
Asset quality - AQ band
31 December 2014
m 
%



AQ1
3,948
20
AQ2
1,999
10
AQ3
3,455
17
AQ4
7,521
37
AQ5
2,035
10
AQ6
1,025
5
AQ7
293
1
Other
2
-




20,278
100
At the year end, 83% of the portfolio exposure was investment grade (AQ1-AQ4). 
The impact of continuing low oil prices on the credit quality of the portfolio is subject to ongoing review, including stress testing. RBS is in regular contact with customers to understand the impacts on them of a sustained low oil price. This activity is backed up by a suite of early warning indicators used to identify customers who may be experiencing financial difficulty.
At the year end, the proportion of RBS's total oil and gas portfolio, excluding RCR, designated as Watchlist Red (performing customers who show signs of declining creditworthiness and so require active management) was 0.4%, of which 0.02% was managed by Restructuring. 
Shipping
RBS's exposure to the shipping sector, significantly all within RCR and CIB, declined 9% during the year, from 11.4 billion to 10.4 billion, as a result of scheduled loan repayments, secondary sales (RCR) and prepayments.
Of the total exposure to the shipping sector, 7.9 billion (31 December 2013 - 8.6 billion) related to asset backed ocean-going vessels. 5.7 billion of the asset-backed ocean-going vessel exposures were in CIB.
The main concentration risks were the bulk sector which represented 38% of the portfolio; tankers at 29% and containers at 17%. The remaining exposures comprised gas, including liquid petroleum gas (10%) and others (6%).
Conditions remained generally subdued during 2014. There has been a recent upturn in rates for tankers due to the fall in oil prices but difficulties remained for containers due to over supply. The majority of RBS's exposure is extended against security in vessels of recent build (average age across the portfolio of 6.4 years including RCR) with less than 3% of the CIB book being above 15 years of age. 87% of the portfolio was below 10 years.
A key protection for RBS is the minimum security covenant. The overall loan-to-value (LTV) on the portfolio was 77%. The LTV for the RCR portfolio was 92% and for the remaining portfolio 73%. In the CIB portfolio, approximately 20% of the portfolio had LTVs above 100%.


Appendix 1 Capital and risk management
Key loan portfolios (continued)
Personal portfolios
This section summaries personal portfolios by type, segment and related credit metrics.

Overview of personal portfolios split by product type and segment

















31 December 2014

31 December 2013


Ulster
Private




Ulster
Private



UK PBB
Bank
Banking
CFG
Total

UK PBB
Bank
Banking
CFG
Total

m
m
m
m
m

m
m
m
m
m












Mortgages (1)
103,235
17,506
8,889
21,122
150,752

99,338
19,034
8,701
19,584
146,657
of which: interest only
24,287
1,263
6,357
9,929
41,836

25,439
2,069
5,968
9,272
42,748
of which: buy-to-let
11,602
2,091
1,388
147
15,228

9,073
2,242
1,024
241
12,580
of which: forbearance
4,873
3,880
100
409
9,262

5,446
2,782
127
373
8,728












Other lending (2)
12,335
591
5,186
10,924
29,036

13,760
740
5,353
8,302
28,155
of which: credit cards
4,951
192
124
952
6,219

5,766
212
129
945
7,052
of which: loans
5,020
322
4,298
1,933
11,573

5,357
421
4,656
1,712
12,146
of which: overdrafts
2,364
77
365
91
2,897

2,637
107
355
100
3,199
of which: auto loans
-
-
-
7,947
7,947

-
-
-
5,545
5,545












Total
115,570
18,097
14,075
32,046
179,788

113,098
19,774
14,054
27,886
174,812












AQ10 % 
3.3%
20.3%
1.0%
1.4%
4.5%

3.9%
18.3%
0.7%
1.5%
4.9%
Notes:
(1)
It is possible for a mortgage loan to appear in more than one category.
(2)
There are other less material categories of personal lending not listed.
Overview of impairments and REIL








31 December 2014

31 December 2013


Ulster
Private



Ulster
Private


UK PBB
Bank
Banking
CFG

UK PBB
Bank
Banking
CFG










Loan impairment charge as a 









 % of gross customer loans 









 and advances









Mortgages
-
(1.0%)
0.1%
0.2%

-
1.2%
-
0.5%
Other lending
2.0%
2.9%
(0.1%)
0.8%

1.8%
2.2%
0.6%
1.0%










Loan impairment provisions (m)









Mortgages
217
1,413
27
146

259
1,726
33
123
Other lending
1,515
104
35
49

1,671
187
50
33










Risk elements in lending (m)









Mortgages
1,218
3,362
95
949

1,702
3,235
116
761
Other lending
1,520
110
80
195

1,863
193
80
148
The most significant personal portfolio - residential mortgages is detailed below.

Appendix 1 Capital and risk management
Key loan portfolios (continued)
Residential mortgages
Total gross mortgage lending of 150.6 billion (31 December 2013 - 148.5 billion) represented 36% of gross customer lending of 412.8 billion (31 December 2013 - 417.8 billion). The table below shows LTVs for RBS's major residential mortgage portfolio totalling 150.8 billion (31 December 2013 - 146.7 billion) split between performing (AQ1-AQ9) and non-performing (AQ10) and also interest only (IOL), with the average LTV calculated on a weighted value basis. Loan balances are shown at the end of the year whereas property values are calculated using property index movements since the last formal valuation.

UK PBB

Ulster Bank

Private Banking

CFG (1)
LTV ratio by value



of which:




of which:




of which:




of which:
AQ1-9
AQ10
Total
IOL
AQ1-9
AQ10
Total
IOL
AQ1-9
AQ10
Total
IOL
AQ1-9
AQ10
Total
IOL
m
m
m
m
m
m
m
m
m
m
m
m
m
m
m
m




















31 December 2014



















<= 50%
34,889
430
35,319
7,802

2,529
188
2,717
100

3,493
14
3,507
2,727

4,498
77
4,575
1,792
> 50% and <= 70%
38,355
783
39,138
9,935

2,316
203
2,519
118

3,667
14
3,681
2,711

6,601
105
6,706
3,436
> 70% and <= 90%
23,660
705
24,365
4,978

2,856
276
3,132
184

1,379
24
1,403
679

6,350
141
6,491
3,372
> 90% and <= 100%
2,837
187
3,024
1,071

1,406
174
1,580
101

64
9
73
44

1,256
48
1,304
624
> 100% and <= 110%
609
73
682
413

1,404
203
1,607
127

33
5
38
35

672
24
696
311
> 110% and <= 130%
143
29
172
104

2,382
512
2,894
295

15
9
24
22

516
17
533
191
> 130% and <= 150%
27
2
29
4

1,554
547
2,101
218

12
1
13
12

119
4
123
32
> 150%
-
-
-
-

481
475
956
120

22
3
25
22

64
3
67
14




















Total with LTVs
100,520
2,209
102,729
24,307

14,928
2,578
17,506
1,263

8,685
79
8,764
6,252

20,076
419
20,495
9,772
Other (2)
486
20
506
(20)

-
-
-
-

124
1
125
105

624
3
627
157




















Total
101,006
2,229
103,235
24,287

14,928
2,578
17,506
1,263

8,809
80
8,889
6,357

20,700
422
21,122
9,929




















Total portfolio average LTV (3)
57%
67%
57%


88%
115%
92%


51%
80%
51%


67%
73%
67%





















Average LTV on new 



















 originations during the year (3)


71%




75%




48%




68%





















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

















Appendix 1 Capital and risk management
Key loan portfolios: Residential mortgages (continued)

UK PBB 

Ulster Bank

Private Banking

CFG (1)
LTV ratio by value



Of which:




Of which:




Of which:




Of which:
AQ1-9
AQ10
Total
IOL
AQ1-9
AQ10
Total
IOL
AQ1-9
AQ10
Total
IOL
AQ1-9
AQ10
Total
IOL
m
m
m
m
m
m
m
m
m
m
m
m
m
m
m
m




















31 December 2013



















<= 50%
26,392
313
26,705
5,977

2,025
170
2,195
113

3,400
16
3,416
2,561

4,669
98
4,767
2,146
> 50% and <= 70%
34,699
591
35,290
9,280

1,837
195
2,032
118

3,397
20
3,417
2,332

5,529
89
5,618
2,929
> 70% and <= 90%
28,920
854
29,774
6,909

2,326
288
2,614
206

1,337
44
1,381
660

5,553
110
5,663
3,019
> 90% and <= 100%
4,057
315
4,372
1,846

1,214
162
1,376
122

87
7
94
65

1,309
39
1,348
525
> 100% and <= 110%
1,790
182
1,972
1,039

1,302
182
1,484
129

87
15
102
96

752
22
774
223
> 110% and <= 130%
552
100
652
382

2,509
461
2,970
332

27
6
33
30

637
17
654
144
> 130% and <= 150%
37
5
42
6

2,202
549
2,751
425

4
4
8
7

183
5
188
32
> 150%
-
-
-
-

2,385
1,227
3,612
624

24
6
30
26

102
4
106
20




















Total with LTVs
96,447
2,360
98,807
25,439

15,800
3,234
19,034
2,069

8,363
118
8,481
5,777

18,734
384
19,118
9,038
Other (2)
511
20
531
-

-
-
-
-

215
5
220
191

463
3
466
234




















Total
96,958
2,380
99,338
25,439

15,800
3,234
19,034
2,069

8,578
123
8,701
5,968

19,197
387
19,584
9,272




















Total portfolio average LTV (3)
62%
75%
62%


103%
130%
108%


51%
77%
51%


67%
69%
67%





















Average LTV on new originations



















 during the year (3)


67%




73%




52%




68%

Notes:
(1)
Includes residential mortgages and home equity loans and lines.
(2)
Where no indexed LTV is held.
(3)
Average LTV weighted by value is calculated using the LTV on each individual mortgage and applying a weighting based on the value of each mortgage. 

Appendix 1 Capital and risk management
Key loan portfolios: Residential mortgages (continued)
Key points 
UK PBB
The UK personal mortgage portfolio increased by 4% to 103.2 billion, of which 91.6 billion (31 December 2013 - 90.3 billion) was owner-occupied and 11.6 billion (31 December 2013 - 9.0 billion) buy-to-let.
Based on the Halifax Price Index at September 2014, the portfolio average indexed LTV by volume was 50.4% (31 December 2013 - 54.1%) and 57.3% by weighted value of debt outstanding (31 December 2013 - 62.0%). The ratio of total outstanding balances to total indexed property valuations was 41.5% (31 December 2013 - 45.1%).
Fixed interest rate products of varying time durations accounted for approximately 56%, with 3% a combination of fixed and variable rates and the remainder variable rate. Approximately 19% of owner-occupied mortgages were on interest only terms with a bullet repayment and 7% were on a combination of interest only and capital and interest.
During 2014 buy-to-let balances increased by 2.6 billion (28.2%) in support of UK PBB's growth strategy with new business subject to rental cover and loan-to-value risk appetite requirements. Approximately 63% of buy-to-let mortgages were on interest only lending terms with a bullet repayment, 34% repayable by regular capital and interest repayments and the remaining 3% a combination of interest only and capital and interest. Buy-to-let lending includes lending to customers who were originally owner occupiers who subsequently, with the agreement of RBS, let out the property to a third party, this represents 26.5% of buy-to-let mortgages.
The portfolio average indexed LTV improved from 62.0% to 57.3%. Within owner-occupied, the average LTV by weighted value improved from 61.6% to 57.0% and within buy-to-let from 66.0% to 59.6%.
Gross new mortgage lending of 19.7 billion (31 December 2013 - 14.4 billion) had an average LTV by weighted average of 70.5%, which was higher than 2013 (66.6%), reflecting growth in the market and RBS's strong support for the Help To Buy scheme. Within this: owner-occupier lending was 16.6 billion (31 December 2013 - 13.2 billion) and had an average LTV by weighted average of 71.7% (31 December 2013 - 66.9%). Buy-to-let lending was 3.1 billion (31 December 2013 - 1.3 billion) with an average LTV by weighted value of 63.9% (31 December 2013 - 63.0%).
All new mortgage business is subject to a comprehensive assessment which includes: i) an affordability test; ii) credit scoring; iii) a maximum loan-to-value of 90% (75% on buy-to-let), with the exception of government-backed schemes, for example Help To Buy and New Buy, where lending of up to 95% is provided: and iv) a range of policy rules that restrict the availability of credit to riskier borrowers.
The arrears rate (more than three payments in arrears, excluding repossessions and shortfalls after property sale), fell from 1.3% to 1.0%. The number of repossessions was also lower (1,129 compared with 1,532 in 2013). The arrears rate for buy-to-let mortgages was 0.6% (31 December 2013 - 0.9%).
There was an overall release of impairment provision of 26 million. This compares to a charge of 31 million in 2013 and reflects improvements in underlying asset quality, including house price increases.
Ulster Bank
Of Ulster Bank's portfolio of 17.5 billion, 86% was in the Republic of Ireland and 14% in Northern Ireland. At constant exchange rates, the portfolio decreased 2.4% during the year as a result of amortisation.
The assets included 2.1 billion (12%) of residential buy-to-let loans. 


Appendix 1 Capital and risk management
Key loan portfolios: Residential mortgages (continued)
Ulster Bank (continued)
The interest rate product mix was approximately 64% on tracker rate products, 23% on variable rate products and 13% on fixed rate. 


Interest only represented 7% of the total portfolio.


Ulster Bank stopped offering interest only loans as a standard mortgage offering for new lending in the Republic of Ireland in 2010 and in Northern Ireland in 2012. 


The average individual LTV on new originations was 75% in 2014, (2013 - 73%); the volume of new business increased from 438 million in 2013 to 618 million in 2014. The maximum LTV available to Ulster Bank customers was 90%.


Based on updated house price indices as at October 2014, the portfolio average indexed LTV improved from 108% to 92% during 2014, reflecting positive house price index trends over the last 12 months. In particular, the Republic of Ireland house price index increased by 16% during 2014, with the Irish market being led by the Dublin area, where the index increased by 22% during the year. The Republic of Ireland house price index is 38% below its peak, which was in September 2007.


The average LTV of new business for owner occupier mortgages was 75%, compared to 69% for buy-to-let.


Indexed loan to value, excluding 2014 new business, was 93% as at 31 December 2014.


Repossessions increased to 497 in 2014 from 262 in 2013.


Ulster Bank provisioning methodology used a point-in-time provision rate based on the latest available house price index prepared by the Central Statistics Office. This is used to create an indexed valuation at property level, which also takes into account costs of realisation and a discount for forced sales, and is one of the primary factors used in the determination of the likely size of the loss upon crystallisation. Loss likelihood rates are also determined and (amongst other considerations) assess whether an active forbearance arrangement is in place. The provision rate is then a combination of these measures and is updated as required depending on the movement of the drivers applied as part of the methodology.


REIL increased from 3.2 billion to 3.4 billion primarily reflecting higher forbearance arrangements. Provision coverage was lower at 41% (2013 - 53%) reflecting an increase in collateral values. 
CFG
The mortgage portfolio consisted of 7.8 billion of residential mortgages (1% in second lien position) and 13.3 billion of home equity loans and lines of credit (HELOC) - first and second liens. Home equity consisted of 45% in first lien position. A Serviced By Others (SBO) portfolio, which is predominantly (95%) second lien, is included in the home equity book.


CFG continued to focus on its 'footprint states' of New England, Mid-Atlantic and Mid-West regions. At 31 December 2014, the portfolio consisted of 17.1 billion (82% of the total portfolio) within footprint.


The SBO portfolio, which was closed to new purchases in the third quarter of 2007, decreased from 1.4 billion to 1.3 billion.


The overall mortgage portfolio credit characteristics are stable with a weighted average LTV of 67% at 31 December 2014. The weighted average LTV of the portfolio, excluding SBO, was 65%.

Appendix 1 Capital and risk management
Market risk
Market risk is the risk of losses arising from fluctuations in interest rates, credit spreads, foreign currency rates, equity prices, commodity prices and other factors, such as market volatilities, that may lead to a reduction in earnings, economic value or both. For a description of market risk framework, governance, policies and methodologies, refer to the Risk and balance sheet management - Market risk section in the 2013 Annual Report and Accounts. There were no material changes to market risk methodologies or models during the year ended 31 December 2014.
Overview
RBS's traded market risk profile decreased significantly, with market risk limits being reduced across all businesses, in some instances by 50-60%. These reductions resulted from: 
The creation of RCR and consequent accelerated wind-down of capital-intensive and potentially volatile exposures; and
In relation to CIB:



the continuing run-down of non-strategic products and exposures in the run-off and recovery business set up towards the end of 2013; and

the decision to exit the US asset backed product (ABP) trading business. 
Risk measurement improvements continued. Credit and funding valuation adjustments were included in the internal measure of RBS's value-at-risk. Previously, only associated hedges were included. The change in scope reflects a more comprehensive economic view of the risk.
RBS continued to manage its non-traded market risk exposures within risk limits throughout the year. Although the restructure of customer facing businesses in 2014 did not affect underlying non-traded market risk exposures, the planned divestment of CFG is expected to reduce structural interest rate and foreign exchange risk exposures.
Longer-term interest rates remained at historically low levels during 2014. RBS maintained its structural hedge of invested equity and rate-insensitive customer deposit portfolios. The aim of the hedge is to stabilise interest earnings. During the year, the duration profile of the hedge did not change materially but action was taken to match the hedge's currency profile more closely to underlying balance sheet exposures.


Appendix 1 Capital and risk management
Trading portfolios
Value-at-risk
The tables below analyse the internal value-at-risk (VaR) for trading portfolios segregated by type of market risk exposure, and between CIB and RCR or Non-Core. 

Year ended

31 December 2014

31 December 2013

Average
Period end
Maximum
Minimum

Average
Period end
Maximum
Minimum
Trading VaR (1-day 99%)
m
m
m
m

m
m
m
m










Interest rate
17.4
16.9
39.8
10.8

37.2
44.1
78.2
19.1
Credit spread
23.1
14.2
42.8
13.4

60.0
37.3
86.8
33.3
Currency
4.7
5.5
9.7
1.0

8.6
6.5
20.6
3.6
Equity
3.0
3.7
6.5
1.2

5.8
4.1
12.8
3.2
Commodity
0.6
0.4
2.5
0.3

0.9
0.5
3.7
0.3
Diversification (1)

(18.2)




(23.7)












Total
27.8
22.5
58.2
17.1

79.3
68.8
118.8
42.1










CIB
26.3
21.3
48.8
15.5

64.2
52.4
104.6
35.6
RCR
4.5
3.0
16.2
2.6

n/a
n/a
n/a
n/a
Non-Core
n/a
n/a
n/a
n/a

19.3
15.2
24.9
14.9
Note:
(1)
The Group benefits from diversification as it reduces risk by allocating positions across various financial instrument types, currencies and markets. The extent of the diversification benefit depends on the correlation between the assets and risk factors in the portfolio at a particular time. The diversification factor is the sum of the VaR on individual risk types less the total portfolio VaR.
Key points
The total traded VaR decreased significantly in 2014 compared with 2013, on both a period end and average basis, for the following two key reasons:

the inclusion of credit valuation adjustment (CVA) and funding valuation adjustment (FVA) trades in internal VaR measure in February 2014 which primarily affected Q1 2014. Prior to this change, VaR was higher as only the associated hedges, which had a risk-additive impact on overall trading book exposures, were captured in the internal risk management framework. 

the decision to exit the US ABP trading business and the unwinding of equity positions in Run-off & Recovery within CIB in line with the exit strategy which largely affected the last three quarters of the year.
The declines in interest rate and credit spread VaR were also affected by specific factors:

Interest rate VaR declined in Q1 2014 due to reduced risk appetite for flow market-making in the Rates business in CIB.

Credit spread VaR declined in H2 2014, because the volatile credit spread series rolled out of the 500-day window for VaR.
Total VaR was notably volatile in the second half of the year, largely as a result of heightened geopolitical risks given the Ukraine/Russia crisis and Middle East tensions and developments in the Eurozone periphery.
The decrease in the average and period end RCR VaR reflects the inclusion of CVA and FVA trades in the calculation of internal VaR and the accelerated wind-down of capital-intensive and potentially volatile exposures.

Appendix 1 Capital and risk management
Trading portfolios (continued)
Capital charges 
The total market risk minimum capital requirement calculated in accordance with CRR was 1,917 million at 31 December 2014 and represents 8% of the corresponding RWA amount, 24 billion. It comprises a number of regulatory capital requirements split into two categories: (i) the Pillar 1 model-based position risk requirement (PRR) of 1,458 million, which in turn comprises several modelled charges; and (ii) the standardised PRR of 459 million, which also has several components. 
The contributors to the Pillar 1 model-based PRR are presented in the table below. Following the implementation of the CRR on 1 January 2014, credit hedges eligible for CVA are no longer included in the modelled market risk capital charges, namely VaR, stressed VaR and the incremental risk charge. Such hedges are now included in the CVA capital charge, which forms part of the capital calculation for counterparty credit risk.





Basel 2.5





31 December

CRR
2013

Average
Maximum 
Minimum 
Period end
Period end
Year ended 31 December 2014
m
m
m
m
m






Value-at-risk
323
527
232
329
576
Stressed VaR (SVaR)
681
856
511
511
841
Incremental risk charge (IRC)
402
530
299
299
443
All price risk
2
6
-
-
8
Risk not in VaR (RNIV)
412
472
319
319
218










1,458
2,086
Key points
Overall, the Pillar 1 model-based PRR declined by 30% during 2014, driven by reductions in the VaR and SVaR charges and the IRC, offset somewhat by an increase in the RNIV charge


The decrease in the VaR and SVaR charges was primarily driven by the removal of the CVA eligible hedges (as noted above) in Q1 and ongoing risk reduction in Q2 and Q3 relating to the asset backed product portfolio as part of the risk reduction strategy.


The IRC declined by 33%, notably in Q4 reflecting a reduced exposure to the Eurozone periphery and continued risk reduction in the US ABP portfolio. 


Given the reduction in the size of the correlation trading portfolio, RBS ceased using an internal model for all price risk during Q2. With the PRA's approval, all remaining open risk is now capitalised under standardised rules.


The RNIV charge increased by 46% year on year. This was primarily due to the removal of the materiality threshold in Q1 and hence all RNIVs are now subject to capital requirements, following agreement with the PRA. This initial increase was partially offset by risk reductions across the portfolio in H2.




31 December
31 December

2014
2013
Capital requirements relating to RNIV
m
m



Risks not in VaR
57
30
Risks not in SVaR
79
39
Stressed RNIV
183
149




319
218

Appendix 1 Capital and risk management
Non-trading portfolios
Non-trading VaR
The average VaR for RBS's non-trading book, predominantly comprising available-for-sale portfolios, was 4.6 million during 2014 compared with 9.2 million during 2013. This was largely driven by a decline in the credit spread VaR in Q1, which partly reflected a decision to switch some of the securities held as collateral from floating-rate notes issued by financial institutions to government bonds during March, as part of RWA reduction. A further driver of the decline, which largely affected the last three quarters of the year, was the decision to reduce the US ABP business in line with the exit strategy. The period end VaR decreased from 5.0 million at 31 December 2013 to 3.8 million at 31 December 2014 forthe reasonsexplained above.
Structured credit portfolio
The structured credit portfolio is measured on a notional and fair value basis because of its illiquid nature. Notional and fair value decreased to 0.4 billion and 0.3 billion respectively (31 December 2013 - 0.7 billion and 0.5 billion), reflecting the sale of underlying assets, primarily consumer ABS, RMBS and CLOs/CDOs, in line with RCR strategy.
Non-traded interest rate risk 
Non-traded interest rate risk affects earnings arising from banking activities. This excludes positions in financial instruments which are classified as held-for-trading. The methodology relating to interest rate risk is detailed in the 2013 Annual Report and Accounts. 
Non-traded interest rate risk VaR metrics are based on interest rate repricing gap reports as at the reporting date. These incorporate customer products and associated funding and hedging transactions as well as non-financial assets and liabilities such as property, plant and equipment, capital and reserves. Behavioural assumptions are applied as appropriate. 
VaR does not provide a dynamic measurement of interest rate risk since static underlying repricing gap positions are assumed. Changes in customer behaviour under varying interest rate scenarios are captured by way of earnings at risk measures. VaR relating to non-traded interest rate risk for RBS's retail and commercial banking activities at a 99% confidence level and a currency analysis at the period end were as follows:






Average
Period end
Maximum
Minimum

m
m
m
m





31 December 2014
50
23
79
23
31 December 2013
45
51
57
30








31 December
31 December


2014
2013


m
m





Euro


2
4
Sterling


12
19
US dollar


27
44
Other


3
2


Appendix 1 Capital and risk management
Non-trading portfolios (continued)
Key points
The decline in VaR between the end of 2013 and the end of 2014 reflects RBS policy to reduce economic exposure to changes in interest rates. This notably related to US dollarandsterlinginterest rate exposures.


The reduction in exposure was achieved in the second half of the year through bothhedging and the utilisation ofnaturally arising balance sheet offsets, such as the increase in net free reserves following the IPO of CFG. This resulted in period end VaR decreasing significantly more than the average for the year.


These movements remained well within the Group's approved market risk appetite.
Sensitivity of net interest income
Earnings sensitivity to rate movements is derived from a central forecast over a twelve month period. Market implied forward rates and new business volume, mix and pricing consistent with business assumptions are used to generate a base case earnings forecast. 
The following table shows the sensitivity of net interest income, over the next twelve months, to an immediate upward or downward change of 100 basis points to all interest rates. In addition, the table includes the impact of a gradual 400 basis point steepening (bear steepener) and a gradual 300 basis point flattening (bull flattener) of the yield curve at tenors greater than a year. 
The scenarios represent annualised interest rate stresses of a scale deemed sufficient to trigger a modification in customer behaviour. The asymmetry in the steepening and flattening scenarios reflects the difference in the expected behaviour of interest rates as they approach zero.






Of which CFG

Euro
Sterling
US dollar
Other
Total
US Dollars
31 December 2014
m
m
m
m
m
m







+ 100 basis point shift in yield curves
(28)
347
214
(17)
516
154
- 100 basis point shift in yield curves
(34)
(298)
(87)
(12)
(431)
(85)
Bear steepener




406
105
Bull flattener




(116)
(58)







31 December 2013













+ 100 basis point shift in yield curves
59
416
175
31
681
183
- 100 basis point shift in yield curves
(29)
(333)
(82)
(15)
(459)
(76)
Bear steepener




403
122
Bull flattener




(273)
(88)
Key points
Interest rate exposure remains asset sensitive, such that rising rates will have a positive impact on net interest income.

The decreased sensitivity to parallel shifts in the yield curve over a 12 month horizon is due to increased exposure to fixed rate assets and changes in assumptions regarding the impact on customer pricing.


Appendix 1 Capital and risk management
Non-trading portfolios (continued)
Structural hedging
Banks generally have the benefit of a significant pool of stable, non and low interest bearing liabilities, principally comprising equity and money transmission accounts. These balances are usually hedged, either by investing directly in longer-term fixed rate assets or by the use of interest rate swaps, in order to provide a consistent and predictable revenue stream. 
RBS targets a weighted average life for these economic hedges. This is accomplished using a continuous rolling maturity programme, which is primarily managed by Treasury to achieve the desired profile. The maturity profile of the hedge aims to reduce the potential sensitivity of income to rate movements. The structural hedging programme is RBS-wide, capturing the position in the UK banking businesses and regulated subsidiaries in other jurisdictions.
Product hedging
Product structural hedges are used to minimise the volatility on earnings related to specific products, primarily customer deposits. The balances are primarily hedged with medium-term interest rate swaps, so that reported income is less sensitive to movements in short-term interest rates. The size and term of the hedge are based on the stability of the underlying portfolio.
The table below shows the impact on net interest income associated with product hedges managed by RBS Treasury. These relate to the main UK banking businesses except Private Banking. The figure shown represents the incremental contribution of the hedge relative to short-term wholesale cash rates.



Net interest income
31 December
31 December
2014
2013
m
m



UK Personal & Business Banking
393
387
Commercial Banking
180
121
Corporate & Institutional Banking
75
77



Total product hedges
648
585



Key points
The incremental impact of product hedges on net interest income remained positive in 2014, increasing from 585 million to 648 million. Throughout the year, short term wholesale cash rates remained at or close to historical low levels. The notional size of the hedge increased from 48 billion to 64 billion. The scope of the hedging programme was extended to cover not only customer current accounts but also customer savings deposits. The incremental yield on the portfolio above 3-month LIBOR fell from 1.2% to 1.0%, largely as a result of the one-off effect of establishing the new hedge. At end-December 2014, the equivalent incremental yield available in the market was 0.8% compared with 1.5% at the end of 2013.


Across RBS, banking book exposure to medium-term fixed rates fell during 2014. The increased exposure established by the product hedge was offset by reducing exposure in Treasury.


Appendix 1 Capital and risk management
Non-trading portfolios (continued)
Equity hedging
Equity structural hedges are used to minimise the volatility on earnings arising from returns on equity. The hedges managed by Treasury relate mainly to the UK banking businesses and contributed 0.8 billion to these businesses in 2014 (31 December 2013 - 0.8 billion), which is an incremental benefit relative to short-term wholesale cash rates. The size of the hedge increased from 39 billion in 2013 to 41 billion in 2014. The fall in yield mainly results from reinvestment of maturing hedges at lower rates.
Foreign exchange risk
The table below shows structural foreign currency exposures.





Structural 





Net assets

foreign currency

Residual 

Net assets 

of overseas 
Net
exposures

structural
of overseas

operations
investment
pre-economic
Economic
foreign currency
operations
NCI
excluding NCI
hedges
hedges
hedges (2)
exposures
31 December 2014
m
m
m
m
m
m
m








US dollar
11,402
(2,321)
9,081
(3,683)
5,398
(4,034)
1,364
Euro
6,076
(39)
6,037
(192)
5,845
(2,081)
3,764
Other non-sterling
4,178
(456)
3,722
(2,930)
792
-
792









21,656
(2,816)
18,840
(6,805)
12,035
(6,115)
5,920








31 December 2013















US dollar
16,176
-
16,176
(1,581)
14,595
(3,808)
10,787
Euro
6,606
(9)
6,597
(190)
6,407
(2,226)
4,181
Other non-sterling
4,233
(372)
3,861
(3,185)
676
-
676









27,015
(381)
26,634
(4,956)
21,678
(6,034)
15,644
Notes:
(1)
NCI represents the structural foreign exchange exposure not attributable to owners equity, which consisted mainly of CFG in US dollar in 2014 (31 December 2013: mainly RFS MI in other non-sterling).
(2)
Economic hedges mainly represent US dollar and euro preference shares in issue that are treated as equity under IFRS and do not qualify as hedges for accounting purposes.
Key points
Structural foreign currency exposure at 31 December 2014 was 12.0 billion and 5.9 billion before and after economic hedges, respectively, 9.6 billion and 9.7 billion lower than at 31 December 2013, of which 7.5 billion related to CFG. Movements in structural foreign currency exposure result from changes in the net assets of overseas operations, non-controlling interests and net investment hedges. 


Net assets of overseas operations declined by 5.4 billion, largely due to write-downs relating to CFG and US deferred tax assets.


Non-controlling interests increased by 2.4 billion, as a result of the partial disposal of CFG during the year. 



Net investment hedges increased by 1.8 billion, primarily due to an increase in US dollar hedging to manage the disposal of CFG. 


Economic hedges, which mainly consist of equity capital securities in issue, remained broadly unchanged. 


Changes in foreign currency exchange rates affect equity in proportion to structural foreign currency exposure.For example, a 5% strengthening in foreign currencies against sterling would result in a gain of 0.6 billion in equity (2013 - 1.1 billion), while a 5% weakening would result in a loss of 0.6 billion in equity (2013 - 1 billion).

Appendix 1 Capital and risk management
Country risk
Country risk is the risk of losses occurring as a result of either a country event or unfavourable country operating conditions. As country events may simultaneously affect all or many individual exposures to a country, country event risk is a concentration risk. Refer to the Annual Report and Accounts: Credit risk for other types of concentration risk such as product, sector or single-name concentration and Country risk for governance, monitoring, management and definitions.
Overview
The comments below relate to changes in country exposures in 2014 unless indicated otherwise.
Net balance sheet and off-balance sheet exposure to most countries declined across most products. RBS maintained a cautious stance and many clients continued to reduce debt levels. The euro depreciated against sterling by 6.5% while the US dollar appreciated by 5.9%.
Total eurozone net balance sheet exposure decreased by 4.9 billion or 5% to 97.6 billion. Reductions in eurozone periphery countries and in net lending in other countries were partly offset by increases in debt securities in Germany and France. The main reductions were in lending to corporate clients (mostly in Ireland, Germany, Spain and France) and to the Irish personal sector; in cash deposits held with central banks in Germany and the Netherlands; in available-for-sale (AFS) debt securities issued by Spanish and Dutch financial institutions; and in net held-for-trading (HFT) government bond positions in Italy and Spain. Net HFT debt securities in Germany, France, the Netherlands, Belgium and a few other countries increased, driven by trading activity and auctions. Notional bought and sold CDS decreased significantly, primarily as a result of novations. On balance, net bought CDS protection on eurozone exposures increased by 1.3 billion; this largely related to hedging of the credit valuation adjustment on uncollateralised or under-collateralised positions, the fair value of which increased, driven by much lower interest rates and a stronger US dollar. Net lending exposure in RCR fell to 4.1 billion for the eurozone as a whole, including 2.0 billion in Ireland, 0.8 billion in Spain and 0.6 billion in Germany, with CRE accounting for broadly half of the total.

Eurozone periphery net balance sheet exposure decreased by 10.4 billion to 31.4 billion.
Ireland - net balance sheet exposure fell by 3.7 billion or 14% to 22.6 billion, with exposure to corporates and households decreasing by 3.3 billion and 1.2 billion respectively, reflecting sales, repayments and write-offs (partly offset by impairment write-backs) plus currency movements. Provisions fell by 2.2 billion to 8.5 billion, reflecting improved collateral values. Cash deposits with the Central Bank of Ireland increased by 0.5 billion as part of Ulster Bank's preparations for the new CRR liquidity coverage ratio requirements which come into effect in 2015.
Italy - exposure fell by 0.9 billion to 4.2 billion, largely reflecting fluctuations in net HFT. Most AFS government bonds were sold, and lending and derivatives exposure to non-bank financial institutions fell by 0.5 billion. Net derivatives exposure to banks increased by 1.2 billion, driven by the acquisition of a (fully cash-collateralised) exposure from another bank.
Spain - exposure decreased by 5.8 billion to 3.3 billion, largely due to sales of 4.8 billion (mostly covered bonds) from the RBS N.V. liquidity portfolio, under favourable market conditions. These sales also reduced concentrations in Spanish banks and CRE. Net HFT debt exposure and lending to the construction, telecom and other sectors also fell.
Portugal - exposure was stable at 0.8 billion. HFT debt securities increased as trading returned but remained small. 


Appendix 1 Capital and risk management
Overview and key developments (continued)

Greece - exposure was essentially unchanged at 0.4 billion. This comprised mostly collateralised derivatives exposure to banks and corporate lending, including exposure to local subsidiaries of international companies. Net of collateral held under credit support annex and reflecting the effect of credit agency cover and parental guarantees, total committed exposure was approximately 120 million net of provisions, mostly in RCR. Contingency planning, including any potential operational and system changes, has been refreshed to ensure readiness for any downside scenario.

Funding mismatches - material estimated funding mismatches at risk of redenomination at 31 December 2014 were: 


- Ireland 4.0 billion (down from 6.5 billion due to reduced lending).


- Spain 0.5 billion (down from 6.5 billion, largely due to the reduction in AFS securities).


- Italy 1.5 billion (up from 0.5 billion due to higher derivatives exposure, lower euro deposits and 
 as the central bank funding line was no longer used).


- Portugal 0.5 billion (slightly up due to higher debt trading).


The net positions for Greece and Cyprus were minimal. With the possible exception of Greece, risks of eurozone break-up (redenomination events) have materially receded since 2011-2012, owing to major improvements in liquidity conditions, driven by the availability of substantial new tools for the European Central Bank, the establishment of the European Stability Mechanism and member countries' progress on reducing imbalances.


Germany - net balance sheet exposure rose by 2.9 billion to 26.6 billion, as a result of increases in net HFT exposure, AFS debt securities and derivatives exposure to non-bank financial institutions. This was partially offset by decreases in corporate lending (particularly in CRE) and to securitisation vehicles, and in cash deposits with the Bundesbank. Off-balance exposure decreased by 1.1 billion, mostly in the insurance and corporate sectors. Government bond holdings were 14.1 billion (AFS - 6.7 billion; HFT long positions - 7.4 billion) at the end of the year.


France - net balance sheet exposure rose by 2.2 billion to 16.1 billion, mainly reflecting debt trading fluctuations and increased derivatives exposure to banks and SFT. Lending to the public, CRE and telecommunications sectors decreased. RBS had 6.8 billion government bond holdings at 31 December 2014 (AFS - 1.1 billion; HFT long positions - 5.7 billion). Off-balance exposure fell by 1.2 billion to 8.6 billion, particularly in the corporate and government sectors.


Netherlands - net balance sheet exposure fell by 1.2 billion to 14.7 billion, as a result of reductions in AFS debt securities in the RBS N.V. liquidity portfolio and in cash deposits held with the central bank, as RBS N.V.'s liquidity needs decreased in line with balance sheet reductions. Net HFT exposure rose by 1.7 billion through normal market fluctuations while derivatives exposure increased by 1.1 billion to 6.8 billion, largely driven by business with a few major banks.


Belgium - net balance sheet exposure increased by 0.8 billion to 3.6 billion, mostly in HFT government bonds and derivatives exposure to banks.


Other eurozone - net HFT government bonds increased by 0.6 billion to 0.9 billion, reflecting increased long positions.


Appendix 1 Capital and risk management
Overview and key developments (continued)
Japan - HFT government bond exposure increased by 3.2 billion to 3.0 billion, driven by market fluctuations. This rise was partly offset by reductions in central bank deposits, in corporate and bank lending, and in derivatives and SFT exposure to financial institutions. In 2015, RBS will be closing its onshore trading business and withdrawing from Japanese government primary bonds dealership activity.


China - lending to banks and off-balance sheet exposure decreased by 1.9 billion and 1.2 billion respectively to 0.7 billion and 0.5 billion, mostly in trade finance, driven by more stringent capital requirements and an effort by RBS to improve average returns in a highly competitive environment. Given concerns about economic risks, RBS undertook stress testing across both financial institutions and corporate portfolios and started setting early warning indicators and action plans.


India - net balance sheet exposure fell by 1.7 billion to 2.0 billion, with reductions in corporate lending, particularly in the oil and gas and mining & metals sectors, and in lending to banks, largely trade finance. The reductions in part reflected increasing capital requirements and sales of low-yielding assets.
Russia - net balance sheet exposure was 1.8 billion and included 0.9 billion corporate lending and 0.7 billion bank lending, around half of which was fully hedged. Internal ratings were reviewed, additional credit restrictions placed on new business, and limits adjusted downwards. Exposures were reviewed against all international sanctions.


South Korea - net lending to banks and corporate clients decreased by 0.4 billion, reflecting a greater focus on capital efficiency. Net balance sheet exposure was 1.3 billion.


Turkey - net balance sheet exposure fell by 0.4 billion to 1.2 billion, mainly reflecting lower lending to corporates.


Shipping - exposures relating to ocean-going vessels are not included in the country risk disclosures as they cannot be meaningfully assigned to specific countries. RBS's shipping portfolio of 10.4 billion (refer to the Credit risk section for more details) is predominantly US dollar-denominated and under English law, and is not expected to be affected by specific country events. 

Appendix 1 Capital and risk management
Summary of country exposures


























Net balance sheet exposure

Analysis of net balance sheet exposures

Off-



CDS



Govt
Central
Other
Other




Net

Debt securities

Net
balance
Total

notional less

Gross
banks
banks
FI
Corporate
Personal
Total
lending

AFS/LAR
HFT (net)

Derivatives
SFT
sheet
exposure

fair value

Derivatives
SFT
31 December 2014
m
m
m
m
m
m
m

m

m
m

m
m

m

m

m

m
m

























Eurozone 
























Ireland
239
587
726
839
5,653
14,593
22,637

21,176

56
413

991
1

2,922

25,559

(48)

2,330
1,464
Italy
112
15
2,519
368
1,187
25
4,226

1,095

169
5

2,957
-

2,031

6,257

(625)

9,192
823
Spain
251
-
583
164
2,184
88
3,270

2,024

47
364

835
-

1,923

5,193

(312)

3,913
422
Portugal
111
-
246
97
322
8
784

282

20
152

330
-

222

1,006

(155)

390
613
Greece
8
-
258
1
92
17
376

63

-
8

305
-

23

399

(8)

416
-
Cyprus
-
-
-
-
113
14
127

108

-
-

19
-

16

143

-

19
-

























Eurozone
























 periphery
721
602
4,332
1,469
9,551
14,745
31,420

24,748

292
942

5,437
1

7,137

38,557

(1,148)

16,260
3,322























-
-
Germany
12,301
2,681
3,940
5,496
2,083
86
26,587

4,601

7,121
5,653

8,317
895

6,090

32,677

(1,749)

39,275
8,704
France
5,203
3
7,089
1,924
1,774
81
16,074

2,931

1,951
4,034

6,392
766

8,586

24,660

(2,406)

41,132
17,598
Netherlands
72
926
5,557
5,981
2,130
29
14,695

3,582

1,690
2,509

6,830
84

9,323

24,018

(815)

20,986
3,573
Belgium
803
3
2,330
93
396
21
3,646

579

274
375

2,334
84

858

4,504

(219)

3,374
932
Luxembourg
(1)
19
556
645
781
5
2,005

968

329
70

461
177

1,475

3,480

(53)

701
2,628
Other 
1,689
19
762
132
533
16
3,151

612

456
930

1,148
5

1,047

4,198

(562)

4,818
302

























Total
























 eurozone
20,788
4,253
24,566
15,740
17,248
14,983
97,578

38,021

12,113
14,513

30,919
2,012

34,516

132,094

(6,952)

126,546
37,059

























Japan
3,257
1,007
1,927
514
325
33
7,063

1,633

3
3,043

2,358
26

844

7,907

(25)

10,129
10,005
China
329
130
1,011
363
1,674
41
3,548

2,886

243
62

243
114

531

4,079

(4)

244
4,770
India
526
85
133
156
1,053
36
1,989

1,336

415
132

106
-

639

2,628

(47)

180
-
Russia
39
14
711
101
915
50
1,830

1,673

39
-

118
-

167

1,997

(166)

202
-
South Korea
319
6
507
108
397
3
1,340

639

203
167

331
-

450

1,790

106

600
29
Turkey
90
71
217
103
716
19
1,216

1,160

44
5

7
-

130

1,346

(36)

40
1,209
These tables show RBS exposure at 31 December 2014 and 31 December 2013 by country of operation of the counterparty, except exposures to governments and individuals which are shown by country of residence.Balance sheet exposures are now shown net of loan impairment provisions and prior period data have been revised and presented on the same basis. Countries shown are those where the balance sheet exposure exceeded 1 billion and which had ratings of A+ or below from Standard and Poor's, Moody's or Fitch at 31 December 2014, as well as selected eurozone countries. The exposures are stated before taking into account risk mitigants, such as guarantees, insurance or collateral (with the exception of reverse repos). Refer to the 2013 Annual Report and Accounts for definitions, including securities financing transactions (SFT).


Appendix 1 Capital and risk management
Summary of country exposures (continued)


























Net Balance sheet exposure

Analysis of net balance sheet exposures

Off-







Govt
Central
Other
Other




Net

Debt securities

Net
balance
Total

CDS notional
Gross

banks
banks
FI
Corporate
Personal
Total
lending

AFS/LAR
HFT (net)

Derivatives
SFT
sheet
exposure

less fair value
Derivatives
SFT

31 December 2013
m
m
m
m
m
m
m

m

m
m

m
m

m

m

m
m
m


























Eurozone 
























Ireland
188
116
688
561
8,973
15,821
26,347

24,893

233
248

900
73

2,711

29,058

(166)
2,476
2,329

Italy
1,676
22
1,329
891
1,171
26
5,115

1,582

519
1,240

1,774
-

1,962

7,077

(734)
7,183
527

Spain
858
-
3,439
1,405
3,093
293
9,088

3,084

4,162
853

989
-

1,981

11,069

(444)
4,128
2,126

Portugal
35
-
310
114
312
6
777

290

93
43

351
-

280

1,057

(163)
418
614

Greece
-
1
228
1
105
14
349

89

-
-

260
-

38

387

(12)
455
-

Cyprus
2
-
1
-
144
10
157

139

-
2

16
-

18

175

-
16
-


























Eurozone
























 periphery
2,759
139
5,995
2,972
13,798
16,170
41,833

30,077

5,007
2,386

4,290
73

6,990

48,823

(1,519)
14,676
5,596


























Germany
7,215
3,588
5,044
4,265
3,520
90
23,722

8,013

5,168
2,524

7,416
601

7,189

30,911

(1,340)
35,529
1,128

France
2,806
-
6,714
1,832
2,427
79
13,858

4,197

1,692
1,678

5,660
631

9,807

23,665

(1,747)
30,644
7,536

Netherlands
1,509
1,713
4,604
5,786
2,303
21
15,936

4,652

4,661
819

5,697
107

9,763

25,699

(356)
15,388
835

Belgium
106
-
1,995
267
431
2
2,801

713

443
(480)

2,123
2

1,170

3,971

(123)
2,966
594

Luxembourg
(1)
11
524
659
386
4
1,583

741

75
98

581
88

1,043

2,626

(58)
1,373
253

Other 
1,075
22
654
160
783
18
2,712

879

510
331

918
74

1,202

3,914

(476)
3,554
622


























Total
























 eurozone
15,469
5,473
25,530
15,941
23,648
16,384
102,445

49,272

17,556
7,356

26,685
1,576

37,164

139,609

(5,619)
104,130
16,564


























Japan
(129)
1,600
2,240
830
687
34
5,262

2,795

72
(172)

2,365
202

352

5,614

4
9,057
16,445

China
345
200
2,794
244
1,518
33
5,134

4,584

166
13

370
1

1,689

6,823

(14)
372
830

India
536
70
949
91
2,050
36
3,732

2,909

571
160

92
-

813

4,545

(21)
190
45

Russia
152
37
754
6
949
53
1,951

1,781

149
2

19
-

364

2,315

(65)
33
27

South Korea
238
4
755
133
576
2
1,708

1,125

179
154

250
-

681

2,389

176
541
50

Turkey
173
59
169
126
1,064
24
1,615

1,404

50
67

94
-

324

1,939

(32)
119
998


Appendix 2
Income statement reconciliations and balance sheet pre and post disposal groups

Appendix 2 Income statement reconciliations and balance sheet pre and post disposal groups

Year ended

31 December 2014

Non-
Reallocation of
Presentational

Statutory
statutory
one-off items
adjustments (1)
CFG (2)
m
m
m
m
m






Interest receivable
15,283
-
-
(2,204)
13,079
Interest payable
(4,009)
(3)
-
191
(3,821)






Net interest income
11,274
(3)
-
(2,013)
9,258






Fees and commissions receivable
5,148
-
-
(734)
4,414
Fees and commissions payable
(900)
-
-
25
(875)
Income from trading activities
1,422
(40)
-
(97)
1,285
Gain on redemption of own debt
-
20
-
-
20
Other operating income 
1,253
67
-
(272)
1,048






Non-interest income
6,923
47
-
(1,078)
5,892






Total income
18,197
44
-
(3,091)
15,150






Staff costs
(6,406)
-
(409)
1,058
(5,757)
Premises and equipment
(2,094)
-
(280)
293
(2,081)
Other administrative expenses
(2,635)
(3)
(2,512)
582
(4,568)
Depreciation and amortisation
(1,107)
-
(3)
180
(930)
Restructuring costs
(1,257)
-
1,257
-
-
Litigation and conduct costs
(2,194)
-
2,194
-
-
Write down of goodwill and other intangible assets
(156)
(130)
(247)
10
(523)






Operating expenses
(15,849)
(133)
-
2,123
(13,859)






Profit before impairment losses
2,348
(89)
-
(968)
1,291
Impairment releases
1,155
-
-
197
1,352






Operating profit
3,503
(89)
-
(771)
2,643
Own credit adjustments (3)
(146)
146
-
-
-
Gain on redemption of own debt
20
(20)
-
-
-
Write down of goodwill
(130)
130
-
-
-
Strategic disposals
191
(191)
-
-
-
Citizens discontinued operations
(771)
-
-
771
-
RFS Holdings minority interest
(24)
24
-
-
-






Profit before tax
2,643
-
-
-
2,643
Tax charge
(1,909)
-
-
-
(1,909)






Profit for continuing operations
734
-
-
-
734






Loss from discontinued operations, net of tax





 - Citizens
(3,486)
-
-
-
(3,486)
 - Other
41
-
-
-
41






Loss from discontinued operations, net of tax
(3,445)
-
-
-
(3,445)






Loss for the period
(2,711)
-
-
-
(2,711)
Non-controlling interests
(60)
-
-
-
(60)
Preference share and other dividends
(699)
-
-
-
(699)






Loss attributable to ordinary and B shareholders
(3,470)
-
-
-
(3,470)
For the notes to this table refer to page 5.


Appendix 2 Income statement reconciliations and balance sheet pre and post disposal groups

Year ended

31 December 2013

Non-
Reallocation of
Presentational

Statutory
statutory
one-off items
adjustments (1)
CFG (2)
m
m
m
m
m






Interest receivable
16,740
-
-
(2,252)
14,488
Interest payable
(5,748)
(11)
-
288
(5,471)






Net interest income
10,992
(11)
-
(1,964)
9,017






Fees and commissions receivable
5,460
-
-
(782)
4,678
Fees and commissions payable
(942)
-
-
19
(923)
Income from trading activities
2,651
34
-
(114)
2,571
Gain on redemption of own debt
-
175
-
-
175
Other operating income 
1,281
117
-
(179)
1,219






Non-interest income
8,450
326
-
(1,056)
7,720






Total income
19,442
315
-
(3,020)
16,737






Staff costs
(6,882)
(1)
(280)
1,077
(6,086)
Premises and equipment
(2,233)
-
(115)
310
(2,038)
Other administrative expenses
(3,147)
2
(4,099)
552
(6,692)
Depreciation and amortisation
(1,404)
-
(6)
163
(1,247)
Restructuring costs
(656)
-
656
-
-
Litigation and conduct costs
(3,844)
-
3,844
-
-
Write down of goodwill and other intangible assets
(344)
(1,059)
-
-
(1,403)






Operating expenses
(18,510)
(1,058)
-
2,102
(17,466)






Profit/(loss) before impairment losses
932
(743)
-
(918)
(729)
Impairment losses
(8,432)
-
-
312
(8,120)






Operating loss
(7,500)
(743)
-
(606)
(8,849)
Own credit adjustments (3)
(120)
120
-
-
-
Gain on redemption of own debt
175
(175)
-
-
-
Write down of goodwill
(1,059)
1,059
-
-
-
Strategic disposals
161
(161)
-
-
-
Citizens discontinued operations
(606)
-
-
606
-
RFS Holdings minority interest
100
(100)
-
-
-






Loss before tax
(8,849)
-
-
-
(8,849)
Tax charge
(186)
-
-
-
(186)






Loss for continuing operations
(9,035)
-
-
-
(9,035)






Profit from discontinued operations, net of tax





 - Citizens
410
-
-
-
410
 - Other
148
-
-
-
148






Profit from discontinued operations, net of tax
558
-
-
-
558






Loss for the period
(8,477)
-
-
-
(8,477)
Non-controlling interests
(120)
-
-
-
(120)
Preference share and other dividends
(398)
-
-
-
(398)






Loss attributable to ordinary and B shareholders
(8,995)
-
-
-
(8,995)
For the notes to this table refer to page 5.


Appendix 2 Income statement reconciliations and balance sheet pre and post disposal groups

Quarter ended

31 December 2014

Non-
Reallocation of
Presentational

Statutory
statutory
one-off items
adjustments (1)
CFG (2)
m
m
m
m
m






Interest receivable
3,823
-
-
(585)
3,238
Interest payable
(908)
-
-
52
(856)






Net interest income
2,915
-
-
(533)
2,382






Fees and commissions receivable
1,247
-
-
(192)
1,055
Fees and commissions payable
(211)
-
-
7
(204)
Income from trading activities
(295)
(84)
-
(24)
(403)
Gain on redemption of own debt
-
-
-
-
-
Other operating income 
204
(47)
-
(22)
135






Non-interest income
945
(131)
-
(231)
583






Total income
3,860
(131)
-
(764)
2,965






Staff costs
(1,455)
-
(134)
264
(1,325)
Premises and equipment
(525)
-
(31)
76
(480)
Other administrative expenses
(827)
(2)
(1,315)
145
(1,999)
Depreciation and amortisation
(250)
-
-
47
(203)
Restructuring costs
(563)
-
563
-
-
Litigation and conduct costs
(1,164)
-
1,164
-
-
Write down of goodwill and other intangible assets
(74)
-
(247)
10
(311)






Operating expenses
(4,858)
(2)
-
542
(4,318)






Loss before impairment losses
(998)
(133)
-
(222)
(1,353)
Impairment releases
623
-
-
47
670






Operating loss
(375)
(133)
-
(175)
(683)
Own credit adjustments (3)
(144)
144
-
-
-
Gain on redemption of own debt
-
-
-
-
-
Write down of goodwill
-
-
-
-
-
Strategic disposals
-
-
-
-
-
Citizens discontinued operations
(175)
-
-
175
-
RFS Holdings minority interest
11
(11)
-
-
-






Loss before tax
(683)
-
-
-
(683)
Tax charge
(1,040)
-
-
-
(1,040)






Loss for continuing operations
(1,723)
-
-
-
(1,723)






Loss from discontinued operations, net of tax





 - Citizens
(3,885)
-
-
-
(3,885)
 - Other
3
-
-
-
3






Loss from discontinued operations, net of tax
(3,882)
-
-
-
(3,882)






Loss for the period
(5,605)
-
-
-
(5,605)
Non-controlling interests
(71)
-
-
-
(71)
Preference share and other dividends
(115)
-
-
-
(115)






Loss attributable to ordinary and B shareholders
(5,791)
-
-
-
(5,791)
For the notes to this table refer to page 5. 


Appendix 2 Income statement reconciliations and balance sheet pre and post disposal groups

Quarter ended

30 September 2014

Non-
Reallocation of
Presentational

Statutory
statutory
one-off items
adjustments (1)
CFG (2)
m
m
m
m
m






Interest receivable
3,839
-
-
(542)
3,297
Interest payable
(976)
-
-
49
(927)






Net interest income
2,863
-
-
(493)
2,370






Fees and commissions receivable
1,296
-
-
(180)
1,116
Fees and commissions payable
(202)
-
-
6
(196)
Income from trading activities
235
33
-
(30)
238
Gain on redemption of own debt
-
-
-
-
-
Other operating income 
167
(40)
-
(19)
108






Non-interest income
1,496
(7)
-
(223)
1,266






Total income
4,359
(7)
-
(716)
3,636






Staff costs
(1,611)
-
(79)
255
(1,435)
Premises and equipment
(490)
-
(53)
68
(475)
Other administrative expenses
(516)
-
(828)
132
(1,212)
Depreciation and amortisation
(306)
-
-
45
(261)
Restructuring costs
(180)
-
180
-
-
Litigation and conduct costs
(780)
-
780
-
-






Operating expenses
(3,883)
-
-
500
(3,383)






Profit before impairment losses
476
(7)
-
(216)
253
Impairment losses
801
-
-
46
847






Operating profit
1,277
(7)
-
(170)
1,100
Own credit adjustments (3)
49
(49)
-
-
-
Citizens discontinued operations
(170)
-
-
170
-
RFS Holdings minority interest
(56)
56
-
-
-






Profit before tax
1,100
-
-
-
1,100
Tax charge
(277)
-
-
-
(277)






Profit for continuing operations
823
-
-
-
823






Profit from discontinued operations, net of tax





 - Citizens
114
-
-
-
114
 - Other
3
-
-
-
3






Profit from discontinued operations, net of tax
117
-
-
-
117






Profit for the period
940
-
-
-
940
Non-controlling interests
53
-
-
-
53
Preference share and other dividends
(97)
-
-
-
(97)






Profit attributable to ordinary and B shareholders
896
-
-
-
896
For the notes to this table refer to the following page. 


Appendix 2 Income statement reconciliations and balance sheet pre and post disposal groups

Quarter ended

31 December 2013

Non-
Reallocation of
Presentational

Statutory
statutory
one-off items
adjustments (1)
CFG (2)
m
m
m
m
m






Interest receivable
3,973
-
-
(536)
3,437
Interest payable
(1,206)
(3)
-
55
(1,154)






Net interest income
2,767
(3)
-
(481)
2,283






Fees and commissions receivable
1,370
-
-
(187)
1,183
Fees and commissions payable
(244)
-
-
4
(240)
Income from trading activities
162
15
-
(2)
175
Gain on redemption of own debt
-
(29)
-
-
(29)
Other operating income 
(115)
146
-
(38)
(7)






Non-interest income
1,173
132
-
(223)
1,082






Total income
3,940
129
-
(704)
3,365






Staff costs
(1,539)
(1)
(1)
250
(1,291)
Premises and equipment
(614)
-
(86)
78
(622)
Other administrative expenses
(985)
1
(2,976)
175
(3,785)
Depreciation and amortisation
(344)
-
8
15
(321)
Restructuring costs
(180)
-
180
-
-
Litigation and conduct costs
(2,875)
-
2,875
-
-
Write down of goodwill and other intangible assets
(344)
(1,059)
-
-
(1,403)






Operating expenses
(6,881)
(1,059)
-
518
(7,422)






Loss before impairment losses
(2,941)
(930)
-
(186)
(4,057)
Impairment losses
(5,112)
-
-
82
(5,030)






Operating loss
(8,053)
(930)
-
(104)
(9,087)
Gain on redemption of own debt
(29)
29
-
-
-
Write down of goodwill
(1,059)
1,059
-
-
-
Strategic disposals
168
(168)
-
-
-
Citizens discontinued operations
(104)
-
-
104
-
RFS Holdings minority interest
(10)
10
-
-
-






Loss before tax
(9,087)
-
-
-
(9,087)
Tax charge
403
-
-
-
403






Loss for continuing operations
(8,684)
-
-
-
(8,684)






Profit from discontinued operations, net of tax





 - Citizens
78
-
-
-
78
 - Other
15
-
-
-
15






Profit from discontinued operations, net of tax
93
-
-
-
93






Loss for the period
(8,591)
-
-
-
(8,591)
Non-controlling interests
3
-
-
-
3
Preference share and other dividends
(114)
-
-
-
(114)






Loss attributable to ordinary and B shareholders
(8,702)
-
-
-
(8,702)
Notes:
(1)
Reallocation of restructuring costs and litigation and conduct costs into the statutory operating expense lines. 
(2)
The statutory results of Citizens Financial Group (CFG), which is classified as a discontinued operation.
(3)
Reallocation of 40 million loss (FY 2013 - 35 million gain; Q4 2014 - 84 million loss; Q3 2014 - 33 million gain; Q4 2013 - 15 million gain) to income from trading activities and 106 million loss (FY 2013 - 155 million loss; Q4 2014 - 60 million loss; Q3 2014 - 16 million gain; Q4 2013 - 15 million loss) to other operating income.


Appendix 2 Income statement reconciliations and balance sheet pre and post disposal groups
Analysis of balance sheet pre and post disposal groups
In accordance with IFRS 5, assets and liabilities of disposal groups are presented as a single line on the face of the balance sheet. As allowed by IFRS, disposal groups are included within risk measures in the Capital and risk management Appendix.

31 December 2014

31 December 2013



Gross of 



Gross of 
Balance 
Disposal 
disposal 
Balance 
Disposal 
disposal 
sheet 
groups (1) 
groups 
sheet 
groups (2) 
groups 

m 
m 
m 

m 
m 
m 








Assets







Cash and balances at central banks
74,872
622
75,494

82,659
2
82,661
Net loans and advances to banks
23,027
1,745
24,772

27,555
22
27,577
Reverse repurchase agreements and stock borrowing
20,708
-
20,708

26,516
41
26,557
Loans and advances to banks
43,735
1,745
45,480

54,071
63
54,134
Net loans and advances to customers
334,251
60,550
394,801

390,825
1,765
392,590
Reverse repurchase agreements and stock borrowing
43,987
-
43,987

49,897
-
49,897
Loans and advances to customers
378,238
60,550
438,788

440,722
1,765
442,487
Debt securities
86,649
15,293
101,942

113,599
24
113,623
Equity shares
5,635
572
6,207

8,811
-
8,811
Settlement balances
4,667
-
4,667

5,591
-
5,591
Derivatives
353,590
402
353,992

288,039
1
288,040
Intangible assets
7,781
583
8,364

12,368
30
12,398
Property, plant and equipment
6,167
503
6,670

7,909
32
7,941
Deferred tax
1,540
-
1,540

3,478
1
3,479
Prepayments, accrued income and other assets
5,878
1,741
7,619

7,614
936
8,550
Assets of disposal groups
82,011
(82,011)
-

3,017
(2,854)
163








Total assets
1,050,763
-
1,050,763

1,027,878
-
1,027,878








Liabilities







Bank deposits
35,806
5,128
40,934

35,329
-
35,329
Repurchase agreements and stock lending
24,859
1,666
26,525

28,650
-
28,650
Deposits by banks
60,665
6,794
67,459

63,979
-
63,979
Customer deposits
354,288
60,583
414,871

414,396
3,273
417,669
Repurchase agreements and stock lending
37,351
706
38,057

56,484
-
56,484
Customer accounts
391,639
61,289
452,928

470,880
3,273
474,153
Debt securities in issue
50,280
1,625
51,905

67,819
-
67,819
Settlement balances
4,503
-
4,503

5,313
-
5,313
Short positions
23,029
-
23,029

28,022
-
28,022
Derivatives
349,805
144
349,949

285,526
1
285,527
Accruals, deferred income andother liabilities
13,346
683
14,029

16,017
101
16,118
Retirement benefit liabilities
2,579
197
2,776

3,210
1
3,211
Deferred tax
500
362
862

507
-
507
Subordinated liabilities
22,905
226
23,131

24,012
-
24,012
Liabilities of disposal groups
71,320
(71,320)
-

3,378
(3,376)
2








Total liabilities
990,571
-
990,571

968,663
-
968,663








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






Appendix 2 Income statement reconciliations and balance sheet pre and post disposal groups

31 December 2014

31 December 2013



Gross of 



Gross of 
Balance 
Disposal 
disposal 
Balance 
Disposal 
disposal 
sheet 
groups (1) 
groups 
sheet 
groups (2) 
groups 

m 
m 
m 

m 
m 
m 








Selected financial data







Gross loans and advances to customers
351,711
61,090
412,801

415,978
1,774
417,752
Customer loan impairment provisions
(17,460)
(540)
(18,000)

(25,153)
(9)
(25,162)
Net loans and advances to customers (4)
334,251
60,550
394,801

390,825
1,765
392,590








Gross loans and advances to banks
23,067
1,745
24,812

27,618
22
27,640
Bank loan impairment provisions
(40)
-
(40)

(63)
-
(63)
Net loans and advances to banks (4)
23,027
1,745
24,772

27,555
22
27,577








Total loan impairment provisions
17,500
540
18,040

(25,216)
(9)
(25,225)








Customer REIL
26,842
1,335
28,177

39,322
-
39,322
Bank REIL
42
-
42

70
-
70
REIL
26,884
1,335
28,219

39,392
-
39,392








Gross unrealised gains on debt securities
1,316
261
1,566

1,541
-
1,541
Gross unrealised losses on debt securities
(145)
(137)
(282)

(887)
-
(887)
Notes:
(1)
Primarily Citizens.
(2)
Primarily investment in associate (Direct Line Group) and Illinois branches of RBS Citizens.
(3)
Primarily Direct Line Group.
(4)
Excludes reverse repos.

Appendix 3
Comparative period
segment performance

Appendix 3 Comparative period segment performance















Year ended 31 December 2013*

PBB

CPB 

CIB 






Ulster 


Commercial
Private



Central


Total

UK PBB
Bank 
Total

Banking
Banking
Total


items (1)
CFG
Non-Core
RBS

m
m 
m

m
m
m

m
m
m
m
m














Income statement 













Net interest income
4,490
619
5,109

1,962
658
2,620

684
783
1,892
(96)
10,992
Non-interest income
1,323
240
1,563

1,195
419
1,614

4,324
126
1,073
(250)
8,450














Total income
5,813
859
6,672

3,157
1,077
4,234

5,008
909
2,965
(346)
19,442














Direct expenses













 - staff costs
(928)
(239)
(1,167)

(513)
(317)
(830)

(979)
(2,625)
(1,091)
(190)
(6,882)
 - other costs
(524)
(63)
(587)

(269)
(84)
(353)

(688)
(4,312)
(986)
(202)
(7,128)
Indirect expenses
(1,954)
(263)
(2,217)

(891)
(475)
(1,366)

(2,900)
6,807
(111)
(213)
-
Restructuring costs













 - direct
(118)
(27)
(145)

(18)
(18)
(36)

(76)
(367)
(16)
(16)
(656)
 - indirect
(109)
(12)
(121)

(37)
(9)
(46)

(126)
299
-
(6)
-
Litigation and conduct costs
(860)
(90)
(950)

(247)
(206)
(453)

(2,441)
-
-
-
(3,844)














Operating expenses
(4,493)
(694)
(5,187)

(1,975)
(1,109)
(3,084)

(7,210)
(198)
(2,204)
(627)
(18,510)














Profit/(loss) before impairment losses
1,320
165
1,485

1,182
(32)
1,150

(2,202)
711
761
(973)
932
Impairment losses
(501)
(1,774)
(2,275)

(652)
(29)
(681)

(680)
(64)
(156)
(4,576)
(8,432)














Operating profit/(loss)
819
(1,609)
(790)

530
(61)
469

(2,882)
647
605
(5,549)
(7,500)














Additional information













Operating expenses - adjusted (m) (2) 
(3,406)
(565)
(3,971)

(1,673)
(876)
(2,549)

(4,567)
(130)
(2,188)
(605)
(14,010)
Operating profit/(loss) - adjusted (m) (2)
1,906
(1,480)
426

832
172
1,004

(239)
715
621
(5,527)
(3,000)
Impairments pertaining to the creation of RCR
(2)
(892)
(894)

(123)
-
(123)

(355)
-
-
(3,118)
(4,490)
Return on equity (3)
9.8%
(33.2%)
(5.7%)

4.9%
(3.1%)
3.7%

(12.9%)
nm
5.7%
nm
(18.7%)
Return on equity - adjusted (2,3)
22.8%
(30.6%)
3.1%

7.7%
8.7%
7.9%

(1.1%)
nm
5.8%
nm
(11.8%)
Cost:income ratio
77%
81%
78%

63%
103%
73%

144%
nm
74%
nm
95%
Cost:income ratio - adjusted (2)
59%
66%
60%

53%
81%
60%

91%
nm
74%
nm
72%
Funded assets (bn)
132.2
28.0
160.2

87.9
21.0
108.9

268.6
102.8
71.3
28.0
739.8
Total assets (bn)
132.2
28.2
160.4

87.9
21.2
109.1

551.2
104.3
71.7
31.2
1,027.9
Risk-weighted assets (bn)
51.2
30.7
81.9

65.8
12.0
77.8

120.4
20.1
56.1
29.2
385.5
Employee numbers (FTEs - thousands)
26.6
4.7
31.3

7.3
3.5
10.8

4.6
51.8
18.8
1.3
118.6














RWAs - end-point CRR basis at 1 January 2014 (bn)
49.7
28.2
77.9

61.5
12.0
73.5

147.1
23.3
60.6
46.7
429.1














nm = not meaningful



























* Restated - refer to page 77 of the main announcement. 


























For the notes to this table refer to page 4. 














Appendix 3 Comparative period segment performance

Quarter ended 30 September 2014

PBB

CPB 

CIB 






Ulster 


Commercial
Private



Central


Total

UK PBB
Bank 
Total

Banking
Banking
Total


items (1)
CFG
RCR
RBS

m
m 
m

m
m
m

m
m
m
m
m














Income statement 













Net interest income
1,198
163
1,361

521
172
693

230
109
493
(23)
2,863
Non-interest income
345
51
396

290
98
388

601
(249)
215
145
1,496














Total income
1,543
214
1,757

811
270
1,081

831
(140)
708
122
4,359














Direct expenses













 - staff costs
(223)
(57)
(280)

(124)
(79)
(203)

(179)
(657)
(255)
(37)
(1,611)
 - other costs
(78)
(20)
(98)

(54)
(19)
(73)

(50)
(836)
(231)
(24)
(1,312)
Indirect expenses
(481)
(61)
(542)

(196)
(105)
(301)

(593)
1,460
-
(24)
-
Restructuring costs













 - direct
(2)
-
(2)

-
-
-

(22)
(143)
(13)
-
(180)
 - indirect
(63)
(12)
(75)

(18)
(7)
(25)

6
98
-
(4)
-
Litigation and conduct costs
(118)
-
(118)

-
-
-

(562)
(100)
-
-
(780)














Operating expenses
(965)
(150)
(1,115)

(392)
(210)
(602)

(1,400)
(178)
(499)
(89)
(3,883)














Profit/(loss) before impairment losses
578
64
642

419
60
479

(569)
(318)
209
33
476
Impairment (losses)/releases
(79)
318
239

(12)
4
(8)

12
(1)
(46)
605
801














Operating profit/(loss)
499
382
881

407
64
471

(557)
(319)
163
638
1,277














Additional information













Operating expenses - adjusted (m) (2)
(782)
(138)
(920)

(374)
(203)
(577)

(822)
(33)
(486)
(85)
(2,923)
Operating profit/(loss) - adjusted (m) (2)
682
394
1,076

425
71
496

21
(174)
176
642
2,237
Return on equity (3)
26.9%
42.2%
30.6%

16.0%
13.3%
15.5%

(11.0%)
nm
5.6%
nm
8.2%
Return on equity - adjusted (2,3)
36.8%
43.5%
37.4%

16.7%
14.8%
16.4%

0.4%
nm
6.1%
nm
16.0%
Cost:income ratio
63%
70%
63%

48%
78%
56%

168%
nm
71%
nm
89%
Cost:income ratio - adjusted (2)
51%
64%
52%

46%
75%
53%

99%
nm
69%
nm
67%
Funded assets (bn)
134.2
26.3
160.5

89.7
21.0
110.7

274.9
87.6
80.5
17.9
732.1
Total assets (bn)
134.2
26.5
160.7

89.7
21.1
110.8

572.9
89.5
80.9
31.3
1,046.1
Risk-weighted assets (bn)
44.7
23.9
68.6

64.9
12.2
77.1

123.2
17.8
64.4
30.6
381.7
Employee numbers (FTEs - thousands)
25.2
4.5
29.7

6.8
3.5
10.3

4.0
48.5
17.5
0.8
110.8














For the notes to this table refer to page 4. 














Appendix 3 Comparative period segment performance















Quarter ended 31 December 2013*

PBB

CPB 

CIB 






Ulster 


Commercial
Private



Central


Total

UK PBB
Bank 
Total

Banking
Banking
Total


items (1)
CFG
Non-Core
RBS

m
m 
m

m
m
m

m
m
m
m
m














Income statement 













Net interest income
1,149
164
1,313

515
173
688

208
127
468
(37)
2,767
Non-interest income
345
38
383

301
103
404

840
(138)
240
(556)
1,173














Total income
1,494
202
1,696

816
276
1,092

1,048
(11)
708
(593)
3,940














Direct expenses













 - staff costs
(230)
(51)
(281)

(132)
(63)
(195)

(138)
(641)
(249)
(35)
(1,539)
 - other costs
(203)
(21)
(224)

(68)
(33)
(101)

(267)
(1,392)
(251)
(52)
(2,287)
Indirect expenses
(519)
(75)
(594)

(281)
(134)
(415)

(959)
2,051
(31)
(52)
-
Restructuring costs













 - direct
(27)
(9)
(36)

(1)
(14)
(15)

(25)
(95)
(11)
2
(180)
 - indirect
(41)
(3)
(44)

(14)
(3)
(17)

35
28
-
(2)
-
Litigation and conduct costs
(450)
(65)
(515)

(222)
(206)
(428)

(1,932)
-
-
-
(2,875)














Operating expenses
(1,470)
(224)
(1,694)

(718)
(453)
(1,171)

(3,286)
(49)
(542)
(139)
(6,881)














Profit/(loss) before impairment losses
24
(22)
2

98
(177)
(79)

(2,238)
(60)
166
(732)
(2,941)
Impairment (losses)/releases
(107)
(1,067)
(1,174)

(277)
(21)
(298)

(429)
(1)
(46)
(3,164)
(5,112)














Operating profit/(loss)
(83)
(1,089)
(1,172)

(179)
(198)
(377)

(2,667)
(61)
120
(3,896)
(8,053)














Additional information













Operating expenses - adjusted (m) (2)
(952)
(147)
(1,099)

(481)
(230)
(711)

(1,364)
18
(531)
(139)
(3,826)
Operating profit/(loss) - adjusted (m) (2)
435
(1,012)
(577)

58
25
83

(745)
6
131
(3,896)
(4,998)
Impairments pertaining to the creation of RCR
(2)
(892)
(894)

(123)
-
(123)

(355)
-
-
(3,118)
(4,490)
Return on equity (3)
(4.0%)
(97.8%)
(35.2%)

(6.7%)
(41.0%)
(12.0%)

(53.1%)
nm
4.7%
nm
(76.3%)
Return on equity - adjusted (2,3)
21.1%
(90.9%)
(17.3%)

2.1%
5.2%
2.6%

(14.9%)
nm
5.1%
nm
(57.6%)
Cost:income ratio
98%
111%
100%

88%
164%
107%

314%
nm
77%
nm
175%
Cost:income ratio - adjusted (2)
64%
73%
65%

59%
83%
65%

130%
nm
75%
nm
97%
Funded assets (bn)
132.2
28.0
160.2

87.9
21.0
108.9

268.6
102.8
71.3
28.0
739.8
Total assets (bn)
132.2
28.2
160.4

87.9
21.2
109.1

551.2
104.3
71.7
31.2
1,027.9
Risk-weighted assets (bn) (4)
51.2
30.7
81.9

65.8
12.0
77.8

120.4
20.1
56.1
29.2
385.5
Employee numbers (FTEs - thousands)
26.6
4.7
31.3

7.3
3.5
10.8

4.6
51.8
18.8
1.3
118.6














RWAs - end-point CRR basis at 1 January 2014 (bn)
49.7
28.2
77.9

61.5
12.0
73.5

147.1
23.3
60.6
46.7
429.1
*Restated - refer to page 77 of the main announcement. 
For the notes to this table refer to the following page.


Appendix 3 Comparative period segment performance
Notes:
(1)
Central items include unallocated income and expenses which principally comprise profits/losses on the sale of the Treasury AFS portfolio (FY 2014 - 149 million; FY 2013 - 724 million; Q4 2014 - 6 million; Q3 2014 - 72 million loss; Q4 2013 - 114 million) and profit and loss on hedges that do not qualify for hedge accounting.
(2)
Excluding restructuring costs and litigation and conduct costs.
(3) 
Return on equity is based on operating profit after tax divided by average notional equity (based on 12% of the monthly average of divisional RWAs; 2013 RWAs are on a Basel 2.5 basis).
(4)
RWAs at 31 December 2013 are on a Basel 2.5 basis.

Appendix 4
Go-forward business profile

Appendix 4 Go-forward business profile
RBS is committed to a leaner, less volatile business based around its core franchises of PBB and CPB. The following table shows the go-forward bank as well those elements from which RBS intends to exit. Significant progress towards those exits is expected in 2015. 


















Go-forward business profile (pro-forma 2014)

Exit group overview (pro-forma 2014)












International






UK
Ulster
Commercial
Private
CIB go-
Other go-
Total go-

CIB
Williams
private


Other
Total
Total

PBB (1)
Bank
Banking
Banking (2)
forward
forward (3)
forward

legacy
& Glyn (4)
banking (5)
Citizens
RCR
investments
exit group
RBS

bn
bn
bn
bn
bn
bn
bn

bn
bn
bn
bn
bn
bn
bn
bn

















Total income
5.2
0.8
3.2
0.9
2.0
-
12.1

1.9
0.9
0.2
3.1
-
-
6.1
18.2
Total operating expenses 
















 - adjusted (6)
(2.9)
(0.6)
(1.6)
(0.6)
(1.8)
(0.1)
(7.6)

(1.8)
(0.4)
(0.2)
(2.0)
(0.4)
-
(4.8)
(12.4)
Impairment losses/(releases)
(0.2)
0.4
(0.1)
-
-
0.1
0.2

-
(0.1)
-
(0.2)
1.3
-
1.0
1.2
Operating profit - adjusted (6)
2.1
0.6
1.5
0.3
0.3
(0.2)
4.6

0.1
0.4
-
0.9
1.0
-
2.4
7.0
Funded assets
114
28
89
15
169
87
502

72
20
6
81
15
1
195
697
Risk-weighted assets
32
24
64
10
46
10
186

61
11
2
68
22
6
170
356
Return on equity - adjusted (%) (6)
36%
16%
15%
18%
nm
nm
13%

nm
nm
(5%)
8%
nm
nm
8%
10%
Notes:
(1)
Excludes Williams & Glyn.
(2)
Excludes international private banking.
(3)
Other go-forward is primarily centre, which includes the liquidity portfolio.
(4)
Does not reflect the cost base, funding and capital profile of a standalone bank.
(5)
Private banking and wealth management activities outside of the British Isles, broadly indicative of the businesses being exited.
(6)
Segmental adjusted RoE excludes restructuring and conduct and litigation costs and is calculated using a 25% notional tax rate and equity equivalent to 12% of average segmental RWAs. Total RBS adjusted RoE excludes restructuring, conduct and litigation costs, own credit adjustments, gain on own debt, write down of goodwill, strategic disposals, discontinued operations and RFS minority interest but includes charges for preference dividends and a notional 25% tax rate. It is calculated using RBS tangible equity. PBB adjusted RoE - 28%; CPB adjusted RoE - 15%.


Appendix 4 Go-forward business profile









CIB - future shape of the business
31 December 2014

Current CIB

Go-forward

Non-strategic

RWAs
Income

RWAs
Income

RWAs
Income
Region
bn
m

bn
m

bn
m









UK/Europe (1)
71
2,488

34
1,630

37
858
US (2)
24
974

11
274

14
700
APAC
12
487

2
111

10
376









Total
107
3,949

46
2,015

61
1,934









Geographical footprint (countries)
38

13

25
Notes:
(1)
EMEA.
(2)
North America.
(3)
Based on 2014 financials.
Our product offering will reduce by over a half as will the number of products and desks in our Markets business.

Appendix 5
Risk factors

Appendix 5 Risk factors
Risk factors
Set out below are certain risk factors which could adversely affect the Group's future results, its financial condition and prospects and cause them to be materially different from what is expected. The factors discussed below and elsewhere in this report should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties facing the Group.
The Group's ability to achieve its capital targets will depend on the success of the Group's plans to further reduce the size of its business through the restructuring of its corporate and institutional banking business and make further divestments of certain of its portfolios and businesses including its remaining stake in Citizens Financial Group.
In response to the global economic and financial crisis that began in 2008 and the weak economic environment that followed, the Group engaged in a financial and core business restructuring focused on achieving appropriate risk-adjusted returns under these changed circumstances, reducing reliance on wholesale funding, lowering exposure to capital-intensive businesses and meeting new capital standard requirements. In November 2013, following HM Treasury's assessment of the merits of creating an external "bad bank" to hold certain assets of the Group, the Group committed to take a series of actions to further derisk its business and strengthen its capital position. In order to strengthen its capital position and CET1 ratio, the Group decided to accelerate the divestment of Citizens Financial Group (CFG), the Group's US banking subsidiary, by selling off 28.75% in an initial public offering in September 2014, and fully divesting its interest in CFG by the end of 2016; and to intensify management actions to reduce risk weighted assets (including through an accelerated divestment of certain of the non-core assets transferred to RBS Capital Resolution ("RCR")).
In the first quarter of 2015, the Group announced its intention to restructure its corporate and institutional banking ("CIB") business to focus on UK corporate and financial institutions with a targeted presence in selected western European customer segments. The future CIB model will:
focus on the Group's leading positions in UK rates, debt capital markets and foreign exchange;


retain two trading hubs in the US and Singapore to support the main London trading operation;


exit central and eastern Europe, the Middle East and Africa, and substantially reduce its presence in Asia and in the US; and


complete the run-down of US asset-backed products.
Following the decision to refine the CIB business model, the Group has decided to lift its capital targets and move to a CET1 ratio of around 13% during the restructuring period (higher than the targets of 11% by 31 December 2015 and above 12% by the end of 2016 previously announced). 
In addition, the Group is in the process of implementing the new divisional and functional structure put into place in 2014 and, as a result of the restructuring of its CIB business, is now taking further steps to implement a number of strategic initiatives which will result in a further reduction of the Group's balance sheet as well as the scope of its activities. Implementation by the Group of these initiatives will require significant restructuring of the Group at the same time that it will also be implementing structural changes to comply with regulatory changes including those introduced under the UK Financial Services (Banking Reform) Act 2013 (the "Banking Reform Act 2013"), including its ring-fencing requirements (the "ring-fence"). See also 'Implementation of the ring-fence in the UK which will begin in 2015 will result in material structural changes to the Group's business. These changes could have a material adverse effect on the Group'. There can be no assurance that the Group will be able to successfully implement this restructuring programme together with other changes required of the Group in the time frames contemplated or at all, and, as a result, the Group may not be able to meet its capital targets.


Appendix 5 Risk factors
The Group's ability to dispose of businesses and certain portfolios, including the further disposal of its remaining stake in CFG and potential disposals associated with the restructuring of its CIB business, and the price achieved for such disposals will be dependent on prevailing economic and market conditions, which remain volatile. As a result there is no assurance that the Group will be able to sell or run down (as applicable) the businesses it is now planning to sell or exit or asset portfolios it is seeking to sell either on favourable economic terms to the Group or at all. Material tax or other contingent liabilities could arise on the disposal or run-down of assets or businesses and there is no assurance that any conditions precedent agreed will be satisfied, or consents and approvals required will be obtained in a timely manner, or at all. The Group may be exposed to deteriorations in businesses or portfolios being sold between the announcement of the disposal and its completion, which period may span many months. In addition, the Group may be exposed to certain risks, including risks arising out of ongoing liabilities and obligations, breaches of covenants, representations and warranties, indemnity claims, transitional services arrangements and redundancy or other transaction related costs.
The occurrence of any of the risks described above could negatively affect the Group's ability to implement its strategic plan and achieve its capital targets and could have a material adverse effect on the Group's business, reputation, results of operations, financial condition and cash flows. There can also be no assurance that if the Group is able to execute its new strategic plan that the new strategy will ultimately be successful or beneficial to the Group.
Implementation of the ring-fence in the UK which will begin in 2015 will result in material structural changes to the Group's business. These changes could have a material adverse effect on the Group.
The UK Government's White Paper on Banking Reform published in September 2012 outlined material structural reforms in the UK banking industry. The measures were drawn in large part from the recommendations of the Independent Commission on Banking ("ICB"), which in its final report published in 2012, included the implementation of a ring-fence of retail banking operations. The implementation of the ring-fencing of retail banking operations was introduced under the Banking Reform Act 2013. The Banking Reform Act 2013 provided primary enabling legislation in the short term with a view to completing the legislative framework for the ring-fence of retail banking operations by May 2015, requiring compliance as soon as practicable thereafter and setting a final deadline for full implementation by 2019. In June 2014, HM Treasury published two statutory instruments, which were passed by Parliament in July 2014, setting out the detail of the ring-fencing regime, specifying which entities will be "ring-fenced banks" and the activities and services that ring-fenced banks can, and cannot, conduct which came into force on 1 January 2015. In October 2014, the PRA published its first consultation paper (CP19/14) on the PRA's ring-fencing rules, focusing on legal structure, governance and continuity of services and facilities. The PRA requested that all firms expected to be affected by ring-fencing, including the Group, submit a preliminary plan of their anticipated legal and operating structures to their supervisors by 6 January 2015, which the Group has done. The PRA will carry out further consultations during 2015 with the Group and other affected UK banks and is expected publish its final rules and supervisory statements during 2016.


Appendix 5 Risk factors
Although final rules and supervisory statements will not be available until later in 2015 and early 2016, based on the proposals put forward by the Group to the PRA and the FCA to implement the ring-fence, the Group has identified a number of material risks associated with such implementation in addition to the uncertainty associated with starting to plan implementation before final rules and guidance are in place. These risks will be exacerbated by the Group's other ongoing restructuring efforts.
The Group intends to establish a ring-fence bank ("RFB") for its banking services while the non-ring-fence group ("NRFB") will hold the Group's remaining CIB activities, the operations of RBS international and some corporate banking activities that are not permitted activities for the RFB and will be the remaining businesses following completion of the restructuring of the Group's CIB business. The establishment of the RFB and the NRFB will require a significant legal and organisational restructuring of the Group and the transfer of large numbers of customers between legal entities. The scale and complexity of completing this process and the operational and legal challenges that will need to be overcome will pose significant execution risks for the Group. The legal restructuring and migration of customers will have a material impact on how the Group conducts its business and the Group is unable to predict how some customers may react to any requirement to deal with both the RFB and NRFB to obtain certain products and services. Such implementation will be costly and although final implementation is not required until 2019, there is no certainty that the Group will be able to complete the legal restructuring and migration of customers to the RFB or NFRB, as applicable, such that the ring-fence exercise is completed on time or in accordance with future regulatory rules for which there is currently significant uncertainty.


As part of the establishment of the RFB, it will be necessary for the RFB to operate independently from the NRFB and an entirely new corporate governance structure will need to be put in place by the Group to ensure the RFB's independence. These requirements have implications for how the Group sets up its board and committee corporate governance structure and the Group cannot predict how the Group will function as a public listed company with a subsidiary (the RFB) that will have an independent board and committee structure. In addition, the Group will need to revise its operations infrastructure so as to establish an appropriate level of segregation of the infrastructure of the RFB in areas such as information technology ("IT") infrastructure, human resources and the management of treasury operations, including capital and liquidity. The Group will also need to evaluate, among other things, the tax exposure of each of the RFB and NRFB, as well as the impact of the ring-fence on intra-group funding and the credit ratings and external funding arrangements of each of these entities. As this structure has never been tested, the Group cannot provide any assurances regarding its ability to successfully implement such a structure. Although the intention is to establish corporate governance and operations in accordance with applicable rules (although not yet finalised) that are as cost efficient as possible, the effects of operating the Group, the RFB and the NRFB in this manner could have a material adverse effect on the Group's business, financial condition and results of operations.


In order to comply with the ring-fence requirements, from 2026 it will not be possible for the RFB and the NRFB to participate in the same pension plan. As a result, it will be necessary for either the RFB or NRFB to leave the pension plan which will trigger certain legal and regulatory obligations. Although the Group will have a number of options available to it to meet its obligations resulting from the separation, it is expected that the costs of separation will be material, including possibly increasing annual cash contributions required to be made into the Group's pension plans. See 'The Group may be required to make further contributions to its pension schemes if the value of pension fund assets is not sufficient to cover potential obligations and to satisfy ring-fencing requirements'.


Appendix 5 Risk factors
Implementation of the ring-fence proposals in the UK will result in major changes to the Group's corporate structure, to the delivery of its business activities conducted in the UK and other jurisdictions where the Group will operate, as well as changes to the Group's business model. The steps required to implement the ring-fence of its retail and certain other core banking activities in the UK from other activities of the Group as well as restructuring other operations within the Group in order to comply with the new rules and regulations are extraordinarily complex and will take an extended period of time to put into place. Implementation will be costly and there can be no assurance that the ring-fence of the RFB and the NRFB will be completed on time to meet the regulatory deadline in 2019. As a result, the implementation of the ring-fence could have a material adverse effect on the Group's reputation, results of operations, financial condition and prospects.
The Group continues to implement certain divestment and restructuring activities announced in 2013 and 2014 as part of its 2013/2014 Strategic Plan but will now enter a further period of major restructuring through the implementation of the regulatory regime relating to the ring-fence of financial institutions by 2019 and the restructuring of the Group's CIB business. Although the goals of this long period of restructuring are to emerge as a less complex and safer bank there can be no assurance that the final results will be successful and that the Group will be a viable, competitive, customer focused and profitable bank.
In the third quarter of 2013 and in 2014, the Group revised its strategic plan by implementing its new divisional and functional structure and embarked on a major investment program to upgrade the Group's operations and IT infrastructure (the "2013/2014 Strategic Plan"). The 2013/2014 Strategic Plan built on the core business restructuring implemented by the Group after the financial crisis which initially focused on reducing the size of the Group's balance sheet, disposing of the "higher risk and capital intensive assets" in RCR and strengthening the Group's capital position, including though the full divestment of the Group's interest in CFG. The 2013/2014 Strategic Plan was intended to reduce the size of the Group's business, mainly within the Markets division, and further strengthen its capital position in response to continuing regulatory change and simplifying the Group by replacing the previous divisional structure with three customer facing franchises focused on the UK and a smaller group of UK based customers. The 2013/2014 Strategic Plan, the restructuring of the Group's CIB business, the implementation of a ring-fence compliant structure and the IT and operational investment programme (as described below) hereinafter collectively referred to as the "Transformation Plan". With the implementation of the Transformation Plan, and in particular the restructuring of the Group's CIB business and implementation of the regulatory ring-fence regime coming into force in the UK, the Group is entering a further period of major restructuring, that will require significant resource and management attention over the next four years, with the intent to continue simplifying the Group's business, making the bank safer by narrowing its business focus, further strengthening its capital position and improving its customer offering. 
Each aspect of the implementation of the Transformation Plan carries material risks. See also 'Implementation by the Group of the various initiatives and programmes which form part of the Group's Transformation Plan subjects the Group to increased and material execution risk'. In addition, although the goal is to emerge as a simpler, safer, customer focused and profitable bank, the aggregate business of the Group will be materially smaller and different than the institution that entered the financial crisis as one of the largest and most diverse financial institutions in the world. On completion of the Transformation Plan in 2019 the Group will be primarily a UK and Western Europe focused bank with a much less diverse group of businesses, products and services. It will service a much smaller group of customers, including large corporate and financial institutions, with its focus and its potential for profitability and growth largely dependent on its success with its retail and SME customers in the UK. 


Appendix 5 Risk factors
This smaller customer base and geographic concentration also carry material business risks. As a result, in addition to the execution risks associated with completion of the Transformation Plan there can be no assurance that even if the Group executes the Transformation Plan it will prove to be a successful strategy or that the Group, on completion of the Transformation Plan, will be a viable, competitive, customer focused and profitable bank. For a further description of the risks associated with the various initiatives comprised in the Transformation Plan, See 'The Group's ability to achieve its capital targets will depend on the success of the Group's plans to further reduce the size of its business through the restructuring of its corporate and institutional banking business and make further divestments of certain of its portfolios and businesses including its remaining stake in Citizens Financial Group', 'Implementation of the ring-fence in the UK which will begin in 2015 will result in material structural changes to the Group's business. These changes could have a material adverse effect on the Group', 'The Group is currently implementing a number of significant investment and rationalisation initiatives as part of the Group's IT and operational investment programme. Should such investment and rationalisation initiatives fail to achieve the expected results, it could have a material adverse impact on the Group's operations and its ability to retain or grow its customer business'. Failure of the Transformation Plan to result in a viable, competitive, customer focused and profitable bank would have a material adverse effect on the Group's business, results of operations and financial condition.
The Group is currently implementing a number of significant investment and rationalisation initiatives as part of the Group's IT and operational investment programme. Should such investment and rationalisation initiatives fail to achieve the expected results, it could have a material adverse impact on the Group's operations and its ability to retain or grow its customer business.
The intent of the 2013/2014 Strategic Plan and of the restructuring of the Group's CIB business is to further simplify and downsize the Group with an increased focus on service to its customers. Such initiatives are being combined and supplemented with significant investments in technology and more efficient support functions intended to contribute to delivering significant improvements in the Group's Return on Equity and costs: income ratio in the longer term as well as improve the resilience, accessibility and product offering of the Group.
The Group started implementing an investment programme of 750 million in 2013 expected to run through 2015 to materially upgrade its IT capability in the UK, to enhance the digital services provided to its bank customers and also improve the reliability and resilience of the IT systems following a number of system failures in the past couple of years. This investment in the Group's IT capability is intended to address the material increase in customer use of online and mobile technology for banking over the past few years as well as provide the capability to continue to grow such services in the future. Increasingly many of the products and services offered by the Group are, and will become, technology intensive and the Group's ability to develop such services has become increasingly important to retaining and growing the Group's customer business in the UK. 


Appendix 5 Risk factors
If the Group is unable to offer competitive, attractive and innovative products that are also profitable, it could lose market share, incur losses on some or all of its activities and lose opportunities for growth. In addition to upgrading its current IT infrastructure, the Group is also undertaking a major project to rationalise its legacy IT infrastructure, aiming to lower costs and improve resilience. With the implementation of the ring-fence regulatory regime there will be further need to manage the Group's IT infrastructure to comply with the regulatory requirements of such regime. 
As with any project of comparable size and complexity, there can be no assurance that the Group will be able to implement all of the initiatives forming part of its investment plan, including the IT investment programme on time or at all, and it may experience unexpected cost increases and delays. Any failure by the Group to realise the benefits of this investment programme, whether on time or at all, could have a material adverse effect on the Group's business, results of operations and its ability to retain or grow its customer business.
Implementation by the Group of the various initiatives and programmes which form part of the Group's Transformation Plan subjects the Group to increased and material execution risk.
The level of structural change intended to be implemented within the Group over the medium term as a result of the Transformation Plan, taken together with the overall scale of change to make the Group a smaller, more focused financial institution, will be disruptive and is likely to increase operational and people risks for the Group and to impact its revenues and business. As a result of the material restructuring plans that make up the Transformation Plan, the Group is subject to increased and material execution risk in many areas including:
Implementation of the Transformation Plan is expected to result in significant costs, mainly in connection with the Group's restructuring of its CIB business, which costs will be incremental to current plans and exclude potential losses on the sale of financial assets and transfer of financial liabilities. Due to material uncertainties and factors outside the Group's control, the costs of implementation could be materially higher than currently contemplated. One of the objectives of the Transformation Plan is also to achieve a medium-term reduction in annual underlying costs (i.e., excluding restructuring and conduct-related charges). Due to material uncertainties and factors outside the Group's control, this level of cost saving may not be achieved within the planned timescale or at any time.


The Transformation Plan includes assumptions on levels of customer retention and revenue generation from the new business model. Due to material uncertainties and factors outside the Group's control, including normal levels of market fluctuation, this level of revenue may not be achieved in the timescale envisaged or at any time.


The Group will be reliant on attracting and retaining qualified employees to manage the implementation of the Transformation Plan and, in particular, the restructuring of the Group's CIB business and to oversee the implementation of the ring-fence and operate in the new ring-fence environment. No assurance can be given that it will be able to attract and retain such employees. See also 'The Group may be unable to attract or retain senior management (including members of the board) and other skilled personnel of the appropriate qualification and competence. The Group may also suffer if it does not maintain good employee relations'.


The significant reorganisation and restructuring resulting from the combined initiatives constituting the Transformation Plan will fundamentally change the Group's business. Implementation will be disruptive and will increase operational risk. See 'Operational risks are inherent in the Group's businesses and these risks could increase as the Group implements its Transformation Plan'.


Appendix 5 Risk factors
The Transformation Plan makes certain assumptions about future regulation including, but not limited to, the rules to be issued by PRA and FCA in connection with the ring-fence regime. Material differences between the rules ultimately adopted and the assumptions made in the plan proposed to implement the ring-fence could make it impossible to execute the ring-fence as currently envisaged. The Transformation Plan is also intended to improve the Group's control environment, particularly in its remaining CIB franchise. Due to material uncertainties, factors beyond the Group's control, and the increased operational risk described above, there can be no guarantee that such improvements will be achieved in the timescale envisaged or at any time or that it will not result in further regulatory scrutiny.
If any of the risks outlined above were to occur, singly or in the aggregate, they could have a material adverse effect on the Group's business, results of operations and financial condition.
The Group is subject to a number of legal, regulatory and governmental actions and investigations. Unfavourable outcomes in such actions and investigations could have a material adverse effect on the Group's operations, operating results, investor confidence and reputation
The Group's operations are diverse and complex, and it operates in legal and regulatory environments that expose it to potentially significant litigation, regulatory and governmental investigations and other regulatory risk. As a result, the Group has recently settled a number of legal and regulatory investigations and is, and may in the future be, involved in a number of legal and regulatory proceedings and investigations in the UK, the EU, the US and other jurisdictions.
The Group is involved in ongoing class action litigation, investigations into foreign exchange trading and rate setting activities, continuing LIBOR related litigation and investigations, securitisation and securities related litigation, and anti-money laundering, sanctions, mis-selling and compliance related investigations, in addition to a number of other matters. In November 2014, the Group announced that it had reached a settlement with the FCA in the United Kingdom and with the Commodity Futures Trading Commission (CFTC) in the US in relation to investigations into failings in RBS's foreign exchange business within its Corporate and Institutional Banking division. The Group agreed to pay penalties of 217 million to the FCA and $290 million to the CFTC to resolve the investigations. The Group continues to cooperate with these and other governmental and regulatory authorities and remains in discussion with these authorities on these issues including settlement discussions regarding the criminal investigation being conducted by the anti-trust and criminal division of the US Department of Justice and certain other financial regulatory authorities. Settlements in relation to these ongoing investigations may result in additional financial, non-monetary penalties, and collateral consequences, which may be material, and may give rise to additional legal claims being asserted against the Group. The Group entered into a deferred prosecution agreement in 2013 in connection with the settlement of the charges relating to the LIBOR investigation (the "LIBOR DPA"). Findings of misconduct by the US Department of Justice relating to the Group, its subsidiaries or employees, may result in a breach of the terms of the LIBOR DPA which may lead to an extension of its terms or further prosecution.
Legal, governmental and regulatory proceedings and investigations are subject to many uncertainties, and their outcomes, including the timing and amount of fines or settlements, which may be material, are often difficult to predict, particularly in the early stages of a case or investigation. It is expected that the Group will continue to have a material exposure to legacy litigation and governmental and regulatory proceedings and investigations in the medium term. For more detail on certain of the Group's ongoing legal, governmental and regulatory proceedings, see Note 15 in the main announcement. Adverse regulatory, governmental or law enforcement proceedings or adverse judgements in litigation could result in restrictions or limitations on the Group's operations or have a significant effect on the Group's reputation, results of operations and capital position. 


Appendix 5 Risk factors
The Group may be required to make new or increase existing provisions in relation to legal proceedings, investigations and governmental and regulatory matters. In Q3 2014, the Group booked a provision of 400 million relating to penalties incurred in connection with the investigations and reviews relating to foreign exchange trading settled with the FCA and the CFTC and during 2014 the Group booked additional provisions of 650 million for Payment Protection Insurance (resulting in total provisions made for this matter of 3.7 billion, of which 2.9 billion had been utilised at 31 December 2014). The provision for interest rate hedging products redress and administration costs was also increased by 185 million in 2014, with total provisions relating to this matter totalling 1.4 billion, of which 1.1 billion had been utilised at 31 December 2014. Significant increases in provisions relating to ongoing investigations may have an adverse effect on the Group's reputation as well as its financial condition and results of operations.
The Group, like many other financial institutions, has come under greater regulatory scrutiny in recent years and expects heightened levels of regulatory supervision to continue for the foreseeable future, particularly as it relates to compliance with historical, new and existing corporate governance, employee compensation, conduct of business, consumer protection regimes, anti-money laundering and antiterrorism laws and regulations, as well as the provisions of applicable sanctions programmes. Past, current or future failures to comply with any one or more of these laws or regulations could have a material adverse effect on the Group's reputation, financial condition and results of operations.
The Group is subject to political risks
Ahead of the upcoming UK election in May 2015, there is uncertainty around how the policies of the elected government may impact the Group, including a possible referendum on the UK's membership of the EU. The implementation of these policies, including the outcome of the EU referendum, could significantly impact the environment in which the Group operates and the fiscal, monetary, legal and regulatory requirements to which it is subject, and in turn could have a material adverse effect on its business, financial condition and results of operations.
The Group may be unable to attract or retain senior management (including members of the board) and other skilled personnel of the appropriate qualification and competence. The Group may also suffer if it does not maintain good employee relations
Implementation of the Group's strategy and its future success depends on its ability to attract, retain and remunerate highly skilled and qualified personnel, including senior management (which include directors and other key employees), in a highly competitive labour market. This cannot be guaranteed, 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 Group). Following the implementation in the UK of provisions of CRD IV relating to compensation in the financial sector and taking into account the views of UKFI, the Group is restricted from paying variable remuneration to individuals for a particular year in an amount higher than the level of his or her fixed remuneration which may place the Group at a competitive disadvantage. 


Appendix 5 Risk factors
The Group's directors as well as members of its executive committee and certain other senior managers and employees will also be subject to the new responsibility regime introduced under the Banking Reform Act 2013 which will impose greater responsibility on such individuals. The new rules include (i) a senior managers' regime which will require such senior managers to be pre-approved either by the PRA or FCA whilst the new rules themselves also introduce a "presumption of responsibility" for those approved as such - where contraventions of a relevant regulatory requirement occur, the accountable senior manager will be presumed guilty of misconduct unless he or she shows to the satisfaction of the relevant regulator that he or she took all reasonable steps to prevent the contravention occurring (or continuing) , (ii) a certification regime which will require the Group to assess the fitness and propriety of certain of its employees (other than senior managers), who are considered to pose a risk of significant harm to the Group or its customers and (iii) a conduct rules regime (which as currently proposed would apply regulatory prescribed conduct rules to most employees of the Group with a UK nexus). 
The rules implementing the new regime are still under consultation by the PRA and the FCA and there remains uncertainty as to the final scope of the new rules and any transitional arrangements. Final rules are expected to enter into force in late 2015 (and early 2016 for the new certification regime). The new regulatory regime may contribute to 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, given concerns over the reverse burden of proof as well as the allocation of responsibilities introduced by the new rules. 
In addition to the effects of such measures on the Group's ability to retain non-executive directors, senior management and other key employees, the market for skilled personnel is increasingly competitive, thereby raising the cost of hiring, training and retaining skilled personnel. 
The Group's changing strategy, particularly as a result of the Group's 2013/2014 Strategic Plan, including the accelerated disposal of the Group's interest in CFG, led to the departure of many experienced and capable employees. The continuing restructuring of the Group, including as a result of the restructuring of the Group's CIB business and the implementation of the ring-fence regulatory regime, is expected to lead to the departure of additional experienced and capable employees. The lack of continuity of senior management and the loss of important personnel coordinating certain or several aspects of the Transformation Plan could have an adverse impact on the implementation of the Group's Transformation Plan and regulatory commitments. The failure to attract or retain a sufficient number of appropriately skilled personnel to manage the complex restructuring required to implement the Transformation Plan, and in particular the implementation of the ring-fence and the restructuring of the Group's CIB business could prevent the Group from successfully implementing its strategy. This could have a material adverse effect on the Group's business, financial condition and results of operations.
In addition, certain of the Group's employees in the UK, continental Europe and other jurisdictions in which the Group operates are represented by employee representative bodies, including trade unions. Engagement with its employees and such bodies is important to the Group and a breakdown of these relationships could adversely affect the Group's business, reputation and results.


Appendix 5 Risk factors
Operational risks are inherent in the Group's businesses and these risks could increase as the Group implements its Transformation Plan
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. The Group has complex and geographically diverse operations and operational risk and losses can result from internal and external fraud, errors by employees or third parties, failure to document transactions properly or to obtain proper authorisations, failure to comply with applicable regulatory requirements and conduct of business rules (including those arising out of anti-bribery, anti-money laundering and anti-terrorism legislation, as well as the provisions of applicable sanctions programmes), equipment failures, business continuity and data security system failures, natural disasters or the inadequacy or failure of systems and controls, including those of the Group's suppliers or counterparties. Operational risks will be heightened as a result of the Group's implementation of its Transformation Plan as described in more detail under " - Implementation by the Group of the various initiatives and programmes which form part of the Group's Transformation Plan subjects the Group to increased and material execution risk". Although the Group has implemented risk controls and loss mitigation actions and significant resources and planning have been devoted to plans to mitigate operational risk associated with the Group's activities as well as the implementation of the Group's Transformation Plan, such actions will be effective in controlling each of the operational risks faced by the Group. Ineffective management of operational risks, including the material operational risks that will arise in implementing the Transformation Plan, could have a material adverse effect on the Group's business, financial condition and results of operations.
The Group operates in highly competitive markets that are subject to intense scrutiny by the competition authorities. Its business and results of operations may be adversely affected by increasing competitive pressures and competition rulings and other government measures.
The competitive landscape for banks and other financial institutions in the UK, the US and throughout the rest of Europe is changing rapidly. Recent regulatory and legal changes are likely to result in new market participants and changed competitive dynamics in certain key areas, such as in retail banking in the UK. The UK retail banking sector has been subjected to intense scrutiny by the UK competition authorities and by other bodies in recent years, including market reviews conducted by the Competition & Markets Authority (CMA) and its predecessor the Office of Fair Trading regarding SME banking and Personal Current Accounts (PCAs), the ICB, whose final report was published in 2012 and the Parliamentary Commission on Banking Standards whose report was published in 2013. These reviews raised significant concerns about the effectiveness of competition in the banking sector.
In 2014, the CMA published two market studies about SME banking and PCAs. On the basis of its findings and following consultation, the CMA made a market investigation reference (MIR) in relation to both SME banking and PCAs. An MIR can be made only if the CMA has reasonable grounds for suspecting that any feature, or combination of features, of a market in the UK for goods or services prevents, restricts or distorts competition. Such investigations typically last between 15-24 months and the CMA currently expects to publish provisional findings in September 2015. While it is too early to assess the potential impact on the Group of these reviews and investigations, the competitive landscape in which the Group operates may be significantly affected as a result and this impact will become more significant as the Group implements its Transformation Plan and its business is increasingly concentrated in the UK on retail activities. 


Appendix 5 Risk factors
The wholesale banking sector has also been the subject of recent scrutiny. In 2014, the FCA launched a review of competition in the wholesale sector (primarily relating to competition in wholesale securities and investment markets and related activities such as corporate banking) to identify areas which might merit in-depth market study and in February 2015 announced that it would be launching a market study to investigate competition in investment and corporate banking services. Adverse findings resulting from this study may result in the imposition of fines or restrictions on mergers and consolidations within the UK financial sector and the FCA may also refer the matter further to the CMA, which has extensive powers to take measures to restore effective competition. 
The competitive landscape in the UK is also likely to be affected by the UK Government's implementation of the ring-fence regime and other customer protection measures introduced by the Banking Reform Act 2013. Although final ring-fence rules will not be available until 2016, firms (including the Group) have submitted plans for their legal and operational structures to implement the new ring-fence regime to the PRA. The implementation of such plans may result in the consolidation of newly separated businesses or assets of certain financial institutions with those of other parties to realise new synergies or protect their competitive position. This consolidation, in combination with the introduction of new entrants into the markets in which the Group operates which is being actively encouraged by the UK Government is likely to increase competitive pressures on the Group.
In addition, certain competitors may have more efficient operations, including better IT systems allowing them to implement innovative technologies for delivering services to their customers, and may have access to lower cost funding and/or be able to attract deposits on more favourable terms than the Group. Furthermore, the Group's competitors may be better able to attract and retain clients and key employees, which may negatively impact the Group's relative performance and future prospects. In addition, recent and future disposals and restructurings by the Group in the context of its Transformation Plan as well as constraints imposed on the Group's compensation structure and its ability to compensate its employees at the same level as its competitors may also have an impact on its ability to compete effectively.
These and other changes to competition could have a material adverse effect on the Group's business, margins, profitability, financial condition and prospects.
The Group's businesses and performance can be negatively affected by actual or perceived global economic and financial market conditions and other global risks although the Group will be increasingly impacted by developments in the UK as its operations become gradually more focused on the UK
On completion of the Group's Transformation Programme its business focus will be preponderantly in the UK. However, the Group's businesses and many of its customers are, and will be, affected by global economic conditions, perceptions of those conditions and future economic prospects. The outlook for the global economy over the near to medium-term is increasingly uncertain due to a number of factors including geopolitical risks, concerns around global growth and deflation. Risks to growth and stability stem mainly from continued imbalances in many countries in Europe and elsewhere, slowing growth in emerging markets and China and the potential consequences of continued sanctions and depressed oil prices on the Russian economy. Further instability may result from uncertainty as to how economies and counterparties will be affected, directly or indirectly, by lower oil prices and other commodity prices as well as to the impact of monetary policy measures adopted by the ECB, the US Federal Reserve and the Swiss Central Bank. There remains considerable uncertainty about when the Bank of England and the Federal Reserve will begin to raise policy interest rates. The Group's businesses and performance are also affected by financial market conditions. Although capital and credit markets around the world have been relatively stable since 2012, financial markets, in particular equity markets, experienced higher volatility in the last quarter of 2014 which has continued into 2015. This volatility is attributable to many of the factors noted above. 
Appendix 5 Risk factors
In addition, the Group is exposed to risks arising out of geopolitical events, such as trade barriers, exchange controls and other measures taken by sovereign governments that can hinder economic or financial activity levels. Furthermore, unfavourable political, military or diplomatic events, armed conflict, pandemics and terrorist acts and threats, and the responses to them by governments could also adversely affect economic activity and have an adverse effect upon the Group's business, financial condition and results of operations.
The challenging operating environment for the Group's businesses, created by uncertain economic and market conditions is characterised by:
reduced activity levels, additional write-downs and impairment charges and lower profitability, which either alone or in combination with regulatory changes or the activities of other market participants may restrict the ability of the Group to access capital, funding and liquidity;


prolonged periods of low interest rates resulting from ongoing central bank measures to foster economic growth which constrain, through margin compression and low returns on assets, the interest income earned by the Group; and


the risk of increased volatility in yields and asset valuations as central banks start or accelerate looser monetary policies or tighten or unwind historically unprecedented loose monetary policy or extraordinary measures. The resulting environment of uncertainty for the market and consumers could lead to challenging trading and market conditions.
Developments relating to current economic conditions and the risk of a return to a volatile financial environment, including those discussed above, could have a material adverse effect on the Group's business, financial condition, results of operations and prospects.
As the Group refocuses on its operations in the UK as a result of its Transformation Plan, and in particular the restructuring of the Group's CIB business, it is increasingly exposed to the UK economy. Although the prospects for the UK and the US remain the strongest among the G-7 and Ireland's economy continues to improve, actual or perceived difficult global economic conditions, failure to meet economic growth projections, particularly in the UK and the Group's key markets, the worsening of the scope and severity of the weak economic conditions currently experienced by a number of EU member states and elsewhere, potential volatility in the UK housing market and restrictions on mortgage lending as well as increased competition, particularly in the UK, would create challenging economic and market conditions and a difficult operating environment for the Group's businesses. 
The Group is exposed to any weakening of the European economy and the renewed threat of default by certain countries in the Eurozone
With few exceptions, countries in Europe have not yet recovered from the effects of the financial crisis. Consensus forecasts of growth in 2015 and 2016 for some of the largest European economies such as France and Italy are low. In addition, the possibility of a European sovereign default has risen due to the recent election in Greece and the outcome and impact of ongoing negotiations by the new Greek government with respect to its outstanding debt is uncertain. The risk that the effect of any sovereign default spreads by contagion to other EU economies and the UK economy remains. The euro could be abandoned as a currency by one or more countries, or in an extreme scenario, the abandonment of the euro could result in the dissolution of the European Economic and Monetary Union (EEMU). While the European Central Bank announced in January 2015 a 1.1 trillion quantitative easing programme designed to improve confidence in Eurozone equities and encourage more private bank lending, there remains considerable uncertainty as to whether such measures will be successful. 


Appendix 5 Risk factors
The effects on the UK, European and global economies of any potential dissolution of the EMU or exit of one or more EU member states from the EMU and the resulting redenomination of financial instruments from the euro to a different currency, are impossible to predict fully. However, if any such events were to occur they would likely:
result in significant market dislocation;


heighten counterparty risk;


result in downgrades of credit ratings for European borrowers, giving rise to increases in credit spreads and decreases in security values;


disrupt and adversely affect the economic activity of the UK and other European markets; and


adversely affect the management of market risk and in particular asset and liability management due, in part, to redenomination of financial assets and liabilities and the potential for mismatches.
The occurrence of any of these events would have a material adverse effect on the Group's business, financial condition, results of operations and prospects.
The Group is subject to a variety of risks as a result of implementing the State Aid restructuring plan
The Group obtained State Aid approval for the aid given to the Group by the UK Government as part of the placing and open offer undertaken by the Group in December 2008. RBS announced on 9 April 2014 that it had entered into an agreement ("DAS Retirement Agreement") with HM Treasury for the future retirement of the Dividend Access Share ("DAS"). The EC concluded that these new arrangements did not constitute new State aid and approved changes to RBS's restructuring plan in its State Aid Amendment Decision of 9 April 2014. RBSG also entered into a Revised State Aid Commitment Deed with HMT under which it undertook to do all acts and things necessary to ensure that HMT is able to comply with the revised State aid commitments made by HMT to the EC, which mainly relate to the deadline for the Group's divestment of the Williams & Glyn business and the divestment of the rest of the Group's interest in CFG.
Implementation of the State Aid restructuring plan exposes the Group to a number of risks. The most significant risks relate to required asset disposals, a number of which are now completed. The Group completed an initial public offering of CFG's common stock in September 2014. The divestment of Williams & Glyn continues to progress following the announcement of a pre-IPO investment by a consortium of investors in September 2013. The Group is required, pursuant to the terms of the State Aid Amendment Decision, to dispose of its remaining interest in CFG by the end of 2016 (with a possible 12 month extension) and must divest its interest in Williams & Glyn by way of an initial public offering by the end of 2016 with the disposal of the remainder of its interest by the end of 2017. Under the terms of the State Aid Amendment Decision, a divestiture trustee may be empowered to conduct these disposals, with the mandate to complete the disposal at no minimum price, if the Group fails to complete such required disposals within agreed or renegotiated time frames, which may result in the Group achieving less than the full value of its investment due to then prevailing market conditions. Furthermore, if the Group is unable to comply with the terms of the State Aid Amendment Decision, including the required divestments, it might constitute a misuse of aid which could have a material adverse impact on the Group.
The occurrence of any of the risks described above could have a material adverse effect on the Group's business, results of operations, financial condition, capital position and competitive position.


Appendix 5 Risk factors
HM Treasury (or UK Financial Investments Limited (UKFI) on its behalf) may be able to exercise a significant degree of influence over the Group and any proposed offer or sale of its interests may affect the price of securities issued by the Group
The UK Government, through HM Treasury, currently holds 62.3% of the issued ordinary share capital of the Group. On 22 December 2009, the Group issued 25.5 billion of B Shares to the UK Government. The B Shares are convertible, at the option of the holder at any time, into ordinary shares. The UK Government has agreed that it shall not exercise the rights of conversion in respect of the B Shares if and to the extent that following any such conversion it would hold more than 75% of the total issued shares in the Group. Any breach of this agreement could result in the delisting of RBSG from the Official List of the UK Listing Authority and potentially other exchanges where its securities are currently listed and traded. HM Treasury (or the UKFI on its behalf) may sell all or a part of its holding of ordinary shares at any time. Any offers or sale of a substantial number of ordinary shares or securities convertible or exchangeable into ordinary shares by or on behalf of HM Treasury, or an expectation that it may undertake such an offer or sale, could negatively affect prevailing market prices for securities issued by the Group.
In addition, UKFI manages HM Treasury's shareholder relationship with the Group and, although HM Treasury has indicated that it intends to respect the commercial decisions of the Group and that the Group will continue to have its own independent board of directors and management team determining its own strategy, should HM Treasury's intentions change, its position as a majority shareholder (and UKFI's position as manager of this shareholding) means that HM Treasury or UKFI might be able to exercise a significant degree of influence over, among other things, the election of directors and appointment of senior management, dividend policy, remuneration policy, or limiting the Group's operations. The manner in which HM Treasury or UKFI exercises HM Treasury's rights as majority shareholder could give rise to conflict between the interests of HM Treasury and the interests of other shareholders. The Board has a duty to promote the success of the Group for the benefit of its members as a whole.
The Group's business performance could be adversely affected if its capital is not managed effectively or as a result of changes to capital adequacy requirements
Effective management of the Group's capital is critical to its ability to operate its businesses, and to pursue its strategy of returning to standalone strength. The Group is required by regulators in the UK, the EU, the US and other jurisdictions in which it undertakes regulated activities to maintain adequate capital resources. Adequate capital also gives the Group financial flexibility in the face of continuing turbulence and uncertainty in the global economy and specifically in its core UK, US and European markets. From 2016, in accordance with the provisions of the Capital Requirements Regulation ("CRR"), a minimum level of capital adequacy will be required to meet new regulatory capital requirements allowing the Group to make certain discretionary payments relating to CET1 (dividends), variable remuneration and payments on additional tier 1 instruments.
The Basel Committee on Banking Supervision's package of reforms to the regulatory capital framework ("Basel III") raised the quantity and quality of capital required to be held by a financial institution with an emphasis on Common Equity Tier 1 (CET1) capital and introduces an additional requirement for both a capital conservation buffer and a countercyclical buffer to be met with CET1 capital. Global systemically important banks (GSIBs) will be subject to an additional CET1 capital requirement, depending on a bank's systemic importance. The Group has been identified by the Financial Stability Board (FSB) as a GSIB. The FSB list of GSIBs is updated annually, based on new data and changes to methodology. The November 2014 update placed the Group in the second from bottom category of GSIBs, subjecting it to more intensive oversight and supervision and requiring the Group to have additional loss absorption capacity of 1.5% in CET1, to be phased in from the beginning of 2016.


Appendix 5 Risk factors
In addition, regulatory proposals relating to domestically systemically important banks (DSIBs) continue to be progressed and could impact the level of CET1 that is required to be held by the Group. The EBA published in December 2014 a quantitative methodology as to how European regulators could quantify which firms would qualify as DSIBs. In addition the Financial Policy Committee ("FPC") of the Bank of England intends to consult with firms in the UK on the UK framework.
Basel III has been implemented in the EU with a new Directive and Regulation (collectively known as "CRD IV") which became effective from 1 January 2014, subject to a number of transitional provisions and clarifications. A number of the requirements introduced under CRD IV have been and continue to be further supplemented through the Regulatory and Implementing Technical Standards ("RTSs"/"ITSs") produced by the European Banking Authority (EBA) and to be adopted by the European Commission which are not yet all finalised. The EU rules deviate from the Basel III rules in certain aspects, and provide national flexibility to apply more stringent prudential requirements than set out in the Basel framework.
Under CRD IV, the Group is required, on a consolidated basis, to hold a minimum amount of regulatory capital of 8% of risk weighted assets of which at least 4.5% must be CET1 capital and at least 6% must be tier 1 capital (together, the "Pillar 1 requirements"). In addition, national supervisory authorities may add extra capital requirements to cover risks they believe are not covered or insufficiently covered by the Pillar 1 requirements (the "Pillar 2A guidance"). The PRA requires that Pillar 2A risks should be met with at least 56% CET1 capital, no more than 44% additional tier 1 capital and at most 25% tier 2 capital. CRD IV also introduces five new capital buffers that are in addition to the Pillar 1 and Pillar 2A requirements and are to be met with CET1 capital: (i) the capital conservation buffer, (ii) the institution-specific counter-cyclical buffer, (iii) the global systemically important institutions buffer, (iv) the other systemically important institutions buffer and (v) the systemic risk buffer. Some or all of these buffers may be applicable to the Group as determined by the PRA. 
The combination of the capital conservation buffer, the institution-specific counter-cyclical capital buffer and the higher of (depending on the institution), the systemic risk buffer, the global systemically important institutions buffer and the other systemically important institution buffer, in each case (as applicable to the institution) is referred to as the "combined buffer requirement". The PRA has also introduced a firm specific Pillar 2B buffer ("Pillar 2B buffer") which is based on various factors including firm-specific stress test results and is to be met with CET1. The PRA will assess the Pillar 2B buffer annually and UK Banks are required to meet the higher of the combined buffer requirement or Pillar 2B requirement. The PRA published a consultation in January 2015 suggesting certain changes to its Pillar 2A framework which will introduce new methodologies for determining Pillar 2A capital as well as the PRA's approach to operating the Pillar 2A buffer. 
In addition, under the provisions of the CRR, which took effect from 1 January 2014, deferred tax assets that rely on future profitability (for example, deferred tax assets related to trade losses) and do not arise from temporary differences must be deducted in full from CET1 capital. Other deferred tax assets which rely on future profitability and arise from temporary differences are subject to a threshold test and only the amount in excess of the threshold is deducted from CET1 capital. The regulatory treatment of such deferred tax assets is dependent on there being no adverse changes to regulatory requirements. 


Appendix 5 Risk factors
Under Article 141 (Restrictions on distribution) of the CRD IV Directive, member states of the EU must require that institutions that fail to meet the "combined buffer requirement" will be subject to restricted "discretionary payments" (which are defined broadly by CRD IV as payments relating to CET1 (dividends), variable remuneration and payments on additional tier 1 instruments). The restrictions will be scaled according to the extent of the breach of the "combined buffer requirement" and calculated as a percentage of the profits of the institution since the last distribution of profits or "discretionary payment". Such calculation will result in a "maximum distributable amount" (or "MDA") in each relevant period. As an example, the scaling is such that in the bottom quartile of the "combined buffer requirement", no "discretionary distributions" will be permitted to be paid. In the event of a breach of the combined buffer requirement, the Group will be required to calculate its maximum distributable amount, and as a consequence it may be necessary for the Group to reduce discretionary payments.
In October 2014 the FPC published its recommendation on the overall leverage ratio framework for the UK banking system. The FPC recommended a minimum leverage ratio requirement of 3% (to be met 75% by CET1 and a maximum of 25% by additional tier 1 capital), a supplementary leverage buffer applied to G-SIBs equal to 35% of the corresponding risk weighted systemic risk buffer (to be met by CET1) and a countercyclical buffer equal to 35% of the risk weighted countercyclical capital buffer (also to be met by CET1). Transition timings have been aligned to those laid out in Basel III and the exposure measure will follow that laid out by the Basel Committee for Banking Supervision. The FPC explicitly ruled out a breach of the leverage ratio resulting in an automatic constraint to capital distributions via the "maximum distributable amount", preferring to leave this linked to risk weighted assets for the purposes of simplicity. 
However, if a breach of the leverage buffers (both G-SIB and countercyclical) were to occur then a recovery plan would need to be discussed with the PRA. The current Group leverage ratio is 4.2% fully met through CET1 leaving it above the minimum requirement while the countercyclical buffer is close to zero.
In addition to the capital requirements under CRD IV, the bank resolution and recovery directive ("BRRD") introduces requirements for banks to maintain at all times a sufficient aggregate amount of own funds and "eligible liabilities" (that is, liabilities that may be bailed in using the bail-in tool), known as the minimum requirements for eligible liabilities ("MREL"). The aim is that the minimum amount should be proportionate and adapted for each category of bank on the basis of their risk or the composition of their sources of funding. The UK Government has transposed the BRRD's provisions into law with a requirement that the Bank of England implements further secondary legislation to implement MREL requirements by 2016 which will take into account the regulatory technical standards to be developed by the EBA specifying the assessment criteria that resolution authorities should use to determine the minimum requirement for own funds and eligible liabilities for individual firms. The EBA noted that the technical standards would be compatible with the proposed term sheet published by the FSB on total loss absorbing capacity ("TLAC") requirements for GSIBs but there remains a degree of uncertainty as to the extent to which MREL and TLAC requirements may differ. As the implementation of capital and loss absorption requirements under BRRD in the UK is subject to adoption of secondary legislation and subject to PRA supervisory discretion in places, and the implementation and scope of TLAC remains subject to significant uncertainty, the Group is currently unable to predict the impact such rules would have on its overall capital and loss absorption requirements or its ability to comply with applicable capital or loss absorbency requirements or to make certain discretionary distributions.


Appendix 5 Risk factors
Building on changes made to requirements in relation to the quality and aggregate quantity of capital that banks must hold, the Basel Committee and other agencies are increasingly focussed on changes that will increase, or re-calibrate, measures of risk weighted assets as the key measure of the different categories of risk in the denominator of the risk-based capital ratio. There is no current global consensus regarding the key objectives of this further evolution of the international capital framework. One extreme position advocated by some regulators would materially deemphasise the role of a risk-based capital ratio. A more broadly held opinion among regulators seeks to retain the ratio but also reform it, in particular by addressing perceived excessive complexity and variability between banks and banking systems. In particular, the Basel Committee on Banking Supervision published a consultation paper in December 2014, in which it recommended reduced reliance on external credit ratings when assessing risk weighted assets and to replace such ratings with certain risk drivers based on the particular type of exposure of each asset. While they are at different stages of maturity, a number of initiatives across risk types and business lines are in progress that will impact RWAs at their conclusion. While the quantum of impacts is uncertain owing to lack of clarity of definition of the changes and the timing of their introduction, the likelihood of an impact resulting from each initiative is high and such impacts could result in higher levels of risk weighted assets.
The Basel Committee changes and other future changes to capital adequacy and loss absorbency and liquidity requirements in the European Union, the UK, the US and in other jurisdictions in which the Group operates, including the Group's ability to satisfy the increasingly stringent stress case scenarios imposed by regulators and the adoption of the MREL and TLAC proposals, may require the Group to issue Tier 1 capital (including CET1), Tier 2 capital and certain loss absorbing debt securities, and may result in existing Tier 1 and Tier 2 securities issued by the Group ceasing to count towards the Group's regulatory capital. The requirement to increase the Group's levels of CET1 and Tier 2 capital, or loss absorbing debt securities, which could be mandated by the Group's regulators, could have a number of negative consequences for the Group and its shareholders, including impairing the Group's ability to pay dividends on, or make other distributions in respect of, ordinary shares and diluting the ownership of existing shareholders of the Group. If the Group is unable to raise the requisite amount of Tier 1 and Tier 2 capital, or loss absorbing debt securities it may be required to reduce further the amount of its risk weighted assets or total assets and engage in the disposal of core and other non-core businesses, which may not occur on a timely basis or achieve prices which would otherwise be attractive to the Group.
On a fully loaded Basel III basis, the Group's CET1 ratio was 11.2% at December 31, 2014. The Group's Transformation Plan targets a fully loaded Basel III CET1 ratio of 13% over the restructuring period. The Group's ability to achieve such targets depends on a number of factors, including the implementation of the ring-fence, the execution of the restructuring of the Group's CIB business and the implementation of the 2013/2014 Strategic Plan, which includes plans for a further significant restructuring of the Group as well as further sales of its remaining stake in CFG in the U.S. See 'Forward looking Statements' and 'The Group's ability to achieve its capital targets will depend on the success of the Group's plans to further reduce the size of its business through the restructuring of its corporate and institutional banking business and make further divestments of certain of its portfolios and businesses including its remaining stake in Citizens Financial Group'. 
Any change that limits the Group's ability to implement its capital plan, to access funding sources or to manage effectively its balance sheet and capital resources (including, for example, reductions in profits and retained earnings as a result of write-downs or otherwise, increases in risk-weighted assets, regulatory changes, actions by regulators, delays in the disposal of certain key assets or the inability to syndicate loans as a result of market conditions, a growth in unfunded pension exposures or otherwise) could have a material adverse effect on its business, financial condition and regulatory capital position.


Appendix 5 Risk factors
The Group's borrowing costs, its access to the debt capital markets and its liquidity depend significantly on its credit ratings and, to a lesser extent, on the rating of the UK Government
The credit ratings of RBSG, RBS and other Group members directly affect the cost of, access to and sources of their financing and liquidity. A number of UK and other European financial institutions, including RBSG, the Royal Bank and other Group members, have been downgraded multiple times in recent years in connection with rating methodology changes, a review of systemic support assumptions incorporated into bank ratings and the likelihood, in the case of UK banks, that the UK Government is more likely in the future to make greater use of its resolution tools that allow burden sharing with debt holders. In 2014 credit ratings of RBSG, the Royal Bank and other Group members were downgraded in connection with the Group's creation of RCR, coupled with concerns about execution risks, litigation risk and the potential for conduct related fines. RBSG's long-term and short-term credit ratings were further downgraded by two notches in 2015 by Standard & Poor's Rating Services ("S&P") to reflect S&P's view that extraordinary government support would now be unlikely in the case of UK non-operating bank holding companies and is likely to become less predictable for bank operating companies in the UK under the newly enacted legislation implementing the bail-in provisions of the BRRD. Rating agencies continue to evaluate the rating methodologies applicable to UK and European financial institutions and any change in such rating agencies' methodologies could materially adversely affect the credit ratings of Group companies. 
Any further reductions in the long-term or short-term credit ratings of RBSG or one of its principal subsidiaries (particularly the Royal Bank) would increase borrowing costs, require the Group to replace funding lost due to the downgrade, which may include the loss of customer deposits, and might also limit the Group's access to capital and money markets and trigger additional collateral requirements in derivatives contracts and other secured funding arrangements. At 31 December 2014, a simultaneous one notch long-term and associated short-term downgrade in the credit ratings of RBSG and the Royal Bank by the three main ratings agencies would have required the Group to post estimated additional collateral of 4.5 billion, without taking account of mitigating action by management.
Any downgrade in the UK Government's credit ratings could adversely affect the credit ratings of Group companies and may have the effects noted above. Credit ratings of RBSG, the Royal Bank, The Royal Bank of Scotland N.V. (RBS N.V.) and Ulster Bank Limited are also important to the Group when competing in certain markets, such as over-the-counter derivatives. As a result, any further reductions in RBSG's long-term or short-term credit ratings or those of its principal subsidiaries could adversely affect the Group's access to liquidity and its competitive position, increase its funding costs and have a material adverse impact on the Group's earnings, cash flow and financial condition.
The Group's ability to meet its obligations including its funding commitments depends on the Group's ability to access sources of liquidity and funding
Liquidity risk is the risk that a bank will be unable to meet its obligations, including funding commitments, as they fall due. This risk is inherent in banking operations and can be heightened by a number of factors, including an over reliance on a particular source of wholesale funding (including, for example, short-term and overnight funding), changes in credit ratings or market-wide phenomena such as market dislocation and major disasters. Credit markets worldwide, including interbank markets, have experienced severe reductions in liquidity and term-funding during prolonged periods in recent years. Although credit markets continued to improve during 2014 and such markets remain accommodating in the early part of 2015 (in part as a result of measures taken by central banks around the world, including the ECB), and the Group's overall liquidity position remained strong, certain European banks, in particular in the peripheral countries of Spain, Portugal, Greece, Italy and Ireland, remained reliant on central banks as one of their principal sources of liquidity. Although the measures taken by Central Banks have had a positive impact, the risk of volatility returning to the global credit markets remains.
Appendix 5 Risk factors
The market view of bank credit risk has changed radically as a result of the financial crisis and banks perceived by the market to be riskier have had to issue debt at significant spreads. Any uncertainty relating to the credit risk of financial institutions may lead to reductions in levels of interbank lending and may restrict the Group's access to traditional sources of funding or increase the costs of accessing such funding. The ability of the Group's regulator to bail-in senior and subordinated debt under the provisions of BRRD implemented in the UK since January 2015 may also increase investors' perception of risk and hence affect the availability and cost of funding for the Group.
Management of the Group's liquidity and funding focuses, among other things, on maintaining a resilient funding strategy for its assets in line with the Group's wider strategic plan. Although conditions have improved, there have been recent periods where corporate and financial institution counterparties have reduced their credit exposures to banks and other financial institutions, limiting the availability of these sources of funding. Under certain circumstances, the Group may need to seek funds from alternative sources potentially at higher costs than has previously been the case, and/or with higher collateral or may be required to consider disposals of other assets not previously identified for disposal to reduce its funding commitments. The Group has, at times, been required to rely on shorter-term and overnight funding with a consequent reduction in overall liquidity, and to increase its recourse to liquidity schemes provided by central banks. Such schemes require assets to be pledged as collateral. Changes in asset values or eligibility criteria can reduce available assets and consequently available liquidity, particularly during periods of stress when access to the schemes may be needed most. 
The Group relies on customer deposits to meet a considerable portion of its funding and it has targeted maintaining a loan to deposit ratio of around 100%. The level of deposits may fluctuate due to factors outside the Group's control, such as a loss of confidence, increasing competitive pressures for retail customer deposits or the repatriation of deposits by foreign wholesale or central bank depositors, which could result in a significant outflow of deposits within a short period of time. 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, have a material adverse impact on the Group's ability to satisfy its liquidity needs.
The occurrence of any of the risks described above could have a material adverse impact on the Group's financial condition and results of operations.
The Group's businesses are subject to substantial regulation and oversight. Significant regulatory developments and increased scrutiny by the Group's key regulators has had and is likely to continue to increase compliance risks and could have a material adverse effect on how the Group conducts its business and on its results of operations and financial condition
The Group is subject to extensive financial services laws, regulations, corporate governance requirements, administrative actions and policies in each jurisdiction in which it operates. Many of these have changed recently and are subject to further material changes. Among others, the adoption of rules relating to ring-fencing, prohibitions on proprietary trading, the entry into force of CRD IV and the BRRD and certain other measures in the UK, the EU and the US has considerably affected the regulatory landscape in which the Group operates and will operate in the future. Increasing regulatory focus in certain areas and ongoing and possible future changes in the financial services regulatory landscape (including requirements imposed by virtue of the Group's participation in government or regulator-led initiatives), have resulted in the Group facing greater regulation and scrutiny in the UK, the US and other countries in which it operates.


Appendix 5 Risk factors
Although it is difficult to predict with certainty the effect that the recent regulatory changes, developments and heightened levels of public and regulatory scrutiny will have on the Group, the enactment of legislation and regulations in the UK and the EU, the other parts of Europe in which the Group operates and the US has resulted in increased capital, funding and liquidity requirements, changes in the competitive landscape, changes in other regulatory requirements and increased operating costs and has impacted, and will continue to impact, products offerings and business models. See also 'Implementation of the ring-fence in the UK which will begin in 2015 will result in material structural changes to the Group's business. These changes could have a material adverse effect on the Group'. 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 timeframes required. 
Any of these developments (including failures to comply with new rules and regulations) could have an impact on how the Group conducts its business, its authorisations and licences, the products and services it offers, its reputation, the value of its assets, and could have a material adverse effect on its business, funding costs and its results of operations and financial condition. See 'Implementation by the Group of the various initiatives and programmes which form part of the Group's Transformation Plan subjects the Group to increased and material execution risk'.
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 those set out above as well as the following:
requirements to separate retail banking from investment banking (ring-fencing);


restrictions on proprietary trading and similar activities within a commercial bank and/or a group which contains a commercial bank;


the implementation of additional or conflicting capital, loss absorption or liquidity requirements, including those mandated under MREL or by the Financial Stability Board's recommendations on TLAC;


restructuring certain of the Group's non-retail banking activities in jurisdictions outside the UK in order to satisfy local capital, liquidity and other prudential requirements;


the monetary, fiscal, interest rate and other policies of central banks and other governmental or regulatory bodies;


the design and implementation of national or supra-national mandated recovery, resolution or insolvency regimes;


additional rules and requirements adopted at the European level relating to the separation of certain trading activities from retail banking operations;


further investigations, proceedings or fines either against the Group in isolation or together with other large financial institutions with respect to market conduct wrongdoing;


the imposition of government imposed requirements and/or related fines and sanctions with respect to lending to the UK SME market and larger commercial and corporate entities and residential mortgage lending;


additional rules and regulatory initiatives and review relating to customer protection, including the FCA's Treating Customers Fairly regime;


requirements to operate in a way that prioritises objectives other than shareholder value creation;


Appendix 5 Risk factors
the imposition of 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;


regulations relating to, and enforcement of, anti-bribery, anti-money laundering, anti-terrorism or other similar sanctions regimes; 


rules relating to foreign ownership, expropriation, nationalisation and confiscation of assets;


other requirements or policies affecting the Group's profitability, such as the imposition of onerous compliance obligations, further restrictions on business growth, product offering, or pricing;


changes to financial reporting standards (including accounting standards), corporate governance requirements, corporate structures and conduct of business rules;


reviews and investigations relating to the retail banking sector in the UK, including with respect to SME banking and PCAs;


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 or changes in tax rates or to the treatment of carry-forward tax losses that reduce the value of deferred tax assets and require increased payments of tax); and


the regulation or endorsement of credit ratings used in the EU (whether issued by agencies in EU member states or in other countries, such as the US).
Changes in laws, rules or regulations, or in their interpretation or enforcement, or the implementation of new laws, rules or regulations, including contradictory laws, rules or regulations by key regulators in different jurisdictions, or failure by the Group to comply with such laws, rules and regulations, may have a material adverse effect on the Group's business, financial condition and results of operations. In addition, uncertainty and lack of 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 resolution procedures under resolution and recovery schemes which may result in various actions being taken in relation to the Group and any securities of the Group, including the write off, write-down or conversion of the Group's securities
In the EU, the UK and the US regulators have or are in the process of implementing resolution regimes to ensure the timely and orderly resolution of financial institutions and limit the systemic risks resulting from the failure of global and complex financial groups. In the EU and the UK, the BRRD which came into force on 1 January 2015, sets out a harmonised legal framework governing the tools and powers available to national authorities to address the failure of banks and certain other financial institutions. These tools and powers include preparatory and preventive measures, early supervisory intervention powers and resolution tools. In July 2014, the PRA published a paper on the implementation of the BRRD in the UK and in December 2014 HM Treasury published final versions of the statutory instruments transposing the BRRD which came into effect in January 2015. The PRA published its final rules and requirements implementing the BRRD in January 2015. The EBA also published final draft regulatory technical standards in December 2014 on the content of resolution plans and final guidelines on measures to reduce or remove impediments to resolvability. The implementation of the BRRD in the UK may also continue to evolve over time to ensure continued consistency with the FSB recommendations on resolution regimes and resolution planning for GSIBs, in particular with respect to TLAC requirements. 


Appendix 5 Risk factors
As a result of its status as a GSIB and in accordance with the PRA's resolution and recovery schemes then in place in the UK, the Group was required to meet certain resolution planning requirements by the end of 2012 and 2013. The Group's US businesses and CFG made their required submissions to the Federal Reserve and the FDIC by their July 1, 2014 due dates. The US supervisory agencies subsequently announced that, beginning in 2015, banks would be required to submit their annual resolution plans by 31 December of each year instead of by 1 July. Similar to other major financial institutions, both the Group and its key subsidiaries remain engaged in a constructive dialogue on resolution and recovery planning with key national regulators and other authorities.
In addition to the preventive measures set out above, the UK resolution authority now has available a wide range of powers to deal with failing financial institutions. As a result of the implementation of BRRD in the UK in January 2015, the provisions of the Banking Act 2009 have been substantially amended to enable the relevant authorities to deal with and stabilise certain deposit-taking UK incorporated institutions that are failing, or are likely to fail. In addition to the existing stabilisation options available under the Banking Act 2009 being (i) the transfer of all or part of the business of the relevant entity and/or the securities of the relevant entity to a private sector purchaser, (ii) the transfer of all or part of the business of the relevant entity to a 'bridge bank' wholly owned by the Bank of England and (iii) temporary public ownership (nationalisation) of the relevant entity, the resolution entity will now be able to rely on an asset separation tool which will enable the Bank of England to use property transfer powers to transfer assets, rights and liabilities of a failing bank to an asset management vehicle. In addition, the new rules have transposed the BRRD requirement that the government stabilisation options may only be used once there has been a contribution to loss absorption and recapitalisation of at least 8% of the total liabilities of the institution under resolution.
Among the changes introduced by the Banking Reform Act 2013, the Banking Act 2009 was amended to insert a bail-in option as part of the powers available to the UK resolution authority. The bail-in option was introduced as an additional power available to the Bank of England to enable it to recapitalise a failed institution by allocating losses to its shareholders and unsecured creditors in a manner that seeks to respect the hierarchy of claims in liquidation. The BRRD also includes a "bail-in" tool, which gives the relevant supervisory authorities the power to write down or write off claims (including debt securities issued by the Group and its subsidiaries) of certain unsecured creditors of a failing institution and/or to convert certain debt claims to equity or to other securities of the failing institution or to alter the terms of an existing liability. The UK Government amended the provisions of the Banking Act 2009, as amended by the Banking Reform Act 2013, to ensure the consistency of these provisions with the bail-in provisions under the BRRD which came into effect on 1 January 2015, subject to certain transition provisions effective for debt instruments as of 19 February 2015 and with the exception of provisions relating to MREL and Article 55 of the BRRD which relates to liabilities within the scope of the bail-in powers but governed by the law of a third country. Such bail-in mechanism, pursuant to which losses would be imposed on shareholders and, as appropriate, creditors (including senior creditors) of the Group (through write-down or conversion into equity of liabilities including debt securities) would be used to recapitalise and restore the Group to solvency. The bail-in regime adopted under the BRRD (and implemented in the UK) also provides that shareholders and creditors should not be left worse off as a result of the exercise of the stabilisation powers than they would have been had the bank not been resolved, but instead placed into insolvency. The exercise of the bail-in option will be determined by the resolution authority which will have discretion to determine whether the Group has reached a point of non-viability. Because of this inherent uncertainty, it will be difficult to predict when, if at all, the exercise of the bail-in power may occur.


Appendix 5 Risk factors
The methods for implementation of any resolution and recovery scheme remain the subject of debate, particularly with respect to banking group companies and for GSIBs with complex cross border activities. Such debate includes whether the bail-in tool may be exercised through a single point of entry at the holding company or at various levels of the corporate structure of a GSIB.
The potential impact of these resolution and recovery powers may include the total loss of value of securities issued by the Group and, in addition for debt holders, the possible conversion into equity securities, and under certain circumstances the inability of the Group to perform its obligations under its securities. The possible application of bail-in to the Group's or certain of its subsidiaries' debt securities and additional Tier 1 and Tier 2 capital securities may also make it more difficult to issue such securities in the capital markets and the cost of raising such funds may be higher than has historically been the case. 
The Group's operations are highly dependent on its IT systems and is increasingly exposed to cyber security threats.
The Group's operations are dependent on the ability to process a very large number of transactions efficiently and accurately while complying with applicable laws and regulations where it does business. 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 its branches and main data processing centres, are critical to the Group's operations. In June 2012, computer system failures prevented NatWest, RBS and Ulster Bank customers from accessing accounts in both the UK and Ireland. Ongoing issues relating to the failure continued for several months, requiring the Group to set aside a provision for compensation to customers who suffered losses as a result of the system failure. In addition, in November 2014, the Group reached a settlement with the FCA and the PRA in relation to this incident and agreed a penalty of 42 million with the FCA and 14 million with the PRA. Ulster Bank, one of the Group's subsidiaries, was also fined 3.5m by the Central Bank of Ireland in relation to the IT incident and IT governance failures which occurred in 2012. The vulnerabilities of the Group's IT systems are due to the complexity of the Group's IT infrastructure attributable in part to overlapping multiple legacy systems resulting from the Group's acquisitions and the consequential gaps in how the IT systems operate, and insufficient-investments in IT infrastructure in the past, creating challenges in recovering from system breakdowns. Critical system failure, any prolonged loss of service availability or any material breach of data security, particularly involving confidential customer data, could cause serious damage to the Group's ability to service its customers, could result in significant compensation costs, could breach regulations under which the Group operates and could cause long-term damage to the Group's reputation, business and brands. The Group is also currently implementing a significant IT investment programme which involves execution risks and may not be successful. See 'The Group is currently implementing a number of significant investment and rationalisation initiatives as part of the Group's IT and operational investment programme. Should such investment and rationalisation initiatives fail to achieve the expected results, it could have a material adverse impact on the Group's operations and its ability to retain or grow its customer business'.


Appendix 5 Risk factors
In addition, the Group is subject to cyber-security threats which have targeted financial institutions as well as governments and other institutions and have increased in the recent years. Failure to protect the Group's operations from cyber-attacks could result in the loss of customer data or other sensitive information. During 2013, the Group experienced a number of IT failures following a series of deliberate attacks which temporarily prevented RBS, CFG and NatWest customers from accessing their accounts or making payments. The Bank of England, the FCA and HM Treasury have identified cyber security as a systemic risk to the UK financial sector and highlighted the need for financial institutions to improve resilience to cyber-attacks and the Group expects greater regulatory engagement on cyber security in the future. Although the Group has been implementing remedial actions to improve its resilience to the increasing intensity and sophistication of cyber-attacks, the Group expects to be the target of continued attacks in the future and there can be no assurance that the Group will be able to prevent all threats.
The Group's operations have inherent reputational risk
Reputational risk, meaning the risk of brand damage and/or financial loss due to a failure to meet stakeholders' expectations of the Group's conduct and performance, is inherent in the Group's business. Stakeholders include customers, investors, rating agencies, employees, suppliers, government, politicians, regulators, special interest groups, consumer groups, media and the general public. Brand damage can be detrimental to the business of the Group in a number of ways, including its ability to build or sustain business relationships with customers, low staff morale, regulatory censure or reduced access to, or an increase in the cost of, funding. In particular, negative public opinion resulting from the actual or perceived manner in which the Group conducts its business activities, the Group's financial performance, ongoing investigations and proceedings and the settlement of any such investigations and proceedings, the level of direct and indirect government support or actual or perceived practices in the banking and financial industry may adversely affect the Group's ability to keep and attract customers and, in particular, corporate and retail depositors. Reputational risks may be increased as a result of the implementation of the Group's Transformation Plan. 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 significantly enhance and accelerate the impact of damaging information and allegations. The Group cannot ensure that it will be successful in avoiding damage to its business from reputational risk, which could result in a material adverse effect on the Group's business, financial condition, results of operations and prospects.
The Group may suffer losses due to employee misconduct
The Group's businesses are exposed to risk from potential non-compliance with policies, regulatory rules, employee misconduct or negligence and fraud, which could result in regulatory sanctions and serious reputational or financial harm to the Group. In recent years, a number of multinational financial institutions, including the Group, have suffered material losses due to the actions of employees, including, for example, in connection with the LIBOR and foreign exchange investigations. It is not always possible to deter employee misconduct and the precautions the Group takes to prevent and detect this activity may not always be effective.


Appendix 5 Risk factors
The Group's earnings and financial condition have been, and its future earnings and financial condition may continue to be, materially affected by depressed asset valuations resulting from poor market conditions
In previous years, severe market events resulted in the Group recording large write-downs on its credit market exposures. Any deterioration in economic and financial market conditions or weak economic growth could lead to further impairment charges and write-downs. Moreover, market volatility and illiquidity (and the assumptions, judgements and estimates in relation to such matters that may change over time and may ultimately not turn out to be accurate) make it difficult to value certain of the Group's exposures. Valuations in future periods, reflecting, among other things, the then prevailing market conditions and changes in the credit ratings of certain of the Group's assets, may result in significant changes in the fair values of the Group's exposures, such as credit market exposures and the value ultimately realised by the Group may be materially different from the current or estimated fair value.
As part of the Group's previous restructuring and capital initiatives, including the 2013/2014 Strategic Plan, it has already materially reduced the size of its balance sheet mainly through the sale and run-off of non-core assets. The assets transferred to RCR (which included assets formerly part of the Group's Non-Core division together with additional assets identified as part of a HM Treasury review), became part of the Group's Capital Resolution Group ("CRG") as of 1 January 2014. In connection with the establishment of CRG, the Group indicated its aspiration to remove the vast majority, if not all of the assets comprising RCR within three years which resulted in increased impairments of 4.5 billion which were recognised in 2013. The value of the assets in RCR, excluding derivatives, was 14.9 billion at December 31, 2014 following significant reductions during 2014. Although the Group to date has successfully reduced the size of the RCR portfolio, the remaining assets in RCR may be difficult to sell and could be subject to further write-downs or, when sold, realised losses. The CRG also includes the Group's stake in the Williams & Glyn business as well as its remaining stake in CFG. In addition, as part of the restructuring of the Group's CIB business, the Group will be exiting or disposing of substantial parts of that business. The Group's interest in these businesses may be difficult to sell due to unfavourable market conditions for such assets or businesses. See also 'The Group's ability to achieve its capital targets will depend on the success of the Group's plans to further reduce the size of its business through the restructuring of its corporate and institutional banking business and make further divestments of certain of its portfolios and businesses including its remaining stake in Citizens Financial Group'. Any of these factors could require the Group to recognise further significant write-downs, realise increased impairment charges or goodwill impairments, all of which may have a material adverse effect on its financial condition, results of operations and capital ratios.
The Group may be required to make further contributions to its pension schemes if the value of pension fund assets is not sufficient to cover potential obligations and to satisfy ring-fencing requirements
The Group maintains a number of defined benefit pension schemes for certain former and current employees. Pension risk is the risk that the assets of the Group's various defined benefit pension schemes do not fully match the timing and amount of the schemes' liabilities which are long-term in nature, and as a result of which, the Group is required or chooses to make additional contributions to the schemes. Pension scheme liabilities vary with changes to long-term interest rates, inflation, pensionable salaries and the longevity of scheme members as well as changes in applicable legislation. The funded schemes hold assets to meet projected liabilities to the scheme members. Risk arises from the schemes because the value of the asset portfolios, together with any additional future contributions to the schemes, may be less than expected and because there may be greater than expected increases in the estimated value of the schemes' liabilities.


Appendix 5 Risk factors
In these circumstances, the Group could be obliged, or may choose, to make additional contributions to the schemes. Given the economic and financial market difficulties that arose out of the financial crisis and the risk that such conditions may occur again over the near and medium term, the Group has experienced and may continue to experience increasing pension deficits or be required or elect to make further contributions to its pension schemes. Such deficits and contributions could be significant and have an adverse impact on the Group's results of operations or financial condition. In May 2014, the triennial funding valuation of The Royal Bank of Scotland Group Pension Fund was agreed which showed that the value of the liabilities exceeded the value of assets by 5.6 billion at 31 March 2013,a ratio of 82%. To eliminate this deficit, RBS will pay annual contributions of 650 million from 2014 to 2016 and 450 million (indexed in line with inflation) from 2017 to 2023. These contributions are in addition to regular annual contributions of approximately 270 million in respect of the ongoing accrual of benefits as well as contributions to meet the expenses of running the scheme.
The Banking Reform Act 2013 requires banks to ring-fence specific activities (principally retail and small business deposits) from certain other activities. Ring-fencing will require changes to the structure of the Group's existing defined benefit pension schemes as ring-fenced banks may not be liable for debts to pension schemes that might arise as a result of the failure of another entity of the ring-fenced bank's group, which could affect assessments of the Group's schemes deficits. The draft Financial Services and Markets Act 2000 (Banking Reform Pensions) Regulations 2015 requires that ring-fence banks ensure that they cannot become liable for the pension schemes of the rest of their group, or anyone else after January 1, 2026. The Group is developing a strategy to meet the requirements of these regulations, which has been discussed with the PRA. The implementation of this strategy will require the agreement of pension scheme trustees. Discussions with the pension trustee will be influenced by the Group's overall ring-fence strategy and its pension funding and investment strategies. If agreement is not reached with the pension trustee, alternative options less favourable to the Group will need to be developed to meet the requirements of the pension regulations. The costs associated with the restructuring of the Group's existing defined benefit pension schemes could be material and could result in higher levels of additional contributions than those described above and currently agreed with the pension trustee. 
The financial performance of the Group has been, and may continue to be, materially affected by counterparty credit quality and deterioration in credit quality could arise due to prevailing economic and market conditions and legal and regulatory developments
The Group has exposure to many different industries and counterparties, and risks arising from actual or perceived changes in credit quality and the recoverability of monies due from borrowers and counterparties are inherent in a wide range of the Group's businesses. In particular, the Group has significant exposure to certain individual counterparties in weaker business sectors and geographic markets and also has concentrated country exposure in the UK, the US and across the rest of Europe (principally Germany, The Netherlands, Ireland and France) (at 31 December 2014 credit risk assets in the UK were 180.8 billion, in North America 81.8 billion and in Western Europe (excluding the UK) 76.3 billion); and within certain business sectors, namely personal finance, financial institutions, commercial real estate, shipping and the oil and gas sector (at 31 December 2014 personal finance lending amounted to 180.8 billion, lending to financial institutions was 91.5 billion, commercial real estate lending was 43.3 billion, lending to the oil and gas sector was 10.7 billion and lending against ocean going vessels was 10.4 billion). As the Group implements its new strategy and withdraws from many geographic markets and materially scales down its activities in the United States, the Group's relative exposure to the UK will increase significantly as its business becomes more concentrated in the UK.


Appendix 5 Risk factors
The credit quality of the Group's borrowers and counterparties is impacted by prevailing economic and market conditions and by the legal and regulatory landscape in their respective markets.
Credit quality has improved in certain of the Group's core markets, in particular the UK and Ireland, as these economies have improved. However, a further deterioration in economic and market conditions or changes to legal or regulatory landscapes could worsen borrower and counterparty credit quality and also impact the Group's ability to enforce contractual security rights. In addition, the Group's credit risk is exacerbated when the collateral it holds cannot be realised or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure that is due to the Group, which is most likely to occur during periods of illiquidity and depressed asset valuations, such as those experienced in recent years. This has been particularly the case with respect to large parts of the Group's commercial real estate portfolio. Any such losses could have an adverse effect on the Group's results of operations and financial condition.
Concerns about, or a default by, one financial institution could lead to significant liquidity problems and losses or defaults by other financial institutions, as the commercial and financial soundness of many financial institutions may be closely related as a result of credit, trading, clearing and other relationships. Even the perceived lack of creditworthiness of, or questions about, a counterparty may lead to market-wide liquidity problems and losses for, or defaults by, the Group. This systemic risk may adversely affect financial intermediaries, such as clearing agencies, clearing houses, banks, securities firms and exchanges with which the Group interacts on a daily basis, all of which could have a material adverse effect on the Group's access to liquidity or could result in losses which could have a material adverse effect on the Group's financial condition, results of operations and prospects.
In certain jurisdictions in which the Group does business, particularly Ireland, additional constraints have been imposed in recent years on the ability of certain financial institutions to complete foreclosure proceedings in a timely manner (or at all), including as a result of interventions by certain states and local and national governments. These constraints have lengthened the time to complete foreclosures, increased the backlog of repossessed properties and, in certain cases, have resulted in the invalidation of purported foreclosures.
The EU, the ECB, the International Monetary Fund and various national authorities have proposed and implemented certain measures intended to address systemic financial stresses in the Eurozone, including the creation of a European Banking Union which, through a Single Resolution Mechanism (SRM) will apply the substantive rules of bank recovery and resolution set out in the BRRD. Current expectations are that the SRM will apply from 1 January 2016, subject to certain provisions which came into effect from 1 January 2015 relating to the cooperation between national resolution authorities and the financial stability board. The effectiveness of these and other actions proposed and implemented at both the EU and national level to address systemic stresses in the Eurozone is not assured.
The trends and risks affecting borrower and counterparty credit quality have caused, and in the future may cause, the Group to experience further and accelerated impairment charges, increased repurchase demands, higher costs, additional write-downs and losses for the Group and an inability to engage in routine funding transactions.


Appendix 5 Risk factors
Changes in interest rates, foreign exchange rates, credit spreads, bond, equity and commodity prices, basis, volatility and correlation risks and other market factors have significantly affected and will continue to affect the Group's business and results of operations
Some of the most significant market risks the Group faces are interest rate, foreign exchange, credit spread, bond, equity and commodity prices and basis, volatility and correlation risks. Changes in interest rate levels (or extended periods of low interest rates such as experienced over the past several years), yield curves (which remain depressed) and spreads may affect the interest rate margin realised between lending and borrowing costs, the effect of which may be heightened during periods of liquidity stress. Changes in currency rates, particularly in the sterling-US dollar and sterling-euro exchange rates, affect the value of assets, liabilities, income and expenses denominated in foreign currencies and the reported earnings of the Group's non-UK subsidiaries and may affect the Group's reported consolidated financial condition or its income from foreign exchange dealing. Such changes may result from the decisions of Central Banks in Europe and of the Federal Reserve in the US and lead to sharp and sudden variations in foreign exchange rates. For accounting purposes, the Group carries some of its issued debt, such as debt securities, at the current market price on its balance sheet. Factors affecting the current market price for such debt, such as the credit spreads of the Group, may result in a change to the fair value of such debt, which is recognised in the income statement as a profit or loss.
The performance and volatility of financial markets affects bond and equity prices, has caused, and may in the future cause, changes in the value of the Group's investment and trading portfolios. Financial markets experienced significant volatility towards the end of 2014 and this trend has continued in early 2015, resulting in further short term changes in the valuation of certain of the Group's assets. In addition, during the last quarter of 2014, oil prices fell significantly against their historical levels and other commodity prices also decreased. The Group is exposed to oil prices though its exposure to counterparties in the energy sector and oil producing countries. Further or sustained decreases in oil prices could negatively impact counterparties and the value of the Group's trading portfolios. As part of its on-going derivatives operations, the Group also faces significant basis, volatility and correlation risks, the occurrence of which are also impacted by the factors noted above. 
While the Group has implemented risk management methods to mitigate and control these and other market risks to which it is exposed, it is difficult to predict with accuracy changes in economic or market conditions and to anticipate the effects that such changes could have on the Group's financial performance and business operations.
The value or effectiveness of any credit protection that the Group has purchased depends on the value of the underlying assets and the financial condition of the insurers and counterparties
The Group has credit exposure arising from over-the-counter derivative contracts, mainly credit default swaps (CDSs), and other credit derivatives, each of which are carried at fair value. The fair value of these CDSs, as well as the Group's exposure to the risk of default by the underlying counterparties, depends on the valuation and the perceived credit risk of the instrument against which protection has been bought. Many market counterparties have been adversely affected by their exposure to residential mortgage linked and corporate credit products, whether synthetic or otherwise, and their actual and perceived creditworthiness may deteriorate rapidly. If the financial condition of these counterparties or their actual or perceived creditworthiness deteriorates, the Group may record further credit valuation adjustments on the credit protection bought from these counterparties under the CDSs. The Group also recognises any fluctuations in the fair value of other credit derivatives. Any such adjustments or fair value changes may have a material adverse impact on the Group's financial condition and results of operations.


Appendix 5 Risk factors
In the UK and in other jurisdictions, the Group is responsible for contributing to compensation schemes in respect of banks and other authorised financial services firms that are unable to meet their obligations to customers
In the UK, the Financial Services Compensation Scheme (FSCS) was established under the FSMA and is the UK's statutory fund of last resort for customers of authorised financial services firms. The FSCS can pay compensation to customers if a firm is unable, or likely to be unable, to pay claims against it and may be required to make payments either in connection with the exercise of a stabilisation power or in exercise of the bank insolvency procedures under the Banking Act 2009. 
The FSCS is funded by levies on firms authorised by the FCA, including the Group. In the event that the FSCS raises funds from the authorised firms, raises those funds more frequently or significantly increases the levies to be paid by such firms, the associated costs to the Group may have an adverse impact on its results of operations and financial condition.
In addition, the BRRD requires Member States to establish financing arrangements for the purpose of ensuring the effective application by national resolution authorities of the resolution tools and powers, which will require national resolution funds to raise "ex ante" contributions on banks and investment firms in proportion to their liabilities and risk profiles as well as "ex post" funding contributions. Following the adoption of the European delegated regulation on "ex-ante" contributions, the UK government confirmed that it would implement the "ex post" funding requirements through the UK bank levy of the Finance Act 2011. 
To the extent that other jurisdictions where the Group operates have introduced or plan to introduce similar compensation, contributory or reimbursement schemes (such as in the US with the Federal Deposit Insurance Corporation), the Group may make further provisions and may incur additional costs and liabilities, which may have an adverse impact on its financial condition and results of operations.
The value of certain financial instruments recorded at fair value is determined using financial models incorporating assumptions, judgements and estimates that may change over time or may ultimately not turn out to be accurate
Under International Financial Reporting Standards (IFRS), the Group recognises at fair value: (i) financial instruments classified as held-for-trading or designated as at fair value through profit or loss; (ii) financial assets classified as available-for-sale; and (iii) derivatives.
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 active, 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. These assumptions, judgements and estimates also need to be updated to reflect changing facts, trends and market conditions. The resulting change in the fair values of the financial instruments has had and could continue to have a material adverse effect on the Group's earnings, financial condition and capital position.


Appendix 5 Risk factors
The Group relies on valuation, capital and stress test models to conduct its business and anticipate capital and funding requirements. Failure of these models to provide accurate results or accurately reflect changes in the micro and macro economic environment in which the Group operates could have a material adverse effect on the Group's business, capital and results.
Given the complexity of the Group's business, strategy and capital requirements, the Group relies on analytical models to assess the value of its assets and its risk exposure and anticipate capital and funding requirements. The Group's valuation, capital and stress test models and the parameters and assumptions on which they are based, need to be constantly updated to ensure their accuracy. Failure of these models to accurately reflect changes in the environment in which the Group operates or the failure to properly input any such changes could have an adverse impact on the modelled results or could fail to accurately capture the risk profile of the Group's financial instruments. Some of the analytical models used by the Group are predictive in nature. The use of predictive models has inherent risks and may incorrectly forecast future behavior, leading to flawed decision making and potential losses. The Group also uses valuation models that rely on market data inputs. If incorrect market data is input into a valuation model, it may result in incorrect valuations or valuations different to those which were predicted and used by the Group in its forecasts or decision making. Should such models prove to be incorrect or misleading, decisions made by the Group in reliance thereon could expose the Group to business, capital and funding risk.
The Group's results could be adversely affected in the event of goodwill impairment
The Group capitalises goodwill, which is calculated as the excess of the cost of an acquisition over the net fair value of the identifiable assets, liabilities and contingent liabilities acquired. Acquired goodwill is recognised initially at cost and subsequently at cost less any accumulated impairment losses. As required by IFRS, the Group tests goodwill for impairment annually, or more frequently when events or circumstances indicate that it might be impaired. An impairment test involves comparing the recoverable amount (the higher of the value in use and fair value less cost to sell) of an individual cash generating unit with its carrying value. At 31 December 2014, the Group carried goodwill of 6.3 billion on its balance sheet. 
The value in use and fair value of the Group's cash generating units are affected by market conditions and the performance of the economies in which the Group operates. Where the Group is required to recognise a goodwill impairment, it is recorded in the Group's income statement, although it has no effect on the Group's regulatory capital position. Further impairments of the Group's goodwill could have an adverse effect on the Group's results and financial condition. 
Any significant write-down of goodwill could have a material adverse effect on the Group's results of operations.


Appendix 5 Risk factors
The recoverability of certain deferred tax assets recognised by the Group depends on the Group's ability to generate sufficient future taxable profits and may be affected by changes to tax legislation
In accordance with IFRS, the Group has recognised deferred tax assets on losses available to relieve future profits from tax only to the extent that 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 changes in tax legislation (including rates of tax) or accounting standards may reduce the recoverable amount of the recognised deferred tax assets. At 31 December 2014, the value of the Group's deferred tax assets was 1.5 billion. In December 2014 the UK Government announceda proposedrestriction on the use ofcertain brought forward tax lossesof banking companies to 50% of relevant profits from 1 April 2015 which may also affect the recoverable amount of recognised deferred tax assets. In addition, the implementation of the rules relating to ring-fencing andthe resulting restructuring of the Group mayfurther restrictthe Group's ability to recognisetax losseswithin the Group asdeferred tax assets .

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