REG - Royal Bk Scot.Grp. - Final Results - Part 2 <Origin Href="QuoteRef">RBS.L</Origin> - Part 6

NatwestAnnouncement

26/02/2015 07:14

- Part 6: For the preceding part double click  ID:nRSZ9136Fe 

                                                                                                                                                                                                                                     
 ·  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