REG - Royal Bk Scot.Grp. - Final Results - Part 2 <Origin Href="QuoteRef">RBS.L</Origin> - Part 9

NatwestAnnouncement

26/02/2015 07:14

- Part 9: For the preceding part double click  ID:nRSZ9136Fh 

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'