REG - Royal Bk Scot.Grp. - Half Year Report - Part 1 <Origin Href="QuoteRef">RBS.L</Origin> - Part 8
05/08/2016 07:07
- Part 8: For the preceding part double click ID:nRSE3368Gg
Commercial & Private Banking 1,444 771 2,215 (1,333) (116) 766
Corporate & Institutional Banking 43 775 818 (729) - 89
Capital Resolution 168 (340) (172) (478) (263) (913)
Williams & Glyn 324 87 411 (242) (17) 152
Central items & other 47 (163) (116) (793) - (909)
Total 4,333 1,731 6,064 (5,929) (409) (274)
Half year ended 30 June 2015*
UK Personal & Business Banking 2,067 566 2,633 (1,844) (18) 771
Ulster Bank RoI 190 80 270 (207) 77 140
Personal & Business Banking 2,257 646 2,903 (2,051) 59 911
Commercial Banking 981 676 1,657 (883) (26) 748
Private Banking 219 107 326 (321) 3 8
RBS International 152 33 185 (82) (1) 102
Commercial & Private Banking 1,352 816 2,168 (1,286) (24) 858
Corporate & Institutional Banking 30 905 935 (1,423) 5 (483)
Capital Resolution 281 431 712 (2,018) 319 (987)
Williams & Glyn 326 88 414 (161) 10 263
Central items & other 172 (48) 124 (377) (48) (301)
Total 4,418 2,838 7,256 (7,316) 321 261
* Restated - refer to page 66 for further details. Re-presented to reflect the segmental reorganisation
Notes
11. Segmental analysis (continued)
Total revenue
Half year ended
30 June 2016 30 June 2015*
External Inter segment Total External Inter segment Total
£m £m £m £m £m £m
UK Personal & Business Banking 3,114 27 3,141 3,094 17 3,111
Ulster Bank RoI 328 1 329 321 16 337
Personal & Business Banking 3,442 28 3,470 3,415 33 3,448
Commercial Banking 1,817 33 1,850 1,770 19 1,789
Private Banking 285 92 377 292 96 388
RBS International 151 79 230 139 94 233
Commercial & Private Banking 2,253 204 2,457 2,201 209 2,410
Corporate & Institutional Banking 961 351 1,312 1,142 500 1,642
Capital Resolution (51) 644 593 1,071 1,174 2,245
Williams & Glyn 455 - 455 457 - 457
Central items & other 719 (1,227) (508) 1,023 (1,916) (893)
Total 7,779 - 7,779 9,309 - 9,309
* Re-presented to reflect the segmental reorganisation
Total assets and liabilities
30 June 2016 31 December 2015
Assets Liabilities Assets Liabilities
£m £m £m £m
UK Personal & Business Banking 151,244 143,523 143,871 140,659
Ulster Bank RoI 24,262 17,867 21,264 15,837
Personal & Business Banking 175,506 161,390 165,135 156,496
Commercial Banking 146,339 102,351 133,546 94,619
Private Banking 17,776 25,645 17,022 23,257
RBS International 24,622 24,152 23,130 21,398
Commercial & Private Banking 188,737 152,148 173,698 139,274
Corporate & Institutional Banking 284,035 258,718 215,272 193,589
Capital Resolution 207,992 195,773 201,476 186,470
Williams & Glyn 24,943 23,989 24,088 24,171
Central items & other 20,411 55,879 35,739 61,261
Total 901,624 847,897 815,408 761,261
Notes
12. Discontinued operations and assets and liabilities of disposal groups
Citizens was classified as a disposal group and a discontinued operation until its disposal in October 2015.
(a) Profit from discontinued operations, net of tax
Half year ended
30 June
2015
£m
Citizens
Total income 1,631
Operating expenses (1,019)
Profit before impairment losses 612
Impairment losses (89)
Operating profit before tax 523
Tax charge (179)
Profit after tax 344
Reversal of loss on disposal (1,2) 10
Profit from Citizens discontinued operations, net of tax 354
Profit from other discontinued operations, net of tax 4
Profit from discontinued operations, net of tax 358
Notes:
(1) Gains in H1 2015 on remeasurement to fair value less costs to sell (fair value hierarchy 2: based on the quoted price of Citizens' shares) were restricted: reversal of goodwill impairment (£368 million) was not recognised.
(2) Of which attributable to owners equity £146 million loss in H1 2015.
(b) Assets and liabilities of disposal groups
30 June 31 December
2016 2015
£m £m
Cash and balances at central banks 40 535
Loans and advances 259 2,348
Debt securities and equity shares 74 443
Other assets 23 160
Assets of disposal groups 396 3,486
Deposits by banks 11 32
Customer accounts 130 2,805
Other liabilities 111 143
Liabilities of disposal groups 252 2,980
At 31 December 2015 disposal groups were principally International Private Banking (£3,344 million assets; £2,724 million
liabilities), the sale of which was completed in H1 2016 and did not result in a material profit or loss. (Fair value less
costs to sell reflects the agreed sale to Union Bancaire Privée: fair value hierarchy level 3).
Notes
13. Financial instruments
Classification
The following tables analyse financial assets and liabilities in accordance with the categories of financial instruments in
IAS 39. Assets and liabilities outside the scope of IAS 39 are shown within other assets and liabilities.
Finance Other
HFT (1,2) DFV (3) AFS (4) LAR (5) HTM (6) leases assets Total
Assets £m £m £m £m £m £m £m £m
Cash and balances at central banks - - - 65,307 - 65,307
Loans and advances to banks
- reverse repos 13,314 - - 1,144 - 14,458
- other 14,069 - - 7,694 - 21,763
Loans and advances to customers
- reverse repos 29,745 - - 1,575 - 31,320
- other 22,107 82 - 300,592 - 3,722 326,503
Debt securities 36,601 122 39,516 2,929 4,890 84,058
Equity shares 229 119 401 - - 749
Settlement balances - - 13,405 13,405
Derivatives 326,023 326,023
Assets of disposal groups 396 396
Other assets - - - - - 17,642 17,642
30 June 2016 442,088 323 39,917 392,646 4,890 3,722 18,038 901,624
Cash and balances at central banks - - - 79,404 - 79,404
Loans and advances to banks
- reverse repos 11,069 - - 1,216 - 12,285
- other 11,295 - - 7,066 - 18,361
Loans and advances to customers
- reverse repos 27,532 - - 26 - 27,558
- other 17,559 63 - 285,006 - 3,706 306,334
Debt securities 35,857 111 38,831 2,387 4,911 82,097
Equity shares 660 147 554 - - 1,361
Settlement balances - - 4,116 4,116
Derivatives 262,514 262,514
Assets of disposal groups 3,486 3,486
Other assets - - - - - 17,892 17,892
31 December 2015 366,486 321 39,385 379,221 4,911 3,706 21,378 815,408
For the notes to this table refer to the following page.
Notes
13. Financial instruments: Classification (continued)
Amortised Other
HFT (1,2) DFV (3) cost liabilities Total
Liabilities £m £m £m £m £m
Deposits by banks
- repos 10,814 - 797 11,611
- other 23,685 - 7,692 31,377
Customer accounts
- repos 27,378 - 1,892 29,270
- other 14,491 2,130 339,098 355,719
Debt securities in issue 3,426 5,421 18,301 27,148
Settlement balances - - 11,262 11,262
Short positions 21,793 - 21,793
Derivatives 322,390 322,390
Subordinated liabilities - 871 19,242 20,113
Liabilities of disposal groups 252 252
Other liabilities - - 1,887 15,075 16,962
30 June 2016 423,977 8,422 400,171 15,327 847,897
Deposits by banks
- repos 9,657 - 609 10,266
- other 20,469 - 7,561 28,030
Customer accounts
- repos 25,570 - 1,542 27,112
- other 11,911 2,661 328,614 343,186
Debt securities in issue 3,883 6,256 21,011 31,150
Settlement balances - - 3,390 3,390
Short positions 20,809 - 20,809
Derivatives 254,705 254,705
Subordinated liabilities - 811 19,036 19,847
Liabilities of disposal groups 2,980 2,980
Other liabilities - - 1,826 17,960 19,786
31 December 2015 347,004 9,728 383,589 20,940 761,261
Notes:
(1) Includes derivative assets held for hedging purposes (under IAS 39) of £6,467 million (31 December 2015 - £3,825 million) and derivative liabilities held for hedging purposes (under IAS 39) of £5,059 million (31 December 2015 - £2,603 million).
(2) Held-for-trading.
(3) Designated as at fair value through profit or loss.
(4) Available-for-sale.
(5) Loans and receivables.
(6) Held-to-maturity.
There were no reclassifications in the half year ended 30 June 2016 or the year ended 31 December 2015.
Notes
13. Financial instruments (continued)
Own credit
The own credit adjustments (OCA) recorded on held-for-trading (HFT) and designated as at fair value through profit or loss
(DFV) debt securities in issue, subordinated liabilities and derivative liabilities are set out below. The cumulative
adjustments below represent reductions/(increases) to the balance sheet liability amounts.
Cumulative own credit adjustment (1,2) Subordinated
Debt securities in issue (3) liabilities
HFT DFV Total DFV Total Derivatives Total(2)
£m £m £m £m £m £m £m
30 June 2016 1 82 83 283 366 135 501
31 December 2015 (118) (42) (160) 180 20 14 34
30 June 2015 (223) (23) (246) 182 (64) 57 (7)
Carrying values of underlying liabilities £bn £bn £bn £bn £bn
30 June 2016 3.4 5.4 8.8 0.9 9.7
31 December 2015 3.9 6.3 10.2 0.8 11.0
30 June 2015 4.3 7.8 12.1 0.8 12.9
Notes:
(1) The OCA does not alter cash flows and is not used for performance management.
(2) The reserve movement between periods will not equate to the reported profit or loss for own credit. The balance sheet reserve is stated by conversion of underlying currency balances at spot rates for each period, whereas the income statement includes intra-period foreign exchange sell-offs.
(3) Includes wholesale and retail note issuances.
Key points
· The cumulative OCA increase during H1 2016 was mainly due to the widening of spreads on RBS issuance during the period, particularly following the EU Referendum. The OCA on senior issued debt is determined by reference to secondary debt issuance spreads, which widened to 115 basis points at 30 June 2016 (31 December 2015 - 54 basis points) at the five year level.
· RBS subordinated debt spreads widened to 411 basis points at 30 June 2016 (31 December 2015 - 267 basis points) at the five year level.
· RBS five year CDS credit spreads have widened to 135 basis points at 30 June 2016 (31 December 2015 - 58 basis points).
Notes
13. Financial instruments (continued)
Financial instruments carried at fair value - valuation hierarchy
Disclosures relating to the control environment, valuation techniques and related aspects pertaining to financial
instruments measured at fair value are included in the 2015 Annual Report and Accounts. There have been no material changes
to valuation or levelling approaches in H1 2016.
The tables below show financial instruments carried at fair value on the balance sheet by valuation hierarchy - level 1,
level 2 and level 3 and valuation sensitivities for level 3 balances.
Level 3 sensitivity
Level 1 Level 2 Level 3 Total Favourable Unfavourable
30 June 2016 £bn £bn £bn £bn £m £m
Assets
Loans and advances - 79.0 0.3 79.3 30 (30)
Debt securities 62.4 13.0 0.8 76.2 30 (30)
- of which AFS 33.4 5.7 0.4 39.5 10 (10)
Equity shares 0.2 0.1 0.4 0.7 80 (40)
- of which AFS 0.1 0.1 0.2 0.4 70 (30)
Derivatives - 323.4 2.7 326.1 210 (210)
62.6 415.5 4.2 482.3 350 (310)
Proportion 13.0% 86.1% 0.9% 100%
31 December 2015
Assets
Loans and advances - 67.2 0.3 67.5 50 (40)
Debt securities 60.3 13.5 1.0 74.8 40 (30)
- of which AFS 32.3 6.2 0.3 38.8 10 (10)
Equity shares 0.6 0.1 0.7 1.4 90 (50)
- of which AFS - 0.1 0.5 0.6 60 (30)
Derivatives - 260.6 1.9 262.5 380 (380)
60.9 341.4 3.9 406.2 560 (500)
Proportion 15.0% 84.0% 1.0% 100%
30 June 2016
Liabilities
Deposits - 78.0 0.5 78.5 10 (20)
Debt securities in issue - 8.3 0.5 8.8 30 (30)
Short positions 17.7 4.1 - 21.8 - -
Derivatives - 319.8 2.6 322.4 380 (380)
Subordinated liabilities - 0.9 - 0.9 - -
17.7 411.1 3.6 432.4 420 (430)
Proportion 4.1% 95.1% 0.8% 100%
31 December 2015
Liabilities
Deposits - 69.8 0.5 70.3 10 (20)
Debt securities in issue - 9.6 0.5 10.1 30 -
Short positions 18.6 2.2 - 20.8 - -
Derivatives - 253.0 1.7 254.7 270 (270)
Subordinated liabilities - 0.8 - 0.8 - -
18.6 335.4 2.7 356.7 310 (290)
Proportion 5.2% 94.0% 0.8% 100%
Notes
13. Financial instruments (continued)
Notes:
(1) Level 1: valued using unadjusted quoted prices in active markets, for identical financial instruments. Examples include G10 government securities, listed equity shares, certain exchange-traded derivatives and certain US agency securities.Level 2: valued
using techniques based significantly on observable market data. Instruments in this category are valued using:(a) quoted prices for similar instruments or identical instruments in markets which are not considered to be active; or(b) valuation techniques
where all the inputs that have a significant effect on the valuations are directly or indirectly based on observable market data.Level 2 instruments included non-G10 government securities, most government agency securities, investment-grade corporate
bonds, certain mortgage products, including CLOs, most bank loans, repos and reverse repos, less liquid listed equities, state and municipal obligations, most notes issued, and certain money market securities and loan commitments and most OTC
derivatives.Level 3: instruments in this category have been valued using a valuation technique where at least one input which could have a significant effect on the instrument's valuation, is not based on observable market data. Level 3 instruments
primarily include cash instruments which trade infrequently, certain syndicated and commercial mortgage loans, certain emerging markets instruments, unlisted equity shares, certain residual interests in securitisations, CDOs, other mortgage-backed products
and less liquid debt securities, certain structured debt securities in issue, and OTC derivatives where valuation depends upon unobservable inputs such as certain credit and exotic derivatives. No gain or loss is recognised on the initial recognition of a
financial instrument valued using a technique incorporating significant unobservable data.
(2) Transfers between levels are deemed to have occurred at the beginning of the quarter in which the instruments were transferred. There were no significant transfers between level 1 and level 2.
(3) For an analysis of derivatives by type of contract refer to Appendix 1 - Capital and risk management - Credit risk - Derivatives.
(4) The determination of an instrument's level cannot be made at a global product level as a single product type can be in more than one level. For example, a single name corporate credit default swap could be in Level 2 or Level 3 depending on whether the
reference counterparty's obligations are liquid or illiquid.
(5) Sensitivity represents the favourable and unfavourable effect on the income statement or the statement of comprehensive income due to reasonably possible changes to valuations using reasonably possible alternative inputs in RBS's valuation techniques or
models. Level 3 sensitivities are calculated at a sub-portfolio level and hence these aggregated figures do not reflect the correlation between some of the sensitivities. In particular, for some portfolios, the sensitivities may be negatively correlated
where a downward movement on one asset would produce an upward movement in the other, but due to the additive presentation above, this correlation cannot be shown.
Notes
13. Financial instruments (continued)
Valuation techniques
The table below shows a breakdown of valuation techniques and the ranges for those unobservable inputs used in valuation
models and techniques that have a material impact on the valuation of Level 3 financial instruments. These are broadly
consistent with Note 9 Financial instruments - valuation, in the 2015 Annual Report and Accounts.
Level 3 (£bn) Range
Financial instruments Assets Liabilities Valuation technique Unobservable inputs Low High
Loans and advances 0.3
DCF based on recoveries Yield 0% 25%
Price-based Price 0% 103%
Debt securities 0.8
Price-based Price 0% 147%
Equity shares 0.4
Valuation EBITDA 0.12 0.4 multiples
Net asset value 80% 120%
Discount factor 9% 25%
Price-based Price 0% 130%
DCF based on recoveries Recovery rates 0% 30%
Customer accounts (0.5)
Priced-based Price 90% 110%
Derivatives 2.7 (2.6)
Credit 0.2 (0.2) DCF based on recoveries Recovery rates 0% 40%
Credit spreads 6bps 338bps
Interest and foreign exchange 2.3 (2.3) Option pricing model Correlation (45%) 99%
Interest rate volatility 30% 83%
FX volatility 90% 110%
Inflation volatility 0.59% 1.18%
Notes:
(1) The table excludes unobservable inputs where the impact on valuation is not significant. Movements in the underlying input may have a favourable or unfavourable impact on the valuation depending on the particular terms of the contract and the exposure. For
example, an increase in the credit spread of a bond would be favourable for the issuer and unfavourable for the note holder. Whilst RBS indicates where it considers that there are significant relationships between the inputs, these inter-relationships will
be affected by macro economic factors including interest rates, foreign exchange rates or equity index levels.
(2) Credit spreads and discount margins: credit spreads and margins express the return required over a benchmark rate or index to compensate for the credit risk associated with a cash instrument. A higher credit spread would indicate that the underlying
instrument has more credit risk associated with it. Consequently, investors require a higher yield to compensate for the higher risk. The discount rate comprises credit spread or margin plus the benchmark rate; it is used to value future cash flows.
(3) Price and yield: There may be a range of prices used to value an instrument that may be a direct comparison of one instrument or portfolio with another or, movements in a more liquid instrument may be used to indicate the movement in the value of a less
liquid instrument. The comparison may also be indirect in that adjustments are made to the price to reflect differences between the pricing source and the instrument being valued, for example different maturity, credit quality, seniority or expected pay
-outs. Similarly to price, an instrument's yield may be compared with other instruments' yields either directly or indirectly.
(4) Recovery rate: reflects market expectations about the return of principal for a debt instrument or other obligations after a credit event or on liquidation. Recovery rates tend to move conversely to credit spreads.
(5) Valuation: for private equity investments, risk may be measured by beta, estimated by looking at past prices of similar stocks and from other sources, such as fund valuation statements where valuations are usually derived from earnings measures such as
EBITDA or net asset value.
(6) Correlation: measures the degree by which two prices or other variables are observed to move together. If they move in the same direction there is positive correlation; if they move in opposite directions there is negative correlation. Correlations
typically include relationships between: default probabilities of assets in a basket (a group of separate assets), exchange rates, interest rates and other financial variables.
(7) Volatility: a measure of the tendency of a price or parameter to change with time
(8) Level 3 structured notes issued of £0.5 billion are not included in the table above as valuation is consistent with the valuation of the embedded derivative component.
(9) RBS does not have any material liabilities measured at fair value that are issued with an inseparable third party credit enhancement.
Notes
13. Financial instruments: Movement in level 3 portfolios
2016 2015
FVTPL AFS Total Total FVTPL AFS Total Total
assets (2) assets assets liabilities assets (2) assets assets liabilities
£m £m £m £m £m £m £m £m
At 1 January 3,152 765 3,917 2,716 4,673 634 5,307 4,595
Amount recorded in the income statement (1) 332 1 333 634 (88) (6) (94) (621)
Amount recorded in the statement of
comprehensive income - 47 47 - - (94) (94) -
Level 3 transfers in 705 27 732 592 489 628 1,117 392
Level 3 transfers out (369) (28) (397) (422) (430) (18) (448) (637)
Issuances 3 - 3 22 - - - -
Purchases 493 11 504 406 296 3 299 5
Settlements (393) - (393) (362) (586) (26) (612) (647)
Sales (344) (204) (548) (16) (485) (48) (533) (4)
Foreign exchange and other adjustments 12 7 19 43 (2) (1) (3) (7)
At 30 June 3,591 626 4,217 3,613 3,867 1,072 4,939 3,076
Amounts recorded in the income statement in
respect of balances held at year end
- unrealised 267 2 269 364 (308) (6) (314) (460)
- realised 193 (188) 5 (85) 4 3 7 (13)
Notes:
(1) Net losses on HFT instruments of £285 million (H1 2015 - £375 million gain) were recorded in income from trading activities in continuing operations. Net losses on other instruments of £16 million (H1 2015 - £152 million gain) were recorded in other operating income and interest income as appropriate in continuing operations. There were no losses in discontinued operations.
(2) Fair value through profit or loss comprises held-for-trading predominantly and designated at fair value through profit and loss.
Fair value of financial instruments not carried at fair value
The following table shows the carrying value and fair value of financial instruments carried at amortised cost on the
balance sheet.
30 June 2016 31 December 2015
Carrying Carrying
value Fair value value Fair value
£bn £bn £bn £bn
Financial assets
Loans and advances to banks 7.8 7.8 7.5 7.5
Loans and advances to customers 305.9 302.1 288.7 281.9
Debt securities 7.8 7.9 7.3 7.2
Financial liabilities
Deposits by banks 4.8 4.8 3.7 3.7
Customer accounts 85.3 85.4 76.9 76.9
Debt securities in issue 18.3 18.7 21.0 21.8
Subordinated liabilities 19.2 19.1 19.0 19.3
The table above excludes short-term financial instruments for which fair value approximates carrying value: cash and
balances at central banks, items in the course of collection from and transmission to other banks, settlement balances,
certain deposits and notes in circulation.
The fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. Quoted market values are used where available; otherwise,
fair values have been estimated based on discounted expected future cash flows and other valuation techniques. These
techniques involve uncertainties and require assumptions and judgements covering prepayments, credit risk and discount
rates. Furthermore, there is a wide range of potential valuation techniques. Changes in these assumptions would affect
estimated fair values. The fair values reported would not necessarily be realised in an immediate sale or settlement.
Notes
14. Contingent liabilities and commitments
30 June 31 December
2016 2015
£m £m
Guarantees and assets pledged as collateral security 9,055 9,036
Other contingent liabilities 5,507 7,002
Standby facilities, credit lines and other commitments 136,871 137,714
Contingent liabilities and commitments 151,433 153,752
Contingent liabilities arise in the normal course of RBS's business; credit exposure is subject to the bank's normal
controls. The amounts shown do not, and are intended to, provide any indication of RBS's expectation of future losses.
Notes
15. Litigation, investigations and reviews
The Royal Bank of Scotland Group plc (the 'company' or RBSG plc) and certain members of the Group are party to legal
proceedings and the subject of investigation and other regulatory and governmental action ("Matters") in the United Kingdom
(UK), the United States (US), the European Union (EU) and other jurisdictions.
RBS recognises a provision for a liability in relation to these Matters when it is probable that an outflow of economic
benefits will be required to settle an obligation resulting from past events, and a reliable estimate can be made of the
amount of the obligation. While the outcome of these Matters is inherently uncertain, the directors believe that, based on
the information available to them, appropriate provisions have been made in respect of the Matters as at 30 June 2016 (see
Note 5).
In many proceedings and investigations, it is not possible to determine whether any loss is probable or to estimate
reliably the amount of any loss, either as a direct consequence of the relevant proceedings and investigations or as a
result of adverse impacts or restrictions on RBS's reputation, businesses and operations. Numerous legal and factual issues
may need to be resolved, including through potentially lengthy discovery and document production exercises and
determination of important factual matters, and by addressing novel or unsettled legal questions relevant to the
proceedings in question, before a liability can reasonably be estimated for any claim. RBS cannot predict if, how, or when
such claims will be resolved or what the eventual settlement, damages, fine, penalty or other relief, if any, may be,
particularly for claims that are at an early stage in their development or where claimants seek substantial or
indeterminate damages.
In respect of certain matters described below, we have established a provision and in certain of those matters, we have
indicated that we have established a provision. RBS generally does not disclose information about the establishment or
existence of a provision for a particular matter where disclosure of the information can be expected to prejudice seriously
RBS's position in the matter.
There are situations where RBS may pursue an approach that in some instances leads to a settlement agreement. This may
occur in order to avoid the expense, management distraction or reputational implications of continuing to contest
liability, or in order to take account of the risks inherent in defending claims or investigations even for those matters
for which RBS believes it has credible defences and should prevail on the merits. The uncertainties inherent in all such
matters affect the amount and timing of any potential outflows for both matters with respect to which provisions have been
established and other contingent liabilities.
The future outflow of resources in respect of any matter may ultimately prove to be substantially greater than or less than
the aggregate provision that RBS has recognised. Where (and as far as) liability cannot be reasonably estimated, no
provision has been recognised.
Other than those discussed below, no member of the Group is or has been involved in governmental, legal or regulatory
proceedings (including those which are pending or threatened) that are expected to be material, individually or in
aggregate. RBS expects that in future periods additional provisions, settlement amounts, and customer redress payments will
be necessary, in amounts that are expected to be substantial in some instances.
Notes
15. Litigation, investigations and reviews (continued)
Litigation
UK 2008 rights issue shareholder litigation
Between March and July 2013, claims were issued in the High Court of Justice of England and Wales by sets of current and
former shareholders, against RBSG plc (and in one of those claims, also against certain former individual officers and
directors) alleging that untrue and misleading statements and/or improper omissions, in breach of the Financial Services
and Markets Act 2000, were made in connection with the rights issue announced by RBS on 22 April 2008. In July 2013 these
and other similar threatened claims were consolidated by the Court via a Group Litigation Order. RBS's defence to the
claims was filed on 13 December 2013. Since then, further High Court claims have been issued against RBS under the Group
Litigation Order which is now closed to further claimants. The aggregate value of the shares subscribed for at 200 pence
per share by the claimant shareholders is approximately £4 billion although their damages claims are not yet quantified.
The court timetable provides that a trial of the preliminary issue of whether the rights issue prospectus contained untrue
and misleading statements and/or improper omissions will commence in March 2017. In the event that the court makes such a
finding, further trial(s) will be required to consider whether any such statements and/or omissions caused loss and, if so,
the quantum of that loss.
In order to facilitate any potential early resolution of the litigation, RBS attended a mediation with the claimants on
26-27 July 2016. This did not lead to any settlement of the claims. Further attempts by the parties to resolve the claims
are possible but absent any final agreement, these will not impact the court timetable. A provision has been recognised in
relation to this matter.
Other securitisation and securities related litigation in the US
RBS companies have been named as defendants in their various roles as issuer, depositor and/or underwriter in a number of
claims in the US that relate to the securitisation and securities underwriting businesses. These cases include actions by
individual purchasers of securities and a purported class action suit. Together, the pending individual and class action
cases (including those claims specifically described in this note) involve the issuance of approximately US$41 billion of
mortgage-backed securities (MBS) issued primarily from 2005 to 2007.
In general, plaintiffs in these actions claim that certain disclosures made in connection with the relevant offerings
contained materially false or misleading statements and/or omissions regarding the underwriting standards pursuant to which
the mortgage loans underlying the securities were issued.
RBS companies remain as defendants in more than 15 lawsuits brought by or on behalf of purchasers of MBS, including the
purported class action identified below.
In the event of an adverse judgment in any of these cases, the amount of RBS's liability will depend on numerous factors
that are relevant to the calculation of damages, which may include the recognised loss of principal value in the securities
at the time of judgment (write-downs); the value of the remaining unpaid principal balance of the securities at the time
the case began, at the time of judgment (if the plaintiff still owns the securities at the time of judgment), or at the
time when the plaintiff disposed of the securities (if plaintiff sold the securities); and a calculation of pre and post
judgment interest that the plaintiff could be awarded, which could be a material amount.
Notes
15. Litigation, investigations and reviews (continued)
In September 2011, the US Federal Housing Finance Agency (FHFA) as conservator for the Federal National Mortgage
Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) filed MBS-related lawsuits against
RBS and a number of other financial institutions, all of which, except for the two cases described below, have since
settled for amounts that were publicly disclosed.
The primary FHFA lawsuit against RBS remains pending in the United States District Court for the District of Connecticut,
and it relates to approximately US$32 billion of MBS for which RBS entities acted as sponsor/depositor and/or lead
underwriter or co-lead underwriter. Of the US$32 billion, approximately US$8.1 billion was outstanding at 30 June 2016 with
cumulative write downs to date on the securities of approximately US$1.1 billion (being the recognised loss of principal
value suffered by security holders). In September 2013, the Court denied the defendants' motion to dismiss FHFA's amended
complaint in this case. This matter continues in the discovery phase.
The other remaining FHFA lawsuit that involves RBS relates to MBS issued by Nomura Holding America Inc. (Nomura) and
subsidiaries, and is now the subject of an appeal. On 11 May 2015, following a trial, the United States District Court for
the Southern District of New York issued a written decision in favour of FHFA on its claims against Nomura and RBS
Securities Inc., finding, as relevant to RBS, that the offering documents for four Nomura-issued MBS for which RBS
Securities Inc. served as an underwriter, relating to US$1.4 billion in original principal balance, contained materially
misleading statements about the mortgage loans that backed the securitisations, in violation of the Securities Act and
Virginia securities law.
RBS Securities Inc. estimates that its net exposure under the Court's judgment is approximately US$383 million, which
consists of the difference between the amount of the judgment against RBS Securities Inc. (US$636 million) and the current
estimated market value of the four MBS that FHFA would return to RBS Securities Inc. pursuant to the judgment, plus the
costs and attorney's fees that will be due to FHFA if the judgment is upheld.
The Court has stayed the judgment pending the result of the appeal that the
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