REG - Royal Bk Scot.Grp. - Half Year Report - Part 2 <Origin Href="QuoteRef">RBS.L</Origin> - Part 3
05/08/2016 07:08
- Part 3: For the preceding part double click ID:nRSE3371Gb
131,980
Total customer deposits 351,234 4,615 355,849 340,087 5,904 345,991
Total funding excluding repos 389,505 44,993 434,498 377,669 47,381 425,050
Total repos 40,881 37,378
Total funding including repos 475,379 462,428
Notes:
(1) Includes £0.8 billion relating to RBS's participation in central bank financing operations under the European Central Bank's Targeted Long Term Refinancing Operations.
(2) Cash collateral includes £10,948 million (31 December 2015 - £9,504 million) from financial institutions.
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 RBS's credit risk framework, governance, policies and methodologies refer to
Capital and risk management - Credit risk in the 2015 Annual Report and Accounts.
Key developments: Exposure measure
RBS has changed its measure of credit risk exposure from Credit Risk Assets (CRA) to current exposure and potential
exposure. The table below summarises the differences between these measures.
CRA Current exposure Potential exposure
Lending exposure Comprises cash balances at central banksas well as loans and advances to banks and customers. Drawn balances (gross of impairment provisions). Drawn balances. Legally committed limits. (1)
Measured net of individual, collective and latent provisions unless otherwise stated.
Counterparty exposure Measured using the mark-to-market value of derivatives after the effect of enforceable netting agreements and regulator-approved models but before the effect of collateral. Measured using the mark-to-market value of derivatives after the effect of enforceable netting agreements and net of legally enforceable financial collateral. (2) Measured using scaled credit limit utilisation, which takes into account mark-to-market movements, any collateral held and
Calculations are gross of credit value adjustments. expected market movements over a specified horizon. (1,2)
Current and potential exposure are measured net of credit valuation adjustments (CVA) unless otherwise stated.
Contingentobligations Primarily letters of credit and guarantees. Drawn balance Drawn balance. Legally-committed amount. (1)
Exclusions · Trading book bonds · Trading book bonds.
· Equity securities · Equity securities.
· Settlement risk · Settlement risk.
· Intra-group credit exposures · Suretyships.
· Securities financing transactions (repos) · Intra-group credit exposures.
· Banking book debt securities
Other · Net of cash and gold collateral.
· Current exposure and potential exposure are reported against the guarantor of a transaction to reflect the transfer of risk.
Notes:
(1) Cannot be less than current exposure.
(2) Current exposure and potential exposure for exchange-traded derivatives are defined as Exposure At Default (EAD).
Appendix 1 Capital and risk management
Key developments: Exposure measure (continued)
The disclosures that follow use the current exposure or potential exposure measure as indicated. Comparatives have been
restated.
Comparing the current exposure measure to the previous CRA measure, the following changes are noted:
● Exposures to the Sovereign sector are higher. This is primarily due to the inclusion of government bond exposure held in the banking book and managed in Treasury and Capital Resolution. The increased current exposure value, compared to CRA, is also a result of risk transfer related to guarantees (pledged by sovereign customers) for obligors active in other sectors.
● In the Banks & Other Financial Institutions sector, the netting of financial collateral reduced the current exposure value compared to CRA. Risk transfer also reduced current exposure compared to CRA.
● Outside these sectors, the impact of risk transfer is less material. However, the impact of netting impairment provisions means that for most other wholesale sectors current exposure is less than CRA.
Appendix 1 Capital and risk management
Credit risk: Management basis
Key loan portfolios*
The table below summarises current exposure, net of provisions and after risk transfer, by sector and geographic
region(1).
30 June 2016 Wholesale
Banks & Natural Retail &
Personal Other FIs Sovereign(6) Property Resources Leisure Other Total
£m £m £m £m £m £m £m £m
UK 142,737 21,531 49,970 38,928 8,136 15,694 39,309 316,305
RoI (2) 15,064 582 2,339 987 511 1,008 2,243 22,734
Other Western Europe 519 9,510 34,218 2,512 2,580 1,254 5,189 55,782
US 307 9,067 19,973 536 809 633 2,676 34,001
RoW (3) 1,434 6,863 5,429 833 799 330 6,435 22,123
Total 160,061 47,553 111,929 43,796 12,835 18,919 55,852 450,945
Flow into forbearance (4) 829 4 - 621 472 307 876 3,109
Provisions 2,637 69 1 1,541 269 618 1,321 6,456
- Individual & Collective 2,191 61 - 1,501 260 567 1,244 5,824
- Latent 446 8 1 40 9 51 77 632
AQ10 (5) 4,277 628 - 1,916 370 144 1,235 8,570
31 December 2015**
UK 136,024 21,187 60,068 37,328 7,386 14,857 37,929 314,779
RoI (2) 13,440 433 1,624 692 436 1,125 1,635 19,385
Other Western Europe 548 9,481 33,942 2,408 2,144 899 6,002 55,424
US 301 8,121 21,819 622 864 767 2,530 35,024
RoW (3) 2,806 7,050 6,141 808 952 469 7,974 26,200
Total 153,119 46,272 123,594 41,858 11,782 18,117 56,070 450,812
Flow into forbearance (4) 1,829 85 - 1,035 643 368 1,044 5,004
Provisions 3,003 73 1 2,282 133 661 987 7,140
- Individual & Collective 2,613 60 - 2,232 124 601 924 6,554
- Latent 390 13 1 50 9 60 63 586
AQ10 (5) 3,765 769 1 2,284 149 223 1,062 8,253
Notes:
(1) Within the Credit Risk key loan portfolios section, unless otherwise stated, geographic region is based on country of operation.
(2) RoI: Republic of Ireland
(3) Rest of World comprises Asia Pacific, Central and Eastern Europe, the Middle East, Central Asia and Africa, and supranationals such as the World Bank.
(4) Completed during the period.
(5)(6) Net of provisions.Includes exposures to central governments, central banks and sub-sovereigns such as local authorities.
*Not within the scope of Ernst & Young LLP's review report.
**Restated - refer to page 17 for further details.
Appendix 1 Capital and risk management
Key loan portfolios* (continued)
A breakdown of asset quality (AQ) on a current exposure basis, net of provisions and after risk transfer, is set out
below.**
http://www.rns-pdf.londonstockexchange.com/rns/3368G_1-2016-8-5.pdf
Note:
(1) AQ10 represents exposure with a 100% probability of default. For further information regarding AQ band classifications refer to the Capital and risk management section on page 188 of the 2015 Annual Report and Accounts.
*Not within the scope of Ernst & Young LLP's review report.
**Restated - refer to page 17 for further details.
Appendix 1 Capital and risk management
Key loan portfolios* (continued)
Key points
The following commentary refers to current exposure, net of provisions and after risk transfer. In this section, the
following key portfolios are discussed in more detail:
○ Commercial Real Estate (CRE) (in Property);
○ Oil & Gas (in Natural Resources);
○ Shipping (in Other); and
○ Mortgages (in Personal).
· The increase in the overall portfolio reflected the significant appreciation of both the euro and
US dollar against sterling, primarily following the EU Referendum. · Excluding the impact of foreign
exchange movements overall current exposure decreased by 3%. This was driven by a risk reduction and
disposal strategy, particularly outside the UK and Western Europe. Current exposure to UK customers
and counterparties represents 70% of the total, an increase from 68% at 31 December 2015 on a constant
currency basis. · Portfolio asset quality has slightly weakened due to challenging market conditions
in the Oil & Gas, Mining & Metals and Shipping sectors. Asset quality was also affected by
recalibrations in the PD models for Banks, Local Authorities, Property, Housing Associations,
Housebuilders and Mortgages. · The decrease in exposure to Sovereigns reflected liquidity management
activities. · In the Property portfolio, 35% of exposure is not related to CRE. This comprises
exposure of £9.3 billion (31 December 2015 - £8.9 billion) to Housing Associations, £4.5 billion to
Construction (31 December 2015 - £4.7 billion) and £1.8 billion to the Building Materials sub-sector
(31 December 2015 - £1.6 billion). · In Other, exposure to the Automotive sector decreased from £5.5
billion to £5.0 billion. AQ10 exposure net of provisions totalled £30 million (31 December 2015 - £39
million). Total provisions excluding latent provisions were £52 million (31 December 2015 - £32
million). · The composition of the Retail & Leisure portfolio remained broadly unchanged from 31
December 2015. Forbearance increased during the period driven by a number of individually material
cases, while the volume of customers receiving forbearance decreased. Total provisions excluding
latent provisions were £561 million (31 December 2015 - £601 million). Credit quality improved with
AQ10 exposure, net of provisions, totalling £150 million (31 December 2015 - £223 million).
·
Excluding the impact of foreign exchange movements overall current exposure decreased by 3%. This was driven by a risk
reduction and disposal strategy, particularly outside the UK and Western Europe. Current exposure to UK customers and
counterparties represents 70% of the total, an increase from 68% at 31 December 2015 on a constant currency basis.
·
Portfolio asset quality has slightly weakened due to challenging market conditions in the Oil & Gas, Mining & Metals and
Shipping sectors. Asset quality was also affected by recalibrations in the PD models for Banks, Local Authorities,
Property, Housing Associations, Housebuilders and Mortgages.
·
The decrease in exposure to Sovereigns reflected liquidity management activities.
·
In the Property portfolio, 35% of exposure is not related to CRE. This comprises exposure of £9.3 billion (31 December 2015
- £8.9 billion) to Housing Associations, £4.5 billion to Construction (31 December 2015 - £4.7 billion) and £1.8 billion to
the Building Materials sub-sector (31 December 2015 - £1.6 billion).
·
In Other, exposure to the Automotive sector decreased from £5.5 billion to £5.0 billion. AQ10 exposure net of provisions
totalled £30 million (31 December 2015 - £39 million). Total provisions excluding latent provisions were £52 million (31
December 2015 - £32 million).
·
The composition of the Retail & Leisure portfolio remained broadly unchanged from 31 December 2015. Forbearance increased
during the period driven by a number of individually material cases, while the volume of customers receiving forbearance
decreased. Total provisions excluding latent provisions were £561 million (31 December 2015 - £601 million). Credit quality
improved with AQ10 exposure, net of provisions, totalling £150 million (31 December 2015 - £223 million).
*Not within the scope of Ernst & Young LLP's review report.
Appendix 1 Capital and risk management
Key loan portfolios* (continued)
Commercial Real Estate (CRE)
The CRE portfolio comprises exposures to entities involved in the development of, or investment in, commercial and
residential properties (including house builders but excluding, housing associations, construction and building materials).
For more information, refer to the CRE section on page 195 of the 2015 Annual Report and Accounts.
A dedicated CRE portfolio controls team is responsible for portfolio strategy, credit risk appetite and policies, as well
as oversight of valuations and environmental frameworks. The sector is reviewed regularly at senior executive committees.
Reviews include portfolio credit quality, capital consumption and control frameworks.
The table below provides a breakdown of the lending exposure within the CRE portfolio on a current exposure basis, net of
provisions and after risk transfer.
Investment Development
Commercial Residential Total Commercial Residential Total Total
By geography(1) £m £m £m £m £m £m £m
30 June 2016
UK 16,768 4,011 20,779 484 3,350 3,834 24,613
RoI 446 203 649 28 89 117 766
Other Western Europe 685 25 710 - 34 34 744
US 182 1 183 - - - 183
Rest of World 58 9 67 2 56 58 125
18,139 4,249 22,388 514 3,529 4,043 26,431
Of which: Capital Resolution 1,099 45 1,144 1 95 96 1,240
Williams & Glyn 2,047 608 2,655 106 563 669 3,324
31 December 2015**
UK 15,825 4,173 19,998 613 3,251 3,864 23,862
RoI 342 95 437 24 80 104 541
Other Western Europe 597 8 605 15 1 16 621
US 241 1 242 - - - 242
Rest of World 211 12 223 5 13 18 241
17,216 4,289 21,505 657 3,345 4,002 25,507
Of which: Capital Resolution 1,318 47 1,365 50 104 154 1,519
Williams & Glyn 2,080 644 2,724 82 483 565 3,289
Note:
(1) Geography splits are based on country of collateral risk.
*Not within the scope of Ernst & Young LLP's review report.
**Restated - refer to page 17 for further details.
Appendix 1 Capital and risk management
Key loan portfolios* (continued)
Other
Western
UK ROI Europe US RoW Total
By sub-sector £m £m £m £m £m £m
30 June 2016
Residential 7,361 292 59 1 65 7,778
Office 3,213 131 500 53 13 3,910
Retail 4,658 101 47 - 5 4,811
Industrial 2,898 38 - - - 2,936
Mixed/other 6,483 204 138 129 42 6,996
24,613 766 744 183 125 26,431
31 December 2015**
Residential 7,424 175 9 1 25 7,634
Office 2,938 76 398 85 62 3,559
Retail 4,497 93 85 19 22 4,716
Industrial 2,600 36 39 - 7 2,682
Mixed/other 6,403 161 90 137 125 6,916
23,862 541 621 242 241 25,507
A breakdown of the Commercial Banking UK investment portfolio by UK region at 30 June 2016 is set out below.
UK Region (1) Proportion
Greater London 25%
Portfolio (2) 25%
Midlands 12%
South East 12%
North 11%
Scotland 8%
Rest of UK 7%
Notes:
(1) Based on management estimates using the postcode of the security. Percentages are based on current exposure gross of provisions.
(2) Portfolio includes lending secured against property portfolios comprising numerous properties across multiple UK locations.
Key points
The following commentary refers to current exposure, net of provisions and after risk transfer.
· Lending to the CRE sector in the UK increased to £24.6 billion at 30 June 2016 compared to £23.9 billion at 31 December 2015. However, the growth slowed significantly in the second quarter of 2016. CPB and PBB businesses have appetite to support activity in the sector. Credit underwriting standards have been tightened and appetite for certain sub-sectors moderated. There were no single-name concentration breaches.
· New business is monitored and controlled against agreed underwriting standards. Agreed bank-wide and business franchise portfolio sector limits are in place, with Sub-sector and asset class limits being used to restrict exposure to emerging risks when appropriate. This activity is reviewed and monitored on a regular basis. In addition, market indices are monitored and risk appetite is adjusted if considered appropriate.
· The majority of non-legacy CRE exposure is within Commercial Banking (£18.5 billion, 31 December 2015 - £17.9 billion). Lending applications are reviewed by specialist CRE transactional credit teams, including a dedicated development team. Lending guidelines and policy are informed by lessons learned from the 2008 financial crisis.
· In the commercial investment sub-sector, new business activity in H1 2016 (including refinancings and increases) in Commercial Banking had a weighted average LTV of 46%.
· The increase in exposure in RoI and Western Europe was primarily due to foreign exchange movements.
*Not within the scope of Ernst & Young LLP's review report.
**Restated - refer to page 17 for further details.
Appendix 1 Capital and risk management
Key loan portfolios* (continued)
CRE exposure by LTV band
The table below provides a breakdown of the CRE investment portfolio by LTV band on a current exposure basis, net of
provisions and after risk transfer.
UK RoI Total (3)
AQ1-AQ9 AQ10 Total AQ1-AQ9 AQ10 Total AQ1-AQ9 AQ10 Total
£m £m £m £m £m £m £m £m £m
30 June 2016
<= 50% 10,180 50 10,230 73 2 75 10,406 52 10,458
> 50% and <= 70% 5,962 131 6,093 100 2 102 6,096 133 6,229
> 70% and <= 80% 565 100 665 78 2 80 643 102 745
> 80% and <= 90% 248 156 404 23 - 23 275 156 431
> 90% and <= 100% 209 47 256 23 - 23 232 48 280
> 100% and <= 110% 159 61 220 12 1 13 172 65 237
> 110% and <= 130% 62 77 139 31 6 37 93 381 474
> 130% and <= 150% 57 32 89 10 8 18 67 52 119
> 150% 113 79 192 42 18 60 156 99 255
Total with LTVs 17,555 733 18,288 392 39 431 18,140 1,088 19,228
Total portfolio average LTV (1) 49% 120% 53% 95% 335% 165% 50% 143% 58%
Minimal security (2) 9 1 10 - - - 9 1 10
Other 2,366 115 2,481 178 40 218 2,710 440 3,150
Development (4) 3,617 217 3,834 67 50 117 3,759 284 4,043
23,547 1,066 24,613 637 129 766 24,618 1,813 26,431
31 December 2015**
<= 50% 9,558 70 9,628 60 2 62 9,896 72 9,968
> 50% and <= 70% 5,691 114 5,805 103 2 105 5,964 116 6,080
> 70% and <= 80% 639 124 763 35 1 36 685 125 810
> 80% and <= 90% 323 115 438 26 2 28 353 376 729
> 90% and <= 100% 134 149 283 9 1 10 143 150 293
> 100% and <= 110% 127 74 201 22 1 23 149 75 224
> 110% and <= 130% 187 108 295 34 5 39 221 122 343
> 130% and <= 150% 30 44 74 13 6 19 44 65 109
> 150% 216 173 389 37 19 56 253 199 452
Total with LTVs 16,905 971 17,876 339 39 378 17,708 1,300 19,008
Total portfolio average LTV (1) 51% 167% 60% 94% 315% 164% 52% 167% 63%
Minimal security (2) 1 3 4 - 1 1 2 4 6
Other 2,002 116 2,118 34 24 58 2,253 238 2,491
Development (4) 3,551 313 3,864 67 37 104 3,641 361 4,002
22,459 1,403 23,862 440 101 541 23,604 1,903 25,507
Notes:
(1) Weighted average by current exposure gross of provisions.
(2) 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.
(3) Total includes regions other than UK and RoI.
(4) The exposure in Development relates to the development of commercial and residential properties. LTV is not a meaningful measure for this type of lending activity.
Key points
· The reduction in portfolio average LTV is primarily the result of reductions through repayments, asset sales and write-offs of legacy non-performing assets from Ulster Bank RoI, Commercial Banking and CIB. Remaining exposures with LTVs greater than 100% are predominantly legacy exposures originated before the 2008 financial crisis.
· The exposure in Other relates predominantly to lending to large corporate entities. It is not asset-backed but lent against corporate balance sheets.
· Interest payable on outstanding loans was covered 3.4x and 1.6x in Commercial Banking UK and Capital Resolution respectively (unchanged since 31 December 2015).
*Not within scope of Ernst & Young LLP's review report.
**Restated - refer to page 17 for further details.
Appendix 1 Capital and risk management
Key loan portfolios* (continued)
A breakdown of the asset quality of the CRE portfolio is provided below, on a current exposure basis, net of provisions and
after risk transfer.**
http://www.rns-pdf.londonstockexchange.com/rns/3368G_2-2016-8-5.pdf
Note:
(1) PE represents the amount by which potential exposure is larger than current exposure. The total of each column represents the total potential exposure for that AQ band
Key point
· Probability of default models for the Property and Housebuilders sectors have been updated. This recalibration, rather than deterioration in underlying risk, has resulted in downward ratings migrations across asset quality bands.
A breakdown of CRE portfolio lending, gross of provision and after risk transfer, risk elements in lending (REIL) and
provisions is provided below.
Total Commercial Banking Capital Resolution
30 June 31 December 30 June 31 December 30 June 31 December
2016 2015 2016 2015 2016 2015
CRE loans, REIL and provisions £m £m £m £m £m £m
Lending (gross of provisions) 27,695 27,561 19,075 18,178 1,487 2,842
Of which REIL 2,479 3,560 1,032 1,050 756 1,951
Provisions 1,264 2,054 422 305 247 1,323
REIL as a % of gross loans to customers 9.0% 12.9% 5.4% 5.8% 50.8% 68.6%
Provisions as a % of REIL 51% 58% 41% 29% 33% 68%
Key points
· While lending has increased, non-performing legacy exposure (mostly managed in Capital Resolution) continued to reduce through run-off, divestment and write-offs.
· The non-performing assets in Commercial Banking are predominantly legacy deals originated before the financial crisis.
*Not within the scope of Ernst & Young LLP's review report.
**Restated - refer to page 17 for further details.
Appendix 1 Capital and risk management
Key loan portfolios* (continued)
Natural Resources
Exposure to the Natural Resources sector, on both a current exposure and potential exposure basis, is summarised below, net
of provisions and after risk transfer.
30 June 2016 31 December 2015**
Of which: Of which: Of which: Of which:
Capital Capital Capital Capital
CE Resolution PE Resolution CE Resolution PE Resolution
£m £m £m £m £m £m £m £m
Oil & Gas 3,298 902 6,356 1,213 3,544 1,539 6,798 2,117
Mining & Metals 816 188 1,941 299 729 237 1,823 391
Electricity 3,374 1,135 8,583 1,522 2,851 1,128 7,683 1,773
Water & Waste 5,347 3,407 8,665 5,661 4,657 1,648 8,261 3,039
12,835 5,632 25,545 8,695 11,781 4,552 24,565 7,320
Commodity Traders 564 65 1,080 71 900 444 1,320 452
Of which: Natural Resources 427 41 759 48 521 212 752 212
Oil & Gas
Exposure to the Oil & Gas sector, measured on a potential exposure basis net of provisions and after risk transfer, is
summarised in the tables below.
Other
Western
UK RoI Europe US RoW (1) Total
30 June 2016 £m £m £m £m £m £m
Producers (incl. integrated oil companies) 882 63 1,350 44 225 2,564
Oilfield service providers 746 10 675 265 82 1,778
Other wholesale and trading activities 432 90 554 52 281 1,409
Refineries 22 - - 357 4 383
Pipelines 98 4 103 9 8 222
2,180 167 2,682 727 600 6,356
Of which:
National oil companies - - - - 58 58
Integrated oil companies 389 - 812 146 50 1,397
Exploration & Production 274 - 143 43 131 591
31 December 2015**
Producers (incl. integrated oil companies) 1,177 51 1,028 275 256 2,787
Oilfield service providers 700 10 678 279 51 1,718
Other wholesale and trading activities 450 76 475 45 432 1,478
Refineries 21 2 - 327 18 368
Pipelines 98 - 310 31 8 447
2,446 139 2,491 957 765 6,798
Of which:
National oil companies - - 21 - 70 91
Integrated oil companies 654 - 868 273 10 1,805
Exploration & Production 338 - 38 130 118 624
Note:
(1) Rest of world comprises Asia Pacific, Central and Eastern Europe, the Middle East, Central Asia and Africa.
*Not within the scope of Ernst & Young LLP's review report.
**Restated - refer to page 17 for further details.
Appendix 1 Capital and risk management
Key loan portfolios* (continued)
A breakdown of asset quality (AQ) for the Oil & Gas portfolio, on a current exposure and potential exposure basis, net of
provisions and after risk transfer. is set out below**.
http://www.rns-pdf.londonstockexchange.com/rns/3368G_3-2016-8-5.pdf
Note:
(1) PE represents the amount by which potential exposure is larger than current exposure. The total of each column represents the total potential exposure for that AQ band.
*Not within the scope of Ernst & Young LLP's review report.
**Restated - refer to page 17 for further details.
Appendix 1 Capital and risk management
Key loan portfolios* (continued)
Key points
· The composition of the Oil & Gas portfolio remained broadly unchanged from 31 December 2015. Exposure decreased by 6.5% due to active credit management and the continued run-off of the North American and APAC portfolios.
· Credit quality for the portfolio deteriorated slightly, consistent with broader sector trends. At 30 June 2016, 69% of the exposure (31 December 2015 - 76%) was investment grade (AQ1-AQ4 or equivalent to BBB- and above). As well as exposure reduction in the AQ1-AQ4 bands during the normal course of business - and the continued run-off of the North American and APAC portfolios - the change in credit profile was the result of migration from investment grade to sub-investment grade for certain exposures.
· RBS had no high-yield bond or loan underwriting positions as at 30 June 2016.
· There were a number of forbearance arrangements totalling £554 million. These predominantly involved the relaxation of financial covenants to give customers more financial flexibility given the current environment. Most of the forbearance related to customers in the Exploration & Production and Oilfield Services sub-sectors where earnings have been more immediately and materially affected by the downturn in the Oil & Gas sector.
· At 30 June 2016, total provisions excluding latent provisions were £153 million (31 December 2015 - £49 million). New provisions were due to the credit deterioration of a small number of material exposures, primarily in the Exploration & Production sub-sector.
· AQ10 exposure net of provisions was £207 million (31 December 2015 - £47 million). In addition, exposures not transferred to AQ10 but classified as Risk of Credit Loss(1) totalled £30 million. These were managed by Restructuring.
Note:
(1) In accordance with the revised problem debt management framework, these are non-defaulted exposures that present a potential credit loss in the next 12 months, should mitigating action not be successful or not taken at all.
*Not within the scope of Ernst & Young LLP's review report.
Appendix 1 Capital and risk management
Key loan portfolios* (continued)
Mining & Metals
A breakdown of asset quality for the Mining & Metals portfolio, on a current exposure and potential exposure basis, net of
provisions and after risk transfer is set out below**.
http://www.rns-pdf.londonstockexchange.com/rns/3368G_4-2016-8-5.pdf
Note:
(1) PE represents the amount by which potential exposure is larger than current exposure. The total of each column represents the total potential exposure for that AQ band.
Key points
· Overall exposure to Mining & Metals increased by £87 million to £816 million on a current exposure basis and by £118 million to £1.9 billion on a potential exposure basis. The increase mainly driven by foreign exchange movements (64% of the portfolio is denominated in US dollars). Excluding the impact of foreign exchange movements, exposure decreased by 2.5%.
· Market conditions in the Mining & Metals sector continued to be challenging, resulting in a deterioration in credit quality. Companies in the Mining & Metals sector have reported lower revenues as a result of lower commodity prices. This has had an adverse impact on EBITDA and leverage. At 30 June 2016, 49% (31 December 2015 - 64%) of the portfolio exposure was investment grade (AQ1-AQ4 or equivalent to BBB- and above). Most of the exposure is to market leaders in the sector with globally diversified
operations and revenues.
· Exposures in the Mining & Metals portfolio classified as Risk of Credit Loss totalled £0.4 million.
· Provisions (excluding latent provisions) increased by £13.0 million to £35.6 million (31 December 2015 - £22.6 million).
· At 30 June 2016, AQ10 exposure on a potential exposure basis, net of provisions was £82.0 million (31 December 2015 - £20.8 million). The rise in AQ10 exposure and the increase in provisions mainly resulted from a single material exposure.
Appendix 1 Capital and risk management
Shipping
Exposure to the Shipping sector, on a current exposure and potential exposure basis, is summarised in the table below.
30 June 2016 31 December 2015**
Of which: Of which: Of which: Of which:
Current Capital Potential Capital Current Capital Potential Capital
Exposure Resolution Exposure Resolution Exposure Resolution Exposure Resolution
£m £m £m £m £m £m £m £m
Shipping 6,765 5,945 7,246 6,049 6,776 6,162 7,301 6,309
Exposure secured by ocean-going vessels and managed by Capital Resolution is summarised in the table below on a current
exposure basis.
30 June 2016 31 December 2015**
Current Current
Exposure AQ10 Provisions (1) Exposure AQ10 Provisions (1)
Vessel type £m (2) £m (2) £m £m (2) £m (2) £m
Container 1,291 54 21 1,164 49 10
Dry bulk 2,040 896 379 2,076 275 153
Tanker 1,290 30 - 1,306 - -
Gas 1,075 - - 1,160 - -
Other 376 62 33 362 25 6
Total 6,072 1,042 433 6,068 349 169
Notes:
(1) Excluding latent provisions.
(2) To allow identification of underlying vessel types, this exposure is shown prior to the impact of the risk transfer and gross of provisions.
*Not within the scope of Ernst & Young LLP's review report.
**Restated - refer to page 17 for further details.
Appendix 1 Capital and risk management
Key loan portfolios* (continued)
Asset quality for the Shipping sector, on a current exposure and potential exposure basis, net of provisions and after risk
transfer is summarised below.**
http://www.rns-pdf.londonstockexchange.com/rns/3368G_5-2016-8-5.pdf
Note:
(1) PE represents the amount by which potential exposure is larger than current exposure. The total of each stacked column represents the total potential exposure for that AQ band.
Key points
· Exposure has remained relatively stable at £6.8 billion (current exposure) and £7.3 billion (potential exposure). Excluding the impact of foreign exchange movements, exposure fell by 10%.Most of the Shipping portfolio related to exposure secured by ocean-going vessels. This was managed in Capital Resolution. The remainder of the exposure related to the Shipbuilders and Inland Water Transport sub-sectors. Excluding the impact of foreign exchange movements exposure decreased due to scheduled loan repayments,
secondary sales and prepayments.
· Conditions remained depressed in the dry bulk market as a result of the continuing oversupply of available tonnage and the slowdown in Chinese commodity imports. Tanker rates fell during H1 2016 and remained profitable but asset values were affected. Employment rates for container vessels continued to deteriorate.
· The LTV position across the portfolio for ocean-going vessels increased to 93% (31 December 2015 - 85%) primarily as a result of deteriorating asset values in dry bulk, which fell by up to 15% in H1 2016.
· Continuing challenging market conditions led to an increase in forbearance granted. This mostly related to the relaxation of minimum security covenants due to deteriorating asset prices and totalled £220 million in H1 2016. In addition there was £191 million of forbearance in process, which has not yet reached legal completion.
· At 30 June 2016, exposures classified as Risk of Credit Loss totalled £78 million. As part of standard credit stewardship, a number of customers were classified as Risk of Credit Loss in July 2016. The majority of these cases were in the dry bulk sector.
· Total provisions, excluding latent provisions, increased from £169 million to £433 million during the six months to 30 June 2016. This is the result of prolonged poor market conditions, as described above.
· At 30 June 2016, AQ10 exposure, net of provisions, was £579 million (31 December 2015 - £210 million).
*Not within the scope of Ernst & Young LLP's review report.
**Restated - refer to page 17 for further details.
Appendix 1 Capital and risk management
Key loan portfolios* (continued)
Personal portfolios
This section summarises personal portfolios by type, segment and related credit metrics, on a current exposure basis net of
provisions.
Overview of personal portfolios split by product type and segment
30 June 2016 31 December 2015**
Ulster Ulster
UK Bank Private RBS UK Bank Private RBS
PBB RoI Banking International W&G Total PBB RoI Banking International W&G Total
£m £m £m £m £m £m £m £m £m £m £m £m
Mortgages 111,248 14,376 6,865 2,599 10,716 145,804 104,599 12,713 6,552 2,525 10,430 136,819
Of which:
Interest only variable rate 11,887 416 3,100 711 1,291 17,405 13,252 407 3,025 730 1,388 18,802
Interest only fixed rate 11,088 7 2,578 64 1,227 14,964 9,112 6 2,431 49 1,076 12,674
Mixed (capital and interest only) 5,297 78 5 27 709 6,116 5,380 76 7 29 745 6,237
Buy-to-let 15,916 2,020 622 866 1,362 20,786 14,098 1,762 476 835
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