REG - Royal Bk Scot.Grp. - Half Year Report - Part 2 <Origin Href="QuoteRef">RBS.L</Origin> - Part 5
05/08/2016 07:08
- Part 5: For the preceding part double click ID:nRSE3371Gd
Of which
UK
Personal - mortgages 123,653 1,083 158 0.9 15 0.1 17 36
- unsecured 14,348 1,262 1,085 8.8 86 7.6 126 501
Property and construction 38,006 2,814 1,282 7.4 46 3.4 27 2,773
Other 110,193 2,198 1,182 2.0 54 1.1 125 800
Latent - - 330 - - - (303) -
286,200 7,357 4,037 2.6 55 1.4 (8) 4,110
Of which
Europe
Personal - mortgages 13,908 2,550 844 18.3 33 6.1 (101) 135
- unsecured 775 49 45 6.3 92 5.8 (5) 12
Property and construction 1,993 1,008 966 50.6 96 48.5 (593) 3,539
Other 7,148 1,011 864 14.1 85 12.1 (8) 1,014
Latent - - 255 - - - (103) -
23,824 4,618 2,974 19.4 64 12.5 (810) 4,700
Banks 19,004 1 1 - 100 - (4) 33
Notes:
(1) Mortgages are reported in sectors other than personal mortgages by certain businesses based on the nature of the relationship with the customer.
(2) Includes instalment credit.
Appendix 1 Capital and risk management
Debt securities
The table below analyses debt securities by issuer and IFRS measurement classifications. The other financial institutions
category includes US government sponsored agencies and securitisation entities, the latter principally relating to
asset-backed securities (ABS). Ratings are based on the lowest of Standard & Poor's, Moody's and Fitch.
Central and local government Banks Other Corporate Total
financial Of which
UK US Other institutions ABS
30 June 2016 £m £m £m £m £m £m £m £m
Held-for-trading (HFT) 3,147 5,733 24,141 910 2,324 346 36,601 827
Designated as at fair value - - 122 - - - 122 -
Available-for-sale (AFS) 8,978 8,622 14,762 2,112 5,013 102 39,589 2,467
Loans and receivables - - - 210 2,564 155 2,929 2,568
Held-to-maturity (HTM) 4,890 - - - - - 4,890 -
Debt securities 17,015 14,355 39,025 3,232 9,901 603 84,131 5,862
Of which US agencies - - - - 299 - 299 -
Short positions (HFT) (2,495) (2,927) (15,513) (273) (373) (212) (21,793) -
Ratings
AAA - - 13,333 1,947 4,442 18 19,740 3,684
AA to AA+ 17,015 14,355 8,105 588 1,345 10 41,418 355
A to AA- - - 10,746 186 1,977 157 13,066 438
BBB- to A- - - 6,321 391 1,257 205 8,174 778
Non-investment grade - - 520 17 493 112 1,142 420
Unrated - - - 103 387 101 591 187
17,015 14,355 39,025 3,232 9,901 603 84,131 5,862
Available-for-sale
AFS reserves (gross of tax) 26 (99) 221 11 188 (17) 330 78
Gross unrealised gains 908 452 662 12 253 - 2,287 186
Gross unrealised losses - - (3) (1) (129) (7) (140) (119)
31 December 2015
Held-for-trading 4,107 4,627 22,222 576 3,689 636 35,857 707
Designated as at fair value - - 111 - - - 111 -
Available-for-sale 9,124 10,359 12,259 1,801 5,599 108 39,250 2,501
Loans and receivables - - - 1 2,242 144 2,387 2,222
Held-to-maturity 4,911 - - - - - 4,911 -
Debt securities 18,142 14,986 34,592 2,378 11,530 888 82,516 5,430
Of which US agencies - - - - 806 - 806 -
Short positions (HFT) (4,697) (3,347) (11,796) (391) (411) (165) (20,807) -
Ratings
AAA - - 11,696 1,696 5,234 3 18,629 3,366
AA to AA+ 18,142 14,986 6,879 119 1,611 66 41,803 261
A to AA- - - 8,880 420 1,991 147 11,438 445
BBB- to A- - - 6,785 79 1,460 301 8,625 363
Non-investment grade - - 352 32 526 200 1,110 446
Unrated - - - 32 708 171 911 549
18,142 14,986 34,592 2,378 11,530 888 82,516 5,430
Available-for-sale
AFS reserves (gross of tax) 12 (78) 90 4 114 4 146 60
Gross unrealised gains 383 104 270 6 110 7 880 90
Gross unrealised losses (7) (62) (9) (1) (58) (3) (140) (42)
Appendix 1 Capital and risk management
Debt securities (continued)
Key points
· Held-for-trading: CIB portfolio increased marginally overall principally auction participation in EMEA and higher trading activity, particularly in the US.
· Available-for-sale: The overall size of the AFS portfolio, predominantly Treasury liquidity portfolio, is broadly unchanged as maturing securities have been offset by new fixed income investments and FX movements.
Derivatives
The table below analyses derivatives by type of contract. The master netting agreements and collateral shown below do not
result in a net presentation on the balance sheet under IFRS.
30 June 2016 31 December 2015
Notional Assets Liabilities Notional Assets Liabilities
£bn £m £m £bn £m £m
Interest rate 22,663 250,850 242,055 19,783 206,138 194,854
Exchange rate 4,181 73,700 79,036 3,702 54,938 58,243
Credit 52 859 748 67 909 840
Equity and commodity 15 630 629 18 559 796
Balance sheet 326,039 322,468 262,544 254,733
Counterparty mark-to-market netting (267,287) (267,287) (214,800) (214,800)
Cash collateral (33,593) (32,636) (27,629) (25,729)
Securities collateral (9,153) (13,551) (7,535) (8,213)
Net exposure 16,006 8,994 12,580 5,991
Banks (1) 1,340 1,324 1,011 1,311
Other financial institutions (2) 4,630 2,646 2,864 1,468
Corporate (3) 8,568 4,385 7,816 3,108
Government (4) 1,468 639 889 104
Net exposure by sector 16,006 8,994 12,580 5,991
UK 9,146 2,636 6,270 1,199
Europe 4,809 3,679 4,069 2,408
US 1,164 1,529 639 714
RoW 887 1,150 1,602 1,670
Net exposure by region of counterparty 16,006 8,994 12,580 5,991
Notes:
(1) Transactions with certain counterparties with whom RBS has netting arrangements but collateral is not posted on a daily basis; certain transactions with specific terms that may not fall within netting and collateral arrangements; derivative positions in certain jurisdictions for example China where the collateral agreements are not deemed to be legally enforceable.
(2) Transactions with securitisation vehicles and funds where collateral posting is contingent on RBS's external rating.
(3) Predominantly large corporate with whom RBS may have netting arrangements in place, but operational capability does not support collateral posting.
(4) Sovereigns and supranational entities with one way collateral agreements in their favour.
(5) The notional amount of interest rate derivatives include £13,940 billion (2015 - £11,555 billion) in respect of contracts cleared through central clearing counterparties. The associated derivatives assets and liabilities including variation margin reflect IFRS offset of £243 billion (2015 - £124 billion and £232 billion (2015 - £118 billion) respectively.
Key points
· Derivative exposures, both balance sheet positions as well as net exposures increased principally as a result of market factors in the lead up to and following the EU Referendum, including the impact of volatility leading to higher trading volumes in the foreign exchange and interest rate market, sterling weakening against all major currencies and downward shift in yield curves.
· Overall net exposure increased from a net asset position of £6.6 billion to £7.0 billion.
· Bank exposures increased by £0.3 billion to a broadly flat net position at H1 2016, from a net derivative liability of £0.3 billion at the year end, largely reflecting derivative asset contracts that do not have a nettable liability exposure, augmented by the impact of foreign exchange movements, as well as the timing of collateral settlement.
Appendix 1 Capital and risk management
Valuation reserves
Valuation reserves reflect adjustments to mid-market valuations to cover bid-offer spread, liquidity and credit risk.
30 June 31 December
2016 2015
£m £m
Funding valuation adjustment (FVA) 1,084 752
Credit valuation adjustments (CVA) 839 774
Bid-offer reserves 340 304
Product and deal specific 702 660
Valuation reserves 2,965 2,490
Key point
· The FVA at 30 June 2016 included additional reserves (Q2 2016 - £220 million; Q1 2016 - £110 million) in Capital Resolution following the estimated widening in implied funding spreads; the Q2 movement reflected the impact of the EU Referendum.
· The increase in other reserves mainly reflected sterling weakening against all major currencies following the EU Referendum and widening credit spreads.
Appendix 1 Capital and risk management
Credit risk: Regulatory basis
EAD and RWA density*
The tables below show exposure at default (EAD) after credit risk mitigation (CRM), RWAs, and related RWA density by sector
cluster.
EAD post CRM RWAs RWA density
IRB STD Total IRB STD Total IRB STD Total
30 June 2016 £m £m £m £m £m £m % % %
Sector cluster
Sovereign
Central banks 43,529 37,613 81,142 1,602 - 1,602 4 - 2
Central government 23,316 14,128 37,444 2,382 30 2,412 10 - 6
Other sovereign 4,279 1,037 5,316 1,230 209 1,439 29 20 27
Total sovereign 71,124 52,778 123,902 5,214 239 5,453 7 - 4
Financial institutions (FI)
Banks 26,415 520 26,935 13,791 129 13,920 52 25 52
Non-bank FI (1) 32,777 21,945 54,722 16,291 14,557 30,848 50 66 56
SSPEs (2) 10,446 1,001 11,447 3,738 703 4,441 36 70 39
Total FI 69,638 23,466 93,104 33,820 15,389 49,209 49 66 53
Corporates
Property
- UK 42,623 4,187 46,810 21,047 3,971 25,018 49 95 53
- RoI 1,714 38 1,752 1,085 38 1,123 63 100 64
- Western Europe 3,286 357 3,643 1,642 350 1,992 50 98 55
- US 468 18 486 260 18 278 56 100 57
- RoW 797 245 1,042 587 189 776 74 77 74
Total property 48,888 4,845 53,733 24,621 4,566 29,187 50 94 54
Natural resources
- Oil & Gas 4,874 165 5,039 2,432 150 2,582 50 91 51
- Mining & Metals 1,596 12 1,608 861 9 870 54 75 54
- Electricity 5,880 60 5,940 3,026 61 3,087 51 102 52
- Water & Waste 6,606 73 6,679 1,616 60 1,676 24 82 25
Total natural resources 18,956 310 19,266 7,935 280 8,215 42 90 43
Of which: commodity traders 602 - 602 346 - 346 57 - 57
Transport
- Shipping 5,994 1,502 7,496 3,299 1,504 4,803 55 100 64
- Automotive 8,045 100 8,145 3,277 92 3,369 41 92 41
- Other 8,897 431 9,328 4,129 148 4,277 46 34 46
Total transport 22,936 2,033 24,969 10,705 1,744 12,449 47 86 50
Manufacturing 21,760 699 22,459 9,270 609 9,879 43 87 44
Retail & leisure 20,720 2,165 22,885 12,560 2,091 14,651 61 97 64
Services 22,148 1,063 23,211 13,231 996 14,227 60 94 61
TMT (3) 6,866 377 7,243 4,152 370 4,522 60 98 62
Total corporates 162,274 11,492 173,766 82,474 10,656 93,130 51 93 54
Of which: commodity traders 837 - 837 476 - 476 57 - 57
Personal
Mortgages
- UK 134,434 8,202 142,636 14,271 3,158 17,429 11 39 12
- RoI 15,952 18 15,970 12,149 13 12,162 76 72 76
- Western Europe - 224 224 - 94 94 - 42 42
- US - 116 116 - 45 45 - 39 39
- RoW - 803 803 - 295 295 - 37 37
Total mortgages 150,386 9,363 159,749 26,420 3,605 30,025 18 39 19
Other personal 29,396 3,573 32,969 11,333 2,547 13,880 39 71 42
Total personal 179,782 12,936 192,718 37,753 6,152 43,905 21 48 23
Other items - 8,137 8,137 - 6,834 6,834 - 84 84
Total 482,818 108,809 591,627 159,261 39,270 198,531 33 36 34
For the notes to this table refer to page 48.
*Not within the scope of Ernst & Young LLP's review report.
Appendix 1 Capital and risk management
EAD and RWA density* (continued)
EAD post CRM RWAs RWA density
IRB STD Total IRB STD Total IRB STD Total
31 December 2015 £m £m £m £m £m £m % % %
Sector cluster
Sovereign
Central banks 46,879 48,451 95,330 1,730 - 1,730 4 - 2
Central government 22,561 14,295 36,856 2,028 28 2,056 9 - 6
Other sovereign 4,109 442 4,551 963 225 1,188 23 51 26
Total sovereign 73,549 63,188 136,737 4,721 253 4,974 6 - 4
Financial institutions (FI)
Banks 25,629 893 26,522 11,941 226 12,167 47 25 46
Non-bank FI (1) 30,898 19,121 50,019 15,366 12,504 27,870 50 65 56
SSPEs (2) 10,971 1,232 12,203 4,140 747 4,887 38 61 40
Total FI 67,498 21,246 88,744 31,447 13,477 44,924 47 63 51
Corporates
Property
- UK 41,992 3,472 45,464 20,827 3,487 24,314 50 100 53
- RoI 1,836 17 1,853 814 15 829 44 88 45
- Western Europe 2,992 378 3,370 1,587 374 1,961 53 99 58
- US 688 19 707 325 19 344 47 100 49
- RoW 930 266 1,196 792 245 1,037 85 92 87
Total property 48,438 4,152 52,590 24,345 4,140 28,485 50 100 54
Natural resources
- Oil & Gas 5,467 139 5,606 2,481 133 2,614 45 96 47
- Mining & Metals 1,497 58 1,555 690 60 750 46 103 48
- Electricity 5,133 72 5,205 2,586 49 2,635 50 68 51
- Water & Waste 5,805 68 5,873 1,511 53 1,564 26 78 27
Total natural resources 17,902 337 18,239 7,268 295 7,563 41 88 41
Of which: commodity traders 776 - 776 365 - 365 47 100 47
Transport
- Shipping 5,811 1,698 7,509 3,790 1,698 5,488 65 100 73
- Automotive 8,580 87 8,667 3,222 80 3,302 38 92 38
- Other 8,890 440 9,330 3,964 162 4,126 45 37 44
Total transport 23,281 2,225 25,506 10,976 1,940 12,916 47 87 51
Manufacturing 22,811 661 23,472 9,430 566 9,996 41 86 43
Retail & leisure 20,071 1,972 22,043 12,207 1,936 14,143 61 98 64
Services 22,080 973 23,053 12,884 903 13,787 58 93 60
TMT (3) 7,424 370 7,794 4,495 338 4,833 61 91 62
Total corporates 162,007 10,690 172,697 81,605 10,118 91,723 50 95 53
Of which: commodity traders 1,350 - 1,350 623 - 623 46 100 46
Personal
Mortgages
- UK 126,295 8,087 134,382 9,397 3,336 12,733 7 41 9
- RoI 14,048 18 14,066 11,564 12 11,576 82 67 82
- Western Europe - 228 228 - 97 97 - 43 43
- US - 111 111 - 45 45 - 41 41
- RoW - 716 716 - 285 285 - 40 40
Total mortgages 140,343 9,160 149,503 20,961 3,775 24,736 15 41 17
Other personal 29,659 4,731 34,390 11,276 3,468 14,744 38 73 43
Total personal 170,002 13,891 183,893 32,237 7,243 39,480 19 52 21
Other items - 9,359 9,359 - 8,677 8,677 - 93 93
Total 473,056 118,374 591,430 150,010 39,768 189,778 32 34 32
*Not within the scope of Ernst & Young LLP's review report.
Appendix 1 Capital and risk management
EAD and RWA density* (continued)
Notes:
(1) Non-bank financial institutions, such as US agencies, insurance companies, pension funds, hedge and leverage funds, broker-dealers and non-bank subsidiaries of banks.
(2) Securitisation structured purpose entities (SSPEs) primarily relate to securitisation related vehicles.
(3) Telecommunications, media and technology.
Key points
Total credit risk exposures remained broadly stable, with EAD post CRM of £592 billion at 30 June 2016. Notable movements
during H1 2016 were:
· An increase due to exchange rate movements following the EU Referendum.
· Exposure reductions in line with business strategy including disposals, limit reductions and early repayments.
· Growth in the UK mortgage book in line with business strategy.
· Exchange rate movements accounted for a £14 billion increase in the underlying exposure. Excluding this impact, EAD post CRM fell by 2% reflecting a reduction in placements with central banks as part of ongoing liquidity management as well as strategic
exposure reductions. This was offset by an increase in mortgage lending in the UK as part of strategy to increase market share.
· RWAs increased 5% to £199 billion. RWA movements during the period were partly driven by recalibrations of the following models: the PD models for banks, local authorities, housing associations and mortgages; and the LGD models for banks and quasi
-governmental organisations.
IRB approach
Overall RWA density under the IRB approach rose marginally from 32% to 33% while RWAs increased by 6%, driven in part by the impact of model changes as well as deteriorating credit quality in some sectors during the period. Overall EAD post CRM increased 2% to £483 billion.
· Sovereign: RWA density rose slightly from 6% to 7% as RWAs increased by 10%, predominantly due to the implementation of a more conservative LGD model for quasi-governmental organisations. EAD post CRM fell 3% to £71.1 billion, reflecting ongoing liquidity
management by Treasury.
· Financial Institutions: RWA density rose from 47% to 49% as RWAs increased by 8%, primarily due to the implementation of the new PD model for banks. EAD post CRM increased 3%, driven by sterling's depreciation against the euro and the US dollar.
· Property: Overall RWA density, RWAs and EAD post CRM remained broadly stable for this sector in H1 2016. For the RoI, the increase in RWA density from 44% to 63% reflected write-offs of defaulted exposure during the period.
· Oil & Gas: RWA density rose from 45% to 50%, reflecting a further deterioration in credit quality. RWAs fell by 2% due to some assets moving into default, while EAD post CRM fell 11% mainly due to exposure reductions in the normal course of business.
· Mining & Metals: RWA density rose from 46% to 54%, reflecting a further deterioration in the credit quality of this sector. EAD post CRM increased by 7%, while RWAs increased by 25%.
· Shipping: RWA density fell from 65% to 55% and RWAs fell by 13%, reflecting some customers moving into default in H1 2016. EAD post CRM increased by 3%, predominantly driven by exchange rate movements, partly offset by scheduled loan repayments,
prepayments and secondary sales.
· Personal Mortgages: RWA density rose from 15% to 18% while RWAs increased by 26% following quarterly PD recalibrations to reflect observed default rates during the period. EAD post CRM increased by 7%, mainly driven by business strategy to increase UK
mortgage lending on the back of the improving UK housing and mortgage market and sustained house price growth. The exposure movements in the RoI were predominantly driven by exchange rate movements.
*Not within the scope of Ernst & Young LLP's review report.
Appendix 1 Capital and risk management
EAD and RWA density* (continued)
STD approach
RWA density for the STD approach deteriorated slightly while RWAs remained largely unchanged. EAD post CRM fell by 8%.
· Sovereign: RWAs and RWA density remained broadly stable during the period. EAD post CRM decreased by 16% due to exposure reduction as a result of ongoing liquidity management.
.
*Not within the scope of Ernst & Young LLP's review report.
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-implied 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 Capital and risk management - Market risk in the 2015 Annual Report and Accounts.
Trading portfolios
Value-at-risk
The table below presents the internal value-at-risk (VaR) for trading portfolios split by type of market risk exposure. The
internal traded 99% one-day VaR captures all trading book positions. By contrast, the regulatory VaR-based charges take
into account only regulator-approved products, locations and legal entities and are based on a ten-day, rather than a
one-day, holding period for market risk capital calculations.
Half year ended Year ended
30 June 2016 30 June 2015 31 December 2015
Average Period end Maximum Minimum Average Period end Maximum Minimum Average Period end Maximum Minimum
Traded VaR (1-day 99%) £m £m £m £m £m £m £m £m £m £m £m £m
Interest rate 12.3 10.2 22.3 7.8 16.0 11.7 29.8 10.8 14.5 12.8 29.8 9.5
Credit spread 8.4 9.7 12.5 5.8 12.5 7.6 16.4 7.5 10.1 7.1 16.4 6.5
Currency 4.0 4.3 9.0 1.0 5.3 5.4 7.8 3.3 4.9 5.0 8.9 1.9
Equity 0.5 0.5 2.1 0.2 2.4 1.2 6.1 1.0 1.6 0.8 6.1 0.4
Commodity 0.6 0.8 1.7 0.2 0.5 0.7 2.2 0.2 0.4 0.5 2.2 0.2
Diversification (1) (9.6) (11.6) (9.1)
Total 15.4 15.9 27.3 9.9 21.8 15.0 30.1 15.0 18.9 17.1 30.1 12.1
Note:
(1) RBS 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
· Internal traded VaR continued to decline in H1 2016 following a reduction in positions, despite the increased volatility and reduced liquidity resulting from macroeconomic and political factors, notably the economic slowdown in China, the US Federal Reserve's decision to reduce its quantitative easing programme and the low interest rate environment in Europe. The uncertainty in advance of the EU Referendum was one of the main drivers of the reduction in positions.
· Average total internal traded VaR fell, compared to both H1 2015 and 2015 as a whole, primarily driven by interest rate and credit spread VaR resulting from a reduction in fixed income securities.
Appendix 1 Capital and risk management
Trading portfolios (continued)
Capital charges*
The total market risk minimum capital requirement calculated in accordance with the Capital Requirements Regulation (CRR)
was £1,675 million at 30 June 2016 (31 December 2015 - £1,700 million); this represents 8% of the corresponding RWA amount,
£20.9 billion. It comprises a number of regulatory capital requirements split into two categories: (i) the non-modelled
position risk requirement (PRR) of £351 million, which has several components; and (ii) the Pillar 1 model-based PRR of
£1,324 million, which comprises several modelled charges.
The following table analyses the principal contributors to the Pillar 1 model-based PRR.
31 December
2015
Average Maximum Minimum Period end Period end
30 June 2016 £m £m £m £m £m
Value-at-risk 329 352 305 305 377
Stressed VaR (SVaR) 462 480 446 448 477
Incremental risk charge (IRC) 278 297 253 270 248
Risk not in VaR (RNIV) 259 301 212 301 221
1,324 1,323
Key points
· The VaR and SVaR charges together decreased by 12%, mainly driven by the euro and US dollar interest rate portfolios as a result of overall risk reduction in Q2 2016 ahead of the EU Referendum.
· The RNIV charge increased by 36% as new RNIVs were introduced to supplement the capitalisation of risks against unreliable market data.
· The IRC increased by 9%, mainly driven by US government bond positions in RBS Securities Inc. The methodology for calculating the IRC was refined during H1 2016, which had a moderate offsetting downward impact (£14 million in RWA terms).
· The non-modelled PRR decreased by 7%, largely driven by a reduction in the specific interest rate risk and trading book securitisation components, reflecting disposals in Capital Resolution.
*Not within the scope of Ernst & Young LLP's review report.
Appendix 1 Capital and risk management
Non-trading portfolios
Non-traded credit spread risk
The main component of total non-traded VaR is credit spread VaR, which captures the risk in Treasury arising primarily from
portfolios held for liquidity and collateral management purposes. Non-traded credit spread VaR was £57.7 million (31
December 2015 - £30.6 million). The rise largely reflected an increase in longer-dated bonds within Treasury's liquidity
portfolio and greater credit spread volatility, primarily affecting US dollar bond swap spreads with tenors of over ten
years.
Non-traded interest rate risk
Interest rate risk arises from two main sources in the non-trading portfolios.
The VaR relating to interest rate risk arising from earnings from retail and commercial banking activities at a 99%
confidence level is presented below, together with a currency analysis at the period-end. This excludes positions in
financial instruments which are classified as
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