REG - Royal Bk Scot.Grp. - Half Year Report - Part 2 <Origin Href="QuoteRef">RBS.L</Origin> - Part 6
05/08/2016 07:08
- Part 6: For the preceding part double click ID:nRSE3371Ge
held-for-trading.
Average Period end Maximum Minimum
Six months ended £m £m £m £m
30 June 2016 21 21 28 10
30 June 2015 - excluding Citizens 16 17 22 9
30 June 2015 - Citizens 9 6 16 3
30 June 2015 - Total 17 13 25 11
31 December 2015 - excluding Citizens 17 10 25 9
31 December 2015 - Citizens 5 - 16 -
31 December 2015 - total 18 10 25 10
30 June 30 June 2015 31 December
2016 excl. Citizens Citizens Total 2015
Period end VaR £m £m £m £m £m
Euro 3 2 - 2 3
Sterling 22 13 - 13 5
US dollar 1 15 6 14 5
Other 3 4 - 4 4
Key points
· VaR remained stable during H1 2016, with fluctuations well within risk appetite.
· As the VaR includes pipeline fixed-rate mortgage hedges but not the underlying mortgages, sterling VaR is relatively high, reflecting this mismatch. At 31 December 2015, there were offsetting risk exposures mainly relating to the pension fund contribution. Including the expected mortgage pipeline, sterling VaR would be £5.5 million and total VaR would be £5.6 million.
The VaR relating to interest rate risk arising from money-market portfolios was £3.7 million at 30 June 2016 (31 December
2015 - £2.5 million).
Appendix 1 Capital and risk management
Non-trading portfolios (continued)
Sensitivity of net interest income*
Earnings sensitivity to rate movements is derived from a central forecast over a 12 month period. A simplified scenario is
shown based on the period-end balance sheet assuming that non-interest rate variables remain constant. Market implied
forward rates are used to generate a base case earnings forecast, which is then subjected to interest rate shocks. The
variance between the central forecast and the shock gives an indication of underlying sensitivity to interest rate
movements.
The following table shows the sensitivity of net interest income, over the next 12 months, to an immediate upward or
downward change of 25 and 100 basis points to all interest rates. All yield curves are expected to move in parallel with
the exception that interest rates are assumed to floor at zero per cent or, for euro rates, at the current negative rate.
The main driver of earnings sensitivity relates to interest rate pass-through assumptions on customer products. The
scenario also captures the impact of the reinvestment of maturing structural hedges at higher or lower rates than the base
case earnings sensitivity and mismatches in the re-pricing dates of loans and deposits.
Multi-year forward projections would increase the negative impact of a downward change in rates or, conversely, the benefit
of an immediate upward change in interest rates to current market rates. This is because, over time a greater proportion of
maturing structural hedges will be reinvested at prevailing rates which may be higher or lower. Also, in the absence of
dynamic assumptions relating to further management actions, the variance to the base case income forecast arising from
margin compression or expansion on managed rate products will continue to accrue.
However, reported sensitivities should not be considered predictive of future performance. They do not capture potential
management action in response to sudden changes in the interest rate environment. Actions that could reduce the net
interest income sensitivity and mitigate adverse impacts are changes in pricing strategies on both customer loans and
deposits as well as hedging. Management action may also be targeted at stabilising total income taking into account
non-interest income in addition to net interest income.
Euro Sterling US dollar Other Total
30 June 2016 £m £m £m £m £m
+ 25 basis point shift in yield curves - 49 16 3 68
- 25 basis point shift in yield curves - (125) (16) 1 (140)
+ 100 basis point shift in yield curves (20) 393 65 11 449
- 100 basis point shift in yield curves - (298) (46) 3 (341)
31 December 2015
+ 25 basis point shift in yield curves (6) 48 25 1 68
- 25 basis point shift in yield curves (7) (66) (24) 1 (96)
+ 100 basis point shift in yield curves (17) 385 94 7 469
- 100 basis point shift in yield curves (7) (345) (79) 2 (429)
*Not within the scope of Ernst & Young LLP's review report.
Appendix 1 Capital and risk management
Non-trading portfolios (continued)
Key points
· Implied forward rates fell between December 2015 and June 2016, so that the June 2016 base-case forecast incorporated a 25-basis-point cut in the UK base rate within the 12-month forecast horizon whereas the December 2015 base-case forecast incorporated a 25-basis-point rate rise.
· The largest change in net interest income sensitivity in H1 2016 relates to the negative impact of an immediate 25-basis-point downward change in interest rates from the base-case forecast. This sensitivity increased from £96 million to £140 million, primarily due to the decline in interest rates during the period as customer deposit pricing is assumed to floor at or close to zero interest rates. Any further falls in market rates therefore reduce income. Maturing structural hedges are also reinvested at
lower rates.
Structural hedging*
RBS has the benefit of a significant pool of stable, non and low interest bearing liabilities, principally comprising
equity and money transmission accounts. These balances are usually hedged, either by investing directly in longer-term
fixed rate assets or by the use of interest rate swaps, in order to provide a consistent and predictable revenue stream.
After hedging the net interest rate exposure of the bank externally, Treasury allocates income to products or equity in
structural hedges by reference to the relevant interest rate swap curve. Over time, the hedging programme has built up a
portfolio of interest rate swaps that provide a basis for stable income attribution to the product and equity hedges.
Product hedging*
Product structural hedges are used to minimise the volatility on earnings related to specific products, primarily customer
deposits. The balances are primarily hedged with medium-term interest rate swaps, so that reported income is less sensitive
to movements in short-term interest rates. The size and term of the hedge are based on the stability of the underlying
portfolio.
The table below shows the impact on net interest income associated with product hedges managed by Treasury. These relate to
the main UK banking businesses except Private Banking and RBS International. Treasury allocates income to products or
equity in structural hedges by reference to the relevant interest rate swap curve after hedging the net interest rate
exposure of the bank externally. This internal allocation has been developed over time alongside the bank's external
hedging programme and provides a basis for stable income attribution to the product and equity hedges.
*Not within the scope of Ernst & Young LLP's review report.
Appendix 1 Capital and risk management
Six months ended
Net interest income - impact of structural hedging 30 June 30 June 31 December
2016 2015 2015
£m £m £m
UK Personal & Business Banking 170 187 186
Commercial Banking 118 127 129
Capital Resolution 6 14 7
Williams & Glyn 21 22 23
Total product hedges 315 350 345
Key points
· The incremental impact on net interest income above LIBOR from structural hedging was positive in H1 2016 as short-term interest rates remained low. Swap rates continued to fall, resulting in the average book yield falling to 1.28% in H1 2016 from 1.51% in
H1 2015 and 1.44% in H2 2015. This was due to maturing hedges being reinvested at lower rates and new hedges being added at prevailing market rates. At 30 June 2016, the equivalent yield available in the market was 0.44% compared to 1.45% at 31 December
2015. If market rates and the volume hedged were to remain unchanged for the remainder of 2016, the average book yield would decline by a further 0.06% to 1.22%.
· The notional size of the hedge increased from £74 billion in H2 2015 to £87 billion in H1 2016. The split by business was broadly in line with the proportion of income shown above. The yield will broadly track medium-term swap rates. However, as the hedge
notional increases, the profile is adjusted to incorporate short-term hedging instruments so that the weighted average life of the hedge is not increased. The yield will fall until the short-term hedges are rolled into longer-term instruments on maturity.
If the hedged notional were to remain stable, the yield would eventually replicate a time series of medium-term swap rates. Additional hedging activity is not captured in the product hedging yield.
· At 30 June 2016, the five-year sterling swap rate was 0.44% compared to 1.45% at 31 December 2015. If market rates and the volume hedged were to remain unchanged for the remainder of 2016, the average book yield would decline by a further 0.06% to 1.22%.
Appendix 1 Capital and risk management
Equity hedging*
Equity structural hedges are also used to minimise the volatility on earnings arising from returns on equity. The hedges
managed by Treasury relate mainly to the UK banking businesses and contributed £0.3 billion to these businesses in H1 2016
(H1 2015 - £0.4 billion; H2 2015 - £0.3 billion), which is an incremental benefit relative to short-term wholesale cash
rates. The size of the hedge in H1 2016 was £35 billion, lower than H12015 (£42 billion) and H2 2015 (£42 billion),
primarily reflecting the payment of £4.2 billion into the pension fund and the £1.2 billion payment of the final DAS
dividend.
The equity hedge also aims broadly to track a time series of medium-to-longer-term swap rates although the yield will be
affected by changes in the capital composition of the bank. Other factors, such as the impact of the sale of risk-free
securities or additional hedging activity, are not captured in the equity yield. The yield of the equity and product hedge
combined was 1.59% at 30 June 2016.
Foreign exchange risk
Treasury seeks to limit the potential volatility impact on RBS's CET1 capital ratio from exchange rate movements by
maintaining a structural open currency position. Gains or losses arising from the retranslation of net investments in
overseas operations are recognised in equity and reduce the sensitivity of capital ratios to foreign exchange rate
movements primarily arising from the retranslation of non-sterling-denominated RWAs. Sensitivity is minimised where, for a
given currency, the ratio of the structural open position to RWAs equals the CET1 ratio. The sensitivity of the CET1 ratio
to exchange rates is monitored monthly and reported to the ALCo at least quarterly.
Structural
Net assets foreign currency Residual
Net assets of overseas Net exposures structural
of overseas operations investment pre-economic Economic foreign currency
operations NCI (1) excluding NCI hedges hedges hedges (2) exposures
30 June 2016 £m £m £m £m £m £m £m
US dollar 989 - 989 (24) 965 (965) -
Euro 7,662 (123) 7,539 (677) 6,862 (2,238) 4,624
Other non-sterling 3,686 (633) 3,053 (2,576) 477 - 477
12,337 (756) 11,581 (3,277) 8,304 (3,203) 5,101
31 December 2015
US dollar 1,172 - 1,172 (134) 1,038 (1,038) -
Euro 6,562 (127) 6,435 (573) 5,862 (1,963) 3,899
Other non-sterling 3,599 (524) 3,075 (2,364) 711 - 711
11,333 (651) 10,682 (3,071) 7,611 (3,001) 4,610
Notes:
(1) Non-controlling interests (NCI) represents the structural foreign exchange exposure not attributable to owners' equity.
(2) Economic hedges mainly represent US dollar and euro preference shares in issue that are treated as equity under IFRS and do not qualify as hedges for accounting purposes.They provide an offset to structural foreign exchange exposures to the extent that there are net assets in overseas operations available.
Key points
· Sterling's depreciation against all currencies following the EU Referendum increased residual structural foreign currency exposures by £0.6 billion; this was partially offset by lower underlying residual exposures.
· Changes in foreign currency exchange rates affect equity in proportion to structural foreign currency exposure. For example, a 5% strengthening or weakening in foreign currencies against sterling would result in a gain or loss of £0.4 billion in equity, respectively (2015 - £0.4 billion).
*Not within the scope of Ernst & Young LLP's review report.
Appendix 2
Williams & Glyn
Williams & Glyn financial information
In the main body of this results document, W&G is presented as a segment within RBS, reflecting the contribution made by
W&G's ongoing business to RBS. This does not reflect the allocation of separation costs or the financial impact of any
disposal transaction. The segmental performance of W&G has been extracted from the 2016 Interim results, which are subject
to the independent review performed by EY.
In this appendix, W&G's financial information is shown on two different bases:
· A non-statutory 'carve out' internally managed basis for the half years ended 30 June 2016, 30 June 2015 together with the year ended 31 December 2015 which reflects the adjustments to the W&G segmental information, relating to a) the full allocation of additional costs for the services W&G received from RBS during these periods and b) the inclusion of certain customer portfolios that are currently reported through other segments in RBS.
· An illustrative standalonebasis of presentation which provides an indicativeview of W&G's standalone profile for the period ended 30 June 2016.
During the periods presented, W&G has been an integral part of RBS and has not operated as a separate legal entity. As
such, the non-statutory carve out basis of presentation does not fully reflect the actual cost base, funding, liquidity and
capital profile of a standalone bank.
In respect of the illustrative standalone basis, W&G's actual cost base, funding, liquidity and capital requirements as a
separated bank may ultimately differ materially from those implied by this illustrative financial information. The
illustrative financial information presented herein is based on certain assumptions, which may prove to be incorrect. As
such, this illustrative financial information should be treated as solely indicative of currently modelled parameters and
should not be construed as an indication or projection of W&G's actual or future results or financial position on a
standalone basis. When considering this information, readers should take this and the risks inherent in preparing such
financial information into consideration. For a description of the risks and uncertainties relating to the W&G separation
and divestment see the risk factors on page 391 in the RBS 2015 Annual Report and Accounts.
The illustrative standalone financial information presented in this appendix does not comply with the UK rules relating to
the preparation of proforma financial information under the Prospectus Directive rules or Regulation S-X in the United
States, and if presented in accordance with these rules, such presentation would be different than that presented herein.
The illustrative standalone financial information presented in this appendix has not been audited or reviewed by EY.
Non-statutory carve out financial statements
Half year Half year
ended Year ended ended
30 June 31 December 30 June
2016 2015 2015
Income statement £m £m £m
Net interest income 335 679 338
Net fees and commissions 85 173 85
Other operating income 9 16 9
Non-interest income 94 189 94
Total income 429 868 432
Administrative expenses (278) (522) (244)
Restructuring expenses (45) (28) -
Depreciation (5) (11) (5)
Total operating expenses (328) (561) (249)
Operating profit before impairment (losses)/releases 101 307 183
Impairment (losses)/releases (13) (15) 11
Operating profit before taxation 88 292 194
Tax charge (25) (60) (40)
Profit for the year 63 232 154
Performance ratios
Loan impairment charge as a % of gross customer loans and advances 0.1% 0.1% (0.1%)
Net interest margin excluding central IEAs 3.32% 3.42% 3.47%
Cost:income ratio 76% 65% 58%
Cost:income ratio - adjusted (1) 66% 61% 58%
30 June 31 December
2016 2015
Balance sheet £m £m
Assets
Cash and balances at central banks 39 94
Loans and advances to customers 20,653 20,325
Derivatives 193 102
Property, plant and equipment 88 90
Prepayments, accrued income and other assets 11 11
Total assets 20,984 20,622
Liabilities
Deposits by banks 14 14
Customer deposits 25,239 25,209
Derivatives 90 17
Amounts due to related undertakings 3,020 3,174
Other liabilities 18 28
Provisions 50 50
Total liabilities 28,431 28,492
Net investment from RBS Group (7,447) (7,870)
Net investment from RBS Group and liabilities 20,984 20,622
Ratios
Loan:deposit ratio (excluding repos) 82% 81%
Risk-weighted assets £bn 10.4 10.0
Note:
(1) Excluding restructuring costs.
Income statement on a non-statutory carve out basis
W&G's net interest income remained relatively flat as the growth in the balance sheet was offset by the reduction in the
net interest margin.
Operating expenses increased by £79 million compared with H1 2015 as W&G continued to develop its capability to operate as
a standalone bank. This included the investment of £45 million in restructuring costs principally associated with the
development of the W&G future IT platform.
Net impairment losses were £13 million compared to a net release of £11 million in H1 2015. The H1 2015 impairments
benefited from a number of releases in the Commercial business.
Balance sheet on a non-statutory carve out basis
Customer net lending grew by £328 million, or 2%, to £20.7 billion in H1 2016 driven by growth in mortgage lending.
Customer deposits were stable at £25.2 billion in H1 2016 with current accounts representing £7.3 billion, or 29% of total
customer deposits.
Williams & Glyn illustrative standalone results
An illustration of W&G's standalone income statement and balance sheet for H1 2016 prepared as though it operated
independently of the RBS Group is presented below based on certain assumptions.
The major adjustments made in preparing this illustrative standalone information compared to W&G's financial information
presented on a "carve out" basis are in respect of:
· Costs - W&G is assumed to have a fully developed cost base, reflecting the people and infrastructure required to operate on a standalone basis
· Capital - Illustrative levels of equity and capital securities have been included on the balance sheet
· Liquidity - W&G is assumed to manage its own funding and liquidity position which, combined with the assumed addition of capital, drives a high level of liquid assets
See page 1 above with respect to important disclosures relating to the preparation of this information.
Williams & Glyn Standalone Financial information
Non-statutory Illustrative
carve Illustrative Williams & Glyn
Segmental Adjustments out financial adjustments standalone financial
performance (1) statements (2) statements
Half year ended 30 June 2016 £m £m £m £m £m
Income statement
Net interest income 324 11 335 (14) 321
Net fee and commission income 79 6 85 - 85
Other operating income 8 1 9 - 9
Non interest income 87 7 94 - 94
Total income 411 18 429 (14) 415
Administrative expenses (197) (81) (278) (23) (301)
Restructuring expenses (45) - (45) 45 -
Depreciation - (5) (5) - (5)
Total operating expenses (242) (86) (328) 22 (306)
Operating profit before impairment losses 169 (68) 101 8 109
Impairment losses (17) 4 (13) - (13)
Operating profit before taxation 152 (64) 88 8 96
Tax charge (3) - (25) (25) (2) (27)
Profit for the year 152 (89) 63 6 69
Performance ratios
Loan impairment charge as a % gross
customer loans and advances 0.2% 0.1% 0.1%
Net interest margin excluding central IEAs 3.30% 3.32% 3.17%
Cost:income ratio 59% 76% 74%
Cost:income ratio - adjusted (4) 48% 66% 74%
Assets
Cash and balances at central banks 36 3 39 3,384 3,423
Loans and advances to customers 20,297 356 20,653 - 20,653
Available-for-sale financial assets - - - 3,477 3,477
Derivatives - 193 193 - 193
Property, plant and equipment - 88 88 - 88
Prepayments, accrued income and other 10 1 11 9 20
assets
Total assets 20,343 641 20,984 6,870 27,854
Liabilities
Deposits by banks 12 2 14 - 14
Customer deposits 23,909 1,330 25,239 - 25,239
Derivatives - 90 90 - 90
Debt securities in issue - - - 415 415
Amounts due to related undertakings - 3,020 3,020 (3,020) -
Other liabilities 18 - 18 - 18
Provisions 50 - 50 - 50
Total liabilities 23,989 4,442 28,431 (2,605) 25,826
Net Investment
Net investment from RBS Group (5) (3,646) (3,801) (7,447) 9,200 1,753
AT1 Instruments - - - 275 275
Net investment from RBS Group (3,646) (3,801) (7,447) 9,475 2,028
Total equity and liabilities 20,343 641 20,984 6,870 27,854
Balance sheet metrics
Loan:deposit ratio (excluding repos) 85% 82% 82%
Risk-weighted assets £bn (6) 9.9 10.4 14.2
Notes:
(1) Adjustments made in respect of RBS recharges and perimeter (e.g. inclusion of customers currently within the NatWest brand) as set out on page 1 of this appendix.
(2) The illustrative adjustments include assumptions with respect to W&G's fully developed cost base, and capitalisation and liquidity adjustments illustrative of a standalone entity. These are management estimates based on a number of assumptions and as a result should not be considered as an indication of W&G's actual or future results as a standalone bank which may be materially different.
(3) Indicative tax charge at 28.5%.
(4) Excluding restructuring costs
(5) W&G is not a separate legal entity and a number of items on the balance sheet are presented as allocations of transactions of the wider RBS Group. The net funding/capital position with RBS Group represents a combination of the overall receivables and payables with W&G and the funding balances with RBS Group, which cannot be separately identified or allocated.
(6) The segmental performance and non-statutory carve out financial information RWAs have been presented on an Advanced Internal Rating Basis (AIRB), while the "illustrative standalone" Williams & Glyn financial information RWAs have been presented on a standardised basis.
This information is provided by RNS
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