REG - Royal Bk Scot.Grp. - Half Yearly Report - Part 2 <Origin Href="QuoteRef">RBS.L</Origin> - Part 3
29/10/2014 09:17
- Part 3: For the preceding part double click ID:nRSA9699Nb
£m
UK Personal & Business Banking 1,118 320 1,438 (1,044) (126) 268
Ulster Bank 152 88 240 (187) (263) (210)
Personal & Business Banking 1,270 408 1,678 (1,231) (389) 58
Commercial Banking 484 325 809 (425) (155) 229
Private Banking 159 110 269 (220) (2) 47
Commercial & Private Banking 643 435 1,078 (645) (157) 276
Corporate & Institutional Banking (1) 141 1,095 1,236 (1,487) (144) (395)
Central items 228 207 435 (86) 3 352
Citizens Financial Group 469 278 747 (548) (32) 167
Non-Core (2) 19 254 273 (159) (398) (284)
Non-statutory basis 2,770 2,677 5,447 (4,156) (1,117) 174
Reconciling items:
Own credit adjustments (3) - 127 127 - - 127
Gain on redemption of own debt - 242 242 - - 242
Strategic disposals - 6 6 - - 6
RFS Holdings minority interest (3) 1 (2) 1 - (1)
Statutory basis 2,767 3,053 5,820 (4,155) (1,117) 548
*Restated
Notes:
(1) Reallocation of £1 million between net interest income and non-interest income to record interest on financial assets and liabilities designated as at fair value through profit or loss.
(2) Reallocation of £11 million between net interest income and non-interest income in respect of funding costs of rental assets, £10 million, and to record interest on financial assets and liabilities designated as at fair value through profit or loss, £1 million.
(3) Comprises £76 million gain included in 'Income from trading activities' and £51 million gain included in 'Other operating income' on a statutory basis.
Notes
10. Segmental analysis (continued)
Total revenue
Half year ended
30 June 2014 30 June 2013*
Inter Inter
External segment Total External segment Total
Total revenue £m £m £m £m £m £m
UK Personal & Business Banking 3,583 7 3,590 3,620 7 3,627
Ulster Bank 408 40 448 549 36 585
Personal & Business Banking 3,991 47 4,038 4,169 43 4,212
Commercial Banking 1,729 13 1,742 1,778 16 1,794
Private Banking 470 258 728 503 340 843
Commercial & Private Banking 2,199 271 2,470 2,281 356 2,637
Corporate & Institutional Banking 3,033 2,028 5,061 3,461 2,691 6,152
Central items 1,200 2,051 3,251 1,550 4,665 6,215
Citizens Financial Group 1,724 5 1,729 1,644 50 1,694
RCR 443 254 697 n/a n/a n/a
Non-Core n/a n/a n/a 1,081 223 1,304
Non-statutory basis 12,590 4,656 17,246 14,186 8,028 22,214
Reconciling items:
Own credit adjustments (51) - (51) 376 - 376
Gain on redemption of own debt 20 - 20 191 - 191
Strategic disposals 191 - 191 - - -
RFS Holdings minority interest 25 - 25 102 - 102
Elimination of intra-group transactions - (4,656) (4,656) - (8,028) (8,028)
Statutory basis 12,775 - 12,775 14,855 - 14,855
*Restated
Notes
10. Segmental analysis (continued)
Total revenue (continued)
Quarter ended
30 June 2014 31 March 2014* 30 June 2013*
Inter Inter Inter
External segment Total External segment Total External segment Total
Total revenue £m £m £m £m £m £m £m £m £m
UK Personal & Business Banking 1,806 3 1,809 1,777 4 1,781 1,821 (7) 1,814
Ulster Bank 210 20 230 198 20 218 289 27 316
Personal & Business Banking 2,016 23 2,039 1,975 24 1,999 2,110 20 2,130
Commercial Banking 875 (18) 857 854 31 885 909 8 917
Private Banking 234 127 361 236 131 367 255 162 417
Commercial & Private Banking 1,109 109 1,218 1,090 162 1,252 1,164 170 1,334
Corporate & Institutional Banking 1,383 1,128 2,511 1,650 900 2,550 1,628 1,470 3,098
Central items 552 1,019 1,571 648 1,032 1,680 873 2,319 3,192
Citizens Financial Group 947 2 949 777 3 780 813 25 838
RCR 193 97 290 250 157 407 n/a n/a n/a
Non-Core n/a n/a n/a n/a n/a n/a 620 144 764
Non-statutory basis 6,200 2,378 8,578 6,390 2,278 8,668 7,208 4,148 11,356
Reconciling items:
Own credit adjustments (190) - (190) 139 - 139 127 - 127
Gain on redemption of own debt - - - 20 - 20 242 - 242
Strategic disposals - - - 191 - 191 6 - 6
RFS Holdings minority interest 11 - 11 14 - 14 1 - 1
Elimination of intra-group transactions - (2,378) (2,378) - (2,278) (2,278) - (4,148) (4,148)
Statutory basis 6,021 - 6,021 6,754 - 6,754 7,584 - 7,584
Total assets and liabilities
30 June 2014 31 March 2014* 31 December 2013*
Assets Liabilities Assets Liabilities Assets Liabilities
Total assets £m £m £m £m £m £m
UK Personal & Business Banking 133,559 147,650 132,802 146,264 132,153 146,255
Ulster Bank 26,734 24,718 26,160 26,055 28,183 27,047
Personal & Business Banking 160,293 172,368 158,962 172,319 160,336 173,302
Commercial Banking 88,573 90,272 89,608 90,158 87,900 93,201
Private Banking 20,794 36,379 21,227 37,173 21,168 37,564
Commercial & Private Banking 109,367 126,651 110,835 127,331 109,068 130,765
Corporate & Institutional Banking 537,563 493,282 546,968 503,189 551,200 512,691
Central items 92,392 81,308 91,219 82,839 103,450 84,279
Citizens Financial Group 76,090 63,661 76,063 63,547 71,738 61,289
RCR 34,449 12,731 38,793 13,475 n/a n/a
Non-Core n/a n/a n/a n/a 31,177 6,100
Non-statutory basis 1,010,154 950,001 1,022,840 962,700 1,026,969 968,426
Reconciling item:
RFS Holdings minority interest 954 144 930 134 909 237
Statutory basis 1,011,108 950,145 1,023,770 962,834 1,027,878 968,663
*Restated
Notes
11. Financial instruments
Classification
The following tables analyse the Group's financial assets and liabilities in accordance with the categories of financial
instruments in IAS 39 with assets and liabilities outside the scope of IAS 39 shown separately.
Non
Financial instruments financial
Amortised Finance assets/
HFT (1) DFV (2) HD (3) AFS (4) LAR (5) HTM(6) cost leases liabilities Total
30 June 2014 £m £m £m £m £m £m £m £m £m £m
Assets
Cash and balances at central banks - - - 68,670 - 68,670
Loans and advances to banks
- reverse repos 25,139 - - 3,024 - 28,163
- other 9,907 - - 18,997 - 28,904
Loans and advances to customers
- reverse repos 53,142 - - 400 - 53,542
- other 18,171 50 - 360,790 - 6,543 385,554
Debt securities 55,893 121 48,698 3,526 4,556 112,794
Equity shares 6,444 338 1,052 - - 7,834
Settlement balances - - - 19,682 - 19,682
Derivatives 270,807 4,099 274,906
Intangible assets 12,173 12,173
Property, plant and equipment 7,115 7,115
Deferred tax 3,107 3,107
Prepayments, accrued income and
other assets - - - - - 7,418 7,418
Assets of disposal groups 1,246 1,246
439,503 509 4,099 49,750 475,089 4,556 6,543 31,059 1,011,108
Liabilities
Deposits by banks
- repos 28,931 - 2,791 31,722
- other 22,168 - 17,011 39,179
Customer accounts
- repos 46,861 - 4,679 51,540
- other 9,287 5,248 386,691 401,226
Debt securities in issue 7,339 12,967 38,781 59,087
Settlement balances - - 15,128 15,128
Short positions 39,019 - 39,019
Derivatives 266,544 3,543 270,087
Accruals, deferred income and
other liabilities - - 1,744 15 13,117 14,876
Retirement benefit liabilities 2,742 2,742
Deferred tax 605 605
Subordinated liabilities - 846 23,963 24,809
Liabilities of disposal groups 125 125
420,149 19,061 3,543 490,788 15 16,589 950,145
Equity 60,963
1,011,108
For the notes to this table refer to the following page.
Notes
11. Financial instruments: Classification (continued)
Non
Financial instruments financial
Amortised Finance assets/
HFT (1) DFV (2) HD (3) AFS (4) LAR (5) cost leases liabilities Total
31 December 2013 £m £m £m £m £m £m £m £m £m
Assets
Cash and balances at central banks - - - 82,659 82,659
Loans and advances to banks
- reverse repos 25,795 - - 721 26,516
- other 9,952 - - 17,603 27,555
Loans and advances to customers
- reverse repos 49,897 - - - 49,897
- other 19,170 49 - 364,772 6,834 390,825
Debt securities 56,582 122 53,107 3,788 113,599
Equity shares 7,199 400 1,212 8,811
Settlement balances - - - 5,591 5,591
Derivatives 283,508 4,531 288,039
Intangible assets 12,368 12,368
Property, plant and equipment 7,909 7,909
Deferred tax 3,478 3,478
Prepayments, accrued income and
other assets - - - - 7,614 7,614
Assets of disposal groups 3,017 3,017
452,103 571 4,531 54,319 475,134 6,834 34,386 1,027,878
Liabilities
Deposits by banks
- repos 23,127 - 5,523 28,650
- other 19,764 - 15,565 35,329
Customer accounts
- repos 52,300 - 4,184 56,484
- other 10,236 5,862 398,298 414,396
Debt securities in issue 8,560 15,848 43,411 67,819
Settlement balances - - 5,313 5,313
Short positions 28,022 - 28,022
Derivatives 281,299 4,227 285,526
Accruals, deferred income and
other liabilities - - 1,764 19 14,234 16,017
Retirement benefit liabilities 3,210 3,210
Deferred tax 507 507
Subordinated liabilities - 868 23,144 24,012
Liabilities of disposal groups 3,378 3,378
423,308 22,578 4,227 497,202 19 21,329 968,663
Equity 59,215
1,027,878
Notes:
(1) Held-for-trading.
(2) Designated as at fair value.
(3) Hedging derivatives.
(4) Available-for-sale.
(5) Loans and receivables.
(6) Held to maturity
Apart from the reclassification of £3.6 billion of Treasury debt securities from AFS to HTM in Q1 2014, there were no other
reclassifications in the first half of 2014.
Notes
11. Financial instruments (continued)
Valuation reserves
When valuing financial instruments in the trading book, adjustments are made to mid-market valuations to cover bid-offer
spread, liquidity and credit risk. The table below shows credit valuation adjustments (CVA) and other valuation reserves.
CVA represent an estimate of the adjustment to fair value that a market participant would make to incorporate the risk
inherent in derivative exposures.
30 June 31 December
2014 2013
£m £m
Credit valuation adjustments
- monoline insurers and credit derivative product companies (CDPC) 57 99
- other counterparties 1,433 1,667
1,490 1,766
Other valuation reserves
- bid-offer 405 513
- funding valuation adjustment 522 424
- product and deal specific 718 745
- other 27 8
1,672 1,690
Valuation reserves 3,162 3,456
The table below analyses CVA relating to other counterparties by rating and sector.
30 June 31 December
Ratings: 2014 2013
£m £m
AAA 85 104
AA to AA+ 25 13
A to AA- 111 168
BBB- to A- 336 446
Non-investment grade 876 936
1,433 1,667
Counterparty:
Banks 38 89
Other financial institutions 196 199
Corporate 1,013 1,126
Government 186 253
1,433 1,667
Key points
· The decrease in CVA was primarily driven by tightening of credit spreads.
· Other valuation reserves were broadly flat with balance sheet reduction impacts being offset by additional funding related reserves.
Notes
11. Financial instruments: Valuation reserves (continued)
Own credit
The cumulative own credit adjustment (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.
Cumulative OCA (CR)/DR (1) Subordinated
Debt securities in issue (2) liabilities
HFT DFV Total DFV Total Derivatives Total (3)
£m £m £m £m £m £m £m
30 June 2014 (395) (87) (482) 237 (245) 54 (191)
31 December 2013 (467) (33) (500) 256 (244) 96 (148)
30 June 2013 (488) 244 (244) 380 136 309 445
Carrying values of underlying liabilities £bn £bn £bn £bn £bn
30 June 2014 7.3 13.0 20.3 0.8 21.1
31 December 2013 8.6 15.8 24.4 0.9 25.3
30 June 2013 9.3 20.7 30.0 0.9 30.9
Notes:
(1) The OCA does not alter cash flows and is not used for performance management.
(2) Includes wholesale and retail note issuances.
(3) 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.
Key points
· The cumulative OCA decreased during the first half of 2014 due to tightening of RBS credit spreads in the second quarter of 2014 partially offset by the impact of time decay (e.g. the reduction in the remaining time to maturity of the trades reduces the impact of changes in RBS credit spreads).
· Senior issued debt OCA is determined by reference to secondary debt issuance spreads, the five year spread tightened to 72 basis points (31 December 2013 - 92 basis points; 30 June 2013 - 140 basis points).
· RBS CDS spreads tightened to 85 basis points (31 December 2013 - 114 basis points; 30 June 2013 - 228 basis points).
Notes
11. Financial instruments (continued)
Financial instruments carried at fair value - valuation hierarchy
Commentary on the control environment, valuation techniques and related aspects pertaining to financial instruments
measured at fair value are included in the Group's 2013 Annual Report and Accounts. There have been no material changes to
valuation or levelling approaches in the half year to 30 June 2014.
The tables below show financial instruments carried at fair value on the Group's 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 2014 £bn £bn £bn £bn £m £m
Assets
Loans and advances to banks - 34.7 0.3 35.0 20 (10)
Loans and advances to customers - 71.2 0.2 71.4 20 (30)
Debt securities 58.3 44.6 1.8 104.7 130 (60)
Equity shares 6.1 1.1 0.6 7.8 100 (80)
Derivatives 0.1 271.8 3.1 275.0 330 (190)
64.5 423.4 6.0 493.9 600 (370)
Proportion 13.1% 85.7% 1.2% 100.0%
Of which
RBS excluding RCR 64.4 409.5 4.4 478.3
RCR 0.1 13.9 1.6 15.6
64.5 423.4 6.0 493.9
31 December 2013
Assets
Loans and advances to banks - 35.5 0.3 35.8 30 (10)
Loans and advances to customers - 68.9 0.2 69.1 20 (30)
Debt securities 58.0 49.7 2.1 109.8 160 (100)
Equity shares 7.0 1.1 0.7 8.8 120 (110)
Derivatives 0.1 284.4 3.5 288.0 390 (250)
65.1 439.6 6.8 511.5 720 (500)
Proportion 12.7% 86.0% 1.3% 100.0%
Of which
RBS excluding Non-Core 64.9 436.2 4.9 506.0
Non-Core 0.2 3.4 1.9 5.5
65.1 439.6 6.8 511.5
Notes
11. Financial instruments: Valuation hierarchy (continued)
Level 3 sensitivity
Level 1 Level 2 Level 3 Total Favourable Unfavourable
30 June 2014 £bn £bn £bn £bn £m £m
Liabilities
Deposits by banks - 51.0 0.1 51.1 10 -
Customer accounts - 61.2 0.2 61.4 - (10)
Debt securities in issue - 19.0 1.3 20.3 30 (50)
Short positions 34.3 4.7 - 39.0 - -
Derivatives 0.1 267.6 2.5 270.2 130 (120)
Subordinated liabilities - 0.8 - 0.8 - -
34.4 404.3 4.1 442.8 170 (180)
Proportion 7.8% 91.3% 0.9% 100.0%
Of which
RBS excluding RCR 34.4 393.5 3.7 431.6
RCR - 10.8 0.4 11.2
34.4 404.3 4.1 442.8
31 December 2013
Liabilities
Deposits by banks - 42.8 0.1 42.9 10 -
Customer accounts - 68.2 0.2 68.4 - (10)
Debt securities in issue - 23.1 1.3 24.4 50 (70)
Short positions 23.9 4.1 - 28.0 - -
Derivatives 0.1 282.4 3.0 285.5 130 (120)
Subordinated liabilities - 0.9 - 0.9 - -
24.0 421.5 4.6 450.1 190 (200)
Proportion 5.3% 93.7% 1.0% 100.0%
Of which
RBS excluding Non-Core 24.0 420.1 4.5 448.6
Non-Core - 1.4 0.1 1.5
24.0 421.5 4.6 450.1
Notes
11. 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. The table excludes
unobservable inputs where the impact on valuation is less 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 we indicate where we consider 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.
Level 3 (£bn) Range
Financial instruments Assets Liabilities Valuation technique Unobservable inputs Low High
Loans 0.3 0.1 Discounted cash flow (DCF) Credit spreads (2) 285bps 1211bps
Deposits 0.2 0.2 Option pricing Volatility (3) 27% 30%
DCF Credit spreads (2) 0bps 25bps
Recovery rates (4) 0% 71%
Price based Price (5) 80% 100%
Debt securities
RMBS 0.2 Price based Price (5) 0% 99%
DCF Probability of default (6) 3% 12%
Yield (5) 10% 40%
Conditional prepayment rates (CPR) (7) 0% 10%
CDO and CLO 0.8 Price based Price (5) 0% 100%
DCF Yield (5) 0% 40%
Probability of default (6) 2% 10%
Other ABS 0.4 Price based Price (5) 0% 100%
Other debt securities 0.4 DCF Credit spreads (2) 100bps 109bps
Price based Price (5) 0% 100%
Equity securities 0.6 Price based Price (5) 0% 100%
EBITDA multiple EBITDA multiple (8) 12x 40x
DCF Yield (5) 10% 30%
Recovery rates (4) 0% 100%
Derivatives
Foreign exchange 1.0 0.6 Option pricing model Correlation (9) (41%) 100%
Volatility (3) 6% 23%
Interest rate 1.3 0.5 Option pricing model Correlation (9) (40%) 100%
DCF CPR (7) 2% 20%
Equities and commodities 0.1 0.6 Option pricing model Volatility (3) 27% 30%
Credit 0.7 0.8 Price based Price (5) 0% 100%
DCF based on defaults Recovery rates (4) 0% 100%
and recoveries Credit spreads (2) 25bps 410bps
Notes
11. Financial instruments: Valuation techniques (continued)
Notes:
(1) Level 3 structured issued debt securities of £1.3 billion are not included in the table above as valuation is consistent with the valuation of the embedded derivative component.
(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) Volatility: A measure of the tendency of a price to change with time.
(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) Price and yield: There may be a range of price based information used for evaluating the value of an instrument. This 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 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 payouts. Similarly to price, an instrument's yield may be compared to other instruments either directly or indirectly. Prices move inversely to yields.
(6) Probability of default: This is a measure of the expected rate of losses in an underlying portfolio of mortgages or other receivables. The higher the probability of default the lower the value of the underlying portfolio. The cumulative losses tend to move
conversely to prepayment rates and in line with constant default rates. The higher the rate, the higher the expected number of defaults and therefore the expected losses. An increase in the default rate is likely to reduce the value of an asset.
(7) Conditional prepayment rate: The measure of the rate at which underlying mortgages or loans are prepaid. An increase in prepayment rates in a portfolio may increase or decrease its value depending upon the credit quality and payment terms of the underlying
loans. For example an increase in prepayment rate of a portfolio of high credit quality underlying assets may reduce the value and size of the portfolio whereas for lower credit quality underlyings it may increase the value.
(8) EBITDA (earnings before interest, tax, depreciation and amortisation) multiple: This is a commonly used valuation technique for equity holdings. The EBITDA of a company is used as a proxy for the future cash flows and when multiplied by an appropriate
factor gives an estimate for the value of the company.
(9) 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.
(10) Group does not have any material liabilities measured at fair value that are issued with an inseparable third party credit enhancement.
(11) Improvements in price discovery resulted in transfers of £0.2 billion and £0.1 billion of asset and liabilities respectively from level 3 to level 2. Transfers from level 2 to level 3 mainly comprised debt securities in issue of £0.2 billion, derivative
assets and liabilities of £0.1 billion each and debt securities of £0.1 billion due to increased unobservability of inputs used in the valuation of these instruments. There were no significant transfers between level 1 and level 2.
Notes
11. Financial instruments: Movement in level 3 portfolios
Amounts recorded in
the income statement
At Amount recorded in Purchases Settlements Sales Foreign At in respect of balances
1 January Income SOCI Level 3 transfers and exchange 30 June held at period end
2014 statement (1) (2) In Out issuances (3) and other 2014 Unrealised Realised
£m £m £m £m
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