rbs201202236k5.htm
 
FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549

 
 
Report of Foreign Private Issuer
 
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934
 
For February 23, 2012
 
Commission File Number: 001-10306

 
The Royal Bank of Scotland Group plc

 
RBS, Gogarburn, PO Box 1000
Edinburgh EH12 1HQ

 
(Address of principal executive offices)
 
 
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.
 
Form 20-F X
  
Form 40-F ___
 
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):_________

 
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):_________


Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.


Yes
   ___
No X
 
 
If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82- ________

 
 
The following information was issued as a Company announcement in London, England and is furnished pursuant to General Instruction B to the General Instructions to Form 6-K:

 
 
 



 
Risk and balance sheet management
 
General overview
The following table defines the main types of risk managed by the Group and presents the key areas of focus for each risk in 2011.
 
 
Risk type
Definition
2011 key areas of focus
Capital, liquidity and funding risk
The risk that the Group has insufficient capital or is unable to meet its financial liabilities as they fall due.
Active run-down of capital intensive assets in Non-Core and other risk mitigation left the Core Tier 1 ratio strong at 10.6%, despite a £21 billion uplift in RWAs from the implementation of CRD III in December 2011. Refer to pages 130 to 135.
 
Maintaining the structural integrity of the Group's balance sheet requires active management of both asset and liability portfolios as necessary. Strong term debt issuance and planned reductions in the funded balance sheet enabled the Group to strengthen its liquidity and funding position as market conditions worsened. Refer to pages 136 to 145.
Credit risk (including counterparty risk)
The risk that the Group will incur losses owing to the failure of a customer to meet its obligation to settle outstanding amounts.
During 2011, asset quality continued to improve, resulting in loan impairment charges 21% lower than in 2010 despite continuing challenges in Ulster Bank Group (Core and Non-Core) and corporate real estate portfolios. The Group continued to make progress in reducing key credit concentration risks, with credit exposures in excess of single name concentration limits declining 15% during the year and exposure to commercial real estate declining 14%. Refer to pages 148 to 180.
Country risk
The risk of material losses arising from significant country-specific events.
Sovereign risk increased in 2011, resulting in rating downgrades for a number of countries, including several eurozone members. This resulted in an impairment charge recognised by the Group in 2011 in respect of available-for-sale Greek government bonds. In response the Group further strengthened its country risk appetite setting and risk management systems during the year and brought a number of advanced countries under limit control. This contributed to a reduction in exposure to a range of countries. Refer to pages 181 to 204.
 
Risk and balance sheet management (continued)
 
General overview (continued)
 
 
Risk type
Definition
2011 key areas of focus
Market risk
The risk arising from changes in interest rates, foreign currency, credit spreads, equity prices and risk related factors such as market volatilities.
During 2011, the Group continued to manage down its market risk exposure in Non-Core and reduce the ABS trading inventory such that the trading portfolio became less exposed to credit risk. Refer to pages 205 to 209.
Insurance risk
The risk of financial loss through fluctuations in the timing, frequency and/or severity of insured events, relative to the expectations at the time of underwriting.
During 2011, focus on insurance risk appetite resulted in the de-risking and significant re-pricing of certain classes of business and exiting some altogether.
Operational risk
The risk of loss resulting from inadequate or failed processes, people, systems or from external events.
During 2011, the Group took steps to enhance its management of operational risks. This was particularly evident in respect of risk appetite, the Group Policy Framework, risk assessment, scenario analysis and statistical modelling for capital requirements.
 
The level of operational risk remains high due to the scale of structural change occurring across the Group, the pace of regulatory change, the economic downturn and other external threats, such as e-crime.
Compliance
risk
The risk arising from non-compliance with national and international laws, rules and regulations.
During 2011, the Group managed the increased levels of scrutiny and legislation by enlarging the capacity of its compliance, anti-money laundering and regulatory affairs teams and taking steps to improve its operating model, tools, systems and processes.
Reputational risk
The risk of brand damage arising from financial and non-financial events arising from the failure to meet stakeholders' expectations of the Group's performance and behaviour.
In 2011, an Environmental, Social and Ethical (ESE) Risk Policy was developed with sector ESE risk appetite positions drawn up to assess the Group's appetite to support customers in sensitive sectors including defence, oil and gas. This also included the establishment of divisional reputational risk committees.
 
Stakeholder engagement was broadened with the implementation of formal sessions between the Group Sustainability Commitee and relevant advocacy groups and non-governmental organisations.


Risk and balance sheet management (continued)
 
General overview (continued)
 
 
Risk type
Definition
2011 key areas of focus
Business risk
The risk of lower-than-expected revenues and/or higher-than-expected operating costs.
Business risk is incorporated within the Group's risk appetite target for earnings volatility that was set in 2011.
Pension risk
The risk that the Group will have to make additional contributions to its defined benefit pension schemes.
In 2011, the Group focused on improved stress testing and risk governance mechanisms. This included the establishment of the Pension Risk Committee and the articulation of its view of risk appetite for the various Group pension schemes.
 
Balance sheet management
 
Capital
The Group aims to maintain an appropriate level of capital to meet its business needs and regulatory requirements as capital adequacy and risk management are closely aligned. The Group's risk asset ratios calculated in accordance with Financial Services Authority (FSA) definitions are set out below.
 
 
 
31 December 
2011 
30 September 
2011 
31 December 
2010 
Risk-weighted assets (RWAs) by risk
£bn 
£bn 
£bn 
       
Credit risk
344.3 
346.8 
385.9 
Counterparty risk
61.9 
72.2 
68.1 
Market risk
64.0 
55.0 
80.0 
Operational risk
37.9 
37.9 
37.1 
       
 
508.1 
511.9 
571.1 
Asset Protection Scheme relief
(69.1)
(88.6)
(105.6)
       
 
439.0 
423.3 
465.5 
 
 
Risk asset ratios
% 
% 
% 
       
Core Tier 1
10.6
11.3 
10.7 
Tier 1
13.0
13.8 
12.9 
Total
13.8
14.7 
14.0 
 
Key points
 
·
The increase in market risk RWAs of £9 billion in Q4 2011 reflects the impact of the new CRD III rules.
   
·
APS relief decreased by £19.5 billion in Q4 2011, reflecting pool movements, assets moving into default and changes in risk parameters.


 
Risk and balance sheet management (continued)
 
Balance sheet management: Capital(continued)
 
The Group's capital resources in accordance with FSA definitions were as follows:
 
 
 
31 December 
2011 
£m 
30 September 
2011 
£m 
31 December 
2010 
£m 
       
Shareholders' equity (excluding non-controlling interests)
      
Shareholders' equity per balance sheet
74,819 
77,443 
75,132 
Preference shares - equity
(4,313)
(4,313)
(4,313)
Other equity instruments
(431)
(431)
(431)
 
70,075 
72,699 
70,388 
       
Non-controlling interests
      
Non-controlling interests per balance sheet
1,234 
1,433 
1,719 
Non-controlling preference shares
(548)
(548)
(548)
Other adjustments to non-controlling interests for regulatory purposes
(259)
(259)
(259)
 
427 
626 
912 
       
Regulatory adjustments and deductions
      
Own credit
(2,634)
(2,931)
(1,182)
Unrealised losses on AFS debt securities
1,065 
379 
2,061 
Unrealised gains on AFS equity shares
(108)
(88)
(25)
Cash flow hedging reserve
(879)
(798)
140 
Other adjustments for regulatory purposes
571 
523 
204 
Goodwill and other intangible assets
(14,858)
(14,744)
(14,448)
50% excess of expected losses over impairment provisions (net of tax)
(2,536)
(2,127)
(1,900)
50% of securitisation positions
(2,019)
(2,164)
(2,321)
50% of APS first loss
(2,763)
(3,545)
(4,225)
 
(24,161)
(25,495)
(21,696)
       
Core Tier 1 capital
46,341 
 47,830 
49,604 
       
Other Tier 1 capital
      
Preference shares - equity
4,313 
4,313 
4,313 
Preference shares - debt
1,094 
1,085 
1,097 
Innovative/hybrid Tier 1 securities
4,667 
4,644 
4,662 
 
10,074 
10,042 
10,072 
       
Deductions
      
50% of material holdings
(340)
(303)
(310)
Tax on excess of expected losses over impairment provisions
915 
767 
758 
 
575 
464 
448 
       
Total Tier 1 capital
56,990 
58,336 
60,124 


 
Risk and balance sheet management (continued)
 
Balance sheet management: Capital(continued)
 
 
 
31 December 
2011 
£m 
30 September 
2011 
£m 
31 December 
2010 
£m 
       
Qualifying Tier 2 capital
      
Undated subordinated debt
1,838 
1,837 
1,852 
Dated subordinated debt - net of amortisation
14,527 
14,999 
16,745 
Unrealised gains on AFS equity shares
108 
88 
25 
Collectively assessed impairment provisions
635 
728 
778 
Non-controlling Tier 2 capital
11 
11 
11 
 
17,119 
17,663 
19,411 
       
Tier 2 deductions
      
50% of securitisation positions
(2,019)
(2,164)
(2,321)
50% excess of expected losses over impairment provisions
(3,451)
(2,894)
(2,658)
50% of material holdings
(340)
(303)
(310)
50% of APS first loss
(2,763)
(3,545)
(4,225)
 
(8,573)
(8,906)
(9,514)
       
Total Tier 2 capital
8,546 
8,757 
9,897 
       
Supervisory deductions
      
Unconsolidated Investments
      
  - RBS Insurance
(4,354)
(4,292)
(3,962)
  - Other investments
(239)
(262)
(318)
Other deductions
(235)
(311)
(452)
 
(4,828)
(4,865)
(4,732)
       
Total regulatory capital (1)
60,708 
62,228 
65,289 
 
 
Movement in Core Tier 1 capital
2011 
£m 
   
At beginning of the year
49,604 
Attributable loss net of movements in fair value of own debt
(3,449)
Foreign currency reserves
(363)
Decrease in non-controlling interests
(485)
Decrease in capital deductions including APS first loss
1,128 
Other movements
(94)
   
At end of the year
46,341 
 
Note:
 
(1)
Total capital includes certain instruments issued by RBS N.V. Group that are treated consistent with the local implementation of the Capital Requirements Directive (including the transitional provisions of that Directive). The FSA formally confirmed this treatment in 2012.


 
Risk and balance sheet management (continued)
 
Balance sheet management: Capital: Risk-weighted assets by division
Risk-weighted assets by risk category and division are set out below.
 
 
 
Credit 
risk 
Counterparty 
risk 
Market 
risk 
Operational 
risk 
Gross 
RWAs 
APS 
relief 
Net 
RWAs 
31 December 2011
£bn 
£bn 
£bn 
£bn 
£bn 
£bn 
£bn 
               
UK Retail
41.1 
- 
- 
7.3 
48.4 
(9.4)
39.0 
UK Corporate
69.4 
- 
- 
6.7 
76.1 
(15.5)
60.6 
Wealth
10.9 
- 
0.1 
1.9 
12.9 
- 
12.9 
Global Transaction Services
12.4 
- 
- 
4.9 
17.3 
- 
17.3 
Ulster Bank
33.6 
0.6 
0.3 
1.8 
36.3 
(6.8)
29.5 
US Retail & Commercial
53.4 
1.0 
- 
4.4 
58.8 
- 
58.8 
               
Retail & Commercial
220.8 
1.6 
0.4 
27.0 
249.8 
(31.7)
218.1 
Global Banking & Markets
45.1 
39.9 
50.6 
15.5 
151.1 
(8.5)
142.6 
Other
9.9 
0.2 
- 
0.7 
10.8 
- 
10.8 
               
Core
275.8 
41.7 
51.0 
43.2 
411.7 
(40.2)
371.5 
Non-Core
65.6 
20.2 
13.0 
(5.5)
93.3 
(28.9)
64.4 
               
Group before RFS MI
341.4 
61.9 
64.0 
37.7 
505.0 
(69.1)
435.9 
RFS MI
2.9 
- 
- 
0.2 
3.1 
- 
3.1 
               
Group
344.3 
61.9 
64.0 
37.9 
508.1 
(69.1)
439.0 
               
30 September 2011
              
               
UK Retail
41.4 
- 
- 
7.3 
48.7 
(9.9)
38.8 
UK Corporate
69.0 
- 
- 
6.7 
75.7 
(16.9)
58.8 
Wealth
11.0 
- 
0.1 
1.9 
13.0 
- 
13.0 
Global Transaction Services
13.7 
- 
- 
4.9 
18.6 
- 
18.6 
Ulster Bank
32.0 
0.5 
0.1 
1.8 
34.4 
(6.7)
27.7 
US Retail & Commercial
51.0 
1.1 
- 
4.4 
56.5 
- 
56.5 
               
Retail & Commercial
218.1 
1.6 
0.2 
27.0 
246.9 
(33.5)
213.4 
Global Banking & Markets
46.1 
35.1 
37.6 
15.5 
134.3 
(10.4)
123.9 
Other
8.8 
0.3 
- 
0.7 
9.8 
- 
9.8 
               
Core
273.0 
37.0 
37.8 
43.2 
391.0 
(43.9)
347.1 
Non-Core
71.0 
35.2 
17.2 
(5.5)
117.9 
(44.7)
73.2 
               
Group before RFS MI
344.0 
72.2 
55.0 
37.7 
508.9 
(88.6)
420.3 
RFS MI
2.8 
- 
- 
0.2 
3.0 
- 
3.0 
               
Group
346.8 
72.2 
55.0 
37.9 
511.9 
(88.6)
423.3 
 
 
31 December 2010
              
               
UK Retail
41.7 
- 
- 
7.1 
48.8 
(12.4)
36.4 
UK Corporate
74.8 
- 
- 
6.6 
81.4 
(22.9)
58.5 
Wealth
10.4 
- 
0.1 
2.0 
12.5 
- 
12.5 
Global Transaction Services
13.7 
- 
- 
4.6 
18.3 
- 
18.3 
Ulster Bank
29.2 
0.5 
0.1 
1.8 
31.6 
(7.9)
23.7 
US Retail & Commercial
52.0 
0.9 
- 
4.1 
57.0 
- 
57.0 
               
Retail & Commercial
221.8 
1.4 
0.2 
26.2 
249.6 
(43.2)
206.4 
Global Banking & Markets
53.5 
34.5 
44.7 
14.2 
146.9 
(11.5)
135.4 
Other
16.4 
0.4 
0.2 
1.0 
18.0 
- 
18.0 
               
Core
291.7 
36.3 
45.1 
41.4 
414.5 
(54.7)
359.8 
Non-Core
91.3 
31.8 
34.9 
(4.3)
153.7 
(50.9)
102.8 
               
Group before RFS MI
383.0 
68.1 
80.0 
37.1 
568.2 
(105.6)
462.6 
RFS MI
2.9 
- 
- 
- 
2.9 
- 
2.9 
               
Group
385.9 
68.1 
80.0 
37.1 
571.1 
 (105.6)
465.5 
 

 
Risk and balance sheet management (continued)
 
Balance sheet management: Regulatory capital developments
 
Basel III and other regulatory impacts
 
Basel III
The rules issued by the Basel Committee on Banking Supervision (BCBS), commonly referred to as Basel III, are a comprehensive set of reforms designed to strengthen the regulation, supervision, risk and liquidity management of the banking sector. In the EU they will be enacted through a revised Capital Requirements Directive referred to as CRD IV.
 
In December 2010, the BCBS issued the final text of the Basel III rules, providing details of the global standards agreed by the Group of Governors and Heads of Supervision, the oversight body of the BCBS and endorsed by the G20 leaders at their November 2010 Seoul summit. There are transition arrangements proposed for implementing these new standards as follows:
 
 
·
National implementation of increased capital requirements will begin on 1 January 2013;
   
·
There will be a phased five year implementation of new deductions and regulatory adjustments to Core Tier 1 capital commencing on 1 January 2014;
   
·
The de-recognition of non-qualifying non-common Tier 1 and Tier 2 capital instruments will be phased in over 10 years from 1 January 2013; and
   
·
Requirements for changes to minimum capital ratios, including conservation and countercyclical buffers, as well as additional requirements for Global Systemically Important Banks, will be phased in from 2013 to 2019.
 
The Group, in conjunction with the FSA, regularly evaluates its models for the assessment of RWAs ascribed to credit risk across various classes. This together with the changes introduced by CRD IV relating primarily to counterparty risk, is expected to increase RWA requirements by the end of 2013 by £50 billion to £65 billion.  These estimates are still subject to change; a degree of uncertainty remains around implementation details as the guidelines are not finalised and must still be enacted into EU law. There could be other future changes and associated impacts from these model reviews.
 
Other regulatory capital changes
The Group is in the process of implementing changes to the RWA requirements for commercial real estate portfolios consistent with revised industry guidance from the FSA. This is projected to increase RWA requirements by circa £20 billion by the end of 2013, of which circa £10 billion will apply in 2012.
 
The Group is managing the changes to capital requirements from new regulation and model changes and the resulting impact on the common equity Tier 1 ratio, focusing on risk reduction and deleveraging. This is principally being achieved through the continued run-down and disposal of Non-Core assets and deleveraging in GBM as the business focuses on the most productive returns on capital.
 
 
Risk and balance sheet management (continued)
 
Balance sheet management: Regulatory capital developments (continued)
 
Basel III and other regulatory impacts (continued)
The major categories of new deductions and regulatory adjustments which are being phased in over a 5 year period from 1 January 2014 include:
 
 
·
Expected loss net of provisions;
   
·
Deferred tax assets not relating to timing differences;
   
·
Unrealised losses on available-for-sale securities; and
   
·
Significant investments in non-consolidated financial institutions.
 
The net impact of these changes is expected to be manageable as the aggregation of these drivers is projected to be lower by 2014 and declining during the phase-in period.

 
Risk and balance sheet management (continued)
 
Balance sheet management: Liquidity and funding risk
 
Liquidity risk
 
Introduction
Liquidity risk is the risk that the Group is unable to meet its obligations, including financing maturities as they fall due. Liquidity risk is heavily influenced by the maturity profile and mix of the Group's funding base, as well as the quality and liquidity value of its liquidity portfolio. 
 
Liquidity risk is dynamic, being influenced by movements in markets and perceptions that are driven by firm specific or external factors. Managing liquidity risk effectively is a key component of the Group's risk reduction strategy. The Group's 2011 performance demonstrates continued improvements in managing liquidity risk and reflects actions taken in light of an uncertain economic outlook, which resulted in improvements in key measures.
 
 
·
Deposit growth: Core Retail & Commercial deposits rose by 9%, and together with Non-Core deleveraging, took the Group loan to deposit ratio to 108%, compared with 118% at the end of 2010.
   
·
Wholesale funding: £21 billion of net term wholesale debt was issued in 2011 from secured and unsecured funding programmes, across a variety of maturities and currencies.
   
·
Short-term wholesale funding (STWF): The overall level of STWF fell by £27 billion to £102 billion, below the 2013 target of circa £125 billion.   
   
·
Liquidity portfolio: The liquidity portfolio of £155 billion was maintained above the 2013 target level of £150 billion against a backdrop of heightened market uncertainty in the second half of the year and was higher than STWF. This represents a £53 billion cushion over STWF.
 
Funding issuance
The Group has access to a variety of funding sources across the globe, including short-term money markets, repurchase agreement markets and term debt investors through its secured and unsecured funding programmes. Diversity in funding is provided by its active role in the money markets, along with access to global capital flows through GBM's international client base. The Group's wholesale funding franchise is well diversified by currency, geography, maturity and type.
 
The Group has been a regular issuer in the debt capital markets in both secured and unsecured arrangements. 2011 net new term debt issuance was £21 billion, with 49% secured and 51% unsecured, of which 71% were public transactions and 29% were private.
 
 
Risk and balance sheet management (continued)
 
Balance sheet management: Liquidity and funding risk: Funding sources
The table below shows the Group's primary funding sources including deposits in disposal groups and excluding repurchase agreements.
 
 
 
31 December 2011
  
30 September 2011
  
31 December 2010
 
£m 
% 
  
£m 
% 
  
£m 
% 
                 
Deposits by banks
                
  - central banks
3,680 
0.5 
  
3,568 
0.5 
  
6,655 
0.9 
  - derivative cash collateral
31,807 
4.6 
  
32,466 
4.4 
  
28,074 
3.8 
  - other
33,627 
4.8 
  
42,624 
5.8 
  
31,588 
4.3 
                 
 
69,114 
9.9 
  
78,658 
10.7 
  
66,317 
9.0 
                 
Debt securities in issue
                
  - conduit asset backed commercial
    paper (ABCP)
11,164 
1.6 
  
11,783 
1.6 
  
17,320 
2.3 
  - other commercial paper (CP)
5,310 
0.8 
  
8,680 
1.2 
  
8,915 
1.2 
  - certificates of deposits (CDs)
16,367 
2.4 
  
25,036 
3.4 
  
37,855 
5.1 
  - medium-term notes (MTNs)
105,709 
15.2 
  
127,719 
17.4 
  
131,026 
17.6 
  - covered bonds
9,107 
1.3 
  
8,541 
1.1 
  
4,100 
0.6 
  - securitisations
14,964 
2.1 
  
12,752 
1.7 
  
19,156 
2.6 
                 
 
162,621 
23.4 
  
194,511 
26.4 
  
218,372 
29.4 
Subordinated liabilities
26,319 
3.8 
  
26,275 
3.6 
  
27,053 
3.6 
                 
Notes issued
188,940 
27.2 
  
220,786 
30.0 
  
245,425 
33.0 
                 
Wholesale funding
258,054 
37.1 
  
299,444 
40.7 
  
311,742 
42.0 
                 
Customer deposits
                
  - cash collateral
9,242 
1.4 
  
10,278 
1.4 
  
10,433 
1.4 
  - other
427,511 
61.5 
  
425,125 
57.9 
  
420,433 
56.6 
                 
Total customer deposits
436,753 
62.9 
  
435,403 
59.3 
  
430,866 
58.0 
                 
Total funding
694,807 
100.0 
  
734,847 
100.0 
  
742,608 
100.0 
                 
Disposal group deposits included above
                
  - banks
1 
    
288 
    
266 
  
  - customers
22,610 
    
1,743 
    
2,267 
  
                 
 
22,611 
    
2,031 
    
2,533 
  
 
 
 
 
31 December 
2011 
31 September 
2011 
31 December 
2010 
Short-term wholesale funding
£bn 
£bn 
£bn 
       
Deposits
32.9 
41.8 
34.7 
Notes issued
69.5 
99.8 
95.0 
       
STWF excluding derivative collateral
102.4 
141.6 
129.7 
Derivative collateral
31.8 
32.5 
28.1 
       
STWF including derivative collateral
134.2 
174.1 
157.8 
       
Interbank funding excluding derivative collateral
      
  - bank deposits
37.3 
46.2 
38.2 
  - bank loans
(24.3)
(33.0)
(31.3)
       
Net interbank funding
13.0 
13.2 
6.9 
 
 
 
Risk and balance sheet management (continued)
 
Balance sheet management: Liquidity and funding risk: Funding sources (continued)
 
Key points
 
·
Short-term wholesale funding excluding derivative collateral declined £27.3 billion in 2011, from £129.7 billion to £102.4 billion. This is £52.9 billion lower than the Group's liquidity portfolio. Deleveraging in Non-Core and GBM has led to the reduced need for funding.
   
·
The Group's customer deposits grew by approximately £7.1 billion in 2011.
 
The table below shows the Group's debt securities in issue and subordinated liabilities by remaining maturity.
 
 
Debt securities in issue
      
 
Conduit 
ABCP 
Other 
CP and 
CDs 
MTNs 
Covered 
bonds 
Securitisations 
Total 
Subordinated 
liabilities 
Total 
notes 
issued 
  
 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
% 
                   
31 December 2011
                  
Less than 1 year
11,164 
21,396 
36,302 
- 
27 
68,889 
624 
69,513 
36.8 
1-3 years
- 
278 
26,595 
2,760 
479 
30,112 
3,338 
33,450 
17.7 
3-5 years
- 
2 
16,627 
3,673 
- 
20,302 
7,232 
27,534 
14.6 
More than 5 years
- 
1 
26,185 
2,674 
14,458 
43,318 
15,125 
58,443 
30.9 
                   
 
11,164 
21,677 
105,709 
9,107 
14,964 
162,621 
26,319 
188,940 
100.0 
                   
30 September 2011
                  
Less than 1 year
11,783 
32,914 
54,622 
- 
43 
99,362 
400 
99,762 
45.2 
1-3 years
- 
795 
28,456 
2,800 
26 
32,077 
2,045 
34,122 
15.5 
3-5 years
- 
2 
18,049 
3,037 
33 
21,121 
8,265 
29,386 
13.3 
More than 5 years
- 
5 
26,592 
2,704 
12,650 
41,951 
15,565 
57,516 
26.0 
                   
 
11,783 
33,716 
127,719 
8,541 
12,752 
194,511 
26,275 
220,786 
100.0 
                   
31 December 2010
                  
Less than 1 year
17,320 
46,051 
30,589 
- 
88 
94,048 
964 
95,012 
38.7 
1-3 years
- 
702 
47,357 
1,078 
12 
49,149 
754 
49,903 
20.3 
3-5 years
- 
12 
21,466 
1,294 
34 
22,806 
8,476 
31,282 
12.8 
More than 5 years
- 
5 
31,614 
1,728 
19,022 
52,369 
16,859 
69,228 
28.2 
                   
 
17,320 
46,770 
131,026 
4,100 
19,156 
218,372 
27,053 
245,425 
100.0 
 
Key point
 
·
Debt securities in issue with a maturity of less than one year declined £25.1 billion from £94.0 billion at 31 December 2010 to £68.9 billion at 31 December 2011, largely due to the maturity of £20.1 billion of notes issued under the UK Government's Credit Guarantee Scheme (CGS). The remaining notes issued under the CGS are due to mature in 2012, £15.6 billion in the first quarter of the year and £5.7 billion in the second quarter.
 
 
 
Risk and balance sheet management (continued)
 
Balance sheet management: Liquidity and funding risk: Funding sources (continued)
 
Long-term debt issuances
The table below shows debt securities issued by the Group with an original maturity of one year or more. The Group also executes other long-term funding arrangements (predominantly term repurchase agreements) which are not reflected in the following tables.
 
 
 
Year ended
  
Quarter ended
 
31 December 
2011 
31 December 
2010 
  
31 December 
2011 
30 September 
2011 
31 December 
2010 
 
£m 
£m 
  
£m 
£m 
£m 
             
Public
            
  - unsecured
5,085 
12,887 
  
- 
- 
775 
  - secured
9,807 
8,041 
  
3,223
1,721 
1,725 
Private
            
  - unsecured
12,414 
17,450 
  
911 
3,255 
4,623 
  - secured
500 
- 
  
500 
- 
- 
             
Gross issuance
27,806 
38,378 
  
4,634 
4,976 
7,123 
Buy backs
(6,892)
(6,298)
  
(1,270)
(2,386)
(1,702)
             
Net issuance
20,914 
32,080 
  
3,364 
2,590 
5,421 
 
Key points
 
·
In line with the Group's strategic plan, it has been an active issuer in recent years as it improved its liquidity and funding profile. Secured funding has increased as a proportion of total wholesale funding more recently as market dislocation and uncertainty over future regulatory developments have made unsecured markets less liquid.
   
·
As the Group delevers, with Non-Core and GBM third party assets decreasing and Retail & Commercial deposits increasing, net term debt issuance decreased from £32 billion in 2010 to £21 billion in 2011. The net requirement in 2012 is expected not to exceed £10 billion as further deleveraging should cover the differences.
   
·
The Group undertakes voluntary buy-backs of its privately issued debt in order to maintain client relationships and as part of its normal market making activities. These transactions are conducted at prevailing market rates.
 
The table below shows the original maturity of public long-term debt securities issued in the years ended 31 December 2011 and 2010.
 
 
 
1-3 years 
3-5 years 
5-10 years 
>10 years 
Total 
Year ended 31 December 2011
£m 
£m 
£m 
£m 
£m 
           
MTNs
904 
1,407 
1,839 
935 
5,085 
Covered bonds
- 
1,721 
3,280 
- 
5,001 
Securitisations
- 
- 
- 
4,806 
4,806 
           
 
904 
3,128 
5,119 
5,741 
14,892 
           
% of total
6 
21 
34 
39 
100 
           
Year ended 31 December 2010
          
           
MTNs
1,445 
2,150 
6,559 
2,733 
12,887 
Covered bonds
- 
1,030 
1,244 
1,725 
3,999 
Securitisations
- 
- 
- 
4,042 
4,042 
           
 
1,445 
3,180 
7,803 
8,500 
20,928 
           
% of total
7 
15 
37 
41 
100 

 
Risk and balance sheet management (continued)
 
Balance sheet management: Liquidity and funding risk: Funding sources (continued)
 
Long-term debt issuance (continued)
The table below shows the currency breakdown of public and private long-term debt securities issued in the years ended 31 December 2011 and 2010.
 
 
 
GBP 
EUR 
USD 
AUD 
Other 
Total 
Year ended 31 December 2011
£m 
£m 
£m 
£m 
£m 
£m 
             
Public
            
  - MTNs
- 
1,808 
2,181 
1,096 
 - 
5,085 
  - covered bonds
- 
5,001 
- 
- 
- 
5,001 
  - securitisations
478 
1,478 
2,850 
- 
- 
4,806 
Private
2,872 
3,856 
3,183 
302 
2,701 
12,914 
             
 
3,350 
12,143 
8,214 
1,398 
2,701 
27,806 
             
% of total
12 
44 
29 
5 
10 
100 
             
Year ended 31 December 2010
            
             
Public
            
  - MTNs
1,260 
3,969 
5,131 
1,236 
1,291 
12,887 
  - covered bonds
- 
3,999 
- 
- 
- 
3,999 
  - securitisations
663 
1,629 
1,750 
- 
- 
4,042 
Private
2,184 
10,041 
2,879 
174 
2,172 
17,450 
             
 
4,107 
19,638 
9,760 
1,410 
3,463 
38,378 
             
% of total
11 
51 
25 
4 
9 
100 
 
Key points
 
·
In line with the Group's plan to diversify its funding mix, issuances were spread across G10 currencies and maturity bands, including £5.7 billion of public issuance with an original maturity of greater than 10 years.
   
·
The Group has issued approximately £2.8 billion since the year end, including a £1 billion public covered bond issuance and a US$1.2 billion securitisation.
 
 
Risk and balance sheet management (continued)
 
Balance sheet management: Liquidity and funding risk (continued)
 
Secured funding
The Group has access to secured funding markets through own-asset securitisation and covered bond funding programmes to complement existing wholesale funding programmes and access to the repo markets. The Group monitors and manages encumbrance levels related to these secured funding programmes. This includes the potential encumbrance of Group assets that could be used in own asset securitisations and/or covered bonds that could be used as contingent liquidity.
 
Own-asset securitisations
The Group has a programme of own-asset securitisations where assets are transferred to bankruptcy remote SPEs funded by the issue of debt securities. The majority of the risks and rewards of the portfolio are retained by the Group and these SPEs are consolidated and all of the transferred assets retained on the Group's balance sheet. In some own-asset securitisations, the Group may purchase all the issued securities which are available to be pledged as collateral for repurchase agreements with major central banks.
 
Covered bond programme
Certain loans and advances to customers have been assigned to bankruptcy remote limited liability partnerships to provide security for issues of covered bonds by the Group. The Group retains all of the risks and rewards of these loans, the partnerships are consolidated, the loans retained on the Group's balance sheet and the related covered bonds included within debt securities in issue. 
 
The following table shows:
 
(i)  the asset categories that have been pledged to secured funding structures, including assets backing publicly issued own-asset securitisations and covered bonds; and
 
(ii) any currently unencumbered assets that could be substituted into those portfolios or used to collateralise debt securities which may be retained by the Group for contingent liquidity purposes.

 
Risk and balance sheet management (continued)
 
Balance sheet management: Liquidity and funding risk (continued)
 
Secured funding (continued)
 
 
 
31 December 2011
  
31 December 2010
     
Debt securities in issue
      
Debt securities in issue
Asset type (1)
Assets 
£m 
  
Held by 
third 
parties (2)  
£m 
Held by 
the 
Group (3)
£m 
Total 
£m 
  
 
Assets 
£m 
  
Held by 
third 
parties (2)  
£m 
Held by 
the 
Group (3)
£m 
Total 
£m 
                       
Mortgages
                      
  - UK (RMBS)
49,549 
  
10,988 
47,324 
58,312 
  
53,132 
  
13,047 
50,028 
63,075 
  - UK (covered bonds)
15,441 
  
9,107 
- 
9,107 
  
8,046 
  
4,100 
- 
4,100 
  - Irish
12,660 
  
3,472 
8,670 
12,142 
  
15,034 
  
5,101 
11,152 
16,253 
UK credit cards
4,037 
  
500 
110 
610 
  
3,993 
  
34 
1,500 
1,534 
UK personal loans
5,168 
  
- 
4,706 
4,706 
  
5,795 
  
- 
5,383 
5,383 
Other
19,778 
  
4 
20,577 
20,581 
  
25,193 
  
974 
23,186 
24,160 
                       
 
106,633 
  
24,071 
81,387 
105,458 
  
111,193 
  
23,256 
91,249 
114,505 
Cash deposits (4)
11,998 
          
13,068 
        
                       
 
118,631 
          
124,261 
        
 
Notes:
 
(1)
Assets that have been pledged to the SPEs which itself is a subset of the total portfolio of eligible assets within a collateral pool.
(2)
Debt securities that have been sold to third party investors and represents a source of external wholesale funding.
(3)
Debt securities issued pursuant to own-asset securitisations where the debt securities are retained by the Group as a source of contingent liquidity where those securities can be used in repurchase agreements with central banks.
(4)
Cash deposits, £11.2 billion from mortgage repayments and £0.8 billion from other loan repayments held in the SPEs, to repay debt securities issued by the own-asset securitisation vehicles.
 
Securities repurchase agreements
The Group enters into securities repurchase agreements and securities lending transactions under which it transfers securities in accordance with normal market practice. Generally, the agreements require additional collateral to be provided if the value of the securities falls below a predetermined level. Under standard terms for repurchase transactions in the UK and US markets, the recipient of collateral has an unrestricted right to sell or repledge it, subject to returning equivalent securities on settlement of the transaction.
 
Securities sold under repurchase transactions are not derecognised if the Group retains substantially all the risks and rewards of ownership. The fair value (which is equivalent to the carrying value) of securities transferred under such repurchase transactions included within debt securities on the balance sheet is set out below. All of these securities could be sold or repledged by the holder.
 
 
Assets pledged against liabilities
31 December 
2011 
£m 
31 December 
2010 
£m 
     
Debt securities
79,480 
80,100 
Equity shares
6,534 
5,148 
 
 
Risk and balance sheet management (continued)
 
Balance sheet management: Liquidity and funding risk (continued)
 
Liquidity management
Liquidity risk management requires ongoing assessment and calibration of: how the various sources of the Group's liquidity risk interact with each other; market dynamics; and regulatory developments to determine the overall size of the Group's liquid asset buffer. In addition to the size determination, the composition of the buffer is also important. The composition is reviewed on a continuous basis in order to ensure that the Group holds an appropriate portfolio of high quality assets that can provide a cushion against market disruption and dislocation, even in the most extreme stress circumstances.
 
Liquidity portfolio
The table below shows the composition of the Group's liquidity portfolio (at estimated liquidity value). All assets within the liquidity portfolio are unencumbered.
 
 
 
31 December 2011
30 September 
2011 
Period end 
31 December 
2010 
Period end 
Average 
Period end 
 
£m 
£m 
£m 
£m 
         
Cash and balances at central banks
74,711 
69,932 
76,833 
53,661 
Treasury bills
5,937 
- 
4,037 
14,529 
Central and local government bonds (1)
        
  - AAA rated governments and US agencies
37,947 
29,632 
29,850 
41,435 
  - AA- to AA+ rated governments (2)
3,074 
14,102 
18,077 
3,744 
  - governments rated below AA
925 
955 
700 
1,029 
  - local government
4,779 
4,302 
4,700 
5,672 
         
 
46,725 
48,991 
53,327 
51,880 
Other assets (3)
        
  - AAA rated
21,973 
25,202 
24,186 
17,836 
  - below AAA rated and other high quality assets
12,102 
11,205 
11,444 
16,693 
         
 
34,075 
36,407 
35,630 
34,529 
         
Total liquidity portfolio
161,448 
155,330 
169,827 
154,599 
 
Notes:
 
(1)
Includes FSA eligible government bonds of £36.7 billion at 31 December 2011 (30 September 2011 - £36.8 billion; 31 December 2010 - £34.7 billion).
(2)
Includes AAA rated US government guaranteed and US government sponsored agencies. The US government was downgraded from AAA to AA+ by S&P on 5 August 2011, although not by Moody's or Fitch. These securities are reflected here.
(3)
Includes assets eligible for discounting at central banks.
 
Key point
 
·
In view of the continuing uncertain market conditions, the liquidity portfolio was maintained above the Group's target level of £150 billion at £155.3 billion, with an average balance in 2011 of £161.4 billion. In anticipation of challenging market conditions, the composition was altered to become more liquid and conservative, as cash and balances at central banks rose to 45% of the total portfolio at 31 December 2011, from 35% at 31 December 2010.
 
 
Risk and balance sheet management (continued)
 
Balance sheet management: Liquidity and funding risk (continued)
 
Liquidity and funding metrics
The Group continues to improve and augment liquidity and funding risk management practices, in light of market experience and emerging regulatory and industry standards. The Group monitors a range of liquidity and funding indicators. These metrics encompass short and long-term liquidity requirements under stress and normal operating conditions. Two key structural ratios are described below.
 
Loan to deposit ratio and funding gap
The table below shows quarterly trends in the Group's loan to deposit ratio and customer funding gap, including disposal groups. 
 
 
 
Loan to
deposit ratio
  
Customer 
 funding gap 
 
Group 
Core 
  
Group 
 
% 
% 
  
£bn 
         
31 December 2011
108 
94 
  
37 
30 September 2011
112 
95 
  
52 
30 June 2011
114 
96 
  
60 
31 March 2011
116 
96 
  
67 
31 December 2010
118 
96 
  
77 
 
Note:
 
(1)
Loans are net of provisions.
 
Key points
 
·
The Group's loan to deposit ratio improved 1,000 basis points to 108% during 2011, as loans declined and deposits grew.
   
·
The customer funding gap halved with Non-Core contributing £27 billion of the £37 billion reduction.
 
 
Net stable funding ratio
The table below shows the Group's net stable funding ratio (NSFR), estimated by applying the Basel III guidance issued in December 2010. The Group is aiming to meet the minimum required NSFR of 100% over the longer term. This measure seeks to show the proportion of structural term assets which are funded by stable funding, including customer deposits, long-term wholesale funding and equity. One of the main components of the ratio entails categorising retail and SME deposits as either 'more stable' or 'less stable'. The Group's NSFR will also continue to be refined over time in line with regulatory developments. It may be calculated on a basis that is not consistent with that used by other financial institutions.
 
Risk and balance sheet management (continued)
 
Balance sheet management: Liquidity and funding risk: Net stable funding ratio (continued)
 
 
 
31 December 2011
  
30 September 2011
  
31 December 2010
    
   
ASF (1)
    
ASF (1)
    
ASF (1)
  
Weighting 
 
£bn 
£bn 
  
£bn 
£bn 
  
£bn 
£bn 
  
% 
                     
Equity
76 
76 
  
79 
79 
  
77 
77 
  
100 
Wholesale funding > 1 year
124 
124 
  
125 
125 
  
154 
154 
  
100 
Wholesale funding < 1 year
134 
- 
  
174 
- 
  
157 
- 
  
- 
Derivatives
524 
- 
  
562 
- 
  
424 
- 
  
- 
Repurchase agreements
129 
- 
  
132 
- 
  
115 
- 
  
- 
Deposits
                    
  - Retail and SME - more stable
227 
204 
  
170 
153 
  
172 
155 
  
90 
  - Retail and SME - less stable
31 
25 
  
25 
20 
  
51 
41 
  
80 
  - Other
179 
89 
  
239 
120 
  
206 
103 
  
50 
Other (2)
83 
- 
  
102 
- 
  
98 
- 
  
- 
                     
Total liabilities and equity
1,507 
518 
  
1,608 
497 
  
1,454 
530 
    
                     
Cash
79 
- 
  
78 
- 
  
57 
- 
  
- 
Inter-bank lending
44 
- 
  
53 
- 
  
58 
- 
  
- 
Debt securities > 1 year
                    
  - central and local governments  
    AAA to AA-
77 
4 
  
84 
4 
  
89 
4 
  
5 
  - other eligible bonds
73 
15 
  
75 
15 
  
75 
15 
  
20 
  - other bonds
14 
14 
  
17 
17 
  
10 
10 
  
100 
Debt securities < 1 year
45 
- 
  
54 
- 
  
43 
- 
  
- 
Derivatives
530 
- 
  
572 
- 
  
427 
- 
  
- 
Reverse repurchase agreements
101 
- 
  
102 
- 
  
95 
- 
  
- 
Customer loans and advances > 1 year
                    
  - residential mortgages
145 
94 
  
144 
94 
  
145 
94 
  
65 
  - other
173 
173 
  
176 
176 
  
211 
211 
  
100 
Customer loans and advances < 1 year
                    
  - retail loans
19 
16 
  
20 
17 
  
22 
19 
  
85 
  - other
137 
69 
  
146 
73 
  
125 
63 
  
50 
Other (3)
70 
70 
  
87 
87 
  
97 
97 
  
100 
                     
Total assets
1,507 
455 
  
1,608 
483 
  
1,454 
513 
    
                     
Undrawn commitments
240 
12 
  
245 
12 
  
267 
13 
  
5 
                     
Total assets and undrawn commitments
1,747 
467 
  
1,853 
495 
  
1,721 
526 
    
                     
Net stable funding ratio
  
111% 
    
100% 
    
101% 
    
 
Notes:
 
(1)
Available stable funding.
(2)
Deferred tax, insurance liabilities and other liabilities.
(3)
Prepayments, accrued income, deferred tax and other assets.
 
Key points
 
·
The NSFR increased by 10% in the year to 111%, with the funding cushion over term assets  and undrawn commitments increasing from £4 billion to £51 billion.
   
·
Available stable funding decreased by £12 billion in the year as a result of a £30 billion reduction in long-term wholesale funding, including the move into short-term of approximately £20 billion of balances under the CGS. This was offset by a £19 billion increase in qualifying deposit balances, including classification of certain deposits as more stable, as some assumptions and methodologies were refined.  
   
·
Term assets decreased in the year by £38 billion primarily reflecting Non-Core disposals and run-offs. The decrease in other assets is primarily due to the closures of certain equities businesses in Global Banking & Markets and other asset movements.

 
Risk and balance sheet management (continued)
 
Balance sheet management: Interest rate risk
Interest rate risk in the banking book (IRRBB) value-at-risk (VaR) for the Group's retail and commercial banking activities at a 99% confidence level was as follows:
 
 
 
Average 
Period end 
Maximum 
Minimum 
 
£m 
£m 
£m 
£m 
         
31 December 2011
63 
51 
80 
44 
31 December 2010
58 
96 
96 
30 
 
A breakdown of the Group's IRRBB VaR by currency is shown below.
 
 
Currency
31 December 
 2011 
£m 
31 December 
 2010 
£m 
     
Euro
26 
33 
Sterling
57 
79 
US dollar
61 
121 
Other
5 
10 
 
Key points
 
·
Interest rate exposure at 31 December 2011 was considerably lower than at 31 December 2010 but average exposure was 9% higher in 2011 than in 2010.
   
·
The reduction in US dollar VaR reflects, in part, changes in holding period assumptions following changes in Non-Core assets.
 
 
Risk and balance sheet management (continued)
 
Balance sheet management: Interest rate risk (continued)
 
Sensitivity of net interest income
The Group seeks to mitigate the effect of prospective interest rate movements, which could reduce future net interest income (NII) in the Group's businesses, whilst balancing the cost of such activities on the current net revenue stream. Hedging activities also consider the impact on market value sensitivity under stress.
 
The following table shows the sensitivity of NII, over the next twelve months, to an immediate upward or downward change of 100 basis points to all interest rates. In addition, the table includes the impact of a gradual 400 basis point steepening and a gradual 300 basis point flattening of the yield curve at tenors greater than a year. This scenario differs from that applied in the previous year in both the severity of the rate shift and the tenors to which this is applied.
 
 
Potential favourable/(adverse) impact on NII
31 December 
2011 
£m 
30 September 
2011 
£m 
31 December 
2010 
£m
       
+ 100 basis points shift in yield curves
244 
188 
232 
- 100 basis points shift in yield curves
(183)
(74)
(352)
Bear steepener
443 
487 
  
Bull flattener
(146)
(248)
  
 
Key points
 
·
The Group's interest rate exposure remains slightly asset sensitive, driven in part by changes to underlying business assumptions as rates rise. The impact of the steepening and flattening scenarios is largely driven by the investment of net free reserves.
   
·
The reported sensitivity will vary over time due to a number of factors such as market conditions and strategic changes to the balance sheet mix and should not therefore be considered predictive of future performance.
 
 
Structural foreign currency exposures
The Group does not maintain material non-trading open currency positions, other than the structural foreign currency translation exposures arising from its investments in foreign subsidiaries and associated undertakings and their related currency funding. The Group's structural foreign currency exposure was £24.2 billion and £17.9 billion before and after economic hedges respectively, broadly unchanged from the 2010 position.
 

 


 
Signatures


 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.







 
 
Date: 23 February 2012
 
 
THE ROYAL BANK OF SCOTLAND GROUP plc (Registrant)
 
 
 
By:
/s/ Jan Cargill
 
 
Name:
Title:
Jan Cargill
Deputy Secretary