rbs201402276k3.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 27, 2014
 
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
 
 
Presentation of information
138
General overview
138
 
 
Capital management
Capital and leverage ratios
141
Capital resources
142
Estimated leverage ratio
146
Risk-weighted assets
149
 
 
Liquidity and funding risk
Overview
151
Liquidity risk
151
Funding risk
154
Encumbrance
158
 
 
Credit risk
Financial assets
162
Loans and related credit metrics
163
Debt securities
171
Derivatives
172
Key loan portfolios
173
 
 
Market risk
Trading portfolios
191
Non-traded interest rate risk
193
Foreign exchange risk
196
 
 
Country risk
Overview
197
Summary of country exposures
199

 
Risk and balance sheet management
Presentation of information
In the balance sheet, all assets of disposal groups are presented as a single line as required by IFRS. In the risk and balance sheet management section, balances and exposures relating to disposal groups are included within risk measures for all periods presented, as permitted by IFRS.
 
General overview
The Group's main risks as well as top and emerging risks are described in the Risk and balance sheet management section of the Group's 2013 Annual Report and Accounts (refer also to Risk factors on pages 201 to 203). The following table defines and presents a summary of the key developments for each risk type during 2013.
 
 
Risk type
Definition
2013 summary
Capital adequacy risk
The risk that the Group has insufficient capital.
The Group's Core Tier 1 ratio on a Basel 2.5 basis was 10.9% and on a fully loaded Basel III basis (FLB3) was 8.6% at 31 December 2013. The Group is targeting a FLB3 Common Equity Tier 1 ratio of c.11% by the end of 2015 and 12% or above by the end of 2016. The timely run-down of RCR and the successful divestment of Citizens, are key to the achievement of our capital plans.
 
Liquidity and funding risk
The risk that the Group is unable to meet its financial liabilities
as they fall due.
Liquidity and funding metrics continued to strengthen with short-term wholesale funding now £32.4 billion, covered more than four times by a liquidity portfolio of £146.1 billion. Liquidity coverage and net stable funding ratios also improved.
 
Credit risk
The risk of financial loss due to the failure of a customer,
 or counterparty, to meet its obligation to settle
outstanding amounts.
During 2013, loan impairment charges were £8.4 billion, of which £4.5 billion related to the creation of RCR and the related strategy. Excluding the increased impairments relating to RCR, loan impairment losses fell by £1.4 billion. Impairment provisions now cover risk elements in lending of £39.4 billion by 64%, up from 52% a year ago. Credit risk RWAs reduced by 16% to £313.4 billion, within which counterparty risk RWAs more than halved to £22.3 billion, reflecting risk reduction and core product focus in Markets as well as Non-Core disposals and run-off.
 
Market risk
The risk of loss arising from fluctuations in interest rates,
credit spreads, foreign currency rates, equity prices,
commodity prices and other risk-related factors such as
market volatilities that may lead to a reduction in
 earnings, economic value or both.
Average trading VaR decreased significantly from £97 million to £79 million reflecting risk reduction and capital management focus.
 
Country risk
The risk of losses occurring as a result of either a country
event or unfavourable country operating conditions.
Balance sheet exposure to eurozone periphery countries continued to reduce, down by 11% to £52.9 billion at the end of 2013, of which 70% related to Ireland, primarily reflecting exposures in Ulster Bank.

 
Risk and balance sheet management
 
General overview (continued)
 
 
Risk type
Definition
2013 summary
Conduct risk
The risk that the conduct of the Group and its staff towards its
 customers, or within the markets in which it operates,
 leads to reputational damage and/or financial loss.
 
The focus in 2013 was on placing conduct risk at the centre of the Group's philosophy and on completing the development of the risk framework. Promoting understanding of conduct issues and ensuring compliance with regulations and rules are priorities for the Group.
Pension risk
The risk to a firm caused by its contractual or other liabilities to,
or with respect to, its pension schemes, whether established
for its employees or for those of a related company or otherwise.
 It also means the risk that the firm will make payments
or other contributions to, or with respect to, a pension scheme
because of a moral obligation, or because the firm considers
that it needs to do so for some other reason.
 
In 2013, various pension risk stress testing initiatives were undertaken, focused both on internally defined scenarios and on scenarios designed to meet integrated PRA stress testing requirements.
 
Operational risk
The risk of loss resulting from inadequate or failed
 processes, people, systems or from external events.
In 2013, the focus was on continued implementation and embedding of risk assessments across the Group, including
 the strengthening of links between risk assessments and other elements of the Group operational risk framework.
 In addition, risk assessments were increasingly used to identify single points of failure.
 
Regulatory risk
The risk of material loss or liability, legal or regulatory sanctions,
or reputational damage, resulting from the failure to comply with
 (or adequately plan for changes to) relevant official sector policy,
laws, regulations, or major industry standards, in any location in
which the Group operates.
The Group's existing Compliance and Regulatory Affairs teams were brought together in H2 2013, following the creation of the role of Group Head of Conduct and Regulatory Affairs. Other enhancements made during 2013 included the creation of a more centralised approach to assurance activities and the introduction of a new 'Centres of Expertise' model for the management of regulatory developments, bringing together divisional and functional resources to manage issues more efficiently.


 
Risk and balance sheet management
General overview (continued)
 
 
Risk type
Definition
2013 summary
Reputational risk
The risk of brand damage and/or financial loss due to a failure to
 meet stakeholders' expectations of the Group.
The reputational risk framework is aligned with the Group's focus on serving customers well, strategic objectives and the risk appetite goal of maintaining stakeholder confidence.
 
In 2013, the Environmental, Social and Ethical risk management function was set up to address the reputational risk associated with the clients the Group chooses to do business with. It sets policy and provides guidance to avoid reputational risk relating to business engagements and lending to clients in sensitive industry sectors.
 
Business risk
The risk of losses as a result of adverse variance in the Group's
 revenues and/or costs relative to its business plan and strategy.
The Group Board has ultimate responsibility for business risk through the achievement of the Group's business plan. The primary responsibility for divisional financial performance rests with the divisional Chief Executive Officer supported by divisional Executive Committees and functions.
 
In 2013, the management and measurement of business risk was enhanced with an increased focus on stress testing.
 
The Group responded to business risk challenges by focusing on the management of net interest margin in order to sustain and grow revenues. In addition, it introduced cost management programmes to deliver substantial savings.
 
Strategic risk
The risk that the Group will make inappropriate strategic choices, or
that there will be changes in the external environment to which the
 Group fails to adapt its strategies.
The Group is focusing on reducing strategic risk following a wide-ranging review to analyse core activities and formulate an appropriate plan, including rationalisation where necessary, to address the business challenges of the next five years.
 
The successful execution of this strategy is set against a background of increasing regulatory demands and scrutiny as well as a challenging macroeconomic environment. Successful and timely execution of the strategy will be key to the future success of the Group.
 
Political risk
The risk to the Group's business and operations of the referendum
on Scottish independence.
During 2013, the focus on the question of potential Scottish independence from the UK has heightened and the Scottish government will be holding a referendum in September 2014. A vote in favour of Scottish independence would be likely to significantly impact the Group's credit ratings and could also impact the fiscal, monetary, legal and regulatory landscape to which the Group is subject. Were Scotland to become independent, it may also affect Scotland's status in the EU.
 
 
 
Risk and balance sheet management
Capital management
 
Introduction
The Group aims to maintain an appropriate level of capital to meet its business needs and regulatory requirements, and operates within an agreed risk appetite. The appropriate level of capital is determined based on the dual aims of: (i) meeting minimum regulatory capital requirements; and (ii) ensuring the Group maintains sufficient capital to uphold customer, investor and rating agency confidence in the organisation, thereby supporting the business franchise and funding capacity.
 
Capital and leverage ratios
The Group's capital, RWAs and risk asset ratios, on the basis of current rules (Basel 2.5) and fully loaded Capital Requirements Regulation (CRR or FLB3), calculated in accordance with PRA definitions, are set out below.
 
Current rules
31 December 
30 September 
31 December 
2013 
2013 
2012 
Capital
£bn 
£bn 
£bn 
       
Core Tier 1
42.2 
47.5 
47.3 
Tier 1
50.6 
56.6 
57.1 
Total
63.7 
66.6 
66.8 
       
RWAs by risk
      
       
Credit risk
      
  - non-counterparty
291.1 
303.1 
323.2 
  - counterparty
22.3 
34.5 
48.0 
Market risk
30.3 
30.6 
42.6 
Operational risk
41.8 
41.8 
45.8 
       
 
385.5 
410.0 
459.6 
       
Risk asset ratios
% 
% 
% 
       
Core Tier 1
10.9 
11.6 
10.3 
Tier 1
13.1 
13.8 
12.4 
Total
16.5 
16.2 
14.5 
       
 
31 December 
30 September 
31 December 
Estimated FLB3 (1)
2013 
2013 
2012 
       
Common Equity Tier 1 (CET1) capital
£36.8bn
£41.1bn
£37.9bn
RWAs
£429.1bn
£452.5bn
£494.6bn
CET1 ratio
8.6%
9.1%
7.7%
Leverage ratio
3.5%
3.6%
3.1%
 
Note:
(1)
Calculated on the basis disclosed on page 145.
 
 
Risk and balance sheet management
 
 
Capital and leverage ratios (continued)
 
Key points
·
Core Tier 1 capital ratios, under current rules and the fully loaded Basel III basis, improved by 60 basis points and 90 basis points respectively in the year. The benefit of lower RWAs was partially offset by the significant attributable loss for the year. The establishment of RCR and the related impairments reduced the ratios by c.10 basis points and c.20 basis points respectively.
   
·
RWA decreases under current rules were primarily in Markets (£36.8 billion) as a result of balance sheet and risk reduction, and in Non-Core (£31.2 billion) reflecting disposal of capital intensive portfolios and run-off.
   
·
The Group continues to target a CET1 ratio of c.11% by the end of 2015 and 12% or above by the end of 2016 on a FLB3 basis.
   
·
The Group has announced plans to accelerate the divestment of RBS Citizens. Preparations for a partial initial public offering in 2014 is on track and the Group intends to fully divest the business by the end of 2016, benefiting CET1.
 
 
 
 
Capital resources
 
 
 
 
 
 
 
 
31 December 2013
 
31 December 2012
 
Current 
Transitional 
Full 
 
Current 
Transitional 
Full 
basis 
basis 
basis 
 
basis 
basis 
basis 
(Basel 2.5)
(PRA) 
(final CRR)
 
(Basel 2.5)
(draft CRR) 
(draft CRR) 
£m 
£m 
£m 
 
£m 
£m 
£m 
 
 
 
 
 
 
 
 
Shareholders' equity (excluding non-controlling
 
 
 
 
 
 
 
  interests)
 
 
 
 
 
 
 
Shareholders' equity
58,742 
58,742 
58,742 
 
68,678 
68,678 
68,168 
Preference shares - equity
(4,313)
(4,313)
(4,313)
 
(4,313)
(4,313)
(4,313)
Other equity instruments
(979)
(979)
(979)
 
(979)
(979)
(979)
 
53,450 
53,450 
53,450 
 
63,386 
63,386 
62,876 
Non-controlling interests
 
 
 
 
 
 
 
Non-controlling interests
473 
- 
- 
 
1,770 
1,770 
1,770 
Regulatory adjustments to non-controlling interests
- 
- 
- 
 
(1,367)
(1,367)
(1,770)
 
473 
- 
- 
 
403 
403 
- 
Regulatory adjustments and deductions
 
 
 
 
 
 
 
Own credit
726 
601 
601 
 
691 
691 
493 
Defined benefit pension fund adjustment
362 
(172)
(172)
 
913 
(144)
(144)
Net unrealised AFS losses
308 
- 
- 
 
346 
346 
- 
Cash flow hedging reserve
84 
84 
84 
 
(1,666)
(1,666)
(1,666)
Other regulatory adjustments
(103)
(55)
(55)
 
(197)
- 
- 
Deferred tax assets
- 
(2,260)
(2,260)
 
- 
(323)
(3,231)
Prudential valuation adjustments
- 
(781)
(781)
 
- 
(310)
(310)
Qualifying deductions exceeding Additional Tier 1 (AT1) capital
- 
- 
- 
 
- 
(8,420)
- 
Goodwill and other intangible assets
(12,368)
(12,368)
(12,368)
 
(13,545)
- 
(13,956)
50% of expected losses less impairment provisions
(19)
(1,731)
(1,731)
 
(1,904)
- 
(6,154)
50% of securitisation positions
(748)
- 
- 
 
(1,107)
- 
- 
 
(11,758)
(16,682)
(16,682)
 
(16,469)
(9,826)
(24,968)
 
 
 
 
 
 
 
 
Core Tier 1 capital
42,165 
36,768 
36,768 
 
47,320 
53,963 
37,908 


Risk and balance sheet management
 
Capital resources (continued)
 
 
 
 
 
 
 
 
31 December 2013
 
31 December 2012
 
Current 
Transitional 
Full 
 
Current 
Transitional 
Full 
 basis 
basis 
basis 
 basis 
basis 
basis 
 
(Basel 2.5)
(PRA) 
(final CRR)
 
(Basel 2.5)
(draft CRR) 
(draft CRR) 
 
£m 
£m 
£m 
 
£m 
£m 
£m 
 
 
 
 
 
 
 
 
Other Tier 1 capital
 
 
 
 
 
 
 
Preference shares - equity
4,313 
- 
- 
 
4,313 
- 
- 
Preference shares - debt
911 
- 
- 
 
1,054 
- 
- 
Innovative/hybrid Tier 1 securities
4,207 
- 
- 
 
4,125 
- 
- 
Qualifying Tier 1 capital and related share premium subject
 
 
 
 
 
 
 
  to phase out from AT1 capital
- 
5,831 
- 
 
- 
4,571 
- 
Qualifying Tier 1 capital included in consolidated AT1
 
 
 
 
 
 
 
  capital issued by subsidiaries and held by third parties
- 
1,749 
- 
 
- 
4,042 
- 
 
9,431 
7,580 
- 
 
9,492 
8,613 
- 
Tier 1 deductions
 
 
 
 
 
 
 
50% of material holdings
(976)
- 
- 
 
(295)
- 
- 
Tax on expected losses less impairment provisions
6 
- 
- 
 
618 
- 
- 
Other regulatory adjustments
- 
- 
- 
 
- 
(17,033)
- 
 
(970)
- 
- 
 
323 
(17,033)
- 
Qualifying deductions exceeding AT1 capital
- 
- 
- 
 
- 
8,420 
- 
 
 
 
 
 
 
 
 
Total Tier 1 capital
50,626 
44,348 
36,768 
 
57,135 
53,963 
37,908 
 
 
 
 
 
 
 
 
Qualifying Tier 2 capital
 
 
 
 
 
 
 
Undated subordinated debt
2,109 
- 
- 
 
2,194 
- 
- 
Dated subordinated debt - net of amortisation
12,436 
- 
- 
 
13,420 
- 
- 
Qualifying items and related share premium
- 
4,431 
3,582 
 
- 
2,774 
7,292 
Qualifying own funds instruments issued by subsidiaries
 
 
 
 
 
 
 
   and held by third parties
- 
9,374 
5,151 
 
- 
12,605 
5,185 
Unrealised gains on AFS equity shares
114 
- 
- 
 
63 
- 
- 
Collectively assessed impairment provisions
395 
- 
- 
 
399 
399 
399 
 
15,054 
13,805 
8,733 
 
16,076 
15,778 
12,876 
 
 
 
 
 
 
 
 
Tier 2 deductions
 
 
 
 
 
 
 
50% of securitisation positions
(748)
- 
- 
 
(1,107)
- 
- 
50% of standardised expected losses less impairment provisions
(25)
- 
- 
 
(2,522)
(3,077)
- 
50% of material holdings
(976)
- 
- 
 
(295)
- 
- 
 
(1,749)
- 
- 
 
(3,924)
(3,077)
- 
Total Tier 2 capital
13,305 
13,805 
8,733 
 
12,152 
12,701 
12,876 
 
 
 
 
 
 
 
 
Supervisory deductions
 
 
 
 
 
 
 
Unconsolidated investments
 
 
 
 
 
 
 
  - Direct Line Group
- 
- 
- 
 
(2,081)
- 
- 
  - Other investments
(36)
- 
- 
 
(162)
- 
- 
Other deductions
(236)
- 
- 
 
(244)
- 
- 
 
(272)
- 
- 
 
(2,487)
- 
- 
 
 
 
 
 
 
 
 
Total regulatory capital
63,659 
58,153 
45,501 
 
66,800 
66,664 
50,784 

 
Risk and balance sheet management
 
Capital resources (continued)
The table below analyses the movements in Core Tier 1, Other Tier 1 and Tier 2 capital on a Basel 2.5 basis during the year ended 31 December 2013.
 
       
Supervisory 
  
 
Core Tier 1 
Other Tier 1 
Tier 2 
deductions 
Total 
 
£m 
£m 
£m 
£m 
£m 
           
At 1 January 2013
47,320 
9,815 
12,152 
(2,487)
66,800 
Attributable loss net of movements in fair value of own credit
(8,961)
- 
- 
- 
(8,961)
Share capital and reserve movements in respect of employee
          
  share schemes
200 
- 
- 
- 
200 
Ordinary shares issued
264 
- 
- 
- 
264 
Foreign exchange reserve
(217)
- 
- 
- 
(217)
Foreign exchange movements
- 
(93)
(106)
- 
(199)
Actuarial gains recognised in retirement benefit schemes (net of tax)
200 
- 
- 
- 
200 
Termination of contingent capital facility
320 
- 
- 
- 
320 
Increase in non-controlling interests
70 
- 
- 
- 
70 
Decrease/(increase) in capital deductions (1)
2,244 
(1,293)
2,175 
2,215 
5,341 
Decrease in goodwill and intangibles
1,177 
- 
- 
- 
1,177 
Defined benefit pension fund
(551)
- 
- 
- 
(551)
Dated subordinated debt issues
- 
- 
1,862 
- 
1,862 
Dated subordinated debt maturities, redemptions and amortisation
- 
- 
(2,666)
- 
(2,666)
Other movements
99 
32 
(112)
- 
19 
           
At 31 December 2013
42,165 
8,461 
13,305 
(272)
63,659 
 
Note:
(1)
From 1 January 2013 material holdings in insurance companies are deducted 50% from Tier 1 and 50% from Tier 2.
 
The table below analyses the movement in CET1 and Tier 2 capital on a FLB3 basis during the year ended 31 December 2013.
 
 
CET1 
Tier 2 
Total 
 
£m 
£m 
£m 
       
At 1 January 2013
37,908 
12,876 
50,784 
Attributable loss net of movements in fair value of own credit
(8,887)
- 
(8,887)
Share capital and reserve movements in respect of employee share schemes
200 
- 
200 
Ordinary shares issued
264 
- 
264 
Nominal value of B shares
510 
- 
510 
Foreign exchange reserve
(217)
(106)
(323)
Actuarial gains recognised in retirement benefit schemes (net of tax)
200 
- 
200 
Termination of contingent capital facility
320 
- 
320 
Decrease in goodwill and intangibles
1,588 
- 
1,588 
Defined benefit pension fund asset
(28)
- 
(28)
Deferred tax assets
971 
- 
971 
Excess of expected loss over impairment provisions
4,423 
- 
4,423 
Grandfathered instruments
- 
(3,121)
(3,121)
Dated subordinated debt issues
- 
1,862 
1,862 
Dated subordinated debt maturities, redemptions and amortisation
- 
(2,666)
(2,666)
Prudential valuation adjustments (PVA)
(471)
- 
(471)
Other movements
(13)
(112)
(125)
       
At 31 December 2013
36,768 
8,733 
45,501 


Risk and balance sheet management
Capital resources (continued)
 
Notes:
General:
In accordance with the PRA's Policy Statement PS7/2013 issued in December 2013 on the implementation of CRD IV, all regulatory adjustments and deductions to CET1 have been applied in full (i.e. no transition) with the exception of unrealised gains on AFS securities which will be included from 2015.
 
CRD IV and Basel III impose additional minimum CET1 ratio of 4.5% of RWAs. There are three buffers which will affect the Group: the capital conservation buffer set at 2.5%; the counter-cyclical capital buffer (up to 2.5% of RWAs), to be applied when macro-economic conditions indicate areas of the economy are over-heating; and the Global-Systemically Important Bank buffer currently expected to be 1.5% for the Group. The regulatory target capital requirements will be phased in and are expected to apply in full from 1 January 2019, in the meantime using national discretion the PRA can apply a top-up. As set out in the PRA's Supervisory Statement SS3/13, the Group and other major UK banks and building societies, are required to maintain a CET1 ratio of 7%, after taking into account certain adjustments set by the PRA.
 
PRA guidance indicates that from 1 January 2015, the Group must meet at least 56% of its Pillar 2A capital requirement with CET1 capital and the balance with Additional Tier 1 capital. The Pillar 2A capital requirement is the additional capital that the Group must hold, in addition to meeting its Pillar 1 requirements in order to comply with the PRA's overall financial adequacy rule.
 
Estimates, including RWAs, are based on the current interpretation, expectations, and understanding, of the CRR requirements, anticipated compliance with all necessary enhancements to model calibration and other refinements, as well as further regulatory clarity and implementation guidance from the UK and EU authorities. The actual CRR impact may differ from these estimates when the final technical standards are interpreted and adopted.
Capital base:
(1)
Includes the nominal value of B shares (£0.5 billion) on the assumption that RBS will be privatised in the future and that they will count as permanent equity in some form by the end of 2017.
(2)
The PVA, arising from the application of the prudent valuation requirements to all assets measured at fair value, has been included in full in line with the guidance from the PRA and uses methodology discussed with the PRA, pending the issue of the final Regulatory Technical Standards (RTS) by the European Banking Authority. The full amount of the applicable PVA has been included in provisions in the determination of the deduction for expected losses.
(3)
Where the deductions from AT1 capital exceed AT1 capital, the excess is deducted from CET1 capital. The excess of AT1 deductions over AT1 capital in year one of transition is due to the application of the current rules to the transitional amounts.
(4)
Insignificant investments in equities of other financial entities (net): long cash equity positions are considered to have matched maturity with synthetic short positions if the long position is held for hedging purposes and sufficient liquidity exists in the relevant market. All the trades are managed and monitored together within the equities business.
(5)
Based on our current interpretations of the final draft of the RTS on credit risk adjustments, issued in July 2013, the Group's standardised latent provision has been reclassified to specific provision and is therefore no longer included in Tier 2 capital.
Risk-weighted assets:
(1)
Current securitisation positions are shown as risk-weighted at 1,250%.
(2)
RWA uplifts include the impact of credit valuation adjustments and asset valuation correlation on banks and central counterparties.
(3)
RWAs reflect implementation of the full internal model method suite, and include methodology changes that took effect immediately on CRR implementation.
(4)
Non-financial counterparties and sovereigns that meet the eligibility criteria under CRR are exempt from the credit valuation adjustments (CVA) volatility charges.
(5)
The CRR final text includes a reduction in the risk-weight relating to small and medium-sized enterprises (SMEs).

 
Risk and balance sheet management
Estimated leverage ratio
The Basel III agreement introduced a leverage ratio as a non-risk based backstop limit intended to supplement the risk-based capital requirements. It aims to constrain the build up of excess leverage in the banking sector, introducing additional safeguards against model risk and measurement errors.
 
The PRA's Supervisory Statement SS3/13 also states that the Group and the other major UK banks and building societies are expected to maintain a 3% end point Tier 1 leverage ratio, after taking into account the adjustments required by the PRA.
 
The transitional period for the introduction of this ratio started with a supervisory monitoring period in 2011, with a parallel run period from January 2013 to December 2017. A minimum ratio of 3% is applied initially. The requirement is expected to be included in Pillar 1 from January 2018.
 
The Basel III leverage percentages are lower than those currently reported, primarily due to changes in methodology relating to the inclusion of potential future exposure on derivatives and undrawn commitments. In addition, inclusion or exclusion of grandfathered capital instruments can result in material differences.
 
The leverage ratios below are based on:
 
●
Tier 1 capital as set out in the final CRR text; and
   
●
Exposure measure calculated using the final CRR text as well as the December 2010 Basel III text; further specificity being sourced from the instructions in the July 2012 Quantitative Impact Study and the related Frequently Asked Questions.
   
Leverage ratio based on the Basel Committee on Banking Supervision (BCBS) proposal issued in January 2014, is also included below.
 
 
 
31 December 2013
  
31 December 2012
Estimated leverage ratio
  
Tier 1 
Leverage 
      
Tier 1 
Leverage 
  
Exposure 
 capital 
Leverage 
Exposure 
 capital 
Leverage 
£bn 
£bn 
% 
£bn 
£bn 
% 
                   
CRR basis:
                  
Transitional measure
1,062.1 
44.3 
24x
4.2 
  
1,205.2 
54.0 
22x
4.5 
Full end point measure
1,062.1 
36.8 
29x
3.5 
  
1,202.3 
37.9 
32x
3.1 
                   
Basel III basis:
                  
Transitional measure
1,093.5 
44.3 
25x 
4.1 
  
1,225.8 
54.0 
23x
4.4 
Full end point measure
1,093.5 
36.8 
30x 
3.4 
  
1,222.9 
37.9 
32x
3.1 
                   
BCBS basis:
                  
Transitional measure
1,082.0 
44.3 
24x 
4.1 
  
1,239.8 
54.0 
23x
4.4 
Full end point measure
1,082.0 
36.8 
29x 
3.4 
  
1,236.9 
37.9 
33x
3.1 
 
Key points
·
The Group's estimated leverage ratios, under both the CRR and Basel III texts, as well as the recently issued Basel proposal are above 3%.
·
Estimated leverage ratios on all full end point measure bases improved during the year reflecting downsizing in Markets and Non-Core as well as risk reduction and portfolio focus ahead of CRR implementation.
   
·
The PRA policy statement PS7/13 requires an acceleration of the CRR transitional approach for computing the capital base. Thus the majority of CET1 capital deductions will apply with immediate effect. This causes a year-on-year reduction of around £10 billion in Tier 1 capital, causing the reduction in transitional measure leverage ratios.
 
 
Risk and balance sheet management
 
Estimated leverage ratio (continued)
            
 
31 December 2013
  
31 December 2012
Exposure measure
CRR 
Basel III 
BCBS 
  
CRR 
Basel III 
BCBS 
basis 
basis 
basis 
basis 
basis 
basis 
£bn 
£bn 
£bn 
£bn 
£bn 
£bn 
               
Cash and balances at central banks
82.7 
82.7 
82.7 
  
79.3 
79.3 
79.3 
Debt securities
113.6 
113.6 
113.6 
  
157.4 
157.4 
157.4 
Equity shares
8.8 
8.8 
8.8 
  
15.2 
15.2 
15.2 
Derivatives
288.0 
288.0 
288.0 
  
441.9 
441.9 
441.9 
Loans and advances to banks and customers
418.4 
418.4 
418.4 
  
459.3 
459.3 
459.3 
Reverse repos
76.4 
76.4 
76.4 
  
104.8 
104.8 
104.8 
Goodwill and intangible assets
12.4 
12.4 
12.4 
  
13.5 
13.5 
13.5 
Other assets
24.6 
24.6 
24.6 
  
26.9 
26.9 
26.9 
Assets of disposal groups
3.0 
3.0 
3.0 
  
14.0 
14.0 
14.0 
               
Total assets
1,027.9 
1,027.9 
1,027.9 
  
1,312.3 
1,312.3 
1,312.3 
Netting of derivatives (1)
(233.8)
(233.8)
(227.3)
  
(369.8)
(369.8)
(358.4)
SFTs (1)
(41.5)
(12.0)
59.8 
  
(45.9)
(23.1)
75.5 
Regulatory deductions and other adjustments (2)
(4.9)
(4.9)
(6.6)
  
(14.9)
(14.9)
(20.9)
Potential future exposure on derivatives (3)
131.3 
130.4 
128.0 
  
133.1 
130.9 
125.8 
Undrawn commitments (4)
183.1 
185.9 
100.2 
  
187.5 
187.5 
102.6 
               
End point leverage exposure measure
1,062.1 
1,093.5 
1,082.0 
  
1,202.3 
1,222.9 
1,236.9 
Transitional adjustments to assets
              
  deducted from regulatory Tier 1 capital
        
2.9 
2.9 
2.9 
               
Transitional leverage exposure measure
1,062.1 
1,093.5 
1,082.0 
  
1,205.2 
1,225.8 
1,239.8 
 
Notes:
(1)
Under the Basel III view, the balance sheet value is reduced for allowable netting under the Basel 2.5 framework (excluding cross-product netting) which mainly relates to cash positions under a master netting agreement. In the CRR calculation, the balance sheet value is replaced with the related regulatory exposure value which has netting of both cash positions and related collateral of securities financing transactions (SFTs). The BCBS view permits the effects of master netting agreements for calculation of counterparty exposure but with very tight restrictions upon the recognition of those agreements for offset of cash received.
(2)
Regulatory deductions: to ensure consistency between the numerator and the denominator, items that are deducted from capital are also deducted from total assets. For the BCBS basis, the shortfall in the stock of eligible provisions relative to expected losses is adjusted.
(3)
Potential future exposure (PFE) on derivatives: the regulatory add-on which is calculated by assigning percentages based on the type of instrument and the residual maturity of the contract to the nominal amounts or underlying values of derivative contracts. Under the latest BCBS proposal, variation margin is permitted to be offset against the replacement cost for derivative exposures (but not the PFE) where specific conditions are met. Refer to page 148 for further analysis.
(4)
Undrawn commitments represent regulatory add-ons relating to off-balance sheet undrawn commitments based on a 10% credit conversion factor for unconditionally cancellable commitments and 100% for other commitments. The CRR basis uses the credit conversion factor (CCF) as per risk measure for medium to low risk trade finance and officially supported export credits. For the BCBS measure, commitments other than securitisation liquidity facilities with an original maturity up to one year and commitments with an original maturity over one year will receive a CCF of 20% and 50%, respectively. Refer to page 148 for further analysis.
 
 
Risk and balance sheet management
 
Estimated leverage ratio (continued)
 
Derivative notionals
The table below analyses derivative notional values by product and maturity.
 
 
<1 year 
1-5 years 
>5 years 
Credit  derivative 
 5% add
on  factor (1)
Credit  derivative 
10% add
on  factor (1)
Total 
31 December 2013 
£bn 
£bn 
£bn 
£bn 
£bn 
£bn 
             
Interest rate
10,582 
16,212 
8,795 
    
35,589 
Exchange rate
3,261 
814 
480 
    
4,555 
Equity
43 
35 
1 
    
79 
Commodities
- 
1 
1 
- 
- 
2 
Credit
      
189 
64 
253 
             
Total
13,886 
17,062 
9,277 
189 
64 
40,478 
             
31 December 2012
            
             
Interest rate
12,515 
12,980 
7,988 
    
33,483 
Exchange rate
3,411 
795 
492 
    
4,698 
Equity
51 
52 
4 
    
107 
Commodities
2 
- 
2 
- 
- 
4 
Credit
      
470 
83 
553 
             
Total
15,979 
13,827 
8,486 
470 
83 
38,845 
 
Note:
(1)
Credit derivatives in the trading book receive a PFE of 10%. Any credit derivatives in respect of a company in which a direct holding would give the Group 10% or more of the voting rights, receive a PFE of 5%.
 
 
Off-balance sheet items
              
 
UK 
UK 
International 
US Retail & 
      
 Retail 
Corporate 
Banking (1)
Commercial 
Markets 
Other 
Total 
31 December 2013
£bn 
£bn 
£bn 
£bn 
£bn 
£bn 
£bn 
               
Unconditionally cancellable items (2)
3.1 
0.5 
0.6 
1.7 
- 
0.3 
6.2 
Other contingents and commitments
9.6 
36.3 
95.4 
16.8 
8.9 
12.7 
179.7 
               
 
12.7 
36.8 
96.0 
18.5 
8.9 
13.0 
185.9 
               
31 December 2012
              
               
Unconditionally cancellable items (2)
3.0 
0.5 
0.8 
1.8 
- 
0.6 
6.7 
Other contingents and commitments
9.3 
33.9 
102.6 
15.6 
12.3 
7.1 
180.8 
               
 
12.3 
34.4 
103.4 
17.4 
12.3 
7.7 
187.5 
 
Notes:
(1)
International Banking facilities are primarily undrawn facilities to large multinational corporations, many of which are domiciled in the UK.
(2)
Based on a 10% credit conversion factor.
 
 
Risk and balance sheet management
 
Risk-weighted assets
The table below analyses the movement in credit risk RWAs by key drivers during the year.
 
 
Credit risk
  
 
Non-counterparty 
Counterparty 
Total 
 
£bn 
£bn 
£bn 
       
At 1 January 2013
323.2 
48.0 
371.2 
Foreign exchange movements
(1.7)
(0.3)
(2.0)
Business movements
(27.4)
(4.9)
(32.3)
Risk parameter changes (1)
(11.0)
(2.9)
(13.9)
Methodology changes (2)
1.4 
(16.1)
(14.7)
Model updates (3)
15.3 
(1.5)
13.8 
Disposals
(8.6)
- 
(8.6)
Other changes
(0.1)
- 
(0.1)
       
At 31 December 2013
291.1 
22.3 
313.4 
 
Notes:
 
(1)
Relates to changes in credit quality metrics of customers and counterparties such as probability of default and loss given default.
(2)
Relates to internal treatment of exposures or calibration of models and regulatory prescribed changes.
(3)
Refers to implementation of a new model or modification of an existing model following approval by the PRA and includes:
 
○
exposure at default treatment (£4.8 billion) in Q2 2013;
 
○
continuation of commercial real estate slotting (£4.4 billion) throughout 2013; and
 
○
loss given default changes to the shipping portfolio (£3.7 billion) in H2 2013.
 
 
 
The table below analyses movements in market and operational risk RWAs during the year.
       
 
Market risk
Operational 
  
 
Markets
Other 
Total 
risk 
Total 
 
£bn 
£bn 
£bn 
£bn 
£bn 
           
At 1 January 2013
36.9 
5.7 
42.6 
45.8 
88.4 
Business and market movements
(9.0)
(1.8)
(10.8)
(4.0)
(14.8)
Model updates (1)
(1.5)
- 
(1.5)
- 
(1.5)
           
At 31 December 2013
26.4 
3.9 
30.3 
41.8 
72.1 
 
Note:
(1)
Market risk model updates in 2013 primarily related to valuation adjustments.
 
 
The table below analyses RWA movements by division during the year.
          
                         
 
UK 
UK 
    
Ulster 
US 
      
Non- 
RFS
  
 
Retail 
Corporate 
Wealth 
IB (1)
Bank 
 R&C (1)
Markets 
Other 
Core 
Core 
MI 
Total 
Total RWAs
£bn 
£bn 
£bn 
£bn 
£bn 
£bn 
£bn 
£bn 
£bn 
£bn 
£bn 
£bn 
                         
At 1 January 2013
45.7 
86.3 
12.3 
51.9 
36.1 
56.5 
101.3 
5.8 
395.9 
60.4 
3.3 
459.6 
Business and
                        
  market movements
(1.8)
(9.6)
(0.3)
(6.0)
(5.7)
(0.4)
(35.1)
2.7 
(56.2)
(22.2)
0.6 
(77.8)
Disposals
- 
- 
- 
- 
- 
- 
- 
- 
- 
(8.6)
- 
(8.6)
Model updates
- 
9.4 
- 
3.1 
0.3 
- 
(1.7)
1.6 
12.7 
(0.4)
- 
12.3 
                         
At 31 December 2013
43.9 
86.1 
12.0 
49.0 
30.7 
56.1 
64.5 
10.1 
352.4 
29.2 
3.9 
385.5 
 
Note:
(1)
IB: International Banking; R&C: Retail & Commercial.
 
 
Risk and balance sheet management
 
Risk-weighted assets (continued)
 
Key points
 
·
RWAs were down £74.1 billion or 16% overall, of which £57.8 billion related to credit risk, £12.3 billion related to market risk and £4.0 billion to operational risk.
·
Credit risk RWAs were down £57.8 billion or 16% to £313.4 billion despite absorbing £13.8 billion of higher RWAs due to model updates.
 
○
Non-counterparty RWAs were down £32.1 billion or 10% to £291.1 billion: In Non-Core (£24.1 billion) due to run-off and disposals in commercial real estate, shipping and leverage finance portfolios; and in Retail & Commercial (£10.0 billion) as loans migrated into default, risk parameter changes and balance sheet reduction.
 
○
Counterparty RWAs were down £25.7 billion or 54% to £22.3 billion in Markets (£17.2 billion) and   Non-Core (£7.8 billion). Methodology changes, significantly all in Markets, reflected extension of product coverage improvements in models and reduction in weighting applied for exposure at default. This was partially offset by the impact of higher loss given defaults for hedge funds.
·
Market risk RWAs were down £12.3 billion or 29% to £30.3 billion significantly all in Markets reflecting balance sheet and risk reduction £9.0 billion and model changes of £1.5 billion.
·
Operational risk RWAs were down £4.0 billion or 9% to £41.8 billion primarily due to reductions in Markets.
 
FLB3 and Basel 2.5
The following tables set out RWAs under current and future rules.
 
 
Estimated 
  
 
FLB3 
Basel 2.5 
31 December 2013
£bn 
£bn 
     
UK Retail
43.9 
43.9 
UK Corporate
82.9 
86.1 
Wealth
12.0 
12.0 
International Banking
50.3 
49.0 
Ulster Bank
30.1 
30.7 
US Retail & Commercial
58.8 
56.1 
     
Retail & Commercial
278.0 
277.8 
Markets
99.9 
64.5 
Centre
13.0 
10.1 
     
Core
390.9 
352.4 
Non-Core
34.2 
29.2 
     
Group before RFS Holdings minority interest
425.1 
381.6 
RFS Holdings minority interest
3.9 
3.9 
     
Group
429.0 
385.5 
 
Key points
·
Estimated FLB3 RWAs were £43.5 billion or 11% higher than under current rules principally reflecting:
 
○
Treatment of securitisations as risk-weighted at 1,250% instead of as capital deductions, £18.7 billion.
 
○
CVA, £16.7 billion and financial institution asset valuation correlation, £5.6 billion.
 
○
Other model and methodology changes, £7.2 billion.
 
○
Reduced risk-weighting for SMEs, £4.6 billion, mainly in UK Corporate.

 
Risk and balance sheet management
 
Liquidity and funding risk
Liquidity and funding risk is the risk that the Group is unable to meet its financial obligations, including financing wholesale maturities or customer deposit withdrawals, as and when they fall due.
 
The risk arises through the maturity transformation role that banks play. It is dependent on company specific factors such as maturity profile, composition of sources and uses of funding, the quality and size of the liquidity portfolio as well as broader market factors, such as wholesale market conditions alongside depositor and investor behaviour.
 
Overview
 
●
During 2013 the Group's deposit surplus continued to build and liquidity reserves were maintained at strong levels, further strengthening the balance sheet. This allowed RBS to easily absorb the minimal outflows following the announcement of the S&P credit rating downgrade (A-/A-2 from A/A-1, with a negative outlook) in November 2013.
●
Following the continued success of the Group's Non-Core run-down and the reduction in the size of the Markets business, the Group's loan:deposit ratio improved by 600 basis points in the year to 94%. In response, the Group has been actively managing down excess cash, through liability management exercises and deposit re-pricing.
●
The Group's credit profile improved significantly during the year, evidenced by the narrowing of the credit spreads. The spread of the most recent subordinated debt issue in December 2013 was 125 basis points lower than a comparable issuance in 2012.
●
Continued reduction in the utilisation of wholesale funding and improvements in the characteristics and behavioural properties of the deposit base. Short-term wholesale funding excluding derivative collateral (STWF) reduced by 22% in the year to £32.4 billion, covered more than four times by the liquidity portfolio and the ratio of customer deposits to total funding improved to 75% from 70%.
●
Continued enablement of new unencumbered assets as pre-positioned collateral for various central bank liquidity facilities.
 
Liquidity risk
The table below sets out the key liquidity and related metrics monitored by the Group.
 
 
31 December 
30 September 
31 December 
2013 
2013 
2012 
 
% 
% 
% 
       
Stressed outflow coverage (1)
145 
147 
128 
Liquidity coverage ratio (LCR) (2)
102 
>100
>100
Net stable funding ratio (NSFR) (2)
122 
119 
117 
 
Notes:
 
(1)
The Group's liquidity risk appetite is based on the internal Individual Liquidity Adequacy Assessment which is measured by reference to the liquidity portfolio as a percentage of stressed outflows under the worst of three severe stress scenarios of a market-wide stress, an idiosyncratic stress and a combination of both. Liquidity risk adequacy is determined by surplus of liquid assets over three months stressed outflows under the worst case stresses. This assessment is performed in accordance with PRA guidance.
(2)
In January 2013, the Basel Committee on Banking Supervision issued its revised draft guidance for calculating LCR which is currently expected to come into effect from January 2015 on a phased basis. Pending the finalisation of the definition, the Group monitors the LCR and NSFR based on its interpretations of the expected final rules.
 
 
Risk and balance sheet management
Liquidity and funding risk: Liquidity risk (continued)
 
Liquidity portfolio
The table below analyses the Group's liquidity portfolio by product, liquidity value and carrying value. Liquidity value is lower than carrying value as it is stated after the discounts applied by the Bank of England and other central banks to instruments, within the secondary liquidity portfolio, eligible for discounting.
 
 
Liquidity value
 
Period end
  
Average 
 
UK DLG (1)
CFG 
Other 
Total 
  
Quarter 
Year 
31 December 2013
£m 
£m 
£m 
£m 
  
£m 
£m 
               
Cash and balances at central banks
71,121 
824 
2,417 
74,362 
  
76,242 
80,933 
Central and local government bonds
              
  AAA rated governments
3,320 
- 
- 
3,320 
  
3,059 
5,149 
  AA- to AA+ rated governments and US agencies
5,822 
6,369 
96 
12,287 
  
13,429 
12,423 
  Below AA rated governments
- 
- 
- 
- 
  
- 
151 
  Local government
- 
- 
- 
- 
  
7 
148 
               
 
9,142 
6,369 
96 
15,607 
  
16,495 
17,871 
Treasury bills
- 
- 
- 
- 
  
6 
395 
               
Primary liquidity
80,263 
7,193 
2,513 
89,969 
  
92,743 
99,199 
Secondary liquidity (2)
48,718 
4,968 
2,411 
56,097 
  
56,869 
56,589 
               
Total liquidity value
128,981 
12,161 
4,924 
146,066 
  
149,612 
155,788 
               
Total carrying value
159,743 
17,520 
6,970 
184,233 
      
 
 
               
31 December 2012
              
               
Cash and balances at central banks
64,822 
891 
4,396 
70,109 
  
74,794 
81,768 
Central and local government bonds
              
  AAA rated governments and US agencies
3,984 
5,354 
547 
9,885 
  
14,959 
18,832 
  AA- to AA+ rated governments
9,189 
- 
432 
9,621 
  
8,232 
9,300 
  Below AA rated governments
- 
- 
206 
206 
  
438 
596 
  Local government
- 
- 
979 
979 
  
989 
2,244 
               
 
13,173 
5,354 
2,164 
20,691 
  
24,618 
30,972 
Treasury bills
750 
- 
- 
750 
  
750 
202 
               
Primary liquidity
78,745 
6,245 
6,560 
91,550 
  
100,162 
112,942 
Secondary liquidity (2)
47,486 
7,373 
760 
55,619 
  
50,901 
41,978 
               
Total liquidity value
126,231 
13,618 
7,320 
147,169 
  
151,063 
154,920 
               
Total carrying value
157,574 
20,524 
9,844 
187,942 
      
 
 
The table below shows the currency split of the liquidity portfolio.
      
           
Total liquidity portfolio
GBP 
USD 
EUR 
Other 
Total 
£m 
£m 
£m 
£m 
£m 
           
31 December 2013
100,849 
33,365 
10,364 
1,488 
146,066 
31 December 2012
84,570 
35,106 
26,662 
831 
147,169 
 
Notes:
(1)
The PRA regulated UK Defined Liquidity Group (UK DLG) comprises the Group's five UK banks: The Royal Bank of Scotland plc, National Westminster Bank Plc, Ulster Bank Limited, Coutts & Company and Adam & Company. In addition, certain of the Group's significant operating subsidiaries - RBS N.V., RBS Citizens Financial Group Inc. and Ulster Bank Ireland Limited - hold locally managed portfolios of liquid assets that comply with local regulations that may differ from PRA rules.
(2)
Includes assets eligible for discounting at the Bank of England and other central banks.

 
 
Risk and balance sheet management
 
Liquidity and funding risk: Key liquidity ratios: Net stable funding ratio (NSFR)
The table below shows the composition of the Group's NSFR, based on the current interpretation of the expected final rules. The Group's NSFR may change over time in line with regulatory developments and related interpretations.
 
 
31 December 2013
  
31 December 2012
  
 
Balance sheet
ASF/RSF (1)
  
Balance sheet
ASF/RSF (1)
Weighting 
 
£bn 
£bn 
  
£bn 
£bn 
% 
             
Equity
59 
59 
  
70 
70 
100 
Wholesale funding > 1 year
76 
76 
  
109 
109 
100 
Wholesale funding < 1 year
51 
- 
  
70 
- 
- 
Derivatives
286 
- 
  
434 
- 
- 
Repurchase agreements
85 
- 
  
132 
- 
- 
Deposits
            
  - retail and SME - more stable
196 
176 
  
203 
183 
90 
  - retail and SME - less stable
66 
53 
  
66 
53 
80 
  - other
156 
78 
  
164 
82 
50 
Other (2)
53 
- 
  
64 
- 
- 
             
Total liabilities and equity
1,028 
442 
  
1,312 
497 
  
             
Cash
83 
- 
  
79 
- 
- 
Inter-bank lending
28 
- 
  
29 
- 
- 
Debt securities > 1 year
            
  - governments AAA to AA-
47 
2 
  
64 
3 
5 
  - other eligible bonds
31 
6 
  
48 
10 
20 
  - other bonds
16 
16 
  
19 
19 
100 
Debt securities < 1 year
20 
- 
  
26 
- 
- 
Derivatives
288 
- 
  
442 
- 
- 
Reverse repurchase agreements
76 
- 
  
105 
- 
- 
Customer loans and advances > 1 year
            
  - residential mortgages
135 
88 
  
145 
94 
65 
  - other
114 
114 
  
136 
136 
100 
Customer loans and advances < 1 year
            
  - retail loans
18 
15 
  
18 
15 
85 
  - other
126 
63 
  
131 
66 
50 
Other (3)
46 
46 
  
70 
70 
100 
             
Total assets
1,028 
350 
  
1,312 
413 
  
Undrawn commitments
213 
11 
  
216 
11 
5 
             
Total assets and undrawn commitments
1,241 
361 
  
1,528 
424 
  
             
Net stable funding ratio
  
122%
    
117%
  
 
Notes:
(1)
Available stable funding and required stable funding.
(2)
Deferred tax and other liabilities.
(3)
Prepayments, accrued income, deferred tax, settlement balances and other assets.
 
Key point
●
The NSFR has improved by 500 basis points to 122% in the year. The required stable funding fell by £63 billion mainly due to the £31 billion decrease in customer lending reflecting balance sheet reduction business disposals and a £24 billion reduction in other assets, principally equity shares reduction in Markets and lower disposal groups. This was mostly offset by a £55 billion reduction in available stable funding primarily due to a £33 billion planned reduction in term wholesale funding and £11 billion in customer deposit outflow.
 

Risk and balance sheet management
 
Liquidity and funding risk (continued)
 
Funding risk
The Group's balance sheet composition is a function of the broad array of product offerings and diverse markets served by its core divisions. The structural composition of the balance sheet is augmented as needed through active management of both asset and liability portfolios. The objective of these activities is to optimise the liquidity profile in the normal business environment, while ensuring adequate coverage of all cash requirements under extreme stress conditions.
 
As set out below the Group's asset and liability types broadly match. Customer deposits provide more funding than customer loans utilise; repurchase agreements are largely covered by reverse repurchase agreements; interbank lending and funding largely match each other and this gap has narrowed over the past 5 years; and derivative assets are largely matched against derivative liabilities.
 
 
Funding sources and uses
    
The table below shows the Group's sources and uses of funding.
       
 
31 December 2013
  
 
Liabilities 
Assets 
  
 
£bn 
£bn 
  
Customer deposits (1)
407 
373 
Loans and advances to customer (1)
Bank deposits (short term only) (1)
14 
18 
Loan and advances to banks (1)
Trading liabilities (2)
67 
93 
Trading assets (2)
Other liabilities and equity (3)
100 
90 
Other assets (3)
Repurchase agreements
85 
76 
Reverse repurchase agreements
Term wholesale funding (1)
69 
90 
Primary liquidity portfolio
       
Funded balance sheet
742 
740 
Funded balance sheet
Derivatives
286 
288 
Derivatives
 
1,028 
1,028 
  
 
Notes:
(1)
Excludes held for trading.
(2)
Financial instruments classified as held-for-trading (HFT), excluding security financing transactions and derivatives.
(3)
Includes non-HFT financial instruments and non financial assets/liabilities.
 
 
Risk and balance sheet management
 
 
Liquidity and funding risk: Funding risk (continued)
        
The table below summarises funding metrics.
                   
 
Short-term wholesale
  
Total wholesale
  
Net inter-bank
funding (1)
funding
funding (2)
 
Excluding 
Including 
  
Excluding 
Including 
  
Deposits 
Loans (3)
Net 
 derivative 
 derivative 
 derivative 
 derivative 
 inter-bank 
collateral 
 collateral 
collateral 
 collateral 
 funding 
 
£bn 
£bn 
  
£bn 
£bn 
  
£bn 
£bn 
£bn 
                   
31 December 2013
32.4 
51.5 
  
108.1 
127.2 
  
16.2 
(17.3)
(1.1)
30 September 2013
34.6 
55.1 
  
113.6 
134.1 
  
18.1 
(16.6)
1.5 
30 June 2013
36.7 
58.9 
  
129.4 
151.5 
  
23.1 
(17.1)
6.0 
31 March 2013
43.0 
70.9 
  
147.2 
175.1 
  
26.6 
(18.7)
7.9 
31 December 2012
41.6 
70.2 
  
150.4 
179.0 
  
28.5 
(18.6)
9.9 
 
Notes:
(1)
Short-term wholesale balances denote those with a residual maturity of less than one year and include longer-term issuances.
(2)
Excludes derivative cash collateral.
(3)
Primarily short-term balances.
 
 
Funding sources
                      
The table below shows the Group's principal funding sources excluding repurchase agreements.
                       
 
31 December 2013
  
30 September 2013
  
31 December 2012
 
Short-term
Long-term
    
Short-term
Long-term
    
Short-term
Long-term
  
 
less than
more than
    
less than
more than
    
less than
more than
  
 
1 year
1 year
Total
  
1 year
1 year
Total
  
1 year
1 year
Total
 
£m
£m
£m
  
£m
£m
£m
  
£m
£m
£m
                       
Deposits by banks
                      
 derivative cash collateral
19,086 
- 
19,086 
  
20,548 
- 
20,548 
  
28,585 
- 
28,585 
 other deposits
14,553 
1,690 
16,243 
  
16,203 
1,850 
18,053 
  
18,938 
9,551 
28,489 
                       
 
33,639 
1,690 
35,329 
  
36,751 
1,850 
38,601 
  
47,523 
9,551 
57,074 
                       
Debt securities in issue
                      
 commercial paper
1,583 
- 
1,583 
  
2,690 
- 
2,690 
  
2,873 
- 
2,873 
 certificates of deposit
2,212 
65 
2,277 
  
2,120 
84 
2,204 
  
2,605 
391 
2,996 
 medium-term notes
10,385 
36,779 
47,164 
  
11,014 
38,438 
49,452 
  
13,019 
53,584 
66,603 
 covered bonds
1,853 
7,188 
9,041 
  
1,871 
7,249 
9,120 
  
1,038 
9,101 
10,139 
 securitisations
514 
7,240 
7,754 
  
10 
8,305 
8,315 
  
761 
11,220 
11,981 
                       
 
16,547 
51,272 
67,819 
  
17,705 
54,076 
71,781 
  
20,296 
74,296 
94,592 
Subordinated liabilities
1,350 
22,662 
24,012 
  
667 
23,053 
23,720 
  
2,351 
24,951 
27,302 
                       
Notes issued
17,897 
73,934 
91,831 
  
18,372 
77,129 
95,501 
  
22,647 
99,247 
121,894 
                       
Wholesale funding
51,536 
75,624 
127,160 
  
55,123 
78,979 
134,102 
  
70,170 
108,798 
178,968 
                       
Customer deposits
                      
 derivative cash collateral
7,082 
- 
7,082 
  
7,671 
- 
7,671 
  
7,949 
- 
7,949 
 other deposits
395,520 
15,067 
410,587 
  
409,661 
17,076 
426,737 
  
400,012 
26,031 
426,043 
                       
Total customer deposits
402,602 
15,067 
417,669 
  
417,332 
17,076 
434,408 
  
407,961 
26,031 
433,992 
                       
Total funding
454,138 
90,691 
544,829 
  
472,455 
96,055 
568,510 
  
478,131 
134,829 
612,960 
 
Key points
●
Wholesale funding reduced by nearly 29% in the year to £127 billion principally reflecting strategic downsizing in Markets.
●
STWF has decreased by £9.2 billion to £32.4 billion reflecting the reduced funding requirement and ongoing liability management.
 
 
Risk and balance sheet management
 
 
Liquidity and funding risk: Funding risk (continued)
           
Total funding by currency
          
 
GBP
USD
EUR
Other
Total
31 December 2013
£m
£m
£m
£m
£m
           
Deposits by banks
7,418 
8,337 
17,004 
2,570 
35,329 
Debt securities in issue
          
  - commercial paper
4 
897 
682 
- 
1,583 
  - certificates of deposit
336 
1,411 
476 
54 
2,277 
  - medium-term notes
6,353 
11,068 
23,218 
6,525 
47,164 
  - covered bonds
984 
- 
8,057 
- 
9,041 
  - securitisations
1,897 
2,748 
3,109 
- 
7,754 
Subordinated liabilities
1,857 
10,502 
8,984 
2,669 
24,012 
           
Wholesale funding
18,849 
34,963 
61,530 
11,818 
127,160 
% of wholesale funding
15%
28%
48%
9%
100%
Customer deposits
272,304 
86,727 
49,116 
9,522 
417,669 
           
Total funding
291,153 
121,690 
110,646 
21,340 
544,829 
           
% of total funding
54%
22%
20%
4%
100%
 
31 December 2012
          
           
Wholesale funding
22,688 
41,563 
93,700 
21,017 
178,968 
% of wholesale funding
13%
23%
52%
12%
100%
           
Total Funding
297,274 
136,490 
146,203 
32,993 
612,960 
% of total funding
49%
22%
24%
5%
100%
 
Key point
●
The proportion of funding held in euros decreased in the year from 24% to 20% reflecting the reduction in euro denominated assets in Non-Core and Markets.
 
 
Deposits and repos
                
The table below shows the composition of the Group's deposits and repos.
                 
 
31 December 2013
  
30 September 2013
  
31 December 2012
 
Deposits 
Repos 
  
Deposits 
Repos 
  
Deposits 
Repos 
 
£m 
£m 
  
£m 
£m 
  
£m 
£m 
                 
Financial institutions
                
  - central and other banks
35,329 
28,650 
  
38,600 
32,748 
  
57,074 
44,332 
  - other financial institutions
53,607 
52,945 
  
54,552 
71,888 
  
64,237 
86,968 
Personal and corporate deposits
364,062 
3,539 
  
379,857 
748 
  
369,755 
1,072 
                 
 
452,998 
85,134 
  
473,009 
105,384 
  
491,066 
132,372 
 
£161 billion (or 39%) of the customer deposits included above are insured through the UK Financial Services Compensation Scheme, US Federal Deposit Insurance Corporation scheme and other similar schemes. Of the personal and corporate deposits above, 53% relate to personal customers.
 
Risk and balance sheet management
 
Liquidity and funding risk: Funding risk (continued)
 
Divisional loan:deposit ratios and funding surplus
The table below shows divisional loans, deposits, loan:deposit ratios (LDR) and customer funding surplus/(gap).
 
 
Loans (1)
Deposits (2)
LDR
  
Funding 
surplus/(gap)
31 December 2013
£m 
£m 
% 
£m 
         
UK Retail
111,046 
114,889 
97 
3,843 
UK Corporate
99,714 
124,742 
80 
25,028 
Wealth
16,644 
37,173 
45 
20,529 
International Banking
35,668 
39,278 
91 
3,610 
Ulster Bank
26,068 
21,651 
120 
(4,417)
US Retail & Commercial
50,279 
55,118 
91 
4,839 
         
Retail & Commercial
339,419 
392,851 
86 
53,432 
Markets
25,231 
21,545 
117 
(3,686)
Other
5,060 
1,085 
nm
(3,975)
         
Core
369,710 
415,481 
89 
45,771 
Non-Core
22,880 
2,188 
nm
(20,692)
         
Group
392,590 
417,669 
94 
25,079 
         
 
31 December 2012
        
         
UK Retail
110,970 
107,633 
103 
(3,337)
UK Corporate
104,593 
127,070 
82 
22,477 
Wealth
16,965 
38,910 
44 
21,945 
International Banking
39,500 
46,172 
86 
6,672 
Ulster Bank
28,742 
22,059 
130 
(6,683)
US Retail & Commercial
50,986 
59,164 
86 
8,178 
Conduits (3)
2,458 
- 
- 
(2,458)
         
Retail & Commercial
354,214 
401,008 
88 
46,794 
Markets
29,589 
26,346 
112 
(3,243)
Other
2,123 
3,340 
64 
1,217 
         
Core
385,926 
430,694 
90 
44,768 
Non-Core
45,144 
3,298 
nm
(41,846)
         
Direct Line Group
881 
- 
- 
(881)
Group
431,951 
433,992 
100 
2,041 
 
nm = not meaningful
 
Notes:
(1)
Excludes reverse repurchase agreements and net of impairment provisions.
(2)
Excludes repurchase agreements.
(3)
All conduits relate to International Banking and have been extracted and shown separately as they were funded by commercial paper issuance until the end of Q3 2012.
 
 
 
Key point
●
The loan:deposit ratio improved by 600 basis points to 94% with the funding surplus increasing to £25.1 billion from £2.0 billion at 31 December 2012. The improvement in Retail & Commercial funding surplus was £6.6 billion and Non-Core run-off resulted in £21.2 billion contraction of its funding gap.

 
 
Risk and balance sheet management
 
Liquidity and funding risk(continued)
 
Maturity analysis
The contractual maturity of balance sheet assets and liabilities reflects the maturity transformation role banks perform, lending long-term but obtaining funding predominantly through short-term liabilities such as customer deposits. In practice, the behavioural profiles of many liabilities exhibit greater stability and longer maturity than the contractual maturity. This is particularly true of many types of retail and corporate deposits which despite being repayable on demand or at short notice, have demonstrated stable characteristics even in periods of acute stress such as those experienced in 2008.
 
The table below shows the behavioural and contractual maturity analysis of Retail & Commercial customer deposits.
 
         
         
 
Less than 
1-5 years 
More than 
Total 
1 year 
5 years 
31 December 2013
£bn 
£bn 
£bn 
£bn 
         
Contractual maturity
381 
12 
- 
393 
Behavioural maturity
124 
220 
49 
393 
         
31 December 2012
        
         
Contractual maturity
380 
20 
1 
401 
Behavioural maturity
145 
219 
37 
401 
 
Encumbrance
The Group's encumbrance ratios are set out below.
 
Encumbrance ratios
  
31 December
31 December
 
2013 
2012 
 
% 
% 
       
Total
  
17 
18 
Excluding balances relating to derivatives transactions
  
19 
22 
Excluding balances relating to derivative and securities financing transactions
  
11 
13 
 
Key points
●
The Group's total encumbrance ratio dropped to 17%.
   
●
31% of the Group's residential mortgage portfolio was encumbered as at 31 December 2013.
●
Unencumbered financial assets covered unsecured liabilities excluding derivatives.
   
●
In addition to the £451.4 billion on balance sheet assets available to support future funding and collateral requirements there is £12.7 billion net available of off-balance sheet collateral from reverse repurchase and derivative collateral transactions.
 
 

Risk and balance sheet management
 
 
Liquidity and funding risk: Balance sheet encumbrance
                        
                                 
 
Encumbered assets relating to:
        
Unencumbered
    
31 December 2013
Debt securities in issue
  
Other secured liabilities
Total 
  
Encumbered 
  
Readily realisable (2)
      
Total
 
Covered 
    
Secured 
encumbered 
assets as a
Liquidity 
  
Other 
Cannot be
Securitisations 
bonds 
Derivatives 
Repos
deposits 
assets (1)
% of related 
portfolio 
Other
realisable(3) 
encumbered (4) 
£bn 
£bn 
  
£bn 
£bn 
£bn 
£bn 
  
assets 
£bn 
£bn 
£bn 
£bn 
  
£bn
                                 
Cash and balances at central banks
- 
- 
  
- 
- 
- 
- 
  
- 
  
74.3 
8.4 
- 
- 
  
82.7 
Loans and advances to banks
5.8 
0.5 
  
10.3 
- 
- 
16.6 
  
60 
  
0.1 
10.9 
- 
- 
  
27.6 
Loans and advances to customers
                                
  - UK residential mortgages
14.6 
16.2 
  
- 
- 
- 
30.8 
  
28 
  
60.8 
18.6 
- 
- 
  
110.2 
  - Irish residential mortgages
9.3 
- 
  
- 
- 
1.2 
10.5 
  
70 
  
0.7 
3.8 
- 
0.1 
  
15.1 
  - US residential mortgages
- 
- 
  
- 
- 
3.5 
3.5 
  
18 
  
9.5 
6.7 
- 
- 
  
19.7 
  - UK credit cards
3.4 
- 
  
- 
- 
- 
3.4 
  
52 
  
- 
3.1 
- 
- 
  
6.5 
  - UK personal loans
3.4 
- 
  
- 
- 
- 
3.4 
  
38 
  
- 
5.5 
- 
- 
  
8.9 
  - other
13.5 
- 
  
18.1 
- 
0.8 
32.4 
  
14 
  
4.4 
9.6 
175.6 
10.2 
  
232.2 
Reverse repurchase agreements
                                
   and stock borrowing
- 
- 
  
- 
- 
- 
- 
  
- 
  
- 
- 
- 
76.5 
  
76.5 
Debt securities
0.9 
- 
  
5.5 
55.6 
2.7 
64.7 
  
57 
  
17.0 
31.9 
- 
- 
  
113.6 
Equity shares
- 
- 
  
0.5 
5.3 
- 
5.8 
  
66 
  
- 
3.0 
- 
- 
  
8.8 
Settlement balances
- 
- 
  
- 
- 
- 
- 
  
- 
  
- 
- 
- 
5.5 
  
5.5 
Derivatives
- 
- 
  
- 
- 
- 
- 
  
- 
  
- 
- 
- 
288.0 
  
288.0 
Intangible assets
- 
- 
  
- 
- 
- 
- 
  
- 
  
- 
- 
- 
12.4 
  
12.4 
Property, plant and equipment
- 
- 
  
- 
- 
0.4 
0.4 
  
5 
  
- 
- 
7.5 
- 
  
7.9 
Deferred tax
- 
- 
  
- 
- 
- 
- 
  
- 
  
- 
- 
- 
3.5 
  
3.5 
Prepayments and other assets
- 
- 
  
- 
- 
- 
- 
  
- 
  
- 
- 
- 
8.6 
  
8.6 
Assets of disposal groups
- 
- 
  
- 
- 
- 
- 
  
- 
  
- 
- 
- 
0.2 
  
0.2 
                                 
 
50.9 
16.7 
  
34.4 
60.9 
8.6 
171.5 
      
166.8 
101.5 
183.1 
405.0 
  
1,027.9 
Own asset securitisations
                    
17.4 
          
                                 
Total liquidity portfolio
                    
184.2 
          
                                 
Liabilities secured
                                
Intra-Group - secondary liquidity
(19.1)
- 
  
- 
- 
- 
(19.1)
                  
Intra-Group - other
(18.4)
- 
  
- 
- 
- 
(18.4)
                  
Third-party (5)
(7.8)
(9.0)
  
(42.7)
(85.1)
(6.0)
(150.6)
                  
                                 
 
(45.3)
(9.0)
  
(42.7)
(85.1)
(6.0)
(188.1)
                  
 
For the notes to this table refer to the following page.
 
Risk and balance sheet management
 
Liquidity and funding risk: Balance sheet encumbrance (continued)
 
Notes:
 
(1)
Encumbered assets are those that have been pledged to provide security for the liability shown above and are therefore not available to secure funding or to meet other collateral needs.
(2)
Unencumbered readily realisable assets are those assets on the balance sheet that can be readily used to meet funding or collateral requirements and comprise:
 
(a) Liquidity portfolio: cash balances at central banks, high quality debt securities and loans that have been pre-positioned with central banks. In addition, the liquidity portfolio includes securitisations of own assets which has reduced over the years and has been replaced by loans.
 
(b) Other readily realisable assets: other liquidity reserves, including assets that have been enabled for use with central banks; and unencumbered debt securities.
(3)
Unencumbered other realisable assets are those assets on the balance sheet that have no restrictions for funding and collateral purposes but are not readily realisable in their current form. These assets include loans that could be prepositioned with central banks but have not been subject to internal and external documentation review and diligence work.
(4)
Assets that cannot be encumbered comprise:
 
(a) derivatives, reverse repurchase agreements and trading related settlement balances.
 
(b) non-financial assets such as intangibles, prepayments and deferred tax.
 
(c) assets in disposal groups.
 
(d) loans that cannot be pre-positioned with central banks based on criteria set by the central banks, primary US, including date of origination and level of documentation.
 
(e) non-recourse invoice financing balances and certain shipping loans whose terms and structure prohibit their use as collateral.
(5)
In accordance with market practice the Group employs its own assets and securities received under reverse repo transactions as collateral for repos.

 
Risk and balance sheet management
 
 
Liquidity and funding risk: Balance sheet encumbrance (continued)
                    
                             
 
Encumbered assets relating to:
                
31 December 2012
Debt securities in issue
  
Other secured liabilities
Total 
  
Encumbered 
  
Unencumbered
  
Total
 
Covered 
Derivatives 
  
Secured 
encumbered 
assets as a % 
Liquidity 
Other 
Securitisations 
bonds 
Repos
deposits 
assets 
of related 
portfolio 
£bn 
£bn 
  
£bn 
£bn 
£bn 
£bn 
  
assets 
£bn 
£bn 
  
£bn 
                             
Cash and balances at central banks
- 
- 
  
- 
- 
- 
- 
  
- 
  
70.2 
9.1 
  
79.3 
Loans and advances to banks
5.3 
0.5 
  
12.8 
- 
- 
18.6 
  
59 
  
- 
12.7 
  
31.3 
Loans and advances to customers
                            
  - UK residential mortgages
16.4 
16.0 
  
- 
- 
- 
32.4 
  
30 
  
58.7 
18.0 
  
109.1 
  - Irish residential mortgages
10.6 
- 
  
- 
- 
1.8 
12.4 
  
81 
  
- 
2.9 
  
15.3 
  - US residential mortgages
- 
- 
  
- 
- 
- 
- 
  
- 
  
7.6 
14.1 
  
21.7 
  - UK credit cards
3.0 
- 
  
- 
- 
- 
3.0 
  
44 
  
- 
3.8 
  
6.8 
  - UK personal loans
4.7 
- 
  
- 
- 
- 
4.7 
  
41 
  
- 
6.8 
  
11.5 
  - other
20.7 
- 
  
22.5 
- 
0.8 
44.0 
  
16 
  
6.5 
217.1 
  
267.6 
Reverse repurchase agreements and stock
                            
  borrowing
- 
- 
  
- 
- 
- 
- 
  
- 
  
- 
104.8 
  
104.8 
Debt securities
1.0 
- 
  
8.3 
91.2 
15.2 
115.7 
  
70 
  
22.3 
26.6 
  
164.6 
Equity shares
- 
- 
  
0.7 
6.8 
- 
7.5 
  
49 
  
- 
7.7 
  
15.2 
Settlement balances
- 
- 
  
- 
- 
- 
- 
  
- 
  
- 
6.7 
  
6.7 
Derivatives
- 
- 
  
- 
- 
- 
- 
  
- 
  
- 
441.9 
  
441.9 
Intangible assets
- 
- 
  
- 
- 
- 
- 
  
- 
  
- 
14.3 
  
14.3 
Property, plant and equipment
- 
- 
  
- 
- 
- 
- 
  
- 
  
- 
10.0 
  
10.0 
Deferred tax
- 
- 
  
- 
- 
- 
- 
  
- 
  
- 
3.5 
  
3.5 
Prepayments, accrued income and other assets
- 
- 
  
- 
- 
- 
- 
  
- 
  
- 
8.7 
  
8.7 
                             
 
61.7 
16.5 
  
44.3 
98.0 
17.8 
238.3 
      
165.3 
908.7 
  
1,312.3 
Own asset securitisations
                    
22.6 
      
                             
Total liquidity portfolio
                    
187.9 
      
                             
Liabilities secured
                            
Intra-Group - used for secondary liquidity
(22.6)
- 
  
- 
- 
- 
(22.6)
              
Intra-Group - other
(23.9)
- 
  
- 
- 
- 
(23.9)
              
Third-party (1)
(12.0)
(10.1)
  
(60.4)
(132.4)
(15.3)
(230.2)
              
                             
 
(58.5)
(10.1)
  
(60.4)
(132.4)
(15.3)
(276.7)
              
 
Note:
(1)
In accordance with market practice the Group employs its own assets and securities received under reverse repo transactions as collateral for repos.

 
Risk and balance sheet management
 
Credit risk
Credit risk is the risk of financial loss due to the failure of a customer or counterparty to meet its obligation to settle outstanding amounts. The quantum and nature of credit risk assumed across the Group's different businesses vary considerably, while the overall credit risk outcome usually exhibits a high degree of correlation with the macroeconomic environment.
 
Financial assets
Exposure summary
The table below analyses the Group's financial asset exposures, both gross and net of offset arrangements as well as credit mitigation and enhancement.
 
             
       
Balance
Collateral
Exposure post
 
Gross 
IFRS 
Carrying 
sheet
    
Real estate
Credit 
 credit mitigation
exposure 
offset (1)
value (2)
offset (3)
Cash (4)
Securities (5)
 Residential (6)
 Commercial (6)
enhancement (7)
and enhancement
31 December 2013
£bn
£bn
£bn
£bn
£bn
£bn
£bn
£bn
£bn
£bn
                     
Cash and balances at central banks
82.7 
- 
82.7 
- 
- 
- 
- 
- 
- 
82.7 
Reverse repos
117.2 
(40.7)
76.5 
(11.4)
- 
(65.0)
- 
- 
- 
0.1 
Lending
423.6 
(3.4)
420.2 
(32.3)
(1.6)
(2.7)
(145.4)
(60.0)
(3.9)
174.3 
Debt securities
113.6 
- 
113.6 
- 
- 
- 
- 
- 
(1.3)
112.3 
Equity shares
8.8 
- 
8.8 
- 
- 
- 
- 
- 
- 
8.8 
Derivatives
553.7 
(265.7)
288.0 
(242.8)
(24.3)
(6.0)
- 
- 
(7.3)
7.6 
Settlement balances
8.2 
(2.7)
5.5 
(0.3)
- 
- 
- 
- 
- 
5.2 
                     
Total
1,307.8 
(312.5)
995.3 
(286.8)
(25.9)
(73.7)
(145.4)
(60.0)
(12.5)
391.0 
Short positions
(28.0)
- 
(28.0)
- 
- 
- 
- 
- 
- 
(28.0)
                     
Net of short positions
1,279.8 
(312.5)
967.3 
(286.8)
(25.9)
(73.7)
(145.4)
(60.0)
(12.5)
363.0 
 
Notes:
(1)
Relates to offset arrangements that comply with IFRS criteria and transactions cleared through and novated to central clearing houses, primarily London Clearing House and US Government Securities Clearing Corporation.
(2)
Carrying value on the balance sheet represents the exposure to credit risk by class of financial instrument.
(3)
Balance sheet offset reflects the amounts by which the Group's credit risk is reduced through master netting and cash management pooling arrangements. Derivative master netting agreements include cash pledged with counterparties in respect of net derivative liability positions and are included in lending in the table above.
(4)
Includes cash collateral pledged by counterparties based on daily mark-to-market movements of net derivative positions with the counterparty.
(5)
Securities collateral represent the fair value of securities received from counterparties, mainly relating to reverse repo transactions as part of netting arrangements.
(6)
Property valuations are limited to the loan value and reflect the application of haircuts and capping in line with regulatory rules to indexed valuations. Commercial collateral includes shipping vessels and plant and equipment collateral.
(7)
Credit enhancement comprises credit derivatives (bought protection) and guarantees and reflect notional amounts less fair value and notional amounts respectively.
 
 
 
 
Risk and balance sheet management
 
 
Financial assets: Exposure summary (continued)
        
 
Gross 
IFRS 
Carrying 
Balance sheet
Exposure 
exposure 
offset (1)
value 
offset (2)
post offset 
31 December 2012
£bn 
£bn 
£bn 
£bn 
£bn 
           
Cash and balances at central banks
79.3 
- 
79.3 
- 
79.3 
Reverse repos
143.2 
(38.4)
104.8 
(17.4)
87.4 
Lending
464.7 
(1.5)
463.2 
(34.9)
428.3 
Debt securities
164.6 
- 
164.6 
- 
164.6 
Equity shares
15.2 
- 
15.2 
- 
15.2 
Derivatives
815.4 
(373.5)
441.9 
(408.0)
33.9 
Settlement balances
8.1 
(2.4)
5.7 
(1.8)
3.9 
Other financial assets
1.1 
- 
1.1 
- 
1.1 
           
Total
1,691.6 
(415.8)
1,275.8 
(462.1)
813.7 
Short positions
(27.6)
- 
(27.6)
- 
(27.6)
           
Net of short positions
1,664.0 
(415.8)
1,248.2 
(462.1)
786.1 
 
Notes:
(1)
Relates to offset arrangements that comply with IFRS criteria and transactions cleared through and novated to central clearing houses, primarily London Clearing House and US Government Securities Clearing Corporation.
(2)
This reflects the amounts by which the Group's credit risk is reduced through master netting and cash management pooling arrangements. Derivative master netting agreements include cash pledged with counterparties in respect of net derivative liability positions and are included in lending in the table above.
 
Loans and related credit metrics
The tables below analyse gross loans and advances (excluding reverse repos) and the related credit metrics by division.
 
       
Credit metrics
      
 
Gross loans to
REIL
Provisions
REIL as a %
        
of gross
Provisions
Impairment charge
  
loans to
as a %
  
Of which
Amounts
Banks
Customers
customers
of REIL
Total
 RCR (1)
written-off
31 December 2013
£m
£m
£m
£m
%
%
£m
£m
£m
                   
UK Retail
760 
113,152 
3,566 
2,106 
3.2 
59 
319 
- 
815 
UK Corporate
701 
102,547 
6,226 
2,833 
6.1 
46 
1,188 
410 
772 
Wealth
1,531 
16,764 
277 
120 
1.7 
43 
29 
- 
15 
International Banking
7,971 
35,993 
470 
325 
1.3 
69 
219 
52 
281 
Ulster Bank
591 
31,446 
8,466 
5,378 
26.9 
64 
1,774 
892 
277 
US Retail & Commercial
406 
50,551 
1,034 
272 
2.0 
26 
151 
- 
284 
                   
Retail & Commercial
11,960 
350,453 
20,039 
11,034 
5.7 
55 
3,680 
1,354 
2,444 
Markets
12,579 
25,455 
338 
286 
1.3 
85 
21 
18 
46 
Other
2,670 
5,126 
1 
66 
- 
nm
65 
- 
- 
                   
Core
27,209 
381,034 
20,378 
11,386 
5.3 
56 
3,766 
1,372 
2,490 
Non-Core
431 
36,718 
19,014 
13,839 
51.8 
73 
4,646 
3,118 
1,856 
                   
Group
27,640 
417,752 
39,392 
25,225 
9.4 
64 
8,412 
4,490 
4,346 
 
 
Note:
 
(1)
Pertaining to the creation of RCR and the related change of strategy.
 
 
 
Risk and balance sheet management
 
 
Loans and related credit metrics (continued)
        
       
Credit metrics
  
 
Gross loans to
REIL
Provisions
REIL as a %
  
of gross
Provisions
loans to
as a %
Impairment
Amounts
Banks
Customers
customers
of REIL
charge
written-off
31 December 2012
£m
£m
£m
£m
%
%
£m
£m
                 
UK Retail
695 
113,599 
4,569 
2,629 
4.0 
58 
529 
599 
UK Corporate
746 
107,025 
5,452 
2,432 
5.1 
45 
836 
514 
Wealth
1,545 
17,074 
248 
109 
1.5 
44 
46 
15 
International Banking
4,827 
42,342 
422 
391 
1.0 
93 
111 
445 
Ulster Bank
632 
32,652 
7,533 
3,910 
23.1 
52 
1,364 
72 
US Retail & Commercial
435 
51,271 
1,146 
285 
2.2 
25 
83 
391 
                 
Retail & Commercial
8,880 
363,963 
19,370 
9,756 
5.3 
50 
2,969 
2,036 
Markets
16,805 
29,787 
396 
305 
1.3 
77 
25 
109 
Other
3,196 
2,125 
- 
1 
- 
- 
1 
- 
                 
Core
28,881 
395,875 
19,766 
10,062 
5.0 
51 
2,995 
2,145 
Non-Core
477 
56,343 
21,374 
11,200 
37.9 
52 
2,320 
2,121 
Direct Line Group
2,036 
881 
- 
- 
- 
- 
- 
- 
                 
Group
31,394 
453,099 
41,140 
21,262 
9.1 
52 
5,315 
4,266 
 
Key points
·
The Group loan impairment charge for the year increased by 58% (£3.1 billion) to £8.4 billion from £5.3 billion in 2012. The Core charge increased 26% (£0.8 billion) to £3.8 billion and the Non-Core charge increased by 100% (£2.3 billion) to £4.6 billion. £4.5 billion of the impairment increase was in relation to the creation of RCR and the related strategy: £1.4 billion in Core and £3.1 billion in Non-Core. The underlying provision charge decreased £1.4 billion mainly in UK Retail (£0.2 billion), Ulster Bank residential mortgages (£0.4 billion) and Non-Core (£0.8 billion), largely due to run down and lower single name charges in Non-Core.
   
·
REIL decreased by £1.7 billion to £39.4 billion during the year mainly in Non-Core (£2.4 billion) and UK Retail (£1.0 billion) offset by increases in UK Corporate (£0.8 billion) and Ulster Bank (£0.9 billion). REIL reductions in Non-Core primarily related to repayments and write-offs in UK Corporate and International Banking donated portfolios.
   
·
The RCR provision charge mainly related to loans already within REIL resulting in a 12% increase in the provision coverage ratio to 64% from 52% at December 2012 while the REIL as a percentage of total loans increased to 9.4% from 9.1% at 31 December 2012.
   
·
UK Retail REIL continued to decrease due to the write-off of aged debt and the transfer of up-to-date mortgages to potential problem loans. Provision coverage remained broadly stable at 59%.
   
·
REIL in UK Corporate increased by 14% mainly driven by individual cases in the commercial real estate and shipping portfolios as credit conditions remained difficult in these sectors. The impact of the RCR related strategy resulted in a £0.4 billion provision increase in Q4 2013.
   
·
Ulster Bank REIL at £8.5 billion increased by 12% compared with 31 December 2012. The increase in REIL was largely in relation to commercial real estate investment loans. RCR and related provisioning in 2013 contributed £0.9 billion to the Core Ulster provision and has resulted in the provision coverage increasing from 52% to 64% in the year and in the fourth quarter.
 

 
Risk and balance sheet management
 
Loans and related credit metrics: Sector and geographical regional analyses - Group
The tables below analyse gross loans and advances to banks and customers (excluding reverse repos) and related credit metrics by sector and geography (by location of lending office) for Group, Core and Non-Core.
 
       
Credit metrics
    
31 December 2013
      
REIL as a
Provisions
Provisions
    
Gross
    
% of gross
as a %
as a % of
Impairment
Amounts
loans
REIL
Provisions
loans
of REIL
gross loans
charge
written-off
£m
£m
£m
%
%
%
£m
£m
                 
Government (1)
8,643 
2 
2 
- 
100 
- 
2 
- 
Finance
35,948 
593 
292 
1.6 
49 
0.8 
4 
72 
Personal
- mortgages
148,533 
6,025 
1,799 
4.1 
30 
1.2 
392 
441 
 
- unsecured
28,160 
2,417 
1,909 
8.6 
79 
6.8 
415 
861 
Property
62,292 
20,283 
13,189 
32.6 
65 
21.2 
5,130 
1,642 
Construction
6,331 
1,334 
774 
21.1 
58 
12.2 
291 
160 
Manufacturing
21,377 
742 
559 
3.5 
75 
2.6 
195 
104 
Finance leases (2)
13,587 
263 
190 
1.9 
72 
1.4 
16 
121 
Retail, wholesale and repairs
19,574 
1,187 
783 
6.1 
66 
4.0 
268 
128 
Transport and storage
16,697 
1,491 
635 
8.9 
43 
3.8 
487 
229 
Health, education and leisure
16,084 
1,324 
756 
8.2 
57 
4.7 
359 
119 
Hotels and restaurants
6,942 
1,427 
812 
20.6 
57 
11.7 
281 
194 
Utilities
4,960 
131 
80 
2.6 
61 
1.6 
54 
23 
Other
28,624 
2,103 
1,370 
7.3 
65 
4.8 
489 
212 
Latent
- 
- 
2,012 
- 
- 
- 
44 
- 
                 
 
417,752 
39,322 
25,162 
9.4 
64 
6.0 
8,427 
4,306 
                 
of which:
                
UK
                
  - residential mortgages
110,515 
1,900 
319 
1.7 
17 
0.3 
39 
180 
  - personal lending
17,098 
2,052 
1,718 
12.0 
84 
10.0 
264 
681 
  - property
44,252 
9,797 
5,190 
22.1 
53 
11.7 
2,014 
950 
  - construction
4,691 
941 
515 
20.1 
55 
11.0 
194 
159 
  - other
110,466 
4,684 
3,202 
4.2 
68 
2.9 
1,091 
537 
Europe
                
  - residential mortgages
17,540 
3,155 
1,303 
18.0 
41 
7.4 
195 
26 
  - personal lending
1,267 
141 
129 
11.1 
91 
10.2 
19 
26 
  - property
13,177 
10,372 
7,951 
78.7 
77 
60.3 
3,131 
659 
  - construction
979 
351 
227 
35.9 
65 
23.2 
72 
- 
  - other
22,620 
4,057 
3,498 
17.9 
86 
15.5 
1,012 
465 
US
                
  - residential mortgages
19,901 
951 
173 
4.8 
18 
0.9 
161 
233 
  - personal lending
8,722 
207 
45 
2.4 
22 
0.5 
114 
151 
  - property
4,279 
85 
19 
2.0 
22 
0.4 
(11)
25 
  - construction
313 
34 
24 
10.9 
71 
7.7 
25 
1 
  - other
27,887 
198 
589 
0.7 
297 
2.1 
65 
131 
RoW
                
  - residential mortgages
577 
19 
4 
3.3 
21 
0.7 
(3)
2 
  - personal lending
1,073 
17 
17 
1.6 
100 
1.6 
18 
3 
  - property
584 
29 
29 
5.0 
100 
5.0 
(4)
8 
  - construction
348 
8 
8 
2.3 
100 
2.3 
- 
- 
  - other
11,463 
324 
202 
2.8 
62 
1.8 
31 
69 
                 
 
417,752 
39,322 
25,162 
9.4 
64 
6.0 
8,427 
4,306 
                 
Banks
27,640 
70 
63 
0.3 
90 
0.2 
(15)
40 
 
For the notes to this table refer to page 170.

 
 
Risk and balance sheet management
 
Loans and related credit metrics: Sector and geographical regional analyses - Group (continued)
 
       
Credit metrics
    
31 December 2012
      
REIL as a
Provisions
Provisions
    
Gross
    
% of gross
as a %
as a % of
Impairment
Amounts
loans
REIL
Provisions
loans
of REIL
gross loans
charge
written-off
£m
£m
£m
%
%
%
£m
£m
                 
Government (1)
9,853 
- 
- 
- 
- 
- 
- 
- 
Finance
42,198 
592 
317 
1.4 
54 
0.8 
145 
380 
Personal
- mortgages
149,625 
6,549 
1,824 
4.4 
28 
1.2 
948 
461 
 
- unsecured
32,212 
2,903 
2,409 
9.0 
83 
7.5 
631 
793 
Property
72,219 
21,223 
9,859 
29.4 
46 
13.7 
2,212 
1,080 
Construction
8,049 
1,483 
640 
18.4 
43 
8.0 
94 
182 
Manufacturing
23,787 
755 
357 
3.2 
47 
1.5 
134 
203 
Finance leases (2)
13,609 
442 
294 
3.2 
67 
2.2 
44 
263 
Retail, wholesale and repairs
21,936 
1,143 
644 
5.2 
56 
2.9 
230 
176 
Transport and storage
18,341 
834 
336 
4.5 
40 
1.8 
289 
102 
Health, education and leisure
16,705 
1,190 
521 
7.1 
44 
3.1 
144 
100 
Hotels and restaurants
7,877 
1,597 
726 
20.3 
45 
9.2 
176 
102 
Utilities
6,631 
118 
21 
1.8 
18 
0.3 
(4)
- 
Other
30,057 
2,177 
1,240 
7.2 
57 
4.1 
322 
395 
Latent
- 
- 
1,960 
- 
- 
- 
(73)
- 
                 
 
453,099 
41,006 
21,148 
9.1 
52 
4.7 
5,292 
4,237 
                 
of which:
                
UK
                
  - residential mortgages
109,530 
2,440 
457 
2.2 
19 
0.4 
122 
32 
  - personal lending
20,498 
2,477 
2,152 
12.1 
87 
10.5 
479 
610 
  - property
53,730 
10,521 
3,944 
19.6 
37 
7.3 
964 
490 
  - construction
6,507 
1,165 
483 
17.9 
41 
7.4 
100 
158 
  - other
122,029 
3,729 
2,611 
3.1 
70 
2.1 
674 
823 
Europe
                
  - residential mortgages
17,836 
3,092 
1,151 
17.3 
37 
6.5 
526 
50 
  - personal lending
1,905 
226 
208 
11.9 
92 
10.9 
38 
13 
  - property
14,634 
10,347 
5,766 
70.7 
56 
39.4 
1,264 
441 
  - construction
1,132 
289 
146 
25.5 
51 
12.9 
(11)
12 
  - other
27,424 
4,451 
2,996 
16.2 
67 
10.9 
817 
539 
US
                
  - residential mortgages
21,929 
990 
208 
4.5 
21 
0.9 
298 
377 
  - personal lending
8,748 
199 
48 
2.3 
24 
0.5 
109 
162 
  - property
3,343 
170 
29 
5.1 
17 
0.9 
(11)
83 
  - construction
388 
8 
1 
2.1 
13 
0.3 
- 
12 
  - other
29,354 
352 
630 
1.2 
179 
2.1 
(86)
149 
RoW
                
  - residential mortgages
330 
27 
8 
8.2 
30 
2.4 
2 
2 
  - personal lending
1,061 
1 
1 
0.1 
100 
0.1 
5 
8 
  - property
512 
185 
120 
36.1 
65 
23.4 
(5)
66 
  - construction
22 
21 
10 
95.5 
48 
45.5 
5 
- 
  - other
12,187 
316 
179 
2.6 
57 
1.5 
2 
210 
                 
 
453,099 
41,006 
21,148 
9.1 
52 
4.7 
5,292 
4,237 
                 
Banks
31,394 
134 
114 
0.4 
85 
0.4 
23 
29 
 
 
For the notes to this table refer to page 170.
 
 
Risk and balance sheet management
 
Loans and related credit metrics: Sector and geographical regional analyses - Core
 
 
       
Credit metrics
    
31 December 2013
      
REIL as a
Provisions
Provisions
    
Gross
    
% of gross
as a %
as a % of
Impairment
Amounts
loans
REIL
Provisions
loans
of REIL
gross loans
charge
written-off
£m
£m
£m
%
%
%
£m
£m
                 
Government (1)
7,490 
2 
2 
- 
100 
- 
2 
- 
Finance
34,663 
393 
183 
1.1 
47 
0.5 
25 
27 
Personal
- mortgages
146,600 
5,815 
1,730 
4.0 
30 
1.2 
353 
328 
 
- unsecured
27,817 
2,326 
1,876 
8.4 
81 
6.7 
371 
812 
Property
43,170 
5,582 
2,474 
12.9 
44 
5.7 
1,347 
465 
Construction
5,074 
708 
417 
14.0 
59 
8.2 
163 
97 
Manufacturing
20,739 
544 
393 
2.6 
72 
1.9 
139 
75 
Finance leases (2)
10,355 
139 
89 
1.3 
64 
0.9 
23 
31 
Retail, wholesale and repairs
18,899 
827 
531 
4.4 
64 
2.8 
209 
114 
Transport and storage
13,927 
1,050 
432 
7.5 
41 
3.1 
402 
77 
Health, education and leisure
15,481 
871 
491 
5.6 
56 
3.2 
275 
82 
Hotels and restaurants
6,238 
810 
474 
13.0 
59 
7.6 
155 
158 
Utilities
4,112 
63 
43 
1.5 
68 
1.0 
65 
23 
Other
26,469 
1,179 
800 
4.5 
68 
3.0 
229 
161 
Latent
- 
- 
1,389 
- 
- 
- 
23 
- 
                 
 
381,034 
20,309 
11,324 
5.3 
56 
3.0 
3,781 
2,450 
                 
of which:
                
UK
                
  - residential mortgages
110,515 
1,900 
319 
1.7 
17 
0.3 
38 
179 
  - personal lending
17,074 
2,028 
1,697 
11.9 
84 
9.9 
258 
675 
  - property
34,752 
3,103 
1,111 
8.9 
36 
3.2 
616 
405 
  - construction
4,036 
591 
330 
14.6 
56 
8.2 
123 
96 
  - other
102,412 
3,308 
2,144 
3.2 
65 
2.1 
812 
401 
Europe
                
  - residential mortgages
17,347 
3,136 
1,285 
18.1 
41 
7.4 
195 
26 
  - personal lending
1,198 
133 
128 
11.1 
96 
10.7 
12 
24 
  - property
3,953 
2,441 
1,358 
61.8 
56 
34.4 
746 
52 
  - construction
378 
75 
55 
19.8 
73 
14.6 
13 
- 
  - other
18,309 
2,214 
2,168 
12.1 
98 
11.8 
730 
251 
US
                
  - residential mortgages
18,161 
760 
122 
4.2 
16 
0.7 
123 
121 
  - personal lending
8,477 
148 
34 
1.7 
23 
0.4 
84 
111 
  - property
4,058 
38 
5 
0.9 
13 
0.1 
(15)
8 
  - construction
312 
34 
24 
10.9 
71 
7.7 
27 
1 
  - other
27,722 
188 
408 
0.7 
217 
1.5 
(8)
72 
RoW
                
  - residential mortgages
577 
19 
4 
3.3 
21 
0.7 
(3)
2 
  - personal lending
1,068 
17 
17 
1.6 
100 
1.6 
17 
2 
  - property
407 
- 
- 
- 
- 
- 
- 
- 
  - construction
348 
8 
8 
2.3 
100 
2.3 
- 
- 
  - other
9,930 
168 
107 
1.7 
64 
1.1 
13 
24 
                 
 
381,034 
20,309 
11,324 
5.3 
56 
3.0 
3,781 
2,450 
                 
Banks
27,209 
69 
62 
0.3 
90 
0.2 
(15)
40 
 
For the notes to this table refer to page 170.
 
 
 
Risk and balance sheet management
 
Loans and related credit metrics: Sector and geographical regional analyses - Core (continued)
 
 
       
Credit metrics
    
31 December 2012 (3)
      
REIL as a
Provisions
Provisions
    
Gross
    
% of gross
as a %
as a % of
Impairment
Amounts
loans
REIL
Provisions
loans
of REIL
gross loans
charge
written-off
£m
£m
£m
%
%
%
£m
£m
                 
Government (1)
8,485 
- 
- 
- 
- 
- 
- 
- 
Finance
39,658 
185 
149 
0.5 
81 
0.4 
54 
338 
Personal
- mortgages
146,770 
6,229 
1,691 
4.2 
27 
1.2 
786 
234 
 
- unsecured
30,366 
2,717 
2,306 
8.9 
85 
7.6 
568 
718 
Property
43,602 
4,672 
1,674 
10.7 
36 
3.8 
748 
214 
Construction
6,020 
757 
350 
12.6 
46 
5.8 
119 
60 
Manufacturing
22,234 
496 
225 
2.2 
45 
1.0 
118 
63 
Finance leases (2)
9,201 
159 
107 
1.7 
67 
1.2 
35 
41 
Retail, wholesale and repairs
20,842 
791 
439 
3.8 
55 
2.1 
181 
129 
Transport and storage
14,590 
440 
112 
3.0 
25 
0.8 
72 
21 
Health, education and leisure
15,770 
761 
299 
4.8 
39 
1.9 
109 
67 
Hotels and restaurants
6,891 
1,042 
473 
15.1 
45 
6.9 
138 
56 
Utilities
5,131 
10 
5 
0.2 
50 
0.1 
- 
- 
Other
26,315 
1,374 
794 
5.2 
58 
3.0 
189 
175 
Latent
- 
- 
1,325 
- 
- 
- 
(145)
- 
                 
 
395,875 
19,633 
9,949 
5.0 
51 
2.5 
2,972 
2,116 
                 
of which:
                
UK
                
  - residential mortgages
109,511 
2,440 
457 
2.2 
19 
0.4 
122 
32 
  - personal lending
19,562 
2,454 
2,133 
12.5 
87 
10.9 
474 
594 
  - property
35,532 
2,777 
896 
7.8 
32 
2.5 
395 
181 
  - construction
5,101 
671 
301 
13.2 
45 
5.9 
109 
47 
  - other
108,713 
2,662 
1,737 
2.4 
65 
1.6 
499 
379 
Europe
                
  - residential mortgages
17,446 
3,060 
1,124 
17.5 
37 
6.4 
521 
24 
  - personal lending
1,540 
143 
138 
9.3 
97 
9.0 
29 
11 
  - property
4,896 
1,652 
685 
33.7 
41 
14.0 
350 
6 
  - construction
513 
60 
39 
11.7 
65 
7.6 
4 
10 
  - other
22,218 
2,280 
1,711 
10.3 
75 
7.7 
362 
267 
US
                
  - residential mortgages
19,483 
702 
102 
3.6 
15 
0.5 
141 
176 
  - personal lending
8,209 
119 
34 
1.4 
29 
0.4 
65 
112 
  - property
2,847 
112 
13 
3.9 
12 
0.5 
3 
27 
  - construction
384 
5 
- 
1.3 
- 
- 
1 
3 
  - other
28,267 
252 
432 
0.9 
171 
1.5 
(111)
90 
RoW
                
  - residential mortgages
330 
27 
8 
8.2 
30 
2.4 
2 
2 
  - personal lending
1,055 
1 
1 
0.1 
100 
0.1 
- 
1 
  - property
327 
131 
80 
40.1 
61 
24.5 
- 
- 
  - construction
22 
21 
10 
95.5 
48 
45.5 
5 
- 
  - other
9,919 
64 
48 
0.6 
75 
0.5 
1 
154 
                 
 
395,875 
19,633 
9,949 
5.0 
51 
2.5 
2,972 
2,116 
                 
Banks
28,881 
133 
113 
0.5 
85 
0.4 
23 
29 
 
For the notes to this table refer to page 170.


 
Risk and balance sheet management
 
Loans and related credit metrics: Sector and geographical regional analyses - Non-Core
 
 
       
Credit metrics
    
31 December 2013
      
REIL as a
Provisions
Provisions
    
Gross
    
% of gross
as a %
as a % of
Impairment
Amounts
loans
REIL
Provisions
loans
of REIL
gross loans
charge
written-off
£m
£m
£m
%
%
%
£m
£m
                 
Government (1)
1,153 
- 
- 
- 
- 
- 
- 
- 
Finance
1,285 
200 
109 
15.6 
55 
8.5 
(21)
45 
Personal
- mortgages
1,933 
210 
69 
10.9 
33 
3.6 
39 
113 
 
- unsecured
343 
91 
33 
26.5 
36 
9.6 
44 
49 
Property
19,122 
14,701 
10,715 
76.9 
73 
56.0 
3,783 
1,177 
Construction
1,257 
626 
357 
49.8 
57 
28.4 
128 
63 
Manufacturing
638 
198 
166 
31.0 
84 
26.0 
56 
29 
Finance leases (2)
3,232 
124 
101 
3.8 
81 
3.1 
(7)
90 
Retail, wholesale and repairs
675 
360 
252 
53.3 
70 
37.3 
59 
14 
Transport and storage
2,770 
441 
203 
15.9 
46 
7.3 
85 
152 
Health, education and leisure
603 
453 
265 
75.1 
58 
43.9 
84 
37 
Hotels and restaurants
704 
617 
338 
87.6 
55 
48.0 
126 
36 
Utilities
848 
68 
37 
8.0 
54 
4.4 
(11)
- 
Other
2,155 
924 
570 
42.9 
62 
26.5 
260 
51 
Latent
- 
- 
623 
- 
- 
- 
21 
- 
                 
 
36,718 
19,013 
13,838 
51.8 
73 
37.7 
4,646 
1,856 
                 
of which:
                
UK
                
  - residential mortgages
- 
- 
- 
- 
- 
- 
1 
1 
  - personal lending
24 
24 
21 
100.0 
88 
87.5 
6 
6 
  - property
9,500 
6,694 
4,079 
70.5 
61 
42.9 
1,398 
545 
  - construction
655 
350 
185 
53.4 
53 
28.2 
71 
63 
  - other
8,054 
1,376 
1,058 
17.1 
77 
13.1 
279 
136 
Europe
                
  - residential mortgages
193 
19 
18 
9.8 
95 
9.3 
- 
- 
  - personal lending
69 
8 
1 
11.6 
13 
1.4 
7 
2 
  - property
9,224 
7,931 
6,593 
86.0 
83 
71.5 
2,385 
607 
  - construction
601 
276 
172 
45.9 
62 
28.6 
59 
- 
  - other
4,311 
1,843 
1,330 
42.8 
72 
30.9 
282 
214 
US
                
  - residential mortgages
1,740 
191 
51 
11.0 
27 
2.9 
38 
112 
  - personal lending
245 
59 
11 
24.1 
19 
4.5 
30 
40 
  - property
221 
47 
14 
21.3 
30 
6.3 
4 
17 
  - construction
1 
- 
- 
- 
- 
- 
(2)
- 
  - other
165 
10 
181 
6.1 
nm 
109.7 
73 
59 
RoW
                
  - personal lending
5 
- 
- 
- 
- 
- 
1 
1 
  - property
177 
29 
29 
16.4 
100 
16.4 
(4)
8 
  - construction
- 
- 
- 
- 
- 
- 
- 
- 
  - other
1,533 
156 
95 
10.2 
61 
6.2 
18 
45 
                 
 
36,718 
19,013 
13,838 
51.8 
73 
37.7 
4,646 
1,856 
                 
Banks
431 
1 
1 
0.2 
100 
0.2 
- 
- 
 
For the notes to this table refer to page 170.

 
 
Risk and balance sheet management
 
Loans and related credit metrics: Sector and geographical regional analyses - Non-Core (continued)
 
 
       
Credit metrics
    
31 December 2012 (3)
      
REIL as a
Provisions
Provisions
    
Gross
    
% of gross
as a %
as a % of 
Impairment
Amounts
loans
REIL
Provisions
loans
of REIL
gross loans 
charge
written-off
£m
£m
£m
%
%
%
£m
£m
                 
Government (1)
1,368 
- 
- 
- 
- 
- 
- 
- 
Finance
2,540 
407 
168 
16.0 
41 
6.6 
91 
42 
Personal
- mortgages
2,855 
320 
133 
11.2 
42 
4.7 
162 
227 
 
- unsecured
965 
186 
103 
19.3 
55 
10.7 
63 
75 
Property
28,617 
16,551 
8,185 
57.8 
49 
28.6 
1,464 
866 
Construction
2,029 
726 
290 
35.8 
40 
14.3 
(25)
122 
Manufacturing
1,553 
259 
132 
16.7 
51 
8.5 
16 
140 
Finance leases (2)
4,408 
283 
187 
6.4 
66 
4.2 
9 
222 
Retail, wholesale and repairs
1,094 
352 
205 
32.2 
58 
18.7 
49 
47 
Transport and storage
3,751 
394 
224 
10.5 
57 
6.0 
217 
81 
Health, education and leisure
935 
429 
222 
45.9 
52 
23.7 
35 
33 
Hotels and restaurants
986 
555 
253 
56.3 
46 
25.7 
38 
46 
Utilities
1,500 
108 
16 
7.2 
15 
1.1 
(4)
- 
Other
3,742 
803 
446 
21.5 
56 
11.9 
133 
220 
Latent
- 
- 
635 
- 
- 
- 
72 
- 
                 
 
56,343 
21,373 
11,199 
37.9 
52 
19.9 
2,320 
2,121 
                 
of which:
                
UK
                
  - residential mortgages
19 
- 
- 
- 
- 
- 
- 
- 
  - personal lending
55 
23 
19 
41.8 
83 
34.5 
5 
16 
  - property
18,198 
7,744 
3,048 
42.6 
39 
16.7 
569 
309 
  - construction
1,406 
494 
182 
35.1 
37 
12.9 
(9)
111 
  - other
13,316 
1,067 
874 
8.0 
82 
6.6 
175 
444 
Europe
                
  - residential mortgages
390 
32 
27 
8.2 
84 
6.9 
5 
26 
  - personal lending
365 
83 
70 
22.7 
84 
19.2 
9 
2 
  - property
9,738 
8,695 
5,081 
89.3 
58 
52.2 
914 
435 
  - construction
619 
229 
107 
37.0 
47 
17.3 
(15)
2 
  - other
5,206 
2,171 
1,285 
41.7 
59 
24.7 
455 
272 
US
                
  - residential mortgages
2,446 
288 
106 
11.8 
37 
4.3 
157 
201 
  - personal lending
539 
80 
14 
14.8 
18 
2.6 
44 
50 
  - property
496 
58 
16 
11.7 
28 
3.2 
(14)
56 
  - construction
4 
3 
1 
75.0 
33 
25.0 
(1)
9 
  - other
1,087 
100 
198 
9.2 
198 
18.2 
25 
59 
RoW
                
  - personal lending
6 
- 
- 
- 
- 
- 
5 
7 
  - property
185 
54 
40 
29.2 
74 
21.6 
(5)
66 
  - other
2,268 
252 
131 
11.1 
52 
5.8 
1 
56 
                 
 
56,343 
21,373 
11,199 
37.9 
52 
19.9 
2,320 
2,121 
                 
Banks
477 
1 
1 
0.2 
100 
0.2 
- 
- 
 
Notes:
(1)
Includes central and local government.
(2)
Includes instalment credit.
(3)
Core/Non-Core excludes balances in relation to Direct Line Group (loans to banks of £2,036 million and loans to customers of £881 million).
(4)
A description of the Group's early problem debt identification and problem debt management is included in the Group's 2013 Annual Report and Accounts.
 
 
 
Risk and balance sheet management
 
Debt securities
The table below analyses debt securities by issuer and IFRS measurement classifications. US central and local government includes US federal agencies; financial institutions include US government sponsored agencies and securitisation entities, the latter principally relating to asset-backed securities (ABS).
 
                   
 
Central and local government
Banks
Other
Corporate
Total
    
financial
  
Of  which
UK
US
Other
institutions
  
ABS
31 December 2013
£m
£m
£m
£m
£m
£m
£m
  
£m
                   
Held-for-trading (HFT)
6,764 
10,951 
22,818 
1,720 
12,406 
1,947 
56,606 
  
10,674 
Designated as at fair value
- 
- 
104 
- 
17 
1 
122 
  
15 
Available-for-sale (AFS)
6,436 
12,880 
10,303 
5,974 
17,330 
184 
53,107 
  
24,174 
Loans and receivables
10 
1 
- 
175 
3,466 
136 
3,788 
  
3,423 
                   
Long positions
13,210 
23,832 
33,225 
7,869 
33,219 
2,268 
113,623 
  
38,286 
                   
Of which US agencies
- 
5,599 
- 
- 
13,132 
- 
18,731 
  
18,048 
                   
Short positions (HFT)
(1,784)
(6,790)
(16,087)
(889)
(1,387)
(826)
(27,763)
  
(36)
                   
Available-for-sale
                  
Gross unrealised gains
201 
428 
445 
70 
386 
11 
1,541 
  
458 
Gross unrealised losses
(69)
(86)
(32)
(205)
(493)
(2)
(887)
  
(753)
                   
31 December 2012
                  
                   
Held-for-trading
7,692 
17,349 
27,195 
2,243 
21,876 
2,015 
78,370 
  
18,619 
Designated as at fair value
- 
- 
123 
86 
610 
54 
873 
  
516 
Available-for-sale
9,774 
19,046 
16,155 
8,861 
23,890 
3,167 
80,893 
  
30,743 
Loans and receivables
5 
- 
- 
365 
3,728 
390 
4,488 
  
3,707 
                   
Long positions
17,471 
36,395 
43,473 
11,555 
50,104 
5,626 
164,624 
  
53,585 
                   
Of which US agencies
- 
5,380 
- 
- 
21,566 
- 
26,946 
  
24,828 
                   
Short positions (HFT)
(1,538)
(10,658)
(11,355)
(1,036)
(1,595)
(798)
(26,980)
  
(17)
                   
Available-for-sale
                  
Gross unrealised gains
1,007 
1,092 
1,187 
110 
660 
120 
4,176 
  
764 
Gross unrealised losses
- 
(1)
(14)
(509)
(1,319)
(4)
(1,847)
  
(1,817)
 
Key points
·
HFT: UK and US government bonds, and US agency ABS decreased reflecting sales and continued focus on balance sheet reduction and capital management in Markets. The decrease in other government bonds primarily comprised reductions in Japanese, French, Belgian and Canadian bonds, partially offset by increases in Italian, German and Spanish bonds. Short positions in US government bonds decreased, reflecting reduced holdings, short positions in German government bonds increased reflecting focus on reduction in net exposure.
·
AFS: Government securities, primarily US, German, UK, decreased by £15.4 billion reflecting Group Treasury's disposals. Holdings in bank issuances fell by £2.9 billion due to maturities and amortisations. The decrease in financial institution securities of £6.6 billion primarily related to ABS (£1.6 billion collateralised loan obligations in Non-Core and £3.4 billion residential mortgage-backed securities), due to disposals, maturities and buy backs by issuers. This was partially offset by a build up of securities (£0.9 billion), primarily US agency securities in US Retail & Commercial. The reduction includes £7.2 billion related to Direct Line Group, not included at 31 December 2013 as it is now an associate.
·
AFS gross unrealised gains and losses: The UK government net decrease of £0.9 billion reflects exposure reductions. The US government decrease of £0.7 billion reflects exposure reduction as well as the impact of expectations of tapering of the liquidity programme by the US Federal Reserve. The reductions in bank, other financial institutions and ABS reflected maturities, disposals and market movements.
 
 
Risk and balance sheet management
 
Derivatives
The table below analyses the Group's derivatives by type of contract. Master netting arrangements and collateral shown below do not result in a net presentation in the Group's balance sheet under IFRS.
 
 
31 December 2013
  
31 December 2012
 
Notional
            
 
GBP
USD
Euro
Other
Total
Assets
Liabilities
  
Notional (1)
Assets
Liabilities
 
£bn
£bn
£bn
£bn
£bn
£m
£m
  
£bn
£m
£m
                       
Interest rate (2)
5,401 
10,583 
13,695 
5,910 
35,589 
218,041 
208,698 
  
33,483 
363,454 
345,565 
Exchange rate
362 
1,982 
628 
1,583 
4,555 
61,923 
65,749 
  
4,698 
63,067 
70,481 
Credit
2 
166 
66 
19 
253 
5,306 
5,388 
  
553 
11,005 
10,353 
Equity and commodity
29 
27 
17 
8 
81 
2,770 
5,692 
  
111 
4,392 
7,941 
                       
           
288,040 
285,527 
    
441,918 
434,340 
Counterparty mtm netting
        
(242,836)
(242,836)
    
(373,906)
(373,906)
Cash collateral
          
(24,288)
(20,429)
    
(34,099)
(24,633)
Securities collateral
          
(5,990)
(5,202)
    
(5,616)
(8,264)
                       
Net exposure
          
14,926 
17,060 
    
28,297 
27,537 
                       
Of which:
                      
Banks
          
1,243 
6,121 
        
Other financial institutions
        
2,166 
2,416 
        
Corporate
          
10,341 
4,778 
        
Government
          
1,176 
3,745 
        
                       
           
14,926 
17,060 
        
     
Asset quality of uncollateralised derivative assets
£m 
  
     
AQ1
8,647 
  
AQ2
252 
  
AQ3
1,713 
  
AQ4
778 
  
AQ5
885 
  
AQ6
882 
  
AQ7
782 
  
AQ8
124 
  
AQ9
184 
  
AQ10
679 
  
     
 
14,926 
  
 
 
Notes:
(1)
Includes exchange traded contracts were £2,298 billion, (31 December 2012 - £2,497 billion) principally interest rate. Trades are margined daily hence carrying values were insignificant: assets - £69 million (31 December 2012 - £41 million) and liabilities - £299 million (31 December 2012 - £255 million).
(2)
Interest rate notional includes £22,563 billion (31 December 2012 - £15,864 billion) in respect of contracts with central clearing counterparties to the extent related assets and liabilities are offset.
 
Key points
 
·
Net exposure decreased by 47% (liabilities decreased by 38%) reflecting increased interest rate yields and continued use of trade compression cycles, partially offset by increased trade volumes.
   
·
Interest rate contracts' fair value decreased due to significant upward shifts in major yield curves as the US Federal Reserve announced tapering of quantitative easing from early 2014. Continued participation in trade compression cycles contributed to a further reduction in exposures.
   
·
Exchange rate contracts' fair value decreased due to strengthening of sterling against the US dollar and decrease in trade volumes.



Risk and balance sheet management
 
Derivatives (continued)
 
Key points (continued)
 
·
The decrease in credit derivatives notionals and fair values was driven by increased use of trade compression cycles and novation of certain trades in Markets in line with the Group's risk reduction strategy, primarily in the first half of the year. Tightening of credit spreads also contributed to the decrease in fair value.
   
·
Sales and reduction in trade volumes contributed to reduction in equity contracts.
   
·
Uncollateralised derivative contracts with financial institutions (bank and non-bank) relate to hedges in Group Treasury.
   
·
71% of the uncollateralised derivatives related to corporates rated AQ1-AQ3.
   
·
Corporate uncollateralised derivatives, principally all in Markets, relate to large corporates who may have netting arrangements in place but do not have collateral posting capability. A significant proportion of the Group's credit valuation adjustments and funding valuation adjustments relate to these uncollateralised derivatives.
 
Key loan portfolios
 
Commercial real estate
The commercial real estate sector comprised exposures to entities involved in the development of, or investment in, commercial and residential properties (including house builders). The analysis of lending utilisations below is gross of impairment provisions and excludes rate risk management and contingent obligations.
 
 
31 December 2013
  
31 December 2012
 
Investment 
Development 
Total 
  
Investment 
Development 
Total 
By division (1)
£m 
£m 
£m 
  
£m 
£m 
£m 
               
Core
              
UK Corporate
20,547 
3,467 
24,014 
  
22,504 
4,091 
26,595 
Ulster Bank
3,419 
718 
4,137 
  
3,575 
729 
4,304 
US Retail & Commercial
4,018 
- 
4,018 
  
3,857 
3 
3,860 
International Banking
762 
182 
944 
  
849 
315 
1,164 
Markets
136 
1 
137 
  
630 
57 
687 
               
 
28,882 
4,368 
33,250 
  
31,415 
5,195 
36,610 
               
Non-Core
              
UK Corporate
1,201 
774 
1,975 
  
2,651 
983 
3,634 
Ulster Bank
3,211 
6,915 
10,126 
  
3,383 
7,607 
10,990 
US Retail & Commercial
232 
- 
232 
  
392 
- 
392 
International Banking
6,980 
15 
6,995 
  
11,260 
154 
11,414 
               
 
11,624 
7,704 
19,328 
  
17,686 
8,744 
26,430 
               
Total
40,506 
12,072 
52,578 
  
49,101 
13,939 
63,040 
 



 
Risk and balance sheet management
 
Key loan portfolios: Commercial real estate (continued)
 
 
 
Investment
  
Development
  
 
Commercial
Residential
Total 
  
Commercial
Residential
Total 
Total
By geography (1)
£m
£m
£m
  
£m
£m
£m
£m
                 
31 December 2013
                
UK (excluding NI (2))
20,862 
5,007 
25,869 
  
678 
3,733 
4,411 
30,280 
Ireland (ROI and NI (2))
4,405 
1,028 
5,433 
  
1,919 
5,532 
7,451 
12,884 
Western Europe (other)
4,068 
183 
4,251 
  
22 
17 
39 
4,290 
US
3,563 
1,076 
4,639 
  
- 
8 
8 
4,647 
RoW (2)
314 
- 
314 
  
30 
133 
163 
477 
                 
 
33,212 
7,294 
40,506 
  
2,649 
9,423 
12,072 
52,578 
                 
31 December 2012
                
                 
UK (excluding NI (2))
25,864 
5,567 
31,431 
  
839 
4,777 
5,616 
37,047 
Ireland (ROI and NI (2))
4,651 
989 
5,640 
  
2,234 
5,712 
7,946 
13,586 
Western Europe (other)
5,995 
370 
6,365 
  
22 
33 
55 
6,420 
US
4,230 
981 
5,211 
  
- 
15 
15 
5,226 
RoW (2)
454 
- 
454 
  
65 
242 
307 
761 
                 
 
41,194 
7,907 
49,101 
  
3,160 
10,779 
13,939 
63,040 
           
 
 
 
Investment
  
Development
  
 
Core
Non-Core
  
Core
Non-Core
Total 
By geography (1)
£m
£m
  
£m
£m
£m
             
31 December 2013
            
UK (excluding NI (2))
21,297 
4,572 
  
3,500 
911 
30,280 
Ireland (ROI and NI (2))
2,763 
2,670 
  
686 
6,765 
12,884 
Western Europe (other)
223 
4,028 
  
11 
28 
4,290 
US
4,313 
326 
  
8 
- 
4,647 
RoW (2)
286 
28 
  
163 
- 
477 
             
 
28,882 
11,624 
  
4,368 
7,704 
52,578 
             
31 December 2012
            
             
UK (excluding NI (2))
23,312 
8,119 
  
4,184 
1,432 
37,047 
Ireland (ROI and NI (2))
2,877 
2,763 
  
665 
7,281 
13,586 
Western Europe (other)
403 
5,962 
  
24 
31 
6,420 
US
4,629 
582 
  
15 
- 
5,226 
RoW (2)
194 
260 
  
307 
- 
761 
 
31,415 
17,686 
  
5,195 
8,744 
63,040 
             
               
 
For the notes to these tables refer to the following page.
 
 
 
Risk and balance sheet management
 
Key loan portfolios: Commercial real estate (continued)
 
 
By sub-sector (1)
  
Ireland 
        
UK 
(ROI and 
Western 
      
(excl NI (2))
 NI (2))
Europe 
US 
RoW (2)
Total 
£m 
£m 
£m 
£m 
£m 
£m 
             
31 December 2013
            
Residential
8,740 
6,560 
200 
1,085 
133 
16,718 
Office
4,557 
813 
1,439 
32 
121 
6,962 
Retail
6,979 
1,501 
967 
84 
73 
9,604 
Industrial
3,078 
454 
43 
30 
13 
3,618 
Mixed/other
6,926 
3,556 
1,641 
3,416 
137 
15,676 
             
 
30,280 
12,884 
4,290 
4,647 
477 
52,578 
             
31 December 2012
  
             
Residential
10,344 
6,701 
403 
996 
242 
18,686 
Office
6,112 
1,132 
1,851 
99 
176 
9,370 
Retail
7,529 
1,492 
1,450 
117 
129 
10,717 
Industrial
3,550 
476 
143 
4 
39 
4,212 
Mixed/other
9,512 
3,785 
2,573 
4,010 
175 
20,055 
             
 
37,047 
13,586 
6,420 
5,226 
761 
63,040 
 
Notes:
(1)
Excludes commercial real estate lending in Wealth as these loans are generally supported by personal guarantees in addition to collateral. This portfolio, which totalled £1.4 billion at 31 December 2013 (31 December 2012 - £1.4 billion) continued to perform in line with expectations and required minimal provision.
(2)
ROI: Republic of Ireland; NI: Northern Ireland; RoW: Rest of World.
 
Credit quality metrics relating to commercial real estate lending were as follows:
 
 
 
Group
  
Non-Core
 
31 December
31 December
  
31 December
31 December
2013
2012
2013
2012
           
Lending (gross)
£52.6bn
£63.0bn
  
£19.3bn
£26.4bn
Of which REIL
£20.1bn
£22.1bn
  
£14.3bn
£17.1bn
Provisions
£13.2bn
£10.1bn
  
£10.6bn
£8.3bn
REIL as a % of gross loans to customers
38.2%
35.1%
  
74.1%
64.8%
Provisions as a % of REIL
66%
46%
  
74%
49%
 
Note:
(1)
Excludes property related lending to customers in other sectors managed by Real Estate Finance.
 

 
Risk and balance sheet management
 
Key loan portfolios: Commercial real estate (continued)
 
Key points
 
·
In line with Group strategy, the overall gross lending exposure to commercial real estate (CRE) fell by £10.4 billion, or 17%, during 2013 to £52.6 billion. Gross lending exposure is now almost half of the exposure of four years ago. The overall mix of geography, sub-sector and investment and development remained broadly unchanged.
   
·
A significant proportion of the decrease was in Non-Core and was due to repayments, asset sales and write-offs. The Non-Core portfolio totalled £19.3 billion (37% of the portfolio) at 31 December 2013 (31 December 2012 - £26.4 billion or 42% of the portfolio).
   
·
CRE lending net of impairment provisions decreased by £13.5 billion or 26% in the year to £39.4 billion in part due to the increased impairment provisions recorded in Q4 2013 in Ulster Bank Non-Core, as part of the RCR creation and related strategy. Provision coverage on CRE REIL was 66% compared with 46% at the end of 2012.
   
·
The UK portfolio was focused on London and South East England. Approximately 47% of the portfolio was held in these areas at 31 December 2013 (31 December 2012 - 43%).
 
The table below analyses commercial real estate (Core and Non-Core) lending by loan-to-value (LTV) ratio, which represents loan value before provisions relative to the value of the property financed.
 
 
Ulster Bank
  
Rest of the Group
  
Group
Loan-to-value ratio
  
Non-
      
Non-
      
Non-
  
Performing
performing
Total
Performing
performing
Total
Performing
performing
Total
£m
 £m
£m
£m
 £m
£m
£m
 £m
£m
                       
31 December 2013
                      
<= 50%
124 
23 
147 
  
7,884 
262 
8,146 
  
8,008 
285 
8,293 
> 50% and <= 70%
271 
55 
326 
  
9,962 
582 
10,544 
  
10,233 
637 
10,870 
> 70% and <= 90%
282 
89 
371 
  
3,699 
1,272 
4,971 
  
3,981 
1,361 
5,342 
> 90% and <= 100%
86 
154 
240 
  
865 
368 
1,233 
  
951 
522 
1,473 
> 100% and <= 110%
121 
212 
333 
  
690 
627 
1,317 
  
811 
839 
1,650 
> 110% and <= 130%
238 
366 
604 
  
333 
1,334 
1,667 
  
571 
1,700 
2,271 
> 130% and <= 150%
102 
438 
540 
  
267 
1,161 
1,428 
  
369 
1,599 
1,968 
> 150%
319 
6,738 
7,057 
  
150 
2,629 
2,779 
  
469 
9,367 
9,836 
                       
Total with LTVs
1,543 
8,075 
9,618 
  
23,850 
8,235 
32,085 
  
25,393 
16,310 
41,703 
Minimal security (1)
6 
3,144 
3,150 
  
54 
13 
67 
  
60 
3,157 
3,217 
Other (2)
144 
1,351 
1,495 
  
5,230 
933 
6,163 
  
5,374 
2,284 
7,658 
                       
Total
1,693 
12,570 
14,263 
  
29,134 
9,181 
38,315 
  
30,827 
21,751 
52,578 
                       
Total portfolio
                      
  average LTV (3)
121%
376%
335%
  
61%
149%
84%
  
65%
261%
142%


 
 
Risk and balance sheet management
 
Key loan portfolios: Commercial real estate (continued)
          
                       
 
Ulster Bank
  
Rest of the Group
  
Group
   
Non- 
      
Non- 
      
Non- 
  
 
Performing 
performing 
Total 
Performing 
performing 
Total 
Performing 
performing 
Total 
Loan-to-value ratio
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
                       
31 December 2012
                      
<= 50%
141 
18 
159 
  
7,210 
281 
7,491 
  
7,351 
299 
7,650 
> 50% and <= 70%
309 
58 
367 
  
12,161 
996 
13,157 
  
12,470 
1,054 
13,524 
> 70% and <= 90%
402 
164 
566 
  
6,438 
1,042 
7,480 
  
6,840 
1,206 
8,046 
> 90% and <= 100%
404 
137 
541 
  
1,542 
2,145 
3,687 
  
1,946 
2,282 
4,228 
> 100% and <= 110%
111 
543 
654 
  
1,019 
1,449 
2,468 
  
1,130 
1,992 
3,122 
> 110% and <= 130%
340 
619 
959 
  
901 
1,069 
1,970 
  
1,241 
1,688 
2,929 
> 130% and <= 150%
353 
774 
1,127 
  
322 
913 
1,235 
  
675 
1,687 
2,362 
> 150%
1,000 
7,350 
8,350 
  
595 
1,962 
2,557 
  
1,595 
9,312 
10,907 
                       
Total with LTVs
3,060 
9,663 
12,723 
  
30,188 
9,857 
40,045 
  
33,248 
19,520 
52,768 
Minimal security (1)
8 
1,615 
1,623 
  
3 
13 
16 
  
11 
1,628 
1,639 
Other (2)
137 
811 
948 
  
6,494 
1,191 
7,685 
  
6,631 
2,002 
8,633 
                       
Total
3,205 
12,089 
15,294 
  
36,685 
11,061 
47,746 
  
39,890 
23,150 
63,040 
                       
Total portfolio
                      
  average LTV (3)
136%
286%
250%
  
65%
125%
80%
  
71%
206%
122%
 
Notes:
(1)
In 2012, the Group reclassified loans with limited (defined as LTV>1,000%) or non-physical security as minimal security, of which a majority were commercial real estate development loans in Ulster Bank. Total portfolio average LTV is quoted net of loans with minimal security given that the anticipated recovery rate is less than 10%. Provisions are marked against these loans where required to reflect the relevant asset quality and recovery profile.
(2)
Other non-performing loans of £2.3 billion (31 December 2012 - £2.0 billion) were subject to the Group's standard provisioning policies. Other performing loans of £5.4 billion (31 December 2012 - £6.6 billion) included general corporate loans, typically unsecured, to commercial real estate companies, and major UK house builders in addition to facilities supported by guarantees.. The credit quality of these exposures was consistent with that of the performing portfolio overall.
(3)
Weighted average by exposure.
 
 
 Key points
·
The reductions in the higher LTV buckets for the performing book were offset by the growth in these buckets in the non-performing book. Ulster Bank Group accounted for the majority of this deterioration and has addressed this through an increase in provisions (refer to the section on RCR). Ulster Bank Group's provision as a percentage of REIL stood at 76% at 31 December 2013 (31 December 2012 - 57%). Valuations continued to be affected by difficult, although improving, market conditions, as well as refinements to the Group's estimation approach.
   
·
Interest payable on outstanding loans was covered 3.1x and 1.6x within UK Corporate and International Banking, respectively, at 31 December 2013 (31 December 2012 - 3.0x and 1.5x respectively). The US Retail & Commercial portfolio is managed on the basis of debt service coverage, which includes principal amortisation as well as interest payable. The average debt service coverage was 1.5x at 31 December 2013 (31 December 2012 - 1.3x). As a number of different approaches are used across the Group and across geographies to calculate interest coverage ratios, they may not be comparable for different portfolio types and legal entities.

 
 
Risk and balance sheet management
 
Key loan portfolios (continued)
 
Residential mortgages
The table below analyses the mortgage portfolios and includes both Core and Non-Core. Total gross mortgage lending comprises 35% of the Group's gross lending of £418 billion.
 
 
31 December
31 December
2013 
2012 
 
£m 
£m 
     
UK Retail
99,338 
99,062 
Ulster Bank
19,034 
19,162 
RBS Citizens
19,584 
21,538 
Wealth
8,701 
8,786 
     
 
146,657 
148,548 
 
Refer to page 183 for further information on interest only loans.
 
 
Risk and balance sheet management
 
Key loan portfolios: Residential mortgages (continued)
The table below shows LTVs for the Group's residential mortgage portfolio split between performing (AQ1-AQ9) and non-performing (AQ10), with the average LTV calculated on a weighted value basis. Loan balances are shown as at the end of the year whereas property values are calculated using property index movements since the last formal valuation.
 
 
UK Retail
  
Ulster Bank
  
RBS Citizens (1)
  
Wealth
Loan-to-value ratio
  
Non-
      
Non-
      
Non-
      
Non-
  
Performing
performing
Total
Performing
performing
Total
Performing
performing
Total
Performing
performing
Total
£m
 £m
£m
£m
 £m
£m
£m
 £m
£m
£m
 £m
£m
                               
31 December 2013
                              
<= 50%
26,392 
313 
26,705 
  
2,025 
170 
2,195 
  
4,669 
98 
4,767 
  
3,400 
16 
3,416 
> 50% and <= 70%
34,699 
591 
35,290 
  
1,837 
195 
2,032 
  
5,529 
89 
5,618 
  
3,397 
20 
3,417 
> 70% and <= 90%
28,920 
854 
29,774 
  
2,326 
288 
2,614 
  
5,553 
110 
5,663 
  
1,337 
44 
1,381 
> 90% and <= 100%
4,057 
315 
4,372 
  
1,214 
162 
1,376 
  
1,309 
39 
1,348 
  
87 
7 
94 
> 100% and <= 110%
1,790 
182 
1,972 
  
1,302 
182 
1,484 
  
752 
22 
774 
  
87 
15 
102 
> 110% and <= 130%
552 
100 
652 
  
2,509 
461 
2,970 
  
637 
17 
654 
  
27 
6 
33 
> 130% and <= 150%
37 
5 
42 
  
2,202 
549 
2,751 
  
183 
5 
188 
  
4 
4 
8 
> 150%
- 
- 
- 
  
2,385 
1,227 
3,612 
  
102 
4 
106 
  
24 
6 
30 
                               
Total with LTVs
96,447 
2,360 
98,807 
  
15,800 
3,234 
19,034 
  
18,734 
384 
19,118 
  
8,363 
118 
8,481 
Other (2)
511 
20 
531 
  
- 
- 
- 
  
463 
3 
466 
  
215 
5 
220 
                               
Total
96,958 
2,380 
99,338 
  
15,800 
3,234 
19,034 
  
19,197 
387 
19,584 
  
8,578 
123 
8,701 
                               
Total portfolio average LTV (3)
62%
75%
62%
  
103%
130%
108%
  
67%
69%
67%
  
51%
77%
51%
                               
Average LTV on new originations
                              
  during the year (3)
    
67%
      
73%
      
68%
      
52%
                               
For the notes to this table refer to the following page.
                        

 
 
Risk and balance sheet management
 
 
Key loan portfolios: Residential mortgages (continued)
                    
                               
 
UK Retail
  
Ulster Bank
  
RBS Citizens (1)
  
Wealth
Loan-to-value ratio
  
Non-
      
Non-
      
Non-
      
Non-
  
Performing
performing
Total
Performing
performing
Total
Performing
performing
Total
Performing
performing
Total
£m
 £m
£m
£m
 £m
£m
£m
 £m
£m
£m
 £m
£m
                               
31 December 2012
                              
<= 50%
22,306 
327 
22,633 
  
2,182 
274 
2,456 
  
4,167 
51 
4,218 
  
3,905 
9 
3,914 
> 50% and <= 70%
27,408 
457 
27,865 
  
1,635 
197 
1,832 
  
4,806 
76 
4,882 
  
2,790 
12 
2,802 
> 70% and <= 90%
34,002 
767 
34,769 
  
2,019 
294 
2,313 
  
6,461 
114 
6,575 
  
1,080 
27 
1,107 
> 90% and <= 100%
7,073 
366 
7,439 
  
1,119 
156 
1,275 
  
2,011 
57 
2,068 
  
93 
7 
100 
> 100% and <= 110%
3,301 
290 
3,591 
  
1,239 
174 
1,413 
  
1,280 
43 
1,323 
  
69 
13 
82 
> 110% and <= 130%
1,919 
239 
2,158 
  
2,412 
397 
2,809 
  
1,263 
42 
1,305 
  
49 
7 
56 
> 130% and <= 150%
83 
26 
109 
  
2,144 
474 
2,618 
  
463 
14 
477 
  
16 
3 
19 
> 150%
- 
- 
- 
  
3,156 
1,290 
4,446 
  
365 
14 
379 
  
29 
3 
32 
                               
Total with LTVs
96,092 
2,472 
98,564 
  
15,906 
3,256 
19,162 
  
20,816 
411 
21,227 
  
8,031 
81 
8,112 
Other (2)
486 
12 
498 
  
- 
- 
- 
  
292 
19 
311 
  
674 
- 
674 
                               
Total
96,578 
2,484 
99,062 
  
15,906 
3,256 
19,162 
  
21,108 
430 
21,538 
  
8,705 
81 
8,786 
                               
Total portfolio average LTV (3)
66%
80%
67%
  
108%
132%
112%
  
75%
86%
75%
  
51%
78%
51%
                               
Average LTV on new originations
                              
  during the year (3)
    
65%
      
74%
      
64%
        
 
Notes:
(1)
Includes residential mortgages and home equity loans and lines (refer to page 182 for a breakdown of balances).
(2)
Where no indexed LTV is held.
(3)
Average LTV weighted by value is calculated using the LTV on each individual mortgage and applying a weighting based on the value of each mortgage.
 
 
Risk and balance sheet management
 
Key loan portfolios: Residential mortgages (continued)
 
Key points
 
UK Retail
 
·
The UK Retail mortgage portfolio was £99.3 billion at 31 December 2013, an increase of 0.3% from 31 December 2012. The mortgages included £9.1 billion (31 December 2012 - £7.9 billion) of residential buy-to-let lending.
   
·
As at 31 December 2013, approximately 43% of the portfolio consisted of fixed rate, 5% a combination of fixed and variable rates and the remainder were variable rate mortgages (including those on managed rates). The interest only proportion of the total portfolio was 26%.
   
·
Gross new mortgage lending amounted to £14.4 billion and the average LTV by volume was 62.7% compared to 61.3% at 31 December 2012. The average LTV calculated by weighted LTV of lending was 66.6% (31 December 2012 - 65.2%).
   
·
Based on the Halifax Price Index at September 2013, the portfolio-average indexed LTV by volume was 54.1% (31 December 2012 - 58.1%) and 62.0% by weighted value of debt outstanding (31 December 2012 - 66.8%). The ratio of total outstanding balances to total indexed property valuations was 45.1% (31 December 2012 - 48.5%).
   
·
All new mortgage business is subject to a comprehensive assessment. This includes: i) an affordability test which includes a stressed interest rate that is higher than the customer pay rate; ii) credit scoring; iii) a maximum loan-to-value of 90% with the exception of the UK Government backed schemes Help-to-Buy (from Q4 2013), New Buy and My New Home products where lending of up to 95% is provided; and iv) a range of policy rules that restrict the availability of credit to borrowers with higher risk characteristics, for example highly indebted and/or adverse payment behaviour on previous borrowings.
   
·
The arrears rate (defined as more than three payments in arrears, excluding repossessions and shortfalls post property sale), fell to 1.3% (31 December 2012 - 1.5%). The number of properties repossessed in 2013 was 1,532 compared with 1,426 in 2012. Arrears rates remained sensitive to economic developments and benefited from the low interest rate environment.
   
·
The impairment charge for mortgage loans was £30 million for 2013 compared to £92 million in 2012, reflecting a lower level of defaults and reduced loss rates as valuations improved on properties held as security on defaulted debt.
 
Ulster Bank
 
·
Ulster Bank's residential mortgage portfolio was £19.0 billion at 31 December 2013, with 88% in the Republic of Ireland and 12% in Northern Ireland. At constant exchange rates, the portfolio decreased 2.5% from 31 December 2012 as a result of amortisation and limited growth due to low market demand.
   
·
The assets included £2.2 billion (12%) of residential buy-to-let loans. The interest rate product mix was approximately 68% on tracker rate products, 23% on variable rate products and 9% on fixed rate. Interest only represented 11% of the total portfolio.
   
·
The average individual LTV on new originations was 73% in 2013, (31 December 2012 - 74%); the volume of new business remained very low. The maximum LTV available to Ulster Bank customers was 90% with the exception of a specific Northern Ireland scheme which permits LTVs of up to 95% (although Ulster Bank's exposure is capped at 85% LTV).


 
Risk and balance sheet management
 
Key loan portfolios: Residential mortgages (continued)
 
Key points (continued)
 
Ulster Bank (continued)
 
·
The portfolio average indexed LTV fell 4% during 2013 and reflected positive house price index trends over the last 12 months.
   
·
Refer to the Ulster Bank Group (Core and Non-Core) section on page 189 for commentary on mortgage REIL and impairments.
 
RBS Citizens
 
·
RBS Citizens residential real estate portfolio was £19.6 billion at 31 December 2013 (31 December 2012 - £21.5 billion). The Core business comprised 91% of the portfolio. The real estate portfolio consisted of £5.9 billion (£5.6 billion Core vs. £0.3 billion Non-Core) of first lien residential mortgages (1% in second lien position) and £13.5 billion (£12.0 billion Core vs. £1.5 billion Non-Core) of home equity loans and lines (first and second liens). Home equity Core consisted of 49% in first lien position while Non-Core consisted of 95% in second lien position.
   
·
RBS Citizens continued to focus on its 'footprint states' of New England, Mid Atlantic and Mid West regions. At 31 December 2013, the portfolio consisted of £16.4 billion (84% of the total portfolio) within footprint.
   
·
Of the total real estate portfolio, of £1.8 billion in Non-Core, the serviced-by-others (SBO) element was the largest component (76%). The SBO book decreased from £1.8 billion at 31 December 2012 to £1.4 billion at 31 December 2013 and was closed to new purchases in the third quarter of 2007. The arrears rate of the SBO portfolio decreased from 1.9% at 31 December 2012 to 1.6% at 31 December 2013 reflecting portfolio liquidation as well as more effective account servicing and collections. The charge-off rate also continued to decrease (4.4% annualised at Q4 2013 compared to 7.4% at 31 December 2012).
   
·
The weighted average LTV of the portfolio decreased from 75% at 31 December 2012 to 67% at 31 December 2013, driven by increases in the Case-Shiller Home Price Index from Q3 2012 to Q4 2013. The weighted average LTV of the portfolio, excluding SBO, was 64%.

 
Risk and balance sheet management
 
Key loan portfolios (continued)
 
Interest only retail loans
The Group's interest only retail loan portfolios include interest only mortgage lending in UK Retail, Ulster Bank, Wealth and RBS Citizens' portfolios of home equity lines of credit (HELOC) and interest only mortgage portfolios.
 
 
31 December 2013
  
31 December 2012
 
Mortgages 
Other loans 
  
Mortgages 
Other loans (1)
£bn 
£bn 
£bn 
£bn 
           
Variable rate
34.8 
1.3 
  
38.5 
1.5 
Fixed rate
8.0 
0.1 
  
8.1 
0.1 
           
Interest only loans
42.8 
1.4 
  
46.6 
1.6 
Mixed repayment (2)
8.3 
- 
  
8.8 
- 
           
Total
51.1 
1.4 
  
55.4 
1.6 
 
Notes:
(1)
The other loans category for 2012 has been restated to exclude non-personal interest only loans within Wealth division.
(2)
Mortgages with partial interest only and partial capital repayments.
 
The Group reduced its exposure to interest only mortgages. UK Retail ceased offering interest only mortgages to residential owner-occupied customers with effect from 1 December 2012. Interest only repayment remains an option for buy-to-let mortgages. Ulster Bank withdrew interest only as a standard mortgage offering for new lending in the Republic of Ireland in 2010 and in Northern Ireland in 2012. Interest only mortgages are now granted on a very limited basis to high net worth customers or as part of its forbearance programme. RBS Citizens offers its customers interest only mortgages and conventional HELOC that enter an amortising repayment period after the interest only period. Wealth offers interest only mortgages to its high net worth customers.
 
The Group recognises impairment provisions in respect of loans in its interest only portfolios (UK Retail - 2 years; RBS Citizens - 1 year) that are approaching their contractual maturity based on historical analysis and customer behaviour. These impairment provisions are refreshed as new trends and data become available.
 

 
Risk and balance sheet management
 
Key loan portfolios: Interest only retail loans (continued)
 
The tables below analyse the Group's interest only mortgage and HELOC portfolios (excluding mixed repayment mortgages) by type, by contractual year of maturity and by originating division.
 
 
 2014 (1)
2015-16 
2017-21 
2022-26 
2027-31 
2032-41 
After 
Total 
 2041 
31 December 2013
£bn 
£bn 
£bn 
£bn 
£bn 
£bn 
£bn 
£bn 
                 
Bullet principal repayment (2)
0.9 
2.1 
6.0 
7.6 
7.9 
7.5 
0.5 
32.5 
Conversion to amortising (2,3)
1.9 
6.0 
2.2 
0.1 
- 
0.1 
- 
10.3 
                 
Total
2.8 
8.1 
8.2 
7.7 
7.9 
7.6 
0.5 
42.8 
                 
 
 2013 (4) 
2014-15 
2016-20 
2021-25 
2026-30 
2031-40 
After 
Total 
 
 2040 
31 December 2012
£bn 
£bn 
£bn 
£bn 
£bn 
£bn 
£bn 
£bn 
                 
Bullet principal repayment (2)
1.4 
2.9 
6.8 
5.9 
8.1 
9.9 
0.7 
35.7 
Conversion to amortising (2,3)
0.5 
1.7 
5.8 
2.7 
0.1 
0.1 
- 
10.9 
                 
Total
1.9 
4.6 
12.6 
8.6 
8.2 
10.0 
0.7 
46.6 
 
Notes:
(1)
2014 includes pre-2014 maturity exposure.
(2)
Includes £2.3 billion (31 December 2012 - £2.2 billion) of repayment mortgages that have been granted interest only concessions (forbearance).
(3)
Maturity date relates to the expiry of the interest only period.
(4)
2013 includes pre-2013 maturity exposure.
 
 
 
Bullet 
  
Total 
Proportion of
principal 
Conversion 
 mortgage 
 repayment 
 to amortising 
 lending 
31 December 2013
£bn 
£bn 
£bn 
% 
         
UK Retail (1)
25.4 
- 
25.4 
25.6 
Ulster Bank
0.7 
1.4 
2.1 
11.0 
RBS Citizens
0.4 
8.9 
9.3 
47.5 
Wealth
6.0 
- 
6.0 
69.0 
         
Total
32.5 
10.3 
42.8 
  
         
31 December 2012
        
         
UK Retail
28.1 
- 
28.1 
28.4 
Ulster Bank
1.4 
1.8 
3.2 
16.7 
RBS Citizens
0.5 
9.0 
9.5 
44.1 
Wealth
5.7 
0.1 
5.8 
66.0 
         
Total
35.7 
10.9 
46.6 
  
 
Note:
(1)
UK Retail also has exposure of £7.7 billion to customers who have a combination of repayment types, capital repayments and interest only.
 

 
Risk and balance sheet management
 
Key loan portfolios: Interest only retail loans (continued)
 
UK Retail
UK Retail's interest only mortgages require full principal repayment (bullet) at the time of maturity. Typically such loans have remaining terms of between 15 and 20 years. Customers are reminded of the need to have an adequate repayment vehicle in place throughout the mortgage term.
 
Of the bullet loans that matured in the six months to 30 June 2013, 53% had been fully repaid by 31 December 2013. The unpaid balance totalled £51 million, 96% of which continued to meet agreed payment arrangements (including balances that have been restructured on a capital and interest basis within eight months of the contract date; customers are allowed eight months leeway for their investment plan to mature and cashed in to repay the mortgage). Of the £51 million unpaid balance, 56% of the loans had an indexed LTV of 70% or less with only 14% above 90%. Customers may be offered a short extension to the term of an interest only mortgage or a conversion of an interest only mortgage to one featuring repayment of both capital and interest, subject to affordability and characteristics such as the customers' income and ultimate repayment vehicle. The majority of term extensions in UK Retail are classified as forbearance.
 
Ulster Bank
Ulster Bank's interest only mortgages require full principal repayment (bullet) at the time of maturity; or payment of both capital and interest from the end of the interest only period, typically seven years, so that customers meet their contractual repayment obligations. For bullet customers, contact strategies are in place to remind them of the need to repay principal at the end of the mortgage term.
 
Of the bullet mortgages that matured in the six months to 30 June 2013 (£1.2 million), 20% had fully repaid by 31 December 2013 leaving residual balances of £0.9 million, 78% of which were meeting the terms of a revised repayment schedule. Of the amortising loans that matured in the six months to 30 June 2013 (£65 million), 69% were either fully repaid or meeting the terms of a revised repayment schedule.
 
Ulster Bank also offers temporary interest only periods to customers as part of its forbearance programme. An interest only period of up to two years is permitted after which the customer enters an amortising repayment period following further assessment of the customer's circumstances. The affordability assessment conducted at the end of the forbearance period takes into consideration the repayment of the arrears that have accumulated based on original terms during the forbearance period. The customer's delinquency status does not deteriorate further while forbearance repayments are maintained. Term extensions in respect of existing interest only mortgages are offered only under a forbearance arrangement.
 
RBS Citizens
RBS Citizens has a book of interest only bullet repayment HELOC loans (£0.4 billion at 31 December 2013) for which repayment of principal is due at maturity, and an interest only portfolio that comprises loans that convert to amortising after an interest only period that is typically 10 years (£8.9 billion at December 2013 of which £8.0 billion are HELOCs). The majority of the bullet loans are due to mature between 2014 and 2015. Of the bullet loans that matured in the six months to 30 June 2013, 50% had fully repaid or are current as of 31 December 2013. The residual balances (modified, delinquent, and charged-off) made up £21 million. For those loans that convert to amortising, the typical uplift in payments is currently 210% (average uplift calculated at £132 per month). Delinquency rates have shown a modest increase in the over 30 days arrears rate. 
 

 
Risk and balance sheet management
 
Key loan portfolios: Interest only retail loans (continued)
 
The tables below analyse the Group's retail mortgage and HELOC portfolios between interest only mortgages (excluding mixed repayment mortgages) and other mortgage loans.
 
 
Interest only
    
31 December 2013
Bullet principal
Conversion
    
repayment
to amortising
Other
Total
£bn 
£bn 
£bn 
£bn 
         
Arrears status
          
Current
31.2 
9.6 
97.0 
137.8 
1 to 90 days in arrears
0.7 
0.4 
2.8 
3.9 
90+ days in arrears
0.6 
0.3 
4.1 
5.0 
         
Total
32.5 
10.3 
103.9 
146.7 

 
31 December 2012
          
           
Arrears status
          
Current
34.4 
10.0 
94.4 
138.8 
  
1 to 90 days in arrears
0.6 
0.4 
3.3 
4.3 
  
90+ days in arrears
0.7 
0.5 
4.2 
5.4 
  
           
Total
35.7 
10.9 
101.9 
148.5 
  
         
31 December 2013
Interest 
      
 only 
Other 
Total
  
£bn 
£bn 
£bn 
  
         
Current LTV
        
<= 50%
10.8 
26.3 
37.1 
  
> 50% and <= 70%
14.6 
31.8 
46.4 
  
> 70% and <= 90%
10.8 
28.6 
39.4 
  
> 90% and <= 100%
2.6 
4.6 
7.2 
  
> 100% and <= 110%
1.5 
2.8 
4.3 
  
> 110% and <= 130%
0.9 
3.4 
4.3 
  
> 130% and <= 150%
0.5 
2.5 
3.0 
  
> 150%
0.7 
3.1 
3.8 
  
         
Total with LTVs
42.4 
103.1 
145.5 
  
Other
0.4 
0.8 
1.2 
  
         
Total
42.8 
103.9 
146.7 
  
               
 
31 December 2012
      
       
Current LTV
      
<= 50%
10.3 
22.9 
33.2 
> 50% and <= 70%
12.4 
25.0 
37.4 
> 70% and <= 90%
13.6 
31.2 
44.8 
> 90% and <= 100%
3.6 
7.3 
10.9 
> 100% and <= 110%
2.4 
4.0 
6.4 
> 110% and <= 130%
2.0 
4.3 
6.3 
> 130% and <= 150%
0.8 
2.4 
3.2 
> 150%
1.2 
3.7 
4.9 
       
Total with LTVs
46.3 
100.8 
147.1 
Other
0.3 
1.1 
1.4 
       
Total
46.6 
101.9 
148.5 
 

 
Risk and balance sheet management
 
Key loan portfolios (continued)
 
Ulster Bank Group (Core and Non-Core)
 
Overview
At 31 December 2013, Ulster Bank Group accounted for 10% of the Group's total gross loans to customers (31 December 2012 - 10%) and 8% of the Group's Core gross loans to customers (31 December 2012 - 8%) Ulster Bank's financial performance continued to be impacted by the challenging economic climate in Ireland, with impairments remaining elevated in the wholesale bank as a result of limited liquidity in the economy which continues to depress the property market and domestic spending. Additionally, in Q4 2013 the Group announced a recovery strategy for loans transferring to RCR. This resulted in a significant increase in provisions as the move from a through the cycle strategy to a 3 year deleverage, reduced expected realisations.
 
The impairment charge of £4,793 million for 2013 (31 December 2012 - £2,340 million) was driven by a combination of new defaulting customers and higher provisions on existing defaulted cases due primarily to the above mentioned RCR strategy. Provisions as a percentage of risk elements in lending increased to 76% in 2013, from 57% in 2012, predominantly as a result of this change in strategy, combined with the deterioration in the value of the Non-Core commercial real estate development portfolio.
 
Core
The impairment charge for the year of £1,774 million (31 December 2012 - £1,364 million) reflected the difficult economic climate in Ireland, and most particularly the RCR deleverage strategy across the corporate portfolios. The mortgage portfolio improved notably in 2013, accounting for £235 million (13%) of the total 2013 impairment charge (31 December 2012 - £646 million) due to lower debt flows driven by improved collections performance and stabilising residential property prices.
 
Non-Core
The impairment charge for the year was £3,019 million (31 December 2012 - £976 million), with the commercial real estate sector accounting for £2,674 million (89%) of the total 2013 impairment charge, again reflecting the RCR strategy. 

 
 
Risk and balance sheet management
 
Key loan portfolios: Ulster Bank Group (Core and Non-Core) (continued)
 
The table below analyses Ulster Bank Group's loans, REIL, impairments and related credit metrics by sector.
 
 
       
Credit metrics
  
   
REIL
Provisions
REIL as a
Provisions
Provisions
    
Gross
% of gross
as a % of
as a % of
Impairment
Amounts
loans
loans
REIL
gross loans
charge (1)
written-off
Sector analysis
£m
£m
£m
%
%
%
£m
£m
                 
31 December 2013
                
Core
                
Mortgages
19,034 
3,235 
1,725 
17.0 
53 
9.1 
235 
34 
Commercial real estate
                
  - investment
3,419 
2,288 
1,151 
66.9 
50 
33.7 
593 
51 
  - development
718 
472 
331 
65.7 
70 
46.1 
153 
4 
Other corporate
7,039 
2,277 
1,984 
32.3 
87 
28.2 
771 
149 
Other lending
1,236 
194 
187 
15.7 
96 
15.1 
22 
39 
                 
 
31,446 
8,466 
5,378 
26.9 
64 
17.1 
1,774 
277 
                 
Non-Core
                
Commercial real estate
                
  - investment
3,211 
3,006 
2,162 
93.6 
72 
67.3 
837 
53 
  - development 
6,915 
6,757 
6,158 
97.7 
91 
89.1 
1,837 
370 
Other corporate
1,479 
1,209 
1,069 
81.7 
88 
72.3 
345 
6 
                 
 
11,605 
10,972 
9,389 
94.5 
86 
80.9 
3,019 
429 
                 
Ulster Bank Group
                
Mortgages
19,034 
3,235 
1,725 
17.0 
53 
9.1 
235 
34 
Commercial real estate
                
  - investment
6,630 
5,294 
3,313 
79.8 
63 
50.0 
1,430 
104 
  - development
7,633 
7,229 
6,489 
94.7 
90 
85.0 
1,990 
374 
Other corporate
8,518 
3,486 
3,053 
40.9 
88 
35.8 
1,116 
155 
Other lending
1,236 
194 
187 
15.7 
96 
15.1 
22 
39 
                 
 
43,051 
19,438 
14,767 
45.2 
76 
34.3 
4,793 
706 


 
Risk and balance sheet management
 
Key loan portfolios: Ulster Bank Group (Core and Non-Core) (continued)
    
         
       
Credit metrics
  
   
REIL
Provisions
REIL as a
Provisions
Provisions
    
Gross
% of gross
as a % of
as a % of
Impairment
Amounts
loans
loans
REIL
gross loans
charge
written-off
Sector analysis
£m
£m
£m
%
%
%
£m
£m
                 
31 December 2012
                
Core
                
Mortgages
19,162 
3,147 
1,525 
16.4 
48 
8.0 
646 
22 
Commercial real estate
                
  - investment
3,575 
1,551 
593 
43.4 
38 
16.6 
221 
- 
  - development
729 
369 
197 
50.6 
53 
27.0 
55 
2 
Other corporate
7,772 
2,259 
1,394 
29.1 
62 
17.9 
389 
15 
Other lending
1,414 
207 
201 
14.6 
97 
14.2 
53 
33 
                 
 
32,652 
7,533 
3,910 
23.1 
52 
12.0 
1,364 
72 
                 
Non-Core
                
Commercial real estate
                
  - investment
3,383 
2,800 
1,433 
82.8 
51 
42.4 
288 
15 
  - development 
7,607 
7,286 
4,720 
95.8 
65 
62.0 
611 
103 
Other corporate
1,570 
1,230 
711 
78.3 
58 
45.3 
77 
23 
                 
 
12,560 
11,316 
6,864 
90.1 
61 
54.6 
976 
141 
                 
Ulster Bank Group
                
Mortgages
19,162 
3,147 
1,525 
16.4 
48 
8.0 
646 
22 
Commercial real estate
                
  - investment
6,958 
4,351 
2,026 
62.5 
47 
29.1 
509 
15 
  - development
8,336 
7,655 
4,917 
91.8 
64 
59.0 
666 
105 
Other corporate
9,342 
3,489 
2,105 
37.3 
60 
22.5 
466 
38 
Other lending
1,414 
207 
201 
14.6 
97 
14.2 
53 
33 
                 
 
45,212 
18,849 
10,774 
41.7 
57 
23.8 
2,340 
213 
 
Note:
(1)
Of which £3.2 billion due to RCR and the related change of strategy.
 
Key points
 
·
The commercial real estate lending portfolio for Ulster Bank Group (Core and Non-Core) totalled £14.3 billion at 31 December 2013, of which £10.1 billion or 71% was in Non-Core. The geographic split of the total Ulster Bank Group commercial real estate portfolio remained similar to 2012 with 64% (31 December 2012 - 63%) in the Republic of Ireland, 26% (31 December 2012 - 26%) in Northern Ireland, 10% (31 December 2012 - 11%) in the UK (excluding Northern Ireland) and the balance (0.1%) in Rest of World (primarily Europe).
   
·
Provisions covered CRE REIL by 78%, up from 58% at the end of 2012, with the investment portfolio being covered 80% and the development portfolio 95%.
   
·
Of the total corporate impairment charge recorded during H2 2013 of £3.9 billion, £3.4 billion related to all loans that will be transferred to RCR, of which £2.9 billion relates to commercial real estate loans and £0.5 billion relates to corporate loans.
 


Risk and balance sheet management
 
 
Key loan portfolios: Ulster Bank Group (Core and Non-Core) (continued)
    
             
 
Investment
  
Development
  
 
Commercial 
Residential 
  
Commercial 
Residential 
Total 
Commercial real estate
£m 
£m 
  
£m 
£m 
£m 
             
31 December 2013
            
ROI
3,227 
806 
  
1,402 
3,684 
9,119 
NI
1,083 
223 
  
517 
1,848 
3,671 
UK (excluding NI)
1,232 
50 
  
56 
112 
1,450 
RoW
9 
- 
  
8 
6 
23 
             
 
5,551 
1,079 
  
1,983 
5,650 
14,263 
             
31 December 2012
            
             
ROI
3,546 
779 
  
1,603 
3,653 
9,581 
NI
1,083 
210 
  
631 
2,059 
3,983 
UK (excluding NI)
1,239 
86 
  
82 
290 
1,697 
RoW
14 
1 
  
8 
10 
33 
             
 
5,882 
1,076 
  
2,324 
6,012 
15,294 
 
Key points
 
·
Commercial real estate continued to be the primary sector driving the Ulster Bank Group defaulted loan book. Exposure to the sector fell during 2013 by £1.0 billion, reflecting Ulster Bank's continuing strategy to reduce concentration risk in this sector. 
   
·
The outlook for the property sector remains challenging. While there may be some signs of stabilisation in main urban centres, the outlook continues to be negative for secondary property locations on the island of Ireland.
   
·
Ulster Bank experienced further migration of commercial real estate exposures to its problem management framework, where various measures may be agreed to assist customers whose loans are performing, but who are experiencing temporary financial difficulties.
 
Residential mortgages
Mortgage lending portfolio analysis by country of location of the underlying security is set out below.
 
 
 
31 December
31 December
2013 
2012 
 
£m 
£m 
     
ROI
16,779 
16,873 
NI
2,255 
2,289 
     
 
19,034 
19,162 
 
 
 
 
 
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: 27 February 2014
 
 
THE ROYAL BANK OF SCOTLAND GROUP plc (Registrant)
 
 
 
By:
/s/ Jan Cargill
 
 
Name:
Title:
Jan Cargill
Deputy Secretary