Royal Bk Scot.Grp. RBS Interim Management Statement - Part 5 of 7

  Royal Bk Scot.Grp. (RBS) - Interim Management Statement - Part 5 of 7

RNS Number : 1670Q
Royal Bank of Scotland Group PLC
02 November 2012






Risk and balance sheet management



Balance sheet management



Capital

The Group  aims  to maintain  an  appropriate level  of  capital to  meet  its 
business  needs  and  regulatory  requirements.  Capital  adequacy  and   risk 
management are  closely aligned.  The Group's  risk-weighted assets  and  risk 
asset ratios, calculated in accordance with Financial Services Authority (FSA)
definitions, are set out below.



                                     30 September 30 June 31 December

                                            2012    2012        2011
Risk-weighted assets (RWAs) by risk           £bn     £bn         £bn
                                                                    
Credit risk                                 334.5   334.8       344.3
Counterparty risk                            53.3    53.0        61.9
Market risk                                  47.4    54.0        64.0
Operational risk                             45.8    45.8        37.9
                                                                    
                                           481.0   487.6       508.1
Asset Protection Scheme (APS) relief        (48.1)   (52.9)       (69.1)
                                                                    
                                           432.9   434.7       439.0



Risk asset ratios                                       %    %    %
                                                                  
Core Tier 1                                          11.1 11.1 10.6
Core Tier 1 excluding capital relief provided by APS 10.4 10.3  9.7
Tier 1                                               13.4 13.4 13.0
Total                                                14.6 14.6 13.8



Key points

· The Core Tier 1 ratio remained stable at 11.1%. Excluding the capital relief
  provided by  APS,  the  Core  Tier  1 ratio  improved  by  70  basis  points 
  year-to-date,  of  which  10  basis  points  were  in  Q3  2012,  reflecting 
  reductions in RWAs  and capital  deductions. Gross RWAs  decreased by  £27.1 
  billion year-to-date, of which £6.6billion was in Q3 2012.
 
· Non-Core RWAs decreased by £21.1 billion year-to-date (Q3 2012 - down  £10.5 
  billion) mainly as a result of lower market risk through active reduction in
  derivatives, including  the  impact  of  restructuring  a  large  derivative 
  exposure to  a highly  leveraged counterparty  in the  first half  of  2012. 
  Credit and counterparty RWAs fell, driven by sales and run-off partly offset
  by the impact of regulatory uplifts.
 
· In Markets, RWAs fell driven by lower market risk.
 
· Retail &  Commercial credit  risk  RWAs remained  stable at  c.£250  billion 
  despite  the   impact  of   regulatory  wholesale   credit  model   changes, 
  particularly in International Banking and UK Corporate.
 
· The decrease in capital  deductions principally related to  securitisations, 
  reflecting the continuation of Non-Core's de-risking strategy.



Risk and balance sheet management (continued)



Balance sheet management: Capital (continued)

The Group's regulatory  capital resources in  accordance with FSA  definitions 
were as follows:



                                           30 September 30 June 31 December

                                                  2012    2012        2011
                                                    £m      £m          £m
                                                                          
Shareholders' equity (excluding
non-controlling interests)                                                 
Shareholders' equity per balance sheet          72,699  74,016      74,819
Preference shares - equity                      (4,313)  (4,313)      (4,313)
Other equity instruments                          (431)    (431)        (431)
                                                67,955  69,272      70,075
                                                                          
Non-controlling interests                                                  
Non-controlling interests per balance
sheet                                             1,194   1,200       1,234
Non-controlling preference shares                 (548)    (548)        (548)
Other adjustments to non-controlling
interests for regulatory purposes                  (259)    (259)        (259)
                                                   387     393         427
                                                                          
Regulatory adjustments and deductions                                      
Own credit                                         651    (402)      (2,634)
Unrealised losses on AFS debt securities           375     520       1,065
Unrealised gains on AFS equity shares              (84)     (70)        (108)
Cash flow hedging reserve                       (1,746)  (1,399)        (879)
Other adjustments for regulatory purposes          895     637         571
Goodwill and other intangible assets           (14,798) (14,888)     (14,858)
50% excess of expected losses over
impairment provisions (net of tax)               (2,429)  (2,329)      (2,536)
50% of securitisation positions                 (1,180)  (1,461)      (2,019)
50% of APS first loss                           (1,926)  (2,118)      (2,763)
                                               (20,242) (21,510)     (24,161)
                                                                          
Core Tier 1 capital                              48,100  48,155      46,341
                                                                          
Other Tier 1 capital                                                       
Preference shares - equity                       4,313   4,313       4,313
Preference shares - debt                         1,055   1,082       1,094
Innovative/hybrid Tier 1 securities              4,065   4,466       4,667
                                                 9,433   9,861      10,074
                                                                          
Tier 1 deductions                                                          
50% of material holdings                          (242)    (313)        (340)
Tax on excess of expected losses over
impairment provisions                               788     756         915
                                                   546     443         575
                                                                          
Total Tier 1 capital                             58,079  58,459      56,990
                                                                          
Qualifying Tier 2 capital                                                  
Undated subordinated debt                        2,245   1,958       1,838
Dated subordinated debt - net of
amortisation                                     12,641  13,346      14,527
Unrealised gains on AFS equity shares               84      70         108
Collectively assessed impairment
provisions                                          500     552         635
Non-controlling Tier 2 capital                      11      11          11
                                                15,481  15,937      17,119
                                                                          
Tier 2 deductions                                                          
50% of securitisation positions                 (1,180)  (1,461)      (2,019)
50% excess of expected losses over
impairment provisions                            (3,217)  (3,085)      (3,451)
50% of material holdings                          (242)    (313)        (340)
50% of APS first loss                           (1,926)  (2,118)      (2,763)
                                                (6,565)  (6,977)      (8,573)
                                                                          
Total Tier 2 capital                              8,916   8,960       8,546



Risk and balance sheet management (continued)



Balance sheet management: Capital (continued)



                            30 September 30 June 31 December

                                   2012    2012        2011
                                     £m      £m          £m
                                                           
Supervisory deductions                                      
Unconsolidated Investments                                 
 - Direct Line Group            (3,537)  (3,642)      (4,354)
 - Other investments              (144)    (141)        (239)
Other deductions                   (217)    (197)        (235)
                                                           
                                 (3,898)  (3,980)      (4,828)
                                                           
Total regulatory capital          63,097  63,439      60,708



Movement in Core Tier 1 capital                                            £m
                                                                            
At 1 January 2012                                                      46,341
Attributable profit net of movements in fair value of own debt            242
Share capital and reserve movements in respect of employee share
schemes                                                                   659
Foreign currency reserves                                                (461)
Decrease in non-controlling interests                                     (34)
Decrease in capital deductions including APS first loss                 1,410
Increase in goodwill and intangibles                                      (30)
Other movements                                                            28
                                                                            
At 30 June 2012                                                        48,155
Attributable loss net of movements in fair value of own debt             (330)
Ordinary shares issued                                                    123
Share capital and reserve movements in respect of employee share
schemes                                                                    46
Foreign currency reserves                                                (567)
Decrease in non-controlling interests                                      (6)
Decrease in capital deductions including APS first loss                   373
Decrease in goodwill and intangibles                                       90
Other movements                                                           216
                                                                            
At 30 September 2012                                                   48,100



Risk and balance sheet management (continued)



Balance sheet management: Capital (continued)



Risk-weighted assets by division

Risk-weighted assets by risk category and division are set out below.



                             Credit Counterparty Market Operational Gross

                              risk         risk   risk        risk  RWAs
30 September 2012               £bn          £bn    £bn         £bn   £bn
                                                                        
UK Retail                      39.9            -      -         7.8  47.7
UK Corporate                   73.5            -      -         8.6  82.1
Wealth                         10.3            -    0.1         1.9  12.3
International Banking          44.5            -      -         5.2  49.7
Ulster Bank                    32.4          0.9    0.1         1.7  35.1
US Retail & Commercial         50.9          0.9      -         4.9  56.7
                                                                        
Retail & Commercial           251.5          1.8    0.2        30.1 283.6
Markets                        15.4         35.3   41.6        15.7 108.0
Other                          12.1          0.4      -         1.4  13.9
                                                                        
Core                          279.0         37.5   41.8        47.2 405.5
Non-Core                       52.4         15.8    5.6        (1.6)  72.2
                                                                        
Group before RFS Holdings MI  331.4         53.3   47.4        45.6 477.7
RFS Holdings MI                 3.1            -      -         0.2   3.3
                                                                        
Group                         334.5         53.3   47.4        45.8 481.0
APS relief                    (42.2)         (5.9)      -           - (48.1)
                                                                        
Net RWAs                      292.3         47.4   47.4        45.8 432.9



30 June 2012
                                                      
UK Retail                     39.6    -    -  7.8  47.4
UK Corporate                  70.8    -    -  8.6  79.4
Wealth                        10.3    -  0.1  1.9  12.3
International Banking         41.2    -    -  4.8  46.0
Ulster Bank                   34.7  0.9  0.1  1.7  37.4
US Retail & Commercial        52.5  1.1    -  4.9  58.5
                                                      
Retail & Commercial          249.1  2.0  0.2 29.7 281.0
Markets                       15.7 33.4 43.1 15.7 107.9
Other                         10.5  0.2  0.2  1.8  12.7
                                                      
Core                         275.3 35.6 43.5 47.2 401.6
Non-Core                      56.4 17.4 10.5 (1.6)  82.7
                                                      
Group before RFS Holdings MI 331.7 53.0 54.0 45.6 484.3
RFS Holdings MI                3.1    -    -  0.2   3.3
                                                      
Group                        334.8 53.0 54.0 45.8 487.6
APS relief                   (46.2) (6.7)    -    - (52.9)
                                                      
Net RWAs                     288.6 46.3 54.0 45.8 434.7



Risk and balance sheet management (continued)



Balance sheet management: Capital: Risk-weighted assets by division
(continued)



                             Credit Counterparty Market Operational Gross

                               risk         risk   risk        risk  RWAs
31 December 2011                £bn          £bn    £bn         £bn   £bn
                                                                        
UK Retail                      41.1            -      -         7.3  48.4
UK Corporate                   71.2            -      -         8.1  79.3
Wealth                         10.9            -    0.1         1.9  12.9
International Banking          38.9            -      -         4.3  43.2
Ulster Bank                    33.6          0.6    0.3         1.8  36.3
US Retail & Commercial         53.6          1.0      -         4.7  59.3
                                                                        
Retail & Commercial           249.3          1.6    0.4        28.1 279.4
Markets                        16.7         39.9   50.6        13.1 120.3
Other                           9.8          0.2      -         2.0  12.0
                                                                        
Core                          275.8         41.7   51.0        43.2 411.7
Non-Core                       65.6         20.2   13.0        (5.5)  93.3
                                                                        
Group before RFS Holdings MI  341.4         61.9   64.0        37.7 505.0
RFS Holdings MI                 2.9            -      -         0.2   3.1
                                                                        
Group                         344.3         61.9   64.0        37.9 508.1
APS relief                    (59.6)         (9.5)      -           - (69.1)
                                                                        
Net RWAs                      284.7         52.4   64.0        37.9 439.0



Risk and balance sheet management (continued)



Balance sheet management (continued)



Liquidity and funding risk

Liquidity risk is the risk that the  Group is unable to meet its  obligations, 
including financing maturities  as they  fall due. Liquidity  risk is  heavily 
influenced by the  maturity profile and  mix of the  Group's funding base,  as 
well as the quality and liquidity value of its liquidity portfolio.



Overview

The Group continues to  improve the structure and  composition of its  balance 
sheet against a backdrop of improved wholesale funding market conditions and a
tempering of UK regulatory requirements relating to liquidity risk.



· Short-term  wholesale   funding  (STWF)   excluding  derivative   collateral 
  continued to be actively  reduced and stood at  £49 billion at 30  September 
  2012, which was  well covered  by a strong  Group liquidity  buffer of  £147 
  billion. STWF  accounted for  5% of  the  funded balance  sheet and  31%  of 
  wholesale funding, compared with 7% and 34%, respectively at 30 June 2012.

· The Group's liquidity buffer was lowered by £9 billion during the quarter to
  £147 billion  reflecting the  shrinking overall  balance sheet  and  reduced 
  STWF.

· The Group's  customer  funding gap  has  decreased significantly,  from  £37 
  billion at the end of 2011 to £19 billion at 30 June 2012 and £8 billion  at 
  30 September 2012.  Customer deposits  now account  for 70%  of the  Group's 
  primary funding sources.

· Progress against the Group's strategic plan has resulted in a balance  sheet 
  structure which  is  broadly matched.  At  30 September  2012,  the  Group's 
  loan:deposit ratio improved to 102% with a Core ratio of 91%.

· The combined impacts  of the  ongoing deleveraging process  being driven  by 
  Non-Core and Markets have allowed the Group to further reduce its  wholesale 
  funding base. During the  third quarter, the Group  completed a cash  tender 
  offer to repurchase £4.4 billion of senior unsecured debt securities  issued 
  by RBS plc. The repurchase was  across dollar, sterling and euro  securities 
  of varying maturities and interest rates.

· The Group took advantage of the improved wholesale market conditions in  the 
  quarter and issued US$2 billion of public fixed rate notes to help  pre-fund 
  future financing needs of the holding company.
· The Group has  drawn £750 million  under the Bank  of England's Funding  for 
  Lending Scheme (FLS) and held a comparable amount of related treasury  bills 
  at 30 September 2012.
· The 'A' senior unsecured  credit rating was affirmed  with a stable  outlook 
  for the Group by Fitch in July 2012 and for RBS plc by S&P in October 2012.



Risk and balance sheet management (continued)



Balance sheet management: Liquidity and funding risk (continued)



Funding sources

The table below shows the  Group's primary funding sources including  deposits 
in disposal groups and excluding repurchase agreements.

                                           30 September 30 June 31 December

                                                  2012    2012        2011
                                                    £m      £m          £m
                                                                          
Deposits by banks                                                          
derivative cash collateral                      28,695  32,001      31,807
other deposits                                  29,433  35,619      37,307
                                                                          
                                                58,128  67,620      69,114
                                                                          
Debt securities in issue                                                   
conduit asset-backed commercial paper
(ABCP)                                            2,909   4,246      11,164
other commercial paper (CP)                      2,829   1,985       5,310
certificates of deposits (CDs)                   6,696  10,397      16,367
medium-term notes (MTNs)                        70,417  81,229     105,709
covered bonds                                    9,903   9,987       9,107
securitisations                                 11,403  12,011      14,964
                                                                          
                                               104,157 119,855     162,621
Subordinated liabilities                         25,309  25,596      26,319
                                                                          
Notes issued                                    129,466 145,451     188,940
                                                                          
Wholesale funding                               187,594 213,071     258,054
                                                                          
Customer deposits                                                          
cash collateral                                  9,642  10,269       9,242
other deposits                                 425,238 425,031     427,511
                                                                          
Total customer deposits                         434,880 435,300     436,753
                                                                          
Total funding                                   622,474 648,371     694,807
                                                                          
Disposal group deposits included above                                     
banks                                                1       1           1
customers                                       22,168  22,531      22,610
                                                                          
                                                22,169  22,532      22,611



The table below shows the Group's wholesale funding source metrics.



            Short-term wholesale           Total wholesale              Net inter-bank

                funding (1)                  funding                     funding (2)
            Excluding   Including     Excluding   Including                           Net

          derivative derivative   derivative derivative                    Inter-bank

          collateral collateral   collateral collateral   Deposits Loans    funding
                 £bn         £bn          £bn         £bn       £bn   £bn         £bn
                                                                                     
30                                                                         (20.2)
September
2012             48.5        77.2        158.9       187.6       29.4                9.2
30 June                                                                    (22.3)
2012             62.3        94.3        181.1       213.1       35.6               13.3
31 March                                                        
2012             79.7       109.1        204.9       234.3       36.4 (19.7)        16.7
31                                                              
December
2011            102.4       134.2        226.2       258.1       37.3 (24.3)        13.0
30                                                              
September
2011            141.6       174.1        267.0       299.4       46.2 (33.0)        13.2



Notes:

(1) Short-term balances denote those with a residual maturity of less than one
    year and includes longer-term issuances.
(2) Excludes derivative collateral.



Risk and balance sheet management (continued)



Balance sheet management: Liquidity and funding risk: Funding sources
(continued)



Notes issued

The table below shows  the Group's debt securities  in issue and  subordinated 
liabilities by remaining maturity.

                        Debt securities in issue                                        
                    Other                                                       Total  Total

          Conduit CP and         Covered Securit-            Subordinated   notes  notes

            ABCP    CDs   MTNs   bonds isations     Total  liabilities  issued issued
30
September
2012           £m     £m     £m      £m       £m        £m           £m      £m      %
                                                                                     
Less than
1 year      2,909  9,079 13,466   1,009       15    26,478        1,632  28,110     22
1-3 years       -    441 22,477   2,865    1,243    27,026        5,693  32,719     25
3-5 years       -      1 13,221   2,323        -    15,545        2,272  17,817     14
More than
5 years         -      4 21,253   3,706   10,145    35,108       15,712  50,820     39

           2,909  9,525 70,417   9,903   11,403   104,157       25,309 129,466    100
                                                                                     
30 June
2012                                                                                  
                                                                                     
Less than   4,246 12,083 16,845   1,020       69    34,263        1,631  35,894     25
1 year
1-3 years       -    293 24,452   1,681    1,263    27,689        5,401  33,090     23
3-5 years       -      1 16,620   3,619        -    20,240        2,667  22,907     15
More than       -      5 23,312   3,667   10,679    37,663       15,897  53,560     37
5 years
                                                                                     
           4,246 12,382 81,229   9,987   12,011   119,855       25,596 145,451    100
                                                                                     
31
December
2011                                                                                  
                                                                                     
Less than
1 year     11,164 21,396 36,302       -       27    68,889          624  69,513     37
1-3 years       -    278 26,595   2,760      479    30,112        3,338  33,450     18
                                                         20,302

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