rbs201402276k4.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
Market risk
 
Trading portfolios
The tables below analyse the internal VaR for the Group's trading portfolios segregated by type of market risk exposure, and split between Core, Non-Core and counterparty exposure management (CEM).
 
 
Year ended
 
31 December 2013
  
31 December 2012
 
Average 
Period end 
Maximum 
Minimum 
  
Average 
Period end 
Maximum 
Minimum 
Trading VaR
£m 
£m 
£m 
£m 
  
£m 
£m 
£m 
£m 
                   
Interest rate
37.2 
44.1 
78.2 
19.1 
  
62.6 
75.6 
95.7 
40.8 
Credit spread
60.0 
37.3 
86.8 
33.3 
  
69.2 
74.1 
94.9 
44.9 
Currency
8.6 
6.5 
20.6 
3.6 
  
10.3 
7.6 
21.3 
2.6 
Equity
5.8 
4.1 
12.8 
3.2 
  
6.0 
3.9 
12.5 
1.7 
Commodity
0.9 
0.5 
3.7 
0.3 
  
2.0 
1.5 
6.0 
0.9 
Diversification (1)
  
(23.7)
        
(55.4)
    
                   
Total
79.3 
68.8 
118.8 
42.1 
  
97.3 
107.3 
137.0 
66.5 
                   
Core
64.2 
52.4 
104.6 
35.6 
  
74.6 
88.1 
118.0 
47.4 
Non-Core
19.3 
15.2 
24.9 
14.9 
  
30.1 
22.8 
41.9 
22.0 
                   
CEM
58.1 
43.5 
85.4 
39.4 
  
78.5 
84.9 
86.0 
71.7 
                   
Total (excluding CEM)
37.2 
33.6 
60.4 
19.1 
  
47.1 
57.6 
76.4 
32.2 
 
 
Quarter ended
 
31 December 2013
  
30 September 2013
 
Average 
Period end 
Maximum 
Minimum 
  
Average 
Period end 
Maximum 
Minimum 
Trading VaR
£m 
£m 
£m 
£m 
  
£m 
£m 
£m 
£m 
                   
Interest rate
32.3 
44.1 
44.1 
19.1 
  
36.1 
32.8 
43.6 
24.7 
Credit spread
40.5 
37.3 
48.4 
33.3 
  
53.9 
44.9 
60.3 
44.9 
Currency
5.9 
6.5 
9.6 
3.6 
  
6.4 
7.6 
9.8 
4.3 
Equity
4.3 
4.1 
12.6 
3.2 
  
5.4 
4.5 
7.2 
4.2 
Commodity
0.7 
0.5 
2.5 
0.4 
  
0.5 
0.6 
1.9 
0.3 
Diversification (1)
  
(23.7)
        
(31.3)
    
                   
Total
58.6 
68.8 
69.7 
42.1 
  
66.1 
59.1 
84.3 
54.5 
                   
Core
44.1 
52.4 
54.4 
35.6 
  
52.4 
46.3 
68.4 
44.2 
Non-Core
15.7 
15.2 
17.7 
14.9 
  
19.4 
17.6 
21.8 
17.5 
                   
CEM
43.9 
43.5 
46.2 
39.4 
  
50.8 
42.8 
58.0 
40.1 
                   
Total (excluding CEM)
25.0 
33.6 
33.6 
19.1 
  
29.4 
26.7 
38.3 
25.4 
 
Note:
(1)
The Group benefits from diversification as it reduces risk by allocating positions across various financial instrument types, currencies and markets. The extent of the diversification benefit depends on the correlation between the assets and risk factors in the portfolio at a particular time. The diversification factor is the sum of the VaR on individual risk types less the total portfolio VaR.
 
Details on methodology and governance are in the Group's 2013 Report and Accounts, Risk and balance sheet management - Market risk section.
 
 
Risk and balance sheet management
Market risk: Trading portfolios (continued)
 
Key points
·
The Group's period-end and average interest rate VaR declined in 2013 compared with 2012. The reduction was mainly seen in Q1 2013, when the rates desk significantly de-risked its exposures and repositioned itself to manage concentrations. In addition, CEM's contribution to VaR decreased due to improvements in the capture of valuation adjustment risk within VaR metrics. The volatility seen in the second half was also due to rate volatility reflecting Bank of England and European Central Bank rate announcements and a US Federal Reserve announcement regarding tapering of its quantitative easing programme.
   
·
The Group's period-end and average credit spread VaR declined in 2013 compared with 2012. This decline was driven by an ongoing reduction in inventory as part of Group-wide efforts to reduce RWAs ahead of CRD IV implementation. Risk reduction during the first half of the year was aided by the flow business reducing the complexity of its trading operations. In the second half of the year, the VaR decrease was driven by a reduction in the asset-backed securities inventory.
   
·
The Group's Core and CEM period-end and average VaR declined, driven by the declines in the interest rate and credit spread VaR.
   
·
The decrease in average and period-end Non-Core VaR reflects the Group's risk reduction strategy.
   
·
During H2 2013, some positions from businesses were migrated to the newly created Run-off and Recovery (ROR) unit in Markets. At 31 December 2013, the VaR on the ROR business was £6.0 million.
 

 
 
Non-trading VaR
The average VaR for the Group's non-traded book, excluding the structured credit portfolio (see below) and predominantly comprising available-for-sale portfolios in Markets and Non-Core, was £9.2 million during 2013 compared with £11.8 million during 2012. Period-end VaR at 31 December 2013 decreased to £5.0 million compared with £9.5 million at 31 December 2012. VaR initially increased in Q1 2013 reflecting changes to the call assumptions on some Dutch RMBS, thereby extending their weighted average life. This increase was offset during Q3 2013 as the issuer bought back some of these securities, resulting in a net decrease in VaR for the year as a whole.
 
Other portfolios
The structured credit portfolio in Non-Core is measured on a notional and fair value basis because of its illiquid nature. Notional and fair value decreased to £0.7 billion and £0.5 billion respectively (Q4 2012 - £2.0 billion and £1.5 billion), reflecting the sale of underlying assets across all categories, in line with Non-Core strategy.
 

 
 
Risk and balance sheet management
Market risk (continued)
 
Non-traded interest rate risk
Non-traded interest rate risk impacts earnings arising from the Group's banking activities. This excludes positions in financial instruments which are classified as held-for-trading, or hedging items.
 
The methodology relating to interest rate risk is detailed in the Group's 2013 Annual Report and Accounts.
 
Value-at-risk
VaR metrics are based on interest rate repricing gap reports as at the reporting date. These incorporate customer products and associated funding and hedging transactions as well as non-financial assets and liabilities such as property, plant and equipment, capital and reserves. Behavioural assumptions are applied as appropriate.
 
VaR does not provide a dynamic measurement of interest rate risk since static underlying repricing gap positions are assumed. Changes in customer behaviour under varying interest rate scenarios are captured by way of earnings at risk measures. VaR relating to non-traded interest rate risk for the Group's Retail & Commercial banking activities at a 99% confidence level and a currency analysis at the period end were as follows:
 
 
Average 
Period end 
Maximum 
Minimum 
 
£m 
£m 
£m 
£m 
         
31 December 2013
45 
51 
57 
30 
31 December 2012
46 
21 
65 
20 
         
     
31 December
31 December
   
2013 
2012 
   
£m 
£m 
         
Euro
    
4 
19 
Sterling
    
19 
17 
US dollar
    
44 
15 
Other
    
2 
4 
 
Key points
·
Period end interest rate VaR was higher at 31 December 2013 than at 31 December 2012. Average VaR was relatively unchanged.
   
·
The overall year-on-year increase in VaR mainly reflected an increase in the duration of the Group's balance sheet - that is, greater economic exposure to longer-term interest rates - as described in more detail below.
   
·
Euro VaR fell, reflecting action taken to reduce the Group's exposure to euro-denominated fixed-rate assets.
   
·
US dollar VaR rose, reflecting action taken by US Retail & Commercial to reduce earnings sensitivity to movements in short term dollar interest rates.
   
·
These movements remained well within the Group's approved market risk appetite.
 
 
Risk and balance sheet management
Market risk (continued)
 
Sensitivity of net interest income
Earnings sensitivity to rate movements is derived from a central forecast over a twelve month period. Market implied forward rates and new business volume, mix and pricing consistent with business assumptions are used to generate a base case earnings forecast.
 
The following table shows the sensitivity of net interest income, over the next twelve months, to an immediate upward or downward change of 100 basis points to all interest rates. In addition, the table includes the impact of a gradual 400 basis point steepening (bear steepener) and a gradual 300 basis point flattening (bull flattener) of the yield curve at tenors greater than a year.
 
The scenarios represent annualised interest rate stresses of a scale deemed sufficient to trigger a modification in customer behaviour. The asymmetry in the steepening and flattening scenarios reflects the difference in the expected behaviour of interest rates as they approach zero.
 
 
Euro 
Sterling 
US dollar 
Other 
Total 
31 December 2013
£m 
£m 
£m 
£m 
£m 
           
+ 100 basis point shift in yield curves
59 
416 
175 
31 
681 
- 100 basis point shift in yield curves
(29)
(333)
(82)
(15)
(459)
Bear steepener
        
403 
Bull flattener
        
(273)
           
31 December 2012
          
           
+ 100 basis point shift in yield curves
(29)
472 
119 
27 
589 
- 100 basis point shift in yield curves
(20)
(257)
(29)
(11)
(317)
Bear steepener
        
216 
Bull flattener
        
(77)
 
Key points
·
The Group's interest rate exposure remains asset sensitive, such that rising rates will have a positive impact on its net interest income.
   
·
The Group's increased sensitivity to parallel shifts in the yield curve over a twelve month horizon primarily reflects the higher volume of structural hedges maturing in 2014 relative to 2013. This reflects the maturity profile of legacy hedges. If rates were to rise, these would be reinvested at higher rates, with an upward impact on net interest income. This increased sensitivity also reflects changes in underlying pricing assumptions for customer loans and deposits.
   
·
The increased sensitivity to the steepening and flattening scenarios is also primarily driven by the maturity profile of structural hedges.
 
 
Risk and balance sheet management
Market risk (continued)
 
Structural hedging
Banks generally have the benefit of a significant pool of stable, non and low interest bearing liabilities, principally comprising equity and money transmission accounts. These balances are usually hedged, either by investing directly in longer-term fixed rate assets, either directly or by the use of interest rate swaps, in order to provide a consistent and predictable revenue stream.
 
The Group targets a weighted average life for these economic hedges. This is accomplished using a continuous rolling maturity programme to achieve the desired profile and is primarily managed by Group Treasury. The maturity profile of the hedge aims to reduce the potential sensitivity of income to rate movements. The structural hedging programme is Group wide, capturing the position within the UK banking group and regulated subsidiaries in other jurisdictions.
 
Product hedging
Product structural hedges are used to minimise volatility on earnings related to specific products, primarily money transmission accounts.
 
The table below shows the element of net interest income (NII) associated with product hedges managed by Group Treasury, relating to the main UK banking divisions except Wealth. The amounts represent the incremental contribution of the hedge relative to the LIBOR cash rate.
 
 
31 December 
31 December
 
2013 
2012 
NII
£m 
£m 
     
Product hedges
    
UK Retail
306 
359 
UK Corporate
206 
214 
International Banking
73 
83 
     
Total product hedges
585 
656 
 
Key point
·
The yield on product structural hedges declined in 2013 due to the low interest rate environment as maturing hedges were reinvested at lower interest rates.
 
Equity hedging
Equity structural hedges are used to minimise the impact of earnings volatility on equity. These hedges contributed £0.8 billion to the UK banking divisions in 2013 (31 December 2012 - £0.8 billion), which is an incremental benefit relative to LIBOR cash rates.
.
 
Risk and balance sheet management
Foreign exchange risk: Structural foreign currency exposures
The Group does not maintain material non-traded open currency positions other than the structural foreign currency translation exposures arising from its investments in foreign subsidiaries and associates and their related currency funding.
 
The table below shows the Group's structural foreign currency exposures.
 
31 December 2013
        
Structural 
    
       
foreign 
  
Residual 
Net 
  
Net 
  
currency 
  
structural 
assets of 
  
investments 
Net 
exposures 
  
foreign 
overseas 
RFS 
in foreign 
investment 
pre-economic 
Economic 
currency 
operations 
MI 
operations 
hedges 
hedges 
hedges (1) 
exposures 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
               
US dollar
16,176 
- 
16,176 
(1,581)
14,595 
(3,808)
10,787 
Euro
6,606 
9 
6,597 
(190)
6,407 
(2,226)
4,181 
Other non-sterling
4,233 
372 
3,861 
(3,185)
676 
- 
676 
               
 
27,015 
381 
26,634 
(4,956)
21,678 
(6,034)
15,644 
               
31 December 2012
              
               
US dollar
17,313 
1 
17,312 
(2,476)
14,836 
(3,897)
10,939 
Euro
8,903 
2 
8,901 
(636)
8,265 
(2,179)
6,086 
Other non-sterling
4,754 
260 
4,494 
(3,597)
897 
- 
897 
               
 
30,970 
263 
30,707 
(6,709)
23,998 
(6,076)
17,922 
 
Note:
(1)
Economic hedges represent US dollar and euro preference shares in issue that are treated as equity under IFRS and do not qualify as hedges for accounting purposes.
 
Key points
·
The Group's structural foreign currency exposure at 31 December 2013 was £21.7 billion and £15.6 billion before and after economic hedges, respectively, both £2.3 billion lower than at 31 December 2012. Movements in structural foreign currency exposure are significantly driven by movements in net assets of overseas operations.
   
·
Net assets of overseas operations declined by £4.0 billion largely due to increased impairments in Ulster Bank Group and capital restructuring in US Retail & Commercial. Sterling strength also contributed approximately £0.5 billion to the reduction.
   
·
Net investment hedges were reduced broadly in line with the reduction in net investments.
   
·
Economic hedges remained broadly unchanged.
   
·
Changes in foreign currency exchange rates affect equity in proportion to structural foreign currency exposure. A 5% strengthening in foreign currencies against sterling would result in a gain of £1.1 billion in equity (31 December 2012 - £1.3 billion), while a 5% weakening would result in a loss of £1.0 billion in equity (31 December 2012 - £1.2 billion).
 
 

 
 
Risk and balance sheet management
Country risk
Country risk is the risk of losses occurring as a result of either a country event or unfavourable country operating conditions. As country events may simultaneously affect all or many individual exposures to a country, country event risk is a concentration risk. For other types of concentration risks such as product, sector or single-name concentration, refer to the Credit risk section.
 
Overview
The comments below refer to changes for the full year 2013 unless indicated otherwise.
 
·
During 2013, the US dollar depreciated by 2.3% against sterling, whereas the euro appreciated by 2.2%, impacting exposures.
   
·
Balance sheet and off-balance sheet exposures to nearly all countries declined across all broad product categories. This was because the Group maintained a cautious stance and many clients reduced debt levels. Non-Core lending declined in most countries, particularly in Spain, the Netherlands, France and Romania, reflecting the Group's risk reduction strategy.
   
·
Most of the Group's country risk exposure is in International Banking (primarily trade facilities, other lending and off-balance sheet exposure to corporates and financial institutions); Markets (principally derivatives and securities financing transactions with financial institutions, and HFT debt securities); Ulster Bank (mostly lending to consumers and corporates in Ireland); and Group Treasury (largely cash balances at central banks and AFS debt securities including Spanish cedulas).
   
·
Total eurozone - balance sheet exposure declined by £49.2 billion or 30% to £114.2 billion, caused mostly by significant reductions in liquidity held with the Bundesbank and in derivatives exposure to banks. Most of the latter reductions related to counterparties in the Netherlands, Germany and France, and were largely due to the sale of a part of the Group's CDS positions.
   
·
Eurozone periphery - balance sheet exposure decreased to £52.9 billion, a reduction of £6.6 billion or 11%, in nearly all countries, despite the appreciation of the euro against sterling, as below:
 
○
Ireland - exposure decreased by £2.1 billion to £37.0 billion, in all broad product categories. Residential and commercial real estate lending declined slightly to £16.9 billion and £10.3 billion, respectively. Provisions increased by £2.8 billion, most of which related to corporate lending.
 
○
Spain - Group Treasury's holdings of covered bonds (cedulas) decreased by £0.7 billion due to sales in improved market conditions. Corporate lending decreased by £1.3 billion to £2.9 billion, with commercial real estate lending more than halving, largely as a result of disposals in Non-Core, to £0.8 billion.
 
○
Italy - the £1.3 billion decrease in exposure to £5.2 billion reflected reductions in lending and derivatives to corporate clients. Net HFT debt exposure fluctuates as the Group is a market-maker in Italian government bonds. Off-balance sheet exposure to corporates and non-bank financial institutions also declined, by £0.7 billion.
 
Risk and balance sheet management
Country risk: Overview (continued)
 
○
Portugal - exposure declined further by £0.4 billion to £0.9 billion. The remaining exposure mainly consisted of corporate lending to a few large highly creditworthy clients and collateralised derivatives trading with the largest local banks.
 
○
Greece - exposure decreased by £0.2 billion to £0.4 billion, caused by reductions in lending and derivatives. The remaining exposure comprised mostly of collateralised derivatives exposure to banks and corporate lending, including exposure to local subsidiaries of international companies.
 
○
Cyprus - exposure increased slightly to £0.2 billion, most of which was covered by parental and export credit agency guarantees from elsewhere.
   
·
Germany - balance sheet exposure decreased from £48.4 billion to £23.9 billion principally owing to a £16.4 billion reduction in cash balances held with the central bank. AFS government bonds decreased by £4.1 billion in line with treasury management strategies. Lending to corporate clients decreased by £1.1 billion, principally in the commercial real estate, oil and gas, and media sectors.
   
·
Netherlands - balance sheet exposure decreased from £23.6 billion to £16.1 billion. AFS debt securities issued by non-bank financial institutions declined by £2.8 billion, primarily following repayments. Corporate lending decreased by £0.8 billion, primarily in commercial real estate. Off-balance sheet exposure to corporate clients decreased by £1.1 billion, mainly in the telecommunications, retail and food and consumer sectors.
   
·
France - balance sheet exposure decreased from £19.7 billion to £14.0 billion. The net long HFT position in government bonds declined by £1.9 billion in the course of normal trading in the rates business.
   
·
Japan - balance sheet exposure decreased by £6.0 billion to £5.3 billion. Net HFT and AFS government bonds fell by £5.1 billion and £1.5 billion, respectively, and derivatives exposure, largely to banks, decreased by £0.5 billion. This reflected depreciation of the yen, lower trading flows and a reduction in Japanese bonds held as derivatives collateral. Lending to the central bank increased by £0.8 billion.
   
·
China - lending to banks increased by £1.8 billion to £2.8 billion. Corporate lending rose by £0.5 billion to £1.5 billion, reflecting customer demand. Derivatives exposure to public sector entities decreased by £0.5 billion to £0.4 billion owing to fluctuations in short-term hedging by clients.
   
·
India - balance sheet exposure decreased by £1.3 billion to £3.8 billion, driven largely by reductions in lending to banks and to the telecommunications and oil and gas sectors.
   
·
CDS positions - the Group approximately halved its European CDS positions by consolidating its derivatives portfolio through contract terminations to reduce risks and capital requirements in line with strategic plans, while maturities reduced the positions further. This resulted in major reductions in the gross notional value of CDS protection bought and sold. Net bought protection in terms of CDS notional less fair value, also fell by £1.2 billion to £5.6 billion, with reductions particularly in the Netherlands and France.
   
·
Funding mismatches - the estimated funding mismatch at risk of redenomination for Ireland was £6.5 billion at the end of the year, falling from £9.0 billion a year before due to an increase in provisions and a reduction in assets. The mismatch for Spain was £6.5 billion, up from £4.5 billion as the Group reduced its local funding (and associated cost) given the improved outlook for the country. The net position for Italy fell to £0.5 billion from £1.0 billion. The net positions for Portugal, Greece and Cyprus were all minimal. Overall, perceived risks of redenomination events in the eurozone declined considerably in 2013.
 
 

 
 
Risk and balance sheet management
 
Country risk: Summary of country exposures
                                          
 
Lending
                        
CDS 
      
Debt securities
  
Off- 
    
notional 
Govt 
Central 
Other 
Other 
    
Total 
  
Of which 
AFS 
HFT 
Net
Balance 
balance 
Total 
  
less fair 
Gross
banks 
banks 
FI 
Corporate 
Personal 
lending 
Non-Core 
and LAR 
(net) 
Derivatives 
SFT 
sheet 
sheet 
exposure 
  
Value 
Derivatives 
SFT 
2013 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
  
£m 
  
£m 
£m 
  
£m 
£m 
  
£m 
  
£m 
  
£m 
  
£m 
  
£m 
£m 
                                                     
Eurozone
                                                    
Ireland
39 
116 
13 
319 
17,440 
17,667 
35,594 
  
9,262 
  
233 
248 
  
900 
73 
  
37,048 
  
2,711 
  
39,759 
  
(166)
  
2,476 
2,329 
Spain
- 
- 
4 
15 
2,924 
318 
3,261 
  
1,696 
  
4,162 
853 
  
989 
- 
  
9,265 
  
1,981 
  
11,246 
  
(444)
  
4,128 
2,126 
Italy
- 
22 
64 
548 
968 
26 
1,628 
  
809 
  
519 
1,240 
  
1,774 
- 
  
5,161 
  
1,962 
  
7,123 
  
(734)
  
7,183 
527 
Portugal
- 
- 
- 
56 
327 
6 
389 
  
203 
  
93 
43 
  
351 
- 
  
876 
  
280 
  
1,156 
  
(163)
  
418 
614 
Greece
- 
1 
1 
1 
110 
14 
127 
  
52 
  
- 
- 
  
260 
- 
  
387 
  
38 
  
425 
  
(12)
  
455 
- 
Cyprus
- 
- 
- 
- 
183 
10 
193 
  
88 
  
- 
2 
  
16 
- 
  
211 
  
18 
  
229 
  
- 
  
16 
- 
                                                     
Eurozone
                                                    
  periphery
39 
139 
82 
939 
21,952 
18,041 
41,192 
  
12,110 
  
5,007 
2,386 
  
4,290 
73 
  
52,948 
  
6,990 
  
59,938 
  
(1,519)
  
14,676 
5,596 
                                                     
Germany
- 
3,588 
402 
683 
3,461 
90 
8,224 
  
3,351 
  
5,168 
2,524 
  
7,416 
601 
  
23,933 
  
7,189 
  
31,122 
  
(1,340)
  
35,529 
1,128 
Netherlands
- 
1,713 
355 
627 
2,122 
22 
4,839 
  
444 
  
4,661 
819 
  
5,697 
107 
  
16,123 
  
9,763 
  
25,886 
  
(356)
  
15,388 
835 
France
406 
- 
1,844 
195 
1,796 
79 
4,320 
  
914 
  
1,692 
1,678 
  
5,660 
631 
  
13,981 
  
9,807 
  
23,788 
  
(1,747)
  
30,644 
7,536 
Belgium
- 
- 
149 
211 
358 
21 
739 
  
212 
  
443 
(480)
  
2,123 
2 
  
2,827 
  
1,170 
  
3,997 
  
(123)
  
2,966 
594 
Luxembourg
- 
11 
95 
260 
421 
4 
791 
  
4 
  
75 
98 
  
581 
88 
  
1,633 
  
1,043 
  
2,676 
  
(58)
  
1,373 
253 
Other
73 
- 
10 
36 
743 
18 
880 
  
168 
  
510 
331 
  
918 
74 
  
2,713 
  
1,202 
  
3,915 
  
(476)
  
3,554 
622 
                                                     
Total
                                                    
  eurozone
518 
5,451 
2,937 
2,951 
30,853 
18,275 
60,985 
  
17,203 
  
17,556 
7,356 
  
26,685 
1,576 
  
114,158 
  
37,164 
  
151,322 
  
(5,619)
  
104,130 
16,564 
                                                     
Japan
- 
1,600 
431 
61 
670 
35 
2,797 
  
58 
  
72 
(172)
  
2,365 
202 
  
5,264 
  
352 
  
5,616 
  
4 
  
9,057 
16,445 
China
- 
198 
2,626 
228 
1,515 
33 
4,600 
  
31 
  
166 
13 
  
370 
1 
  
5,150 
  
1,689 
  
6,839 
  
(14)
  
372 
830 
India
- 
63 
759 
69 
2,000 
36 
2,927 
  
29 
  
571 
160 
  
92 
- 
  
3,750 
  
813 
  
4,563 
  
(21)
  
190 
45 
Russia
- 
37 
741 
5 
947 
53 
1,783 
  
118 
  
149 
2 
  
19 
- 
  
1,953 
  
364 
  
2,317 
  
(65)
  
33 
27 
South Korea
- 
- 
622 
75 
426 
2 
1,125 
  
- 
  
179 
154 
  
250 
- 
  
1,708 
  
681 
  
2,389 
  
176 
  
541 
50 
Turkey
67 
59 
148 
101 
1,023 
24 
1,422 
  
122 
  
50 
67 
  
94 
- 
  
1,633 
  
324 
  
1,957 
  
(32)
  
119 
998 
Brazil
- 
- 
842 
- 
132 
3 
977 
  
68 
  
- 
268 
  
84 
- 
  
1,329 
  
245 
  
1,574 
  
12 
  
118 
- 
 
These tables show the Group's exposure, at 31 December 2013 and 31 December 2012 by country of operation of the counterparty, except exposures to governments and individuals which are shown by country of residence. The country of operation is the country where the main operating assets of a legal entity are held, or where its main cash flows are generated, taking account of the entity's dependency on subsidiaries' activities. Previously, exposures in this section were reported by country of incorporation. The new basis provides a better reflection of the country risks taken by the Group and is more in line with internal risk management. Prior period information has been revised. Countries shown are those where the Group's balance sheet exposure to counterparties exceeded £1 billion and which had ratings of A+ or below from Standard and Poor's, Moody's or Fitch at 31 December 2013, as well as selected eurozone countries. The exposures are stated before taking into account risk mitigants, such as guarantees, insurance or collateral (with the exception of reverse repos) which may have been put in place to reduce or eliminate exposure to country risk events. Exposures relating to ocean-going vessels are not included as they cannot be meaningfully assigned to specific countries from a country risk perspective. For a description of the governance, monitoring and management of the Group's country risk framework and definitions, refer to Risk and balance sheet management - Country risk of the Group's 2013 Annual Report and Accounts.
 
Risk and balance sheet management
Country risk: Summary of country exposures (continued)
                                      
 
Lending
                        
CDS 
      
Debt securities
  
Off- 
    
notional 
Govt 
Central 
Other 
Other 
Corporate 
Personal 
Total 
  
Of which 
AFS 
HFT 
Net
Balance 
Balance 
Total 
  
less fair 
Gross
banks 
banks 
FI 
lending 
Non-Core 
and LAR 
(net) 
Derivatives 
SFT 
sheet 
sheet 
exposure 
  
value 
Derivatives 
SFT 
2012 
£m 
£m 
£m 
£m 
£m 
£m 
£m 
  
£m 
  
£m 
£m 
  
£m 
£m 
  
£m 
  
£m 
  
£m 
  
£m 
  
£m 
£m 
                                                     
Eurozone
                                                    
Ireland
42 
73 
99 
395 
18,185 
17,890 
36,684 
  
9,595 
  
424 
363 
  
1,213 
503 
  
39,187 
  
2,855 
  
42,042 
  
(71)
  
3,244 
4,915 
Spain
- 
6 
1 
73 
4,269 
340 
4,689 
  
2,780 
  
4,871 
503 
  
1,754 
- 
  
11,817 
  
1,592 
  
13,409 
  
(375)
  
5,694 
610 
Italy
9 
21 
222 
707 
1,533 
23 
2,515 
  
1,113 
  
977 
630 
  
2,358 
- 
  
6,480 
  
2,669 
  
9,149 
  
(548)
  
9,653 
3 
Portugal
- 
- 
- 
128 
450 
7 
585 
  
327 
  
180 
35 
  
514 
- 
  
1,314 
  
332 
  
1,646 
  
(126)
  
618 
26 
Greece
- 
7 
- 
1 
180 
13 
201 
  
68 
  
- 
1 
  
363 
- 
  
565 
  
40 
  
605 
  
(31)
  
609 
- 
Cyprus
- 
- 
- 
- 
103 
14 
117 
  
95 
  
- 
4 
  
32 
- 
  
153 
  
14 
  
167 
  
- 
  
33 
- 
                                                     
Eurozone
                                                    
  periphery
51 
107 
322 
1,304 
24,720 
18,287 
44,791 
  
13,978 
  
6,452 
1,536 
  
6,234 
503 
  
59,516 
  
7,502 
  
67,018 
  
(1,151)
  
19,851 
5,554 
                                                     
Germany
- 
20,005 
508 
712 
4,607 
85 
25,917 
  
3,758 
  
9,263 
3,500 
  
9,474 
264 
  
48,418 
  
7,689 
  
56,107 
  
(1,448)
  
57,285 
8,209 
Netherlands
7 
1,822 
277 
753 
2,931 
26 
5,816 
  
1,157 
  
7,800 
647 
  
9,047 
335 
  
23,645 
  
10,775 
  
34,420 
  
(1,030)
  
23,679 
4,602 
France
494 
9 
2,417 
209 
2,451 
71 
5,651 
  
1,621 
  
2,242 
3,581 
  
7,515 
698 
  
19,687 
  
9,675 
  
29,362 
  
(2,288)
  
45,154 
16,636 
Belgium
- 
- 
164 
276 
464 
22 
926 
  
416 
  
844 
564 
  
3,130 
- 
  
5,464 
  
1,041 
  
6,505 
  
(215)
  
4,902 
476 
Luxembourg
- 
13 
149 
493 
600 
4 
1,259 
  
106 
  
59 
192 
  
709 
141 
  
2,360 
  
1,285 
  
3,645 
  
(206)
  
2,018 
3,858 
Other
126 
- 
19 
90 
1,033 
14 
1,282 
  
281 
  
576 
666 
  
1,737 
8 
  
4,269 
  
1,380 
  
5,649 
  
(437)
  
5,975 
1,432 
                                                     
Total
                                                    
  eurozone
678 
21,956 
3,856 
3,837 
36,806 
18,509 
85,642 
  
21,317 
  
27,236 
10,686 
  
37,846 
1,949 
  
163,359 
  
39,347 
  
202,706 
  
(6,775)
  
158,864 
40,767 
                                                   
Japan
- 
832 
317 
207 
360 
36 
1,752 
  
123 
  
1,548 
4,890 
  
2,878 
199 
  
11,267 
  
577 
  
11,844 
  
(71)
  
13,266 
15,047 
China
2 
183 
830 
48 
969 
31 
2,063 
  
62 
  
201 
61 
  
916 
1 
  
3,242 
  
851 
  
4,093 
  
36 
  
221 
1,818 
India
- 
100 
1,023 
49 
2,628 
106 
3,906 
  
170 
  
683 
391 
  
74 
- 
  
5,054 
  
930 
  
5,984 
  
(43)
  
177 
108 
Russia
- 
53 
848 
14 
779 
54 
1,748 
  
151 
  
160 
249 
  
120 
- 
  
2,277 
  
518 
  
2,795 
  
(251)
  
124 
15 
South Korea
- 
22 
771 
101 
287 
3 
1,184 
  
- 
  
144 
163 
  
221 
26 
  
1,738 
  
704 
  
2,442 
  
(58)
  
617 
94 
Turkey
115 
163 
82 
94 
983 
12 
1,449 
  
260 
  
56 
125 
  
93 
- 
  
1,723 
  
481 
  
2,204 
  
(37)
  
111 
449 
Brazil
- 
- 
564 
69 
137 
3 
773 
  
118 
  
14 
582 
  
197 
- 
  
1,566 
  
310 
  
1,876 
  
394 
  
211 
- 
 
 

 
 
Risk factors
Summary of our Principal Risks and Uncertainties
Set out below is a summary of certain risks which could adversely affect the Group; it should be read in conjunction with the Risk and balance sheet management section on pages 137 to 200. This summary should not be regarded as a complete and comprehensive statement of all potential risks and uncertainties. A fuller description of these and other risk factors is included in the Group's 2013 Annual Report and Accounts.
 
●
The Group's ability to implement its new strategic plan and achieve its capital goals depends on the success of its efforts to refocus on its core strengths and the timely divestment of RBS Citizens. The Group has undertaken since 2009 an extensive restructuring, including the disposal of non-core assets as well as businesses as part of the State Aid restructuring plan approved by the EC. The Group recently created RBS CRG to manage the run down of problem assets with the goal of removing such assets from the balance sheet over the next three years. The Group has also taken steps to strengthen its capital position and established medium term targets which will require the timely divestment of RBS Citizens to achieve. The Group is also undertaking a new strategic direction which will result in a significant downsizing of the Group, including simplifying the Group by replacing the current divisional structure with three customer segments. The level of structural change required to implement the Group's strategic and capital goals together with other regulatory requirements such as ring fencing are likely to be disruptive and increase operational risks for the Group. There is no assurance that the Group will be able to successfully implement its new strategy on which its capital plan depends or achieve its goals within the time frames contemplated or at all.
   
●
Despite the improved outlook for the global economy over the near to medium-term, actual or perceived difficult global economic conditions and increased competition, particularly in the UK, create challenging economic and market conditions and a difficult operating environment for the Group's businesses.  Uncertainties surrounding the referendum on Scottish independence and the implications of an affirmative outcome for independence are also likely to affect the Group. These factors, together with additional uncertainty relating to the recovery of the Eurozone economy where the Group has significant exposure and the risk of a return of volatile financial markets, in part due to the monetary policies and measures carried out by central banks, have been and will continue to adversely affect the Group's businesses, earnings, financial condition and prospects.
   
●
The Group is subject to substantial regulation and oversight, and any significant regulatory or legal developments such as that which has occurred over the past several years could have an adverse effect on how the Group conducts its business and on its results of operations and financial condition. Certain regulatory measures introduced in the UK and in Europe relating to ring-fencing of bank activities may affect the Group's borrowing costs, may impact product offerings and the viability of certain business models and require significant restructuring with the possible transfer of a large number of customers between legal entities.
   
●
The Group could fail to attract or retain senior management, which may include members of the Group Board, or other key employees, and it may suffer if it does not maintain good employee relations.
   
●
The Group is subject to a number of regulatory initiatives which may adversely affect its business, including the UK Government's adoption of the Financial Services (Banking Reform) Act 2013, the US Federal Reserve's new rules for applying US capital, liquidity and enhanced prudential standards to certain of the Group's US operations and ongoing reforms in the European Union with respect to capital requirements, stability and resolution of financial institutions, including CRD IV and other currently debated proposals such as the Resolution and Recovery Directive (RRD).
 
Risk factors
●
The Group's ability to meet its obligations including its funding commitments depends on the Group's ability to access sources of liquidity and funding. The inability to access liquidity and funding due to market conditions or otherwise or to do so at a reasonable cost due to increased regulatory constraints, could adversely affect the Group's financial condition and results of operations. Furthermore, the Group's borrowing costs and its access to the debt capital markets and other sources of liquidity depend significantly on its and the UK Government's credit ratings which would be likely to be negatively impacted by political events, such as an affirmative outcome of the referendum for the independence of Scotland.
   
●
The Group's business performance, financial condition and capital and liquidity ratios could be adversely affected if its capital is not managed effectively or as a result of changes to capital adequacy and liquidity requirements, including those arising out of Basel III implementation (globally or by European, UK or US authorities) as well as structural changes that may result from the implementation of ring-fencing under the Financial Services (Banking Reform) Act 2013 or proposed changes of the US Federal Reserve with respect to the Group's US operations. The Group's ability to reach its target capital ratios in the medium term will turn on a number of factors including a significant downsizing of the Group in part through the sale of RBS Citizens.
   
·
The Group is, and may be, subject to litigation and regulatory and governmental investigations that may impact its business, reputation, results of operations and financial condition. Although the Group settled a number of legal proceedings and regulatory investigations during 2013, the Group is expected to continue to have a material exposure to legacy litigation and regulatory matter proceedings in the medium term. The Group also expects greater regulatory and governmental scrutiny for the foreseeable future particularly as it relates to compliance with new and existing laws and regulations such as anti-money laundering and anti-terrorism laws.
   
●
Operational and reputational risks are inherent in the Group's businesses.
   
·
The Group is highly dependent on its information technology systems and has been and will continue to be subject to cyber attacks which expose the Group to loss of customer data or other sensitive information, and combined with other failures of the Group's information technology systems, hinder its ability to service its clients which could result in long-term damage to the Group's business and brand.
   
●
The Group or any of its UK bank subsidiaries may face the risk of full nationalisation or other resolution procedures, including recapitalisation of the Group or any of its UK bank subsidiaries, through bail-in which has been introduced by the Financial Services (Banking Reform) Act 2013 and will come into force on a date stipulated by HM Treasury. These various actions could be taken by or on behalf of the UK Government, including actions in relation to any securities issued, new or existing contractual arrangements and transfers of part or all of the Group's businesses.
   
●
As a result of the UK Government's majority shareholding in the Group it may be able to exercise a significant degree of influence over the Group including on dividend policy, the election of directors or appointment of senior management or limiting the Group's operations. The offer or sale by the UK Government of all or a portion of its shareholding in the company could affect the market price of the equity shares and other securities and acquisitions of ordinary shares by the UK Government (including through conversions of other securities or further purchases of shares) may result in the delisting of the Group from the Official List.
 
Risk factors
●
The actual or perceived failure or worsening credit of the Group's counterparties or borrowers, including sovereigns in the Eurozone, and depressed asset valuations resulting from poor market conditions have led the Group to realise and recognise significant impairment charges and write-downs which have adversely affected the Group and could continue to adversely affect the Group if, due to a deterioration in economic and financial market conditions or continuing weak economic growth, it were to recognise or realise further write-downs or impairment charges.
   
●
The value of certain financial instruments recorded at fair value is determined using financial models incorporating assumptions, judgements and estimates that may change over time or may ultimately not turn out to be accurate.
   
●
Recent developments in regulatory or tax legislation and any further significant developments could have an effect on how the Group conducts its business and on its results of operations and financial condition, and the recoverability of certain deferred tax assets recognised by the Group is subject to uncertainty.
   
●
The Group is required to make planned contributions to its pension schemes and to compensation schemes in respect of certain financial institutions, either of which, independently or in conjunction with additional or increased contribution requirements may have an adverse impact on the Group's results of operations, cash flow and financial condition.
 
 
 
 
Statement of directors' responsibilities
The responsibility statement below has been prepared in connection with the Group's full Annual Report and Accounts for the year ended 31 December 2013.
 
We, the directors listed below, confirm that to the best of our knowledge:
 
 
·      the financial statements, prepared in accordance with International Financial Reporting Standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole; and
 
 
·      the Strategic Report and Directors' report (incorporating the Business review) include a fair review of the development and performance of the business and the position of the company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.
 
 
By order of the Board
 
Philip Hampton
Ross McEwan
Nathan Bostock
Chairman
Group Chief Executive
Group Finance Director
 
26 February 2014
 
 
 
Board of directors
 
Chairman
Executive directors
Non-executive directors
Philip Hampton
Ross McEwan
Nathan Bostock
 
 
Sandy Crombie
Alison Davis
Tony Di lorio
Robert Gillespie
Penny Hughes
Brendan Nelson
Baroness Noakes
Philip Scott
 

 
 
Additional information
Share information
 
31 December 
2013 
30 September 
2013 
31 December 
2012 
       
Ordinary share price
338.1p 
359.9p 
324.5p 
       
Number of ordinary shares in issue
6,203m 
6,186m 
6,071m 
 
 
Statutory results
Financial information contained in this document does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006 ('the Act'). The statutory accounts for the year ended 31 December 2012 have been filed with the Registrar of Companies and those for the year ended 31 December 2013 will be filed with the Registrar of Companies following the company's Annual General Meeting. The report of the auditor on those statutory accounts was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under section 498(2) or (3) of the Act.
 
Financial calendar
   
2014 first quarter interim management statement
2 May 2014
2014 interim results
1 August 2014
 

 
 
 
 
 
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